What We’re Reading (Week Ending 13 November 2022)

What We’re Reading (Week Ending 13 November 2022) - 13 Nov 2022

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 13 November 2022):

1. Graham & Dodd Annual Breakfast 2022 – Investment Management Insights

During one of Todd Combs and Warren Buffett’s famed Saturday afternoon living room chats, the two posed the following question as a means of valuation: if you take a business, what is your level of confidence in predicting what it looks like in five years?

Buying a whole business requires varied degrees of scrutiny into factors which cannot be evaluated using financial modeling formulas, such as: level of capital required, management style and efficacy.

Combs recalled the first question Charlie Munger ever asked him was what percentage of S&P 500 businesses would be a “better business” in five years. Combs believed that it was less than 5% of S&P businesses, whereas Munger stated that it was less than 2%. You can have a great business, but it doesn’t mean it will be better in five years. The rate of change in the world is significant, which makes this exercise difficult, but this is something that Charlie, Warren and Todd think about. When Combs started at Berkshire, they had a 7/10 confidence on the businesses outlook for the next five years. The nature of the world is that things are constantly changing, and Todd says they are right on maybe 1/10 predictions. 

Michael asked if there are traditional measures that Combs/Berkshire look at to indicate good business performance? And how does Combs/Berkshire assess that quantitatively? Combs explained how one question is constantly asked, usually daily, and that is if the moat is wider or narrower on any of their businesses.

98% of what Buffett and Combs discuss is qualitative. If something is 30x earnings you can calculate what it will have to do to get to run rate earnings. The worst business grows and needs infinite capital with declining returns. The best business grows exponentially with no capital…

…Combs goes to Buffett’s house on many Saturdays to talk, and here’s a litmus test they frequently use. Warren asks “How many names in the S&P are going to be 15x earnings in the next 12 months? How many are going to earn more in five years (using a 90% confidence interval), and how many will compound at 7% (using a 50% confidence interval)?” In this exercise, you are solving for cyclicality, compounding, and initial price. Combs said that this rubric was used to find Apple, since at the time the same 3-5 names kept coming up…

… Every time Combs meets with a company, there are two questions he always asks management: (1) How long do you spend talking to investors, and (2) what would you be doing if you were not publicly traded? The median response is 25% of the time is spent talking to investors. In response to the second question management usually lists a number of things that make a lot of sense, and Combs then proceeds to ask why they don’t do that, and they say because they feel handcuffed. When management is focused on the quarterly performance, and they don’t have the proper time horizon, they are not empowered to do the right thing. As a fiduciary you are setting yourself up for failure if you don’t have the right time horizon.

2. TIP492: The Best Investor You’ve Never Heard Of – Clay Finck

[00:00:25] Then at the end of the episode, I talked a bit about the lessons we can learn from Nick Sleep in identifying a great business, buying it at a reasonable price, and holding it for a very long time. From there, I started reading into Nick Sleep’s letters and I wanted to put together an episode talking about his overall investment approach, how Buffett and Munger influenced him and his incredible investment track record through his fund, the Nomad Investment partner.

[00:00:50] He achieved a stellar total return of 921% versus 117% for the world Index during the fund’s tenure of 13 years from 2001 to 2014. I also touch on his home run investments in Berkshire Hathaway, Costco, in Amazon. His Amazon investment in his personal portfolio got so large in his portfolio that he actually decided to sell half of it and allocate it to a fourth company, a sauce, which I’ll be diving into at the end of this episode…

…[00:24:43] These companies like Costco and Amazon that he owned, they were doing just as well in the bad economic times as they were in the good While overall. I’ll be diving into the scaled economics model here in a little bit, but I want to focus on the financial crisis now. While overall retail sales were down 10%, Amazon’s biggest day leading up to Christmas was 16% higher in 2008 than in 2007.

[00:25:09] Even though many of the companies they owned were down 50% in 2008, the businesses themselves still continued to surge ahead. He said that Amazon was priced as if it wouldn’t grow in the future, despite them seeing some of the best growth prospects they could ever imagine for a company. By mid 2009, Amazon’s revenues were up over 60% over the past couple of years.

[00:25:33] Yet the stock was all doom and gloom. The business did so well. It was almost as if a credit crisis made Amazon’s business even stronger than it would’ve been otherwise. Here’s how Sleep rounded out his 2008 letter quote. The commentary in the press is uniformly gloomy, and this is serving to depress share price.

[00:25:54] What we know is that prices are lower than a few years ago in corporate behavior is improv. We mean no disrespect to those unfortunate enough to lose their jobs or caught up in other people’s. Too busy to think mistakes and scandals. But from the perspective of an investor, there is less to worry about today than there was a few years ago.

[00:26:15] Indeed, I doubt that worrying is the solution to anything. Particularly we are reminded of Winston Churchill’s story of a man on his death bed. I have had a lot of trouble in my life saying the dying. Most of which never happened. It may not feel like it, but for a long term investor, this is the best of times, not the worst.

[00:26:36] It is in this environment that people sell their GTOs for 750 pounds. Take heart and look to the horizon. End quote. Now this reference to the GTO is referring to a story he told about a motor car that sold for just ridiculously cheap…

…[00:27:58] At this time of utter chaos, since the end of 2008, Berkshire today is up 344%. Costco is up 825% and Amazon is up 4008%. I repeat 4008%. Now, I expected the recovery of the Nomad Fund to be pretty good relative to the index in the year to come in 2009, but I did not expect it to be this good. To round out 2009, the Nomad Fund was up 71% while the World Index was up 30% from 2009 through 2013, Nomad returned investors 404%…

…All right, so let’s get started with Costco. It was at the end of 2002 when he first started discussing his position in Costco and his letters. This was a 3.1% position in the fund at the time.

[00:33:05] He recognized early on that Costco was a great business and he still owns it today. Since the beginning of 2002, Costco shares are up tenfold. To give a quick recap of their business model, Costco is a warehouse retailer that charged a $45 membership fee at the time to allow members to shop in their store.

[00:33:26] A key differentiator for Costco relative to other retailers was that they implemented an everyday low pricing strategy and they never marked up their products more than 15% from what they bought them. While Walmart at the time had markups of around 20%, and the industry standard was really around 30%.

[00:33:45] So Costco customers know that Costco is giving them a great price on their products, and there isn’t really any marketing schemes to offer temporary discounts on their products. You know, every time you go into Costco and make a purchase, You’re getting a great price, at least relative to what they pay to their suppliers.

[00:34:04] Now, what I like to look for and find in a business is what Jim Collins popularize, which is called the flywheel effect. The Costco model definitely had a flywheel effect as well. The low prices would lure customers in, which means that Costco receives more profits as a result of the greater number of customer.

[00:34:23] Costco would then use those profits to go out and open more stores wherever they found the best opportunities to do so. Since Costco then had more stores, they had more bargaining power over their suppliers, which in turn would incentivize even more customers to join and purchase that membership, and so on and so forth.

[00:34:42] This was the Costco business model, The standard markup strategy they used continued to push the cost savings onto the customer. Build that trust with them to keep coming back year after year, after year to do more and more shopping. Now, Sleep refers to the Costco and the Amazon business model actually as the shared economics model.

[00:35:03] Both of these companies are super cost efficient, so they can offer super low prices. So as the business grows, their prices are able to go lower and lower, which begets more growth. So as the business grows, their moat grows and the quality of the company and the amount of time the company is able to withstand extends as they grow, as they build more customers and build more stores.

[00:35:27] So customers actually benefit from the growth of the company. For a company like say Nike, that has a high margin business, the same really can’t be said as each year they are paying a high margin for Nike’s products, and Nike’s really relying on that brand with loyalty. But for Costco, you’re getting better prices each year.

[00:35:48] As the company grows in, the economies of scale are shared with the customers. At the time, Sleep estimated that Costco could fund itself to grow at around 14% per year. From that point, he said that this level of growth was much more sustainable than the companies that the retailed crowd was chasing at the time.

[00:36:07] With growth of 30% or more for many of the companies, he estimated that Costco could reach a thousand stores in the. And 200 stores in the uk. While at the time they had 284 in the US and 14 in the uk. So a ton of room for long term growth. According to his assessment of the market, Costco’s stock peaked in 2000 at around $55 per share.

[00:36:31] And Nomad purchased at $30 per share according to his 2002 shareholder letter, and they ended up purchasing more over the years. Of course, he stated that he believed a reasonable valuation for Costco was north of $50 per share at the end of 2002. And in his letter he stated, Costco is as perfect a growth stock as we have analyzed and is available in the stock market at close to half price.

[00:36:57] In 2004, Costco was trading at a earnings multiple of 24, while the PE ratio today is around 35, 36, so we have a 50% higher. Today, if I had to guess why? Part of it is likely due to the market’s appreciation of the quality of the business Costco has, and the other part is probably because the overall market is just priced higher today than in 2004.

[00:37:23] A lot more people know about Costco now than they did then too. So he also explained how Costco is so difficult to compete with because they’re just so giving to the customer. Wall Street, you know, oftentimes urges companies to give back to the shareholders rather than the customers through things like share repurchases through dividends.

[00:37:44] This is exactly what most shareholders want, including Wall Street. But Costco gives a lot of their earnings potential actually, to their customers, and this in turn leads to a stronger business that is more likely to sustain far, far into the future. It’s truly a business that focuses on the long-term.

[00:38:03] Which aligns right with Sleep’s investment philosophy. When purchasing a great business, Sleep oftentimes would interview management of a company, and he just saw that the management team was so serious about never marking up their products more than 15%. You know, there might be a time where they can make a killing on some specific product, they get at a huge discount.

[00:38:22] But management was like, “No, we’re going to pass on these savings to the customer.” So they just did it over and over and over. And the model has definitely. One idea that Sleep wrote about was related to business quality and moats. If you’re holding a business for the long term, it is extremely important that the company has a strong moat.

[00:38:40] The difficulty really lies in assessing the strength of a company’s m.o. because it’s not necessarily a number you can just point to on a balance sheet or on an income statement. It’s more of a qualitative metric that’s up to the eye of the beholder. Sleep talked about the idea of the robustness ratio, which analyzes how much a company saves their customers relative to how much money the company actually makes.

[00:39:05] In theory, a business that saves customers a ton of money and makes very little money relative to how much they save their customers, you know, that’ll be very hard to disrupt, at least relative to a business that has high profits relative to what they save their customer. This concept definitely applies to Costco because with the way their business is set up, it actually discourages competition because of how much investment it would take to make the same amount of money that Costco does.

[00:39:33] On top of that, you’re already competing with a really strong brand that Costco is built for their customers. Sleep estimated that for every $1 in profit Costco, Customers were saving $5. Now, he actually came up with this idea of the robustness ratio from Warren Buffett when he described Geico. Buffett stated in his 2005 annual letter that Geico was saving their customers roughly $1 billion in earning $1 billion in pretax profits as well.

[00:40:02] So in Buffett’s eyes, it was clear that Geico had a moat. Because of the enormous cost savings they passed down to their customers relative to the profit they receiv. Sleep took that idea and applied it to Costco, claiming they had a moat as well, in that the quality of the moat could actually be quantified through the robustness ratio.

[00:40:21] You know, just using one metric to get an idea of how strong it was. He makes it clear that the robustness ratio isn’t the end all, be all of a mote. It’s just one indicator to get a rough idea.

3. FTX Had a Death Spiral – Matt Levine

The worst case is something like:

1. You have 100 Customer As who are long Bitcoin on margin: They each have 1 Bitcoin in their accounts and owe you $10,000.
2. You have 100 Customer Bs who are short Bitcoin on margin: They each have $20,000 in their account and owe you 0.5 Bitcoin.
3. You have loaned 50 of the Customer As’ Bitcoins to the Customer Bs, and $1 million of the Customer Bs’ dollars to the Customer As. You keep the other 50 Bitcoins and $1 million as collateral.
4. Your accounts show that you owe clients 100 Bitcoins and $2 million, and that they owe you back 50 Bitcoins and $1 million, and you have 50 Bitcoins and $1 million on hand, so everything balances.
5. You have one Customer C who says “hi I would like to borrow 50 Bitcoins and $1 million, I will secure that loan with 150,000 FTT, each of which is worth $20.”
6. You say “sure, sounds good,” and hand over all your collateral.
7. Now you have 150,000 of FTT, worth $3 million, as collateral (and no Bitcoins or dollars).
8. Your accounts show that you owe clients 100 Bitcoins and $2 million and 150,000 FTT, and they owe you back 100 Bitcoins and $2 million, and you have 150,000 FTT of collateral, so everything balances.

But then if the value of FTT drops to zero, you have nothing. You have no Bitcoins to give to the customers to whom you owe Bitcoins, no dollars to give to the customers to whom you owe dollars. You just have to call up Customer C and say “hey we need all those dollars and Bitcoins back.” But Customer C will not want to give you back all those valuable dollars and Bitcoins in exchange for now-worthless FTT. Also the fact that Customer C had all that FTT in the first place is not a great sign. It is an FTT whale, and FTT is now worthless. Has it been borrowing elsewhere against FTT? Are all those debts coming due?

Now let’s add a few more FTX-specific elements. One is that FTX is an exchange for levered traders, offering products like perpetual futures and leveraged tokens that build in margin lending. So whereas the basic model of Coinbase is “they buy Bitcoin for you and put it in an envelope,” the basic model of FTX has to be “they lend you money to buy crypto and then make use of your crypto to get the money.” In financial terms, they have to rehypothecate your collateral; you can’t expect them to just keep it in an envelope if they’re lending you the money to buy it.

The other is that FTX is closely associated with a hedge fund called Alameda Research. Sam Bankman-Fried founded Alameda to do crypto arbitrage and market-making trades, and then he founded FTX to basically have a better exchange for Alameda to trade on. Alameda has lots of FTT, and last week Coindesk reported on its balance sheet; the gist of that report was “wow its balance sheet is mostly FTT”:

The financials make concrete what industry-watchers already suspect: Alameda is big. As of June 30, the company’s assets amounted to $14.6 billion. Its single biggest asset: $3.66 billion of “unlocked FTT.” The third-largest entry on the assets side of the accounting ledger? A $2.16 billion pile of “FTT collateral.”

There are more FTX tokens among its $8 billion of liabilities: $292 million of “locked FTT.” (The liabilities are dominated by $7.4 billion of loans.)

That is not in itself a reason for a run on FTX! It might be a reason for the price of FTT to go down, if you think that Alameda has too much of it and might need to sell it.

The reason for a run on FTX is that you think that Alameda is, in my terminology, Customer C. The reason for a run on FTX is if you think that FTX loaned Alameda a bunch of customer assets and got back FTT in exchange. If that’s the case, then a crash in the price of FTT will destabilize FTX. If you’re worried about that, you should take your money out of FTX before the crash. If everyone is worried about that, they will all take their money out of FTX. But FTX doesn’t have their money; it has FTT, and a loan to Alameda. If they all take their money out, that’s a bank run.

And all of this is self-fulfilling: If you are worried about FTX’s business, then the price of FTT should go down. If the price of FTT goes down, then FTX’s business is riskier, because it has less collateral. If, say, the operator of the biggest crypto exchange gently raises one eyebrow and says “FTT, eh?” that can be enough to topple FTX. FTT goes down, leaving FTX undercapitalized, leading to customer withdrawals, leading to ruin.

Anyway it is still early and confusing but that seems to be the story of FTX. Coindesk reported on Alameda’s FTT exposure, and then Changpeng “CZ” Zhao, the founder of Binance Holdings Ltd., the largest crypto exchange, raised eyebrows by tweeting that Binance would sell its FTT holdings “due to recent revelations.” People worried that this would tank the price of FTT and put pressure on FTX, so they started withdrawing money from FTX. FTX didn’t have the money, and Bankman-Fried started calling around asking for a loan or a bailout. Eventually he called CZ himself, and they announced a non-binding letter of intent for Binance to acquire FTX and make customers whole. Bankman-Fried’s fortune basically vanished, as did his “ emperor aura.” Venture capital investors in FTX — which last raised money at a $32 billion valuation — are probably getting zeroed, the price of FTT collapsed, and now regulators are investigating.

4. Is Alameda Research Insolvent? – Dirty Bubble Media

On November 2nd, a report from Coindesk shared some critical financial details from Alameda Research, the crypto hedge fund controlled by crypto mogul Sam Bankman-Fried (“SBF”). Coindesk reported that they had obtained a copy of the hedge fund’s Q2 balance sheet. According to their reporting, the company’s balance sheet is comprised of:

• Total assets: $14.6 billion. This is comprised of $5.8 billion FTT token, $1.2 billion Solana token (SOL), $3.37 billion in unidentified “crypto held,” $2 billion in “investments in equity securities.” This leaves roughly $2.2 billion in assets. According to our sources, hundreds of millions of dollars of the remaining assets are comprised by Alameda’s holdings of the Serum (SRM), Oxygen (OXY), MAPS, and FIDA tokens, all of which are from other SBF projects. According to this balance sheet, Alameda only had $134 million in cash on hand in June 2022.
• Total liabilities: $8 billion, of which $7.4 billion is “loans,” with another $292 million worth of FTT token owed. The remainder is unidentified by the Coindesk article.

This purported leak of Alameda’s financials demonstrates that the firm’s largest asset is its holdings of “FTX Token (FTT),” issued by none other than SBF’s FTX Exchange. The FTT token on Alameda’s balance sheet is roughly 1/3 of their total assets and equal to 88% of Alameda’s net equity. In other words, the firm’s largest asset is a crypto token issued by SBF’s other company, with a very significant portion of their assets in tokens issued by other related parties.

It’s almost as if SBF found a way to hack the financial system, printing billions of dollars out of thin air against which he was able to borrow massive sums from unknown counterparties. Almost as if he discovered a financial perpetual motion machine…

…Readers of this site will recall that the now-defunct Celsius Network, a multi-billion dollar crypto lending firm (Ponzi scam) with very close ties to SBF, was destroyed in part by its token, CEL. Celsius Network was built around the CEL token, under the brilliant idea that it could be used to spin up billions of dollars in free assets. The structure of a flywheel scheme is quite simple:

1. Create a token: Tokens are literally just bits of code on a blockchain. Program that sucker up and get rolling. Make sure you retain the majority of those tokens on your balance sheet for maximum flywheeling.
2. Pump the token’s price: Retain a “market maker.” Buy tokens using your customer’s assets. Wash trade it to infinity. Do whatever it takes to drive that price sky-high! And since you kept most of the tokens for yourself, there’s that many fewer tokens out there to pump.
3. Mark those babies to market: That’s right! Now you reap your rewards; at least, on paper. Now you can show billions of dollars in “assets” on your balance sheet.
4. Show off your success: Now’s the time to cash in. Hook some savvy investors (suckers), like pension funds, into massively overpaying for your equity or into making you big loans collateralized by your token.
5. Keep that flywheel spinning: Now you have real dollars. Buy yourself something nice, like stadium naming rights, politicians, or failed crypto companies. But don’t forget: If the flywheel stops spinning, you’re gonna have a bad time.

Of course, nothing is really this simple. It turns out that the flywheel scheme is just another bit of unsustainable financial engineering, for a couple of reasons. First, as your drive the price of your token higher, it begins to cost more to keep the price up; the people that own the token are increasingly incentivized to sell out, forcing you to buy more tokens at higher prices. Eventually, you either run out of money, own all of the tokens in existence, or stop buying. Which you can’t do, because if you stop it all comes crashing down.

More critically, it turns out that marking massive quantities of totally illiquid assets to market only generates wealth on paper. Celsius, despite holding hundreds of millions in CEL above liabilities, cannot liquidate any significant portion of those tokens without crashing the price of the token to zero. Such is the danger of controlling over 90% of the total tokens in circulation when nobody wants to own them in the first place!..

…According to Coindesk’s report, Alameda owned $5.8 billion FTT tokens in June of 2022. According to market aggregator CoinGecko, this is equivalent to 180% of the total circulating supply of the tokens:…

…A scan of the blockchain confirms that FTT ownership is highly concentrated, with 93% of the total tokens held by only 10 addresses:…

…All this to say that Alameda will never be able to cash in a significant portion of FTT to pay back its debts. There are few buyers, and the largest buyer appears to be the very company Alameda is most closely tied to. The reality of this situation is that the vast majority of the value Alameda accrues to FTT token is unrealizable, and the fair market value of their FTT in the event of large sales would rapidly approach $0.

5. Kirsten Green – Investing in Consumer Change – Patrick O’Shaughnessy and Kirsten Green

Patrick: [00:10:18] When you think about the list of pre-research hypotheses that you had, which one was the most wrong?

Kirsten: [00:10:25] There’s so much conversation about climate change and about the need for changing our ways that everybody would be interested in participating in that, particularly the younger generation, the younger generation. I mean I have kids telling me I should — “That’s recyclable, mom, that shouldn’t go in the trash,” or “Can you please buy an electric car instead of that gas car?” When we went and looked at this data at a really detailed level, the person that was most concerned about behaving in a way that aligned with environmental causes was a middle-aged, busy adult in a lower income bracket, so surprising. To me, I was like, they have got too many other pressures to be thinking about this. And it’s — a lot of times, many of those practices are still on the more expensive angle. So I was just really curious that, that audience was in tune to it in a certain way. The other thing, like specifically, is crypto and all this conversation that was — kind of ruled the day in ’21, we sort of had this fantasy or this perception that this was a young generation really kind of fueling that fire. That also is much more of a middle-aged person.

Patrick: [00:11:37] That’s bizarre.

Kirsten: [00:11:38] A much more of a less — it has all the other attributes of somebody who’s an early adopter or who’s techy. And that was really interesting, too. And there’s a list of others, but we’re going to publish a report.

Patrick: [00:11:49] We’ll save it. We’re going to show everything today. I’m really interested by the 12 personas and sort of who historically of those personas has driven a lot of the spending in the consumer space. Obviously, we’re going to get to investing here soon. For the most part, even if it’s interactive ads or something on one of the social platforms, you’re looking for revenue from these persona groups in the consumer business. I would love you to just riff on who is it that drives the spending? And is that changing at all?

Kirsten: [00:12:15] So we looked at this body of work to say some of the qualitative things we’ve been talking about and then to put an overlay around what are the size of these different archetypes and what is the spending power of these archetypes, and then what does it cost to be – exist, so what’s nondiscretionary and what’s discretionary to really understand, again, where was their purchasing power, adoption power. The other thing when we try to translate this stuff over into the investing in the business side is to think about where are we on the continuum of those groups evolving. So today, they might sit in one bubble representing one set of spending power. But in 5 years, they’re going to get advanced on the spectrum in some ways, maybe in some behavioral ways and some financial ways. And we’re early-stage venture investors. We’re trying to thread that needle between — what we’re really looking for is something that’s going to be on everyone’s mind a couple of years from now, 5 years, 10 years from now. It’s going to have broad adoption and people are going to be like, “Oh, yes, I can’t remember when we didn’t have that.” That’s a 10-year continuum, but it has enough relevancy that it can be relevant to adopt it today by some critical mass to create scale. And so you’ve got to understand where the demand is flowing when we think about where the spending power is today, where it’s going to be tomorrow and where the push for change is, that’s less surprising to people probably on the continuum. You are looking at someone who’s just out of college today but being much more relevant in a lot of these ways when there are parties, let’s say, to the person that’s mid-life and going through a lot of changes. Like those are really transformative years. And so that has always been the case. That’s why everybody always focuses on 18 to 45, and you get to 45, when you’re suddenly like, “Am I relevant or not anymore?” I mean the reality is there’s a ton of money, a ton of money in the baby boomer on the upside. And it’s a shifting profile on what’s discretionary and nondiscretionary. And there’s a big need there, but there’s also less behavior change. So it’s a complicated picture but it’s an interesting lens to put over, obviously, all your investing…

…Patrick: [00:47:06] You’ve invested in product categories that are far apart from each other in the consumer space, but all have tended to have very strong brands, at least in hindsight. I thought it’d be interesting to spend a few minutes talking about your take on brand, given how many amazing brands you’ve been associated with and helped grow and probably those that you’ve seen not work as well. And I know you’re coming out with a big, really interesting report that we’re looking forward to at the end of this year on a huge study that you’ve done on all these consumers and different brands around the world. So we won’t steal the thunder from that report. But I’d love if you could introduce it maybe at the highest level, sort of the framework that you think might emerge from that. And then we’ll talk about some case studies rather than talk about the specific framework and then look forward to what you publish later on this year.

Kirsten: [00:47:50] We have, over time, like teased out a view on that, but we really felt like we needed to take a step back, think about all of the lessons that we’ve learned, all of the observations that we’ve made, all of the reading that we’ve done around brands and say, what really makes a good brand? What is a framework that we might be able to use to help the companies that we’re working with, understand whether they’re on a path to set the stage and foundation for building a great brand? And so through those efforts, we came up with 6 core tenets that we felt really underpinned brand. And again, this is like from a mosaic of inputs. And then we went about kicking tires and testing on that from every angle. So we started with our own hypotheses and our own research. We went and had interviews with people who are experts in the industry. So people that are leaders of some of the most well-known recognizable brands and brands that we revere, we went and had conversations with people who are behind the scenes, brand whispers, if you will, working at agencies and have been doing this for decades across dozens or hundreds of brands, and we interviewed them along the criteria. We then went to consumers, and we went to over 14,000 people over the course of the study to explore their impressions of these 6 criteria and their impressions of brands.

And we started with a list of 100 brands, and we tried to get a real cross spectrum of things that would be obviously on the list and things that might not obviously be on the list. But really, they were focused on businesses at scale that are more or less known because we wanted to also talk to customers and noncustomers to really get a feeling for like does it vary between customers and noncustomers, can you actually build a brand and make a statement without having had a customer-first relationship. So we compared all of that information and ultimately got conviction around a framework, awaiting for a framework and scored these brands and build what we think is a pretty comprehensive list of traits and rankings and explored the rankings from all different angles in addition to those on the matrix, like, for instance, how big their businesses are, how fast their businesses have grown, et cetera. And it was really interesting and really fun. And I think it started to poke more questions and more explorations, which ultimately is like a pretty big body of work and conversation on this topic.

Patrick: [00:50:13] If you could sum it up in like a simple idea that wouldn’t betray the whole formula, how would you sum it up?

Kirsten: [00:50:20] A good brand delivers on its promise. A good brand has a clear directive around what relationship it wants to have with the consumers and the community at large, and it delivers on that in a consistent way across multiple or all touch points.

6. Ramon Pacheco Pardo, Shrimp to Whale: South Korea from the Forgotten War to K-Pop – Kalani Scarrott and Ramon Pacheco Pardo

Kalani Scarrott (07:17): Yeah. And I’ll ask this at the beginning just in case it might lead us down some rabbit holes, but your favorite period or even moment in South Korean history?

Ramon Pacheco Pardo (07:24): Yeah, that’s a great question. I mean, I really like a study in the 1980s, ’90s, the transition to democracy period because it was a people’s led process. And I find that very interesting how you saw different groups coming together. you have the student and workers movement that have been pressing for democracy for decades, but that’s the start of a strong feminist movement in Korea that also joins this fight for democracy among other things. but also normal white collar workers, office workers that traditionally have been less politicized in Korea. And obviously this group was smaller when Korea was poor, that also you in the fight for democracy. So you had all these different groups coming together. So I think that’s the one I enjoyed the most studying and researching and writing about.

Kalani Scarrott (08:15): Yeah. And in the book, you made a great illustration on the growth after the war, cause I think off the top of my head, the IMF even called South Korea basket case. So the growth from after the war. And you gave this great illustration just from someone being born in 1920 through to them turning 50. So could you highlight the changes they saw and what that looked like?

Ramon Pacheco Pardo (08:34): Yeah, it is interesting you, you pick up on the, on that, because quite a few readers have mentioned that, right? Including many Koreans who went through that process and said, Oh, that was me, right back in the day. So yes, that section I mean, I go back to someone who, who may have been born when Korea was under Japanese colonial rule who may have been sent to a Japanese mine as a slave worker, basically. Or who was a woman who may have been a sex slave or comfort women, right? Sent to one of the stations that Japan had during the Second World War. So a real suffering. We’re talking here, being a slave, basically of another country, right? And then how this person, during the Korean War, or after the Korean War, of course, during the Korean War, they would have suffer family losses after the Korean War having really poor.

(09:24): And that’s exactly when the World Bank was saying, Look, Korea is not, South Korea is not going to grow. It has no future, basically. And that person would have had to work extremely hard, obviously for his or her own sake to begin with, but also for the good of the country, for the country to, we can develop. And by the 1970s this person would live in a flat, probably in some cases, for the first time ever, they would be able to live in a flat they would have a TV, a fridge, things that in other countries were taken for granted. Of course you know, Europe, Australia, Canada, the US, but certainly not in Korea at the time. they would be able to scrap some holidays from time to time, probably to Jeju island of course in the south of South Korea.

(10:10): And they would have a completely different life from the moment when they were born. I draw this picture so to speak, in the book because if we compare with other countries that were already developed, where the development process took hundreds of years, really, we’re not even talking about decades. this wasn’t necessarily the case in other countries when the case of Korea, this was this compressed development in a period of 30, 40 years going for being colonized and extreme poverty to having a fairly middle class life, fairly stable job. And as I said, being able to go on holiday, something that certainly hadn’t been taken for granted by Koreans in, in history. Really.

Kalani Scarrott (10:52): Yeah. And it’s the insane growth and how quickly it’s all happened. That’s maybe what’s fascinating to me, cause I’ll pull this from your book “in 1953, South Korea was poorer than Subha Sub-Saharan Africa than the poorest region in the world.” And again, little to no natural resources. So some thought there might be better futures on the African continent, but what has South Korea done differently or maybe done better than other countries that have allowed it to succeed then? Yeah,

Ramon Pacheco Pardo (11:15): It’s interesting cause the comparison with Sub-Saharan Africa wasn’t mine, actually. It came from official documents that I read from different institutions, right? In a sense they were trying to say that back then there were different parts of the world that were really poor, right? And, and, and one of them was Korea the Korean peninsula in South Korea. And I think South Korea was able to do is actually three things. One of them, he was able to focus on the basics. So something that even before the 1960s, even after the Korean War, there was this focus on, on having universal education both girls and boys, actually, not only boys. That’s happening in some other countries Vaccination, for example. So, kids basically wouldn’t pass away, right? From, from tuberculosis or other diseases.

(12:08): And also focusing on the development of infrastructure. So trying to build housing, trying to build roads, railroads as well. So trying to build the basic infrastructure that any country would need if they want you to export. And that would be the second key point in the case of Korea, that other countries, if you look for example, at Latin America, they were focusing on this import substitution policy whereby they just wanted to get rid of foreign goods right, and produce domestic goods. But the case of credits was supplemented by exporting, right? By making goods that would be exported to the rest of the world. Of course, South Korea was not the first country to think about this. Mexicans have done it in the past, but South Korea really emphasizes in 1950s. So from the 1960s onwards and especially related to these, the emphasis on moving up the value added chain, because other developing countries, I wouldn’t say they were happy to only focus on textiles, shoes, et cetera, et cetera, but maybe had the long term thinking just say, Okay, how do we move to the next stage?

(13:12): Right? things like iron, for example, chemicals sorry, steel, chemicals later on shipping, semiconductors, et cetera, et cetera. So there was this focus on export about the long term component. And I think the third aspect is the strong network that the government had with the Chaebols that dominated the current economy, the big conglomerates these had downsides, of course there was corruption and, and some felt that the government was telling them basically what to do, at least until the 1980s. but they had upsides as well, which was you had these very big companies that were able to receive the capital from the state, but then they were able to become internationally competitive. And if they had been a small medium size enterprises, it might be me, have been very difficult to scale up sufficiently to be able to, to export so that, that matter as well in the case of Korea and to whether with the two of them, of course, the, the, the first aspect that I mentioned, you had this long-term planning to have a healthy population, educated population, and then they were, they were the workforce for this Chaebol that we’re working together with the government.

Kalani Scarrott (14:22): Yeah, there’s a million different threads I could pull on there, but I’ll start with the Chaebols. So could you explain, just for someone who’s never heard of the term, what they are, and then maybe why were they able to flourish and what’s their function, I guess, in the greater economy of South Korea?

Ramon Pacheco Pardo (14:35): Yeah, absolutely. There are these big conglomerates that span many different sectors. So they can span 30, 40, 50, 60 different sectors. Now, this gives them a couple of advantages. one of them is a variable to attract more capital because of their size, right? most of them are too big to fail, even though the, in Asian financial crisis, maybe this wasn’t the case if we look at some of them, but for many, we thought they were too big to fail. So obviously they receive a state support as, as well. And, and second characteristic, because they were in so many different sectors. If you look at the Chaebols such as Samsung, we know them because of the semiconductors and mobile phones. So if you go to Korea, for example, they also doing insurance. They’re involved in the housing sector, so involved in all types of sectors.

(15:26): And, and of course the advantage of this is that if one of the sectors is not working quite well, but some others are working better, right? this means that the Chaebol can survive, right? It’s not focused on a single sector. They’re very diversified. and if one of them is not working well, they can cut their losses and focus on other ones, right? And, example of Samsung that they just mentioned, for example, for a while, Samsung tried to get into the car making sector. This actually didn’t work right? But, but it’s very strong in many other sectors. So the, the company didn’t disappear, it was able to continue, right? So this allows for a long term planning that it wouldn’t be able, if you only focus on one sector or, or you only had one company essentially in two or three sectors only…

…Kalani Scarrott (18:43): And yeah, for South Korea overall going forward, how bullish and excited or positive are you about their future? Because you mentioned they’ve moved up the value-added chain. So what is now what in the past might have been steel, shipbuilding now is semiconductors, internet of things, because Korea’s done very well, over 50 million population, economy’s fourth largest in Asia, and 10th in the world by GDP. So yeah, where do they go from here?

Ramon Pacheco Pardo (19:05): Yes. I mean, that’s really good question. Cause there is a big discussion in, in Korea. I mean, it’s not new, but you can trace it back at least to the 1980s about to what extent Korea can continue to thrive, especially in consideration like this next to China, right? And, China is also moving up the value added chain. This has been a very big fear in Korea. As I said, it’s not new, It has been there for 40 years, but Korea has been able to continue to innovate to an extent that hasn’t been absorbed, so to speak by China. there was also fear in the past that he wouldn’t be able to compete with Japan. So again, that it would be a squeeze between high tech, Japan, low wage China. But now if we look at Korea, it competes at the global level, not only with Japan, in, in some sector, in some sectors, of course Japan and other countries, US, Europe, other countries are more technological advanced.

(19:53): But in some others, if you look at semiconductors, well Korea’s have there, along with Taiwan, for example. if you look at the green shipping which is I think the next big growth engine for Korea it leads at the global level, not in shipping first of all, but in the more environmentally friendly ships that increasingly we have to use for transportation, right? At the global level. if you look at robotics Korea’s getting up there, together with Japan, which is probably the most advanced country in this, in this sector, right? And now you see for example, after the pandemic, the biotech sector, right? So, so Korea, for the first time ever really developing an indigenous vaccine, it wasn’t able to export it. But who knows in the future it might be something that is able to do, to do as well.

(20:37): So I think innovation really is, is where Korea can thrive. I think it’s well known there is a population decline. Of course, some people see this as a challenge. but then I think there is a debate there because it can be a challenge if there are less workers, but we focus on the economy. Something interesting that you see in Koreas that focus on these less labor intensive sectors, cause it doesn’t have enough workers, right? And more focused on these high tech, capital intensive sectors. Plus, for example something very interesting, whenever I visit the increasing presence of robots actually before it was in factories only, but now you go to the airport or you go to a restaurant and you see robots because they simply don’t have enough workers, right? So robots, for example, they will take your dishes, you know, once they’re dirty instead of a waiter doing this because they don’t have enough, right?

(21:25): So after each of the robot, then they have to take it somewhere so it can be picked up, right? So I think that’s where I see the future of Korea going. The innovation, right? And innovation also on how to drive economic growth within the workforce. Because I, I don’t think even if the birth rate goes up is, is not going to reach the replacement rate doesn’t happen any developed country actually. And that’s not going to happen in Korea. And I don’t see Korea opening up too much migration that’s not really on the cards in my view. We may be surprised, but I don’t think it’s on the cards. So, so we’re going to see this innovation in terms of how to drive growth in an environment, which you actually have less workers as well.

7. How Binance CEO and aides plotted to dodge regulators in U.S. and UK – Tom Wilson and Angus Berwick

As 2022 dawned, Changpeng Zhao was riding high. In less than five years, the founder and chief executive of Binance had turned his young company into the world’s largest crypto exchange, accounting for more than half the trading in the trillion-dollar market.

True, global authorities were scrutinising crypto exchanges ever-more closely. But the Chinese-born billionaire, known to staff and fans by his initials, CZ, had that covered. He told customers in a blog post in January that Binance “embraces regulations” and “has always worked collaboratively with regulators all over the world.”

Behind the scenes, however, trouble loomed.

For at least a year before that post, the U.S. Justice Department had been pursuing a money laundering investigation into Binance, seeking extensive records on Binance’s policies and the conduct of Zhao and other top executives, Reuters reported on Sept. 1. Binance called such requests a “standard process” and said it works with agencies worldwide to address their questions.

Now, new reporting by Reuters reveals fresh details about Binance’s strategy for keeping regulators at arm’s length and continuing disarray in its compliance programme. The reporting includes interviews with around 30 former employees, advisers and business partners and a review of thousands of company messages, emails and documents dated between 2017 and early 2022.

It shows that in 2018, Zhao approved a plan by lieutenants to “insulate” Binance from scrutiny by U.S. authorities by setting up a new American exchange. The new exchange would draw regulators’ attention away from the main platform by serving as a “regulatory inquiry clearing house,” according to the proposal. Executives went on to set the plan in motion, company messages show.

In public, Zhao said the new U.S. exchange – called Binance.US – was a “fully independent entity.” In reality, Zhao controlled Binance.US, directing its management from abroad, according to regulatory filings from 2020, company messages and interviews with former team members. An adviser, in a message to Binance executives, described the U.S. exchange as a “de facto subsidiary.

This year, Binance.US’s compliance operation has been in turmoil. Almost half the U.S. compliance team quit by mid-2022 after a new U.S. boss was appointed by Zhao, according to four people who worked at Binance.US. The staff left, these people said, because the new chief pushed them to register users so swiftly that they couldn’t conduct proper money laundering checks.

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Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Amazon, Apple. and Costco. Holdings are subject to change at any time.