What We’re Reading (Week Ending 23 August 2020) - 23 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.” We (the co-founders of Compounder Fund) 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 23 August 2020):
1. 10 years ago – Joshua Brown
And 10 years ago this August I had a new career. A fresh start. I had a couple of million dollars in assets under management from the small handful of clients I brought with me. I had a spot working at an RIA in midtown Manhattan. I had my Series 65. I had a decade of experience doing retail brokerage, selling stock trades and mutual funds. I had nothing saved in the bank and barely anything in retirement accounts to my name. I had no idea where my next client was going to come from. I had a wife and two children under the age of five to feed and support. I was terrified.
But I knew it was the only way to give financial advice the way I wanted to. Working at brokerage firms for a decade I had learned most of the important stuff about investing, securities, markets, risk and return. And when I say “the important stuff,” I’m referring to behavior. This is the one thing I had figured out. If I could help investors avoid the endless mistakes, conflicts and dangers I had witnessed on the sell side, then I could be delivering the most valuable service in the world to them. I would save one person at a time from all of the horrible things I’d seen and experienced. The bet was that someday, telling the truth and rescuing families from bad decisions would pay off.
I made the bet.
[Ser Jing here: Josh Brown’s piece really resonates with me, because Jeremy and I both recently took the plunge to set up Compounder Fund to – borrowing Brown’s words – “help investors avoid the endless mistakes, conflicts and dangers” we had noticed in the financial markets.]
2. When The Magic Happens – Morgan Housel
The 1930s were a disaster.
Almost a quarter of Americans were out of work in 1932. The stock market fell 89%.
Those two economic stories dominate the decade’s attention, and they should.
But there’s another story about the 1930s that rarely gets mentioned: It was, by far, the most productive and technologically progressive decade in history.
The number of problems people solved, and the ways they discovered how to build stuff more efficiently, is a forgotten story of the ‘30s that helps explain a lot of why the rest of the 20th century was so prosperous…
… A couple of things happened during this period that are worth paying attention to, because they explain why this happened when it did.
The New Deal’s goal was to keep people employed at any cost. But it did a few things that, perhaps unforeseen, become long-term economic fuels.
Take cars. The 1920s were the era of the automobile. The number of cars on the road in America jumped from one million in 1912 to 29 million by 1929.
But roads were a different story. Cars were sold in the 1920s faster than roads were built. A new car’s novelty was amazing, but its usefulness was limited.
That changed in the 1930s when road construction, driven by the New Deal’s Public Works Administration, took off.
3. Earthquake detection and early alerts, now on your Android phone – Marc Stogaitis
Starting today, your Android phone can be part of the Android Earthquake Alerts System, wherever you live in the world. This means your Android phone can be a mini seismometer, joining millions of other Android phones out there to form the world’s largest earthquake detection network.
All smartphones come with tiny accelerometers that can sense signals that indicate an earthquake might be happening. If the phone detects something that it thinks may be an earthquake, it sends a signal to our earthquake detection server, along with a coarse location of where the shaking occurred. The server then combines information from many phones to figure out if an earthquake is happening. We’re essentially racing the speed of light (which is roughly the speed at which signals from a phone travel) against the speed of an earthquake. And lucky for us, the speed of light is much faster!
To start, we’ll use this technology to share a fast, accurate view of the impacted area on Google Search. When you look up “earthquake” or “earthquake near me,” you’ll find relevant results for your area, along with helpful resources on what to do after an earthquake.
4. Fintech Scales Vertical SaaS – Kristina Shen, Kimberly Tan, Seema Amble, and Angela Strange
Let’s assume the average vertical SMB customer spends about $1,000/month on software and services. Of that, $200 per month will typically be on traditional software (e.g., ERP, CRM, accounting, marketing), and the rest on other financial services (e.g., payments, payroll, background checks, benefits). In a traditional vertical SaaS business, the only way to capture more revenue from the customer was to upsell software. This left the $800 per month potential revenue from financial services to other vendors.
But with SaaS + fintech, a vertical SaaS company can capture a customer’s traditional software spend as well as the spend on employee and financial services.
1. Traditional SaaS expansion – Upsell software products or add software modules 2. Fintech opportunity – Add financial services, such as payments, cards, lending, bank accounts, compliance, benefits and payroll
In our hypothetical above, a vertical SaaS company that adds, or even embeds, financial products, can potentially 5x the revenue per customer from the $200/month software spend to the full $1000/month for software and services.
5. Tweetstorm on why India will be a hotbed for innovative, world-class enterprise startups – Hemant Mohapatra
3/n Internet penetration has benefited B2C but has 2nd order impact on B2B. For every Dropbox or Facetime, there’s also a Box or Zoom using digital tools to build, test, & launch at breakneck speeds & then in “consumerish ways” brands, sell, & monetize enterprises.
4/n “Developer is the new buyer” — think fewer site-wide MSDN or RHEL licenses, more personal/team-wide Github/Slack/digitalOcean accounts. Corporate IT spend will disaggregate and many top-down decisions will turn bottoms-up where individual “consumer” needs to be influenced.
5/n Founders w/ dev-first mindset will win big globally & Indian founders have a unique advantage here: our developer ecosystem is one of the most vibrant in the world. We are curious, engaged, & hungry to learn. Being a techie in India isn’t “geeky/nerdy”, it’s cool, fashionable…
… 10/n By itself, India is now the 2nd largest public cloud buyer in APAC, ~50% of China & growing faster. Vs China, the Indian buyer is hungrier & doesn’t care for brand or roadmap (so, ideal for startups), is more top-line focused & trying to get more process-driven to scale…
… 13/n While India-to-US has been tried before successfully, India now has the potential to be the Enterprise / SaaS hub for local and SEA markets. Why?
14/n China enterprise cos are either h/w focused or serve local markets. Meanwhile, rest of SEA has strong cultural, language AND use-case alignment w/ India given history & development stage (gig-based, migrant population, etc). Works in India? Can work there.
15/n and to support all this value creation, the key pieces are coming together nicely. Vast majority of founders now have prior startup experience — this is where many of the smartest people are headed — not banking, consulting, or Google/FB.
6. Tencent: The Ultimate Outsider – Packy McCormick
With monetization booming, Tencent IPO’d in 2004 at a valuation of 6.22 billion HKD, or $790 million USD. Cue Motley Fool headline: if you had invested $10,000 in Tencent at its IPO in 2004, you would have $7.9 million today.
Oh, you didn’t invest in Tencent at its IPO? Damn. To be fair, it’s a very different company today than it was then, thanks to two 2005 hires: Martin Lau and Allen Zhang.
After completing its IPO, Tencent hired the Goldman Sachs investment banker who took it public, Martin Lau. Lau had the pedigree – Chinese-born, undergrad at Michigan, engineering masters at Stanford, and MBA at Kellogg – and a skillset that was complementary to Ma’s. Lau became the English-speaking face of the business, taking on a role that the shy Ma hated, and the master capital allocator. In the beginning of his tenure, Lau focused on acquiring studios to grow its scorching games business as the Chief Strategy Officer. By the next year, Ma promoted him to President.
Tencent also turned its attention to competitive threats to the portal business, including Microsoft’s increasing presence in China via MSN. To combat the threat, it acquired competitor Foxmail in 2005 to build QQ Mail. The product was successful, but more importantly, Tencent acquired the developer behind Foxmail, Allen Zhang.
With Lau and Zhang on board, Tencent grew rapidly via desktop games and the QQ platform. Its revenue jumped 15x from $200 million in 2005 to $2.9 billion in 2010. But 2011 was the year when Zhang and Lau really made their mark.
7. Are Emerging Markets Turning Into the S&P 500? – Ben Carlson
Emerging markets are cheaper on every metric. Many investors say this makes sense considering emerging markets are full of energy, materials, and financials while the U.S. is more driven by technology and consumer stocks.
And this was a good argument in 2007 or even 2015 but not so in 2020.
The make-up of emerging market equities has changed dramatically in recent years. Blackrock sent me the sector changes in their iShares Emerging Markets ETF (EEM) since 2007:
… Here are some notable changes since the start of 2007:
- Energy has gone from more than 15% to less than 6%
- Materials were closer to 16% and now sit at 7%
- Financials have gone from more than 20% to 18% (and are down from a high of 27% in 2015)
- Consumer discretionary stocks have gone from roughly 3% to 18%
- Technology is now the biggest sector, having risen from 13% in 2007 to more than 18% now
Financials still have a large weighting but it’s a dwindling market share compared to the past. Energy and materials companies combined are now less than either of those categories were individually in 2007. And technology stocks now make up the largest sector in the fund.
