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Interview with Mirakle

A few weeks ago, I did an interview with Mirakle, a Korean language business newsletter (link [1])

Below is the English version:

Thank you so much for the opportunity – My first language is not English and although I have learned English for 6 years in regular school system in South Korea, my written English may not sound clear to understand

No worries. I promise my Korean is far worse than your English

I learned how you started newsletter writing (at here link [2]) and how you were picked up by Twit community – That is quite amazing story – The idea that researching and writing only can make your living would quite resound to my audiences – How do you appreciate your current position now? How satisfied are you and your family on what you are doing?

In 2008 Kevin Kelly wrote this essay, 1,000 True Fans [3], that basically talked about how, contrary to the prevailing belief that grabbing the attention of millions was required to earn a living online, an independent creator need only find a relatively small number of “true fans” who were willing to pay for their work. This was nice in theory at the time – the internet made it possible for any normie to broadcast their creativity to the world – but tough to realize in practice because how does one find those fans? Social media supplied part of the answer. A blog dedicated to an arbitrarily niche interest can resonate with a likeminded group on Twitter. That group can be far larger than what narrow personal day-to-day experience might lead you to expect as there are more than 200 million people engaging with that platform every day, and even a thin sliver of that population can translate into a meaningful audience for a single creator. I set an aspirational goal of 200 subscribers when I started. That close to 1,500 readers would pay ~$210 a year to read a blog written by an unknown analyst would have seemed far-fetched at the time, yet here we are.

You no longer need to be affiliated with an established media outfit. New independent writers are making good money covering niche topics with far greater depth and insight than traditional media (I’ll take my work, or that of Mostly Borrowed Ideas [4]TSOH [5], and Yet Another Value Blog [6] – other terrific independent writers in my genre – over the cursory stock pitches published in Barron’s any day). There are even trusted independent curators, like The Browser [7] and Liberty’s Highlights [8], to help sift through the sea of content. This is not to diminish the ground level reporting and assiduous fact checking that large publications put into major news stories of broad public interest. That is important and noble work. But the explosion of independent newsletters is great for those who enjoy long form analysis on niche topics.

Of course, working for yourself on things you find interesting has widespread appeal, and with Substack and Twitter eliminating what few entry barriers there were in launching a paid newsletter, the competition for readers has exploded. My particular domain – analyzing competitive advantages and business models – seems to get more saturated by the month. After a certain point, growing a subscriber base requires more than just good content. You need to get out there and actively engage through Twitter threads, Spaces, podcasts, etc. But I don’t think of scuttleblurb as a business and have never been interested in growth for its own sake. I’m not trying to build the largest possible audience. So long as this blog brings in enough to provide for my family, I’m satisfied.

If I were in your position, I would be bombarded with the inner-mind tension between writing something that I only found out to broader people and investing something that I only thought would increase its value for broader people – writing and investing for others – what does interest you more? I learned that you have dipped your feet into both choices and assumed that you might give us more insights.

Frankly, I didn’t set out to be a writer. Scuttleblurb was a means to an end. I needed a way to cover expenses while I scaled my investment business, so I figured I’d post my research online and see if anyone would pay to read it.

Writing, for me, is a selfish act. Besides putting food on the table, it makes me a better investor. It puts structure to thoughts and stops me from fooling myself (a good way to test whether you really understand a concept is to explain it to others). I also find that the very act of writing can open creative outlets and trigger new avenues of exploration. My coverage isn’t influenced by what I think my subscribers want to read. I just write about companies that interest me and hope others come along for the ride.

Most of people who do investing in remote companies from countries like South Korea often feel it to be difficult to know more about the stocks that they want to invest. For them I think your ways to approach companies could have interesting implication – as you are individual researcher who might not have ample chances to participate fancy IR events that companies are holding. Can you share your routes to corporate information and if you have any advice, can you please share?

You might be surprised how far you can get with just an internet connection. Publicly traded companies in the US post their annual and quarterly reports, earnings calls, and investor presentations on their websites. Their Investor Relations departments will often speak to individual investors. You can reach out to former employees and competitors on LinkedIn or to industry folks who publish or are quoted in trade publications. The hit rate is low, so you need to be scrappy and persistent, but it’s certainly doable. Just don’t waste people’s time. Put in enough work to ask substantive questions and be willing to share what you’ve learned as well.

Keep in mind that sound investing has as much to do with judgment and synthesis as it does information gathering. Do enough of these calls and you’ll realize that everyone is blindfolded and touching a different part of the elephant. Part of an analyst’s job is to weigh to different perspectives and roll them up into as accurate an understanding of the company as you can. Saying you’ve spent countless hours doing this many calls is a quantifiable measure of progress. By contrast, synthesis, dispassionate analysis, and resource management are somewhat abstract skills, not something you can really brag to allocators about. But the lens through which you interpret information and how you balance your time across different opportunities are so important.

I once heard an investor say that they take research on a company to the point of diminishing returns…and then push even further. But there are some downsides to this impressive-sounding rigor. The world is an unpredictable place. No matter how well you know a company, there will always be something that takes you by surprise. Deep diligence can lead to unjustified conviction or lull you into a false sense of security. Reluctant to admit to wasted effort, you may dismiss counterarguments and rationalize negative developments. And the time spent taking your knowledge from 99.01 to 99.02 on company A might have been better spent going from 0 to 10 on companies B and C…so even if you have the mental flexibility to change your mind and exit an insanely well researched position, you may find yourself lacking replacement candidates as you literally don’t know what you’re missing. The balance between exploration and exploitation is unique to each person. As for me, I want to be in maybe the 80th to 90th percentile of knowledge on each of the companies I own. But finding myself in the 99th percentile may be a sign that I’m not optimally allocating my scare time.

As an ant returns to its nest after finding a food source, it will leave a pheromone trail for other ants to follow. Those ants, upon finding food at the end of the trail, will leave more pheromones on their way back, further reinforcing the path for other ants. As a food path becomes less promising, fewer ants follow it and the pheromone scent dissipates. So ants explore many possible routes simultaneously and devote ever more resources to the promising ones (what Douglas Hofstadter calls a “parallel terraced scan”…you can read more about this in Melanie Mitchell’s book Complexity). That seems like a good basic model for thinking about how to spend your limited resources. You don’t know what’s worth spending time on at the start, so you extend tentacles every which way. As you gather more knowledge about each, you prune some branches and intensify pursuit of others, and then extend this approach down to avenues of inquiry within each company.

I felt that there are full of interesting angles approaching the companies in the Scuttleblurb posts – and I also felt people love your style of writing factual walkthroughs on the history of the companies without telling them BUY/SELL/HOLD. So basically I thought that you are opening them the door for new possible interpretation of the world but leave the door open for the audiences to close. That is quite different from other analyst or researchers, I guess. What do you like most about your style of work? and what makes you keep it that way?

In investing, writing is very often a tool of persuasion. An analyst does their research, determines the stock is a BUY, and crafts a narrative consistent with that rating, which often leads them to diminish contrary views. I write to understand, not to persuade. Scuttleblurb is a research journal. It’s a place for me to think out loud and figure things out. My thoughts should be structured coherently but they need not coalesce into an airtight consistent thesis that argues why you should buy or sell a particular stock.

This approach doesn’t sell nearly as well as sensationalized long or short reports, especially on certain battleground stocks (Burford [9] in 2019 comes to mind). It may seem that reading two lopsided but opposing takes might get you to something resembling the full picture. But that’s sort of like saying the average of Fox News and MSNBC converges to the truth. Are you really hearing “both sides of an argument” (as if there can only be 2 sides) or just two distorted and motivated points of view? I would much rather get one intellectually honest assessment of things than dogmatic takes on opposite sides of an issue.

At the other interview, you mentioned that writing is part of your process of investing – How writing is adding value to the right investment decision? And what initiates your writing? do you write companies that you want to buy at first? and how do you select the topics of your writing?

I don’t know if I want to buy a company before I write about it but nor do I dive into things totally blind. On the surface, there are glimmers of scale, network effects and other sources of competitive advantage, and I write to flesh out whether and to what degree they apply. These companies come to my attention somewhat serendipitously – in the process of researching one name, I’ll think of another that shares similar characteristics or I’ll stumble upon another company in the same ecosystem that seems interesting.

For instance, Moody’s and S&P are a standards-based duopoly. Their ratings serve as benchmarks that market participants use to peg the credit worthiness of one bond versus another over time. To issue bonds at the lowest possible coupon or have those bonds included in major indices, an issuer must pay Moody’s and S&P for a rating, and each issuer that does so further entrenches Moody’s and S&P as the standard. Researching those companies led me to FICO, which enjoys a similar moat in consumer credit, with its FICO Score ubiquitously adopted by US lenders to assess the creditworthiness of borrowers. And looking into FICO led me to the big 3 national credit bureaus – Equifax, Experian, and TransUnion – who supply the data that goes into FICO’s algorithm and whose data and software are woven into the workflows and business systems of banks. Those business systems include purchase core/issuer processors from Fiserv and Fidelity, who tie into a complex Payments ecosystem that includes card duopolists Visa and Mastercard, merchant acquirers like First Data and Adyen, payment facilitators like Stripe, etc. etc.

For me, I think writing should affect people’s investment decision as they read again what they wrote before, so over time, I believe that writing would help a great deal to make quality feedback on their own decisions. So I am more curious about your experience – Do you have stocks that you initially dig into but ended up not wanting to buy after a while of study?

I don’t buy the vast majority of stocks I write about. That’s the way it should be. For me, writing is a learning expedition. It would be one hell of a coincidence if each one led to “buy” decision. If that were the case, it’d be a sign that I either have insanely good intuition or I am lying to myself (far more likely the latter).

Your research must take quite an amount of time as it doesn’t fail to take deep dive into the wide range of coverage everytime – but for me (based on my own experience), I often felt strong impulse of writing as soon as I come up with an idea (plus we have audiences who waits for me to write), so I could not really focus on the longer-term research. How do you balance research timing and writing?

I do both at the same time. If I just sit back and passively consume content, nothing will stick. So rather than write only after I’ve spent several weeks researching, I will summarize what I’m learning in my own words and come up with questions and theories in real time, organizing paragraphs and sentences along the way. As I do more research, I’ll go back and revise the stuff that is wrong or incomplete.

I believe that the definition of corporate value itself or the way to gauge corporate value have not been changed by the technological advances, but sometimes I throw doubts on that beliefs, too – especially when I am looking at the balance sheets of the companies of big techs, I often ask questions myself such as ‘where’s the IPs of Apple?’ ‘where’s the most valuable assets of Google – their tech engineers!’ ‘where’s the culture of Amazon?’ ‘where’s Elon Musk’s COVID19 health condition in Tesla’s balance sheet?’ How value investors have to adopt the new changes? and how are you evolving?

Even for industries that are heavy in tangible assets, value creation is often tied to intangibles. Value resides less so in things but in how creatively and efficiently those things are arranged and used.

Take the low-cost European airline Ryanair for example. The key to operating a consistently profitable airline is to command the lowest unit costs, which is a function of cost discipline and having full planes in the air for as long as possible. Ryanair enforced single-class seating to speed onboarding; did away with in-flight meals to minimize clean-up time; and standardized on a single aircraft model to reduce crew training and maintenance costs. They targeted uncongested secondary airports, where planes could take-off and land faster and which were willing to agree to lower landing fees. Cost savings from the above actions were invested in lower ticket prices, which attracted more passengers, giving Ryanair the leverage to bargain for lower landing fees at airports and secure aircraft volume discounts from Boeing, which cost savings were partly recycled into still lower fares. Leading up to the COVID-19 pandemic, Ryanair was profitable every year since at least 2000, averaging close to 20% operating margins. That’s unheard of for an airline. Clearly, Ryanair is more than just the value of the planes on its balance sheet. Anyone with a few billion dollars can own jets; what’s hard is replicating all the activities that give rise to the feedback effects of scale. A number of incumbent airlines have tried and failed.

Or consider Amazon’s e-commerce business, which has around $105 billion of PP&E assigned to it. The link between those considerable tangible assets and business value is the intangibles that surround it: an organizational setup comprised of small agile teams who can innovate and launch new products without much incremental bureaucracy; the famous flywheel dynamic, where order volumes leverage fixed costs and attract suppliers, resulting in more product selection and lower unit costs that are passed on to consumers, both of which draws more order volumes; a subscription program, Prime, that promotes customer loyalty and accelerates flywheel spin. Riding on top of all that is $40 billion of revenue from digital ads. While it didn’t generate any meaningful revenue until maybe 5 years ago, the digital ads business was really almost 30 years in the making: without Amazon’s logistics base and the aggregation of consumer demand, the ads business doesn’t exist.

Fixed assets are a double-edged sword. The resulting operating leverage can wreck a company. But when paired with intangibles – culture, org structure, software, online distribution, and other stuff you won’t see on a balance sheet – that optimize their use, they can create an insurmountable moat.

Now, a unique property of companies that directly monetize intangibles is the degree to which they can scale. It doesn’t matter how much scale and cost discipline Ryanair has, there are only so many people that can ride its planes in a given year. The same constraints don’t apply to an online business like Google. Before Google, search engines determined relevance by matching site content with user queries, an approach that taxed computing resources by more than it improved search quality as more and more pages were indexed. Google’s algorithm, on the other hand, works like a voting system, where pages are ranked based on the quality and volume of inbound links from other sites. It gets stronger as the web grows. And as more users choose Google for its superior search results, the more data Google has to deliver even better results, attracting still more users.

Google enjoys winner-take-most outcomes. There are feedback effects to scale and, because its service is equally accessible to everyone, there is no reason for users to opt for the second-best search engine. There are practically no marginal costs or constraints to delivering search results (and the corresponding ads) to almost anyone in the world, so Google can grow its revenue to an extent that an airline or car manufacturer cannot. Last year, Google did over $209 billion of ad revenue, up from $135 billion in 2019. That kind of growth on such a huge base is without precedent in the pre-internet age and we should think twice about applying base rates from that era to digital businesses today (I touched on this in my interview with LibertyRPF [10] earlier this year).

If you feel comfortable, can you tell us your relationship with Korea? (I just assume that you have something in Korea as your last name is KIM)

I was born and raised in the states, but my mom is from Busan and my dad is from Daegu. I have lots of family in Seoul and try to make it back there every few years.

CarMax, Carvana, and used car retailing

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Related posts: [KMX – CarMax; CVNA – Carvana] Moat, Growth, and Competition (Mar. 30, 2018) [CVNA – Carvana] Fat tail investing (Aug. 13, 2020) As previously discussed, the cost structure of used car retailing has become less variable, more fixed over the years. CarMax pioneered this transition in the early ‘90s, applying the lessons of [...]
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[DXCM] Dexcom

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Diabetes is a disease caused by the body’s inability to produce or effectively use insulin, a hormone produced by the pancreas that carries glucose into the body’s cells and stores excess glucose in the liver.  Its absence can trigger a hyperglycemic state, where blood glucose levels rise to abnormal levels, which can lead to long-term [...]
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[AVLR] Avalara + another quick EVBG update

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[AVLR] Avalara Avalara makes software that businesses use to calculate sales tax and prepare returns, leveraging two key enabling elements: The first is content. Avalara maintains a current log of sales tax requirements across myriad jurisdictions, domestic and international, and the business logic to apply the right tax rules to the right product in a [...]
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[TRUP] Trupanion

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Trupanion is a pet medical insurer that promises its members the best value, not the cheapest price. It runs a cost-plus model, targeting a 71% claims ratio (% of premiums paid to vets) for each category, so that if it turns out that vet costs for 3-year old German Shepherds in 97214 run at, say, [...]
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[ABNB, BKNG] Airbnb v Booking

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With 60% of rooms supplied by a fragmented set of independent hotels, the European hospitality market is set up to be aggregated: no individual hotel is large or prominent enough to effectively bargain against an aggregator or attract guests on their own, and coordinating action among a diffuse set of players is challenging.  A hotel [...]
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interview with @LibertyRPF

Posted By scuttleblurb On In Business updates,SAMPLE POSTS | No Comments

I recently did an interview with my friend @LibertyRPF [13], who publishes an insightful newsletter [8] covering tech, science, investing, and various other topics. It is one of my morning staples. You can access the original interview here [14].

Q: Hey David! It’s been a little over a year since we last did this [see 𝕊𝕡𝕖𝕔𝕚𝕒𝕝 𝔼𝕕𝕚𝕥𝕚𝕠𝕟 #𝟙 for our first interview [15] -Lib], I’m sure a lot has happened in the interim, but first, how are you? How are Zoe and Riley [16], the newest members of the ’blurb family?

Hey Liberty, the twins and I are doing great!  Thanks for asking.

Q: A lot of people have joined the newsletter game in recent times.  What I’m curious about is, as one of the Granddaddies of the genre, at least when it comes to the financial deep-dive sub-genre, what are you noticing when it comes to having longevity in this game? 

What stuff are you finding out in year three and four that you wouldn’t have easily guessed early on? What are you doing differently now, or want to change going forward?

For the first few years, I was just trying to get on the radar.  I didn’t know about Twitter so, like a savage, I sent personalized emails and handwritten letters with sample posts to money managers who I thought would like my work.  You, @BluegrassCap, and several others tweeted my blog and pulled me into modern times.  Scuttleblurb spread through word of mouth among the much-larger-than-I-imagined subset of fintwit that cares about fundamental research, which set the conditions for huge growth in 2019 and 2020.  But last year, I stopped engaging and focused near-exclusively on my work.  What little podcasting and Twittering I did in prior years ceased almost entirely.  Reclusive behavior, combined with the explosion of competing newsletters, had a predictably stultifying effect on growth. My subscriber base flatlined for most of last year. I’m frankly surprised (and relieved) that it didn’t shrink.

I guess the super obvious takeaway here is that if you want to grow it’s important to stay top of mind through regular, substantive Tweets and podcast appearances (voice tightens the bond). Ideally, you want your newsletter to be part of a subscriber’s daily routine, something they peruse while sipping morning coffee. I know Ben Thompson’s Stratechery occupies that privileged slot for many of us. But that’s not a realistic aspiration for a deep dive writer like me who only publishes once or twice a month and doesn’t offer takes on the biggest, most topical news stories of the day.

The explosion of content has changed the way readers engage with it. Most people, including me, will flip through one essay after the next like nothing, oblivious to all the hard work and creativity that went into it. Some will cancel their subscription if they have to waste even 5 seconds logging in to read a 5,000 word post.  “Too much friction”.  We are spoiled with great content.  I personally subscribe to over a dozen newsletters.  Most sit in my inbox unread. Sometimes my auto-renewal receipts remind readers to cancel as they realize they haven’t gotten around to reading my posts. This has been happening to me with greater frequency.

“Fluff” is also friction, avoid fluff, of which there are two kinds (I’m guilty of both at times). There’s the stylistic kind where you overwhelm the reader with jargon and needless sentences. And then there’s the more insidious content-specific kind where you don’t make a meaningful point. A nice trick here is to ask yourself if any reasonable person would agree with the inverse of your claim. If not, then is your claim worth making in the first place? “We strongly believe that the best companies have durable competitive advantages, innovative cultures, and are managed by aligned founders who strive for non-zero sum outcomes”. That’s motherhood and apple pie. I have yet to come across an investor who argues for narrow moat enterprises with torpid cultures led by rapacious hired guns.  

Q: There seem to be very strong forces that pull many writers out of the field.  By that I mean that a successful newsletter is a great resumé, and many of the writers I know have gotten very appetizing job offers. 

I feel like there’s probably only a relatively small subset of newsletter writers who truly want to write as an end goal — writing is thinking, and thinking is hard — and many others who are doing it to build towards something else.  So over time they leave and it may be possible for the few that just keep on going to kind of be the last people standing through sheer longevity.  I guess I’m just curious if you have any thoughts on this dynamic..?

I think you’re right – the industries where folks will pay good money for informed newsletters are also those in which writers are least committed to newslettering as a profession.  Lots of folks go into finance/investing for money and prestige, and compared to managing capital or working at a hedge fund, writing a newsletter can seem like a big downgrade on both dimensions. I think this is less true than it used to be.  Ben Thompson legitimized newsletter writing as a profession in so far as he showed you could earn a nice living by offering thoughtful analysis, without pumping stocks.  But when I launched scuttleblurb in late 2016, more than a few well-meaning folks felt my career was moving backwards. And it’s not like my newsletter motives were “pure” either. My fund didn’t start with anywhere near the AUM to earn a sustainable living. Scuttleblurb was an attempt to generate steady income in a manner that was synergistic with managing money.   

There are many more finance-interested people who want to work at or start funds than who want to write for a living….but I think those in the former camp increasingly realize the complementary value of publishing a Substack or Revue.  For those trying to land an analyst job, there is no better resume than a record of your investment writing.  A blog is a canvas to showcase creativity, analytical skill, passion and intellectual honesty.  For emerging managers, writing is an excellent way to attract and screen for the right partners.  An allocator who has read your work over the course of a year will have a clear sense of what you’re about before they reach out.  It saves time on both sides.

Every so often on Twitter I’ll see someone say “if newsletter writers were any good they’d be managing money” and I always think “great, when can I expect your wire?”….as if raising capital is the easiest thing in the world. At least for me, finding aligned partners has been a long process. Getting to scale took over 5 years, it came all at once, and there are a million scenarios where I make the same moves and things don’t work out. Just because someone isn’t managing money doesn’t mean they aren’t capable of doing so. Plus, some analysts just don’t want the stress of managing outside capital. Why diminish those who take an alternative path or don’t share your life choices and goals? Isn’t it better to have thoughtful analysts out there publishing their work than not? 

Q: What do you love most about this job? What part of it are you most excited about, or do you feel is most rewarding?

Definitely the money.  This work feeds my family.  The inspirational stuff around community, intellectual challenge, non-zero sum knowledge sharing, etc. applies of course.  But this project didn’t start with high-minded aims.  It started with me stressing out over how I was going to earn a living as I burned through my limited savings and struggled to launch my fund.  It started with me publishing into a void and thinking I was not gonna make it.  So to now have ~1,500 readers expressing support with their hard-earned cash is insanely rewarding.

Q: What do you dislike most about it? If someone told you they want to do what you do, all starry-eyed and optimistic, what warnings would you give them to make sure they know what they’re really facing out there?

There are so many newsletters competing for attention.  For every successful newsletter writer, I’m sure there are hundreds more who never gained traction, not because they weren’t talented but because it’s just really hard to break through all the other terrific free and paywalled stuff out there.

If you’re thinking about starting a newsletter anyway, I would fantasize less about success and ruminate more on whether you will actually enjoy the day to day experience. Writing for a living has a certain romantic appeal, but it is a solitary endeavor that can feel like a slog for someone who does not intrinsically enjoy reading, thinking, and writing for hours on end, day after day. This job suits my personality. I crank Zeppelin and lose myself in the work. But it’s not for everyone. Some people don’t like Zeppelin. (a little dad humor for you Liberty 😉 [Ha! You know me so well! 🤓 -Lib]

Q: Last year in our interview, you wrote about your research process. I’m guessing it’s not something that changes a lot, but I’m curious if you’ve learned new tricks or changed anything since?

No, not really.  

Q: Or if you’ve changed your views on anything important when it comes to your investing? Any companies or industries that you know little about, but feel like are holes in your knowledge, and you’re looking forward to digging into in 2022?

I think young fund managers, and I’ve been guilty of this too, have a tendency to over-intellectualize and complicate investing. Some of this is theater.  To stand out and appear deep, one quotes Marcus Aurelius and draws facile analogies between physics and investing.  By comparison, wisdom from experienced veterans can often appear trite and simplistic. But I’ve come to believe that that’s often because they’re done trying to impress.  They recognize that investing is not about complex theories, superficially applied but rather basic insights, deeply absorbed.  It’s that classic Charlie Munger line: “take a simple idea and take it seriously”. This is an old lesson I’m relearning. It didn’t stick the first time.

Great companies really feel this in their guts. Old Dominion Freight Lines, Sherwin-Williams (long), Fastenal, and Charles Schwab (long) are organizations that build around simple drivers of value creation. For instance, while the LTL industry embraced “asset lite” dogma, Old Dominion invested in the service centers and trucks required to offer reliable on-time service at a fair price (not the cheapest price). The profits it realized from winning share and scaling its fixed cost base were reinvested into still more service-enhancing capital investments, driving still more profitable share gains.  

Twilio obsesses over developers. CEO Jeff Lawson’s 300-page manifesto testifies to this. The company is made up of Amazon-inspired multi-disciplinary “two-pizza” teams who can respond to customer needs with the agility of a startup. As they grow past 10 members, those teams split into smaller ones, with the code base divided at each mitotic [Good vocabulary! -Lib] phase so that technical debt is paid down as the company grows. All employees are required to spend time supporting customers and building software with Twilio’s APIs.  

This isn’t always feel-good stakeholder capitalism stuff and there is sometimes more than one viable vector of attack. Airbnb and Booking (long) are, to borrow a phrase from William Finnegan [17] (Barbarian Days), the “oversold thesis and understated antithesis”. Booking quietly games the mechanics of performance marketing and conversion through maniacal experimentation. They’ve systemized the process more than any other OTA, with a team dedicated to maintaining the tools and scaffolding that allow anyone in the company, including new employees – who are, by the way, trained on statistics and hypothesis formation when hired – to launch experiments without permission. To pull this off, you need a culture that runs flat and encourages frequent (but small) failures.  

Airbnb is equally ambitious but crunchier. They built the most resonant brand in this space by taking community, connection, and product seriously. That Airbnb commands ~the same enterprise value as Booking on ~half the gross bookings and none of the profits is at least partly a function of vibes and storytelling: it’s easier to dream big with Airbnb than with Booking because CAC can be framed as intangible asset investment that should scale better than a recurring Google toll, and the company’s granular inventory molds better to all sorts of use cases and economic environments…though whether one is justified buying into this vision has yet to be seen.  Back when Booking was at Airbnb’s 2019 level of gross bookings, it grew faster and delivered +37% EBITDA margins vs. -7% for Airbnb.  Anyways, I guess the point is I tend to emphasize strategy when sometimes what really matters is that a company knows, like really knows deep in its marrow, what it’s all about and does uniquely well, top to bottom, things that are consistent with that identity. 

Besides “culture”, something else folks talk about is incorporating base rates into the investment process.  This sounds like good hygiene, but I find it hard to apply and even easy to misapply in practice.  I once listened to a podcast interview, this was maybe 5 years ago, where the guest chided a sell-side analyst for modeling Amazon’s annual revenue growth at 15% for the 10 year period from 2015 to 2025, retorting (and I’m paraphrasing somewhat): “If you look at the top 1,000 US companies since 1950 that started with $100bn in revenue, not a single one grew 15%+ per year over the subsequent 10 years.”

I’m reminded of that classic Monte Hall game [18], where a prize lies in one of 3 boxes.  You pick Box A.  The host, who knows which box contains the prize and is tasked with opening a prize-less one, opens Box C.  Do you switch from Box A to Box B?  Yea, sure, because in picking Box C, the host conveys information that suggests it is more likely that the prize is in Box B.  That’s just Bayesian updating.  But now imagine the same setup except this time the host randomly opens Box C.  Here there is no advantage to switching. In both scenarios, the observation is exactly the same: the host opens Box C; there is no prize inside.  But whether you, the contestant, are better off switching hinges on whether the host knew which box held the prize and opened an empty one. To paraphrase Judea Pearl, the process by which an observation is produced is as important as the observation itself.  

That “no $100bn companies since 1950 have grown revenue by 15% over a decade” may be an empirical fact, but it doesn’t take into account the process by which Amazon (long) got to where it is.  The speed and intensity with which online businesses scale is unlike anything we’ve seen in the Age of Oil, Automobile, and Mass Production (h/t Carlota Perez) and it seems misguided to anchor to pre-internet statistical artifacts. It’s proper to start with the “outside” view and adjust according to local information about a company’s competitive positioning, addressable market, unit economics, etc.  Too many investors get swept up in company-specific narratives and ignore broader context, that’s true. But I’ve also found that those who tsk-tsk with “no company has ever…” finger-wagging often frame against the wrong context and tend to downplay updating or don’t possess the company-specific knowledge to understand how significant that updating should be.  

If you’re walking through the woods and happen across a lizard reciting the alphabet and your friend asks whether it can vocalize words, you don’t reply “the base rates don’t look good; no reptile in existence has ever uttered words”. No, first you wonder about the mushrooms you picked earlier, but then you say “holy shit, this lizard knows its ABC’s!” Not a great analogy, but you get my drift. [🦎 -Lib] That Amazon, like no other private enterprise, got to $100bn of revenue in 20 short years and was still growing close to 30%/year off that huge base is an indication that there may be something special going on here, that perhaps the idiosyncratic merits of this situation demand major updating of base rate priors.  The same could also have been said of Google, also a member of the ~$100bn club, growing 20%+. Rather than cling too firmly to historical base rates, it seems more useful to ask what’s different about Amazon and Google, and to then consider the consequences of that answer. Statistics aren’t explanations.  Data doesn’t speak for itself.  Without a qualitative understanding of how a company creates and captures value, you don’t know why the numbers are what they are or what might cause them to break down or inflect. 

Q: I know it’s hard to judge one’s own work, but I’m curious if — looking back on Scuttleblurb since the very beginning — you could share what you think were some of the high-points and low-points when it comes to your analysis.  Any standouts where you think, “this really aged well, I got it right there” or “oops, I think I screwed up there for reason XYZ”..?

Like 2 or 3 years ago I wrote a few posts about how private permissioned blockchains might have some interesting business use cases… for instance, in simplifying the process of transferring land titles, counting proxy votes, and recording share ownership, tasks that are today are processed through byzantine methods subject to uncertainty, delays, and costly errors.  I saw blockchain as being more about efficiency than revolution, a way to handle pedestrian record keeping tasks more transparently, at lower cost and greater accuracy.  I acknowledged that there were major institutional barriers to adoption, but nevertheless thought we would be talking more about corporate blockchain today.  

But enthusiasm around this stuff has waned.  Today crypto ideas are more philosophical, more self-referential, less obviously and immediately useful. Remember when, to sound smart, people used to say “I’m skeptical of crypto but blockchain is interesting”?  They don’t say that anymore.  The party around crypto assets has drowned out staid corporate conversations around blockchain as a record keeping technology.  The talk these days is more around leveraging crypto incentives to organize people for…blah…whatever, yacht parties, climate change.  I pine for the days of Long Island Iced Tea Blockchain.  It’s not clear to me if it is decentralization or the hype around decentralization that is doing the heavy lifting here or if it even matters.  I offer no opinion on how much of this is good or bad, and have less than zero desire to defend any side of this holy war.  I only mean to say that things have played out much differently than I thought they would…but of coursethey did.

I was much too enthusiastic about Twitter (long) and overestimated the pace and impact of some of their product initiatives.  At first, it was almost endearing to see Twitter stand and fall (“c’mon Twitter buddy, you can do it!”) while Facebook won its nth Gold medal.  But after so many years of missteps, now we’re all worried about degenerative bone disease.  They’ll likely miss DAU guidance.  Expenses are off kilter.  Creator products were slow to launch and remain janky. Investor sentiment is terrible. Twitter’s enterprise value is about where it was in 2018/2019.

But – and here’s the part where I get booed offstage – the company is in a much better place today than it was back then.  They are experimenting with new products and acting with way more urgency than they have in prior years.  They’ve made it easier to onboard, proposing to users a growing selection of Topics rather than requiring them to build interest graphs by piecemeal following individual accounts.  Recent and pending product launches – Spaces, Private Spaces, Revue, Super Follows, tipping, etc. – have the potential to better engage and retain users.  

It’s hard to exaggerate how bad things were on the ad side. Twitter was an interest-based graph that didn’t track your interests. It would show ads based on who you followed and the ads you engaged with in the past. Hobbled by a dilapidated tech stack, Twitter would take months to roll out new ad units. But having just devoted the last 2-3 years splitting its ad server functions into separate sandboxes, the company is now developing and launching new ad formats at an accelerated pace. 

Twitter won’t ever rival the “always-on” direct response dominance of Facebook – they have relatively limited data and the text-centric nature of its platform may not lend itself as well to certain visual categories.  And compared to Facebook, Twitter doesn’t have near the expertise to deftly maneuver around ATT constraints. But it can certainly be a much stronger complement than it is today. The idea is that with user-side initiatives like Topics and Communities [19] producing sharper signals, Twitter will bring a more targeted ad product to the episodic brand advertising – creating buzz around products launches, drafting off cultural moments – for which it is uniquely well-suited, as well as crystalize durable interest clusters for the long tail of smaller advertisers to DR-advertise against.  

In short, Twitter is tying users to interests, which generates more targeted data for advertisers, who now also have access to a more user-friendly back-end from which to launch better converting ad formats. This is one of the most socially consequential information networks on the planet and the business is improving off a very low performance base. But man, enough already, right?  This year, Twitter needs to demonstrate that its simultaneous user and ad-side efforts are bearing fruit.  C’mon Twitter buddy, you can do it!

In my Zillow post, I took for granted the basic operational and blocking/tackling aspects of iBuying.  When looking at the world through a strategy prism, you can sometimes lose sight of obvious ground level realities.  I thought Zillow’s brand and traffic gave it an advantage in acquiring and turning over inventory, and that it could monetize rejected iOffers as highly qualified seller leads.  But obviously, none of that matters if you’re recklessly buying market share at any cost and betting on home price appreciation to bail you out!

It’s not clear to me that iBuying is an inherently broken model.  Opendoor seems to be doing fine, reporting strong unit margins even as they continue to expand the buy box. Zillow discarded underwriting discipline in a rush to grow. It may even be that Zillow’s existing assets and revenue streams – brand, mortgages, escrow, title, agent network – were in fact liabilities in so far as iBuying conflicted with agent lead gen or the company thought it could be a bit sloppy on iBuying because they could make up for it in other ways.  Opendoor, on the other hand, had to be much more assiduous about forecasting home prices, monitoring repair costs, and otherwise managing risk because there was nothing else to fall back on. Getting the basics wrong would have had world-ending consequences for them.

But if iBuying is a viable model – “if”, because this model hasn’t been tested by a bear market and it’s unclear how much extra rake can be pushed through or how many ancillary services can be cross-sold to offset negative HPA – well, that puts Zillow in a tough spot since one of the reasons they got into iBuying in the first place was because they saw it as an existential threat to their core lead gen business. For that reason, and given Rich Barton’s propensity for shaking things up, I suspect there’s probably another BHAG in the hopper, maybe on the institutional side of things. Zillow has this amazing top-of-funnel asset that you’d think they’d be able to monetize in a big way, though I guess people have been saying that about TripAdvisor (and Twitter!) forever too.

Anyway, I could go on and on.  Every one of my posts has these kinds of blind spots and shortcomings.  But on the whole, I’m happy with my work.

Q: Normally I’d ask you about how Scuttleburb has been doing in the past year as a business, but you’ve published a business update at the end of December, so I’m just going to link it here:

First, while I detect a melancholy tone, I gotta say that I find what you’ve built with only your words extremely impressive, with revenue going up 15x since 2017 (and in this business, revenue and profits are fairly close if you’re a one-person-orchestra).

It’s interesting how the psychology of momentum works, and how our brains tend to extrapolate whatever has been happening recently forward.  If your subscriber graph had been going up in a straight line from 2017 to 2021, it would probably feel really good. But because it’s been plateauing lately, it doesn’t feel nearly as good (even if the next phase eventually turns out to be more growth — time will tell).  I think it’s important to zoom out. You’re a guy sitting at home in pyjamas, typing stuff into the computer, and you’ve materialized through sheer persistence and intelligence a community of customers that would fill a decent-sized concert hall. Kudos!

I guess this isn’t really a question, but I am curious what you think about the ups & downs of being a solo creator, and how the psychology of it plays out.

Thanks for that.  I didn’t mean for the letter to come across as melancholy or pessimistic.  When I say “subscriber trends look weak” and that I’m “fading somewhat amid the scrum of new talent”, well, those are just the plain realities.  Acknowledging the realities doesn’t imply that I am sad or frustrated by them or hope for something better.  If my subscriber count stayed flat from here on out, that would be a fantastic outcome.  I just don’t want to shrink to unsustainable levels.  In 2020, my annual churn was 14%; in 2021, it jumped to 26%.  I think I’m still in the safe zone, but the trend isn’t great and I can’t be having like more than half my subscribers leave every year.  At some point I’ll have cycled through the addressable fintwit TAM. But beyond the income threshold required to sustain my modest lifestyle, send the girls to college, and save for retirement, I don’t really care about growth. I care a great deal about doing quality work though. I think it was Ira Glass who said that at some point you get good enough at your craft to know what great looks like and it can be disappointing not to live up to that standard. I feel that sometimes.

Q: Were any of your posts from the past year particularly difficult to research, or that you learned a lot from..? Maybe things that unexpectedly went pear-shaped, like Everbridge, and how you analyzed and scuttlebutted the situation to figure out the odds on what was going on?

Hm, I don’t really have pivotal moments where everything locks into place. For me, synthesis is a gradual process. TV shows and movies emphasize silver bullet events – Bobby Axelrod lays down a big hero bet after finagling a key piece of information. 

Reality is far less exciting.  What really happens is you build muscle memory about a company and its ecosystem over years and calibrate conviction along the way. That’s why I would caution against buying after a first deep dive. Research should be exploratory, not confirmatory.  The idea is you don’t know if the stock you’re researching is as good as you think it is at the start, but it’s very easy to convince yourself that it is just because you’ve devoted so many of your waking hours to it this month. There is a Dunning-Kruger effect at play where because you don’t know how little you know, you deceive yourself into thinking you understand more than you do….until the stock sells off by 30%. Then your hands turn to paper.

Q: Anything else you’d like to share? What did I forget to ask about?

No, except that nothing I’ve said in this interview is investment advice and I can buy or sell any of the securities mentioned at any time.  Thanks for the thoughtful questions!

Q but not a Q: Thanks man!

[INTC] Intel Corp.

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