What We’re Reading (Week Ending 30 August 2020) - 30 Aug 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.” 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 30 August 2020):
1. Matt Ball – The Future of Media: Movies, the Metaverse, and More – Patrick O’Shaughnessy and Matthew Ball
Certainly I think under COVID, this topic of the metaverse has certainly accelerated and there were a lot of conflations. I think a lot of people think of the metaverse as virtual worlds, those certainly have existed for decades. They think of it as UGC content creation platform, such as Minecraft, that’s basically an interactive or immersive version of a YouTube. Others think about this from an avatar perspective. You have a virtual version of you that exists somewhere else that you have control of.
All of those are interesting elements, even AR glasses come into the conversation about the metaverse. But if you’re talking about the metaverse, that’s basically like saying Google is the internet, or iPhone is the internet, or the Yahoo directory was the internet. It’s not entirely wrong. It’s certainly an important element of the consumer experience of it or what they might describe it, but it completely misses the idea that the internet itself is a series of tubes in the ground, standards, protocols, technology, and ideas that were formalized into infrastructure
2. Risk Is Never as Simple as It Seems – Ben Carlson
There are plenty of examples like this where safety measures can offer a false sense of security, thus introducing additional risks to the equation.
A study in Norway found new cars, despite having better safety measures and more advanced technology, get into more crashes than old cars. And this takes into account the fact that there are more new cars on the road. The probability of damage and injury is higher when driving a new car because people feel safer driving them and also use them more often.
Safety measures in the world of finance are sure to have unintended consequences as well.
The financial models many banks used gave them a false sense of security leading up to the Great Financial Crisis. Garbage-in, garbage out is the same for financial models as it is for your sink.
The measures enacted during the current crisis, as necessary as they may have been, are sure to change the way investors view risk in the years ahead.
3. A Robot Tried to Fix Value Investing and Ended Up Buying Amazon – Justina Lee
The strategy of buying stocks that appear cheap relative to their fundamentals has been struggling for more than a decade, but a South Korean money manager reckons its AI-augmented exchange-traded fund is the answer.
Qraft Technologies filed on Friday to create the Qraft AI-Enhanced U.S. Next Value ETF, ticker NVQ. It says this strategy can revive the factor by estimating a firm’s intangible assets based on financial statements and patent databases…
… The top three holdings of the machine-guided fund in July were Amazon.com Inc., Alphabet Inc. and Facebook Inc. Those are far from the kind of undervalued stocks typically favored by a value strategy. But to Qraft, it’s just value 2.0.
“Intangible assets have become a more important factor in the actual value of the company due to the development of information technology,” founder Hyungsik Kim wrote in an email. “It is easy to tell which of the following is more important in measuring the value of Amazon: warehouses (tangibles) or automated logistics systems (intangibles).”
It’s the rallying cry for many remaining proponents of value: The factor isn’t dead, it’s simply plagued by outdated accounting rules that treat intangible investments such as research as expenses rather than capital.
As a result, knowledge-intensive firms end up with much lower book values and higher costs, which make them look more expensive than they actually are.
4. Tweetstorm on how an onion farmer in the USA managed to corner the market for onions – Sahil Bloom
1/ Vince Kosuga fancied himself as more than just your average onion farmer. He had a productive 5,000-acre onion farm in Pine Island, NY. But it was his side hustle, trading in futures markets, that would make him (in)famous.
2/ Futures markets offered a way for farmers to hedge their risk. They could execute a contract to sell their crop at a fixed price at a later date, removing the risk of price fluctuations. But Vince was more interested in using futures for speculation. He wanted to get rich!
3/ After some unsuccessful episodes trading in wheat futures, Vince Kosuga had a (seemingly obvious) revelation. He knew all there was to know about onions, so he should be trading in onions! He would pull off the greatest onion trade of all time.
4/ The idea was simple. He would corner the entire US market for onions. Executing against it was not. To pull it off, he would need to own the vast majority of all harvested or in-ground onions in the country. But Vince thought big. He and his partners began buying onions.
5/ They built secret warehouses across the country, buying and storing millions of onions. But this only covered harvested onions, which was just one piece of the market. So they began buying up futures contracts, essentially taking ownership of all future US onion harvests.
6/ By the fall of 1955, Vince Kosuga had a stranglehold on the entire market for onions in the United States. Most importantly, no one knew it. With this control, Vince Kosuga could move onion prices as he pleased. Now, it was time to get rich.
5. Alternative Forms of Wealth – Morgan Housel
You have a level of independence that goes beyond money. You can cook for yourself, do your own laundry, change a flat tire, and be alone without getting bored…
… You have emotional stability, accepting reality without it driving you crazy.
You can lead a productive conversation with a stranger from any background.
You don’t have to pretend to look busy to justify your salary.
You have enough time to prioritize eight hours of sleep with stress levels low enough to allow sleep.
You can say, “I have no idea” when you have no idea.
6. Test results in hand, Thrive raises $257M to push liquid biopsy toward approval – Jason Mast
Thrive started raising for the Series B immediately after the study results were published in Science at the end of April. That study, run across 10,000 women at the Geisinger Health System, showed for the first time that a blood test could help doctors diagnose certain types of cancer in patients who did not yet show symptoms, more than doubling the percentage of cancers that were detected.
“We wanted that data in hand as a big catalyst to drive the process,” Thrive CFO Isaac Ro told Endpoints.
7. Could Roger Federer be as successful playing badminton? – Martin Hirt
In late January, Roger Federer won his sixth Australian Open title. His tally of Grand Slam championships now numbers 20—an incredible feat. As tennis’s biggest star, he is well compensated for his efforts: Forbes magazine estimates that he took home $64 million last year.
Why does Federer make so much money? The answer, most would say, is clear: talent, hard work, good looks, business acumen.
But what if Federer played badminton? He would face Lin Dan, the champion in that sport. Each man may be the best ever in his respective game, and both are extremely marketable, with competitive instincts and personal charm. But Dan doesn’t make anywhere near what Federer does—and he never will. That’s because Dan has an “industry” disadvantage. A Top 10 tennis player makes 10 to 20 times what a Top 10 player in any other racket sport earns…
… The role of industry in a company’s position is so substantial that you’d rather be an average company in a great industry than a great company in an average industry. The median pharmaceutical company (India-based Sun Pharmaceuticals), the median software company (Adobe Systems), and the median semiconductor company (Marvell Technology Group) all would be in the top quintile of chemicals companies and the top 10% of food products companies.
In some cases, you’d rather be in your supplier’s industry than in your own. For example, the average economic profit of airlines is a loss of $99 million, while suppliers in the aerospace and defense category average a profit of $453 million. In fact, the 20th percentile aerospace and defense supplier, Saab AB, earns more economic profit than the 80th percentile airline, Air New Zealand. That is not to say that all airlines have poor economic performance (witness Japan Airlines), nor that all is rosy in aerospace and defense. But it is a fact of life that there are more and less attractive playing fields.
