Market Talk, February 27th 2022
Market Talk is a bi-weekly Sunday issue, where I share a curation of the best things I have consumed during the week.
Each Sunday I will share:
• The greatest articles I have read during the last two weeks
• A few stellar podcasts or interviews
Comments from Me
A weird couple of weeks for me. I contracted covid for a little while there, spent a few days in bed, and recovered pretty quickly. Sadly, this coincided with my partner’s mother visiting us from India. As such, I had to self-isolate for most of the visit. Life sucks that way sometimes, but I hope to be visiting India for a few months sometime soon. However, there are certainly worse things going on in the world, so I count myself fortunate. Like many, I have been watching that unfold with sadness.
In other news, some of you might have seen that I accepted a role at Commonstock full-time last week. I had been working behind the scenes for this exciting start-up for ~6 months prior to that, and am glad to be taking a more hands-on role for the rest of 2022.
In other…other…news, I am in the process of writing up some quick thoughts on earnings for the companies that I own. Should be out soon. I plan to share bite-size thoughts on most, with full memos saved for the likes of PLBY Group and maybe Etsy or Square.
Here is a shortlist of a few interesting pieces that I have read over the course of the week, to feed your mind.
Note, these articles are not numerically listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) The Agony & The Ecstacy: The risks and rewards of a concentrated stock position
Length: Moderate Read
Source: (JP Morgan)
This week I have been reading a lot on the theme of concentration, as you will see later down in this memo. This all started with finding this report from JP Morgan that takes a look at the risks and rewards of a concentrated stock position.
The piece dives into a case study of business failures (1980 through 2020), and the primary factors, as well as venturing into economic conditions, diversification and hedging. Fantastic piece of work.
“Another way to think about concentration risk: how often would a family have been better or worse off owning cash, or the Russell 3000 Index instead of the concentrated position? As shown in the table, around 40% of the time a concentrated position in a single stock experienced negative absolute returns, in which case it would have underperformed a simple position in cash. And around 2/3 of the time, a concentrated position in a single stock would have underperformed a diversified position in the Russell 3000 Index. While the most successful companies generated massive wealth over the long run, only around 10% of all stocks since 1980 met the definition of “megawinners”.
2) Guide to Asia-Pacific Markets 2022
Length: Moderate Read
Source: (Asian Century Stocks)
Fritz over at Asian Century Stocks put together this fantastic PDF slide document outlining his guide to Asian-Pacific markets for 2022. Covering items such as why one should invest in Asia, demographics, tailwinds, currency, valuations, and even dedicated slides to 12 separate stock markets in the region.
By now, I have come to know Fritz as THE person to go to for Asian stock market insights, and this was a masterful piece of research. A must-read for those interested in the region.
“Why Invest in Asia?
An educated and hard-working population: Education and work ethic provide companies with competitive advantages vs their Western peers.
A gradual shift of manufacturing towards Asia: Companies may be diversifying away from mainland China but manufacturing stays within Asia. Light manufacturing exports drive middle-class consumption, urbanisation as well as higher credit penetration rates as countries develop.
Low valuation multiples: Asia-Pacific overall trades at significant lower multiples than the United States, and to a lesser extent Europe..
Less competition from other investors: Outside of a few Chinese tech stocks, global investors do not pay much attention to the region. The probability of gaining unique ideas and variant views on individual stocks is much higher than say in the competitive US market.
Diversification: Do not place all your eggs in one US tech focused basket. Asia and other parts of the world provide much needed diversification.”
3) Hasbro, Let Wizards Go
Length: Dense Read
Source: (Alta Fox Capital)
I wanted to share this slice of shareholder activism from Alta Fox Capital. In this report, Alta Fox (now a top 10 shareholder) layout, in phenomenal detail, what they feel has gone wrong as Hasbro and how their poor capital allocation has hindered the growth of their ‘crown jewel’; the Wizards of the Coast business that is utilised as a cash cow to fund Hasbro’s “brand blueprint” strategy, which has nothing to do with WOTC.
In doing so, Alta suggests that a spin-off (separating the WOTC business and the RemainCo) will force the market to value WOTC appropriately. Currently, Hasbro trades like a toy business, despite WOTC (a high margin, growth business) equating to 50% of their EBITDA in 2021 (up from 25% just 2-years prior). Alta Fox has proposed 5 new board members to replace the outdated board which largely consists of toy and media executives; not a representation of the Hasbro business which stands today.
A truly compelling pitch, and brilliantly compiled. Really enjoyed reading this, and provoked me to conduct my own research on the potential opportunity.
“It appears that the market still perceives and values Hasbro as a slow growth toy company, yet its consumer (toy) business accounts for only 22% of Alta Fox’s estimate of intrinsic value. Our view is that Hasbro is now a “Wizards of the Coast” business that also happens to make toys.”
4) A Good Filter For Finding Winners
Length: Light Read
Source: (Woodlock House)
Chris Mayer shared this memo, discussing the art of investment filters. Admitting that they, naturally, cause the investor to miss some huge winners, the upside is that it creates a more manageable investment universe. Put differently, pick your pond, and fish. The piece also touches on concentration with some wise words from both Buffett and Greenblatt.
“I made this idea a key filter in my investment philosophy. I want to invest alongside people who have a sizable equity ownership in the business. The first thing I do when I look at a business is pull up the proxy. If there are no significant shareholders among the executives and directors, it’s an easy pass. I go on to the next name. Does it mean I will miss out on great investments run by hired hands with very little skin in the game? Of course. A good investment filter makes the investable universe manageable and is absolutely essential for managing your time and attention. Filters, by design, exclude. You have to be comfortable with the idea that a lot of good ideas will slip through your nets.
A good filter should focus on things that help you find winners. You want to fish in good waters. Stocks with higher levels of insider ownership tend to outperform their peers, as backed up by various studies. In short, there’s good fishing in these pools.”
(5) Due Diligence – Get On The Ground
Length: Light Read
A short and succinct memo by Ian Cassel takes a look at what we can do as investors to improve our due diligence process. Namely; read everything, utilise your network, talk to multiple people on the ground, and get on the ground yourself.
“We often feel the urge “to do something”. We love to come to quick conclusions by analyzing what is on the surface. But reality is much more nuanced. Sometimes what is easily seen is meant to distract us. 100% of investors can see what is on the surface. 5% are willing to dig below the surface to find the truth.”
Other Items I Read
Note: ($) indicates there is a paywall on this content.
• 1Main Capital: Fourth Quarter Investor Letter
• Third Point: Fourth Quarter Investor Letter
• Hayden Capital: Fourth Quarter Investor Letter
• Doomberg: What Canada Means for Crypto
• Joshua Brown: How Options Expiration Keeps Crushing the Stock Market
• Abraham Thomas: Minsky Moments in Venture Capital
• Value Stock Geek: Risk Partity as an Alternative to Cash
• Ensemble Capital: Pricing Power and Inflation
• Aswath Damodaran: Revisiting the FANGAM Stocks
🕵️ Company Insight 🕵️
• TSOH Research (ABNB): Completely Additive ($)
• TSOH Research (DIS): Content, Content, Content ($)
• Meta Newsroom (META): Global Launch of Facebook Reels
• Stratechery (INTL): An Interview with Intel CEO Pat Gelsinger
• Stratechery (SHOP): Shopify’s Evolution
• MacroOps (MRX): Europe’s Best Way To Buy Glasses
• Punch Card (ZBRA): The Picks and Shovels of Industries
• MT Capital (SPOT): Spotify Write-Up
• Strat Becker (BRCC): Black Rifle Coffee's Red Flags
• Value Stock Geek (SNA): Snap-On Write up
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share three podcasts I listened to during the last two weeks, that I feel are worth your time.
(1) Dan McMurtie: The SuperFLUgatu Episode
Whenever Dan McMurtie speaks, it’s always interesting to listen. This one is ~3 hours long, so might take a couple of stints to complete, but I assure you it’s well worth it. Discussion centres around valuing research time, emerging managers, trust in digital, and HODL mindsets. I appreciate how Dan appears to have no ego, and tells it like it is, oft cutting through the bullshiza.
Guest: Dan McMurtie
(2) Volatility = Price of Admission
Motley Fool Money
Morgan Housel hops onto Motley Fool Money in this brief but insightful discussion about volatility. Enjoyable, and particularly relevant considering the upsetting events unfolding in Europe this year, and the market turmoil.
Guest: Morgan Housel
(3) Quantitative & Quality Investing with Tobias Carlisle
Chit Chat Money
So rarely does Tobias do external interviews, I was excited to listen to this one with Ryan and Brett, as I greatly enjoyed the Value After Hours podcast that Jake, Toby, and Bill operate. The story starts with some background and Toby’s journey in discovering investing, but the juiciest part hits ~25 minutes in when the topic turns to qualitative vs quantitative research.
Guest: Tobias Carlisle
Amongst all the horrific headlines, I did find something to make me laugh recently, albeit at the unfortunate expense of those who bought into the latest poorly executed NFT scheme, to the tune of $70M. A project named ‘Pixelmon’ had promised a rich roadmap, as well as aesthetically pleasing characters, and even released a teaser for ‘actual gameplay’ footage (below tweet) to build up hype for their project.
There seemed to be a great deal of hype surrounding, yet another, game-changing NFT project. That was, until they actually released art for the NFTs this week.
The monkey below was a personal favourite, but I implore you to simply punch in ‘pixelmon’ on your Twitter search bar if you would like to spend a few minutes laughing today. Speculators paid as much as $10K pre-launch to get their hands on NFTs like below.
And trust me, there are some that look far worse. Some even featured bald patches of grass, with buggy characters hiding somewhere between the greenery.
If you are looking for a somewhat hilarious rabbit hole, then I recommend this one. As humorous as it might be, it goes to show that the unregulated nature of this ‘wild west’ marketplace is still in its infancy. Whether that’s a good or a bad thing, I’ll let you decide. I am not an opinion you want to listen to when it surrounds NFTs. For a legitimate voice/news source in the space, I suggest following The Drop.
Author of Investment Talk