Winner and Loser's Games, Re-Nicotisation, YouTube is Teens Favourite App, and Investing During a Recession

Market Talk, Edition 56, August 14th 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 following segments:

• 6x Must-Reads: The 6 readings I found most insightful, with commentary.

• Other Items of Interest: A collection of other readings I found enjoyable.

• Great Listens: Podcasts, interviews, or videos I enjoyed.

• Something Interesting: A palate cleanser to round off the issue.

Comments from Me

Readership of Investment Talk recently surpassed 10,000 individuals, the outcome of over 2 years of hard work. I just wanted to express my perpetual gratitude once again to each of you. In other news, I got the chance to spend some time fishing this week. I ventured back to my hometown (great fishing spots) early in the morning to catch the high tide. When testing the rods, we managed to catch a mackerel after just 3 casts. For the remaining 4 hours and 57 minutes that we occupied the waterfront, there was not a single nibble.

Malcolm the Mackerel, Gone but not forgotten.

I am sure there is some analogy that can be drawn from this (not that there really has to, it’s just fishing after all). Perhaps this bears a resemblance to the optical randomness of successful long-term IRRs. Should the mackerel have been caught in the last 3 minutes of the session, then maybe the time spent would have felt more vindicated. After all that hard work, we finally caught something at the last moment. It was worth it. Assume you buy at stock for $10, and for 4 years it remains the same price. Then, in year 5 it concludes the year at $30 per share. That’s a ~25% CAGR. This resembles catching the fish in the dying moments (example 1).

Catching the fish in the first 3 minutes, however, looks more like example 5, where the entirety of the performance is collected in the first year. Performance which is then eroded as returns remain flat and the quantity of time through which that performance is judged expands. Each result will no doubt stir up alternate emotions from an investor. Example 1 would feel like you caught a lucky break. Example 5 would feel like you squandered the remaining time and fell victim to opportunity cost.

It would be interesting to explore this idea further, but for all intents and purposes, the greatest joy that comes from fishing is not the act of catching the fish. It’s the conversations which take place between those moments, as well as the appreciation of nature, weather, and tranquillity. I also had the time to finish up some memos I had been working on; one was a precursory write-up of Tortilla Mexican Grill; the other is a compilation of all the resources I enjoy using. You can find them below.

Recent Publications: Memos I have shared since the last Market Talk.

• MEX: Tortilla Mexican Grill

• Resources, Resources, Resources

6x Must Reads

In every edition of Market Talk, I share a sizeable number of readings that I have consumed over the past two weeks. Here are the 6 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) Like a Pro

Length: Moderate

Source: (Lewis Enterprises)

I must start by saying that I only had the pleasure of stumbling across this last week as a fruitful byproduct of Twitter’s algorithm. The memo begins with a captivating golf analogy between the stark deviation in skill between the average golfer and a pro. This then migrates to another sport, tennis, where Charles Ellis remarked, in 1975, that “tennis was not one game but two. One game of tennis is played by professionals and a very few gifted amateurs; the other is played by all the rest of us.” It was at this point that Ellis suggested professional tennis is a “winner’s game”, in which the outcome is decided by the activities of the winner. Amateur tennis, on the hand, could be thought of as a “loser’s game”.

The author makes a crisp distinction between the two games; “Pros win serves, hit aces and score points after long, exciting rallies; successful amateurs on the other hand simply return the ball to their opponent until they almost inevitably make an unforced error.” This eventually leads to a discussion about the battle between professional and amateur investors in the stock market. A topic made even more relevant now that the rise of passive investing is set to surpass that of active investing in the near future. “Ellis believed the influence of increasingly sophisticated active participants had shifted the market closer to efficiency. The irony today is that fewer and fewer participants are making an effort to beat the market. Happy with average, a greater share of investment flows to quantitative, albeit primitive, strategies that buy equities in a perfunctory manner, trusting that someone, somewhere has checked the scales.”

I could talk some more but instead, I think you should just sit and read “Like a Pro”, the fluidity of the writing style is exquisite.

“The belief of passive investors is broadly that the past will be prologue, that average performance going forward will be a continuation of long-term trends. But equity returns are a function of valuations and valuations are themselves a reflection of long-term expectations. In John Maynard Keynes’ General Theory of Employment, Interest and Money he foresaw what today plays out at a massive scale: That many invest with scant knowledge of the underlying enterprises and allocate capital largely based on a general view about the future which may or may not be correct or relevant.”

2) How to Think About Investing During a Recession

Length: Light

Source: (Compound)

One word description of this memo; “context”. This piece by Charlie Bilello is jam-packed with quick snippets of context related to investing in recessionary environments, all aided with a splash of colour in the form of visual imagery to support each argument. News flash, recessions happen quite often, attempting to time them is a fool’s errand, as is attempting to time the bottom, and a diversified portfolio that can weather a recession is a simple solution to not getting wiped out.

Permabears will call it copium, but I enjoy reading materials of this nature as I find it grounds me and reminds me that this is just par for the course. If you enjoy this kind of memo, you may also find Ben Carlson’s latest post, “When is a Bear Market Over?” useful.

“Don’t Wait for the Robins. Maybe you can’t time a recession, but why should you invest new money when the economy is contracting? Wouldn’t it be better to wait for the news to improve and the downturn to end before adding to your portfolio? Historically, the answer has been a resounding no. During the last 6 recessions, the S&P 500 has gained an average of 61% from its low by the time the official end of the recession was declared by NBER. In October 2008, during the worst recession the US had experienced since the Great Depression, Warren Buffett famously penned an op-ed entitled “Buy American. I am.” He made the case for investing in equities despite all of the terrible news of the day, saying that if you “wait for the robins, spring will be over.”

3) The New Era of Nicotine

Length: Moderate

Source: (Invariant)

An inquisitive research piece on the new frontier of nicotine consumption or as the author puts it, the “great re-nicotisation”. The value contribution of traditional cigarettes is expected to decline as a % of the overall world nicotine category in the decades to come but is not falling as fast as some people may think. Whatsmore, the price increases in cigarettes typically more than offset any decline in volume.

This is a musical that will eventually draw its closing curtains, but the industry as a whole has a swath of alternative products reading to satisfy the appetites, and perhaps the health concerns, of nicotine-lovers. Devin (author) takes the reader through those alternatives. The memo as a whole is a superb overview of the state of the global nicotine trade as it stands today. An ideal read for anyone with exposure to the space, or even just for the curious (like myself).

“Granted, HTPs and TFNPs are still relatively nascent, so this growth is coming off small bases. With that said, the future runway appears enormous. And critically, major producers have spent years optimizing these new products, scaling production, working with regulators, and going through the painstaking logistical hoops of mapping distribution, getting retailers onboard, and raising consumer awareness. But it’s all starting to come together.”

4) Teens, Social Media and Technology 2022

Length: Moderate

Source: (Pew Research Center)

Pew Research shared an interesting report which updates their data from 2014-2015 where they surveyed teen trends and the usage of social media and technology in the US. Something which surprised me was the outright dominance of YouTube, with 95% of teens reported to be using it, 19% of them suggesting they use it “almost constantly” and 41% saying they use it “several times a day”. This surprisingly outranked TikTok, where 16% said they use it almost constantly and 32% admitted to using it several times a day.

The caveat here would be that teens are not the mystic megs that we hope they are. There was a time when some heralded Snapchat as the next star on account of its rising domination of teen demographics. Today, TikTok is garnering attention for the same reason and overshadowing its yellow cousin. The report also paints a picture of how integral smartphones are to humans today. Between 2014 to 2022, the number of teens who report owning smartphones has increased from 73% to 95%. Meanwhile, the percentage of teens that own laptops/desktops has grown from 87% to 90% and those owning game consoles have fallen from 81% to 80%. Further, whilst the ownership of smartphones tends not to deviate too much between household incomes (93% for the lowest and 94% for the median) the ownership of laptops (79% for the lowest vs 85% for the median) and game consoles (70% for the lowest and 90% for the median) is notably more elastic for lower-income households compared to smartphones.

Anyway, I will allow you to dig in for yourself and deduce your own findings, there is a lot of interesting data in the report.

“In addition, the share of teens who say they use the internet almost constantly has gone up: 46% of teens say they use the internet almost constantly, up from only about a quarter (24%) of teenagers who said the same in 2014-15.”

5) Dare To Be Naïve

Length: Light

Source: (Woodlock House)

A strong memo from Chris Mayer outlining the importance of having quality filters. Once an investor has curated a portfolio of companies that meet those hurdles, aside from the continuous verification that those entities continue to meet those hurdles, the dilemma that occurs is deciding how much to allocate to new ideas (both time and capital) versus the collection of companies one already owns. Naturally, one always wants to be expanding their circle of competence and welcoming fresh ideas into the fold, but at times it can feel that new capital is best allocated to ideas that already harbour our conviction.

Mayer offers a counter; “don’t let perfect be the enemy of the good”. Any new position ought to be superior (or of equal stature) to the names already residing in the portfolio. For each new entrant, the hurdle that must be overcome is “is this security worthy of my capital over that of the securities I have already confirmed as meeting my quality criteria”. Even at that, there is a sense of healthy arrogance portrayed in this ideology, that the investor actually knows which of the two decisions will lead to a superior outcome. However, arrogance is a necessity in stock picking, otherwise, an ETF would suffice. One of the greatest analogies with respect to that arrogance is Buffett’s baseball-orientated quip about waiting for fat pitches. He explains that in investing, one can wait for the pitch they feel could lead to a home run, but that the nature of the game involves a crowd of peanut-gallery dwellers in the background constantly yelling “swing, you bum!”. The beauty of this analogy is that, unlike baseball, there are no called strikes; the investor can wait as long as they like for those opportunities to pass by until the right one comes along. The conversation of Mayer’s memo then digresses into the idea of ‘cash drag’ (sitting on cash and waiting for great ideas whilst it gets eaten away by inflation), before concluding with a warning about first-order thinking. A great way to spend 3 minutes of your day feeding the brain with food for thought.

“So if you thought the war in Ukraine would drive wheat higher – which seems perfectly logical – you didn’t get paid for that insight. A friend of mine shared part of a research piece that documented, in a similar way, the errant forecasts that seem endemic to the oil industry. One particularly memorable forecast was by a professor named James Hamilton, who is an econometrician and studies the oil markets. In 2014, he came out with a strongly reasoned paper which reached the conclusion that “hundred-dollar oil is here to stay.” Six months later, oil went from $105 to $46 and wouldn't reach $100 again until 2022.”

6) Technical Analysis - Explained

Length: Moderate

Source: (Credit Suisse)

This report from Credit Suisse is a great introduction to the world of technical analysis, providing descriptive explanations of the subjects listed within the content page I have shown below, as well as visual aids. Technical analysis is not something that I personally use all too often but after surveying a small sample of Investment Talk readers a while back, I came to understand that a healthy number of readers have been investing for less than 1-3 years. As such, I do make a concerted effort to try and highlight resources that are more rudimentary in nature. Even for those who might be more fundamentally inclined, understanding the breadth, depth and liquidity of the broader market, or the individual security, is useful.

Other Items of Interest

Note: ($) indicates there is a paywall on this content.

• Asian Century Stocks: 10 Questions with Michael Dunne

• Stock Opine: How does CHIPS Act affect semi-companies?

• Kyla’s Letter: The Inflation Narrative

• SemiAnalysis: The History and timeline of Flash Memory

• Stratechery: Political Chips

• Bronte Capital: Q2 Investor Letter

• Deep Sail Capital: Q2 Investor Letter

• OfCom: Online Nation Report (Mostly UK data)

• MacroOps: The Greatest Value Investor You've Never Heard Of

• Factset: Merger Announcement Slow as Corporate Cash Builds

• CAIA: Evaluating Inflation Hedges

• Research Affiliates: Quantifying the Impact of Direct Indexing

🕵️ Company Related 🕵️

• Invariant (PM): Phillip Morris International Write-up

• Vest Rule (ELY): Callaway Golf Write-up

• Antonio (APPS): Digital Turbine Write-up

• Behind the Numbers (IBM): IBM Commentary

• GQ Investing (AVLR): Avalara Write-up

• AGB (IQV): Iqvia Write-up

• MT Capital (AMD): Advanced Micro Devices write-up

• Stock Opine (PYPL): PayPal Q2 Earnings Write-Up

• Stock Opine (BKNG): Booking Holdings Q2 Earnings Write-up

• Best Anchor Stocks (TOI): Topicus Q2 Earnings Write-up

• Mostly Borrowed Ideas (SQ): Block Q2 Earnings write-up

• Mostly Borrowed Ideas (IAC): IAC Q2 Earnings write-up

• MacroOps (DSK.ASX): Dusk Group, Microcap Pitch

• Platformer (META): Inside Facebook's encryption conundrum

• 01Core (AMZN): Amazon revenue mix shift; fulfilment losses; sum of parts valuation (w segment commentary)

Great Listens

Here, I will share some audio/video materials I listened to during the last two weeks, that I feel are worth your time.

(1) The Science of Hitting

The Compound and Freinds

I only listened to one podcast these last two weeks, and it was on Friday that just passed. This episode of Compound and Friends with Alex Morris (author of The Science of Hitting) was great. I particularly enjoyed the discussion on the streaming wars (an area Alex covers well), the longevity of big tech, as well as the conversation around the bull and bear case for Meta Platforms.

Note: I am not sure if it was an editing error, but the first ~8 minutes or so is pre-live small talk between the participants. Afterwhich the podcast actually begins.

Host: Michael Batnick, Josh Brown

Guest: Alex Morris

Something Interesting

I started with a fishing analogy, and I shall end with one.

As I rewatch The Office for the umpteenth time, I was reminded of a rare insightful comment from Kevin Malone, the show’s resident imbecile. During a quiz night, in which the cast is attempting to win $1,000 so that they can purchase their own product and meet a quarterly sales quota, Kevin Malone’s team miraculously finds themselves competing in the final head-to-head round. Structured as a lightning-round, the final two deciding points are won by Kevin. He gets the first question right for knowing the maximum capacity of the standard analogue scale is 300 pounds (Kevin is a large character). The second question asked which 2001 masterpiece from Gilles Paquet-Brenner explores a family in disarray to which Kevin correctly replies Les jolies chooses. He was aware of the niche drama because of the presence of female nudity within it. He concludes the episode, talking into the camera as was customary in The Office, by stating that "I know it’s easy to say tonight was just a fluke and maybe it was, but here is a piece of trivia. A fluke is one of the most common fish in the sea, so if you go fishing for a fluke, chances are, you just might catch one."

A Fluke

I am not a believer in waiting for things to just “happen”, nor am I someone who plans or relies upon luck (this is especially true with investing). But I am someone who firmly believes in the notion that the randomness of life is a cause for eternal optimism. Perhaps this is a byproduct of my UK surroundings, but I observe that humans adore the comfort of routine, so much so that they rarely see opportunities for what they are, and instead view them as risks. I persistently remind myself that an individual’s life (whether tangibly or mentally) can change dramatically via the alteration or introduction of one single variable. This brings me comfort during trying times. It could be a telephone call, a chance meeting, a cold outreach, a trip, or something that one reads. To put it another way, an opportunity. But opportunities rarely come to those who are idle, which reminds me of the quote that states; “I'm a great believer in luck, and I find the harder I work the more I have of it.” Luck and opportunity can be seen as synonymous for this purpose, and luck is often the outcome of placing yourself in the path of opportunity. Put another way, if you go fishing for a fluke, you just might catch one.

Conor,

Author of Investment Talk

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.

Tickers mentioned in this issue: AMZN 0.00 META 0.00 IAC 0.00 TOI 0.00 PYPL 0.00 SQ 0.00 IQV 0.00 ELY 0.00 PM 0.00 AVLR 0.00 APPS 0.00