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    Value Hive Podcast

    Philo Investor: Know Thy Edge, Know Thyself

    Fri Jan 12 2024
    InvestingValue-oriented investingStreaming servicesEmerging marketsInvesting mindset

    Description

    The Macarops Value High podcast aims to make high risk-adjusted returns by offering differentiated research, theory, education resources, and a slack community for investors. The speaker discusses value-oriented investing, valuing businesses, streaming services like Coursera and Duolingo, Disney's challenges, investing in emerging markets, the investing mindset for long-term wealth and personal growth, and concludes with closing thoughts on Leonardo da Vinci.

    Insights

    Value-oriented investing

    Value-oriented investing involves finding stocks priced below their intrinsic value. The speaker focuses on individual stocks and ranks them based on risk-reward ratio.

    Coursera and Duolingo

    Coursera has a strong balance sheet and offers diverse learning options. Duolingo has a large ecosystem of free learners and high margins for its SaaS-type products.

    Valuing businesses and streaming services

    Traditional spreadsheet analysis may not accurately capture a business's potential. Valuing businesses as options provides a different perspective. Streaming services like Netflix have advantages over legacy media companies.

    Disney and emerging markets

    Disney's control over distribution is diminishing, and the company faces challenges due to mismanagement and resistance to change. Emerging markets like Latin America and Poland offer relative cheapness.

    Investing in emerging markets

    Investing in emerging markets requires a case-by-case approach. A good business with a strong balance sheet can perform well despite high inflation. The US outperforms Europe and some emerging markets due to passive investing flows favoring large global companies.

    Investing mindset and long-term wealth

    Buying stocks at new highs can be the best time to buy on a risk-adjusted basis. Understanding the lifecycle of a business is important for evaluating its stock. Holding onto stocks for the long term can lead to substantial wealth.

    Investing mindset and personal growth

    Short-term performance obsession is prevalent in the market. Many investors lack the correct education to think as long-term investors. Being an investor requires resilience and dedication.

    Closing thoughts

    The speaker would have dinner with Leonardo da Vinci and is interested in his opinion on modern art.

    Chapters

    1. Introduction
    2. Value-Oriented Investing
    3. Coursera and Duolingo
    4. Valuing Businesses and Streaming Services
    5. Disney and Emerging Markets
    6. Investing in Emerging Markets
    7. Investing Mindset and Long-Term Wealth
    8. Investing Mindset and Personal Growth
    9. Closing Thoughts
    Summary
    Transcript

    Introduction

    00:01 - 07:37

    • The Macarops Value High podcast aims to make high risk-adjusted returns and offers differentiated research, theory, education resources, and a slack community for investors.
    • MIT Investment Management Company (Matico) invests with emerging managers who can earn exceptional long-term returns and has created emergingmanagers.org for stock pickers.
    • Metemco is the investment team of Matico and occasionally hires new members. Job descriptions can be found at mitimco.org/global-investor.
    • Marhelm Data is an information service that helps investors find value in an overvalued market, with a focus on shipping and commodities. Listeners of the Value-Hive podcast can get a 20% discount on a subscription using the code "value@checkout" at marhelm.com.
    • Filo Investor started during COVID lockdowns as a way to answer investment-related questions from friends. It covers topics like passive vs active investing and real estate.
    • Filo Investor has a background in investments and worked in investment management before starting the website.
    • Filo Investor considers themselves a value-oriented investor with a business owner mindset, following Warren Buffett's approach of finding intrinsic value by understanding the business intimately.

    Value-Oriented Investing

    07:08 - 15:12

    • Value-oriented investing involves finding stocks that are priced below their intrinsic value.
    • The speaker focuses on individual stocks rather than buying the index.
    • During COVID in 2020, the speaker bought banks, retail stocks, industrials, and tech stocks.
    • When multiple stocks appear attractive, the speaker ranks them based on risk-reward ratio.
    • Many investors overlooked the downside risks during the COVID market rally.
    • Markets give clues about overvalued stocks with no real business prospects.
    • New business models that emerged in a low-interest-rate environment may struggle in a higher interest rate world.
    • Differentiating between old and new business models is crucial for investors to assess financials accurately.
    • Some companies may choose to lose money temporarily due to investments in growth areas like sales and marketing or research and development.
    • Coursera's new business model operates differently from traditional businesses, with expenses reflected on the income statement rather than the balance sheet.

    Coursera and Duolingo

    14:45 - 23:06

    • Coursera has a strong balance sheet with no debt and $600 million in cash.
    • They have a diverse ecosystem with offerings for corporates, institutions, universities, governments, and learners of all levels.
    • Content will not be free in the future as there are costs associated with creating and distributing content.
    • Network effects play a significant role in the profitability of content platforms like YouTube.
    • Duolingo is another interesting company in the space, with a large ecosystem of free learners and a small percentage of paid users.
    • Duolingo offers language courses as well as additional services like the Duolingo English test and a paid version called Duolingo Plus.
    • Margins for SaaS-type products like Duolingo can be almost 100% after reaching a certain point of revenue.
    • The economics of these businesses can be hard to understand due to changing dynamics and high initial costs.
    • The reduction of sales and marketing spend is crucial for improving cash flow and operating profits.

    Valuing Businesses and Streaming Services

    22:38 - 30:32

    • The timing and decisions made by a company can greatly impact its cash flow, operating profits, and valuation.
    • Traditional spreadsheet analysis like DCFs may not accurately capture the potential of a business.
    • A back-of-the-envelope approach can provide a broader understanding of a business's potential by considering various factors such as sales, marketing, R&D, and uncertainties.
    • Valuing businesses as options allows for a different perspective on pricing and potential upside.
    • Applying envelope math to Duolingo involves estimating the number of learners, revenue per user, margins, and applying a multiple to determine valuation range.
    • Streaming services like Netflix are becoming as expensive or even more expensive than legacy media due to technological improvements and changing consumer preferences.
    • Netflix's success came from its global expansion strategy and investment in original content.
    • Legacy media companies struggled to adapt to the shift towards streaming due to debt, reliance on linear TV, confusion, and lack of strategy.
    • Streaming-only companies have an advantage over legacy media in terms of cost structure and flexibility in pricing and market share.

    Disney and Emerging Markets

    30:08 - 38:18

    • Disney was forced to concede to charter's demands in a recent deal, which shows that their control over distribution is diminishing.
    • Legacy media companies are realizing the need to partner with streaming platforms like Netflix for content distribution.
    • Disney has complicated relationships and interconnectedness due to its various revenue streams, such as parks and linear TV.
    • The speaker views Disney as uninvestable due to mismanagement, lack of strategy, and resistance to adapt to a changing world.
    • The value of Disney's IP could be destroyed quickly if they continue on their current path.
    • The world is becoming more fat-tail-oriented, where outliers are becoming more common and pronounced. This can lead to unexpected consequences for companies like Disney.
    • Social trends and the fiscal situations of countries are examples of fat-tails in the world.
    • Major Western economies are over-indebted and running into budget deficits without serious plans for improvement.
    • Emerging markets, particularly Latin America and Poland, offer relative cheapness compared to the US.

    Investing in Emerging Markets

    37:48 - 46:17

    • The speaker believes that the state is misusing tax revenues and political conflict will exacerbate the situation.
    • The speaker disagrees with the idea of investing in China as an emerging market and prefers Latin America and Poland.
    • Investing in emerging markets should be approached on a case-by-case basis, as not all companies in countries like China or Brazil are the same.
    • Despite high inflation, a good business with a strong balance sheet and competent management can still perform well in emerging markets.
    • The US outperforms Europe and some emerging markets due to passive investing flows favoring large global companies.
    • The speaker shares an example of investing in a Greek retailer during the 2015 European crisis, highlighting the importance of choosing quality businesses.
    • When seeking new investment ideas, the speaker looks for opportunities where the market may misunderstand certain securities or industries going through changes.
    • The speaker used to focus on bombed-out stocks but now considers both new lows and new highs without obsessing over price.
    • Success has influenced the speaker's shift towards considering stocks at new highs, emphasizing that price shouldn't be a sole determining factor for investment decisions.

    Investing Mindset and Long-Term Wealth

    45:49 - 54:01

    • Buying stocks when they are making new highs can be the best time to buy on a risk-adjusted and absolute return basis.
    • Investing and trading are different approaches, with investing focusing on fundamental considerations and trading being more short-term oriented.
    • Buying on weakness refers to buying stocks that are experiencing temporary problems or are at all-time lows.
    • Identifying whether a problem is temporary or structural helps in making investment decisions.
    • Understanding the lifecycle of a business is important when evaluating its stock. Early-stage companies may have different opportunities compared to late-stage ones.
    • Long-term investors who understand where a company is going can make significant profits.
    • Holding onto stocks for the long term can lead to substantial wealth, as seen with Steve Ballmer's Microsoft stock holdings.
    • Investors often have biases towards sectors or businesses they haven't thoroughly researched.
    • Price is not always an accurate indicator of truth in the markets, as it can be influenced by various factors.
    • There is too much emphasis on short-term performance, especially for those managing other people's money.

    Investing Mindset and Personal Growth

    53:36 - 1:01:19

    • Short-term performance obsession is prevalent in the market, especially for those working for others.
    • Investors often look for lottery ticket-like investments based on big themes, without a business-oriented mindset.
    • Many investors lack the correct education to think as long-term investors.
    • Being an investor is like being an athlete, requiring resilience and dedication.
    • Investors may struggle to hold onto their portfolios during periods of market decline or stagnation.
    • People tend to prefer investments that provide consistent returns, but fail to consider the potential for exponential growth over time.
    • Mega-cap stocks may not be a reliable investment choice due to similarities with the dot-com bubble of 1999.
    • Believing in the possibility of making significant profits can have a positive impact on one's investing mindset.
    • Trading and investing require a specific mindset and tolerance for risk, which not everyone possesses naturally.
    • Each individual's strategy and edge in trading or investing will be unique to them and should align with their personality and risk tolerance.

    Closing Thoughts

    1:00:51 - 1:02:38

    • The speaker discusses the question of who they would have dinner with from the past or present.
    • They mention Leonardo da Vinci as their choice because he was an outsider and self-taught in various disciplines.
    • The speaker expresses interest in getting da Vinci's opinion on modern art.
    • The conversation ends with gratitude and well wishes for the future.
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