The Best Media Content I Consumed This Month (May 2023 Edition)
Here's a glimpse into the best articles, podcasts, videos, and books I consumed in May 2023.
Articles
1) The Great Australian Delusion: Why Home Ownership May Not Be the Best Way to Build Wealth
The decision of whether to rent vs. buy a home is something I’ve been grappling with a lot these past few months. Most of us (likely via our parents) have been brainwashed into thinking that purchasing residential property is the ONLY way to become wealthy, ignoring other possible (and arguably more tried-and-tested) avenues for wealth creation, such as investing in shares, starting a business or a side hustle, or investing in corporate real estate.
This article adroitly highlighted one of the core (but hidden) downsides of owning a home in your 20s: it constrains your ability to take risks and invest to maximise your long-term earnings power. Rather than being able to take risks (e.g., start a new business, move overseas for a lucrative job opportunity, take unpaid jobs for skill development, invest in startups, etc), the constant pressure of having to meet mortgage obligations (note: of which 70-80% will go to interest payments for the first 10 years assuming a 10-20% deposit) will naturally quell one’s appetite to take risks. Ugh.
These are my favourite quotes from the article:
“In fact, if you look carefully at most stories of people who created exceptional wealth, you’ll notice they didn’t create it by buying a home and sitting in it for 30 years waiting for it to appreciate.”
“So, right when they have the greatest capacity to take financial risks – which is what, in the long-term, would potentially reward them the most financially – they’ve taken out a massive loan that reduces their willingness and ability to take risk.”
2) Stanley Druckenmiller's Only High Conviction Trade is Against the US Dollar
I devour every media appearance made by “Druck” who is most famous for working with George Soros and achieving a 30% compounded annual return from 1980-2010 for his hedge fund, Duquesne Capital Management.
Druck has been transparent over the last few years that the current market conditions are among the toughest of his investing career and that he is not particularly high conviction on any trades right now. In this article (which summarises the main takeaways from an interview he gave a few weeks ago), Druck offered the following insights into his current portfolio positioning:
He owns Japanese government bonds.
He expects the US to enter a recession in late-2023 (the consensus view).
He is short the US dollar.
He is long gold (and other commodities). Same!
He is remaining patient and waiting for “fat swings” (i.e., no-brainer opportunities).
His current portfolio is net short.
Podcasts/Videos
1) L1 Long Short Fund Investor Webinar
I thoroughly enjoyed this 25-minute investor update from L1 Capital (the best performing long-short hedge fund in AUS since inception in 2014). Some of my key takeaways:
L1 shines in down markets when the market falls. Their performance is broadly in line with the ASX200 for “positive” months, but they only fall around 10% as much as the ASX200 index during “down” months. In other words, if the ASX200 falls 1.0% in a given month, L1’s portfolio only falls, on average, 0.1% that month. This excellent downside protection is the main reason for L1’s substantial outperformance since 2014.
Growth stocks have greatly outperformed value stocks so far in 2023 as the market is pricing in rate cuts towards the back half of 2023. L1 doesn’t expect these rate cuts to eventuate and, as such, is much less bullish on growth stocks than the market.
Investor positioning for defensive stocks (e.g., Coles, Transurban) is very crowded right now. In contrast, investors are very pessimistic on cyclicals/resource stocks (e.g., energy and commodities). L1 is confident that cheap cyclical/resource stocks will substantially outperform the broader market over the next few years.
Overall, L1 is quite bearish on equities right now and has near their lowest net market exposure since inception in 2014.
The median company in their portfolio trades on a 9x P/E multiple, has an 8% free cash flow yield, and has above-market EPS growth (the holy trifecta!).
Two of their highest conviction positions are: (1) Flutter (US sports betting company) and (2) Capstone (Canadian copper producer).
Disclaimer: I own shares in ASX:LSF and will probably be buying more over the next week or so. It’s hard to argue against their long-term performance and that juicy 10% discount to NAV.
2) Selective Search (Private Equity Deals)
Private Equity Deals is one of my all-time favourite podcasts with very succinct interviews that delve into the stories of some fascinating US businesses acquired by PE firms. I just finished listening to one on a business called “Selective Search”, a matchmaking service for high-income professionals, celebrities, and famous people. It’s a very interesting concept and I imagine the market would be much bigger than expected. Some interesting learnings:
The business model is essentially the same as executive corporate search. A client comes in wanting a specific request (e.g., female partner, aged 40-50, well-educated, likes golf, going to the beach, etc) and the matchmaking firm is responsible for completing both outbound search and also using their internal database to find a suitable match for that client.
The more specialised and specific the search request, the higher the fee.
Prices start at around $50k/year and can rise to $500k/year for highly specialised requests (so it’s definitely catering to the top 1% of income earners).
The business does $12-15m USD in annual revenue with 100-125 clients.
They are very careful in ensuring that clients only engage in monogamous relationships (i.e., no using the service to sleep around). Clients can only see one potential partner at a time and both the client/potential partner need to opt-out of the relationship before the matchmaker can suggest another potential partner.
The business was acquired for a multiple of between 4-6x free cash flow (wish we saw those multiples in VC land!).
Future growth is expected to come from: (1) moving down-market and offering lower-touch but cheaper services (e.g., $50k/year) and (2) offering the matchmaking service to companies to help boost staff morale and engagement.
3) Precious Metals Masterclass w/ Tavi Costa (The Investor’s Podcast)
This was a cracking podcast with a fund manager who specialises in precious metals. My key takeaways:
Commodities are priced well below their historical average vs. equity indices (e.g., the S&P 500). In other words, commodities are VERY cheap relative to equities.
Tavi is very overweight gold in his portfolio (becoming a common theme amongst macro-conscious investors).
There are several structural factors that suggest inflation will remain high for most of the 2020s: (1) labour costs as a % of corporate profits are at historical lows and should revert to the mean over time, suggesting a possible incoming “wage spiral”, (2) CapEx investments in precious metals have been much lower in recent years, which almost always precedes a large boom in commodities (a substantial component of CPI), (3) consistently high fiscal spending from governments, and (4) deglobalisation and the need for countries to rebuild local supply chains.
A decade of strong earnings growth (e.g., 2010s) has NEVER been followed by another decade of strong earnings growth. In short, history suggests the 2020s will be a tough time for equities.
Central banks are purchasing gold in large quantities and dumping US treasuries.
Books
1) The Aspirational Investor: Investing in the Pursuit of Wealth and Happiness
This was a solid (but not remarkable) book, written by Ashvin Chhabra who has an incredible resume (PhD in Physics from Yale, former CIO of BAML’s wealth management division, former CIO of Princeton’s endowment fund, and current CIO of Jim Simon’s family office).
It delved into some interesting concepts and helped reshape my worldview on asset allocation, but it could’ve easily been a 2k word article instead of a 200-page book. Chhabra divides assets/portfolios into three buckets:
Safety bucket - Assets that increase one’s sense of safety and reduce exposure to being wiped out. These include having an emergency fund, term deposits, other cash, gold, etc.
Stability bucket - Investments that aim to match inflation and maintain / slightly improve one’s purchasing power. This would be the traditional endowment or modern portfolio model, consisting of a mix of equities ETS, more active trading of bonds, downside-focused hedge funds, exposure to some commodities, etc.
Aspirational bucket - Higher-risk investments focused on maximising wealth and beating the market. These include starting a business, angel investing, making more speculative personal investments (e.g., individual stock selection), speculating in crypto, etc.
The mix of the above buckets depends very much on one’s life stage and risk appetite. I’ve applied the concepts to my own portfolio in the following ways:
Safety bucket - I aim for this bucket to be around 20-30% of total assets and to rise over time to increase my “worst-case scenario” for life (i.e., what I would have to live on during an extended market downturn). I aim for an emergency fund with six months of living expenses, a sizeable allocation to both gold/silver, and other cash sitting in a term deposit (for a potential investment property). I’m undecided at this stage whether I include super in this bucket but I’m leaning towards yes.
Stability bucket - I have very little in this bucket (<10%) but would like to increase this over time. This includes some ETFs (e.g., Vanguard Emerging Markets ETF) and also exposure to downside-focused hedge funds (e.g., L1 Long Short Fund). Here the main goal is to match or slightly beat the market and preserve purchasing power.
Aspirational bucket - This is where >60% of my assets are (currently) with a view to beating the market and creating generational wealth. This consists primarily of individual stock investments with the goal of beating the market (e.g., Axon Enterprise, Catapult Sports, ResMed, Coupang, Lemonade) as well as exposure to VC through a large holding in Bailador Tech Investments (note: where I work so biased). Over time, I imagine my allocation to angel investments will increase as well.
Simple concepts but helped me assess how I think about asset allocation and being deliberate about: (1) reducing downside and risk of catastrophic ruin through having a “safety bucket” while also (2) taking substantial risk in an attempt to beat the market through the “aspirational bucket”. Kind of like a barbell approach to investing.
1) Loneliness is now an epidemic …
2) They say a picture is worth a thousand words …
13F Updates
Q1 13Fs for large US investing firms with greater than $100m USD AUM came out about a fortnight ago. This is something I track closely to help with new idea generation for public stocks. Here is a short summary of the major changes for the funds I follow, which all share the common themes of being: (1) very concentrated, (2) long-only funds with a global mandate, and (3) boast a historical track-record of outperformance vs. the index:
Bill Ackman (Pershing Square) - bought Alphabet. This is very interesting as Ackman only owns 8-10 stocks in his portfolio and is hyper-concentrated.
Daniel Loeb (Third Point) - bought Alphabet + Salesforce.
ValueAct (activist investor) - bought a stake in Spotify + big add to Salesforce.
Nelson Peltz (Trian Partners) - bought a stake in GE Health Technologies. This one looks interesting at first glance but is a recent spin-off from GE and has around $10b debt with $2b cash (i.e., $8b net debt position on a $35b market cap).
Dev Kantesaria (Valley Forge) - big add to Intuit + sold Amazon. I respect Dev as much as any investor on the planet, so his sale of Amazon (note: I own shares) is quite concerning.
Tiger Global - doubled their stake in Alphabet + new positions in Apple and KKR.
Chris Hohn (TCI) - bought GE + sold Alphabet and Union Pacific.
Brad Gerstner (Altimeter) - bought Alphabet.
Li Lu (Himalaya Capital) - bought East West Bancorp (a Chinese bank listed in the US). This one is unfortunately a bit outside my “circle of competence”.
Dennis Hong (ShawSpring Partners) - added a lot to Coupang. Good timing as I just wrote an article on Coupang that I shared on my substack (see below).
Triple Frond Partners - bought KKR.
Josh Tarasoff (Greenlea Lane Capital) - bought Microsoft and Markel + sold Netflix.
Keep in mind these updates are as of the end of Q1 2023 (31st March 2023), so they’re about six weeks out of date. Nonetheless, my big takeaways were:
All these investors are very concentrated in US large cap tech (i.e., not that much international exposure).
Alphabet (i.e., Google) was a very common buy in Q1 2023 (likely taking advantage of the sell-off due to concerns around ChatGPT).
KKR came up a few times. Some of these large public asset management firms (e.g., KKR, Blackstone, etc) look cheap at first glance, but they’re difficult to analyse with very complex financial statements.
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Cheers,
Jordan