The Lindy Effect, Restoring Disney, the State of Mobile & The Year in Franchising
The Lindy Effect, Restoring Disney, the State of Mobile & The Year in Franchising
Market Talk, Edition 67, January 22nd 2023
The Lindy Effect, Restoring Disney, the State of Mobile & The Year in Franchising
Once every second Sunday I will curate the most interesting things I have consumed during the previous two weeks. These will be bucketed into 5x must-reads (works I wish to highlight and comment on) and honourable mentions.
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Comments from Me
As this letter goes out, I am sitting in the Charles de Gaulle Airport, waiting for my return trip home from Paris, where I have spent the last five days. After two postponements, and some well-timed post containing that all-important Visa, I made it to France, for the first time. Thanks to the kind folks over on Twitter who sent me their recommendations a while back. Paris is a European city unlike any other that I have visited and certainly lives up to the “hype”. The food was undeniably excellent and the people were kind, even though I don’t speak French. A highlight of my trip was finding out that Leandro from Best Anchor Stocks also happened to be in Paris at the same time as me. Naturally, we met for lunch. We have conversed for years, but this was the first time meeting in person, and it was wonderful. Moments like this are why I enjoy travelling so much and connecting with other investors.
As far as other travel plans, I will be heading to India again from March to May, and hope to do a better job of sharing some of my experiences this time around. The first time I visited, I think I was so enamoured by the novelty of it all, that I wanted to focus on experiencing it. In other news, the newsletter has now surpassed 17,000 readers, edging closer to my personal goal of 20,000 by the end of 2023. Thanks to the 17 of you who choose to support the newsletter. It means a lot and goes a long way.
Recent Publications: Memos I have shared since the last Market Talk.
• Warren Buffett: The Investor's Investor, 1979
• On Tolerance: And Why Twitter Makes People Angry
5x Must Reads
In every edition of Market Talk, I share a number of readings that I have consumed over the past two weeks. Here are 5 that I found particularly enjoyable or insightful. 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 ‘Lindy’ Effect: The Triumph of Experience Over Hope
Length: Light
Source: (Lindsell Train)
In the 11 years since the Fund at Lindsell Train was launched, the team have sold just four stocks. In the last 8 years, they have bought only four. Of the 24 positions they own, 15 are over 100 years old. One, The London Stock Exchange (LSEG), is over 300 years old; surviving several market collapses, two major pandemics, the rise of the telephone, the computer, the smartphone, and has been around since railways commanded 80% of the US market value to today when a third of it is dominated by a handful of tech companies such as Apple, Amazon, Google, Tesla, and Microsoft.
“I am often asked by would-be entrepreneurs ‘How do I build a small firm for myself?’ The answer seems obvious: buy a very large one and just wait.”
In Vogue technology comes and goes, but some companies exhibit the Lindy Effect; the observation that the longer something has endured, the longer it is likely to go on enduring. In the author’s words; “old needn’t mean decrepit or dilapidated”.
Despite being over 313 years old when the fund acquired a position in LSEG, the stock has increased 10-fold since 2011; relative to the Nasdaq 100’s 4-fold and the S&P 500’s 2-fold. This short essay outlines the traits of a Lindy company and details their mystique, as well as discusses economic moats; all peppered with data and case studies. An enjoyable read, indeed.
“Why do they stand apart? In our view, the answer lies in a deeper understanding of economic ‘moats’. Introduced by Buffett, the term reflects the tenacity of a business model and its barriers to competitive entry. Moats ultimately determine the durability of excess returns and are highly coveted. However, whilst many companies claim shelter from some form of moat, they are not all created equally. In our experience, most are built into unstable foundations (technology being a particularly precarious competitive advantage) and ultimately prove transitory. Mean reversion is revered for a reason. Higher turnover strategies perhaps navigate this fade by trading around it, but as long-term investors we need something more durable. Moatsthat last not just years, but decades.”
2) The QSR Top 50, 2022 Edition
Length: Moderate
Source: (QSR)
Released in August of last year, the QSR Top 50 is an industry-leading report on all things franchise; breaking down the past year for America’s largest 50 food & beverage franchise businesses with a concise blurb for each. The report also contains an array of tables, data, and commentary.
This a solid resource for anyone who invests in the restaurant industry and is looking for a quick refresh on the market’s players. Of particular interest, you will find a table on the last page titled “The Contenders”. Here, the report lays out 50 brands ready to break through in the coming years, with store counts as small as 5 to as large as 1,300. As someone who owns a couple of micro restaurant chains myself, don’t knock them; this could be a hunting ground for future small caps.
Note: The source will take you to a PDF request page, where you can have a copy emailed to you instantly.
3) How Many Stocks Should You Own?
Length: Light
Source: (NDVR)
This paper stands as a counterargument to the last edition of Market Talk’s “The Alpha of Best Ideas” paper that advocated for concentration; arguing that alpha is diluted by fund managers when they invest outside of their “best ideas”. The authors of that study claimed that the money management industry makes it “optimal for managers to introduce stocks into their portfolio that are not outperformers” and believe investors would benefit if managers held more concentrated portfolios.
In complete contrast, the study by Yin Chen and Roni Israelov argues “long-term investors should hold at least 200 stocks in their portfolio to more reliably achieve the full potential of the stock market”. They remark that whilst a portfolio of 20 companies does have similar volatility to that of a market average, many ignore the wide distribution of those realised returns and volatilities. Therefore, to avoid significant shortfalls in terminal wealth, they advocate for more stocks. As always, you may not agree with the conclusions; I am not sure I do. But I believe it is important to read a wide variety of opinions and perspectives, and this was an interesting, concise, paper that challenges the status quo.
“Absent some other information, there’s no optimal point on this graph. Increasing the number of stocks always reduces portfolio volatility in this model. This is the power of stock diversification. The question is when has volatility been reduced enough such that the marginal benefit of an additional holding is immaterial. Most studies use the fully diversified portfolio as a benchmark and then derive that a portfolio of 20-30 stocks achieves a ‘similar’ risk profile as the target portfolio. One can optically see from Figure 1 that the rate of volatility reduction has slowed down significantly once a portfolio has more than a couple dozen holdings. We challenge this conclusion and show that convergence in volatility at this level is an insufficient criterion from a longterm investor’s perspective.
4) Value for the Money
Length: Light
Source: (Value Investor Insight)
I was reading over the Q4 2022 Fund commentary letter from Akre Capital, the ship that was once manned by Chuck Akre. Now managed by John Neff and Chris Cerrone, it was a pretty crisp and to-the-point letter; two pages in total. After the first negative performance year since the fund’s founding in 2009, the response was amusing and I wanted to share it with you. No macro excuses, just candour.
“What can be learned from the experience of 2022? For us, the answer to both questions is “remarkably little.” There is nothing shocking or insidious about 2022’s widespread valuation declines given the backdrop of high starting valuations, rising inflation and interest rates, and a hawkish Federal Reserve. Unpleasant? Certainly. Unreasonable? Not at all.”
“We believe 2022 served to blow the froth off the stock market as a whole. In the more profitless and speculative corners of the market, whole “mugs” were overturned!”
Acting as the chaser
, was an article I read with John and Chris within the Value Investor Insight publication. The entire thing is 9 pages long, with the final 5 pages carved out for discussing new ideas (discussion of American Tower, Moody’s, Constellation Software, and Roper Technologies, for those interested). However, it was the first three pages, where the duo discuss finding quality compounders that I enjoyed most.“That version of quality stock picking we don’t at all believe is broken. But quality investing in the absence of that type of valuation discipline has more to do with “collecting” than it does investing. We’re not collectors of outstanding businesses at any price, we’re investors in outstanding businesses when our discipline allows us to buy them at what we think are opportunistic valuations.”
The above quote indicates that the pursuit of outstanding businesses should not come at the expense of valuation discipline. Over the long haul, I think this is something that would serve an investor well. There will always be caveats. Sometimes outstanding companies command a premium multiple for years while their valuations continue soaring. Other times, like recently, you take that mentality into a battleground located within the top of a cycle and you get crushed. To use this bit again; “There is nothing shocking or insidious about 2022’s widespread valuation declines given the backdrop of high starting valuations”. Many quality companies took a bullet (or a full clip) in 2021/22. They may still be quality companies, but exercising discipline with respect to entry costs will help alleviate capital impairments and make your mistakes (because we all make them) less costly (so long as you eventually realise it’s a mistake) over the long term.
“We put more emphasis than some is on the extent of the reinvestment opportunity, both in terms of the absolute magnitude of the opportunity and on the ability of the management team to capitalize on it. Getting that wrong can really short circuit what might otherwise be a promising investment, while getting it right can really turbocharge shareholder returns.”
5) State of Mobile 2023 Report
Length: Dense
Source: (Data.ai)
The annual State of Mobile report by Data.ai (formerly App Annie) breaks down the data for the year across the mobile landscape covering themes such as; Macro Mobile Trends, Gaming, Finance, Retail, Video Streaming, Social, Food & Drink, Travel, Health & Fitness, and Sports. In a year where consumers spent less (-2%) on app stores, time spent, downloads, and ad spending were still growing (albeit, at a decelerated pace) in 2022.
A quick browse will show that TikTok is dominating, across mostly every geographic region in downloads and consumer spend. I am certain there is something in this report for everyone.
Note: The report requires a quick sign-up process, inserting your email.
“Mobile will take over share of advertising wallet as more time than ever before is spent in apps, with total hours on track to surpass 4 trillion in 2022 on Android phones alone. However, growth of ad spend will slow in the face of economic headwinds. Short Video apps are expected to drive ad spend, as social networking platforms are suffering decline. It's the brands that matter. Spend in brand advertising will help bolster the effects of dipping spend on performance marketing in the face of tightened marketing budgets”.
6) Disney: Restore the Magic (Bonus Must Read)
Length: Moderate
Source: (Trian Partners)
Regardless of the company in question, I find activist reports like the one that Trian Partners recently shared about Disney, quite interesting. It’s helpful to see how another firm dissects a company and isolates its problems. The team at Trian claim that Disney is the “most advantaged consumer entertainment company in the world” with “unrivalled global scale, irreplaceable brands, inimitable Parks and intellectual property”. However, they argue that the much-loved brand is “nickel-and-diming” the core tenants of their business to support new ventures like streaming; an area where Trian feel the maths doesn’t add up. For instance, they highlight that Disney’s guide for subs by 2023 which was made in 2019 was 90 million. Today the guidance for 2023 stands at 260 million. Projected subscribers are up 3x, with a 4x expected hike in consumer spend, yet the profitability guidance is unchanged…
Put differently, they are devising short-term solutions for long-term issues. The report also contains case studies on the wastefulness of Disney’s recent capital allocation practises pertaining to M&A, some whining about the uncertainty of their reinstation of the dividend (which represented a return of $2.9 billion to shareholders in 2019 before it was axed), and the firm’s proposals to realign the ship that they believe is teetering off course, towards a date with an iceberg. A great read for any analyst, and particularly for anyone who owns Disney stock.
The response from Disney, shortly after, is quite humorous too.
“While we believe Disney+ started as a niche DTC extension of Disney’s franchise “flywheel,” it has rapidly shifted to the core distribution channel for the majority of Disney’s IP, leading Disney to significantly ramp up investment to drive new subscriber growth at all costs. However, in our view, management failed to effectively communicate the financial rationale behind the strategic pivot, as the profitability guidance has not changed while the change in strategy put significant stress on Disney’s balance sheet and cash flow profile”.
Honourable Mentions
• Concentrated Compounding: 2022 Annual Letter
• Ben Carlson: Dividends Juice Your Returns
• Investing 101: Risk Management in the Age of Yolo
• Anchor Stocks: The Power of Delaying Gratification
• Chris Mayer: How Many Stocks Should You Own?
• Ensemble Capital: The Equity Anxiety Premium
• Net Interest: Broker Rivalry
Company Related Write-Ups
• Kingswell (BRK, AAPL): Will Berkshire Take Another Bite of Apple?
• Holland Advisors (RYAAY): Ryanair Holdings, End Game
• Investing Marathon (FERG): Ferguson PLC write up
• Overlooked Alpha (NFLX): Newspapers and Netflix
• Wedgewood Partners (META): Meta, If You Built It They Will Come
• AGB (VMC): Vulcan Materials write up
• SLT Research (RMS): Hermes International write up
• TSOH Research (KO): “Regardless of Price” $
• Patient Capital (GOOG): Uncommon Facts about Alphabet’s Common Stock
Macro
• BlackRock: 2023 Global Outlook Playbook
• Goldman Sachs: Investment Strategy Group Report - Wealth Management Outlook (Jan 2023)
• Last Bear Standing: One-Dollar Bond and The Platinum Coin
• Konichi-Value: Japan's Bubble-Burst, The Party That Wasn't Supposed to End
• Rob Arnott: Price-to-Fantasy Ratio, Self-Deception with Forward Operating Earnings
• Apricitas: A Global Perspective on the Car Shortage
Authors Mentioned
Please be sure to visit the publications of the mentioned writers!
Disclaimer
These are opinions only of the individual author. The contents of this piece do not contain investment advice and the information provided is for educational purposes only and no discussions constitute an offer to sell or the solicitation of an offer to buy any securities of any company. All content is purely subjective and you should do your own due diligence.
Occasio Capital Ltd makes no representation, warranty or undertaking, express or implied, as to the accuracy, reliability, completeness or reasonableness of the information contained in the piece. Any assumptions, opinions and estimates expressed in the piece constitute judgments of the author as of the date thereof and are subject to change without notice. Any projections contained in the Information are based on a number of assumptions as to market conditions and there can be no guarantee that any projected outcomes will be achieved. Occasio Capital Ltd does not accept any liability for any direct, consequential or other loss arising from reliance on the contents of this presentation. Occasio Capital Ltd is not acting as your financial, legal, accounting, tax or other adviser or in any fiduciary capacity.
I am unsure if this term is used outside of the UK often, but in this context, it implies the 2-page Q4 letter was the “shot”, washed down with the lengthier Value Investor article.
thank you, great coverage
Great read Conor. Regarding the "3) How Many Stocks Should You Own?", we would argue that rather than holding over 200 stocks, just buy the index. If you are not into the active investment game you are possibly better off in buying a couple of ETFs and forget about it.