The Rise of the Access Economy
The author, Alex Danco, does a brilliant job of articulating an emerging phenomenon and the reasons for it. As he states,
What is the access economy? It’s a term I use to describe a phenomenon we’ve all experienced and that I believe will help define the future, yet is surprisingly un-articulated today. The access economy is what emerges when access to (x) becomes cheap, satisfactory, convenient and reliable enough that the premium on ownership of (x) disappears.
Note the particular emphasis I’ve placed on the word emerges: the principal reasons why I believe the access economy will become such a defining feature of my generation have less to do with our non-dependency on ownership and more to do with the emergent behaviour that results. We already see examples of this behaviour today: Airbnb, Uber, Netflix, Codecademy, Elance and Starbucks are examples of companies that natively understand this phenomenon, and whose business models work because of their users’ emergent behaviour.
Here is the link: https://alexdanco.com/2015/02/02/the-rise-of-the-access-economy/
On Bullshit in Investing
The best article I have read on how Wall Street fools investors and fools itself.
Key Resources for Learning about Investing and How to Value Investments
The Little Book that Builds Wealth by Pat Dorsey. I suggest you read this book first. It is little, as it’s title suggests, and gets to the essence of investment valuation absent all of the Wall Street doubletalk.
One Up on Wall Street by Peter Lynch. This book is phenomenal. I would read it after Dorsey’s book.
Warren Buffett’s annual shareholder letters from the Berkshire Hathaway website. Find them and read them. Full stop.
The Warren Buffett Way by Robert Hagstrom was my first introduction to the methodology that Buffett uses to evaluate investments. It goes beyond platitudes and gives a glimpse under the hood.
The classic tomes of value investing are Security Analysis and The Intelligent Investor by Ben Graham, the father of value investing, who developed the analytical framework of using financial metrics to assess investments. Prior to Graham the prevailing approach to investment selection was, “Buy this sucker. It’s bound to go up. I heard about it at a cocktail party.” These books are good reference books, but I would not use them as an introduction to investing. They can be intimidating right out of the box. They are very dense. Then again, maybe my problem is just that I am dense.
Aswath Damodaran, the New York University finance professor, and so-called Dean of Valuation has been incredibly generous in his teachings. His full MBA valuation course and other materials are all online. This guy is a gem, and his materials are spectacular. (Don’t buy his books: even he admits they are a waste of your money.)
You will need to understand the fundamentals of accounting before tackling Damodaran’s online valuation course. I suggest looking online, but I don’t have a specific suggestion. (I learned accounting well before the web—around the time Martin Van Buren was president.) You might want to poke around Khan Academy and see what they have to offer.
Wikipedia and Investopedia are great online resources for definitions. Do you need to brush up on the difference between Return on Capital, Return on Invested Capital, and Return on Tangible Capital Employed? Wikipedia and Investopedia are great resources.
ROIC.AI. This is a very useful website to which I subscribe. It has a great one page summary of key company statistic including ratios such as operating margins, return on capital, and return on equity. There are other services similar ROIC.AI, but I found this one to be the most useful for me.
Dataroma. This site reports the 13F filings for high profile investors. Institutional investors in the US managing more than $100M have to file 13F forms quarterly with the US Securities and Exchange Commission, detailing what securities they bought and sold. Dataroma does the best job of aggregating 13F forms and presenting the summary information. I go to Dataroma periodically to get investing ideas.
Put a note in your calendar to check in on 15 February, 15 May, 15 August, and 15 November. These are key reporting dates. Dataroma’s information is broken down by investor (Buffett, Klarman, etc.). In particular I look at new additions as well as significant additions to existing holdings. These are ideas, needing further investigation and scrutiny. They are merely leads that warrant investigation. You need to do your homework, not just accept someone else’s conclusions blindly.
For a discussion of investment screening approcahes, I recommend Safal Naveshak’s blog here. In it he shows his screening criteria and dicusses it in detal. Read and study it.
Here are some other books I highly recommend:
The Essence of Warren Buffett: Lessons for Corporate America by Lawrence Cunningham. Cunningham has reorganized Buffett’s investor letters into themes.
Margin of Safety by Seth Klarman. This is a good read from an investor with a long track record. Copies in print are difficult to find and very expensive. I’m not sure why the publisher has not printed a second edition. With a little searching, you can find a PDF online.
Common Stocks and Uncommon Profits, by Phil Fisher. Although I have read (and liked) this book, I don’t have it on my bookshelf. It is worth a second read, and having a copy.
Value Investing: from Graham to Buffett and Beyond, by Bruce Greenwald and others. Greenwald has a number of keen insights. This book is worthy of space on the bookshelf.
The Outsiders by William Thorndike. Thorndike did a study of various—often eccentric—CEOs who were spectacular and unorthodox in capital allocation. Since a CEO’s capital allocation abilities are so essential to the long term health of a company, understanding this skill is crucial in terms of an evaluating companies.
Expectations Investing by Michael Mauboussin and Alfred Rappaport. This book inverts DCF analysis. Traditional DCF analysis looks at future cash flows and discounts them back to present value. On this basis of the DCF, you decide if the investment is worthy of buying at its current price.
Expectations Investing asks, the opposite question: given today’s price, how long will it take the value to realize that price given the underlying economics of the business? The authors also have a website with step-by-step analysis and models, using Dominos Pizza as a tangible example.
Mauboussin in particular has written extensively about investment valuation throughout his career. He has many keen insights. If you search his name, you will find a listing of this insights.
Caveat Emptor
This may come to you as a shock, dear reader, but in life not all of the children are above average. It turns out that the average child on average is…average.
And so it goes with books, websites, blogs, Substacks and other materials.
There is a huge amount of online materials. The vast majority are garbage. In reading materials graze widely—and dispose of quickly. I read probably 200 pages of material per days. I continue to graze wildly because occasionally I come across something useful, and even more rarely, something spectacular, like the Benn Eifert article I mention above.
For instance, on one blog in 2020, I came across a post on Orphan Stocks, stocks that are not followed by any Wall Street analysts. The blog mentioned specific companies, which I further qualified. One in particular stock caught my eye, but I held off on investing because its valuation was very high: there was no margin of safety. I finally began to invest in mid-2023.
There is a lot of triage in my investing approach.
Returning to books, there is a genre which I describe as investing odyssey books. Generally, these have the theme of “I was lost, but now I am found.” I don’t find this genre especially useful. Here is a review I posted on Amazon:
I borrowed Gautam Baid’s "The Joys of Compounding" from my local library. I am glad I did not purchase the book. My review of the book is lukewarm.
"The Joys of Compounding" is another investing odyssey book about learning at the feet of Ben Graham, Warren Buffett, and Charlie Munger. It follows in the footpath of similar books written by other value investors such as Guy Spier’s "The Education of a Value Investor" and Monish Pabrai’s "The Dhando Investor."
A good author doth not necessarily a savvy investor make.
Case in Point: I have a particular disdain for Pabrai. For many years, he has traded off—what I believe to be—his cursory relationship with Charlie Munger, with a lot of “Charlie and Me,” photos, quotes and other paraphernalia. You would think these guys are roommates.
His rhetoric outruns his results. If Pabrai’s 13F filings are any indication of his investing prowess, I can summarize him in four words: big hat, no cattle.
Nevertheless, I liked his book.
Let’s get back to Baid.
Baid’s investing epiphany is personal, but it is not necessarily instructive for the rest of us. His voice sounds like the latest cohort of gobsmaked teenagers who breathlessly claim their generation is the first to discover sex. Their very existence belies their claim.
Unlike so many of his Wall Street brethren who were minted in New Canaan, who were branded at Phillips Exeter, Harvard, and Wharton, and who effortlessly rose through the ranks of Brown Brothers Harriman, Baid grew up on the wrong side of the railroad tracks—indeed the wrong side of the world. His life story is a heart-warming Horatio Alger narrative around overcoming daunting odds by grit, perseverance, and determination. In a world where zip-code is destiny, Baid escaped. Good for him.
Regrettably his book is not as compelling as his life story.
Readers have who have read extensively by and about Graham and Buffett will not find a lot of new information in "The Joys of Compounding". This is old information organized around personal revelation and evolution.
The book starts slow; Baid spends an inordinate amount of time on topics such as the value of extensive reading. He goes over the same ground again and again and again. I’m a slow learner, but even I can figure out something by the tenth time an author explains it to me. Baid also tends to pontificate.
I was hoping to find lessons based on what Baid has learned thus far in his career. I was disappointed from the lack of insights resulting from investing successes—and more importantly—failures. I did find one, which I photocopied for further study.
Baid discusses two investments in Indian companies making graphite electrodes. A graphite electrode is a consumable used in the production of steel in electro-arc furnaces. It is a minor cost component—about 3% of the cost of production—but essential to steel production. A graphite electrode is to steel production what a wick is to a candle. Without it, nothing happens. Because graphite electrodes are sold into a cyclical industry (steel production), the stock prices of graphite electrode manufacturers tend to exhibit cyclical behavior.
At the bottom of the economic cycle, Baid made two concurrent investments, one in a market leader and the second in a market laggard. He learned an important investing lesson. As the business cycle rose, the laggard’s stock price rose much faster and further than the market leader—a counterintuitive outcome. He found this perplexing until he thought it through: the issue has to do with baseline expectations.
When it comes to US Presidential administrations, it is fair to say that George W. Bush exceeded expectations much more than George Washington. That is because Bush’s baseline started so low. Surely, you have heard the joke that Crawford Texas was missing the village idiot, but that the authorities found him in Washington.
The stock price of two graphite electrode companies went through a similar evolution. Assuming the market has priced in the financial status of each at economic cycle’s bottom, a laggard that moves through the cycle from an operating loss to a modest operating margin has done much better than a leader that doubled its operating margin. Because the laggard’s expectations are so low, the stock price has an exaggerated response to the earning gains through the cycle.
I have invested for years, but this simple insight had eluded me. Mea culpa: I am currently invested in a US graphite electrode manufacturer and getting my head kicked in. (Note: I may be from Crawford myself.) My investment is either going to be a masterstroke or a face-plant—probably the latter. Baid’s insight may not save my butt on this one, but his experience is relevant and helpful.
On balance, I found Baid’s book decent but not spectacular. The book is published by Columbia Business School Publishing, but don’t let that bamboozle you. Some books from this publisher are so sloppy they make your local high school newspaper look like the "New York Times".