Market Talk, October 24th 2021
Each Sunday I will share:
• 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
This Monday I will be sharing my notes on what I learned from Yen Liow at his recent MicroCap Leadership Summit. The sections covered are as follows:
Section 1: Hunting for Horses - Understanding what exactly Arvart Global are looking for in their hunt for long-term compounders.
Section 2: Game Selection - The importance of deciding where to hunt.
Section 3: Exploiting Volatility - What makes volatility exploitable, and the relationship between business and price volatility.
Section 4: The Power of Transitions - Alpha explosions in transition case, and the emergence of transitioning monopolies.
Section 5: Concluding Remarks - My closing remarks.
With earnings season back in full swing, you can expect reports to flow into your inbox soon.
Side Note: I now have access to a feature that facilitates sharing PDFs within Substack, so going forward I will be experimenting with giving readers the option to download long-form newsletters as PDFs.
📈 Market Action 📉
Here are your quick updates from the past week for various asset classes.
The S&P 500
Sectoral ETFs for the US
🌎 Global Indices 🌎
Europe & UK
🛢️ Commodities 🛢️
💷 Major Currencies 💷
FX rates are correct as of the time of publishing.
🔇 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 67 up from 51 last week.
The CBOE VIX stands at 15.43, down from 16.30 the week before.
Major Earnings for the Coming Week
Some of the major earnings for the upcoming week, compiled by Fincredible.
📰 Brain Food 📰
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) Third Quarter 2021 Investment Update
Length: Moderate Read
Source: (Ensemble Capital)
I am someone who greatly enjoys reading the musings of other investors and Ensemble Capital provides a lot of unique insight. In this third quarter memo, the team share their opinions on the third quarter, as well as for a number of their own positions; Illumina, Mastercard, Nintendo, Chipotle, Google, Netflix, Booking, and Landstar Systems.
“When we think of the intrinsic value of businesses, it’s the people working millions of person-hours every day that are compounding it over time. We absolutely love the win-win-win combination of value creation in which all stakeholders a company interacts with go out of their way to help it succeed because they all benefit from its success. To paraphrase Peter Kaufman, CEO of Glenair and editor of POOR CHARLIE’S ALMANAC: Stakeholder risks and benefits are multiplicative – when any of the stakeholders isn’t treated fairly, it creates a big off balance sheet liability that ultimately risks long-term material value destruction for all stakeholders (a concept very similar to Ensemble’s articulation of “MORTGAGING THE MOAT.” But when they’re all seen as part of the same team, and natural tensions between them are well managed, their efforts will multiply for all to benefit with the company’s productive health at its core.”
2) Triggered Disclosures: Escaping the Disclosure Dilemma
Length: Moderate Read
Source: (Musings on Markets)
Aswath Damodaran shared this piece on Tuesday, which follows on from his discussion surrounding corporate disclosures in public filings. Arguing that corporate disclosures have become more bulky and murky whilst also becoming less informative, he remarks that “some of this disclosure complexity could be attributed to the law of unintended consequences, with good intentions driving bad disclosure rules, and that some of it is deliberate, as companies use disclosures to confuse and confound, rather than to inform”.
In this piece, he lays out why they have become seemingly more murky/bulky/less informative over time, with some potential remedies for the investor.
“As data becomes easier to collect and access, the demands for data disclosure from different interest groups will only increase over time, as investors, regulators, environmentalists and others continue to add to the list of items that they want disclosed. That will make already bulky disclosures even bulkier, and in our view, less informative. There are three ways to have your cake and eat it too. The first is to allow for increasing customization of disclosure requirements to the firms in question, since requiring all firms to report everything not only results in disclosures becoming data dumps, but also in the obscuring of the disclosures that truly matter. The second is to shift the materiality definition from impact on earnings to impact on value, thus moving the focus from the past to the future. Finally, tying disclosures to a company's characteristics and value stories will limit those stories and create more accountability.”
3) Consider Your Competition
Length: Light Read
Source: (MicroCap Club)
Seemingly inspired by Yen Liow’s MicroCap Summit presentation, Chip Maloney seeks to expand on the notion that game selection is one of the most critical elements in long term performance.
Choosing a game that gives you the greatest odds of winning, based on your own tolerances and skillset.
“Being a skilled investor doesn’t guarantee success. But if you choose the right investing game and play it against limited competition, you will most definitely increase your chance of outperforming even the best investing professionals.”
4) Beyond Smart
Length: Light Read
Source: (Paul Graham’s Essays)
This essay by Paul Graham is a short, but insightful discussion on the relationship between intelligence and one’s ability to develop new ideas. The two don’t always go hand in hand, and sometimes the former can act as a roadblock to the latter.
Besides intelligence, Graham looks to identify what other ingredients are required in the pursuit of idea generation.
“I grew up thinking that being smart was the thing most to be desired. Perhaps you did too. But I bet it's not what you really want. Imagine you had a choice between being really smart but discovering nothing new, and being less smart but discovering lots of new ideas. Surely you'd take the latter. I would. The choice makes me uncomfortable, but when you see the two options laid out explicitly like that, it's obvious which is better.
Why do so many smart people fail to discover anything new? Viewed from that direction, the question seems a rather depressing one. But there's another way to look at it that's not just more optimistic, but more interesting as well. Clearly intelligence is not the only ingredient in having new ideas. What are the other ingredients? Are they things we could cultivate?”
Other Items I Read This Week
Note: ($) indicates there is a paywall on this content.
• Tidefall Notes: Q3 2021 Letter
• Ark Invest: Social Commerce: The Next Wave in Online Shopping
🕵️ Company Insight 🕵️
• Reuters (PINS, PYPL): PayPal in $45B bid for Pinterest
• The Science of Hitting (COST): The Costco Snowball ($)
• The Verge (FB): Facebook is planning to rebrand the company with a new name
• The Science of Hitting (FB): Facebook: Two Divergent Trends ($)
• The Financial Times (FB): Facebook confronts growth problems in young users
• Pinterest News Room (PINS): Pinterest introduces “Takes”
• The Verge (GOOGL): Google lowers Play Store fees for subscriptions
• TechCrunch (TWTR): Twitter Acquires Group Message app Sphere
• SemiAnalysis (INTC): Intel Betting The Farm
🍬 Ear Candy 🍬
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.
Uber: The Undeletable App
Admittedly, I was stuck to a desk this week, and so this was the only podcast I listened to, but it was a great one.
Abstract from the typical business breakdown format, this week included two PMs, Mario and Ram, who broke down their respective bull cases on the stock. Despite both being bulls, each guest has alternate viewpoints on particular aspects of the business, which was enjoyable to learn from.
Host: Patrick OShaughnessy
Thank you for reading Market Talk and have a great week,
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