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.

I recently did an interview with my friend @LibertyRPF ^[11], 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 ^[12].

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Q: Hey David! It’s been a little over a year since we last did this [see 𝕊𝕡𝕖𝕔𝕚𝕒𝕝 𝔼𝕕𝕚𝕥𝕚𝕠𝕟 #𝟙 for our first interview ^[13] -Lib], I’m sure a lot has happened in the interim, but first, how are you? How are Zoe and Riley ^[14], 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 ^[15] (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 ^[16], 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 ^[17] 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:

• Scuttleblurb business update (2021) ^[18]

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!

Dear friends and subscribers:

While I consider this my most productive year from a research standpoint, the business side of things was mixed.  Scuttleblurb is on track to surpass $300,000 in subscription sales this year, more than I could have imagined when I launched nearly 5 years ago.  But growth has slowed and subscriber trends look weak. 

It used to be that publishing twice a month and pushing a link out to Twitter was all I needed to grow.  But now it seems more is required, especially given the explosion of competing newsletters over the last year or so.  Slim Charles put it best: “game’s the same, just got more fierce”. There are only so many investment newsletters that one has time to read. As the selection continues to expand, so too inevitably will the number of newsletters that do a better job than I reliably addressing certain readers’ interests, particularly given my broad and thematically inconsistent coverage. Also, newsletters today are clued in to the reality that readers are drawn not only to content but to vibes and community. They reinforce their brands through regular Twitter threads, Spaces, AMAs, podcast appearances, collaborations, etc., activities that I have neglected entirely this year in my hermit-like focus on research and writing (and, frankly, due to personal anxieties around such stuff).

So I was early to this paid newsletter game and shined for a while but am fading somewhat amid the scrum of new talent.  Admitting this feels a bit weird…as if in doing so I am violating tacit norms of the “creator economy”, where one gushes about the infinite reach of the internet and sticks to prescribed ways of calling attention to personal victories in blusterous tweets. Projecting success is good business because social proof is important for subscriber growth and people would much rather support winning projects than prop up stagnant ones.

But I never set out to run a business and never saw growth as an end in itself. I was just striving for “enough”. Scuttleblurb began as a personal research journal that I paywalled to cover rent and groceries as I tried to scale my investment fund, which launched in 2016 with round-down-to-0 AUM.  Scale happened, thanks to the backing of a large institutional allocator that discovered me through the blog.  Along the way, I forged what I expect will be lasting, meaningful friendships.  Because of your feedback, I cringe less at things I wrote 3 months ago than things I wrote 3 years ago.  Scuttleblurb makes me a better analyst and investor while providing for my growing family (the twins are doing great!).  So long as that remains true, I’m good.

I want to give some shoutouts to fellow newsletter writers whose work I appreciate. There are too many great ones to name, so I’ll limit myself to the paid invested-related ones I subscribe to, most of which exhibit an authentic style that sets them apart from the usual bowdlerized sell-side fare, all of which demonstrate that we need not rely on pedigree as a proxy for insight and critical thinking when those qualities are plainly observable in someone’s writing. Abdullah Al-Rezwan ^[4] at MBI Deep Dives ^[19] and Alex Morris ^[5] at The Science of Hitting ^[20] are generalists who analyze investment opportunities with nuance and intellectual honesty.  Andrew Rangeley ^[6] at Yet Another Value Blog  ^[21]is one of the sharpest, most thorough analysts I know, particularly in media and special sits.  Nathan Baschez ^[22] and Dan Shipper ^[23] started this online writer collective last year, Every ^[24], that bundles newsletters about strategy and leadership.  I subscribe to 2 of the strategy ones, Divinations ^[25] and Napkin Math ^[26], both thought-provoking and enjoyable reads.  Mule ^[27] for semiconductors (Fabricated Knowledge ^[28]); muji  ^[29]for hhhypergrowth tech ^[30]; Marc Rubinstein ^[31] for financial services (Net Interest ^[32]); and Frederik Gieschen ^[33] for investor profiles (Neckar’s Insecurity Analysis ^[34]).  Byrne Hobart ^[35] at The Diff  ^[36]is reliably insightful about finance and tech.  LibertyRPF ^[37]‘s eclectic newsletter, Liberty’s Highlights ^[8], is one of my morning staples, along with Ben Thompson ^[38]‘s Stratechery ^[39].    

I am so grateful for your support in what has got to be the wildest time of my investing career. Absurdity cavorts with profundity. Dog coins and various web3-instantiated woo woo are bound up in intriguing frameworks for creating, distributing, and tracking value. Meme stocks were bid to the stratosphere by retail investors compelled by not only hopes and dreams but also nihilism and lolz. But beyond the speculative fervor and techno-utopian themes that have seized the public’s attention, more prosaic considerations like strategy, culture, and capital allocation in established terrains like market infrastructure, coatings, insurance, cable, enterprise software, payment processing, and real estate remain as relevant as ever.

I can’t wait to see what happens next. Have a wonderful holiday season and catch you in the new year,   

Dave

I recently did an interview with my friend @LibertyRPF ^[11]. It will serve as a substitute for my 2020 year-end review since it contains everything I wanted to say (and more).

With permission from @LibertyRPF, I have reproduced the interview below. You can access the original here ^[40].

Interview with David Kim a.k.a. Scuttleblurb

𝕊𝕡𝕖𝕔𝕚𝕒𝕝 𝔼𝕕𝕚𝕥𝕚𝕠𝕟 #𝟙

Scuttleblurb ^[41] is one of my favorite sources of investing/business information, and its creator, David Kim ^[42], is one of my favorite people I’ve met online (we haven’t met in person yet, but I hope to fix that someday… hurry up, Pfizer!).

As a writer, he’s who I want to be when I grow up.

He dives deep into companies and industries, but not in the typical way of many financial writers: He’s not trying to pitch you, he’s not starting with a conclusion in mind that he’s trying to justify by cherry picking info. He immerses himself in a business for a while and then reports what he finds about industry dynamics, management quality, unit economics, competitive advantages, how historical developments have made things the way they are today, etc.

He’s more ‘Magellan writing about his voyages’ than ‘salesman trying to get you to buy that shiny Dyson’…

His pieces often conclude on some shade of gray, without a clear call to action or price target, but I like that. It’s how the real m’f’kin’ world works.

Enough from me, let’s go to David (I’m in bold):

---

Hi David, thanks for doing this, I really appreciate it! I know you must have your hands full between the piles of transcripts and 10Ks and the new twins. ^[43]

Thanks back. I very much enjoy your eclectic newsletter. It’s one of the first things I read in the morning.  I also appreciate that we’re doing this interview in writing, which I much prefer to speaking.

I don’t want to assume that everybody reading this already knows you and reads your stuff, so could you start by telling the reader who you are, what’s your background and how you got to where you are now, and what’s your day job these days?

These days I write the scuttleblurb blog ^[41] and manage a small fund.  Prior to doing either, I was a research analyst at a L/S equity hedge fund.  

The reason I started scuttleblurb is that I had just launched a fund with no prospective investors and my wife Maria and I needed a way to pay the bills.  I write research notes as part of my investment process, and I put those notes online hoping people would pay to read them.  Very few did.  

So it was mid-2017 and we were stuck.  scuttleblurb was going nowhere.  My big idea for getting people to discover and then pay for my work was sending personalized emails and handwritten letters (really) to fund managers and analysts, with coupon codes and free trials and such. I spent a few thousand bucks advertising on marketfolly, which worked all right, but otherwise scuttleblurb got no traction. Maria and I just had our first baby and we were scraping by on her teaching salary plus income from a condo I was renting out as we weighed my non-existent career options.  Then you somehow discovered my blog [Finding stuff is what I do! -Lib] and tweeted a link to one of my posts.  Then so did @Bluegrasscap ^[44], @Intrinsicinv ^[45], and a few others. 

I didn’t use Twitter at the time.  I had a zombie account with like 40 followers that I barely touched.  So you can imagine my surprise when the blog started to gain followers on this geeky community I had never heard of called FinTwit.  I kept writing, people kept tweeting my posts, and here we are.  I estimate that more than 70% of my subscribers have come from Twitter word-of-mouth.  I’m so grateful for FinTwit.  This community lifted me on its shoulders when things looked utterly hopeless. I honestly get a little choked up thinking about it. 

What fascinates me most is your research process. You do such a good job, I’m curious what techniques I may be able to learn from you, though I suspect that there are no real tricks, just lots and lots of reading, asking questions and then tracking down answers, figuring out what is most important to focus on, etc… Can you describe what the research process is like for one of your long posts or series of posts?

Like every analyst, I read SEC filings and transcripts, Google, watch relevant YouTube videos, talk to management (usually IR), and do the same for competitors and anyone else of note in the ecosystem. 

I write up every company that sparks my interest, whether I find the company an attractive investment opportunity at the time or not.  I recall you mentioning that you research companies that speak to you regardless of how pricey they are and then keep those companies on a watchlist so that you’re ready to pounce when valuation approaches something reasonable.  I’m the same way.  

Speaking from personal experience, most investment funds don’t let their analysts do deep dives on interesting companies trading at uninteresting valuations.  Try telling your PM that you’re going to spend a month studying such-and-such industry because you find it interesting but there’s probably nothing to buy at the moment and there may never be.  See how that conversation goes.  It’s nice to be able to set your own research agenda.

But in the time it takes for a sane valuation to arrive you may find yourself forgetting what it is you found so interesting about the stock in the first place, so it’s useful to have a write-up to refer back to. For the sake of efficiency, many analysts jot down bullet points and preserve a folder of notes, but there’s something about long-form prose.  I can’t explain the underlying mechanics of how it happens, but oftentimes the very act of writing sparks an idea and exploring that idea in more detail leads me to an important point that I don’t think I would’ve grasped otherwise.  This was true with Align Technology [Link for SB members ^[46]. -Lib], which on the surface looked like a static collection of expiring IP selling a commodity product whose economics were just waiting to be siphoned away by low-end clear aligner competition.  Writing led me down the track of thinking about Align as a system of reinforcing pieces – data from case starts enabling more complex malocclusion cases; vertically integrated software and hardware crowding out competing solutions and saving orthodontists chair time; a strong brand synonymous with clear aligner treatment – that in concert fueled more case starts, data, manufacturing process improvements, orthodontist adoption, etc. (there’s an argument to be made that Smile Direct Club is re-setting the basis of competition and presents the first major competitive threat to Align in over a decade, which I’ll likely touch on in a future post).

I don’t mean to sound prescriptive.  I think many people find writing to be mentally taxing and maybe the time spent writing would be more efficiently put to use elsewhere.  I just happen to enjoy writing, it’s like therapy for me, but I don’t want to promote an approach that may not make sense for most others. 

I’m the same. Writing is very hard even if I enjoy it, but it’s also very fruitful because it’s hard. Writing is hard because thinking is hard, and on the page the gaps in logic and missing pieces of the puzzle can’t be hand-waved away as easily, while with what I’d do otherwise — the path of least resistance — my brain would probably skip over a lot more holes and leave some interesting doors unopened.

As far as what I focus on, I spend a lot of time trying to understand a company’s advantages or the advantages it might build up to.  Earning a decent return on the growthy compounders I often write about at today’s valuations means you have to be right about the secular trend, the state of competition, and the ability to execute/adapt.  Those are basically the 3 core elements.  The secular trend is often the safe bet because it’s readily apparent to all that more compute is moving off-prem, that connected TV is taking share, that telehealth adoption is infiltrating healthcare, that semiconductor consumption is accelerating, and so forth, whereas the state of competition over the next 5-10 years can seem much more distant and abstract.  The boundaries of competition can be fluid, especially in tech, and justifying current valuations often means assuming the company successfully trespasses into adjacent, already occupied territory.  Maybe for companies with low enough market caps, you can lean on the “there’s plenty of TAM to go around and I just need to be directionally right” defense, but compounding at 20% over the next 7 years on, say, Snowflake, a $75bn company trading at 150x revenue (or wherever it’s at now), means being right on the specific state of the data management ecosystem and Snowflake’s ability to capture value within it.   

The other thing I try to do is provide context, nuance, and caveats around different explanations in order to avoid overfitting concepts and mental models.  LendingTree [Direct link for SB subs ^[47]. -Lib] might look like a classic marketplace that scales through cross-side network effects between lenders and borrowers, but I think it’s more aptly described as a sophisticated marketing coop that arbitrages online ad inventory.  Live Nation [Direct links for SB subs, #1 ^[48] and #2 ^[49]. -Lib] is often described as a flywheel, but it looks more like a bundle that loss leads through a promotions biz.  Sometimes network effects are relevant but they’re not really the moat they seem to be.  Equity exchanges enjoy network effects in that buyers attract sellers and vice-versa, and the growing concentration of liquidity narrows bid/ask spreads, in turn drawing more buyers and sellers.  But in the mid-2000s, as legacy equity exchanges lost regulatory protection, non-exchange trading platforms stole enormous share through superior technology and the backing of powerful brokers.  Yelp has network effects in theory, but Google guards the front door and absorbs most of the value in local search.  Symantec, Cisco, Palo Alto Networks [Direct link for SB subs ^[50]. -Lib], and other cybersecurity vendors monitor trillions of telemetry points, but the resulting data network effects seem to be quickly arbitraged away, and that’s something to consider when evaluating the explanatory weight of network effects for the post-2010 breed of cloud native, zero-trust vendors. 

By overapplying cherished concepts, you risk minimizing the importance of other factors or confirmation biasing your starting theory.  An analyst begins to treat the diligence process the same way an attorney might, selectively gathering evidence to defend a starting hypothesis rather than considering the case from multiple angles to surface the best explanation.  Maybe mismatches between changes in balance sheet items and the cash flow statement confirms your starting thesis that Company X is a fraud, and you so badly want this to be true that you don’t give due consideration to another plausible explanation….that under GAAP balance sheet items are translated from local currency to USD at period-end exchange rates while the cash flow statement is translated using monthly averages, which can create large discrepancies between the two during periods of volatile FX movements , discrepancies that are accounted for in shareholder’s equity.

And sometimes you dismiss the existence of moats in places where you don’t expect to find them.  In Surfaces and Essences, Douglas Hofstadter talks about how a given item can belong in many unrelated categories depending on context.  The image of a basketball rolling, for instance, is more readily accessible than that of a basketball floating because most of our observations and experiences related to basketballs have been on the ground.  We think of airlines as intrinsically terrible businesses, loaded with high fixed costs, selling a commodity product, prone to price wars and periodic bouts of bankruptcy.  But the same set of conditions may create advantages for disciplined airlines like Ryanair [Direct link for SB subs ^[51]. -Lib] and Wizz Air [Direct link ^[52]. -Lib], who at the expense of bloated competitors, leverage superior unit costs to maintain low ticket prices, generating more passenger volumes on a fixed cost base, fueling better landing fees with airports and volume discounts on aircraft, thereby reinforcing the cost advantage.  This starts to look like a flywheel, a designation that we typically reserve for consumer internet and tech companies. 

The set of concepts and mental models that you have at your disposal will evolve over time and with experience you get better at not only drawing on the right ones but doing so in a way that is unfettered by preconceptions, proportionate to the case at hand, and peppered with the appropriate caveats.   

I can’t tell you how many bearish SaaS pitches I read 5-10 years ago that were predicated on accounting-based red flags and quarterly billings weakness, factors that were just absolutely swamped by massive secular tailwinds (this has pissed off some really smart low-multiple investors because the only thing worse than being wrong is seeing someone who you perceive as less sophisticated and experienced than you being right at your expense). The Bezos flywheel napkin sketch helped me understand the reflexive properties of scale economies, but then I found myself applying the sketch to areas where it probably didn’t belong, and in recent years I’ve chilled out a bit and drawn on the concept in a more nuanced way. 

Proportionality is important to sound analysis. You don’t want to start seeing flywheels and fraud everywhere you look.  You don’t want to diminish the tsunami of ad spend moving to connected TV because (gasp) Trade Desk’s [Direct link ^[53]. -Lib] receivables outpaced revenue this one quarter; nor do you want your enthusiasm over connected TV blind you to the possibility that surplus in that domain may eventually concentrate inside walled gardens.  You don’t want your commitment to low multiples steer you away from companies with compelling unit economics that are losing money as they invest in growth; nor do you want to stretch one assumption after the next to validate a purchase of a company you love (assuming, of course, that you’re optimizing for risk and reward when investing, which you may not be and that’s totally fine).  By the way, congrats your investment in The Trade Desk.  I sold 40% ago, oops.  Why didn’t you tell me the stock would go from $500 to $800 in like a month….thought we were friends, geez. [Well, I sold ALGN a while ago and didn’t get the rebound on that one, so you win some and lost some ¯\_(ツ)_/¯ -Lib]

If it’s not an industry you already know, how do you first attack it and is it ever overwhelming? Have you ever given up entirely on something you wanted to write about because it’s just too complex?

It’s always overwhelming.  My imposter syndrome is usually up to here because I cover such a wide range of companies and most of the industries I want to write about reside well outside my existing circle of competence at the time I want to write about them.  

To be clear, I don’t mind being the dumbest guy in a room of specialists.  I have no interest in being the sapient thought leader [I had to look up ‘sapient ^[54]’, good vocabulary! -Lib] with big sweeping ideas of what software or media looks like in 10 years.  I see myself more as the plucky interloper at a house party, probing one room, then the next, trying to make sense of what’s going on in each.  But the feeling that I have no business charging people to read something I’ve written given my lack of background knowledge and expertise doesn’t ever go away.  I just do my best to push through it and trust that approaching the work with intellectual honesty and an open mind will compensate for my considerable knowledge deficits and yield something that people want to read.

What’s your Big Picture vision for Scuttleblurb? What are you trying to give the reader, and who is your ideal reader? What kind of mindset and expectations should someone have going in?

The ideal reader is someone who derives intrinsic enjoyment from analyzing businesses, regardless of sector, even without the carrot of an actionable investment idea. If you’re looking for stock tips, please don’t subscribe [Subscribe anyway ^[55], and then get over that urge. You’ll be better off for it. -Lib].  You will feel ripped off and I will feel bad.  I try to be very clear about this up front, in the  “About Me” page and in the “Subscription” page, though I think some folks may still be frustrated or confused by the absence of price targets and buy/sell recommendations.  My posts will often include a back-of-the-envelope valuation section, like “under such-and-such assumptions, here are the returns you can expect”, but the point of that is to offer a sense of what you need to believe to earn 10%, 15%, or whatever.  You can make up whatever numbers you want.  What I’m hoping to do is provide as honest a qualitative context as possible to inform your assumptions.

Some time back, a subscriber commented that I should focus on names in which I have a high degree of conviction.  I think following this recommendation would yield a barren website because there are so few stocks that meet that criteria for me.  Who knows, it might even tempt me to dishonestly convey conviction where it doesn’t exist for the sake of placating readers.  But more importantly, it would be out of character.  I don’t really have the emotional makeup to be a “high conviction, bet-the-farm” investor and I don’t really fall in love with the companies I analyze (which can be both an asset and a liability).  I could act otherwise, but over time you’d see through the facade.

I think that we tend to remember the results we see and forget the mistakes we avoid.  Convincing your PM not to buy a stock that stock goes to zero will not earn you the same glory (or bonus) as convincing your PM to buy a stock that doubles.  The PM doesn’t have the same felt sense of profit and loss on the stock he avoids that goes to 0 as he does on the stock he owns that doubles.  Similarly, a scuttleblurb writeup that prompts a position size reduction will not get the same credit as a newsletter “high conviction list” that prompts a new purchase, even if the losses prevented in the former and the gains realized in the latter are the same.  The fact of the matter is that most people want black-and-white buy/sell recommendations.  They want conviction.  I offer neither.  This can be frustrating.    

There’s value to what I offer but it’s hard to quantify.  I guess I would say don’t purchase a scuttleblurb subscription hoping to make money on actionable stock ideas.  Do so because you want to get a little smarter about certain businesses than you are today and trust that over the course of your career as an investor, being a sharper business analyst will pay dividends.

Do you have a long-term vision for the site that is different from what it is today?

Nope.  

Almost a year ago, you wrote about how Scuttleblurb was doing as a business ^[56]. I don’t know if you’re planning to do the same thing this year, and I don’t want to steal your thunder, but I’m curious to know how things have been going? Has the pandemic hurt or helped your business? Are you finding that the more you grow, the more growth rate accelerates because you’re getting more name recognition in the space and you have more subs spreading the word to potential subs?

I think I’m just going to link to this interview for my year-end review.  It has everything I want to say.  I don’t know if the pandemic has hurt or helped the blog.  Things have been going pretty well.  Scuttleblurb passed 1,000 paying subs this year and it looks like my gross bookings in 2020 will be about double what they were a year ago.  Bookings have gone from $19k in 2017 to $49k in 2018 to $114k in 2019 to what’s looking like maybe $230k-$235k this year (vs. $223k LTM through Nov 8), so while the growth rate has decelerated, it’s nonetheless been so much stronger than my expectations. [Very happy for you, you deserve it! -Lib]  

But while growth has been strong, my annual churn rate has spiked from ~11% in 2019 to what’s looking like ~high-teens this year.  Part of this I think is just that as my audience has grows, incremental subscribers are not going to be as passionate about my work as the early adopters.  

Another contributing factor is competition.  There has been an explosion of Substack newsletters launched this year, many of which focus on tech and media analysis/strategy.  It’s like all the cool kids are giving hot takes on Joe Rogan going to Spotify and Nvidia buying ARM or providing commentary on Stripe, Ant Financial, Snowflake, Shopify….and then here’s me off in the corner writing about a 100+ year-old company that sells bacteria to dairy processors [Direct link to Chr. Hansen & Novozymes post ^[57]. -Lib].  Very off-trend.  I write about SaaS, consumer internet, and other trendy stocks, sure, but not reliably so.

But the market for tech/media business analysis, while hot, is also crowded. When Stripe files to go public, your inbox will no doubt be flooded with Substack commentary.  You do not need another newsletter breaking down that S-1.  This is not an area where I can differentiate, nor do I care to.  And there are so many talented writers with fast minds and fingers who can do the daily run much better than I ever will.  I am a slow, plodding thinker.  It really takes me a while to come up with something that I think is worth publishing.  Sometimes I will sit on a write-up for over a year because it’s just not worth reading.  I suck at extemporaneous thought and can’t think of clever things to say on the fly.  I wish it weren’t like this. 

Anyways, everyone’s now hip to the notion that customer obsession is the way to value creation, so what a real business publication would do upon seeing churn spike as mine has is find a way to write about what interests their readers most.  But the truth, and this will hardly endear me to your audience, is that I spend no time thinking about what my subscribers want to read.  I have always treated scuttleblurb as a personal research journal rather than a business, a way to pursue my own personal interests and get paid in the process.  I’m quite sure that forcing myself to write about popular topics merely to attract subscribers would be the beginning of scuttleblurb’s end.  And so my analysis and writing has got to be strong enough to compensate for incomplete overlap between my interests and those of my readers.  

Sometimes the overlap is just too minimal.  No amount of quality analysis on the consumer credit bureaus is going to satisfy subscribers who just want to read about enterprise SaaS.  And someone looking for stock tips is not going to be satisfied with case studies.  If subscribers churn off for reasons like those, so be it.  I’m cool with that.  If they’re cancelling because they’re looking for well-written, quality analysis and aren’t finding it on scuttleblurb, that’s a problem.  I hope most of my churn is coming from the former, but I can’t really be sure.  

Thanks so much for doing this, there’s so much gold and wisdom in there, it’s a masterclass masquerading as an interview. Take care my friend!

12/31/2020 update: scuttleblurb stats

Like Tom Hanks sustaining dialog with a Wilson volleyball, I sometimes let myself believe that my words mean more to my readers than is certainly the case.  For most of you, scuttleblurb is just one of many resources you consume to get smarter about companies.  But for me, a guy who reads and writes most of the day in the quiet island of his attic, you play an active, multi-faceted role. You pay to read my posts, which makes you a customer; you challenge my assumptions and send me your research, which makes you a collaborator; you tell your friends about this blog and tweet my posts, which makes you my salesforce.  And so, given what I see as your vital role in the growth and viability of this venture, I thought it only fair to let you in on what’s been taking place behind the scenes.

Here are my gross bookings over the last 3 years:

I’ve been adding around 25 to 30 new subscribers/month recently.  This year, my annual churn rate was just under 11% and my largest expense by far was credit card processing fees, which amounted to 3.5%-4.0% of my gross billings.  While scuttleblurb is not exactly crushing it, it’s building towards an income that seems good enough to support a modest lifestyle for a family of 4 in Portland, OR. 

Being fine with “good enough” was something that hit me in my early 30s, after I had spent a decade building a career that was most definitely not supposed to culminate in me blogging in sweat shorts from an attic.  Maybe I was preparing myself for fatherhood or maybe I was still rebelling against the bovine stupor of b-school recruiting, but at some point I stopped speculating abstractly about the limits of what I could achieve in my career and began thinking concretely about what I wanted my day-to-day to look like.  It occurred to me that up until then, I had been conflating what I really wanted (to do intellectually stimulating work on my own terms; spend time with friends and family; and live proximate to nature) with some vague and cartoonish notion of who I thought I was supposed to be (a money guy with title and status). 

scuttleblurb global HQ (Portland, OR; December 2019)

As this realization took hold, I considered where my abilities and obsession intersected with what other people might pay for, which narrowed the ways I could spend my time to 1/ investing and 2/ writing about companies. 

The second option, writing about companies, was intended to partially stem the hemorrhaging of personal savings as I pursued the first.  But the thing is, before investing OPM you must first convince other people to give you money.  And if you don’t come from money, that usually takes a lot of time plus a Goldilocks blend of commercial acumen, salesmanship, and track record paired with some lucky breaks. I was unwilling to take fast money, but with a family to support, I couldn’t just wait around for patient capital that might never come. 

Hence, scuttleblurb. 

Writing is central to my investment process.  I find it to be the most effective test of whether I really know what I think I know.  It also jogs my mind and opens new avenues of exploration in a way that listing bullet points or checking off diligence items do not.  So I figured if I was going to write for myself, I may as well see if others would pay to come along for the ride…which, in retrospect, was a rather arrogant thought given how many smart analysts publish their work for free.  Andrew Walker’s yetanothervalueblog ^[58] comes to mind (his recent 3-parter on media is excellent), as do thoughtful writeups from John Hempton ^[59], Kyler Hasson ^[60], Mine Safety Disclosures ^[61], Ensemble Capital ^[62], Chris Mayer ^[63], and Bill Brewster ^[64].  You can find plenty of decent reports on Value Investors Club ^[65] too.  Not to mention, several times a year, Greenhaven Road ^[66], Coho Capital, Upslope Capital ^[67], RGA Investment Advisors ^[68], and many other talented managers publish investor letters with insightful stock-specific opinions.      

And how much should I charge?  As I thought about comps, I found no reliable correlation between price and quality.  Ben Thompson charges $100/year for a consistently high-quality newsletter, delivered 4 times/week. But then there are at least a handful of independent research shops that charge thousands/year for low insight copy-and-paste jobs festooned with DCF snapshots, sensitivity tables and other adornments to show you they mean business.  I suppose they justify their lofty prices by offering actionable ideas that will yield many times what they charge.  I have no problem with stock pitches (I do my fair share of them), but good ideas tend not to abide by arbitrary publishing schedules.  And also, it’s not hard to see how getting paid to pitch might incent perverse outcomes…how one could be tempted, even subconsciously, to tweak a few paragraphs or ignore alternative perspectives so as to accentuate a clean, consistent narrative that stands a better shot, compared to a nuanced take, of attracting subscribers seeking unambiguously and immediately actionable stock tips.

The retail version of this – rags purporting to reveal “The Secret Stock Picks of Billionaire Investors” or inviting you to discover the “Top 10 Cannabis Stocks to Buy Right Now” – is far more toxic, as it lassos retail investors who may not possess the financial savvy to sniff out meretricious claims.  These publications are ubiquitous and so scammy that I think many investors have understandably tuned out all investing related newsletters, especially low-priced ones like mine. 

Scuttleblurb is currently priced at $210/year, where I expect it will remain for the foreseeable future.  Why $210?  Well, I figured if I charged thousands/year, subscribers might start to think of me as their on call personal analyst, which would spoil my quality of life and crowd out research time (of course, that’s assuming enough people would pay that much to read my blog, which I doubt).  At the other extreme, given the niche appeal of my writeups, I didn’t think I could build a readership large enough to earn a living at a price below $100.  $210 felt just low enough where if you enjoyed the blog, you wouldn’t feel weird casually telling your friends to subscribe and you wouldn’t think twice about renewing your own subscription.  Now, it would be one hell of a coincidence if $210, a number I more or less picked at random, were the revenue optimizing price.  I suppose I could tweak things in a way that captures more value, but frankly I just don’t care enough to bother.  I’m fine with how things are going at $210.

I wasn’t so whimsical during the early dark days of scuttleblurb.  The business was in a rather precarious state a few years ago.  For months, I published into a vacuum, my posts attracting no subscribers, eliciting no feedback, nothing.  I literally could not give away a subscription.  Desperate to get on somebody’s radar, I emailed free username/passwords to fund managers, authors, and “pundits”.  Nobody logged in.  The first flickers of life were sparked by several ad campaigns that I ran on Market Folly in late 2016/early 2017.  But it wasn’t until @LibertyRPF ^[37] and @BluegrassCap ^[44] tweeted a few of my posts that scuttleblurb found its audience and the blog began to take shape as viable business. 

Who is that audience and where do they come from?

Based on the subset of scuttleblurb subscribers who filled out my survey, most of you are professional investors.  Nearly 75% of you discovered the blog through word-of-mouth on Twitter and COFB.  Another 11% were referred by friends and colleagues. 

Scuttleblurb lives on subscriber recommendations and securing those recommendations requires a dedication to producing relevant, consistently high-quality work.  There are no hacks.   

Quality is tough to describe, but I think people who obsess over the same niche interest will generally agree on the extent to which it is present in a piece of writing or analysis pertaining to that interest.  Relevance is harder to tackle because each reader is drawn to a unique combination of factors.  Some are looking for compounders regardless of industry; some want compounders, but only capital light compounders or small cap compounders; others love payments (I have a certain dentist in mind! 😉) or just want to read about SaaS. 

It’s often said that the internet has allowed countless creators of niche content to find a paying audience.  But being niche in one area often means being broad somewhere else.  Ben Thompson, for instance, is niche in that he focuses on technology, but broad in that he analyzes technology’s implications on politics, society, culture, and business.  I am niche in that I limit my analysis to business models and competitive strategy, but broad in that I write about many different sectors, from software to aluminum cans.

One of the challenges with not being niche along both dimensions is that I will never consistently satisfy those who subscribe solely to read about a particular company or sector, which I was sure would foment lots of churn. But so far that hasn’t been the case.  Hot sectors like SaaS and media register elevated interest, sure, but in general I have been surprised by how consistent readership has been from one writeup to the next (my post on Protector Forsikring, an obscure small cap P&C insurer in Norway, was far more popular than I would have imagined). 

A more pressing concern with broad sector coverage is that there is no way I can be an expert on all or even most of the things I write about (some of you send emails asking me what’s up with such-and-such company that I wrote up in the past.  If I don’t respond, it’s usually because I have no clue).  When you subscribe to the work of Matthew Ball, Ben Thompson, and Bill Bishop, you are paying for expert opinions on media, big tech, and China.  Unfortunately, I cannot claim a similar level of competence about anything really.        

Another issue is that when folks assign your blog to the “investing” category, they often want a buy or sell recommendation plus the full pageantry of comp tables, DCF snapshots, etc. that they have been conditioned to expect (one prospective subscriber asked for a complete track record of how my stock picks from the blog performed).  But as you know, I try not to play that game. 

So then what are scuttleblurb subscribers paying for?  Well, I find that most business analyses fall short in that they either list stats and attributes (“this is a good company because it is capital light, has low customer concentration, boasts an LTV/CACC of 6, etc.”) or devote too much real estate to showcasing Excel outputs (the soothing and often time consuming exercise of wiring an Excel model can sometimes lull you into thinking you understand a business better than you do).  Very few analyze companies within the context of a broader ecosystem or offer more than a cursory discussion of competitive strategies and business models.  Many are jacked up with sensational, lopsided claims. 

It seems to me that investment research has assumed a more performative flair over time, as if the purpose of a write-up were to argue with great conviction and adamance for either the long or short side, as if conceding any point were tantamount to betraying your tribe, as if tribal devotion to an investment hypothesis weren’t utterly ridiculous. For some funding sensitive stocks like Burford Capital and maybe Tesla, each side may be trying to seize control of the narrative to reflexively provoke certain outcomes, but I think in most cases people just feel pot committed to their priors and get emotionally hijacked by opposing views.  You might try nudging yourself closer to reality by reading the opposing arguments side-by-side with an open mind, but doesn’t it seem odd to think that combining two distorted but contrasting views should somehow blend to an informed, nuanced perspective?  The problem is that both sides are so charged in their clamor for territory that neither leaves any neutral ground on which to apply independent judgment, and so rather than evaluating the merits of the company, you instead find yourself assessing the rhetorical strengths of two disagreeing raconteurs. 

I hope you find scuttleblurb to be a welcome reprieve from the melee, a place where you can find sober, clearly articulated posts about what a company does, how it competes, and how it creates and claims value in its ecosystem.  I don’t always get it right but, without the pressure to pitch or to maintain the appearance of expertise, I can fess up to mistakes and explore ideas with sincerity.  I try to stay humble about my state of knowledge and offer arguments as an informed amateur groping for good explanations.  I believe my readers have come to expect this approach from me as much as I demand it of myself. 

Someone once said you get the customers you deserve.  If that’s true, then I consider the quality of scuttleblurb’s subscriber base to be the finest compliment I could hope to receive.  Thanks for all your friendship and support this year.  I had the pleasure of meeting some of you in person this year and I hope to meet many more of you in 2020.

Until soon,

Dave