Book summary: Buffett the making of an American capitalist by Roger Lowenstein

Keep things simple. Simple should not be confused with easy.

Business model assessment

  • Easy to understand economics
  • Strong defensible moat
  • Trustworthy management who treat capital of shareholders with ownerlike care
  • Selling at a reasonable price
  • Able to generate high returns without excessive usage of debts

Guiding principles

  • Stick to companies with your circle of competence
  • Ignore macro economics trends and analyst forecast
  • Choosing between growth and value is a misguided one. See the business model holistically.
  • A share in a business is basically a bond whose coupon rate you need to figure in yourself
  • The character flaws of an individual tend to have very serious spill over effects. Always check for serious character flaws of individuals whose company you plan to invest in.

Float

  • Buy cash generating assets to finance purchase of more assets
  • Insurance is a prepaid model
  • Blue Chip is a prepaid stamp sales model

Management of cashflow

  • Give out dividend
  • Share buy back
  • Reinvest or MnA

The last option is almost always value destroying unless the management can generate ROI above it’s current RoA rate. This is predicated upon a strong defensible moat.

Leadership

  • Confidence
  • Perspective
  • Ability to focus
  • Communication

Analysis of MeetUp.com’s penetration into Japan and relevant mobile behavior on crowded trains

MeetUp.com observed to have significantly penetrated Japan.

A quick study shows significant levels of liquidity on both the supply and demand side for this two sided market place in major cities of Japan.

  • Tokyo
  • Kyoto
  • Osaka

Acquisition model attributes

  • Primary acquisition channel: SEO
  • Primary use case: interest groups as an excuse to practice English.
  • Retention pattern: Weekly recurring usage

Other noteworthy mobile user behavior

Primary data observed glancing over the shoulders of mobile users in crowded trains

recurring use cases

  • Reading comic
  • playing mobile games
  • reading up news on Google News
  • social media (Facebook)
  • No significant usage of music listening via ear phones on trains.

 

 

Learnings on the auto industry in Japan

  • the bulk of the profit margin is in the heavy equipment and second hand used car
  • dealers buy used second hand cars from wholesalers through auctions. They then resell the cars to end consumers for a profit
  • Osaka Japan is the bulk of where Japanese car manufacturers are based
  • Tesla has a presence in Japan though the model 3 is still on the big side when considering normal size of cars in Japan.
  • it is very hard to get prices of sold cars and parts from different parts of the world.
  • Japanese government publish the prices of exported cars the previous year.
  • van life is an officially recognized trend in Japan and has a defined segment

Examples of various networks failing at scale

Most solutions will inevitably break when used at scale. These are two recent examples.

AirBnB’s network scales to extend it starts disrupting entire neighborhoods

https://www.bloomberg.com/news/articles/2019-11-06/miami-beach-airbnbs-top-market-in-u-s-as-charlotte-grows-rapidly

Political campaigning on social media gets way out of control after politicians attempt to scale up the method which got President Obama elected to office 

https://www.bloomberg.com/news/articles/2019-11-07/google-considers-changing-its-political-advertising-policy

Technology eco-system scales up operations in California thereby triggering the housing crisis.

https://www.bloomberg.com/graphics/2019-california-housing-crisis/

Moderation and self restrain is not common when caught up in a winner takes all situation

 

Crypto-currency exchanges

Business model

  • Pricing model
    • USD 80K initial listing fee
    • fees on each transaction
  • Enterprise sales acquisition approach
    • acquisition channels
      • LinkedIn
      • Crypto-conferences
    • Cost
      • USD2500/month for sales staff
      • USD4000/month for engineers

Landscape

  • Over supply of exchanges versus crypto projects
    • Crypto-currencies have tanked in 2019
    • There are more than 2000 exchanges right now
    • 20 new currencies are minted each month
    • There is a lack of differentiation between exchanges
  • crypto projects are reporting an exceeding high level of failure rates
    • due diligence traditionally handled by VCs for traditional startups are left to end consumers for crypto projects
    • most projects do not have a sound use case
    • teams tend to be poorly managed
  • Uneven playing field
    • US media’s extensive distribution network is the primary advantage of US based exchanges
      • Binance is the largest exchange
      • Binance ability to tap into engineering talent in US has allowed it to be the trail blazer helping it garner constant media attention
    • Chinese crypto-currency companies are attempting to penetrate US and Europe by hiring talents with fluent in English

Complementary assets for Biki

  • Parent company’s crypto news portal
  • Parent company’s engineering knowledge in building exchange software

Microsoft university penetration strategy

Tools of the trade

  • content marketing like documentation and tutorials on how to use tools
  • Speaking at events as first point of contact for lecturers and TAs
  • Sponsorship through hackathons
  • direct outreach to educational TAs
  • support for student mentorship programs

Acquisition

  • Reach to TAs to try out tools for free
  • Setup booths at hackathons and conducting workshops
  • Train student on the use of MS tools so that they can become successful mentors – GitHub strategy
  • Provide budget for student groups who want to organize learning sessions involving how to use the tools

Feedback mechanism /

  • track the conversion rate of documentations visit to corresponding sign up levels
  • track time on documentation
  • listen for feedbacks when interacting with students during hackathons to figure out portions of the documentation that are confusing

Metrics

  • track YoY student traffic usage during lull periods to determine if baseline is improving.

NYMT rotation from agency RMBS to CMBS

NYMT has been observed to shift much of its portfolio to CMBS from agency RBMS over the year.

This is to guard against the likelihood of prepayment risk and reinvestment risk associated with the lowering interest rate environment we are seeing right now as the US/China trade war forces lower interest rates and a flatter yield curve. The downside to this strategy is that most of the loans will be maturing within 10 years as opposed to 30 years.

Performance across various interest rate environments

In a stable interest rate environment a rotation to RMBS can help guard against reinvestment risk and prepayment risk since loans mature over a period of 30 years and borrowers are unlikely to increase their rates of prepayment.

And since these are agency RMBS, the government become  the ultimate underwriter in the event of defaults.

In an environment where interest rate increase and spread widens, increase in short term interest rates pinches into profit margins thus lowers net interest income for all both types of MBS. Also likelihood of default increases.

Overview of CMBS versus RMBS

CMBS typically matures over a 10 year period. It pays interest during the entire period with a final lump sum principal payment at the end.

Borrowers will usually extend another loan to pay off lump sum as the current loan matures. The new loans is usually at then prevailing interest rates.

CMBS are usually backed by 10 to 300 commercial properties.

RMBS matures over a period of 30 years. It pays both interest and principal steadily over the entire course with increasing amounts of interest paid to the end.

RMBS is usually backed by thousands of homes.

Types of risks:

  • default risk – property does not generate rent to cover interest
  • maturity risk – borrower can not repay final lump sum at maturity
  • prepayment risk – more is paid down rapidly so less overall interest income generated from loan
  • reinvestment risk – associated with prepayment risk. If mortgage is paid down fairly quickly due to low interest rate environments, owner of lender will be forced to lend out loans in prevailing lower interest rate environments
  • extension risk – less principal is paid down by borrower per period because interest rate has increased

Of the above CMBS is usually only subjected to default risk and maturity risk.

Arrangements are within contract to guard against prepayment risk and extension risk in CMBS.

Default risks for CMBS are low unless tenants are no longer able to pay for rental of commercial space. Senior CMBS were not much affected even during 2008 / 2009

Other issues for consideration

Subordination are important points for consideration. Senior loans with 30% subordination means it will only start experiencing default when 30% of tranche beneath it has defaulted.

CMBS annual default rate peaked at 4.07% in 2010 while cumulative default rate peaked at 13.52% in 2013.

Related references

https://www.lordabbett.com/en/perspectives/fixedincomeinsights/investment-brief-commercial-mortgage-backed-securities.html

https://www.sec.gov/ix?doc=/Archives/edgar/data/1273685/000127368519000074/nymt-06302019x10q.htm#s4E8231C084AE58E780F8E58D6BD4C381

General thoughts on Mark Zuckerberg’s warning of the internet’s role in Authoritarianism displacing Democracy

  • The polarization between democratic systems and authoritarian systems is becoming more apparent as China leverages its growing middle class to project it’s influence on the world stage a strategy that US has been utilizing for the past decades.
  • Facebook is a vehicle for projecting American values overseas.
  • The African continent remains a land grab for the two different regime types. Thus far, China has won out on the physical infrastructure and government level while FaceBook has won out on the community grassroots levels.
  • For the C Suite especially CMOs to execute their jobs well they need to be focused on what’s happening out there in the world as opposed to what’s happening within their own functional organization. It’s the VP of marketing’s job to handle what is within their own marketing organization.
  • Its a time when US companies will need to navigate the international markets while managing the challenges to their American values.
  • The Chinese government has done a better execution on that front with their One Belt Road initiative by clearing the path at the government level to facilitate the unhindered expansion at the commercial level by its enterprises.
  • Western media is working at full Rev to control the narrative frames that drives public opinions.
  • Mark Zuckerberg has masterfully leverage recent trends to reframe Libra as a champion of democratic ideals as opposed to a disintermediation force on central banks around the world.

Related references

Zuckerberg Warns China’s Censored Internet Could Still Win Out
https://www.bloomberg.com/news/articles/2019-10-17/zuckerberg-warns-china-s-censored-internet-could-still-win-out

Apple bows to China by removing Taiwanese emoji

https://qz.com/1723334/apple-removes-taiwan-flag-emoji-in-hong-kong-macau-in-ios-13-1-1/

Christian Dior apologizes for omitting Taiwan from Chinese map

https://www.breitbart.com/national-security/2019/10/17/china-bullies-christian-dior-apologizing-omitting-taiwan-map/

China exerts pressure on NBA to fire key executive for tweet on Hong Kong unrest

https://www.nytimes.com/2019/10/17/sports/basketball/nba-china-adam-silver.amp.html

Solomon island switches relationship to China from Taiwan

https://www.nytimes.com/2019/09/16/world/asia/solomon-islands-taiwan-china.amp.html

Kiribati switches relationship to China from Taiwan

https://amp.theguardian.com/world/2019/sep/20/taiwan-loses-second-ally-in-a-week-as-kiribati-switches-to-china

Southeast Asia balances between Chinese Markets and US defense

https://www.nytimes.com/interactive/2018/03/09/world/asia/china-us-asia-rivalry.html

Facebook Warns Washington That Beijing Wins If Libra Plan Fails
https://www.bloomberg.com/news/articles/2019-10-17/facebook-warns-washington-that-beijing-wins-if-libra-plan-fails

 

 

An unchanging constant as the source of trust

Trust is the ultimate source of wealth in any society. The level of manifested physical wealth correlates positively with the level of perceived trust members of society have for an entity.

When an entity, be it a phenomena or a behavior, is observed to be consistent across time without much falter, it soon becomes accepted as the norm. Overtime this norm gets deeply embedded within a society and becomes an integral part of its culture. It thus becomes trusted and a source of credibility.

Societal commerce is built on trust. Trust accumulated through consistency overtime can be converted to other forms of tangible currency. These currencies can then be used to direct resources within the society towards the achievement of very material goals.

When comparing between two entities that are embedded within the cultural fabric of society, the one that exhibits a higher level of consistency inevitably gains more trust. This explains why while fiat currencies comes and goes, the value of gold remains consistent across time.

While it might be tempting to equate trust with value, there is a subtle difference. While trust elicits value, value need not necessarily elicit trust.

Expressing the entire civilization’s undertaking at any point in time as an linear equation, any essential variable that happens to be the most restrictive in supply at that point inevitably becomes the most valued. However wide fluctuations in value does not elicit trust in the long run.

Sources of trust

  • the rotation of seasons and our subsequent practice of agriculture
  • the constant speed of light and it’s use in Einstein’s theory of relativity
  • gold with its scarcity and it’s persist use as a store of wealth
  • well run institutions with well defined constitutions
  • fiat currencies with under sound government regimes
  • individuals who exhibit consistent behavior overtime

Qualities of viable currencies

  • Ability to be divisible
  • Ability to be moved
  • Ability as a store of wealth overtime
    • consistent levels of supply
    • scarcity

Functions of currencies

  • a means to facilitate transactions
  • a store of wealth

Examples of trust erosion

Example 1: Michigan Pulls $600 Million From Ken Fisher an individual After Lewd Remarks

https://www.bloomberg.com/news/articles/2019-10-12/michigan-pulls-600-million-from-ken-fisher-after-lewd-remarks

Example 2: 1918 Germany as an institution, towards the tail end of WWI.

When it became evident that the country will loss the war, it experienced increased inability to raise debt to in domestic currency denomination to continue financing its war efforts. It’s currency soon lost it’s reserve currency status and it was increasingly forced to denominate debt in foreign reserve currencies.

Post WWI debts denominated in domestic currency where inflated away through printing of cash by the  German government to pay of debts denominated in foreign currencies.

Example 3: Africa use of glass beads as a failed form of currency

Europe was able to cheaply produce this in abundance . Europeans for a period were able to exploit this asymmetry by exchanging cheap glass beads for valuable natural resources. When value within the African society became depleted,  Europeans were eventually able to subjugate the entire African population and exploit them through the slave trade.

Example 4: Wall Street crash and the Great Depression of the 1930s.

Bankers increasingly became concern of easy credit driving share prices to stratospheric valuations. An eventual tightening of credit lead to rapid deleveraging within the system. The lack of trust within the system prevented the circulation of money and credit. The central bank ultimately had to step in to restore trust.

It did so by first preventing the flight to value. This was achieved through the banning of conversion of USD dollar to gold.

Example 5: An ongoing slow erosion of fiat money

With the deliberate pursuit of constant 2% yearly inflation by central banks around the world current fiat money are failed stores of wealth .

The currency of the Roman Empire is a perfect example of where we will be headed. Overtime less gold per coin is used. Their currency was ultimately replaced by paper which allowed rampant printing by the government during times of war. The effects of inflation eroded the Roman empires currency as a long term store of wealth.

Examples of persistent sources of trust

  • The institution of the Catholic Church
  • The consistent adherence to a set of sound principles by Berkshire Hathaway’s reinsurance business over multiple decades. 
  • Federal reserves consistent adherence to the dual mandate of 2% inflation and low unemployment rates

Conclusion

To build trust is to build wealth. The key to doing so is to adhere and operate on a consistent set of sound principles over across time and in all environments. Being slow and steady is a pre-requisite of this process.

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