Market Talk, January 2nd 2022
Market Talk is a free Sunday issue, where I share a curation of the best things I have consumed during the week.
Each Sunday I will share:
• A Quick update on what’s coming for IT Subscribers
• The greatest articles I have read during the week
• The best pieces of company-related insights I have consumed over the week
• One stellar podcast or interview
And we are back after a one-week Christmas hiatus! I hope everyone had a fantastic holiday season, and I wish you all a happy new year. Thanks again for all of the nice feedback on my summary of the second year writing Investment Talk (discussed in “Two Years on Substack”). Since posting that recap, the total number of Investment Talk readers surpassed 7,000 and I am looking forward to implementing some of the points I discussed in that memo for the year ahead.
January’s company spotlight issue for this month will be Freetrade; a UK-domiciled, comissionless, brokerage that recently raised its 7th community funding round (£9M). Striving to take on incumbent brokerages across the UK and the EU (expansion imminent), CEO Adam Dodds has his eye on an eventual IPO. With the platform now housing over 1M customers (average age of 31), this write-up will take a look at the UK investing appetites, Freetrade’s business model, and their place in the market.
📈 Market Action 📉
The S&P 500
Sectoral ETFs for the US
🌎 Global Indices 🌎
Europe & UK
🔇 US Market Sentiment 🔇
Fear & Greed Index
The CNN Greed and Fear Index measures market sentiment based on seven factors; momentum, price strength, price breadth, put/call ratios, junk bond demand, volatility, and safe-haven demand.
The current reading stands at 61 up from 40 last week.
The CBOE VIX closed at 17.32, down from 17.96 the week before.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by Quartr.
Articles of the Week
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) Customers Love Free Stuff … But That’s Not Your Problem
Length: Moderate Read
Source: (Above the Crowd)
This one was written by Bill Gurley (VC at Benchmark) back in June 2021, and dives into the subject matter of customer loyalty incentives through free giveaways, branching off into a discussion of pre-IPO access as a new reincarnation of an old-marketing scheme.
The conversation then migrates into Gurley’s perception that the IPO process has long been broken, packed with a plethora of case studies and data. Really interesting read for those wishing to learn more about the IPO process, and how this could be reminded (made “fairer”) in the future.
“ You know what customers like more than free stuff? You guessed it — straight up free money. A doughnut is one thing, cold-hard cash is even better. Paypal famously offered customers $5 to invite a friend, who would then also get $5 as part of a highly successful viral marketing campaign (they actually started at $20, and then reduced it to $10 and then ended at $5). According to an interview with Elon Musk, this campaign cost Paypal about $60 million, which most Silicon Valley historians would consider money well spent. Interestingly, many years later, Square would use other innovative “cash giveaway” strategies to steal market share from Paypal (in addition to copying the give $5, get $5 model). With Super Cash App Friday, customers who market and promote Cash App earn “entries” for a sweepstakes with an approximate retail value in weekly prizes of $20K.”
2) House Money
Length: Moderate Read
Source: (Young Money)
As a fan of poker myself, I really enjoyed Jack’s (author) discussion on the impact of the “house money” effect and how this correlates with the activity we are seeing in the equity and crypto asset classes. Investopedia defines the house money effect as “a theory used to explain the tendency of investors to take on greater risk when reinvesting profit earned through investing than they would when investing their savings or wages.”
For such a young guy, his writing sure packs a lot of wisdom. Highly enjoyable read.
“The most dangerous hand in poker isn’t the 2-7 off suit. It’s the hand that wins 99% of the time, and you bet like it wins 100% of the time, on an instant that happens to be the 1% of the time.
The most dangerous hand in poker isn’t just a poker thing. It’s an everything thing.
It’s the crypto speculator who has never made a bad trade, but gets locked out of his wallet. The SPAC trader who get rug-pulled by unusual warrant terms that he missed in the prospectus. The investor whose “sure thing” position commits accounting fraud. It’s a lot of things.”
3) No Planet for the Apes
Length: Light Read
Comedy is often a great lubricant. Blend humour together with serious topics and, if done well, it can enhance one’s learning. At the very least it can lower the barrier to being able to understand the underlying message. So few people are able to effectively meld together humour and investing, but Doomberg does it succinctly. As such, this is a must-have in your collection of publications related to the stock market.
In this memo, the Doomberg team discuss the … interesting… shareholder activism that surrounds AMC, as well as the dubious actions of the executive suite; whose mouths cite allegiance with the cause, but their purse strings suggest otherwise.
“In a Greater Fool’s trade, a speculator takes a position in a questionable security in the hopes that a more foolish investor will bail them out at a higher price. This happens regularly, especially in market booms like the one we’ve experienced in the past 18 months, and the ending is never different. Eventually, the supply of new foolish money dries up, momentum behind the movement fizzles, and the price of the security reverts to fair value. The underlying business at AMC is in terminal decline, the capital table is wrecked, the stock has been diluted so extensively it would make a penny stock promoter blush, and we believe the fair value of AMC is zero. Could it double or triple from here before reality is confronted? Absolutely, which is why we have no position and have no intention to take one.
4) Does Market Timing Work?
Length: Moderate Read
Source: (Charles Schwab)
Not an overly complicated subject matter, but an insightful piece nonetheless. Taking 5 distinct investing styles, and backtesting each one over a 20-year period, the results show that even an investor who suffers from horrendous market timing (buying the peak) still comes out the other end fairly well.
“If you’re tempted to try to wait for the best time to invest in the stock market, our study suggests that the benefits of doing this aren’t all that impressive—even for perfect timers. Remember, over 20 years, Peter Perfect amassed $15,920 more than the investor who put her cash to work right away.
Even badly timed stock market investments were much better than no stock market investments at all. Our study suggests that investors who procrastinate are likely to miss out on the stock market’s potential growth. By perpetually waiting for the “right time,” Larry sacrificed $76,733 compared to even the worst market timer, who invested in the market at each year’s high.”
Other Items I Read This Week
Note: ($) indicates there is a paywall on this content.
• MBI Deep Dives: 2021 Annual Letter
• Neckar: Going Pro: A Recap of 2021
• Autumn Capital: 2021, Looking Forward
• McKinsey: Are you chasing the right digital assets?
• Markets Insider: A DAO Group wants to buy Blockbuster and revive it
🕵️ Company Insight 🕵️
• EdgaralanROE (MITK): Deep-dive: MITK
• Young Hamilton (CPRT): AGB 2021.25 - Copart
• Enlightened Capital (MSCI): MSCI Deep Dive
• Halland Advisors (MVRS): Owner Manager Inc
• Meta for Media (MVRS): Bulletin at Six Months
• Dhaval Kotecha (ROKU): What Roku told us so far in 2021?
Podcast of the Week
There is a huge range of Podcasts to listen to, and the choice can feel quite saturated at times. Here, I will share one podcast I listened to during the week, that I feel is worth your time.
London Stock Exchange Group
I listen to the Business Breakdowns podcast casually but have found that on two or three occasions the short elevator-pitch introductions on the businesses the team covers has led me to go investigate further on my own. Whilst the podcast itself is not strictly a part of my discovery process, I now embrace each episode as though it’s a stock pitch on a business I haven’t spent time on.
I found the London Stock Exchange Group episode particularly interesting. Sitting within a market that has high barriers to entry, secular tailwinds, 90% gross margins, attractive FCF generation, and having acquired some interesting assets via M&A this year, the episode implored to investigate further. This may be a future company spotlight.
Host: Zack Fuss
Guest: Nick Shenton
Author of Investment Talk