Circle Of Competence Issue #22

July 28, 2018

Quote of the week: (On a real optimist) "So he expects the world around him to break all the time. But he knows – as a matter of faith – that if he can survive the day-to-day fractures, he’ll capture the up-and-to-the-right arc that learning and hard work produces over time."

 

 

DEPARTMENT OF GENERAL FINANCE

 

Mindsets: Optimism Vs. Complacency Vs. Pessimism

Wonderful article by Morgan Housel at Collaborative Fund on what constitutes a real optimist in the face of disappointments and obstacles. I drew my quote of the week from this article. Highly recommend.

 

What Makes A Great Investor

I love this simple post from Howard Lindzon describing how essential a good network is to being a great investor. I started Circle of Competence mostly because I am passionate about learning and investing, but also because I’d like to connect with likeminded people and investors along the way. Growing your network is simply growing the knowledge base to which you have access. 

 

The Theft Of GGP: Special Situations Analysis

Special situation investment pitch from Andrew Walker of Rangeley Capital explaining how Brookfield Property Partners LP is acquiring GGP Inc., an A class mall operator for a cheap price. What is interesting about the pitch is all of the attached tax shenanigans that come with owning GGP. If you are interested in special situations, this one is pretty hairy so enjoy!

 

Three Key Trends To Watch

I’m not a gold bug and typically don’t have an opinion on the gold markets, but I do watch the yield curve and the dollar has big effects on bottom lines for companies. 3 Interesting charts on gold, the yield curve, and the dollar for perspective. 

 

Private Equity Funds: Leverage & Performance Evaluation

Interesting article from the CFA institute on how private equity managers can manipulate IRR on investments by utilizing subscription lines of credit to defer capital calls to investors. The lesson here is to use multiple metrics to compare performance in PE because using just IRR can be slightly misleading. Using a full suite of metrics such as public market equivalent (PME), total value paid in multiple (TVPI), as well as internal rate of return (IRR). More broadly, why would anyone make a decision on any investment using simply one metric?

 

Lazard's Shareholder Activism Review 1Q 2018

Seems to be record activist campaigns being waged during Q1 according to Lazard’s shareholder activism overview. Interesting trends to watch include more activists attempting to win board seats (up from historic averages) to gain strategic control of companies as well as simply the record amounts of capital being put to work by activists in 2018.
 

Surrendering To Magical Thinking

Interesting piece by Ben Carlson at A Wealth Of Common Sense on how easily humans are fooled by clever marketers. If you are interested in more psychological biases and the ways in which people assert influence over others, check out Robert Cialdini’s “Influence.” It doesn’t disappoint! And it’s recommended by Charlie Munger. 

 

Seth Klarman: Why Investors Should Be More Like Athletes

As a professional athlete myself, I can say honestly that this article is spot on. There have been many times in my career when I felt great about the way I approached a game and felt great competing... but the results simply did not add up to expectations. It can be frustrating, but over the long run, good process leads to good results. And it is the same in investing. The quotes from Klarman in this article are absolute gold on sticking to your process through the good times and the bad. 

 

 

DEPARTMENT OF TECHNOLOGY

 

Investing Outside The Bay Area

Solid read from Semil Shah, a Venture Partner at Lightspeed Venture Partners, who also runs an early-stage firm called Haystack. He makes the case that venture capital is chasing talented founders who are more and more likely to be found outside of Silicon Valley. Using data as well as anecdotal evidence, he writes that the Valley is simply becoming too expensive to live in and run a company, but that other entrepreneurial ecosystems are simultaneously coming to life and offering competitive options for startup founders and employees. 

 

Title Insurance, Ownership, & Blockchain

Magnificent deep dive into the title insurance industry and the risk inherent to the industry that blockchain poses (and why they are overhyped at the moment in the author’s opinion).

 

Gene Munster's Open Letter To Elon Musk

Interesting open letter from Gene Munster of Loup Ventures to Elon Musk. There isn't much substance to the letter other than "put twitter in time out and focus on running your company, or else investors will continue losing confidence."

 

Can Outsiders Redefine The Insurance Industry?

Parthasarathi Varatharajan's piece from the Christensen Institute (Clayton Christensen of Harvard Business school, author of "The Innovator's Dilemma") on how insurance companies may be able to innovate on the extremely old value chain that constitutes the modern day Insurance industry.  

 

The second option for innovation seems a very natural progression from where we are today - why wouldn't, for example, all car companies also bundle insurance on the cars as an added service? Or Apple for its iphones? And the list could go on and on.

 

 

DEPARTMENT OF NEW COMPANIES

 

This week, I will be starting to share companies that are raising money that I think are tackling massive problems and disrupting massive industries. If you have others, please forward them! These are (potentially some of) the companies that we will be talking about tomorrow, so why not learn about them today?

 

- Gaming Company Improbable, creator of a massive development engine (think of shovels for the gaming gold rush), raised $50M at $2B valuation

 

- Zoox Inc., an autonomous vehicle company, raised $800M to redesign autonomous vehicles from the ground up

 

- Looking Glass, a holographic display company gets funding from Brad Feld.

 

- Alector raises $133M to take on Alzheimer's

 

- Ciitizen, founded by Anil Sethi of Apple, raised $3M from Andreessen Horrowitz to fix medical record integration and data analysis

 

- ColdQuanta, a maker of a device designed to operate quantum computing-like operations for near-term quantum problems, raises $6.75M. (FYI - I think this is one of the must underinvested areas of the future currently!). 

 

- Metromile, a pay-by-mile car insurer, has raised $90M for pure insurance innovation!

 

- Healx, a company using AI to match drug treatments for rare diseases, raised $10M.

 

- Leolabs, which tracks spacecraft and debris in low Earth orbit and sells subscription tracking services to everyone from satellite operators to the insurance industry, raised $13M. I am bullish long term on the space industry because I am fairly convinced that in the long term, humans must become a space faring species. But this is a discussion for another day...

 

 

DEPARTMENT OF PODCASTS

 

Masters In Business - John Carreyrou & Breaking Open The Theranos Fraud

I have to admit, I haven't gotten around to reading "Bad Blood," Carreyrou's new book on Theranos. But, in this episode, he goes in depth into the entire Theranos scandal and how Elizabeth Holmes duped so many people for so long. I can't recommend this highly enough! It is incredible.

 

Marc Andreessen's Interview With Elad Gil, Author of 'The High Growth Handbook'

Super interesting episode where Andreessen goes deep with Gil on what it looks like to scale an organization from 10 people to 1000 people once a product or service truly finds its market fit. I can't understate how much good advice is in this episode for anyone interested in starting your own company or in the midst of scaling up. I am adding Elad's book to my reading list as well - it looks incredible!

 

The Investor's Podcast #200 - ETF's Powered By Deep Learning & AI

Although AI and Deep Learning are certainly big trends affecting most industries at this point, the technology is nascent in the exchange traded fund (ETF) & passive investing industry. This is an interesting discussion with Sam Masucci about how his company is using IBM Watson to create an ETF 100% powered by deep learning to make all purchase decisions. 

 

 

DEPARTMENT OF LETTERS

 

Alluvial Capital Management Q2 Letter

Fun letter to read with short descriptions of some portfolio winners and losers as well as special situation positions.
 

Third Point Capital Q2 Letter

Interesting discussion of Third Point’s new position in PayPal, it’s new special purpose acquisition company for acquiring financial technology companies, and its credit strategies.

 

Ensemble Fund (Ensemble Capital) Q2 Letter

Excellent discussion on their philosophy behind knowing when to sell a position in a company. Unless you plan to hold a position forever, like Warren Buffett always famously said, it can be tough to know when to sell. Essentially, it comes to down to asking yourself: do I still believe that the reasoning behind buying this company’s stock still holds true? If yes, hold, and if not, sell.

 

Wiedower Capital - JD.Com Investment Thesis

Solid investment writeup of the Chinese Amazon - JD.com. It is also interesting to note in the last part of the thesis that the Chinese logistics market is so fragmented compared to the mature US market that has FedEx, UPS, and USPS as our major carriers. The author makes a good point that given JD.com’s current infrastructure, they should stand to be one of the major players once the industry begins to consolidate because of their scale.
 

MPE Capital First Half Review

MPE is a relatively new fund founded in 2017.  I really like the table presented in the letter illustrating that over 94% of 10 year hold periods over the past century, the S&P 500 has yielded positive returns. Most people pay lip service to being a “long-term” investor. But true long term investors understand the emotional grit it takes to just hold on through the ups and downs and stick to the original plan when the markets get volatile.
 

O'Shaughnessy  Asset Management Q2 Letter

O’Shaughnessy asset management second quarter letter illustrates how open of an organization they are about collaborating with equity research and mentions some interesting projects they are working on currently. My favorite part of the letter was the study on the Russell 1000 growth versus 1000 value and their “factor return” profile. It is clear that value has struggled the last decade vs. growth tilted portfolios, and they break this down in their study at a very granular level. 

 

Euclidean Technologies Q2 Letter - "What Are These Things We Call Companies?"

Solid philosophical discussion on what a company actually is. It seems like since Jeff Bezos began using the “flywheel” model to describe Amazon’s business model, it has been applied to many other concepts. In Euclidean’s letter, they use the flywheel concept to describe a company from a capital (equity, debt, and cash) perspective and I think it is helpful for investors to visualize what the ongoing process of capital allocation looks like full cycle. 

 

Miller Value Partners 2Q Letter

Classic commentary on the market from renowned value investor Bill Miller. No one knows where markets are headed, and the best investors out there don’t care. As the economy cycles (as it is bound to do at some point) they’ll simply sharpen their pencils and go to work finding the best opportunities available. 

 

Greenwood Investors Q2 Letter

Interesting letter by Greenwood on their process and generating ideas in both the “deeply undervalued” and “high quality” company groups. Here is the quote that caught my attention: 

“When your author was recently asked to weigh in on the value vs. quality debate, he was left wondering, why would investors only choose one and not the other? Of course we can optimize for both, and the fact that most firms still don’t ensures that we have substantial opportunities in the very wide gap between deep value and supreme quality.”

I couldn’t agree more. Why be a one trick pony when there are opportunities to invest in many forms of “value” scenarios: event driven such as spinoffs, deeply undervalued companies, and high growth high quality compounders. There are many ways to skin a cat.

 

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