What We’re Reading (Week Ending 16 August 2020) - 16 Aug 2020
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” Jeremy and myself read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 16 August 2020):
1. Here We Are: 5 Stories That Got Us To Now – Morgan Housel
Everyone is innocently short-sighted when trying to make sense of 2020.
January, before Covid-19 upended everything, feels like a different lifetime. March is already a blur. Time slows when you experience surprise, and every day of 2020 brings a new shock. So the recent past feels like distant history.
But if you survey the confusing mess we’re in – 50 million jobs lost, 130,000 dead, Tesla stock up 400% – you have to remember that none of it happened in a vacuum. Every event has parents, grandparents, siblings, and cousins – previous events that planted the seeds, passed on their DNA, and continue to influence what’s happening today.
To have any hope of making sense of what’s happening in 2020, we have to pay attention to a bunch of seemingly unrelated stories that began before anyone had heard of Covid-19.
2. Characteristics of Winning Software Stock Selection – Software Stack Investing
The most important measure of user adoption for a software stack company is its ability to expand usage within its established customer base. This usage growth is represented as the Dollar Based Net Expansion Rate (DBNER). This rate is calculated as the percentage growth in spend from existing customers over a 12 month period. I like to see software stack companies with a DBNER over 120%. This means that existing customers will spend 20% more each year on the company’s offerings and becomes a powerful force in driving recurring revenue growth.
Questions to consider when evaluating developer mindshare:
- Has the company extended its software product offerings by exposing the underlying APIs and platform services for developers to consume?
- Does the company actively target developers for its marketing efforts? If it holds conferences, are they focused on building versus watching?
- Is it easy to evaluate the software solution in a self-service manner, without talking to a salesperson first?
- Is detailed documentation publicly available online about API’s and service usage? Are there code samples or starter kits in GitHub?
- Are the software solutions being taught as part of developer training programs? Bootcamps and university programs come to mind here.
- Does the software stack company achieve a high DBNER with existing customers?
3. Philip Carret: Buy ‘Em Cheap and Hold ‘Em – Jason Zweig
At 97, Phil Carret has well learned an essential truth about markets: Traders rarely die rich, patient investors often do.
“I’ve been involved in the market too long to get excited,” he says, talking about the aftermath of Alan Greenspan’s interest rate boosts.
Since 1919, through thick and thin, four U.S. wars, roaring inflation and deadening recessions, Philip Carret (rhymes with hurray) has been investing with success in stocks and bonds. Longevity pays in investing. It means that your successful stock picks compound, uninhibited by capital-gains taxes.
“There’s no point in taking profits and paying taxes,” Carret explains. “Turnover usually indicates a failure of judgment. It’s extremely difficult to figure out when to sell anything. So I’d rather have the stock taken away from me in a merger or a buyout. It’s much easier.”
With a buy-and hold portfolio and a fatalistic shrug on the matter of where the market is headed, an investor can work a short day. “Don’t worry too much,” advises Carret. “If you buy them cheap enough, they watch themselves.”
4. Tweetstorm on Netflix’s hidden competitive advantage in its early days – Mario Cibelli
This tweet storm dates back to the 2003/2004 timeframe and involves a little DVD rental company called Netflix. If you read the book Netflixed, I was quoted saying: “There’s not a snowball’s chance in hell that Blockbuster can do this”
This is the story behind that quote and about one of the best investor meetings I ever had.
While I was fortunate enough to have met with Reed and Barry a number of times before the company become really well followed, neither of these two, nor any senior staff for that matter, were present for this meeting.
Sometimes the best insights into a company do not come from visiting with senior management. This particular meeting took place in a warehouse off the Long Island Expressway with a former operations engineer named Rich. I remember his full name to this day.
5. Tweetstorm on an individual’s incredible experience of escaping from Kuwait during Iraq’s invasion in 1990 – Abraham Thomas
2/Exactly 30 years ago, on August 2nd 1990, Saddam Hussein’s army invaded Kuwait. I remember it clearly; I was there.
3/ My family was part of the massive Indian expat community. My father worked for the Kuwaiti ministry of health; my mother was a teacher. We had lived in Kuwait for 6 years.
4/ We woke up that morning to an unusual sight: a line of tanks, moving down the highway.
5/ As fate would have it, the main training camp of the Kuwaiti National Guard was across the highway from us. The tanks stopped, and started lobbing shells at the camp; the camp returned fire. Soon we were witnessing a full-pitched battle.
6/ We didn’t watch for long; we took refuge in the basement of our apartment complex, hoping it’d be safer than above ground.
7/ We spent 36 hours in that basement, among boilers and electrical machinery. An apartment on the 8th floor was hit by a shell and caught fire; fortunately, the fire didn’t spread. (Ours was on the 4th floor).
8/ On day 2 we went up to get food and water. There was a hole in the metal frame of my bedroom window. I recovered a melted, misshapen bullet.
9/ That was enough; we decamped to a friend’s house in a less strategically important neighbourhood.
6. The Anglerfish Deleted Its Immune System to Fuse With Its Mate – Edith A. Widder
All vertebrates, including humans, have two kinds of immune systems. The first is the innate system, which responds quickly to attacks by microscopic invaders with a variety of chemicals like mucous physical barriers like hair and skin, and disease-munching cells called macrophages. The second line of defense is an adaptive system that produces both “killer” T cells to attack the pathogen and antibodies custom-made to fight specific bacteria or viruses. The two systems work together to fight infections and prevent disease.
But in a study published Thursday in the journal Science, researchers from Germany’s Max Planck Institute and the University of Washington found that many anglerfish species (there are more than 300) have evolved over time to lose the genes that control their adaptive immune systems, meaning that they can’t create antibodies and lack those T cells…
… Boehm says he hopes that the finding will perhaps lead to a new understanding of immunosuppression in humans, and perhaps better treatments for organ transplant recipients in the future. “From an evolutionary perspective, any immunologist would say it’s impossible to disentangle the innate and adaptive arms of the immune system,” Boehm says. “They’ve been together for more than 500 million years. If we fiddle with one or the other arm, it’s a catastrophic event. This is the first big surprise—that there is hope and that there is life without one of these two arms.”
7. Eric Vishria – The Past, Present, and Future of SaaS and Software – Patrick OShaughnessy & Eric Vishria
If you were Coca-Cola and you had traditional software, it wouldn’t make sense for you to invest in automation for your ERP, but if you’re doing it across a thousand customers, it does make sense. There were benefits there. But it was still single instance not multi-tenant SaaS. That first generation of SaaS companies, the other kind of interesting notion if you think about what was Siebel became Salesforce, was PeopleSoft became Workday, was Peregrine became ServiceNow.
It was actually the same founders, literally. It was the same people. They just realized, “Wait a minute. There’s a better delivery model. We know what to build. We know the features. There’s a better delivery model. There’s a better economic model. Let’s go build it.”
David Duffield, you have the Peregrine founders founded ServiceNow. Tom Siebel and Benioff worked together at Oracle I believe, before Benioff went off to do Salesforce. You have a lot of the same ideas and honestly, not that great software experience, but it was a better delivery and economic model. That was what I would call gen one SaaS. All those companies were founded, 1999 to 2005. So, really that generation.
Patrick (00:27:39): By the way, those three examples, Salesforce, Workday, ServiceNow relative to Siebel, PeopleSoft and Peregrine are 10 times the size or something. Just the delivery and economic model is a much more valuable company.
Eric Vishria (00:27:51): I mean I think even more than 10. I think Siebel was a little around 3 billion ultimately, acquisition and I think Salesforce, whatever is like 170 billion.
Patrick (00:27:59): Two orders of magnitude.
Eric Vishria (00:28:00): Yeah. Two orders of magnitude. I mean I think PeopleSoft was a big outcome and Workday. So, PeopleSoft and Workday are probably 5x or so. But I think Peregrine and ServiceNow would be like 150x. I mean these things are just… some of that’s market expansion, but definitely better delivery and economic model too.
