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In the eighth issue of QGQ we feature articles, videos and letters from Consilient Observer, J. Stern & Co, Simon Evan-Cook, Joe Wiggins, Winton Capital, Howard Marks, Visual Capitalist, Investor Amnesia, Morgan Stanley’s Counterpoint Global, Sands Capital, the Financial Times, Peter Tasker and others. All articles are below.
“We examine whether a study of market share and related concepts can help us determine if a company has a sustainable competitive advantage. This takes us on a journey that includes life cycles, market share, concentration, markups, intangibles, and ‘superstars’. We study the link between some of these variables and return on investment and provide some analytical tools along the way. We finish with some case studies to see how these ideas apply to a handful of industries.”
“Amazon is famed for finding new areas of the market to enter and disrupt. Jeff Bezos once said, ‘your margin is our opportunity’, and it is a sackable offence at the company if you put off a project due to fears about the impact on short-term outcomes. It is currently on earnings at the bottom end of its historical average, which in our view represents good value, especially with the momentum that AWS has, along with the share gains and better efficiency in e-commerce. It is a tremendous business.”
“We have, over the years, built a database of prices for the markets we trade, often going much further back in time than the price histories typically available from data vendors. While this historical data is not a direct input to our algorithms, these long-term price charts do provide useful context, particularly during periods declared to be unprecedented in journalistic analysis. Below we provide an example of one such chart: copper, back to 1860.”
“In the media and public discourse, companies like Alphabet, Apple, and Microsoft are often lumped together into the same “Big Tech” category…it’s easy to assume they’re in direct competition with each other, fiercely battling for a bigger piece of the “Big Tech” pie. But while there is certainly competition between the world’s tech giants, it’s a lot less drastic than you might imagine…this series of graphics by Truman Du provides a revenue breakdown of Alphabet, Amazon, Apple, and Microsoft.”
“Over the past three decades, a sustained surge in inflation has been absent in developed markets. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heighted inflation risk. We provide some insight by analyzing both passive and active strategies across a variety of asset classes for the U.S., U.K., and Japan over the past 95 years.” [Chart to the right shows average/cumulative inflation by decade 1910s to 2010s]
“Investors must look past simple measures of profits to understand a business’s true ability to create value. The rise of intangibles means more investments than ever are expensed immediately versus capitalized, which makes the financial statements of today appear distorted relative to those of the past. Academics distinguish between GAAP losers, companies that have losses but a high return on investment, and real losers, or those that have expenses unrelated to investment that exceed sales. Evidence from recent decades shows that GAAP losers produced attractive total shareholder returns relative to the real losers and profitable companies.”
“I’ve written many times about having joined the investment industry in 1969, when the “Nifty Fifty” stocks were in full flower. My first employer, First National City Bank, as well as many of the other “money-centre banks” (the leading investment managers of the day), were enthralled with these companies, with their powerful business models and flawless prospects. Sentiment surrounding their stocks was uniformly positive, and portfolio managers found great safety in numbers. For example, a common refrain at the time was “you can’t be fired for hiring IBM,” the era’s quintessential growth company.”
“OK, so we all know the story about why short-end rates have soared in the UK.* But what about the long-end? Well, basically pension plans appear to have been caught in doom-loop of margin calls on interest rate derivatives that forced them into dumping longer-maturity UK gilts, and spurred the Bank of England into intervening today.”
“Spend time studying funds, and you’ll begin to recognise ‘types’ that crop up over and over again. Get to know these types (there are eleven of them) and you’re on your way to understanding which funds to hold, and which to avoid like the plague.”
“Rapid responses are vital in being able to understand immediately what a sensible course of action looks like. If we only felt pain in our hand two years after we put it on the stove, then the lesson really isn’t that valuable. If we want to make good decisions in the future, we need to receive good quality feedback as quickly as possible. This is a real problem for investing. A long-term approach is critical for most successful investors, but – by definition – we only reap the rewards of this over time. We don’t get helpful instant feedback. We must wait and trust that we will get the right outcomes from the choices we make.”
“It wasn’t until like 2012 or 2013 that YouTube started to show success as a business. In 2008 and 2009, the Google CFO considered shutting down or selling off YouTube. These are conversations that Google had all the time about expensive projects like Google Maps or self-driving cars.”
“This paper asks the following question: Does an ‘adjusted’ (intangibles-based) book value of a company on its balance sheet provide value-relevant information for investors? The categories of intangible assets include 1) marketing-related, 2) customer-related, 3) contract-related, 4) technology-related, and 5) other unspecified intangible assets. After estimating unrecorded intangibles, the author adjusts the book values of firms using the estimates to calculate the intangible-adjusted B/M ratio (iB/M), which is based on two adjustments for book values: capitalizing unrecorded knowledge capital (Kcap) and organization capital (Ocap) and subtracting goodwill that is subject to the issue of unverifiable fair value estimates.”
“Nearly every factory has room for more automation, with greater penetration in existing industries and expansion into new industries expected over the next decade. Sands Capital’s Suni Thakor and Danielle Menichella discuss why Keyence, a factory automation market leader that specializes in sensor and sensor systems, will likely be a beneficiary of that growth and what makes the company so unique within its sector.”
“The Abe administration’s liberalization of visa requirements set off a tourism boom that added 1% to GDP and, more importantly, redefined the concept of “a foreigner” in the eyes of the public. Now a Japanese is much more likely to encounter a fellow-Asian than the archetypical American tourist with baseball cap and phrasebook in hand. Much the same goes for foreign residents of Japan. Numbers increased by 50% over the same period and the proportion of people from other Asian countries is 84%. There are more Nepalese living in Japan than North Americans or Europeans. Most of them speak excellent Japanese. The era of the blonde English language teacher as neighbourhood celebrity is over.”
“Inflation affects us all, but the rate at which we experience it will depend on our unique spending habits. Use the calculator to estimate your personal inflation rate.”
© Quality Growth 2021