#94 - Companies Set to Thrive in Re-Opening, Crypto Crash and How To Invest In The New Normal
In this week's episode of Reformed Millennials, Broc and Joel talk about the Canadian economic reopening and how to change your investing mindset, challenges surrounding the Metaverse and Morgan Housel’s Durability Mindset.
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👉 For specific investment questions or advice contact Joel @ Gold Investment Management.
Effects of inflation:
The market has digested a significant move in the 10-year from historically low levels. The market is also very concerned about inflation. Similarly, I have no opinion on the future direction of inflation, but I would note that Warren Buffett’s fantastic article from 1977, “How inflation swindles the equity investor” suggests that high ROE/ROIC businesses should outperform low ROE/ROIC businesses in a high inflation environment as they will suffer less relative compression in their ROEs and ROICs.
Pricing power is also obviously important, but less important than relative ROIC/ROE. Technology companies broadly speaking have some of the highest ROICs in the market even if these unit economics are obscured by conscious decisions to invest in growth for some of the less mature businesses.
We became optimistic that every vaccine was going to work last summer and was convinced that the combination of multiple successful vaccines and the unprecedented stimulus was likely to lead to the fastest GDP growth in my lifetime in 2021. Although this type of top-down view is rare for me, I was a cautious believer in the “Roaring 20s” hypothesis for consumer behavior and GDP growth.
What we’re focusing on over the coming year is as follows:
Accurately identifying which new habits — WFH, working out at home rather than gyms, remote meetings rather than business travel, car ownership, the great migration out of cities, food delivery — that formed during Covid are durable vs. ephemeral is going to be essential.
Accurately identifying which cheap consumer cyclical company is permanently improved by their business models such that they can sustainably grow off 2021 numbers vs. those which did not invest and improve their business models is going to be critical.
This isn't a relief to me and requires I put in more effort than working within the top-down, thematic market of the last 15 months. I generally lean heavily on my macro abilities when investing and I'm excited to work on my general bottoms-up analysis.
We should note that I am almost always early, so if history is any guide this is not the bottom for “secular” growth stocks but I do believe secular growth stocks are steadily becoming more attractive.
💸Reformed Millennials - Post of The Week
Changing your mind and changing others minds:
If the last 16 months of the pandemic hasn't driven us all completely insane, the arguments we've had with our friends and loved ones sure have.
IN MY JOB, I NEED TO UNDERSTAND MY BIASES MORE THAN ANYTHING.
It's easy to read Keynes' quote:
"When the facts change, I change my mind - what do you do, sir?"
and nod your head, but it doesn't make it any less difficult for anyone to change their opinions.
Why is that?
Murakami had a great quote that I try to remind myself every time I disagree with someone:
“Always remember that to argue, and win, is to break down the reality of the person you are arguing against. It is painful to lose your reality, so be kind, even if you are right.”
Unfortunately, one of the downsides of arguments/debates on social media is it's mostly performative in nature.
You not only lose arguments that shatter your "reality", but you also go through the experience publicly which makes it even harder to accept and change. And gives you incentives to anchor.
When we discuss investments, we have enormous incentives to get things right. We lose money when we are wrong.
Any investor should be viscerally interested in the arguments of the other side and I often find that people, myself included, are unwilling to seek out counterarguments.
WHY DON'T OTHERS SEE IT THE WAY YOU DO?!
There is a natural tendency and desire for people to speak to the choir. We don't try to imagine how we would want to be convinced if we were on the other side.
A supermajority of critics of Facebook, for example, make such exaggerated, pompous, harsh, and stretched claims that it becomes very, very difficult to even finish a critical piece.
It feels like the critics don't even want to reach an audience who are on the other side.
Ironically, when people on "my side" do the same to the "other side", it's a fun read. Sometimes, I probably read it more than once.
Just think about the lopsided feedback loop our brains usually go through. There is perhaps no more potent drug than confirmation bias.
Equanimity is super hard. And yet, it is perhaps a requirement to be a successful investor in the long term.
Hopefully, even writing it down helps us a little bit to get there.
I read a great article from Joe Weisenthal @ Bloomberg (sub blocked)
In the piece, Joe did a fantastic job breaking down his thoughts regarding the Crypto Crash of the last 3 weeks and Paul Krugman's infamous "the internet will never be a thing" quote.
this sell-off resembles the Christmas 2017 peak in two ways. The first is that this coincided with a major moment of institutional adoption (the Coinbase IPO) while the 2017 peak was the same week as the CME futures launch. Also Bitcoin peaked prior to the alts peaking -- the same as last time around.
While Bitcoin and Ethereum are around 40% - 50% off their recent highs, a number of altcoins have been cut by WAYY MORE. It will be interesting to see if some of this stuff bounces back. A lot of these DeFi platforms and yield-farming profits come from altcoin trading. So if the trading fades, so will yields. And so do the exchange and wallet companies' revenues. (Coinbase Stock, Gemini, Anchorage and Kraken)
Bitcoin and its cheerleaders should learn something from the refrigerator industry. You almost never hear anyone complaining about how much electricity refrigerators use. That's because the importance of food preservation is pretty well accepted by everyone around the world. People won't complain as much about Bitcoin's energy consumption if more people believe that cryptocurrency is good, as opposed to just a get-rich-quick thing. Unfortunately, the space is full of hucksters and charlatans(Pompliano, Musk, Saylor etc), and so you can't be surprised that a lot of people think it's just a hot speculative mess.
A lot of folks in the space are excited about the prospect of Chinese Bitcoin mining going away... The catalyst for this excitement is that it would make mining cleaner in general, while also concentrating hashpower outside of communist China.
Everyone's focusing on wasted energy, expect more attention soon to be paid on what crypto (not just Bitcoin) is doing to semiconductor prices and hardware availability.
After having been burned 20 times, everyone's going to be scared to declare Bitcoin or crypto dead or over. Those predictions have never been correct, so people will stop making them.
We're in the Metaverse RIGHT NOW
The conclusion from the Thread:
It’s key to understand that dominant strategies now center on killing the concept of comparison. You don’t win because a customer says A is better than B.
You win because they only ever see A, see social proof of A, and would be shunned for not knowing about A.
Selection is so great that you are seeing people simply revert back to asking people in their social network what is good.
20 options on Amazon was awesome.
20,000 on 1000 websites is a nightmare.
You’re just going to go with what other people I know vouch for.
🌊Best Links of The Week🔮
Welcome to the Everything Game - As software eats the world, you'll have no choice but to play.
Important Lesson From Morgan Housel - Franklin Roosevelt – the most powerful man in the world whose paralysis meant the aides often had to carry him to the bathroom – once said, “If you can’t use your legs and they bring you milk when you wanted orange juice, you learn to say ‘that’s all right,’ and drink it.”
Google announced it’s partnering with Shopify - giving the e-commerce platform’s over 1.7 million merchants the ability to reach consumers through Google Search and its other services. The integration will allow merchants to sign up in just a few clicks to have their products appear across Google’s 1 billion “shopping journeys” that take place every day through Search, Maps, Images, Lens, and YouTube.
Last week AT&T accepted that it should never have bought Warner Bros - this week Amazon is apparently in talks to buy MGM, for $10bn. Appearances apart, this makes far more sense - Amazon does actually have a real strategic reason to be in the content business. It's also striking how much both the Warner/Discovery deal and this are entirely media industry conversations - tech changed the landscape, but the questions for the future of media are all media questions, not tech questions.
Snap spectacles are back with 'AR' - A couple of years ago Snap experimented with a wearable camera - 'Spectacles' - and now it's experimenting again with some prototype AR glasses, that are available for selected partners. In parallel, it's just bought the optics provider, WaveOptics, for (apparently) $500m.
Find out how much of the e-commerce market Shopify owners with BuiltWith
Business Breakdowns - Justin Drake - Ethereum: Into the Ether
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