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No One Loses Money in China?
Distributions of Return on Equity (ROE) for Mainland China and NYSE listed firms highlight the curious fact that very few Chinese companies seem to be losing money. The distribution for companies in North America is not surprising: a normal distribution with a positive skew. More companies make money than lose money as one would expect (companies that lose money tend to go away over time…).
For Mainland China listed firms, the distribution is much more surprising. It looks like it should be a normal distribution but there is a cliff at 0% ROE. This suggests that companies which may be close to the threshold of positive returns are taking measures to mask their lack of profitability.
An appropriate piece for the first month of a new decade! Marc Andreesen and Kevin Kelly discuss a wide variety of topics. The synopsis? Technology is still just beginning its protracted positive impact on society, despite how much better things already are for people across the world.
This is a familiar refrain but one worth reminding ourselves of from time to time. This article explores “tunneling”. When we’re stressed and feeling pressed for time our attention and cognitive bandwidth narrow as if we’re in a tunnel. It can sometimes be a good thing, helping us to focus on our most important work, but often, we get caught up in a time scarcity trap of busyness. We might only have the capacity to focus on immediate (and often low-value tasks), right in front of us rather than the not urgent (but important) work that can get us out of the tunnel in the first place.
“There is a direct parallel between scarcity of money and scarcity of time,” Mani says. “With money, we do what’s urgent – we pay this bill, we try to make the budget work, even when we know it’s more important to take time to be a good parent or talk to your mom. At work, it’s the same. We get captured by whatever’s in front of our face, and we don’t give ourselves the space or introspection to think about what might be more meaningful to do.
Cliff Asness of AQR Capital, an upcoming speaker at our Capitalize for Kids Investors Conference, consistently produces thought-provoking content. Many subscribers to this distribution might take issue with his premise, but we think it has some merit, even if reality is more nuanced.
Essentially, Cliff suggests that Private Equity investing is akin to small/mid cap public investing on a leveraged basis, and there may in fact be an illiquidity discount given that implementing such a portfolio would produce substantial returns that few would have the stomach to hold through the cycle:
If people get that PE is truly volatile but you just don’t see it, what’s all the excitement about? Well, big time multi-year illiquidity and its oft-accompanying pricing opacity may actually be a feature not a bug! Liquid, accurately priced investments let you know precisely how volatile they are and they smack you in the face with it.
What if many investors actually realize that this accurate and timely information will make them worse investors as they’ll use that liquidity to panic and redeem at the worst times? What if illiquid, very infrequently and inaccurately priced investments made them better investors as essentially it allows them to ignore such investments given low measured volatility and very modest paper drawdowns?
This probably doesn’t need much of an explanation. Jeff Bezos’ clarity of thinking since day one is beyond impressive. If you are pressed for time just read the 1997 letter - it will seem familiar.
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