What We’re Reading (Week Ending 07 February 2021) - 07 Feb 2021
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 07 February 2021):
1. 7 Life Lessons from a Guy Who Can’t Move Anything but His Face – Jon Morrow
The only parts of my body I can move are my eyes and lips. My hands, feet, arms, and legs, are almost totally paralyzed, managing the occasional twitch and nothing more.
And yet… I have an amazing life.
Using speech recognition technology, I’ve written articles read by more than 5 million people. I’ve also built several online magazines that have, shockingly, made me a millionaire.
“This can’t be real,” you say. “You did all this, and you can’t freaking move?”
Hard to believe, I know, but it’s true. I do it all from home, sitting in my wheelchair, speaking into a microphone.
I’ve traveled a good bit too. I’ve lived in San Diego, Miami, Austin, and even Mazatlan, Mexico…
…During my 34 years, I’ve had pneumonia 16 times, recovered from more than 50 broken bones, and spent literally years of my life in hospitals and doctor’s offices.
But I’m still here. Not only have I survived my condition, but I’ve built a life most people only dream about.
And starting today, I want to talk about how…
…At some point or another, life punches everyone in the face.
The punch may be hard, or it may be soft, but it’s definitely coming, and your success or failure is largely determined by the answer to a single question: how well can you take the punch?
Do you roll around on the ground, weeping and moaning? Do you rock back on your heels but then keep going? Or have you been punched so many times already you don’t even notice?
Personally, I’m a living example of the last one. If you want to know what it’s like to live with a severe disability, just imagine that every morning six big guys sneak into your room and beat the hell out of you. Most days, the beating isn’t so bad, and you can limp through your day. Every now and again though, they keep punching and kicking you until you’re bleeding and broken, lose consciousness, and wake up in the hospital breathing through a tube.
That’s the best way I know to describe my life. Since the day I was born, muscular dystrophy has given me a daily beating.
The upside?
It’s made me incredibly strong. I can take any punch life throws at me without even breaking stride.
Lost $100,000 on a business deal? No biggie. Key employee quits? Yawn. Getting audited by the IRS? Wake me up when something important happens. Next to fusing my spinal vertebrae together, shattering my legs, or nearly drowning in my own mucus, none of it is honestly that big of a deal.
This, my friends, is the advantage of pain. The more you experience, the more you can handle in the future, and the less it knocks you off your game.
The way you respond to that pain is another matter, which we’ll talk about in a moment. For now, the point I want to make is this: if you feel depressed and weak, unable to cope with the difficulties of life, it’s not because you are a flawed human being. It’s because you were unprepared for the pain you are experiencing. The problem, ironically, is that you haven’t suffered enough.
2. Unfortunate Investing Traits – Morgan Housel
Napoleon’s definition of a military genius was “The man who can do the average thing when everyone else around him is losing his mind.”
What he meant, I think, is that most wars are lost rather than won. The final outcome is driven more by one side’s blunder than the other’s brilliance. One screw up can overwhelm a dozen smart decisions that preceded it, so even if strategy is crucial the expert is rarely preoccupied asking, “How can I be great?” The obsession is, “How can I ensure I’m at least average and never a disaster during the most important moments?”
And isn’t investing the same?…
…A few unfortunate traits that commonly prevent investors from doing the average thing:…
…An ignorance of what I’d call “normal disasters.”
If markets never crashed they wouldn’t be risky. If they weren’t risky they’d get very expensive as all potential returns were wrung out. When markets are expensive they’re fragile. And when they’re fragile they crash.
If you accept that logic – and I think it’s the punchline of all market history – you realize that huge market declines characterized as surprising and shocking and unexpected are in fact foreseeable. The timing isn’t predictable but the occurrence is inevitable. If you get caught in a period when you lose a third of your money and it stays that way for a year or two, you have not been hit by a 100-year storm; you’ve just experienced the base rate of investing, par for the course. That’s why they’re normal disasters.
Same in business. Take a group of 100 companies from nearly any industry. The odds that no more than half will still be around a generation from now are very high, not because they merged but because they went out of business. Competition is relentless and most competitive advantages die. It’s a disaster, but it’s normal and everyone should plan accordingly.
If you’re flying on an airplane, normal means everything is smooth and calm. Investing is closer to whitewater rafting. You’re going to get wet and tossed around, with a decent chance of minor injury. It’s kind of the point. Many investing blunders occur when people expect “normal” to be a period when nothing goes wrong when in fact it’s normal for things to constantly be breaking and falling apart.
It’s hard to do the average thing if you can’t accept that not only is it normal for things to break, but even frequent breakages don’t prevent great long-term growth.
3. Amazon’s Cloud King: Inside the World of Andy Jassy – Kevin McLaughlin
Mr. Jassy was not an obvious candidate to start a business that has made Amazon, in effect, a landlord for a chunk of the internet. A graduate of Harvard University—where he was an advertising manager of the Crimson, the student newspaper—Mr. Jassy is not an engineer. His passions, according to a person close to AWS, include sports, pop culture and music. As of a few years ago, he had a collection of several thousand CDs, a former colleague said. Last year, he joined the ownership group for a new, as-yet-unnamed National Hockey League franchise for Seattle.
After joining Amazon in 1997, the year of its initial public offering, he caught Mr. Bezos’ eye by writing the business plan for a new Amazon business—selling music CDs online—arguing that it was the logical next step for Amazon after book selling, another former colleague said. He later became general manager of the group.
In 2003, Mr. Bezos picked Mr. Jassy to be his technical assistant, a role that entailed shadowing the Amazon CEO in all of his weekly meetings and acting as a kind of chief of staff. While previous technical assistants had languished under the demanding Amazon leader, Messrs. Jassy and Bezos became close friends during that time and Mr. Jassy remains one of Mr. Bezos’ trusted advisers (he is on the “S-team,” a group of about a dozen Amazon executives in Mr. Bezos’ inner circle).
Mr. Jassy’s biggest break came when Mr. Bezos and Rick Dalzell, Amazon’s chief information officer at the time, tapped him to lead what became AWS. The business was an outgrowth of earlier technical work Amazon had done to let independent retailers sell goods through Amazon’s e-commerce systems.
Gradually, Mr. Jassy and others came to realize Amazon could take over the management of even more basic computing chores for outside companies, such as storage and databases, by running them inside Amazon data centers. Customers no longer had to worry about purchasing and maintaining the hardware and software needed for their applications.
The launch of its first services in 2006 coincided with the rise of a new generation of internet startups, many of them propelled by the emergence of smartphones as a platform for applications. Mr. Jassy was well attuned to the needs of these startups, most of which were happy to let Amazon run their technical infrastructure while they focused on more meaningful innovations.
“He’s able to think about things that are very complex and boil them down into a few clear action items that really matter,” said Mr. Dalzell, who left Amazon in 2007 and was one of Mr. Jassy’s mentors. “He has a unique ability to get to the essence of what’s important to customers and put that at the forefront.”
In meetings, Mr. Jassy follows Mr. Bezos’ approach of letting others speak first and then weighing in later with his feedback, a former AWS employee said. He doesn’t hold back if he feels their work isn’t up to par, but he has a softer touch than Mr. Bezos—known for his scorching criticisms—favoring “humor and gentle cajoling” to get what he wants, the person said.
Even though Mr. Jassy was the top dog at AWS, he remained mostly invisible outside Amazon. He allowed the division’s chief technology officer, Werner Vogels, a Dutch computer scientist with a knack for public speaking, to become the face of the new business, while he focused on products.
For years, Mr. Jassy was opposed to Amazon disclosing the division’s financial results, because he didn’t want competitors knowing how fast AWS was growing, according to a former employee. The parent company finally began releasing the AWS numbers in April 2015; under accounting rules, the business got so large the company could no longer conceal it.
“Andy wanted to keep them guessing,” the former employee said. “If they knew what Andy knew, they likely would have invested more earlier.”
4. How David Beats Goliath in Real Life – Josh Brown
On Wall Street, David doesn’t beat Goliath in real life – especially in a battle of brute force and liquidity.
The hedge fund industry manages $3 trillion. Private equity and real estate and venture money is even bigger than that. Funds are backed by banks and brokerages which are backed by the Federal Reserve. Get a grip on reality. This complex doesn’t lose an arms race. The money is infinite. You can’t squeeze it. It will crush you. The louder and more bellicose you are on the internet, the tighter it will squeeze back, until your head has literally popped off…
…So how does David win? David wins by avoiding Goliath and becoming a stronger, smarter, healthier, happier version of himself or herself. How?
David invests capital, time and energy in the furtherance of his or her career, not on memes and internet chatroom bullshit with other Davids…
…David focuses on the main thing under his control – how much he saves versus spends – and then allocates as much as possible to an investment portfolio….
…David diversifies broadly, and has the humility to accept the inherent unknowability of the future…
…Easier said than done. Warren Buffett once talked about the Paradox of Dumb Money. He said that the moment it realizes that it is the dumb money (and acts accordingly), it ceases to be the dumb money. Accepting your limitations isn’t the same as admitting defeat. It’s how you succeed. Because you stop playing the wrong game and start playing the right one.
5. Twitter thread on the “plumbing” that goes on behind the scenes at financial market brokerages – Compound248
Dear Media, what’s happening with RobinHood? A quick primer. This is a “plumbing” issue. It is esoteric, even for those on Wall Street. A very long thread on how the toilet is clogged. Read on
First: RH was not the only brokerage to restrict buying in $GME et al. Much of the below applies to many brokerages. I’m going to use “RH” in my writing for simplicity and because it’s the most prominent, but it’s not fair to call this a RobinHood issue, per se.
The restrictions impacted retail AND institutional players – many institutional prime brokers (“PBs”) did the same thing to their hedge fund clients. Why? Surely PBs can’t be trying to punish their own clients just to benefit Citadel. There must be something else happening… Let’s talk plumbing.
Most RH clients (& all HFs) use “margin” accounts, not “cash” accounts. RH’s sign up process nudges new customers into margin accounts by default. Whether RH should do that is worthy of discussion another day. This is a story of lending and capital.
Margin accounts are Wall Street’s way of denoting lending accounts. Practically speaking, in margin accounts, the client does NOT own *any* securities. Rather, margin account holders “own” a promise from their broker. Yay.
When an RH’er buys $GME, a whole bunch of things happen behind the scenes, all of which are the ugly plumbing of Wall Street.
6. Netflix at 200 Million: Is the Streaming Race Over? – Tien Tzuo
Netflix recently announced that it has over 200 million global subscribers, an impressive milestone. But more importantly, the company is “very close” to being free cash flow positive, despite previously forecasting a loss of up to $1 billion on the year. As Barron’s put it, “the big news was the revelation that Netflix is no longer a money pit. It’s now well on the way to becoming a cash machine.”
This is the same publication, I might add, that wrote an article called “Netflix Shares Could Dive to $45” in 2016. “Investors continue to overlook increasing cash burn and relatively modest income,” warned Barron’s. The stock is now trading at around $563.
Lots of people felt the same way back then. Do some googling and you’ll find plenty of articles with headlines like: “It’s Official: Netflix, Inc. (NFLX) Stock’s Run is OVER,” (Investor Place, 2016). Here’s another quote from Movie City News: “Netflix will be purchased by 2020… because the content issues will overwhelm their business, not too much unlike the way Netflix overwhelmed Blockbuster and the remaining mom & pop DVD/video stores.”
The bear argument against Netflix has always been that it will never be able to repay the huge amount of debt it has accrued ($16 billion at last count) to finance all those thousands of hours of content….
…That argument has now been settled. Not only does Netflix now have a significant competitive moat with attendant pricing leverage (get ready for your monthly rate to go up this year), but it’s also planning on an initial $500 million debt payment, as well as stock buybacks.
Of course, this will come as no surprise to Subscribed readers. As I noted in the book, borrowing heavily to invest in new content was simply Netflix using its recurring revenue as a competitive weapon. Unlike traditional movie production shops, Netflix starts every year with known, predictable revenue. It just made sense to use leverage, similar to a mortgage on a house, to invest in attracting new subscribers, especially if it also extended the lifetime value of their existing subscribers. That’s the beauty of a smartly run subscription model.
So now that Netflix has proven the naysayers wrong, is it all over? Has the streaming race been won? I don’t think so, not by a long shot. To paraphrase a line from The Social Network, “Two hundred million is a pretty good number. Do you know what’s an even better number? Two billion.”
7. It Feels Like the Game is Rigged – Michael Batnick
There are about a million and one different angles to consider when talking about the big story in the stock market.
The most important thing that’s happening is the deterioration of faith that people have in financial institutions. Once trust is lost, it’s almost impossible to gain it back. Memes aside, this is no laughing matter…
…You’re right, Jimmy. Insiders have advantages. I understand that it feels like parts of the system are broken. I understand that it feels unfair. I understand that it feels like the odds are stacked against you.
But I’m asking you to please reconsider.
I’m thrilled for the people that got in early and made boatloads of money. But the people who are getting in late will be left holding the bag. And when they do, they will go looking for people to blame. The “system is rigged” will be shouted out when what will really happen is the market’s inherent rejection of rewarding get rich quick strategies. If you play their game, and this is their game, you will not win. But Jimmy, if you take a long-term view, then you almost can’t lose.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. Of all the companies mentioned, we currently have a vested interest in the shares of Amazon and Netflix. Holdings are subject to change at any time.
