What We’re Reading (Week Ending 19 July 2020) - 19 Jul 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 19 July 2020):
1. Here We Are: 5 Stories That Got Us To Now – Morgan Housel
We are lucky that a lot of today’s economy can shift seamlessly into remote work. It wouldn’t have been possible to this extent if Covid-19 struct in 2010 instead of 2020.
But it again sets up a stark contrast of haves and have nots, and groups of people who are experiencing Covid-19 in different ways.
Massachusetts did a survey in April that tells the story:
- 88% of those with an advanced degree can work from home, vs. 35% with a high school degree or less.
- 75% of those making more than $150,000 a year can work from home, vs. 44% of those earning less than $50,000 a year.
- 74% of salaried workers can get their jobs done from home, vs. 40% of hourly workers.
There is a long history of economies being hit with downpours. But this is the first in which perhaps 70% of the economy has a sturdy umbrella while 30% is left to get soaked…
… In 1900 roughly 800 per 100,000 Americans died each year from infectious disease. By 2014 that was 45.6 per 100,000 – a 94% decline…
…This decline is probably the best thing to ever happen to humanity.
To follow that sentence with “but” is a step too far. It’s a wholly good thing.
However, it creates an anomaly.
We are medically more prepared to fight disease than ever before. But, psychologically, the mere thought of a pandemic has never felt so foreign, so unprecedented, so upending.
What was a tragic but expected part of life 100 years ago is now a tragic and inconceivable part of life in 2020.
2. 5 Thoughts on a World with No Yield – Ben Carlson
If you’re waiting for valuations to revert back to some magical 15x average CAPE ratio from 1871 you may be waiting for a long time if the low yield environment is here for some time.
The best argument against this line of thinking is a place like Japan where interest rates have been on the floor since 1990. Rates have been low or negative in many European countries for a number of years now too.
My counterargument to that case would be the United States now makes up 55% of the global equity market cap. Fifty percent of all Americans take part in the stock market (it was just 1% of the population in the Great Depression). Americans are on their own when it comes to saving and investing for retirement and we have a much worse social safety net than these other countries.
At the height of the dot-com bubble, the highest stock market valuations in history, investors could still earn 5-6% yields on U.S. Treasuries. That is not the case today.
Valuation is not useless but it does require context.
3. Charlie Songhurst – Lessons from Investing in 483 Companies – Patrick OShaughnessy and Charlie Songhurst
There’s a book by Will Durant called Caesar and Christ, it’s a whole history of Rome, from the founding to 500 AD and sort of the full history and afterwards. So it’s interesting to think, how would you invest through that? Do you buy or sell Roman real estate when Caesar’s murdered? Cause you get a civil war and you get chaos, but then you get Augustus and peace afterwards. Then when you get this whole state of bad emperors and it looks like everything’s going to fall apart, maybe you would sell and then you get Hadrian and the good emperors and you get a great hundred years.
It makes you think about sort of volatility and about having to make decisions with only information available at that time. And what’s so interesting is, you do get this sort of pattern of going from a power and sort of fashion being to have your base in city of Rome, to being out in Capua or out in the smaller provinces. And that cycle seems to co-exist for like the 500 years of history. And if you look at London, I think the peak population was in the 1930s. I think it’s still higher than the present population. Or it may just have peaked so maybe that’s the beginning of one of these great 40 year demographic changes, but people move back to the suburbs or not. This is speculation. I certainly don’t have as much conviction on it as I do on startup stuff…
…Often my enthusiasm has been greater than my competence and it’s the people that bet on the enthusiasm more than the competence, I’m eternally grateful to them.
4. Netflix CEO Reed Hastings Responds To Whitney Tilson: Cover Your Short Position. Now – Reed Hastings
Next in the litany of Whitney threats is market saturation. In 2011, this is unlikely to affect us. Streaming is growing rapidly; it is propelling Hulu, YouTube, Netflix and others to huge growth rates. Streaming adoption will likely follow the classic S curve, and we’re still on the first part (acceleration) of the S curve. Since we expanded into streaming, Netflix net subscriber additions have been 1.9m in 2008, 2.9m in 2009, and over 7m this year (estimated). While saturation will happen eventually, given the recent huge acceleration of our business specifically, and streaming generally, saturation seems unlikely to hit in the short term.
The next issue is what Whitney calls our “weak content.” While Whitney may think “Family Guy” is weak content, our subscribers do not. Furthermore, our huge subscriber growth to date has been built on this “weak content,” so imagine how much upside we have as we improve our content, as we are always trying to do. I think what Whitney may be misunderstanding is that at $7.99 per month, consumers don’t expect to have everything under the sun. A variant of this misunderstanding is when DirecTV (DTV) advertises against Netflix, calling out some Netflix content weaknesses. When an $80 per month service is picking on an $8 per month service, the $8 per month service just gets more attention from consumers and grows even faster.
5. 3 lessons from owning FAANG stocks for over a decade – Chin Hui Leong
In January 2007, I bought shares of a little known, US-based business doing DVD rentals by mail. Little did I know that, by doing so, I had bought the first of a set of five coveted stocks that are now affectionately known as “FAANG”.
You see, that DVD-rental business slowly but surely morphed into a massive global online streaming service. The company’s name? Netflix (NASDAQ: NFLX).
I still own around half of my shares from 13 years ago, and those shares are up over 160 times my original cost.
But that was not all.
6. State of the Cloud 2020 – Byron Deeter, Elliott Robinson, Hansae Catlett, Mary D’onofrio
By 2020 it’s estimated that the average cost of a data breach will be over $150 million, with the global annual cost forecast to be $2.1 trillion. New laws such as GDPR and CCPA are creating the demand for enterprises to tighten their data privacy practices.
“While many tech companies were architected to collect data, they were not necessarily architected to safely store data. Today there’s not just a rift, but a chasm between where data privacy technology, processes, and regulations should be and where they are, thus creating massive amounts of “privacy debt,” wrote Partner Alex Ferrara in his Data Privacy Engineering Roadmap.
“Like technical debt, privacy debt requires reworking internal systems to adapt and build to the newest standards, which will not only make consumers happier but also make companies better.”
We’re seeing a new category of technology dedicated to helping enterprises, large and small, comply with global privacy regulations and help protect consumer data. For example, last year Bessemer invested in BigID’s Series C, a data intelligence platform that finds, analyzes, and de-risks identity data, allowing enterprises to understand where their sensitive data lives, at scale.
7. “One of the Investment Greats” Explains His Portfolio Strategy – Robert Korajczyk and Lou Simpson
Well, I think you need a combination of quantitative and qualitative skills. Most people now have the quantitative skills. The qualitative skills develop over time.
But, as Warren used to tell me, “You’re better off being approximately right than exactly wrong.” Everyone talks about modeling—and it’s probably helpful to do modeling—but if you can be approximately right, you will do well.
For example, one thing you need to determine is: Are the company’s leaders honest? Do they have integrity? Do they have huge turnover? Do they treat their people poorly? Does the CEO believe in running the business for the long term, or is he or she focused on the next quarter’s consensus earnings?
