Profits, great investors and stock market maxims - the best investing blogs and podcasts from the past week
Hello, and Merry Christmas!
I was half-hoping things would slow down in the run up to the holiday this year, but if anything they’ve speeded up.
As tempting as it is to bang on about Santa Rallies (no, not yet, and almost no chance, it seems), the truth is that hard realities (rather than seasonal investing myths) are in control of the stock market this year.
High and rising inflation, and consequent interest rate hikes have been the dominant theme all the way through 2022. A lot of the associated fear has been about the impact on profit margins. To what extent, and how quickly, would input price inflation be something companies could pass on to customers?
In the US and Europe at least, the story so far seems to be that they have managed this pain quite well:
But we’re not out of the woods yet. The next problem is that the interest rates levers that central banks are pulling to try and control inflation are designed to slow down the economy.
All year, it has been clear that some level of recession is on the way. News this week that the UK economy contracted faster than expected through the autumn was another smoke signal.
A big question for markets next year is really whether inflation can be tamed quickly and whether any recession can be kept to a minimum. Profit margins depend on it.
But of course, for some investors the definition of profit really is subjective…
While 2022 was a terrible year for ‘growth’ investing, some are unperturbed. This memo from Cathie Wood at innovation-focused ARK Invest earlier this month, is a bit of an eye-opener: Disruptive Innovation And Profitability
To get a sense of what’s going on in there, think back for a moment to those times in the past when ‘value’ investing has completely capitulated.
Periods of underperformance is an inbuilt part of value strategies: it’s a feature not a bug. It usually happens during tearing bull runs, leaving value stocks doing terribly and value investors stricken. Much of the past 10 years have been a good example.
But when this happens, value investors point to the huge amounts of heritage in the strategy: proof of a predictable approach backed by decades of data showing that ‘value always comes good eventually’.
Well this note from Cathie Wood seems to claim a similar kind of moral high ground, but for extreme growth investing instead. Rather than staying quiet on the terrible performance of her fund this year, this is a shot back with claims that exotic measures of profitability are perfectly viable. It also paints more regular investing approaches as “short term”.
This got some robust responses from investors like Dan Loeb and Cliff Asness on Twitter:
The thrust of Cathie’s note is that highly innovative companies can only really be valued once you’ve made some (quite big) adjustments to EBITDA. They deserve special treatment - and once you give them that, they no longer deserve the moniker “profitless tech”.
It’s a divisive idea. The ARK Invest ETF is down 65% in 2022. Many people aren’t going to buy this rewriting of what ‘profit’ really is.
Highlights from the past week
Invest Like the Best with Patrick O'Shaughnessy - [Podcast] Michael Mauboussin - Sharpening Investor & Executive Toolkits
Michael Mauboussin has appeared a few times in Fully Invested recently, largely because he’s put out so much research this year. Mauboussin is head of Consilient Research at Counterpoint Global (Morgan Stanley) and he’s brilliant on business strategy as it relates to both businesses themselves, and investors.
Paired with Patrick O’Shaughnessy, this is a conversation that you should definitely check out. It ranges through Mauboussin’s studies of market share and how much you can infer about a company’s competitive advantage from the share of the market it has. That leads to questions about profitability and how the dynamics of market share stability over time. Also interesting is the topic of market power and the increasingly important role of intangible assets in calculating the mark-ups of firms. At 47.00 the conversation shifts to capital allocation.
If you’re into the nuances of calculating company returns, then this is for you. It’s heavy in places, but this is basically the leading edge thinking on some of this stuff.
You can read the reports that they talk about in this podcast here:
Capital Allocation
ROIC and Intangible Assets
Return on Invested Capital
Market Share
Neckar's Minds and Markets - Between Rest and Overdrive: Are Great Investors Lazy?
Frederik Gieschen is a superb writer on investment thinking. His Substack is crammed with articles from the past two years (some of which are paywalled but many are free).
This is an interesting retrospective that pulls on a recurring theme in some of his studies of famous investors - that optimum results can often come from very low intensity work. In other words, some of the best investors hate working but can still produce impressive returns.
Buffett is his favourite subject, but this covers the behaviour of others like George Soros and Bill Miller, who all learnt to build an investing environment to suit them. It’s a thought-provoking view that you don’t necessarily have to be working in overdrive to get results.
Meb Faber Research - [Podcast] Episode #460: Louisa Nicola – How To Perform At Your Best Physically & Mentally
This is a bit of a diversion from Meb Faber’s regular podcasts: Louisa Nicola is an ex-competitive triathlete who got seriously injured and then turned to studying neuroscience and working with elite athletes. She then moved into finance and began working with investors.
If you had in mind that you might endeavour to be a better version of yourself in 2023, this is probably for you. They talk over the three key factors that make all the difference in life (and death): sleep, nutrition and exercise. Louisa’s views on the importance of sleep are nothing new really (certainly if you’ve read Matthew Walker’s Why We Sleep), but it’s just so easy to skip some of the basics. On nutrition and exercise, again, some of this may come as a wake up call - and it’s certainly ideal for a bit of new year inspiration. Whether or not you’re prepared to start taking exogenous ketones, there could be some ideas in here for self improvement in 2023.
Investment Talk - Investment Maxims Are Not One-Size-Fits-All
I really like this. Turning complex into simple and transforming intricate investment ideas into relatable, plain-speaking prose is a bit of a tightrope. One of the repercussions from trying too hard is the occasional maxim that ends up over-simplifying an idea… and causing even more confusion.
This article from Conor MacNeil is the perfect end-of-year exploration of some ideas that are sometimes too simple for their own good. From diversification to DCF models, the article breaks down nine stock market truisms together with a bunch of honourable mentions.
Have a great Christmas,
Ben
PS. Links to all the best of everything else I’ve come across this week are below…
Thinking & Strategy
Behavioral Value Investor
7 Investing Reflections For 2023 That Might Pique Your Curiosity
Investment Uncut
[Podcast] S4 Ep. 9 Expected Returns with Antti Ilmanen
Behavioural Investment
Our Future Decisions Will Be Defined by Our Past Decisions
Compound Advisors
Investing Resolutions for Life
Of Dollars And Data
Trading Games
Institutional Research
Verdad
A Sharper Signal Amid the Noise, Part II: Evidence from Europe
M&G
Margins under pressure as recession looms
Columbia Threadneedle
Closing Bell – where next for financial markets?
Premier Miton
New Era – New Thinking
Janus Henderson
[Video] 2023 outlook: a comeback year for European equities?
Franklin Templeton
Quick Thoughts: What to watch in 2023
Goldman Sachs
2023 Commodity Outlook: An Underinvested Supercycle
Securities & Markets
Investors' Chronicle
[Podcast] The Companies and Markets show: Currys, AI, and 2022 in review
CFA Institute Enterprising Investor
The Six Stages of Asset Bubbles: The Crypto Crash
This Week in Intelligent Investing
[Podcast] Year in Review: Why 2022 Was a Year to Remember and Possibly a Turning Point
Trustnet
Leading fund managers reveal what trends they will be watching closely in 2023
Quality Small Caps[Podcast]
Small Caps Podcast with Paul Scott – episode 25