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Circle of Competence Issue #70

QUOTE OF THE WEEK

"If a man knows not to what port he sails, no wind is favorable." - Seneca

FOOD FOR THOUGHT

Not all revenue is created equal: the keys to the 10X revenue multiple club (Bill Gurley)

This is an oldie but a goodie. Gurley gives a solid quantitative and qualitative explanation of why some (software) companies are worthy of the incredible 10X revenue multiple. More importantly Gurley's points can be expanded and applied generally to all industries and all investment opportunities. He covers the whole gamut: sustainable competitive advantage and strategic position of a company (and what that means in the software industry), predictability of cash flows (applied to software), and the financial metrics of business model (growth, margins, and cash flows). This is one of the better evergreen pieces of content I've seen in a while. The only puzzle piece I'd add to the conversation would be management - what is their track record, what is their record at the company, and what is their character?

Sub-zero yields begin to take hold in Europe's junk bond market (Bloomberg)

Signs of the times. 14 junk rated bonds are now trading at sub-zero yields in Europe. I always wonder why people even bother to buy these, but when your deposit rates are negative, it might look somewhat attractive? The ECB is literally forcing, through policy actions, institutional investors to purchase investments that will cost their investors money with mathematical certainty if held to maturity. The world is a strange place.

Ted Talk on the paradox of choice (Barry Schwartz)

Do yourself a favor a