Monday, 20 May 2019

The problem with Ben Thompson's 'aggregation theory'

Ben Thompson, via his website Stratechery ('Strategy' and 'Tech'), has made a name for himself over the past decade popularising the concept of 'aggregation theory'. I invite readers to check out his material directly for a fuller explanation, but in short, his argument is that tech platforms have become so powerful (and profitable or potentially profitable) because in the internet era, the game has changed, and it has become far more important for companies to aggregate (and control) demand than to control supply (the latter of which Ben argues was the case in the past). Organisations that now control demand are the ones destined to prosper, and those companies are the large tech platforms.

Saturday, 18 May 2019

Berkshire Hathaway succumbs to the tech bubble

We have currently reached the point in the cycle where investors are once again questioning whether traditional value investing is dead. The last time this occurred was in 1999, and much like in 1999, it has also resulted in many self-described value investors caving in to the pressure of years of disconfirmatory market outcomes (high growth, high quality businesses sharply outperforming - particularly hyper-growth tech names); abandoning traditional value discipline; and rationalising a move towards more growth-oriented investing, which feels much more comfortable (being with the crowd, and doing something that has worked very well in recent history).

Monday, 13 May 2019

Uber, delusion, and ride-hailing's structural economic inefficiency

Uber's much-anticipated IPO occurred on Friday, and to the surprise of almost no one (sensible), the stock ended the session down 7% (despite the offer having already been priced at a discount to initial ambitions, after Lyft's weak post-IPO showing). In my view, the stock likely has much further to fall, and in many respects the Uber story is the perfect exemplar of this cycle's excesses.

Thursday, 9 May 2019

Turkey update, Lira outlook, and keeping one's eye on the ball

In recent weeks/months, Turkey has again been making headlines for all the wrong reasons. This time the focus has been on the acrimonious outcome of local elections; the further recent weakening of the Lira from about 5 to more than 6 vs. the USD (after having recovered from over 7 in August last year, touched on the day I first blogged about Turkey); controversy about the sufficiency of the Turkish central bank's foreign currency reserves; a March spike in overnight Lira swap rates; and the debate on the willingness or otherwise of the CBT to tighten sufficiently to ward off seemingly intractably high inflation (19.5% YoY at present - down from a peak of 25.5% in October 2018, but still elevated).

Wednesday, 13 March 2019

The great bribe-the-distributor US drug pricing scam

The US Senate Finance Committee recently conducted a hearing investigating galloping list prices for US drugs, quizzing the chiefs of a number of pharmaceutical giants. One of the key messages from these drug companies was that their 'net' received prices, after paying significant rebates to PBMs (Pharmacy Benefit Managers) and insurance companies, are considerably less than 'list' drug prices, and that furthermore, their net prices had been rising at very modest rates, in comparison to spiralling list prices, or even falling. They blamed middlemen for escalating drug prices.

Thursday, 7 March 2019

Is another tech bust coming?

The technology sector (referring to online services, and to a lesser extent, SaaS, which is somewhat different in the B2B space) has been one of the strongest stock market performers over the past decade. Growth rates in users and top-line have been incredible, but with a relatively small handful of exceptions (Facebook, Google, Tencent, Alibaba, Expedia & Priceline, and a few others), profitability has been vanishingly rare. However, managers with heavy technology exposure - either in the listed or unlisted space - have nevertheless made a tonne of mark-to-market/capital-raising-valuation profits, as valuations have escalated alongside galloping top line and user growth.

Thursday, 21 February 2019

Flawed thinking on buybacks, and why buybacks are still underutilized

Something I encounter repeatedly in the world of investment commentary/analysis is a lot of flawed thinking and fundamental confusion about the issue of dividends vs. corporate buybacks. You'll often hear people say things like "I would prefer the company reduce the dividend so it can increase buy backs, as the shares are undervalued", or "management shouldn't be buying back stock at current elevated prices; they should instead be returning excess capital to shareholders via dividends".

Wednesday, 6 February 2019

The value of what is vs. what could be, and the economics of disruption redux

In the past, I have blogged about both the often-tortured debate on the growth vs. value investing dichotomy, and how in my assessment, many self-described value investors are today practicing strategies more akin to growth investing than value investing. Meanwhile, I've also outlined some thoughts on how the economics of disruption is often misunderstood (see here). I hope to pull together these strands here, and offer some additional insights.

Sunday, 3 February 2019

The real reason populism is rising in the West

In recent years, we have seen the emergence of 'populist' movements across many developed countries, from the US (Trump) to the UK (Brexit), to Italy and now even the Yellow Vest protests in France (not to mention the rise of what are sometimes described - often unfairly - as 'alt right' parties across Europe). This has given rise to much confusion and concern amongst the elite, but if the issues are properly understood, it shouldn't. I feel the underlying drivers are very poorly understood and often misdiagnosed, and I hope to shed a little light on what is going on with this post.

Thursday, 31 January 2019

The Road to Serfdom: How identity politics and socialist-communist ideology are intimately linked

In the world of investing, politics is a little bit like economics. Despite all the incessant media chatter, most of the time it doesn't matter very much. However, occasionally, it matters a great deal (e.g. during the US housing bubble and the ensuing GFC). Politics generally doesn't matter too much, as long as policies do not swing to the hard left (not to be confused with the center-left), where property rights and economic freedoms start to get seriously undermined. Those that say buy and hold always works, have clearly never invested in a country overrun by socialism/communism. Buffett has a strongly-held view that the US "has a system that works", but it never malfunctioned in his lifetime, and so is potentially outside the range of his contemplated experience.

The art of worldly wisdom, smoking, and British American Tobacco

When students study either undergraduate finance or an MBA, they are taught various methods of valuing companies - primarily discounted cash flow models, utilising appropriate discount rates (or inappropriate ones - CAPM has been long debunked). The problem with this valuation education is that the mathematics involved in valuing a company - given certain cash flow and discount rate assumptions - is trivially easy. The hard bit is figuring out what the likely cash flows will be. And finance degrees/MBAs offer virtually no useful instruction in this regard.

Monday, 28 January 2019

Apple's strategic dilemma

After a heady run, Apple has been a poor performer over the past several months, and has de-rated to levels that have started to attract value investor interest. Peters-McGregor, for instance, recently purchased shares, outlining all the traditional strengths the bulls have historically identified with Apple (brand, customer lock-in, growing services), and that the stock is now on only 13x (and 11-12x ex cash).

Saturday, 26 January 2019

Fishing where the cod is, and Munger's stunning rebuke of many 'value' investors

I've been thinking a lot over the past few years about some of the things I seem to be doing differently to the vast majority of self-described value investors. I just look at companies all day and try to value them, and I buy the ones I think are the cheapest. Presumably, most other value investors are doing the same thing. And yet, for years I have seen many self-described value investors complain incessantly that they can't find anything to buy - often organisations stocked with large teams of people. Some of them have closed shop as a result.

Friday, 25 January 2019

The capacity to suffer, LCV/CAC, and Capital One Financial

Earlier this week, Capital One Financial (COF US) - a stock I own - announced a 4Q18 result which, while above expectations at the EPS line on a reported basis, was below expectations after excluding various 'one-off' items. Markets sent the stock down 6.2%.

Wednesday, 23 January 2019

Is Netflix screwed?

Netflix has become a darling stock over the past decade (despite a moderation in the euphoria of late), and is an honourary member of the FANG club. It is seen as one of the new breed of incumbent online monopolies, and trades at more than 100x current earnings. However, to my mind, many investors seem to be ignoring some fairly important realities/risks, and believe it can be argued that Netflix is more akin to a Tesla than an Amazon - i.e. a company that is set to become 'just another media (auto) company' that will soon have to compete with many seasoned competitors in possession of far greater financial resources. It's going to be interesting to see what happens.

Tuesday, 22 January 2019

US cultural breakdown, and identity politics run amok

Fairly extraordinary things are currently happening in US popular culture. A short clip of a native American man banging a drum near the face of a smirking 15 year old white kid, who appeared to many to be taunting the man with his expression, set off a firestorm of controversy over the weekend, in both the mainstream media and twittosphere, with the level of vitriol directed at the kid reaching almost unimaginable levels.

Sunday, 20 January 2019

Worst marketing campaign ever...?

Ominous music plays. "Women, is this the best we can do, really?", booms a voiceover. Scenes play in the background of women being hysterically emotional, falsely accusing people of rape, bickering & bitching amongst each other, being ditsy blondes, and exhibiting all sorts of the worst cliched 'toxic femininity'.

Saturday, 19 January 2019

Greek bank update: The importance of regulatory forbearance

In November of last year, I blogged about the Greek banks, and specifically Eurobank. Since that time, Greek bank prices have remained under pressure, falling about 20%, although Eurobank has bucked the trend somewhat, rising 10%. It is nevertheless down about 10% YTD after rallying in late 2018, underperforming what has been a strong rally in global bank share prices this year.

Thursday, 17 January 2019

WSJ exposes corrupt hospital practices that inflate healthcare bills

Last year, I discussed how corrupted incentives have acted to inflate drug prices well above what would have occurred in a properly functioning market. As noted at the time, this is just one small piece of the complex puzzle of why US healthcare costs remain so absurdly high (18-19% of GDP, more than twice the OECD average, which is itself far from optimised, and continues to rise).

In December, the WSJ ran an excellent article/expose on another feature of the system that is well worth discussing. I highly recommend the article be read in full (paywall). The article highlights how increasing market consolidation and 'vertical integration' amongst hospital networks into the provision of primary healthcare services, coupled with a third-party payer system and a lack of price transparency, have all contributed to the cost of labs tests and other tests & procedures all being grossly inflated.