What We’re Reading (Week Ending 28 February 2021) - 28 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 28 February 2021):
1. What Are mRNA Therapies, And How Are They Used For Vaccines? – CB Insights
The ongoing Covid-19 pandemic has highlighted the potential for mRNA therapies, with both of the current FDA-approved Covid-19 vaccines leveraging mRNA. But the potential for mRNA spans beyond that, to treating other infectious diseases, genetic diseases, and even cancer.
Cells use mRNA to translate DNA into proteins, which then can be used to replace abnormal or deficient proteins or to prepare a patient’s immune system to fight against infections or cancerous cells…
…Traditionally, vaccines use fragments of proteins to train the immune system to attack viruses that show similar proteins. However, manufacturing these protein fragments can take months — a particularly challenging timeline in the midst of a pandemic.
In contrast, mRNA vaccines encode protein fragments into a single strand of mRNA, then rely on cellular machinery to produce the proteins. This cuts manufacturing time to a number of weeks.
Moderna Therapeutics, with a Covid-19 vaccine approval under its belt, is already developing 3 new mRNA-based vaccines for HIV, seasonal flu, and the Nipah virus. Another major player in the space, CureVac, has partnered with the Bill and Melinda Gates Foundation to develop vaccines for Rotavirus and malaria…
…mRNA may be the key to unlocking personalized cancer therapies. By combining genetic screening, liquid biopsies, and artificial intelligence, healthcare providers can design and manufacture mRNA therapies specifically made for patients’ unique tumor genetics. Similar to vaccines, mRNA can be used to encode cancer-specific proteins that teach the immune system to recognize and target only a tumor (and not healthy tissue).
There are currently 150+ mRNA-focused clinical trials ongoing for blood cancers, melanoma, brain cancer, prostate cancer, and more.
2. Best Story Wins – Morgan Housel
The Civil War is probably the most well-documented period in American history. There are thousands of books analyzing every conceivable angle, chronicling every possible detail. But in 1990 Ken Burns’ Civil War documentary became an instant phenomenon, with 39 million viewers and winning 40 major film awards. As many Americans watched Ken Burns’ Civil War in 1990 as watched the Super Bowl that year. And all he did – not to minimize it, because it’s such a feat – is take 130-year-old existing information and wove it into a (very) good story.
Bill Bryson is the same. His books fly off the shelves, which I understand drives the little-known academics who uncovered the things he writes about crazy. His latest work is basically an anatomy textbook. It has no new information, no discoveries. But it’s so well written – he tells such a good story – that it became an instant New York Times bestseller and the Washington Post’s Book of the Year.
Charles Darwin didn’t discover evolution, he just wrote the first and most compelling book about it.
John Burr Williams had more profound insight on the topic of valuing companies than Benjamin Graham. But Graham knew how to write a good paragraph, so he became the legend…
…When a topic is complex, stories are like leverage.
Leverage is just something that squeezes the full potential out of something with less effort. Stories can leverage ideas in the same way debt can leverage assets.
Trying to explain something like physics is so hard if you’re just deadlifting facts and formulas. But if you can explain things like how fire works with a story about balls rolling down hills and running into each other – watch Richard Feynman, an astounding storyteller, do that here – you can explain something complex in seconds, without much effort.
This is more than just persuading others. Stories help you just as much. Part of what made Albert Einstein so talented was his imagination and ability to distill complexity into a simple scene in his head. When he was 16 he started imagining what it would be like to ride on a beam of light, holding onto the sides like a flying carpet and thinking through how it would travel and bend. Soon after he began imagining what your body would feel like if you were in an enclosed elevator riding through space. He contemplated gravity by imagining bowling balls and billiard balls competing for space on a trampoline surface. He could process a textbook of information with the effort of a daydream.
Ken Burns once said: “The common stories are 1+1=2. We get it, they make sense. But the good stories are about 1+1=3.” That’s leverage.
3. The Stock Market Is Smarter Than All of Us – Ben Carlson
In Wealth, War and Wisdom, Barton Biggs writes about two of my most favorite historical topics: (1) World War II and (2) the stock market.
Biggs gives a blow-by-blow history of many of the turning points in the war through the lens of stock markets in various countries.
Many of those market moves seem completely counterintuitive:
On September 1, 1939, Hitler invaded Poland and Prime Minister Neville Chamberlain, his voice quavering, announced Britain was at war with Germany. The next day the New York Stock Exchange experienced a three-day mini-buying panic with a 20 point or 7% gain in the Dow. Volume was the busiest in two years as investors anticipated defense orders would create an economic boom.
We were on the brink of a second world war in 20 years yet investors remained optimistic.
The London stock market more or less predicted the United States would come along to help before it was too late:
The London stock market deduced in the early summer of 1940, even before the Battle of Britain at a time when the world and even many English despaired, that Britain would not be conquered. Stocks made a bottom for the ages in early June although it wasn’t evident until October that there would be no German invasion in 1940 and until Pearl Harbor 18 months later, that Britain would prevail.
It almost seems that throughout 1941 the London stock market intuitively sensed and responded to the growing and deepening alliance between Britain and the United States. It was more confident of America’s entry into the war than even Churchill. Certainly there was no good war news to celebrate because Britain was suffering defeat after defeat.
Even the German stock market got ahead of the fact that the tide was turning on Hitler before anyone else:
Similarly, the German stock market, even though imprisoned in the grip of a police state, somehow understood in October of 1941 that the crest of German conquest had been reached. It was an incredible insight. At the time, the German army appeared invincible. It had never lost a battle; it had never been forced to withdraw. There was no sign as yet that the triumphant offensive into the Soviet Union was failing. In fact, in early December a German patrol actually had a fleeting glimpse of the spires of Moscow, and at the time Germany had domain over more of Europe than the Holy Roman Empire. No one else understood this was the tipping point.
The war didn’t end until 1945 but the Dow bottomed in the spring of 1942 and never looked back:
4. Yuval Noah Harari: Lessons from a year of Covid – Yuval Noah Harari
Three basic rules can go a long way in protecting us from digital dictatorships, even in a time of plague. First, whenever you collect data on people — especially on what is happening inside their own bodies — this data should be used to help these people rather than to manipulate, control or harm them. My personal physician knows many extremely private things about me. I am OK with it, because I trust my physician to use this data for my benefit. My physician shouldn’t sell this data to any corporation or political party. It should be the same with any kind of “pandemic surveillance authority” we might establish.
Second, surveillance must always go both ways. If surveillance goes only from top to bottom, this is the high road to dictatorship. So whenever you increase surveillance of individuals, you should simultaneously increase surveillance of the government and big corporations too. For example, in the present crisis governments are distributing enormous amounts of money. The process of allocating funds should be made more transparent. As a citizen, I want to easily see who gets what, and who decided where the money goes. I want to make sure that the money goes to businesses that really need it rather than to a big corporation whose owners are friends with a minister. If the government says it is too complicated to establish such a monitoring system in the midst of a pandemic, don’t believe it. If it is not too complicated to start monitoring what you do — it is not too complicated to start monitoring what the government does.
Third, never allow too much data to be concentrated in any one place. Not during the epidemic, and not when it is over. A data monopoly is a recipe for dictatorship. So if we collect biometric data on people to stop the pandemic, this should be done by an independent health authority rather than by the police. And the resulting data should be kept separate from other data silos of government ministries and big corporations. Sure, it will create redundancies and inefficiencies. But inefficiency is a feature, not a bug. You want to prevent the rise of digital dictatorship? Keep things at least a bit inefficient.
The unprecedented scientific and technological successes of 2020 didn’t solve the Covid-19 crisis. They turned the epidemic from a natural calamity into a political dilemma. When the Black Death killed millions, nobody expected much from the kings and emperors. About a third of all English people died during the first wave of the Black Death, but this did not cause King Edward III of England to lose his throne. It was clearly beyond the power of rulers to stop the epidemic, so nobody blamed them for failure.
But today humankind has the scientific tools to stop Covid-19. Several countries, from Vietnam to Australia, proved that even without a vaccine, the available tools can halt the epidemic. These tools, however, have a high economic and social price. We can beat the virus — but we aren’t sure we are willing to pay the cost of victory. That’s why the scientific achievements have placed an enormous responsibility on the shoulders of politicians.
Unfortunately, too many politicians have failed to live up to this responsibility. For example, the populist presidents of the US and Brazil played down the danger, refused to heed experts and peddled conspiracy theories instead. They didn’t come up with a sound federal plan of action and sabotaged attempts by state and municipal authorities to halt the epidemic. The negligence and irresponsibility of the Trump and Bolsonaro administrations have resulted in hundreds of thousands of preventable deaths…
…One reason for the gap between scientific success and political failure is that scientists co-operated globally, whereas politicians tended to feud. Working under much stress and uncertainty, scientists throughout the world freely shared information and relied on the findings and insights of one another. Many important research projects were conducted by international teams. For example, one key study that demonstrated the efficacy of lockdown measures was conducted jointly by researchers from nine institutions — one in the UK, three in China, and five in the US.
5. Get Smart: How To Find The Next Growth Stock – Chin Hui Leong
We love business stories. A great tale can help you learn more about a business than you can ever hope to learn from a textbook.
The best part is…
…the story which you are about to hear actually happened.
What we are about to share is not some made-up story to make a point about investing. It’s a real-life story about innovation and failure. With that in mind, let’s get started.
Over a decade ago, a CEO stood at the stage, ready to reveal his company’s next exciting product. The anticipation was high for a huge reveal. The atmosphere was electric. The hype was in the air.
…and then, the moment finally arrived.
The CEO unveiled what he called a “revolutionary and magical” product. In fact, he was so confident that he declared the company’s new product as being five years ahead of other similar products, instantly pulling the shade over all its competitors. The statement was nothing short of bold, to say the least.
Now, to his credit, the company followed up by launching two models of the product within six months. The initial sales were promising. But with Christmas around the corner, the company blinked. Less than three months after the product launch, it decided to completely eliminate one of its product models.
If that wasn’t embarrassing enough, the company cut the price of the remaining model by 33%. Predictably, the customers that bought earlier were incensed. With his tail between his legs, the CEO offered to provide a rebate to soothe the feelings of the early buyers of its product. But the damage had already been done…
We are going to pause for a moment here to let you take in all that you have read so far.
The hype, the reveal, the promise, the fleeting initial success, and the bitter disappointment that followed…
Now, with all that in mind, here’s the question for you…
Given all that you know, would you, dear reader, be willing to back this company’s “revolutionary and magical” product for the next decade?
6. What Happened to Gold? – Michael Batnick
If you went into a laboratory to build a gold price optimizer, you would want a couple of things.
- A falling dollar
- Rising inflation expectations
- Money printing
- Central bank balance sheets expanding
- Fiscal deficits increasing Political turmoil
All of these things were in place over the last few months, and yet gold has done the opposite of what you expected it to do. It’s down 9% over the last 6 months, and it’s 15% below its highs in August.
Gold could rally on any one of the items I mentioned. All six were in place at the same time, and it couldn’t get out of its own way.
7. Dreams All the Way Up – Packy McCormick
In the late 1860’s, when the mile record stood at 4:36, runners around the world started seriously attempting to break the four minute barrier. Three different Walters in a row traded the record, bringing it down below 4:20 by the mid 1880’s.
Between 1942 – 1945, two Swedes, Gundar Hägg and Arne Andersson, traded the record four times, driving it down from 4:06.2 to 4:01.4, a nearly 5-second improvement in just three years. And then, nothing. The record stood, unimproved, for the next nine years, until Roger Bannister stepped up to the starting line at Iffley Road sports ground in Oxford.
Bannister took two seconds off the record, completing his mile in 3:59.4 and becoming the first person in history to break the four-minute mile.
His record stood for 46 days. John Landy smashed it with a 3:58.0. A year later, three runners broke the 4-minute mile in the same race, and today, over 1,500 people have run a competitive mile in under four minutes. Hicham El Guerrouj holds the world record with a 3:43.13 that he ran in 1999.
The moral of the story here is that there wasn’t necessarily anything physical keeping humans from breaking four minutes; it was mental. When people saw it could be done, they just kind of … did it. Bannister, through extraordinary performance, eliminated a mental barrier, and afterwards, other great but not all-time exceptional runners followed his lead.
In the public markets in the 2010s, the $1 trillion market cap was the four-minute mile. As someone who owned Apple stock and options earlier in the decade, I can tell you how frustrating it was that the stock seemed to trade at a discount (sub-10x P/E ratio) simply because it was so big, despite insane profitability and growth. $1 trillion felt like a restraining wall.
Then, on August 2, 2018, an extraordinary company broke another mental barrier, when Apple became the first US company to crack the $1 trillion market cap mark.
What happened next wasn’t quite the immediate flood that Bannister unleashed, but within 16 months, by January 2020, three more companies — Microsoft, then Amazon, then Google — had broken $1 trillion. FAAMG had been undervalued across the board. Since Apple couldn’t break $1 trillion for psychological reasons, and it was clear that the other four weren’t as valuable as Apple, they had to be worth some discount to Apple’s artificially low market cap.
Apple took the governor off, and today, after a wild, tech-friendly pandemic and zero interest rate policy (ZIRP) drove stocks higher, the FAAMG market caps are:
- Apple: $2.273 trillion
- Microsoft: $1.848 trillion
- Amazon: $1.651 trillion
- Google: $1.415 trillion
- Facebook: $770 billion
If certain parts of the market feel bubbly, these companies don’t. They’re category-defining companies that continue to grow and innovate at a faster clip than megacaps ever have before, and they trade at very reasonable NTM EV/EBITDA multiples:
- Apple: 22.0x
- Microsoft: 24.8x
- Amazon: 22.4x
- Google: 15.4x
- Facebook: 13.1x
That’s not bubbly…
…Here’s my logic: FAAMG stocks seem to be reasonably priced and good anchors off of which everything else is pegged. FAAMG (particularly Amazon and FB) market caps have actually grown faster than startup and non-FAAMG public tech valuations. Startup and non-FAAMG valuation growth is just starting to catch up to FAAMG growth over the past year.
Startups and smaller cap tech companies are being valued based on a probability that they can become as big as the FAAMG companies (or the biggest companies in their verticals), and even at the same probability, they should be worth 5-15x as much as they were worth a decade ago, because the ceiling has risen that much.
In other words, if you think that FAAMG are reasonably valued, and you think that the probability of newer companies coming in and eventually growing as big as the biggest tech companies is about the same as it was a decade ago, startups and smaller cap tech companies are actually fairly valued or even undervalued today…
…Shopify’s relationship with Amazon is the textbook example of P/FAAMG valuation.
Since going public in May 2015, Shopify’s stock is up over 5,000%. It’s currently trading at a 60x NTM EV / Revenue multiple and a 395.7x NTM PE ratio. Those are both very high numbers if you’re valuing Shopify based on the fundamentals, and indeed, Shopify has felt expensive at almost every point on its meteoric rise since late 2018.
Breaking apart SHOP’s valuation that way, there are two factors: how much has Amazon grown, and how much has the probability that Shopify becomes as big as Amazon changed?
- Amazon Market Cap. Over the past five years, Amazon has grown its market cap 6.7x, from $245 billion to $1.65 trillion.
- Probability SHOP Becomes AMZN. The implied probability that Shopify becomes Amazon, based on their relative market caps, has increased from 0.68% to 10.76%, not taking into account the fact that Amazon is likely to continue to get bigger as SHOP catches up.
Let’s assume Amazon’s future growth and the discount rate come out in the wash, which is conservative, and we’re left with an ~11% chance that Shopify becomes as big as Amazon. If you believe that Amazon is fairly valued, and that an 11% chance of Shopify becoming Amazon is reasonable, then Shopify’s market cap isn’t as crazy as it seems from looking only at traditional valuation metrics.
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 Alphabet, Amazon, Apple, Facebook, Microsoft, and Shopify. Holdings are subject to change at any time.
