Valuation and Expected Returns
There are a tremendous number of variables that can influence returns over any 10-year period. That said, where you start from a valuation perspective is among the most important. Following the sell-off in December, equity valuations were as low as they have been in several years – an opportunity which was unfortunately somewhat short lived. With the rebound we’ve seen in January, forward multiples have climbed back to ~16x at the time of publishing.
A somewhat technical read from Harvard Business Review on the value of network effects – why some of the platforms we know and love have been able to thrive, while others have struggled as businesses. A good example of this is the concept of a true national or global network:
“Consider Uber. Drivers in Boston care mostly about the number of riders in Boston, and riders in Boston care mostly about drivers in Boston. Except for frequent travelers, no one in Boston cares much about the number of drivers and riders in, say, San Francisco. This makes it easy for another ride-sharing service to reach critical mass in a local market and take off through a differentiated offer such as a lower price.
Now let’s compare Uber’s market with Airbnb’s. Travelers don’t care much about the number of Airbnb hosts in their home cities; instead, they care about how many there are in the cities they plan to visit. Hence, the network more or less is one large cluster. Any real challenger to Airbnb would have to enter the market on a global scale—building brand awareness around the world to attract critical masses of travelers and hosts. So breaking into Airbnb’s market becomes much more costly.”
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Marc Andreessen and Ben Horowitz, two of the world’s leading venture capitalists, share wide-ranging thoughts alongside some witty banter. Topics include: (1) the value of investing in entrepreneurs who are extreme and often “not normal,” (2) blockchain and its value as a new platform, and (3) the decline of retailers.
Listening to individuals who are on the cutting edge of technology helps frame our own thinking into what the future might look like.
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Every few months, it seems a new theory rises around the downfall of China. We have learned to ignore the hyperbole over the years but are becoming increasingly concerned with the level of debt, and the seemingly decreasing capacity for meaningful government intervention. In Bloomberg Businessweek’s latest in-depth analysis, they summarize China’s current situation – a subject we believe all investors should be watching rather closely.
“Total debt relative to national output surged to 253 percent in mid-2018, from only 140 percent a decade earlier, according to the Bank for International Settlements. No emerging economy since the 1990s has had such an outsize debt expansion and escaped some sort of financial calamity. China would have to defy history to dodge a debt disaster.”
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A great summary of the book Sapiens, which we found to be one of the most insightful reads in recent years. It is worth tackling the whole text, but this article provides an introduction to human beings’ journey to the top of the food chain. The key insights revolve around our ability to work together, communicate, and coordinate in very large groups. These same characteristics have allowed knowledge to be passed down and built on over many generations.
“Ants and bees can also work together in huge numbers, but they do so in a very rigid manner and only with close relatives. Wolves and chimpanzees cooperate far more flexibly than ants, but they can do so only with small numbers of other individuals that they know intimately. Sapiens can cooperate in extremely flexible ways with countless numbers of strangers. That’s why Sapiens rule the world, whereas ants eat our leftovers and chimps are locked up in zoos and research laboratories.”
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