All articles

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 21 March 2021:

1. Reverse Wealth Transfer on Steroids – Josh Brown

Do not buy SPACs, digital currencies or non fungible tokens sold to you by millionaires and billionaires with your stimulus check.

This is the exact opposite of what’s intended for young people like yourself receiving stimulus checks from the government. These checks are meant to improve your current situation by giving you a chance to purchase things that you need today or pay your bills or pay down debt. Speculating in digital assets is not part of the intent. Buying an online baseball card is not helping you, even if it goes up in price immediately after your having bought it…

…Trillionaires have the right to create any kind of nonsense they want and offer it up for sale. You have the right to come to your senses and say, “You know what, I don’t actually need that shit, I need a job. I need a nice new suit to go on interviews with. I need to fix my car. I need to upgrade my apartment so I can bring a date home and not be embarrassed about my situation.”…

…Take the $1400 and do one of these things:

Buy a business suit, some nice shirts and a pair of shoes. Laugh all you want, but these will be tools you can use to get into the right rooms and meet the right people. I promise you this is true: When you’re well dressed, people treat you differently. With respect. With honor. They hold doors for you and make eye contact with you. They can tell you hold yourself in high esteem and this subconsciously encourages them to hold you in high esteem as well. You can scoff at this and call it materialistic or bourgeois or anachronistic or whatever other big bad words you learned in college, but what I am telling you is the truth. If you had invented Facebook, you would have invented Facebook. But you didn’t. So the hoodie isn’t going to work. Watch how people deal with you when your shirt is tucked in and your shoes are shined.

Buy a bicycle. Set a routine. Breathe fresh air. See the sun. Feel the breeze. Smell the roses. You can listen to your podcasts while getting some exercise and being a human being. Every hour you spend with your eyes off the screens is an hour better spent. You will know I am right because you will feel it in your soul.

Buy a cookbook and some high quality pots and pans. Maintaining a grown-up kitchen with nice implements and utensils, as well as obtaining the ability to make quality meals for yourself or others will bring you the kind of psychic income that speculating in someone else’s shitty art projects can never replace.

2. Ray Dalio & The Power of Setting Defaults For Optimism – Ben Carlson

Optimism pays when it comes to investing because, most of the time, markets go up. The stock market is up roughly 3 out of every 4 years, on average. Over the long-term, optimism as a strategy is nearly impossible to beat. This is why buy and hold is perhaps the greatest strategy ever invented.

Unfortunately, there are always good reasons to be worried. The future is always uncertain. There is always bad news and we hear about that bad news more than any generation in history in the information age.

And there is something about finance people that makes them worry more about the downside than the upside. It’s like the exact opposite of people in Silicon Valley who are almost unanimously optimistic about the future.

Ray Dalio may be right to worry about the future. But he has a long track record of worrying about the future that hasn’t really panned out that well.

Dalio penned a piece for Institutional Investor about the importance of knowing when you’re wrong and changing your mind. He used his own prediction of a depression in the early-1980s as an example:

The biggest of these mistakes occurred in 1981–’82, when I became convinced that the U.S. economy was about to fall into a depression. My research had led me to believe that, with the Federal Reserve’s tight money policy and lots of debt outstanding, there would be a global wave of debt defaults, and if the Fed tried to handle it by printing money, inflation would accelerate. I was so certain that a depression was coming that I proclaimed it in newspaper columns, on TV, even in testimony to Congress. When Mexico defaulted on its debt in August 1982, I was sure I was right. Boy, was I wrong. What I’d considered improbable was exactly what happened: Fed chairman Paul Volcker’s move to lower interest rates and make money and credit available helped jump-start a bull market in stocks and the U.S. economy’s greatest ever noninflationary growth period.

Of course, there was no depression. Instead, the early-1980s kicked off one of the longest expansions in market and economic history.

That history bled into the 1990s as well. It may not seem like it when you look back at high double-digit returns from 1980-1999 but the nirvana-like economic and market environment in the 1990s was not a foregone conclusion at the outset of the decade.

In a piece from the New York Magazine in 1992, Dalio was quoted saying bonds were a better bet than stocks over the course of the 1990s:

Over the long term, both Dalio and Jones agree, as a result of these circumstances bonds in the nineties will almost certainly outperform stocks. In the fifties, says Dalio, wary investors were still looking in the rearview mirror at the Depression of the thirties, when stocks took the shellacking of all time. Thus, bonds remained the preferred investment when the environment of accelerating growth and inflation actually favored stocks. As a result, those who took what appeared to be a risk and bought stocks in the fifties wound up making fortunes, while those who bought bonds wound up eventually losing their shirts.

Now, says Dalio, the situation is precisely reversed. Investors in the nineties remain traumatized over the carnage that inflation and sky-high interest rates wreaked in the bond market in the seventies, so they’re investing in stocks instead. Unfortunately, says Dalio, the current economic climate of low inflation and historically slow growth means that bonds will actually prove to be the better long-term performers.

To be fair, bonds did perform well in the 1990s. The 10 year treasury returned nearly 67% in total from 1992-1999 or 6.6% per year. That’s pretty good for bonds. But the S&P 500 was up more than 316% or nearly 20% per year from 1992-1999.

Dalio was wrong again.

Then in 2015, Dalio began warning we could see a repeat of the 1937 downturn. This nasty recession and 50% market crash is highly underrated by historical standards because it was sandwiched between the Great Depression and WWII. Dalio made a similar prediction for a 1937 situation in 2017.

Alas, there was no double-dip recession following the Great Financial Crisis. The stock market and the economy were doing just fine until the pandemic hit and now are back on trend.

Now, I’m not pointing out Dalio’s mistakes here to rub it in his face. We all get stuff wrong when it comes to the markets. This stuff is hard…

…Whatever the case may be, it appears Dalio doesn’t allow his macro predictions to influence Bridgewater’s investment strategy. Or if he does, it certainly doesn’t show up in their long-term track record.

I’m a huge advocate for default settings as an investor.

You should default your savings rate. Default increases to that savings rate over time. Default your investment choices. Default your bill payments. Automating good decisions ahead of time is one of the most important steps you can take to meaningfully improve your finances.

And when it comes to investing, the most important default by far is optimism.

Yes, there are always going to be risks but pessimism does not pay as a strategy over the long-run.

If you’re not optimistic about the future, what’s the point of investing in the first place?

3. Too Much, Too Soon, Too Fast – Morgan Housel

Let me tell you about Robert Wadlow. He was enormous, the largest human ever known.

A pituitary gland abnormality bombarded Wadlow’s body with growth hormone, leading to staggering size. He was six feet tall at age seven, seven feet tall by age 11, and when he died at age 22 stood an inch shy of nine feet tall, weighed 500 pounds, and wore size 37 shoes. His hand was a foot wide.

He was what fictional stories would portray as a superhuman athlete, capable of running faster, jumping higher, lifting more weight and crushing more bad guys than any normal person. Like a real-life Paul Bunyan.

But that was not Wadlow’s life at all.

He required steel leg braces to stand and a cane to walk. His walk wasn’t much more than a limp, requiring tremendous effort. What few videos of Wadlow exist show a man whose movements are strained and awkward. He was rarely seen standing on his own, and is usually leaning on a wall for support. So much pressure was put on his legs that near the end of his life he had little feeling below his knees. Had Wadlow lived longer and kept growing, casual walking would have caused leg bones to break. What actually killed him was nearly as grim: Wadlow had high blood pressure in his legs due to his heart’s strain to pump throughout his enormous body, which caused an ulcer, which led to a deadly infection.

You can’t triple the size of a human and expect triple the performance – the mechanics don’t work like that. Huge animals tend to have short, squatty legs (rhinos) or extremely long legs relative to their torso (giraffes). Wadlow grew too large given the structure of the human body. There are limits to scaling.

Writing before Wadlow’s time, biologist J.B.S. Haldane once showed how many things this scaling issue applies to.

A flea can jump two feet in the air, an athletic human about five. But if a flea were as large as a man, it would not be able to jump thousands of feet – it doesn’t scale like that. Air resistance would be far greater for the giant flea, and the amount of energy needed to jump a given height is proportional to weight. If a flea were 1,000 times its normal size, its hop might increase from two feet to perhaps six, Haldane assumed.

Look around and this concept is everywhere, in every direction…

…“For every type of animal there is a most convenient size, and a change in size inevitably carries with it a change of form,” Haldane wrote.

A most convenient size.

A proper state where things work well, but break when you try to scale them into a different size or speed.

Which, of course, also applies to business and investing.

4. Apple, CAID, and China: rock, meet hard place – Eric Seufert

Early this week, it was revealed that the China Advertising Association (CAA), a state-backed advertising trade group in China, has rolled out its China Advertising ID (CAID) to a consortium of large Chinese advertisers for use as an alternative to the IDFA, which is set to be deprecated imminently in iOS 14.5.

The CAID is effectively a crowd-sourced persistent ID derived from device fingerprints: the CAA has created something of a data co-op, where members — which pay a participation fee — pool IP-indexed fingerprints to allow for devices to be identified as they engage with apps. The general idea is that if enough parameters are captured for a given device in a fingerprint, and the device is fingerprinted in enough apps in a short amount of time, the device can be identified even when its IP address changes because the other parameters (like memory utilization) stay relatively constant.

Building this type of probabilistic identity mechanism is fairly straightforward, but in order for it to be viable, participation and coordination are required from publishers that have large and overlapping user bases. This is the reason I was skeptical of such a solution being broadly adopted, as I articulated in this Twitter thread from a few months ago: in order for a fingerprinting solution based on IP addresses to provide utility, frequent touchpoints with users must be maintained to capture fingerprint snapshots that change subtlely enough for an identity to be probabilistically valid. It seemed unlikely that Western companies would be willing to cooperate to the degree necessary to deliver that. But the ability to coordinate nearly unimaginable, mass-scale projects, of the flavor seen during COVID, is the Chinese government’s distinctive advantage. Whereas a data co-op comprised of large US-based app publishers and ad networks is nearly unimaginable, apparently, ByteDance, Tencent, and Baidu are all participating in the CAID program that is organized by the state-sponsored CAA.

The development and adoption of the CAID puts Apple in a difficult position. Rock, meet hard place: China is Apple’s second-largest market after the US, and the specter of a WeChat ban on the iPhone during the Trump administration was estimated to potentially reduce Apple’s iPhone sales revenue by up to 30%. Apple already applies a separate standard with its App Store guidelines for certain Chinese developers, allowing eg. Tencent to run what is essentially an app store inside of WeChat. Would Apple simply extend this notion of a separate Chinese principle to privacy and allow CAID to be used for persistent identity by Chinese companies while subjecting companies domiciled elsewhere (read: Facebook) to the restrictions of ATT, which explicitly prohibits fingerprinting?

5. Twitter thread on the laws that govern the banking business – Maxfield on Banks

The longer you study a subject, the closer you get to the core laws that govern it. Here are 10 laws that govern banking, deduced from a decade of studying the industry… [thread]

1. Success in banking is foremost about winning a war of attrition. More than 17,300 banks have failed since the birth of the modern American banking industry in the Civil War. That’s over three times the number of banks in business today…

…3. The darlings in one era are often pariahs in the next. In 1978, Continental Illinois Bank & Trust was selected by Dun’s Review as one of America’s five best-managed companies. Six years later, it was seized by the FDIC due to mismanagement.

4. The crux of banking is watching what others are doing and then not doing it yourself. Warren Buffett calls this the institutional imperative: “the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so.”

5. Credit quality is a myth until it’s a reality. Washington Mutual’s nonperforming assets as a % of all assets:

1998: 0.73%
1999: 0.55%
2000: 0.53%
2001: 0.93%
2002: 0.97%
2003: 0.70%
2004: 0.58%
2005: 0.57%
2006: 0.80%
2007: 2.17%
2Q08: 6.62%
4Q08: Failed…

…8. All roads lead to skin in the game. One reason M&T Bank has been so successful, its CEO Rene Jones once explained, “is that we could get 60% of our shareholders seated around the coffee table in my predecessor’s office.”

6. 2020 in Review – Howard Marks

Finally, much of the worry about whether we’re in a bubble relates to valuations. For the S&P 500, for example, the current ratio of price to projected 2021 earnings is roughly 22 (depending on which earnings estimates you use). This seems expensive compared to the historic average in the range of 15-16. But knee-jerk judgments based on the relationship between current valuations and historic averages are too simplistic to be dispositive. Before making a judgment about today’s valuation of the S&P 500, one must consider (a) the context in terms of interest rates, (b) the shift in its composition in favor of rapidly growing technology companies, with their higher valuations, (c) the valuations of the index’s individual components, including those tech companies, and (d) the outlook for the economy. With these factors in mind, I don’t think most of today’s asset valuations are crazy. Of course, a big correction in speculative stocks could have a negative impact on today’s bullish investor psychology.

In particular, as to item (a) above, we can look at the relationship between today’s 4.5% earnings yield* on the S&P 500 and the yield on the 10-year Treasury note of 1.4%. The implied “equity risk premium” of 310 basis points is very much in line with the average of 300 bp over the last 20 years. Valuations can also be viewed relative to short-term interest rates. The current p/e ratio on the S&P 500 of 22 is slightly below the reading of 24 in March 2000 (the height of the tech bubble), and the fed funds rate is around zero today versus 6.5% back then. Thus, in 2000, the earning yield on the S&P 500 was 4.2%, or 230 basis points below the fed funds rate, while today it’s 450 bp above. In other words, the S&P 500 is much cheaper today relative to short-term rates than it was 21 years ago.

The story is similar in the credit market. For example, the yield spread on high yield bonds versus Treasurys is below the historic range, although probably still more than adequate to offset likely credit losses. Thus, as with most other assets today, the price of high yield bonds is high in the absolute, fair-ish in relative terms, and highly reliant on interest rates staying low.

So where does that leave us? In many ways, we’re back to the investment environment we faced in the years immediately prior to 2020: an uncertain world, offering the lowest prospective returns we’ve ever seen, with asset prices that are at least full to high, and with people engaging in pro-risk behavior in search of better returns. This suggests we should return to Oaktree’s pre-Covid-19 mantra: move forward, but with caution. But a year or two ago, we were in an economic recovery that was a decade old – the longest in history. Instead, it now appears we’re at the beginning of an economic up-cycle that’s likely to run for years.

Over the course of my career, there have been a handful of times when I felt the logic for calling a top (or bottom) was compelling and the probability of success was high. This isn’t one of them. There’s increasing mention of a possible bubble based on concerns about valuations, federal government spending, inflation and interest rates, but I see too many positives for the answer to be black-or-white.

7. Twitter thread on lessons learned from working for Sheryl Sandberg, currently Facebook’s COO – Dan Rose

I learned about leadership & scaling from Sheryl Sandberg. My direct manager for 10+ yrs, we spent countless hours together in weekly 1x1s (she attended religiously), meetings, offsites, dinners, travel, etc. Here are some of the most important lessons I took away from Sheryl:

In one of our early M-team offsites, everyone shared their mission in life. Sheryl described her passion for scaling organizations. She was single-mindedly focused on this purpose and loved everything about scaling. It’s a huge strength to know what you were put on earth to do.

Sheryl implemented critical systems to help us scale – eg 360 perf reviews, calibrations, promotions, refresh grants, PIPs. She brought structure to our management team and board meetings, hired senior people across the company, and streamlined communications up and down the org.

Sheryl told Mark the things he didn’t want to hear. As companies grow, people don’t want to give the CEO bad news. Mark knew Sheryl would never worry about losing her job or falling out of favor. And over time Sheryl taught me and others how to be truth-tellers for her and Mark.

Sheryl refused to participate in late night meetings. She had the confidence to admit she went to bed at 10pm and told Mark she’d be happy to meet when she woke up at 5am if he still hadn’t gone to bed yet. Her vulnerability was inspiring and signaled strength not weakness…

…Sheryl & I disagreed early on about a decision. I thought Mark would agree with me so I went around her to make my case. She sat me down and explained that if we were going to work together she needed to be able to trust me. She invited escalation but insisted on transparency.

We faced a tough situation with a partner and one of their board members asked Sheryl to meet. She invited me to join but I demurred, I knew this would be a contentious mtg. She told me about one of her colleagues in DC who testified when nobody else wanted to – “step up, own it”

---

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in Apple, Facebook, and Tencent. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 14 March 2021:

1. The Fed Isn’t Printing As Much Money As You Think – Morgan Housel

The risk of rising inflation over the next few years is probably the highest it’s been in decades. Inflation happens when too much money chases too few goods, and Covid-19 closed a lot of businesses and gave people an unprecedented amount of money. The stars align.

That out of the way, let me cool things down: The Fed is printing a lot of money, but not nearly as much as it looks…

…Money supply has increased from $4 trillion a year ago to $18 trillion today.

A 450% increase!

That’s something you might see in a third-world country with hyperinflation.

But before you dump life savings into gold and build a bunker, here’s the punchline: The huge majority of the increase you’re seeing in this chart is not money printing or new money creation.

It’s an accounting rule change.

Here’s what happened.

The supply of money is measured a few different ways. M1, which this chart shows, measures money that’s readily available – mostly paper cash, coins, and checking accounts.

Another measure called M2 is a little broader. It includes money in savings accounts and retail money market accounts.

The difference between a checking and savings account is how often you can access your money. That might seem trivial but it explains most of what happened in this chart.

If you put money in a checking account, regulators make banks set aside a cushion as reserves in case they get into trouble. But if you put money into a savings account, regulators tell banks they don’t have to reserve anything. The catch is that it’s only considered a savings account if the consumer is allowed to make no more than six withdrawals per month.

It’s worked that way for years.

But then Covid hit, and regulators realized that having trillions of dollars in savings accounts with limited withdrawals was a burden as 22 million people lost their jobs.

So last April the Fed changed the rules and eliminated the six-withdrawal limit on savings accounts…

…But it changed the relationship between M1 and M2.

Savings accounts are measured in M2 and left out of M1. But once the six-withdrawal rule was removed, every savings account suddenly became, in the eyes of regulators and people who make these charts, a checking account.

So M1 exploded higher. Not because the Fed printed a bunch of money, but because trillions of dollars in savings accounts were reclassified as checking accounts.

2. Twitter thread on how the great physicist Richard Feynman developed deep understanding of a given topic – Sahil Bloom

Richard Feynman observed that complexity and jargon are often used to mask a lack of deep understanding. The Feynman Technique is a learning framework that forces you to strip away needless complexity and develop a deep, elegant understanding of a given topic. The Feynman Technique involves four key steps:

(1) Identify
(2) ELI5 (“Explain It To Me Like I’m 5”)
(3) Reflect & Study
(4) Organize, Convey & Review

Let’s cover each step and how you can make this powerful framework work for you…

Step 1: Identify
What is the topic you want to learn more about?
Identify the topic and write down everything you know about it.
Read and research the topic and write down all of your new learnings (and the sources of each).
This first step sets the stage for what is to come.

Step 2: ELI5
Attempt to explain the topic to a child.
Once again, write down everything you know about your topic, but this time, pretend you are explaining it to a child.
Use simple language and terms.
Focus on brevity.

Step 3: Reflect & Study
Reflect on your performance in Step 2.
How well were you able to explain the topic to a child? Where did you get frustrated? Where did you resort to jargon or get stuck?
These are the gaps in your understanding.
Read and study to fill them.

Step 4: Organize, Convey & Review
Organize your elegant, simple language into a compelling story or narrative.
Convey it to others. Test-and-learn. Iterate and refine your story or narrative accordingly.
Review (and respect) your new, deeper understanding of the topic.

3. Write Simply – Paul Graham

There’s an Italian dish called saltimbocca, which means “leap into the mouth.” My goal when writing might be called saltintesta: the ideas leap into your head and you barely notice the words that got them there.

It’s too much to hope that writing could ever be pure ideas. You might not even want it to be. But for most writers, most of the time, that’s the goal to aim for. The gap between most writing and pure ideas is not filled with poetry.

Plus it’s more considerate to write simply. When you write in a fancy way to impress people, you’re making them do extra work just so you can seem cool. It’s like trailing a long train behind you that readers have to carry.

And remember, if you’re writing in English, that a lot of your readers won’t be native English speakers. Their understanding of ideas may be way ahead of their understanding of English. So you can’t assume that writing about a difficult topic means you can use difficult words.

Of course, fancy writing doesn’t just conceal ideas. It can also conceal the lack of them. That’s why some people write that way, to conceal the fact that they have nothing to say. Whereas writing simply keeps you honest. If you say nothing simply, it will be obvious to everyone, including you.

Simple writing also lasts better. People reading your stuff in the future will be in much the same position as people from other countries reading it today. The culture and the language will have changed. It’s not vain to care about that, any more than it’s vain for a woodworker to build a chair to last.

Indeed, lasting is not merely an accidental quality of chairs, or writing. It’s a sign you did a good job.

4. State of the Cloud 2021 – Bessemer Venture Partners

Top takeaways

1. Cloud companies have not just reset in the New Normal, but have thrived with a record-breaking market capitalization of more than $2 trillion.
2.There’s been a changing of the guard afoot: MT SAAS has overtaken FAANG.
3. Cloud multiples are rising to new heights, with both public and private cloud trading over 20x.
4. Cloud growth rates and access to capital are at all-time highs, with the average Cloud 100 company growing 80% YoY and $186 billion going into private cloud companies in 2020 alone.
5. Good-better-best of growth endurance is 70%-75%-80%.
6. GTM strategies have adapted in the New Normal; best practices include product-led growth, usage-based pricing, and the adoption of cloud marketplaces.

5. Interview: Patrick Collison, co-founder and CEO of Stripe – Noah Smith

N.S.: So, what are the three things that excite you most about the 2020s?

It’s hard to restrict to three! But here are the first that jump to mind:

First, the explosive expansion in access to opportunity facilitated by the internet. Sounds prosaic but I think still underestimated. Several billion people recently immigrated to the world’s most vibrant city and the system hasn’t yet equilibrated. When you think about how YouTube is accelerating the dissemination of tacit knowledge, or the number of creative outsiders who can now deploy their talents productively, or the number of brilliant 18 year-olds who can now start companies from their bedrooms, or all the instances of improbable scenius that are springing up… in the landscape of the global commons, the internet is nitrogen fertilizer, and we still have a long way to go — economically, culturally, scientifically, technologically, socially, and everything in between. I challenge anyone to watch this video and not feel optimistic.

Second, progress in biology. I think the 2020s are when we’ll finally start to understand what’s going on with RNA and neurons. Basically, the prevailing idea has been that connections between neurons are how cognition works. (And that’s what neural networks and deep learning are modeled after.) But it looks increasingly likely that stuff that happens inside the neurons — and inside the connections — is an important part of the story. One suggestion is that RNA is actually part of how neurons think and not just an incidental intermediate thing between the genome and proteins. Elsewhere, we’re starting to spend more time investigating how the microbiome and the immune system interact with things like cancer and neurodegenerative conditions, and I’m optimistic about how that might yield significantly improved treatments. With Alzheimer’s, say, we were stuck for a long time on variants of plaque hypotheses (“this bad stuff accumulates and we have to stop it accumulating”)… it’s now getting hard to ignore the fact that the immune system clearly plays a major — and maybe dominant — role. Elsewhere, we’re plausibly on the cusp of effective dengue, AIDS, and malaria vaccines. That’s pretty huge.

Last, energy technology. Batteries (88% cost decline in a decade) and renewables are well-told stories and the second-order effects will be important. (As we banish the internal combustion engine, for example, we’ll reap a significant dividend as a result of the reduction in air pollution.) Electric aircraft will probably happen, at least for shorter distances. Solar electricity is asymptoting to near-free, which in turn unlocks other interesting possibilities. (Could we synthesize hydrocarbons via solar powered atmospheric CO2 concentration — that is, make oil out of air — and thereby render remaining fossil fuel use-cases carbon neutral?) There are a lot of good ideas for making nuclear energy safer and cheaper. France today gets three quarters of its electricity from nuclear power… getting other countries to follow suit would be transformatively helpful in averting climate change.

There’s lots more! New semiconductor technology. Improved ML and everything that that enables. Starlink — cheap and fast internet everywhere! Earth-to-earth travel via space plus flying cars. The idea of urbanism that doesn’t suck seems to be gaining traction. There’s a lot of good stuff on the horizon.

6. The Biggest Economic Experiment in History – Ben Carlson

The Great Depression left an indelible mark on household finances because there was no government backstop. No unemployment insurance. No Social Security. No checks in the mail.

So a generation of frugal misers was born.

I don’t think we have to worry about that happening this time around. If anything, people are worried about the opposite — a nation of risk-takers and speculators.

It’s way too early to draw any concrete conclusions just yet but the total amount of money that’s helped get people through the pandemic is staggering…

…But the Post notes the total tab is $2.2 trillion to workers and families in total from each of these bills. That’s more than the government spends on Social Security, Medicare and Medicaid combined in a given year.

There are, of course, people who are worried about this level of spending. Who is going to pay for all of this government debt? What happens if this overheats the economy and we get inflation?

These concerns are valid. There are risks here.

It should be noted that government debt doesn’t ever truly get paid back. It’s not a mortgage. One of the ways you “pay” it back is through higher economic growth and inflation.

It’s understandable why people are nervous about the prospect of inflation from all this spending. The first thing people think about when they hear the word ‘inflation’ is higher prices. Why would anyone want to pay higher prices for goods and services?

But inflation does not exist in a vacuum and it’s not all bad.

The entire reason the Fed is willing to let inflation run a little hot is because they’re trying to get to full employment.1 If that happens companies will either have to become more productive and efficient or pay more to attract talent.

This is one of the things most people miss when thinking about the ramifications of inflation. Yes, prices rise and your standard of living becomes more expensive but the only way we get sustained inflation is through wage increases. And that higher inflation could come with higher economic growth as well. The whole pie could get bigger.

You can have both at the same time…

…Listen, I have no idea what’s going to come from all of this spending. No one does. This is unprecedented. I’m trying to see both sides of the potential outcomes.

We could see the roaring 20s. GDP growth of 4-5% over the next 3-4 years is on the table.

We could see inflation get out of control, which causes the Fed to raise rates or the government to raise taxes or both, leading to a recession.Financial assets could take off from a booming economy or struggle because of inflation.

All I know is this is an economic experiment on a massive scale the likes of which this country has never seen before.

And for once, the lower and middle class appear to be the main beneficiaries.

7. The day the growth trade topped – Josh Brown

One of the myriad ways you can spot a veteran investor amid a crowd of new or inexperienced investors – the veteran doesn’t need a reason to explain everything that’s happened. Veterans, after ten or twenty years, come to accept the randomness inherent in the game. Until you can accept that there isn’t always a reason for everything, it’s hard to move forward in this business.

Sometimes psychology just changes and sellers become in the mood to buy, or buyers get in the mood to sell. The media takes note of this shift in behavior and attitudes, and it sets out to find a reason for it afterwards. They do this because it satisfies the audience’s very human need for cause and effect. We all want linearly plotted story lines that have a beginning, a middle and an end. We want to know what force caused this or that reaction, because – our minds reason – if we see that force abate, then so too will we see the reaction subside.

This week it’s rising rates. Treasury bond rates are rising which is said to be bad for high multiple growth stocks therefore if we can just get ahead of when rates might stop rising, maybe people will stop selling high multiple growth stocks and start buying them again.

Now, of course, this “analysis” completely disregards the fact that stocks and interest rates have a history of rising together. This happens all the time. Stocks have risen in 13 of the last 15 rising rate environments. Tech stocks too. High multiple tech stocks too.

---

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. We don’t have a vested interest in any companies mentioned. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 07 March 2021:

1. The Cost of Convenience – Max Kim

Coupang — a portmanteau of coupon and the sound of one going off: pang! — was launched in August 2010 by Kim Beom-seok, a Korean American in his early 30s, as a daily-deals “social commerce” venture modeled on Groupon. Launched with backing from Clayton Christensen’s Disruptive Innovation Fund, it was turning a modest profit by 2012, when Kim — who goes by “Bom Kim” in English — decided to take the company public on the Nasdaq.

The weekend before the listing was due, Bom Kim pulled the plug. His vision, he had said in numerous interviews, was to create something that left customers saying, “How did I ever live without Coupang?” — and his company wasn’t that. From then on, the company would model itself not on Groupon, but on Amazon.

By 2015, Coupang had built something that surpassed even Amazon: a long, unbroken supply chain, whereby products moved seamlessly from warehouse to driver to customer, with 99% of orders delivered within 24 hours, all year and 7 days a week. (Amazon has since made a similar delivery network.) In 2016, Coupang was named one of the 50 Smartest Companies by MIT Technology Review. The same year, Bom Kim appeared on Forbes’ “Global Game Changers” list with the tagline “beating Jeff Bezos at his own game.”

Like Bezos, Bom Kim had rightly predicted that faster and “frictionless” delivery — not just competitive pricing and wide selections — would be the future of e-commerce. And with its dense, smartphone-friendly urban populations, South Korea was close to a perfect market. At the time, a slate of third-party marketplaces and Groupon imitators made up most of the country’s e-commerce sector.

“In modeling itself after Amazon by investing aggressively in its own logistical infrastructure, Coupang swooped in and set an entirely new standard for e-commerce [in South Korea],” says Im Il, a professor at the Yonsei University School of Business in Seoul. “It eventually sparked both a price war and a delivery war across the entire market.”…

…To cement Coupang’s control over the last mile, Bom Kim did something that few others in the industry wanted to: he hired his own drivers.

In March 2014, the company launched what has since become its crowning achievement, Rocket Delivery, starting with 50 “Coupang Men” — full-time drivers in branded trucks — who guaranteed next-day delivery of packages, which the company calls “gifts.”

Referred to internally as “spreaders of happiness,” Coupang Men were the spiritual ambassadors of the company. To win over female customers in their 20s and 30s — a key demographic — Coupang Men handed out flowers and handwritten cards, snapped photos of packages to confirm delivery, and would know not to ring the doorbell at homes with babies.

Bom Kim called them “the weapon that Amazon doesn’t have.” And unlike local shipping companies, which hired fleets of drivers on precarious temp contracts, Coupang Men were given a fair wage, full insurance coverage, annual health checkups, 15 vacation days a year, and company trucks and gas…

…The toll of this rapid growth is not only financial. The pace of expansion and the demand for maximum speed and efficiency have placed an enormous burden on the people who work fulfilling Coupang’s orders…

…Tae-il, who is stocky with shaggy hair, is wearing his Coupang polo and navy-blue wraps on his arms and knees. He has just picked up the 300 or so packages he will be delivering today from the nearby delivery camp. These apartments are his first stop.

“I have 180 homes today,” he says by way of greeting. His truck is one of the newer models, which supposedly eliminate dead space with sliding side doors that open into three horizontal shelves. The truck is packed to the brim, with boxes squeezed into even the passenger seat. When Tae-il yanks the sliding door open, an avalanche of stuff spills out. Asked how the AI system that orchestrates the loading process works, he answers with an exasperated laugh: “AI? It’s humans that do this work.”…

…Far from the idealized image of the Coupang Man as a “spreader of happiness,” Tae-il, who works 52 hours, five days a week, has a beleaguered air about him. When asked why he’s not writing any personalized letters or dropping off candy, Tae-il sneers. “Not a single person does that anymore. If you do, you get called an idiot. And you will probably get written up for not making deliveries,” he says.

2. How Does the Stock Market Perform When Interest Rates Rise? – Ben Carlson

But it’s also worth remembering the stock market generally holds up well when rates are rising…

…Surprisingly, growth has performed even better than value in large, mid and small cap stocks when rates have risen in the past.

It may also be instructive to look at some historical examples of rising rate environments.

From 1954-1960, the 10 year treasury yield went from 2.3% to 4.7%. In that time, the S&P 500 was up 207% in total (17.4% annualized).

Then from 1971-1981, rates went vertical, rising from 6.2% to 13.7%. This period included sky-high inflation and the brutal 1973-1974 crash, but nominal returns were still pretty decent, at 113% in total (7.1% annual).

From 1993-1994, rates shot up from 6.6% to 8.0%. The S&P 500 was still up nearly 12% in total despite some carnage in the bond market.

At the tail-end of the dot-com bubble, rates rose from 5.5% in 1998 to 6.5% in 1999. Didn’t matter. Stocks were up more than 55% (although that was followed by a 50% crash beginning in early-2000).

From 2003 through 2007, rates went from 3.3% to 5.1%. The S&P rose nearly 83% (12.8% annualized) before the onset of the 2008 crash.

And the latest rising rate environment saw the 10 year go from 1.5% in 2012 to 3% by 2018. Even with the mini-bear market at the end of 2018, stocks were still up 131% in total.

Could rising rates lead to a stock market crash? Yes, that is possible.

Do we know what level of rates will potentially cause a crash? Nope.

Should the stock market care if interest rates are rising for the right reason? Time will tell.

Are tech stocks being propped up by extremely low interest rates? We’ll see.

The problem with the current rate environment is we’ve never experienced interest rates this low before. Maybe investors will become spooked at lower rates than they have in the past. Maybe markets will be given the benefit of the doubt if the economy is chugging along.

3. Google’s Latest Chess Move is Great News for the Open Internet – Jeff Green

Yesterday Google made yet another announcement regarding its approach to the future of identity. And in the 24 hours since then, I’ve fielded dozens of calls about what this means for the open internet and for The Trade Desk.

The short answer? Not much has changed. But what has changed, will ultimately prove positive.

To be clear, Google’s announcement went a step further than they had previously. Specifically, Google stated that “today, we’re making explicit that once third-party cookies are phased out, we will not build alternate identifiers to track individuals as they browse across the web, nor will we use them in our products.”

On the surface, that may not seem like news. Cookies are going away after all. Nothing new there. You already knew that. And, of course, cookies only impact the browsing internet. That’s about 20% of data-driven ads today. 20% is meaningful, but the open Internet has already created an alternative to third-party cookies — Unified ID 2.0. Additionally, cookies don’t matter much to the fastest growing areas of the digital advertising ecosystem, such as CTV. With CTV, consumers log in with an email or phone number and that login helps create everything from customized viewing recommendations to a better ad experience that features fewer, more relevant ads. And this is critical for content owners, who rely on advertising to pay for that expensive content. In this new golden era of TV content quality, ad revenue is crucial to almost every content creator except for Netflix.

Rather, the new revelation is that Google will not rely on any identifiers that they don’t own.

Why is that important? In any chess match, eventually you have to let pieces go. You trade a less valuable piece for those that matter most. Google is making a trade. With this announcement, Google is doubling down on its own properties, such as search and YouTube and adding bricks to the walls around those properties. The trade-off is that Google no longer values serving ads on the rest of the internet as much — certainly not as much as they once did. DoubleClick, the ad server and the ad exchange, will be operating at a small disadvantage going forward. DV360 will likely be in a similar position. On the open internet, they will not use alternative identifiers to cookies, but everyone else will.

Those alternatives, especially Unified ID 2.0, eliminate the cookie syncing problem that once hurt the open internet’s ability to scale. But perhaps most important, Unified ID 2.0 has been designed with the consumer in the driver’s seat. The consumer’s information is not identifiable. The consumer controls how their data is shared. And the consumer gets a simple, clear explanation of the value exchange of relevant advertising in return for free content. With this approach, Unified ID 2.0 has the best opportunity to become a new common currency of the open internet. It’s already beginning. It is a common currency that pays off the value exchange of the internet in a way that benefits publishers, advertisers and consumers. It is also one that cannot be controlled by any one company, including Apple or Google.

4. Twitter thread on the future of the cable TV industry – Matthew Ball

1/ I want to talk about cord cutting and how current forecasts/models are fundamentally flawed (in the technical sense)

I’ve been tracking this for years, and faulty estimates have always stemmed from a focus on cutting rates rather than leading indicators: usage and investment

2/ I describe the disruption-era Pay-TV ecosystem in three waves. It is critical to differentiate in order to prognostic. We are going into a fundamental new state, one never seen before.

I wrote about this here a year ago. Jan-Feb solidified it.

3/ Wave #1 is 2007-2015.

During this time, Pay-TV actually became MUCH better.

It’s VALUE got much better, too. 

Enormous surges in original TV quality (Mad Men, Breaking Bad, Thrones) + volumes (150 to 400 original scripted series per year) + RSN rights…

…5/ Wave #2: 2015-2019.

The Pay-TV ecosystem was still getting better (quality x volume) and now, finally, prices were coming down via vMVPDs. 

So we see a lot more/better content, plus lower prices. 

Two-sided value growth..

…7/ Wave #3: 2019-Present. 

For the first time ever, the Pay-TV ecosystem is getting *objectively* worse, defunded, underfunded, harvested. Disney takes half of FX’s slate and makes it exclusive to Hulu. Remaining half goes next day to Hulu with no/low ads, as does Hulu library…

…14/ This will not have a standard effect on cord cutting. It will not get steeper. Eventually, the floor will start to drop out

Live news/sports are the primary value drivers in the bundle today, true, but Paramount/Peacock now diverting these en masse too

15/ And the very companies that own the live sports/news networks are, for the first time, those driving the decline of Pay-TV too. They cannot do this while unaware of the harm being done to their other pockets, or without planning for further change

5. China’s “Semiconductor Theranos”: HSMC – Kevin Xu

China’s semiconductor ambition just had its first ponzi scheme fully exposed: Wuhan Hongxin Semiconductor Manufacturing (HSMC).

The HSMC ponzi scheme was led by a trio of characters, who have zero expertise in semiconductor (or anything tech related), but are experts in manipulating local government subsidies, construction contractors, a renowned but gullible former TSMC executive, and China’s desperate need for homegrown chips to pull of a heist so large it makes Theranos look amateur…

…Let’s first summarize the major elements of the HSMC heist that unfolded between late 2017 and early 2021 (which may read like a movie script, not real life):

Part I — the Trap:

• Throughout 2017, a man by the name of Cao Shan traveled across China looking for a local government to invest in his semiconductor scheme. (“Cao Shan” is actually a fake name this person uses, because his real name is already tainted by the scams he used to do back in his hometown.)
• Cao eventually found an accomplice, Mr. Long Wei, who worked his connections to get the City of Wuhan’s East-West Lake District Government to provide land and investment.
• Long brought another close friend into the fold: Ms. Li Xueyan, a small business owner who has opened restaurants and sold Chinese rice liquor.
• The trio — Cao, Long, Li — formed the board of directors of what became HSMC.

Part II — the Money:

• Throughout 2018, the trio worked to secure two sources of “income”: direct subsidies from the East-West Lake District Government (aka taxpayer money) and deposits from construction contractors who want to build the HSMC factory.
• Sourcing both government subsidies and contractor deposits is a strategy for scam factory projects to increase the amount of money to be scammed.
• The East-West Lake District Government decided to invest in HSMC partly because of its jealousy of a local rival district, which attracted and incubated a successful flash storage manufacturer.
• To make themselves look important and powerful, the trio would spread false rumors about their personal background. Long was rumored to be the grandson of some high-level official, while Li would pretend to be the sister of some other political figure.
• By May 2019, HSMC has received 6.5 billion RMB (~$1 billion USD) of investment from the district government. Cao and Long have quit the board, giving Li and her cronies full control. Cao began going to other provinces to set up similar ponzi schemes.

Part III — Chiang Shang-Yi, TSMC, and ASML:

• By June 2019, the trio targeted and successfully persuaded Chiang Shang-Yi, the legendary founding CTO of TSMC, to join HSMC as its CEO.
• To convince Chiang, HSMC spread false rumors publicly that it has already attracted 100 billion RMB (~$15 billion USD) of investments. They also took advantage of Chiang’s gullibility and professional insecurities. (At the time, Chiang was a consultant at SMIC, China’s largest chip foundry, with relatively little influence.)
• Using Chiang’s aura, HSMC started aggressively poaching engineers from TSMC with salary packages worth 2 to 2.5x more than what they were earning.
• Chiang also used his industry reputation to convince ASML, the Dutch company and world’s leading manufacturer of lithography equipment, to sell one DUV equipment to HSMC. (DUV is not the most advanced equipment, but this is still a huge coup given heavy US pressure at the time on the Dutch government to not sell to China.)
• December 2019, the ASML equipment was delivered to HSMC amidst huge fanfare. The company also secured more investment due to this accomplishment from the district government, totaling 15.3 billion RMB (~$2.4 billion USD).
• One month later, the same equipment was offered as collateral to a local Wuhan commercial bank for a 580 million RMB loan (~$90 million USD) — another new source of “income” for the heist.

Part IV — HSMC Collapses, Heist Completed:

• During the first half of 2020, while Wuhan was ravaged by the coronavirus, the trio began siphoning HSMC money away.
• One of its primary methods was conducting employee training programs with a company run by Li’s younger brother.
• HSMC also refused to pay its construction contractors money, owing tens of millions of dollars.
• By July 2020, it became clear that HSMC was a scam. Chiang left the company. The Wuhan city government started leaking news that HSMC is running out of money.
• By November 2020, Li was pushed out of the company and the East-West Lake District Government took full ownership of HSMC.
• By January 2021, Chiang rejoined SMIC. HSMC furloughed all its employees for 40 days and reduced salaries across the board.

6. What Is Quantum Computing? – CB Insights

Quantum computing is the processing of information that’s represented by special quantum states. By tapping into quantum phenomena like “superposition” and “entanglement,” these machines handle information in a fundamentally different way to “classical” computers like smartphones, laptops, or even today’s most powerful supercomputers.

Researchers have long predicted that quantum computers could tackle certain types of problems — especially those involving a daunting number of variables and potential outcomes, like simulations or optimization questions — much faster than any classical computer.

But now we’re starting to see hints of this potential becoming reality.

In 2019, Google said that it ran a calculation on a quantum computer in just a few minutes that would take a classical computer 10,000 years to complete. A little over a year later, a team based in China took this a step further, claiming that it had performed a calculation in 200 seconds that would take an ordinary computer 2.5B years — 100 trillion times faster.

Though these demonstrations don’t have practical use cases, they point to how quantum computers could dramatically change how we approach real-world problems like financial portfolio management, drug discovery, logistics, and much more.

Propelled by the prospect of disrupting countless industries and quick-fire announcements of new advances, quantum computing is attracting more and more attention from players including big tech, startups, governments, and the media.

7. When Everyone’s a Genius (A Few Thoughts on Speculation) – Morgan Housel

The end of a speculative boom can be inevitable but not predictable. Unsustainable things can last a long time. Identifying something that can’t go on forever doesn’t mean that thing can’t keep going for years. Years and years and years.

Part of it is emotion. During the Vietnam War Ho Chi Minh said, “You will kill ten of us, and we will kill one of you, but it is you who will tire first.” Emotional trends aren’t beholden to logic, which can keep them going far past any point of reason.

Part is storytelling. Unsustainable trends have life support if enough people think they’re true, and once people believe something’s true it gets hard to convince them it’s not. Or put differently: If enough people believe it’s true it’s just as powerful as actually being true.

Every investor is making bets on the future. It’s only called speculation when you disagree with someone else’s bet.

In hindsight there was as much speculation in the 1990s that Kodak and Sears would keep their market share as there was that eToys and Pets.com would gain market share. Both were bets on the future. Both were wrong. It happens.

Of course there’s a speculation spectrum. But let’s not pretend that others speculate while you only deal with certainties…

…Jim Grant once put it: “To suppose that the value of a stock is determined purely by a corporation’s earnings discounted by the relevant interest rates and adjusted for the marginal tax rate is to forget that people have burned witches, gone to war on a whim, risen to the defense of Joseph Stalin and believed Orson Welles when he told them over the radio that the Martians had landed.”

Optimism is the best long-term mindset. And it requires a certain level of believing things that can’t be verified, either because you don’t have the technical skills to verify them – nobody knows everything – or because something hasn’t happened yet but you think it will happen in the future. Not enough speculation is just as dangerous as too much speculation.

---

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in Alphabet (parent of Google), Amazon, Apple, Netflix, and The Trade Desk. Holdings are subject to change at any time.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles 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: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. 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.

We’ve constantly been sharing a list of our recent reads in our weekly emails for The Good Investors.

Do subscribe for our weekly updates through the orange box in the blog (it’s on the side if you’re using a computer, and all the way at the bottom if you’re using mobile) – it’s free!

But since our readership-audience for The Good Investors is wider than our subscriber base, we think sharing the reading list regularly on the blog itself can benefit even more people. The articles we share touch on a wide range of topics, including investing, business, and the world in general.

Here are the articles for the week ending 21 February 2021:

1. 12 Things I Remind Myself When Markets Go Crazy – Ben Carlson

1. There is no such thing as a normal market. Uncertainty is the only constant when investing. Get used to it.

2. The most effective hedge is not necessarily an investment strategy. The best hedge against wild short-term moves in the markets is a long time horizon.

3. Your gains will be incinerated at some point. Investing in risk assets means occasionally seeing your gains evaporate before your eyes. I don’t know why and I don’t know when but at some point a large portion of my portfolio will fall in value. That’s how this works.

4. You still have a lot of time left. I’m still young(ish) with (hopefully) a number of decades ahead of me to save and invest. That means I’m going to experience multiple crashes, recessions, bull markets, manias, panics and everything in-between in the years ahead.

The current cycle won’t last forever just like the last one or the next one.

5. Know yourself. One of the biggest mistakes you can make as an investor is confusing your risk profile and time horizon with someone else’s. Understanding how markets generally work is important but understanding yourself is the key to successful investing over the long haul.

6. There’s nothing wrong with using a “dumb” strategy. Buy and hold is one of the dumbest investment strategies ever…that also happens to have the highest probability of success for the vast majority of investors.

There’s no shame in keeping things simple.

7. The crowd is usually right. Being contrarian will always make you feel like you’re smarter than everyone else, but the crowd is right more often than it’s wrong when it comes to the markets. Yes, things can get overcrowded at times but being a contrarian 100% of the time will lead you to be wrong far more often than you’re right.

2. The Beginning of the End –  Dan Teran

Some view third party food delivery operators, such as DoorDash, UberEats, and Grubhub, as heroes of the pandemic, a lifeline to restaurants, creators of employment for masses of essential workers that are responsible for slowing the spread of the virus by keeping diners safely in their homes.

Others view these firms as unscrupulous predators, draining profits from independent restaurants while undercompensating and mistreating delivery workers, all to satisfy the appetites of venture capital investors who have gambled billions of dollars on a business model that may never generate more cash than it has consumed…

…While the pandemic has driven unprecedented demand and introduced new narratives, the facts remain largely unchanged – the third party delivery industry is bad for independent restaurants, bad for delivery workers, and serves customers who are indifferent so long as their food arrives. The pandemic has brought these harsh truths irreversibly into the light, and it is for this reason that we will look back on this year not as one of good fortune for third party delivery, but as the beginning of the end…

…The case for the downfall of third party delivery begins and ends with the business model. Peter Drucker refers to a business model as “assumptions about what a company gets paid for.” Today’s third party delivery operators make the following assumption:

Restaurants will pay 30% of revenue for new customers, serviced by a third party delivery network.

This sounds reasonable. A few extra meals a night to new customers would better utilize existing resources and make the restaurant more profitable. A nice story, but not true.

While sales representatives from DoorDash and UberEats tell restaurateurs they are paying for new customers, in reality they know they will also be charged 30% to service existing and repeat customers, too. Industry data first shared with Expedite suggests that more than half of the orders placed on third party delivery platforms today are from repeat customers.

While third party delivery has always been a bad deal for restaurants, delivery did not represent a significant share of most restaurants business prior to 2020, and so the damage to a restaurant’s bottom line was obscured. The pandemic has brought an inconvenient truth into focus: third party delivery will kill your business if you let it, and third party delivery operators do not care.

How could third party delivery kill your business while bringing customers in the door? The model below shows a P&L for a restaurant that does ~$1M in sales annually at a 15% EBITDA margin, this would be considered very good by any standards. As you can see at the top, as third party delivery takes over more of the business, the business becomes incrementally worse. In this case, third party delivery begins to kill the business as soon as they reach 50% of revenue––sooner if you want to draw a salary, repair equipment, or pay back investors.

During the pandemic, many restaurants have gone from doing ~20% of their business through third party delivery platforms to ~80%, and watched their income statements turn from black to red, as fees ate their business alive. The message from third-party operators? Too bad.

3. SaaS Stocks Prove to Be Winners as Business World Moves to the Cloud – Chin Hui Leong

Before cloud computing arrived, traditional enterprise software was hard to deploy and costly to maintain.

Applications had to be installed by location. To do that, companies had to invest heavily in IT infrastructure, networks and software licenses. The implementation was also complex and could take as much as 18 months, according to an example cited by the Harvard Business Review.

And that’s not all.

There is also the high cost of maintaining the on-premise system. Enterprises had to hire teams of IT staff and consultants to integrate, support, and upgrade the on-premise applications.

Enter Marc Benioff, the founder and CEO of Salesforce (NYSE: CRM).

In 1999, Benioff founded Salesforce based on two big ideas: software should be delivered over the internet, and the service will be subscription-based.

Salesforce’s software is delivered over the internet, making its service easier to deploy and scale. The company’s subscription model removed most of the upfront cost associated with the traditional way of software deployment.

Armed with these advantages, Salesforce set its sights on the customer relationship management (CRM) market, where the problems associated with traditional enterprise software were the most acute.

The lower installation cost also allowed the company to target small and medium businesses. From there, Salesforce would gradually move upstream to take on larger enterprises.

And the rest, as they say, is history.

With an annual revenue base of over US$20 billion today, Salesforce is valued at close to US$220 billion.

Investors during the company’s IPO in 2004 would have made close to 90 times their original investment.

As Salesforce grew, the broader SaaS industry also came into its own.

4. What Your Data Team Is Using: The Analytics Stack – Justin Gage

The goal of any analytics stack is to be able to answer questions about the business with data. Those questions can be simple:

1. How many active users do we have?
2. What was our recurring revenue last month?
3. Did we hit our goal for sales leads this quarter?

But they can also be complex and bespoke:

1. What behavior in a user’s first day indicates they’re likely to sign up for a paid plan?
2. What’s our net dollar retention for customers with more than 50 employees?
3. Which paid marketing channel has been most effective over the past 7 days?

Answering these questions requires a whole stack of tools and instrumentation to make sure the right data is in place. You can think of the end product of a great analytics stack as a nicely formatted, useful data warehouse full of tables like “user_acquisition_facts” that make answering the above questions as simple as a basic SQL query. \

But the road to getting there is unpaved and treacherous. The actual data you need is all over the place, siloed in different tools with different interfaces. It’s dirty, and needs reformatting and cleaning. It’s constantly changing, and needs maintenance, care, and thoughtful monitoring. The analytics stack and its associated work is all about getting that data in the format and location you need it.

The basics:

1. Where data comes from: production data stores, instrumentation, SaaS tools, and public data
2. Where data goes: managed data warehouses and homegrown storage
3. How data moves around: ETL tools, SaaS connectors, and streaming
4. How data gets ready: modeling, testing, and documentation
5. How data gets used: charting, SQL clients, sharing

5. Stop Stressing About Inflation – Barry Ritholtz

Inflation occurs when one or more factors combine to drive prices higher. Often, wage pressures raise prices for good and services, filtering into the general economy (1960s). Sometimes, the combination of a weakening dollar and rising commodity prices send input costs higher, which kicks off an inflationary spiral (1970s). Third, there are times when the cost of capital becomes so cheap it sends anything priced in dollars or debt off into an upwards spiral of (2000s).

But Inflation is not inevitable. There are numerous countervailing forces that have been at work for much of the past 50 years. The three big Deflation drivers: 1) Technology, which creates massive economies of scale, especially in digital products (e.g., Software); 2) Robotics/Automation, which efficiently create more physical goods at lower prices; and 3) Globalization and Labor Arbitrage, which sends work to lower cost regions, making goods and services less expensive.

Put into this context, Inflation is periodic, driven by specific events; Deflation is consistent, the background state of the modern economy. To fully understand this requires grasping how scarcity and abundance act as the drivers of the price of labor and goods. My suspicion is many economists who came of age during earlier eras of inflation fail to discern how the world has changed since.

Consider what this combination implies: the dominant modern world “flation” tends to be biased more towards falling than rising prices. We live in an era of Deflation, punctuated by occasional spasms of Inflation. This suggests that fears of inflation are likely to be more overstated, even with low monetary rates and high fiscal stimulus.

The net result: Forecasters have been over-estimating inflation by more than a little and hyper-inflation by more than a lot. Indeed, the Fed and most economists got this wrong in the 2000s, radically under-estimating how the novelty of ultra-low rates, high employment, and weak dollar caused prices to go higher.

Inflation was robust until the Great Financial Crisis came along; in its aftermath, inflation was (despite all too many forecasts) a no show. Persistent under-employment led to a lot of slack in the labor force, even as the US economy saw unemployment fall to below the 4% levels.

Perhaps this explains why so many economists forecast a post GFC inflation that never arrived. Post Covid, we should see hiring and lots of pent up demand and a transitory bout of modest inflation. But even that is likely to be much less of a threat than it has been in prior decades.

But not to the old school economists. Perhaps they need to reconfigure their models of what causes inflation and deflation. Being wrong for the past two decades should provide the motivation to update those models. Unfortunately, we see little evidence they are interested in changing their fundamental concept of what drives prices higher.

6. Twitter thread on what it’s like working for Jeff Bezos and Mark Zuckerberg – Dan Rose

People often ask me to compare working for Bezos vs Zuck. I worked with Mark much more closely for much longer, but I did work directly with Jeff in my last 2 years at Amazon incubating the Kindle. Here are some thoughts on similarities that make them both generational leaders:..

…They both lived in the future and saw around corners, always thinking years/decades ahead. And at the same time, they were both obsessive over the tiniest product and design details. They could go from 30,000 feet to 3 feet in a split second.

In the best tech companies, product defines strategy and culture. Jeff and Mark were both product CEOs first and foremost (though Jeff is arguably more commercial). Amazon and Facebook’s products are also an embodiment of Jeff and Mark’s individual personalities and values.

Neither of them would ever dwell on success. Every time I took a hill and looked up to celebrate, Jeff or Mark had already moved on to the next hill. They set unrealistic goals and were insanely intense, disciplined, hard working and hard driving…

…The skill set required to start a company is insanely different than being CEO of a mega corporation. Scaling of this magnitude requires tireless commitment, crazy focus, thick skin, unbridled ambition. You have to be a learning machine, constantly growing and pushing yourself….

…The cultures they built are also very different. Amzn is more siloed/secretive, while FB is radically open/transparent. There are pros and cons to each (which I will cover in a future post), but culture at both companies runs deep and is rooted in the values of the founder.

7. Congress Wants to Talk About GameStop – Matt Levine

Tenev also sheds some light on how Robinhood got a surprising margin call from its clearinghouse, and how it negotiated it down:

At approximately 5:11 a.m. EST on January 28, the NSCC sent Robinhood Securities an automated notice stating that Robinhood Securities had a deposit deficit of approximately $3 billion. That deficit included a substantial increase in Robinhood Securities’s VaR based deposit requirement to nearly $1.3 billion (up from $696 million), along with an “excess capital premium charge” of over $2.2 billion. SEC rules prescribe the amount of regulatory net capital that Robinhood Securities must have, and on January 28 the amount of the NSCC VaR charge exceeded the amount of net capital at Robinhood Securities, including the excess net capital maintained by the firm. Under NSCC rules, this triggered a special assessment—the “excess capital premium charge.” In total, the NSCC automated notice indicated that Robinhood Securities owed NSCC a total clearing fund deposit of approximately $3.7 billion. Robinhood Securities had approximately $696 million already on deposit with NSCC, so the net amount due was approximately $3 billion.

Between 6:30 and 7:30 am EST, the Robinhood Securities operations team made the decision to impose trading restrictions on GameStop and other securities. In conversations with NSCC staff early that morning, Robinhood Securities notified the NSCC of its intention to implement these restrictions and also informed the NSCC of the margin restrictions that had already been imposed. NSCC initially notified Robinhood Securities that it had reduced the excess capital premium charge by more than half. Then, shortly after 9:00 am EST, NSCC informed Robinhood Securities that the excess capital premium charge had been waived entirely for that day and the net deposit requirement was approximately $1.4 billion, nearly ten times the amount required just days earlier on January 25. Robinhood Securities then deposited approximately $737 million with the NSCC that, when added to the $696 million already on deposit, met the revised deposit requirement for that day.

Basically Robinhood got a normal margin call—its “VaR based deposit requirement”—for about $1.3 billion, because its customers were trading a lot of stocks that were very volatile. This margin call exceeded Robinhood’s regulatory capital, which under the clearinghouse’s rules triggers another, even bigger margin call. You can see why that would be a problem! We have talked about Robinhood’s clearinghouse margin call before, and we have discussed the destabilizing potential of these margin calls: As things get scary and volatile, clearinghouses have a lot of unchecked discretion to demand huge piles of money from brokers at exactly the worst moment for those brokers. Here, precisely because Robinhood was so thinly capitalized, its clearinghouse had the right to demand even more money from Robinhood, exacerbating the risk of disaster. And then it just waived the whole extra $2.2 billion charge and said “ehh never mind you’re fine,” because Robinhood agreed to stop trading so much of the volatile stocks.

---

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Of all the companies mentioned, we currently have a vested interest in Amazon, Facebook, and Salesforce. Holdings are subject to change at any time.