I experienced a Black Tuesday not Black Monday since in 1987 I was working in the Korean time zone. The crash started in Hong Kong on October 20 and migrated west. I had worked in Australia the year before, watching what were called Great White Sharks. afr.com/business/black…
"On that historic day, the sharemarket opened 25 per cent down. Heavyweight stocks traded at only three-quarters of their price the day before and many lightweight stocks did not trade at all because there was no market in them." AFR
HOWARD MARKS: "Portfolio insurance convinced people that they could somehow own more stocks without increased risk, which is fanciful. And like all silver bullets, it didn’t work." bloomberg.com/news/features/…
Netflix grew by 7M ~net subscribers in the quarter. Acquiring each one has a cost. Due to churn, the *gross* acquisition rate was higher. NFLX does not release churn or acquisition cost so you must be a detective to find an answer. Watch people guess here: marketwatch.com/amp/story/guid…
You can't value Netflix with a P/E ratio because it is growing and an up front acquisition cost is required. Some subscriptions create value and some do not. If you are able to determine the difference, you can create an analytical and informational edge. But work is required.
I have written two blog posts on Reed Hastings and Netflix. google.com/amp/s/25iq.com… and google.com/amp/s/25iq.com… Without high confidence that your guess on churn and acquisition costs is roughly accurate, you can't calculate a valuation that's any more than a SWAG (silly wild...).
My quarterly revenue was $18.8B down 2%. My tax rate of 10.2% was delivered by the tooth fairy. So was non-GAAP EPS of $3.42. GAAP EPS was $2.94. Who am I?
The tooth fairy told me he only likes to deliver accounting earnings since "excluding items" and adjusting rates is so much fun. Reality-based computations like free cash flow where dollars are just counted are no fun he said. He loves P/E ratios, especially if they are non-GAAP!
Bill Gates said in 1995: "Paul Allen makes high-risk investments. He’d be the first to say some will do well, others will not. That’s a risk you take.” Paul understood that it is magnitude of success and not frequency of success that matters in venture investing.
In 2000 Paul asked Craig McCaw and I to meet with him about making Metricom's business model a success. At the time his investment was $500M. We met a few times, but unfortunately the unit economics couldn't be made to work. He wasn't afraid to swing the bat seeking a grand slam.
Paul Allen's offices has a curved Window which has a shade that would lower to allow showing slides like it was a bat cave. In the Mercer Island conference room he had incredible art of the walls that made it a bit hard to concentrate. He did not have small thoughts.
1/ "Paul knew a lot more than I did about computer hardware, the machines themselves. One summer day in 1972, when I was sixteen and Paul was nineteen, he showed me a ten‑paragraph article buried on page 143 of Electronics magazine."
2/ It was announcing that a young firm named Intel had released a microprocessor chip called the 8008. Paul and I realized this first microprocessor was very limited, but he was sure that the chips would get more powerful and computers on a chip would improve very rapidly."
3/ "Paul and I wondered what we could program the 8008 to do. He called up Intel to request a manual. We were a little surprised when they actually sent him one. We figured out a way to use the little chip to power a machine that could analyze traffic monitors on city streets..."
Barclays will offer checking accounts for its U.S. online bank which already offers credit cards, savings and loans to 13 million customers. "The more aspects of the relationship a customer has with us, the happier we are." A customer paying for multiple services lowers:
"Bank of America’s businesses sent more than 44,000 referrals to the Global Wealth and Investment Management division, which includes Merrill Lynch and U.S. Trust. At the same time GWIM sent more than 77,000 referrals to the other businesses." Cross selling is everyone's focus.
The value of cross selling explains freemium. But zero commission stock trades is only survivable if you have something else to sell. If a competitor offers a product for free and they can make enough money to keep the lights on, then you have a problem. google.com/amp/s/www.geek…
My 300th blog post "Lessons from Annie Duke (Author of 'Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts') is now up at 25iq.com/2018/10/13/les… “There are exactly two things that determine how our lives turn out: the quality of our decisions and luck.”
“The book title ‘Thinking in Bets’ really comes from the person who wins a bet is not the one who affirms their priors, it’s the person who has the most accurate model of the world.”Annie Duke. It helps make you information hungry and think more probabilistically.
“What good poker players and good decision-makers have in common is their comfort with the world being an uncertain and unpredictable place. They understand that they can almost never know exactly how something will turn out. They embrace that uncertainty..." Annie Duke
One life lesson I learned vicariously when the Internet and telecom bubbles popped in 2000-2001 was about the downside of margin loans. It was like watching other people pee on an electric fence. Even though it was vicarious, the experience was memorable and the lessons clear.
"Leverage magnifies outcomes, but doesn’t add value.” Howard Marks. Add volatility and margin loans are a portfolio extinction event for muppets. oaktreecapital.com/docs/default-s…
Even very smart investors can find margin loans to be a financial disaster. "Mohnish Pabrai once said Warren Buffett told him that 'Rick Guerin was just as smart as us, but he was in a hurry.' Levered with margin loans, Rick's ambition was his downfall. google.com/amp/s/www.fool…
As everyone knows, the facts available to investors today are very different than the facts that they had yesterday. Not. amp.cnn.com/cnn/2018/10/10… Real value is delivered by making predictive statements about events before they happen, not telling a retrofitted story afterward.
As everyone knows, the facts available to investors so far today are completely different than the facts they had yesterday. So the NASDAQ is green. Everything is perfectly explainable if you retrofit!
Telling made up stories is excellent muppet bait. Many people are comforted by a fabricated narrative. "Why are markets suddenly bouncing back? News late Thursday that President Trump would meet next month with Chinese leader Xi Ji" amp.cnn.com/cnn/2018/10/12…
Paul Romer: “Relying on a micro-foundation ... "Assume A, assume B, ... blah blah blah .... And so we have proven that P is true. Then the model is identified." paulromer.net/wp-content/upl…
“The nice thing about ideas is that if I use your idea, you are not one idea short. This is different from capital, labor, and other classical factors of production. If we all produce more ideas, we all benefit from these new ideas, not just the people who produce them.”
“Climate change and its effect on everyone’s well-being, William Nordhaus pointed out, is not a part of national accounts, while profits and GDP are.” GDP ≠ welfare. theconversation.com/paul-romer-and…
2018 Nobel Prize Winner William Nordhaus "illuminated how flawed economists’ attempts to measure changes in living standards are. Any true reckoning of real incomes must somehow account for the vast changes in the quality of things we consume." google.com/amp/s/amp.econ…
"only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers." nber.org/papers/w10433
Nordhaus "estimates that innovators capture a mere 2.2% of the total 'surplus' from innovation. (The total surplus of innovation is, roughly speaking, the total value to society of innovation above the cost of producing innovations.). marginalrevolution.com
"A three person Board should not have committees. A five person Board could and should have them if there is a lot of work required for audit and compensation. A seven person Board and larger should most certainly have committees." avc.com/2012/04/the-bo…
"The compensation committee provides oversight of the Company's compensation plans, including equity compensation. The audit committee provides oversight of the CFO function, the auditors, and related matters (which might include tax compliance, SEC compliance, etc, etc)."
"Golden Rules: 1) No one is ever happy with compensation, and compensation has never made anyone happy. 2) People always find out what everyone else is making. 3) Create a system that revisits compensation only 1-2x a year. 4) Be as formulaic as you can." firstround.com/review/A-Count…
1M shares outstanding, 20% unissued option pool (200k options in it) and lenders have warrants to purchase 50k shares (making the fully diluted shares outstanding equal to 1.25M and your 10K shares now represent 0.8% which is your fully diluted ownership. avc.com/2018/10/fully-…
"3.5% – 5% annual dilution assuming no executives need to be hired. As a point of reference most public technology companies increase their option pools by 4% to 5% per year, so the proposed dilution is well within the reasonable range." blog.wealthfront.com/the-right-way-…
"Tell people the amount of stock options they are receiving (total number), the value of those stock options (say $100k), the value of the company (e.g. $10M post money) and therefore if we sold for $100M one day your gain would be approximately $1M)."!bothsidesofthetable.com/how-to-discuss…
"there’s a supply of investor error. A factor can go away from either the supply or the demand side. It can go away from too many people trying to exploit it. There’s a finite amount of error out there. Or it can go away from that error clearing up." bloomberg.com/news/features/…
ES: Why have quants done so poorly of late?
CA: "The big culprit on the year is systematic value investing. That one has been bad for quite a long time, probably since just after the financial crisis."
Seems possible that this factor has changed since the economy has changed.
How has the economy fundamentally changed? Bill Nygren of Oakmark writes about it here: oakmark.com/Commentary/Com… "the economy has become more asset-light"
"Since market cycles vary from one to the next in terms of amplitude, pace and duration of their fluctuations, they’re not regular enough to enable us to be sure what’ll happen next on the basis of what has gone on before." Howard Marks like to draw pictures to make his points:
Jason Zweig: "Marks admits his book is a tug of war between his certainty that 'we don’t know what the future holds' and his belief that 'we can identify where the market stands in its cycle.'" It doesn’t tell us anything about the short-term but does about long term probability.
"There is no single reliable gauge that one can look to for an indication of whether market participants’ behavior at a point in time is prudent or imprudent. All we can do is assemble anecdotal evidence and try to draw the correct inferences from it.” 25iq.com/2018/10/06/les…
Right about now (10am PST) I face the question of how many words to write in my 25iq blog post for next weekend. I have written 2,958 words. I have ~ 1 hour of writing time left. More than 4K words is getting long. For example, Scott Belsky post 3,585. Howard Marks post 3,564.
300 25IQ blog posts x 3,500 words = over one million words.
Howard Marks has over 100 memos on his web site and has said: “The price is right, since it is free.” When asked by Barry Ritholtz why he writes, Marks responded:
It is 11AM (PST) and my allotted writing time is up. I finished my blog post on Annie Duke (3,545 words).
I made it to 300 25IQ posts. I will spend a week thinking about what to do next, while working, making applesauce and being part of my team's annual charity fund raiser.
“Charlie Munger has read more broadly and has had another 22 years to read further. He always a broader reader than I was and so has this ability to call on these references. Its it’s kind of silly to think that we can reinvent all the wisdom in the world. " Howard Marks
“I probably know Howard Marks as well as I know anybody. He is a very smart man. You have to believe in the tooth fairy to believe [Bernie Madoff] was having those ﬁgures by the methods he claimed to use. You wouldn’t have gotten that one by Marks for 2 seconds." Charlie Munger
"I was fortunate to have one of my occasional lunches with Charlie Munger. As it ended and I got up to go, he said something about investing that I keep going back to: “It’s not supposed to be easy. Anyone who finds it easy is stupid.” Howard Marks
My 299th blog post "Lessons from Howard Marks’ New Book: “Mastering the Market Cycle – Getting the Odds on Your Side.” 25iq.com/2018/10/06/les… "You can prepare; you can’t predict." Howard Marks wanted the subtitle to be the book title since it is more accurate.
"There are two things I would never say when referring to the market: 'get out' and 'it’s time.' I’m not that smart, and I’m never that sure. The media like to hear people say 'get in' or 'get out,' but most of the time the correct action is somewhere in between." Howard Marks
"Investing is not black or white, in or out, risky or safe. The key word is “calibrate.” The amount you have invested, your allocation of capital.. and the riskiness of the things you own all should be calibrated along a continuum that runs from aggressive to defensive." H. Marks
"If you’re an equity investor, all the hectoring has probably left you frazzled, staring anxiously at fixed-income markets for early signs of the apocalypse." More like: "If you're an idiot investor..." bloomberg.com/news/articles/…
"Prophesies of doom are everywhere....worst two-day tumble since May." Two days!
If you want some actual intelligence listen to the Barry Ritholtz interview of Howard Marks. bloomberg.com/news/audio/201… or read 25IQ tomorrow. You decide.
In this Bloomberg interview with Howard Marks you learn his mantra continues to be, “move forward, but with caution," that the cycle is in the 8th innining but it could go beyond 9 innings, that he isn't a Fed watcher but anticipates interest rates going into the 3's, but not 4.
Jim Chanos: "Wall Street is a giant positive reinforcement machine. That’s why it exists." "If you are a short seller you are being told constantly that you are wrong. Not everyone has the ability to drown that out.” google.com/amp/s/25iq.com…
Jim Chanos: "The market won’t necessarily immediately see what you see and in fact often doesn’t. Fundamental short sellers are often early. You have to borrow the shares. The ability to effect a short position in reasonable size once everything is clear may not be given to you.”
“It’s ruined a lot of people. You can go broke doing it.” “You’ll see way more stocks that are dramatically overvalued than dramatically undervalued. You might think short selling is easy, but it’s not."
My 25IQ blog post for next Saturday is on the new book" Mastering the Market Cycle- Getting the Odds in your Favor" by Howard Marks. You may recall that the market cycle was one of the most important things in his previous book "The Most Important Thing." The new book drills down
For people who did not live through the NASDAQ hitting the bottom of its cycle in 2001, what mattered most was cash money. To this day (actually even before then) if you try to buy a hot dog with "earnings" you will go hungry. Cash rules everything around me & a business (CREAM).
The cash disappeared when the Internet bubble popped like water does when you finish cleaning your toothbush and push down on the faucet handle. Cash was there in abundance pre-bubble pop and then was completely absent. No new cash. If you had cash then, you named your own price.
Verizon's proprietary 5G Home customers "receive 'white glove installation' of the service, a 24-hour concierge line, and free hardware upggrades" = Punishing CAC and COGS! Truck roll white glove installation is VERY spendy. iphone.appleinsider.com/articles/18/10…
Why "white glove" fixed 5G installs? Equipment like this sticking out of a window must have line of sight to a base station. If coverage doesn't exist the operator eats the cost of the truck roll and the qualified lead.
Potential customer in a store asks: "is fixed 5G service available in my house?" The right answer is "maybe" if there is a nearby base station. Actual answer is only determinable on site after an expensive truck roll.
There are three "seasons" books are most often launched: Fall, Winter and Spring. Launch day is often on a Tuesday for historical reasons, so books like The Messy Middle (Beksky) and Mastering the Market Cycle (Marks) arrive in bookstores and delivery trucks arrive tomorrow.
Reviewers get prepublication copies which allowed me to write a book review for Belsky's The Messy Middle which is launching officially tomorrow and post it last Saturday. I will review the Howard Marks book next Saturday. 25iq.com/2018/09/29/les…
Book launch "seasons" gave time for sales reps to travel to all the many physical stores. With each season came big sales conferences, where editors presented their book lists to the sales teams. These book conferences lasted for an entire week. deanwesleysmith.com/the-new-world-…