Market Talk, May 22nd 2022
Market Talk is a bi-weekly Sunday issue, where I curate the best things I have consumed during the last two weeks.
Every second Sunday I will share:
• The greatest articles I have read during the last two weeks
• A few stellar podcasts or interviews
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Comments from Me
This marks the 50th edition of Market Talk, and to celebrate, i’ll write 50 more editions. In other news, i have just wrapped up my first week-off from all work in ~3 years. I make the effort to have a lot of fun in my life, but wow did I forget how much more there is to life than work and weekends. I spent most of the time being a tourist in my home country (Scotland), exploring the cities and areas I had not been to yet, as well as acquiring an Indian tourist visa. I feel refreshed, and thankfully the weather was superb for the duration of my time away.
General: Next week I should have one new write-up, and one new interview with an excellent guest who has spent time in hedge funds, mutual funds, VC, has authored a book, and now runs a fund.
UK Stocks: This year, I have been increasing my exposure to UK-domiciled stocks. I have had readers express interest in write-ups of this nature in the past, so you may be pleased to know there are some coming down the line.
Sponsors: Readers will know, that back in February, after nearly two years of writing Investment Talk, I removed the paywall. To help with the running costs of this newsletter, I figured Market Talk, which has always been free, would be a suitable place to allow sponsorships from time to time. No garbage, only brands I think are genuinely useful or of interest to readers. I hope you can understand that this allows me to keep grinding on Investment Talk and, candidly, it incentivises me too.
Recent Publications: Memos I have shared since the last Market Talk.
Here is a shortlist of a few interesting pieces that I have read over the course of the last two weeks, to feed your mind.
Note, that these articles are not listed in order of perceived value.
To access the suggested article, click the purple link after the source subheading.
1) The Makings of a Multibagger
Length: Dense Read
Source: (Alta Fox Capital)
Okay, so first things first, this thing is 645 pages long. Certainly not a report you can consume in one sitting unless you are Warren Buffett. But it is a great resource to be tucked away and nibbled on over a period of time. Back in 2020, Alta Fox put together this monster report to discover the makings of a multi-bagger, by shining the torch on some of the best-performing stocks from the prior 5-years, identifying their common characteristics, trends, and catalysts, in an effort to identify strategies to discover the next set of high-performance stocks.
Alta Fox analyse 104 companies, each across 6 slides, outlining the quantitative and qualitative datasets including; an overview, the business model, competitive analysis, what investors missed, and key takeaways. Furthermore, the high-level and specific takeaways shared on slides 18 and 19 allow the reader to digest the findings in minutes.
A fun and insightful read, and one that may help with one’s own investment process. Naturally, there would have been a great deal of work behind each finding, more so than 6 slides can represent, but it highlights the importance of concise pitching and presentation.
2) Third Point First Quarter Letter
Length: Moderate Read
Source: (Third Point)
Dan Loeb and Third Point’s first quarterly letter of the year and the hedge fund manager details his decision to reduce exposure, giving the fund a cash position that prompts “buying power higher than at any time during the last 10 years”. Believing the best defence is a strong offence, Third Point has increased cash, reduced leverage, increased their short basket, and appears to be playing the commodities trade with large investments across energy and other cyclicals.
Pages 3 to 4, under the heading ‘Further Thoughts’ paint a particularly interesting viewpoint of regime changes, and how Loeb and Co plan to remain alert to avoid the risk of ruin, arguing that “the key, of course, is to change your framework when the environment changes”.
“Since I started Third Point 27 years ago, I have seen many investors (including myself) stumble after years of success because they did not adapt their models and frameworks quickly enough as conditions shifted. I have said before that they don’t ring a bell when the rules of the game are changing, but if you listen closely, you can hear a dog whistle. This seems to be such a time to listen for that high-pitched sound..”
3) Wealth Transfers: Redistribution of Value via Capital Allocation
Length: Moderate Read
Source: (Counterpoint Global)
A wealth transfer occurs when a company buys or sells a mispriced security. This memo by Mauboussin and Callahan explains the nuance surrounding when company purchases and sells its own stock, and the ramifications this may have on both new and existing holders of said stock.
Companies can influence the wealth of shareholders in various ways. They can reinvest into the operations of the business, hoping to generate an attractive ROI, in excess of the cost of said capital. However, this can be hard to sustain in certain market and/or competitive environments. During moments when management conducts dealings of mispriced shares, the duo find that most often, this actually results in selling high and buying low, which stands to benefit existing holders, with transacting holders (new) faring much worse.
“Astute investors focus on a management’s ability to allocate capital and tend to focus on investments in the business. This is appropriate. But investors should also be aware of the impact of management actions with regard to their own stock. The essential guide is the gap between price and value. Finally, many investors count on mispriced stocks regressing toward their value per share over time as a means to generate excess returns. Wealth transfers show that actions by management can change the value per share without any change in the underlying fundamentals of the operations”.
4) In Search of a Steady State: Inflation, Interest Rates and Value
Length: Moderate Read
Source: (Musings on Markets)
In true Damodaran style, Aswath shared the academic overview of inflation, complete with the historical backdrop, how inflation impacts financial asset pricing, the economic consequences and what this could mean for the investors amongst us.
A must-read for those wondering how inflation might impact their portfolio today, and across the next few years. As hard as it might be to predict macro, it doesn’t hurt to be well informed. He posted a follow-up to this memo yesterday morning, for those interested.
“The inflation genie is out of the bottle, and if history is any guide, getting it back in is going to take time and create significant pain. It is the lesson that the US learned in the 1970s, and that other countries have learned or chosen to not learn from their own encounters with inflation. It is the reason that when inflation made itself visible in the early part of 2021, I argued that the Fed should take it seriously, and respond quickly, even if there existed the possibility that it was transient. Needless to say, the Fed and the administration chose a different path, one that can be described as whistling past the graveyard, not just ignoring the danger with happy talk, but also actively taking decisions that only exacerbated the danger. Needless to say, they now find themselves between a rock (more inflation) and a hard place (a recession), and while you may be tempted to say "I told you so", the truth is that we will all feel the pain.”
5) 10-K Navigation Guide
Length: Dense Read
Source: (Wolfe Research)
Of the nearly 8,000 people that read Investment Talk, there are investors on all points of the experience spectrum, and one should never be too proud to revisit the basics. This comprehensive, 229, report from Wolfe Research walks the reader through the ins and outs of navigating the 10-K filing.
A great resource for younger investors, or those looking to polish up their old skills.
“Graham and Dodd’s seminal book, Security Analysis, popularized financial statement analysis as a critical component of investing. It fostered the notion that a thorough reading and understanding of a company’s annual report would lead Wo identifying overlooked investment opportunities and potential risk exposures. In short, reading an annual report increased the odds of producing alpha. Perhaps even more so in a current environment dominated by ‘one’ decision momentum stocks, quantitative strategies, and passive investment flows. 10-K are larger than ever before with complicated accounting principles underlying the figures and footnotes. To assist investors in navigating through these lengthy documents, this report explains and interprets essential financial statement disclosures and GAAP accounting. We’ve arranged this report by key sections, following the typical 10-K progression, and wrote each section in such a way as each topic may be read individually.”
6) Hold Fast: Tips for 100 Baggers
Length: Light Read
Source: (Woodlock House)
No, the irony of sharing a “100 bagger” type memo at this moment in time is not lost on me. But the memo is good, and I like to read the works of all manner of investors. Discussing investors’ instincts to focus more on stock prices than LT fundamental health, Mayer highlights how this view can taint one’s narrative, and lead to suboptimal returns, whilst offering up a potential solution to help stay focussed on what really matters.
“And then he asks “Would a businessman seeing only those figures have been jumping in and out of the stock?” And he answers: “I doubt it.” I agree. Just look at those financials. That’s a healthy business. And if you held on for the whole 20 years, you were up something like 25x, excluding dividends. But how many people held on for that 25-bagger? Probably not many. As Phelps writes, the industry won’t let you. The industry conditions you to measure performance using quarterly or annual stock prices. You almost never see anyone print the results of their portfolio by showing you anything like this table. You don’t see anyone in their quarterly letter show you financial snapshots of the businesses in the portfolio, or track their progress for you like this. No, you see them write about stock prices being up this or down that. So people focus on stock prices.
Other Items I Read
Note: ($) indicates there is a paywall on this content.
• A Wealth of Common Sense: Some Things I’m Not Going to Regret in 20 Years
• A Wealth of Common Sense: The 2 Types of Bear Markets
• Neuro Athletics: Tools for Managing Burnout
• Morningstar: The Four Horsemen of Investing
• Stratechery: Cable’s Last Laugh
• Baillie Gifford: The Long View, Investing in the Future
• Ensemble Capital: The Disconnect Between Corporate Fundamentals & Stock Prices
• Net Interest: Dotcom 2.0
• Saga Partners: Q1 Shareholder Letter
• GivnerLawPC: Social Media Market Manipulation 101
• 🕵️ Company Related 🕵️
• Young Money Capital (FB): Instagram Write-up
• Enlightened Capital (APO): Apollo Global Write-up
• Bronte Capital (SWMA): Commentary on Swedish Match
• Holland Advisors (JDW): JD Wetherspoons Write-up
• Punch Card (NVDA): Nvidia Write-up, Part 2, Data Centers
• Cedar Grove Capital (WOOF): Petco Write-Up
• Semi Analysis (INTC): Intel Write-Up
• Meta (FB): Conversations 2022, Messaging Conference
Here, I will share some podcasts I listened to during the last two weeks, that I feel are worth your time.
(1) Blackberry vs iPhone
For those who have not listened to Business Wars before, it’s an acquired taste. The series of short episodes tend to paint a picture of some battle between two businesses, brands, or products, at a point in time. I first was introduced to this series by the Coca Cola vs Pepsi edition. However, the narrative is akin to storytelling, almost as though someone is reading a book to you.
Nonetheless, I personally enjoy them when community or walking. This 5-part series details the battle between the smartphones, Blackberry and iPhone, and what ultimately led to Blackberry’s downfall.
(2) Warren Buffett v Cathie Wood, Small Cap Value and Growth, Dopamine
Value After Hours
Value After Hours is a pod I listen to weekly, but this particular episode, with Ian Cassell, a well-known microcap investor that I enjoy greatly, was refreshing. Amidst the downturn of US markets, and the topic of macro thrusting itself onto the centre stage of investment commentary, there has been a great volume of “noise” percolating in a lot of my social circles. I would attest that it’s likely harder to be an accurate macroeconomist than it is to be a successful investor (albeit, with the caveat that both are incredibly difficult). This episode was grounding, and refreshing. A great quote from Cassell, flagged by Matthew Cochrane over at 7Investing:
"When stocks are dropping, you get more and more macro-centred. Everybody on this Zoom has probably never thought more about interest rates, inflation, more than in the last 60 days. As you become more macro and less micro-focused, the more you turn yourself into a market strategist than a stock picker. That's the wrong place to be. It makes you unproductive and paralyzes you from making decisions for the portfolio.”
Guest: Ian Cassell
(3) Do Unions Still Work?
As I have been taking an interest in US unions lately (re Starbucks), I found this episode of Freakonomics to be particularly insightful. Last year ~10% of the US workforce belonged to a union, which is at historic lows. In the 1980s it was closer to ~20%, and the peak was back in 1954, when ~35% of the workforce belonged to a union. Yet, support for unions appears to be at all-time highs, with ~70% of the US public supporting unions, and ~77% of under 35s. This episode discusses the confusing juxtaposition of those two factoids.
The old saying, “history does not repeat itself, but it often rhymes” is something I wanted to touch on today. If readers remember edition 46 of Market Talk I shared some thoughts on the “Information Highway” narrative that later just became “The Internet”. Back in 2003, during this same period of ‘early internet’, the people at San Fran-based studio, Linden Lab, created a game titled “Second Life”. Launched three years after the ‘Sims’ game, another game that pioneered this passive living social experience game mechanic, Second Life marketed itself to be more than just a game, with founders proclaiming “There is no manufactured conflict, no set objective".
The project was created in 1999, with founder Phillip Rosedale seeking to create hardware that would allow users to become engulfed in a virtual world. With weak demand for the prototype, he later shifted course and settled for a software adaptation. Second Life promised escapism, avatars, its own currency, its own economy, and the ability to be whoever you wished to be in this new… second…life. Gaining popularity in 2005, the world soon had 1M users, before dwindling into the abyss. We could go down the wormhole here, but the point I wanted to make is that it’s eerily similar to what Facebook is attempting to do with their Reality Labs division. More specifically, Horizon Worlds.
The difference is that now we have the technology, the awareness and the demand to allow hardware to be a larger part of the equation. Since Second Life was born, the mobile phone became ‘the’ screen, and immersive experiences have slowly begun to migrate towards AR and VR, with some suspecting they could supplant the mobile as the new screen. The idea of ‘the metaverse’ is something which has existed for decades, in my opinion. We lead digital lives simply by presenting an alternate version of ourselves on Social Media. We build communities and meet friends on Reddit, on Twitter, through gaming, and even through apps like Tinder and Hinge. Meta’s vision simply accentuates that with VR, bringing the connectivity and interaction to a new, oft richer, level.
Is that good for humanity? Like the initial explosion of Facebook blue, and Instagram it’s easy to find flaws and consequences. But it’s also easy to underappreciate just how seismic of an impact it had on humans and their ability to connect, communicate, and form communities across the world. I feel that, if VR/AR ever does amount to a similarly explosive S-Curve of adoption, then it comes with its own unique set of foibles and benefits.
Personally, I have been making it a habit to leave my phone at home when I leave the house, with the caveat that I use an Apple Watch for direction or if someone really needs to get a hold of me. I find it helps me remain present, and have been enjoying it thus far.
Author of Investment Talk