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Mostly Borrowed Ideas

25 Jun, 12 tweets, 3 min read

@mjmauboussin

1/ Thread: The impact of intangibles on base rates

@mjmauboussin and Dan Callahan published a new piece couple of days ago. As an ardent student of Mauboussin's work, I am leaving my notes here.

2/ There are two ways to forecast the future.

a) The Inside View: You study the company of interest, understand the economics, and project operating metrics based on the narrative.

b) The Outside View: You think statistically, find reference class of the company of interest...

3/ ... and evaluate what happened to that reference class. You get your base rates from the reference class which influences your forecasted numbers.

4/ Mauboussin thinks base rates are underutilized in investing.

In my circle (especially the ones with MBAs), it is perhaps overutilized that led people to miss some of the most powerful secular themes in the last 10 years.

5/ The key, however, is finding the appropriate reference class. Perhaps most mistakes for following base rates mantra is simply thinking about the wrong reference class.

6/ Mauboussin mentioned intangibles really changed the game and it has two important, but opposing forces:

a) intangibles can scale at an exceptional rate
b) intangibles can lose value precipitously when a better version comes along

7/ Because of (a), "intangible-based businesses can grow faster than what the base rate data show. In essence, the right tail of the distribution of growth rates is extending outward from the average."

8/ Because of (b), "we should observe greater variance in the distribution of growth rates for intangible-based businesses. That means that the left tail of the distribution of growth rates is also spreading further from the average."

9/ Companies that suffer from the fear of (b), it can look optically very cheap, and the ones who have shielded them from (b), it can appear very expensive.

But if a company can scale fast without the fear of (b), it can be a very attractive investment.

10/ Mauboussin showed empirical evidence to these assertions. Healthcare and tech are sectors with the highest intangible asset intensity, and they are over-represented among the fastest growers in the market, but they also exhibit higher dispersion.

11/ "we should see two effects in the data: higher growth and more dispersion in the outcomes"

"The base rate of sales growth is getting stretched from the average in both the positive and negative direction."

End/ Link to the paper: morganstanley.com/im/publication…

All my twitter threads: mbi-deepdives.com/twitter-thread…

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20 Jun

1/9 Thread: No Slam Dunk in Investing

I was recently speaking with someone and we both somewhat lamented how Buffett did not bet big on Google.

Google IPOed in 2004; it may not be clear then that they would win search. But surely by 2014, Buffett should have known it, right?

2/9 Following our conversation, we both explored a bit whether it really was that obvious that Google was an easy buy in 2014 when it was trading at ~$500.

Let me share two quotes.

3/9 "The growth rate in Internet penetration is set to peak in 2016. Were Google’s revenue and profit continues to track Internet penetration, then those metrics would peak as well"

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9 Jun

1/5 Thread: Income inequality gimmick

ProPublica's "leak" on wealthy individuals' taxes reminded me of some of the studies related income inequality I read a few years ago.

A short thread.

2/5 University of Michigan did a study from 1975 to 1991 following a group of individuals who initially started in the bottom 20%.

95% of these people were found not to be in the bottom 20% in 1991. 29% actually reached the top 20%.

Link: (page 8) scribd.com/document/88651…

3/5 IRS later did a similar study from 1996 to 2005, and found people who started in the bottom 20% in 1996 saw their income increase by 91% over the decade and people who started at the top 1% actually saw their income fall by 26%.

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2 Jun

@depop

1/ Thread on @depop acquisition by $ETSY

Etsy just announced to acquire Depop, a gen Z focused online apparel resale marketplace for $1.625 Bn (all cash). Optically expensive i.e. ~2.5x GMS or ~23x revenue based on 2020 numbers.

Here are my thoughts.

2/ Etsy coined an interesting term today “house of brands”.

After Reverb acquisition in '19 and now Depop, the strategy seems clear: keep penetrating vintage, handmade core marketplace AND acquire other niche marketplaces that you will have hard time building a connection with.

3/ Why is this important?

E-commerce is primarily behavioral in nature. Once you buy something from a marketplace, they have enough of your data to encourage you to buy again.
Once a marketplace grabs critical attention in a niche, it can be difficult to unseat the incumbent

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28 May

1/ Thread: $ADSK FY 1Q’22 Update

ADSK had a pretty decent 1Q, comfortably beating high end of the revenue guidance. 98% of revenue are now recurring, and net revenue retention was in the range of 100-110%.

Topline guidance was raised by ~$40 mn. Here are my notes from the call

2/ Q1 is expected to be trough from growth standpoint and the rest of the year is likely to have some acceleration post-pandemic. ~75% of FCF of this year will be generated in the 2H.

3/ Billings from converting noncompliant users doubled YoY in Q1. In fact, a noncompliant customer converted into one of the largest premium customers.

But don’t expect hockey stick growth from conversion of noncompliant users. ADSK wants to gradually and naturally convert.

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26 May

1/9 Thread: Retention rate illusions

With the rise of SaaS businesses, retention rate is often discussed and followed by investors.

Here are some of the notes I took from an academic paper discussing illusions/misconceptions when it comes to retention rates.

2/9 Issue #1: Reported retention rate may not be indicative of realized renewal rate. Let me give an example.

Let’s say a business reports retention rate is 95% which is, of course, awesome. What is less discussed, however, is the duration of the customer contracts.

3/9 To illustrate why it is important, imagine Company A, B, and C all report 95% retention rates, but customers only renew the contracts in every 1, 3, and 5 year respectively.

Here’s how the reported and underlying retention rate differs for these companies.

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24 May

1/8 Thread: Changing your mind

It's easy to read Keynes' quote, "When the facts change, I change my mind - what do you do, sir?" and nod your head; but it doesn't make it any less difficult for anyone to change their opinions.

Why is that?

2/8 Murakami had a great quote that I try to remind myself every time I disagree with someone:

“Always remember that to argue, and win, is to break down the reality of the person you are arguing against. It is painful to lose your reality, so be kind, even if you are right.”

3/8 Unfortunately, one of the downsides of arguments/debates on twitter or any social media is it's mostly performative in nature.

You not only lose arguments that shatter your "reality", you go through the experience publicly which makes it even harder to accept and change.

Read 8 tweets

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