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Podcast Blurbs [Snap-On short, Amazon black hole, Illusory self, LP incentives]

Invest Like the Best, Ep. 53 (Meb Faber – Factors, Dividends, and Angel Investing)

Meb Faber:

“I saw a stat the other day that the average Robin Hood account checks his balance ten times a day…and so, all that does is create horrific behavior.”

“There’s a lot of [fintech companies] getting funded that have great revenue that are essentially predatory.  So a lot of these savings and investing apps that millennials are attracted to and I’ve mentioned these publicly, like Acorn and Stash and a lot of these that charge a dollar a month, which doesn’t sound like much until you realize that the average account is a hundred bucks.  So, they’re paying 12% in fees….we’re still in silly season on a lot of these fintech companies and valuations getting funded.”

“If you go buy Warren Buffett’s stocks through 13Fs every quarter back to 2000, he’s outperformed the market by 5%-6% per year…that beats 99% of all mutual funds and it’s even higher if you go back to the ’90s/’80s/’70s/’60s because he had a smaller asset base and he beat by 10% per year.  How many people would invest in that guy?  Everyone.  And you pay no fees, there’s low turnover every quarter, he crushes it.  Well, he’s underperformed 8 of the last 10 years.  A lot of that’s just because value has struggled in this period vs. destroying it from 2000-2008.  So…if you blinded people to who was running this and just showed this performance track record, that person would be out of business 6 years ago.  So forget 8 out of 10, 2 out of 3, 3 out of 4, gone.  You’re not in business anymore.

The biggest part of [Buffett’s] alpha is not his investment approach, which is pretty simple – value, quality, sticks to his strategy and doesn’t waiver.  So, here’s my idea…we’ll call it the “Forever Fund.”  There’s a 10 year lockup.  And there is a declining redemption fee structure, so you redeem in year 1, you’re going to pay 10% penalty, maybe 5%.  And it declines each year…so there’s a penalty for being an idiot.  However, that sales charge doesn’t go to the fund company, it goes to the investors in the fund.  So, maybe once a quarter or year, you get a “good behavior” bonus for not being an idiot and holding your money long term in this fund…you probably get sued out the wazoo.”

JCAP (8/12/17: Snap-on Your Parachute)

Tim Murray (on shorting SNA):

“[Snap-On] is a company that’s been around for about 100 years.  They make hand tools for auto mechanics and also diagnostic equipment for repair of cars […] The Snap-On credit division is a group of franchisees that sells to independent mechanics…in the ’90s, they started providing financing to both their franchisees and their end customers.  And then in 2009-2010, Snap-On Credit took over the joint venture [the JV partner was CIT, which was running into problems during that time] that was offering credit.”

“Each [franchisee] has a truck that they lease from the company, they have around $100k in inventory, they can provide payment programs for their end customers, and they a route of around 300 customers.”

“The reason to short them is their excessive use of credit to make sales.  They have accumulated bad debt, which is a greater problem than revealed in the provisions.  It has reached a critical point and we expect that the bad debts to rise from 3% of their loan book to 6% and at the same time, that this will see the revenue to the Snap-On Tools division go down and the amount of earnings from the finance division go down because there will be less loans made.”

“The most common way [for a franchisee] to make a sale [to the end customer] is to sell on the revolving account, which is using the working capital of the franchisee where they put in a payment program over 10 weeks at no interest cost to the customer.  For a well-run franchisee, this will be about 70% of their sales […] [the franchisees in turn, are funded by Snap-On Credit.  The franchisees owe no interest for some period of time before the interest steps up to 9%-10%.] […] [25% of sales] are done on what’s called ‘extended credit’ which is lending from Snap-On Credit division to the end customer, with paper negotiated by the franchisee…the amounts are between $2.5k and $10k and the interest rates range from 10% to 27%, so you can imagine for the technician who earns $40k/year, the interest cost when you’re at 27% is cripplingly high.”

“[Starting in 2011] the finance receivables was about 54% of SNA’s annual sales.  It’s now 86% of sales […] credit growth of around 15%/year achieving sales growth in the Snap-On Tools group of about 7%/year, so they had to have credit growth 2x the rate of sales growth rate to achieve those sales.  Last year, credit growth remained at 15% but sales growth fell to 5%, and in the most recent quarter, sales growth has stopped and credit growth is still around the same level.”

“If I’m a franchisee and I wish to make loans to customers, I can overturn a Snap-On Credit decision […] but in order to have the right to overturn that, I have to have a low default rate…so, I’ll swallow losses on other defaults in order to maintain that [low threshold] default rate.  So, typically a franchisee will have a default rate of 5%-15%, but in order to stay in the program, they have to keep it at 3%.  So, if somebody defaults, I will repossess their tools, resell them…and if I make a slight loss, I might accept all of that loss in order to keep my default rate at a low level.”

“[Loading customers with debt] has a downward spiraling effect in the end because each time you make one of these extended credit sales to a customer, you fill them up with debt and that reduces the…ability of customers to buy tools from you in the future.”

“Snap-On’s always had really good cash flow and a really healthy balance sheet, and so when they took over the credit division, they were funding it with their own cash flows and balance sheet initially, and they’ve done that until recently.  Now, they’re taking on more debt to keep this finance division afloat.”

The Nerdist (8/17/17; Neil deGrasse Tyson)

Neil deGrasse Tyson:

“There is no accurate science in Star Wars.  In The Force Awakens, they figure, ‘let’s up the stakes a bit and have the Death Star suck all the energy out of a star; now we can destroy more than one planet at a time.’  Okay, this is evil magnified.  Six planets all at once simultaneously.  Excuse me?!  If you take all the energy out of a star so that the star completely disappears…do you realize that that is enough energy to destroy a thousand planets?  They didn’t do this math.  Had they done the math, it could have been an even more bad ass planet killer.  So, don’t tell me that real science is holding you back.  No.  Real science is grander than even the limits of your own imagination.”

The McKinsey Podcast (9/8/17: Financial Globalization Hits a More Stable, Inclusive Stride)

“In the 10 years since the global financial crisis began, cross border capital flows have fallen by 65%, from over $12tn to just over $4tn in 2016.  Half of that decline is coming from a decline in cross-border lending and other types of banking activity. [The global banks] are reducing their foreign exposure, allowing loans to expire without renewing them.  So overall, there’s been a broad-based retreat to domestic activity.  And the main drivers of this retrenchment have been the need to rebuild capital and recoup losses after the crisis, but also the need to meet new international and regulatory requirements.”

“While you do see a major retrenchment of European and US banks, there are banks from other countries that are expanding abroad in different ways.  For instance, Canadian banks are highly international and they have increased their international businesses over the last 10 years.  Right now, roughly half of the balance sheets of the large Canadian banks are overseas, particularly seen in the US.  We also see the largest Japanese banks expanding abroad in different ways…Probably the biggest change in the global landscape has been the increased activities of Chinese banks outside China.  Their foreign loans have gone from negligible levels 10 years ago to over $1tn in 2016.  This reflects them following Chinese corporations who are investing and also the FDI by Chinese companies as supplied by Chinese banks […] But despite this tremendous growth, just 9% of their total assets in foreign assets outside China.  When you look at banks in all the other advanced economies, it’s at least 20%.”

“Financial globalization is heavily concentrated.  Advanced economies account for 85% of all foreign assets and liabilities.  The top 5 advanced economies account for half of assets.”

Recode Decode (9/11/17: What Amazon should buy next)

Scott Galloway (who called Amazon’s acquisition of Whole Foods):

“[Amazon’s] trying to build a cable pipe of stuff into the wealthiest households in America and create intensity, and a key component of intensity in a relationship is making fluid, not episodic.  It’s very difficult to have that sort of intense consumer relationship with a households if you aren’t in the largest consumer sector in the world, grocery, it’s $150bn.  And the hard part about grocery is the last mile.  And what Whole Foods has done is create 550 flexible, well-lit warehouses in incredibly dense, wealthy neighborhoods.  So, the fastest way for Amazon to get from, not “A”, but from “B” to “E” is to buy this company…they could shut [the stores] down and use them as warehouses and still justify the price. […] The 550 stores probably cover 60%-70% of household that have incomes in the 90th-95th percentile…I think it’s going to be to Amazon what Instagram was to Facebook.”

“In terms of the next possible acquisition, the logical one would be Nordstrom’s because it would be cheap, it’s in Seattle, they know each other well, they are operationally very sound.  And [Amazon] has been trying to establish relationships with high-end brands…and Nordstrom’s has those and has a lot of credibility and a lot of wealthy households.”

“…the bigger prediction is that [Amazon’s] going to launch something call it “Prime Squared”, where they’re going to use AI, your credit card, a fulfillment network, and Alexa to just start sending you stuff…you send what you don’t want back in the empty box…they’ll do this, they’ll get better and better at it using AI and then they’ll announce that the test takes Amazon Prime users from $1,300/year in purchases to $7,000, the stock will become anti-gravity, race to a trillion dollars.”

“The reason by [Uber] isn’t worth $70bn and why Airbnb is going to worth more than Uber at some point is that…to compete with Airbnb, you need to have regional supply and global demand.  If you’re in Austin, you have to have apartments in Austin but people coming to Austin are from all over the world.  So, the most is much greater for Airbnb than it is for Uber.  Uber’s going to have a series of small competitors nipping at their heels regionally in different areas.”

“Google is God.  As we become more affluent and educated, society has become less religious and less dependent on the a super being.  At the same time, our modern day anxieties grow and that creates a void where we need a super being that we trust more than any other entity.  We want something we can send information into the atmosphere, prayer…and we want some divine intervention to send us back an answer.  One in six queries to Google have never before been asked in the history of mankind.”

Waking Up, Ep. 92 (The Limits of Persuasion)

Sam Harris:

“Reason is itself is not this bloodless calculating instrument.  It is also built on very visceral intuitions about right and wrong and consistency and the need to remain consistent and finding certain propositions doubtful.  I think doubt is an emotion.  Detecting the most basic errors in anything is a felt, embodied experience.  So this opposition between reason and emotion, as many people have pointed out, doesn’t hold much water.”

“In terms of the self being an illusion, that’s not really a paradox […] The subject is an illusion, the subject is absent.  The illusory-ness of the self can be established logically.  Everything to be noticed has to have first appeared in consciousness…and this feeling of self is also appearing in some way…and by virtue of appearing in consciousness, that proves that consciousness is prior to it and transcendent of it.  Just as you can see an object across the room and by virtue of seeing it, not feel identical to it.”