Customers are the lifeblood a business and Salesforce touches just about every nook of software that has anything to do with finding, acquiring, and supporting them.  The grandaddy of SaaS, Salesforce pioneered a cloud-hosted subscription model that altered not only when software vendors realize revenue but how they create value. With one-and-done license sales replaced […]

(all $ is USD unless noted otherwise; CAD figures are converted to USD at $1 USD: $1.28 CAD) The waste management business isn’t hard to understand conceptually, though to get a felt sense of the territory probably requires a bunch ground level inside knowledge because the competitive dynamics differ so much by market. Still, the […]

When a car gets into accident, an insurer must decide whether to repair it or cut a check to the claimant for the pre-accident value and recoup whatever it can by sending the car to a salvage auction. In the US, that salvage auction is most likely operated by Copart or IAA, who each handle […]

A few weeks ago, I did an interview with Mirakle, a Korean language business newsletter (link ^[3])

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 ^[4]) 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 ^[5], 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 ^[6], TSOH ^[7], and Yet Another Value Blog ^[8] – 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 ^[9] and Liberty’s Highlights ^[10], 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 ^[11] 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 ^[12] 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.

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