What We’re Reading (Week Ending 25 April 2021) - 25 Apr 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 25 April 2021):
1. So you want to become a long-term investor – Chin Hui Leong
You do not make money from buying stocks. As an investor, finding and buying a great stock is just the first step. But simply purchasing shares of an outstanding business or company does not guarantee that you will make money out of it.If you fail to hold this stock for the long term, you are unlikely to realise its full potential.
Yet, most of the attention is focused on what stock to buy. Far fewer words are written on what
is more important: holding the stock for the long term. So, let us correct this shortfall today.
Do not just do something, sit there.
As French philosopher Blaise Pascal says: “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
There is nothing particularly special about holding a stock for many years. All you have to do is to, well, do nothing. But sitting around without taking any action can be harder than it looks.
Take Netflix, for example, a stock that I have owned for more than 14 years. Over this time frame, shares of the online streaming giant have gained well over 150 times, a handsome return by any measure.
However, if you think that holding Netflix for 14 years was easy, think again. Between 2007 and 2020, its shares plunged by 20 per cent or more, from peak to trough, in all but two years.
To add to that, there were seven years when the shares sank 30 per cent or more, as shown in the accompanying chart.
To top it off, they fell by nearly 80 per cent in 2011, when it made a mess of its transition from a DVD-by-mail service to online streaming. By splitting these two services into separate payment plans, the subscription price for the new DVD and streaming bundle rose by 60 per cent, angering its membership base.
Thankfully, Netflix chief executive officer (CEO) Reed Hastings owned up to his mistake a month later and rolled back the changes.
Today, a decade later, we can say his decision to pivot to online streaming has paid off in spades. At the end of 2020, Netflix had amassed over 200 million paid subscribers, a feat that was unlikely to be achieved through its original DVD-by-mail business.
But for investors, there were moments of heartburn to endure, even for those who believed in where the company was headed.
2. How a surprising discovery turned into a promising new early-detection test for cancer – Fastco Works
In 2013, the healthcare company Illumina began offering a non-invasive prenatal test (NIPT) to pregnant women. The test aimed to find tiny DNA fragments in the women’s blood that might indicate chromosomal abnormalities in the fetuses they were carrying—abnormalities that could signal the presence of genetic disorders such as Down syndrome.
Dr. Meredith Halks-Miller, pathologist and laboratory director of Illumina’s NIPT clinical lab at the time, noticed odd findings in some of the blood samples of the pregnant women. They didn’t show evidence of the chromosomal disorders the test was designed to find, but they indicated chromosomal abnormalities that raised suspicions.
“I was pretty sure that these expectant mothers had cancer and didn’t know it,” Halks-Miller recalls. “I encouraged the clinical consulting staff to do more clinical follow-up for these patients even though they appeared to be healthy.”
Halks-Miller shared the information with Illumina’s chief medical officer at the time, Rick Klausner, a former director of the National Cancer Institute, who told her, “I don’t know of anything else that changes the genome the way you’re showing me here.”
Sure enough, 10 women with these DNA abnormalities were eventually diagnosed with cancer.
That was the “Eureka!” moment that led to Galleri, a new multi-cancer early detection test from the healthcare company GRAIL, which was spun off from Illumina, with Klausner as a cofounder, in 2016 (Klausner also serves on GRAIL’s board of directors). GRAIL hopes that Galleri, which is expected to become commercially available before summer, could revolutionize cancer screening, potentially leading to major reductions in mortality and expense.
3. Transcript of Li Lu and Bruce Greenwald – Value Investing in China – Roiss Investment Insights
Bruce: Let’s talk about the evolution of the markets. In particular at a 2010 panel at Columbia Business School, you mentioned that Asia’s role in the global financial systems was becoming increasingly important. Looking back, how has Asia’s role evolved over the last ten years and what about China’s role going forward in both the world’s business economy and in the financial?
Li Lu: It has gone exactly as we predicted. Asia has indeed become more important and in particular china. In the next few decades I would say that the Chinese market and Asia in general will become even more significant. The dynamics that are already set in place will continue to play out in a robust way. The Chinese security market in general and the Asian economy will become an ever more important component of the global market.
Bruce: Let me give you some data that I don’t think is widely appreciated. The Chinese numbers are obviously difficult to interpret, at least the official numbers. Whenever you see that, the data you want to look at is where there is a reliable counter. The trade data is reliable, partly because every Chinese export has to be an import in another country and every Chinese import has to be an export from another country. Over the last eight to ten years China’s trade has grown only about two and a half percent a year, less than one percent faster than the US trade. What does that say about Chinese growth? It is clearly much slower than the trade growth prior to 2010. It has been fluctuating but if anything it has been slowing down. What does that say about China’s future?
Li Lu: It tells you that the characteristics of the Chinese economy has changed fundamentally. What propelled the Chinese growth up until 10 years ago was international trade. Back in 2010 the net trade, so export-import netted out was roughly about nine percent of GDP. That means that the Chinese economy was heavily dependent on the global market. As a result they were growing at a double-digit rate, when the rest of the world’s growth factor was a fraction of that. At a certain point once you become the world’s largest trading nation it becomes harder to grow. Another thing that is happening that after the citizens become middle-class, their demands change. As you point out roughly around ten years ago the Chinese economy has slowly evolved into a more consumer-driven one. Last year was a watershed year, in a sense that the total volume of retail sales for the first time overtook the US. China was the largest racial market in the whole world at 6 trillion $ compared to the 5.5 trillion of the US. Granted it was a special year, due to the pandemic. However, China is emerging to become the most dynamic, fastest growing consumer market in the whole world and that is likely to continue for many decades to come. Wanting to sell to the consumers, the middle class in China will make China even more attractive to the global economy. The characteristics of the economy will continue to change and provide interesting, unique opportunities for global investors.
Bruce: The thing about developed economies is that they’re overwhelmingly service economies and not good economies. On that dimension it doesn’t look like China is doing particularly well. The export data one would understand to slow down, but the fact that the import data has slowed down just as much or more, tells you something about the nature of domestic growth in China. What about the challenges in the service sector in China?
Li Lu: You’re right that at the current stage the service sector has yet to become as powerful and dominant as it is in most mature, developed economies in the west, but that’s really an amazing set of opportunities for the decades ahead of them. It isn’t that much different than all other developed economies at a comparable stage of the development state at around 10.000$ per capita GDP, which is where China is today. One can see that both consumption and services are basically the areas that are growing the fastest. Overall trade internationally is still growing at a robust rate, but not as fast as the domestic side of the economy. That is why their share of the GDP has gradually begun to shrink. It just tells you the different stage of the economy and where it is today.
Bruce: Where do you see the unique challenges and opportunities of value investing in China?
Li Lu: China remains one of the best markets if you are a value investor. The market is still underdeveloped and as a result not representative of the real economy compared to the US. The traders and investors are also not as mature and there’s still a mentality of fast trading and high turnover. That results in some of the companies going through a faster pace of the boom and bust circle, which in turn provided opportunities for those who are mature and patient investors. The service sector or the economy when it comes to financial services is still yet to be developed. China is right at that stage where the financial service industry is about to take off in a big way. It also just so happens that the Chinese government is quite keen in making macroeconomic policies quite conducive for the development of the financial service industry. They began to open up to the global firms in a way that they have never done before. All those confluences of factors make the market more attractive today, than it was before.
4. How Payment Processor Stripe Became Silicon Valley’s Hottest Startup – Peter Rudegeair
The pandemic threatened to clobber Stripe Inc. Instead, it turbocharged the company.
Stripe processes payments for e-commerce companies, keeping a tiny cut of each purchase as a fee for its services. When stay-at-home orders early in the pandemic caused spending to plunge and refund requests to skyrocket, the outlook wasn’t great.
Then everything moved online. More than 500,000 doctors’ offices, farmers markets and other businesses migrated to online payments and used Stripe to do it. As people worked out at home, redecorated or both, Stripe customers such as Peloton Interactive Inc. and Wayfair Inc. enjoyed blockbuster sales.
Stripe’s revenue last year rose nearly 70%, to about $7.4 billion, according to people with knowledge of the company’s finances. Other startups might have flashier apps or more recognized brands, but Stripe showed that it is better to be a workhorse than a show pony…
…Irish brothers Patrick and John Collison launched Stripe around 2010 after dropping out of the Massachusetts Institute of Technology and Harvard University, respectively. Frustrated with the experience of getting their earlier business ventures approved for credit-card-processing accounts, the Collisons decided to build a solution themselves.
At the time, there was a perception that online payments were a solved problem. Dot-com darling PayPal Holdings Inc. had been around for more than a decade, but after it sold itself to eBay Inc., the company primarily catered to merchants there.
Stripe started out by working with a group particularly neglected by banks: other startups. As customers such as Instacart Inc. and DoorDash Inc. broke out, Stripe broke out with them.
5. The Spectrum of Optimism and Pessimism – Morgan Housel
At one end you have the pure optimist. He thinks everything is great, will always be great, and sees all negativity as a character flaw. Part is rooted in ego: he’s so confident in himself that he can’t fathom anything going wrong…
…One rung down are the optimists who are wholly confident in themselves but equally pessimistic about others. They’re easy to mistake for pessimists, but they actually view their own futures as flawless…
…In the middle we have what I call reasonable optimists: those who acknowledge that history is a constant chain of problems and disappointments and setbacks, but who remain optimistic because they know setbacks don’t prevent eventual progress. They sound like hypocrites and flip-floppers, but often they’re just looking further ahead than other people…
…Further down come the skeptics. They don’t disagree that progress is possible, even likely. But they have such a high bar for proving it that only hindsight observations are convincing – and even then, the question whether the data is accurate, or if there’s something else we’re not looking at. They’re nice people but torture themselves in this state, because they know progress is occurring but rather than enjoy it then fight to deny it…
…And at last come the pure pessimists. He thinks everything is terrible, will always be terrible, and sees all positivity as a character flaw. Part is rooted in ego: he has so little confidence in himself that he can’t fathom anything going right. He’s the polar opposite of the pure optimist, and just as detached from reality.
6. Doris Buffett Said To Invest At Failed Firm – Caroline E. Mayer
Doris Buffett, sister of Omaha investor Warren Buffett, apparently was one of two customers of a Falls Church brokerage company whose heavy stock market losses forced the firm to close its doors last week, according to sources.
The two customers, who lost $6 million in the market’s collapse, defaulted on $2.6 million in obligations owed to the firm, First Potomac Securities Corp., said Carole L. Haynes, the company’s president. She declined to identify the customers.
One customer, who apparently was Doris Buffett, owed $1.4 million because of losses in stock and option transactions…
…Warren Buffett, chairman of Berkshire Hathaway Co. Inc., is a highly successful investor whose net worth recently was estimated at $2.1 billion by Forbes magazine.
Sources said that Doris Buffett’s losses came on investments in stocks or options purchased through a margin account, which allows investors to pay for only part of the investment. The rest is borrowed from the brokerage firm.
Investors who buy stocks on margin put up 50 percent of the cost of the purchase, while customers trading in options need only put up 15 percent of the investment’s cost.If the price of the stock or option falls, the customer may be required to deposit additional cash or collateral in the margin account immediately.
7. Doris Buffett | A life of fortunes and misfortunes – Bill Freehling
Doris Buffett has spent the better part of the last 14 years giving away her considerable fortune to people who have suffered some misfortune in their lives.
The 68 years that Buffett lived before that taught her plenty about misfortune.
Despite being the sister of one of the world’s richest men, Fredericksburg resident Doris Buffett has suffered plenty of pain and hardship during her life, a new book by Michael Zitz makes clear.
“For the first sixty-eight years of her life, whoever was to blame, not much had gone right for Doris, despite being blessed with beauty, brains and charisma,” Zitz writes in “Giving It All Away: The Doris Buffett Story.”
First there was the childhood spent with a verbally abusive mother who convinced Doris she was stupid despite IQ tests showing her intelligence rivaled that of her younger brother, Warren. She wasn’t encouraged to attend college, had four failed marriages, lost nearly all her money in a 1987 stock market crash, had a falling out with her three children and has gone through counseling for depression.
But Doris Buffett’s life took a dramatic turn for the better in 1996–and not just because the millions of dollars she inherited in Berkshire Hathaway stock when her mother died ended any personal financial needs she would ever have.
To be sure, the fortune has allowed Doris Buffett to lead a comfortable life. She beautifully restored a Caroline Street house in Fredericksburg, and she also has a waterfront home in Rockport, Maine. She often flies by private jet, drives a nice car and loves diamonds.
But the primary fulfillment that the money has brought Doris Buffett is the ability to help others.
Buffett set up The Sunshine Lady Foundation shortly after she inherited the money in 1996. Over the past 14 years, she’s donated more than $100 million in her own money, and her goal is to give away her entire fortune before she dies.
Some of the personal misfortunes that befell Buffett have shaped the causes she supports. She’s given millions to educate battered women and prisoners, to build facilities for treatment of the mentally ill and to provide a better childhood for the underprivileged.
Letters pour in seeking help from Buffett’s foundation. The people who receive assistance are those who have suffered bad luck through no fault of their own, and who will be able to use the money to improve their lives. Her brother Warren, who knows a thing or two about giving away millions (or in his case billions), puts it thusly in the foreword to “Giving It All Away”:
“If you’ve created your own problems, don’t bother to call Doris. If some undeserved blow has upended you, however, she will spend both her money and time to get you back on your feet. Her interest in you will be both personal and enduring.”
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 Illumina, Netflix, and PayPal. Holdings are subject to change at any time.
