Author: Lifeandthemarket

On Life:

The biggest personal update is that I founded an organization, called Kingdom Wealth Building. Last year I was able to present the content 5 times to three church communities in three U.S. states. Aside from Peloton, all of my sweat now goes into this project. I spent the holiday season remodeling the website, so take a peek at KingdomWB.org and please share with others as God may nudge you. Feedback is always welcome!

On the Market:

There are many ways to define “the stock market,” but by any measure 2022 was one of the worst years in its history. Back in October, I attended an event where a speaker noted that 2022 was one of the 7 worst years ever, with the other 6 occurring during The Great Depression. And then after that things got worse, with the market declining 20% by the time December 31 arrived.
 

But wait, there’s more! The picks I recommended last year did even worse than the downtrodden market, as MongoDB declined 60%, Unity declined 79%, and the talk of “Web3” was probably the most badly-timed thing I’ve uttered since the day I congratulated a coworker on being pregnant (she was not). Therefore I’ll understand if some of you decide to stop scrolling. For the rest, here’s an overly simplified take on what happened:

When the Music Stops 

Many factors caused the stock market to suffer mightily in 2022, but the most important is that the government changed its approach to the money supply. For over a decade, the gov had consistently printed lots of extra money. Boosted by relatively loose lending policies, the money flowed through all areas of society, enabling businesses and individuals to spend with relative ease. This progressively increased the prices of pretty much anything considered an asset — from stocks to houses to baseball cards — and yes of course, crypto. 

Eventually the rising prices became noticeably measurable as inflation, and the government has been trying to remove money from the system — rapidly — ever since. This process is healthy for markets in the long run, but ideally it happens more gradually, enabling businesses to adjust without having to do things like layoffs. Unfortunately trying to remove money this quickly, especially after years of so much indulgence, is a recipe for a stock market crash.

Babies in Bathwater

Conditions like these are tough for almost everyone, but technology companies and future-oriented “growth stocks” tend to be particularly vulnerable to such changes in money policy. Once it became clear the government had truly found religion, Wall Street slashed the prices of companies in that category severely. It didn’t seem to matter that some companies were of better quality than others, they pretty much all got cut in half (or more)

Throughout 2022 there were periods when stocks in that category were all down by exactly the same percentage. This despite the fact that they differed substantially in terms of margins, debt, and competitive positioning. Wall Street is supposed to evaluate these and other criteria to determine a reasonable stock price. Each time I observed such evidence of herd-mentality thinking, it suggested that Wall St. was applying a broad brush to all companies in the space, meaning there would be ample opportunity for the truly quality ones to surprise:

Two Baskets 

As 2023 begins there are massive global uncertainties, such as the Russia-Ukraine war, recent changes in China’s response to covid, and governments that hope to curtail inflation by causing layoffs, just to name a few. One thing that seems to be consensus is that there will be some type of recession in the first half of the year. Given all that, I’m taking a two-pronged approach to buying stocks in 2023. 

The first basket of stocks I’m recommending is simply about surviving the year 2023. These picks are: Dollar General (DG), Walmart (WMT) and Dollar Tree (DLTR). It’s a relatively conventional strategy — during recessions consumers become more thrifty, bypassing their usual stores in favor of passable goods from low-cost providers. It’s also a crowded trade already, as these three firms widely outperformed the S&P 500 in 2022. However, the point of this strategy is just to survive. If this trade doesn’t work, that will likely have meant the economy did much better in 2023 than the bad scenarios that seem quite plausible today, in which case mostly everyone will be better off in many ways, including financially. Lastly remember that wherever people end up going for their needs, Visa (V) and Mastercard (MA) will benefit, so I recommend both as safe havens for this coming year as well.

The other basket is about buying stocks to thrive beyond the year 2023. The tough economic landscape of today provides a promising buying opportunity for the next decade. In this basket I’m placing only one stock, Cloudflare (NET). Like MongoDB in the example above, I anticipate that Cloudflare’s stock price may suffer in the near term (in line with its sector) but I also expect it to positively surprise Wall St. many times over. There are other “baby in the bathwater” stocks I would love to write about here, but I’m being more cautious after the disaster that was 2022. 

Cloudflare is a company I have high conviction about in terms of business model and long-term competitive advantage. Unlike flashy “tech stocks” that simply rode the wave of hype during the last cycle, Cloudflare has spent years building massive infrastructure across the globe. They can increasingly leverage their buildout for profit, at a rate I don’t think Wall Street will expect. Although 2023 may be yet another bumpy ride, those who are able to buy Cloudflare periodically — especially during market selloffs — should feel very good about that choice a half decade from now.

Final Thoughts on 2023

There are very sobering realities that suggest 2023 will be another rough year for the stock market. I don’t wish to minimize those. Looking back at 100 years of history, it’s rare for the market to decline in two consecutive years, especially after a double-digit fall like we saw in 2022. Unfortunately, the last time that did happen was during a stretch of 2000-2002, and there are many aspects of this recent cycle that seem to closely mirror what happened in that era. 

However it also seems quite plausible that by the end of 2023 things will be looking up, especially because stocks are forward-looking by their nature. This moment is either one of the toughest times to invest or one of the absolute best in recent memory; it all depends on your timeline and psychology. Either way, I wish you well and hope to see you next year. 

— Jan. 4, 2023

On Life

This year was certainly better than the last. Highlights include moving to a new city, landing in a great church community, and forging meaningful friendships. God has continued to bless in manifold ways, which deepens my desire to bless others. Whenever I speak about the future the 27th Proverb tends to echo, but I aim to have much to share with you by next January.

On the Market

With 2021 officially in the books we now have 5 years of stock picks on this blog:

The market as defined by the S&P 500 grew 27% in 2021. My newer picks from last year cleared that benchmark by wide margins, led by Cloudflare (76%) and MongoDB (51%). Shopify neared that number (26%) while Amazon decided to sit this one out (5%), though perhaps cooling off was rational after its 76% run in 2020. 

Visa (0%) and MasterCard (2%) are literally stuck in quarantine, as both companies earn more revenue when people swipe in foreign countries. These stocks will likely surge whenever cross-border travel becomes a thing again, but given how prolonged the global response to covid has been it’s anyone’s guess as to when that will happen. For similar reasons it will be a while before we can truly evaluate AirBnB’s stock (20%).   

When I started investing during college, I would never believe there’d be a day I’d feel “meh” about a 26% annual return. Yet here we are 🙃. It’s disappointing not to soundly ‘beat the market’ for the first time in 14 years of investing, but hopefully I’ve built enough goodwill for you to trust these strategies. Here are my picks for 2022: 

1. MongoDB: Without getting too technical jargon-y, MongoDB enables companies of all kinds to do really cool things with data. It is almost universally loved by developers and people who influence IT spend. Further, the way Mongo has leveraged open-source policies to compete with larger cloud firms like Amazon is so clever it should be a business school case study. I think the world is changing too rapidly and chaotically to say, “here’s a new blue-chip stock you can buy & hold for a decade” but Mongo is about as close as it gets to that reality.

2. Unity: Unity fulfills a vital role in the gaming ecosystem, enabling games to be built, operated, and monetized across all platforms. Gaming is already the world’s most valuable type of media, generating more revenue than the music, TV, and movie industries — combined. Yet Unity’s ambitions go far beyond its roots. 

The company is positioning itself to provide leading graphics technology to businesses across many sectors including TV & movie production, urban planning, construction, and automobile design, just to name a few. A day may come when your social media posts include advanced CGI the likes of which was only available to Hollywood studios, all powered by Unity in the background. 

The total addressable market for Unity’s burgeoning platform is much larger than any Wall Street analyst would price into the stock, today. Therefore I expect there to be a time when Unity grows upwards of 70%, I just don’t know if that’s more likely to happen in 2022 or 2023. I’m probably early on this one, and given Unity’s focus on growth (at the expense of profitability) the stock may be a bit of a bumpy ride. However if you’re a patient investor looking for a sound way to bet on the future of gaming, graphics, and even ‘the Metaverse,’ Unity is a great way to do it.

Thoughts on Web3 

Remember the part I wrote earlier, about the world changing rapidly and chaotically?

The number of people I’ve seen drop everything — including well-paying jobs — to pursue cryptocurrency projects has been too astounding to ignore. So this year I strived to learn everything I could about the crypto industry (or Web3, which just sounds more sophisticated, don’t it?)

Ultimately I’m now convinced that crypto will transform everything. The potential changes that blockchains enable are already mind-blowing, despite the fact that relatively few things have been built or widely adopted. What will the world be like once seemingly everything is token-ized, in the way that during the last decade everything became digitized?

While it may take another decade for crypto to transform everything, I think many will be surprised by how quickly it impacts most things. Reading any piece of content about the future that doesn’t at least consider Web3 already feels like a waste of time. I wonder how long it will take The Wall Street Journal to publish an article suggesting the new “60-40 portfolio” is 60% stock… 40% tokens.

But people don’t read this blog to hear me postulate about the future, they come for investment advice. For 2022, I recommend Ethereum and Solana. Each has potential to surpass Bitcoin as the most valuable blockchain. Everything I’ve observed about winners through the history of technology indicates that these two projects are building fundamental value. Even if there are massive crashes, or thousands of other cryptos built on speculative value go to zero, fundamental value is something that endures. History tends to repeat itself even as new things are invented. But perhaps the most appropriate statement I’ve seen regarding crypto is that it’s very very late, and very very early. 

— Jan 1, 2022

On Life 

2020 was a year of tough losses in my personal life, to a point where the pandemic felt like an afterthought. Volunteer programs were halted — including a new one I was excited to write about — but rarely did I feel capable of giving my best self to others. Like many of you I took time to pause, heal, and consider the future.  

While my personal life brought plenty of losses, my investments continued to generate gains:

Due to the way interest compounds on itself my stock holdings are on pace to generate millions annually, possibly reaching the one billion mark before I turn 70. Of course circumstances may curb future returns, but even the fractions that would result from worst-case scenarios would still be too much for me to steward wisely.

Bernie Sanders I am not, but I’ve been thinking about how much wealth is morally acceptable for a person to possess during a lifetime. Someday God will ask what I did with the opportunities He gave me, and I hope to say I did things to improve the lives of many. 

One of the challenges I’m weighing is how much to give immediately versus continuing to invest, which could enable me to impact more people in the future. My favorite pastor J.D. Greear speaks about how some individuals set a wealth cap — a pledge to never let their net worth exceed a certain amount — by giving away 100% of gains. I’m still praying about this idea but it’s something I find inspirational and logical. For now my goal is to be able to donate one million annually, and $50 million during the course of my lifetime.  

But when it comes to philanthropy I’m pretty much a beginner. I have little idea of what decisions would be best or potential mistakes to look out for. The one person I knew with experience in this area passed away, so if you know someone who could mentor or simply offer advice please contact me.

On the Market 

Before recommending stocks for 2021, let’s review the picks from last year. The market as defined by the S&P 500 grew 15% in 2020. Visa and Mastercard edged that benchmark (16% and 20%), while Amazon blasted it by growing 76%. Alibaba was beating the market by double digits all year long until Christmas Eve, when a government intervention cratered its growth rate to 10%. (Sigh, they say Christmas is just another day in China). Despite that if you invested in these stocks you gained 30% last year. 

Note: I put an asterisk for 2020 in the table above because that 30% number doesn’t include 3 other recommended stocks. AirBnB didn’t become available to investors until mid-December, so it’s too early to judge. I also recommended Zoom in July of 2019 — long before it became a verb, but because it wasn’t emphasized like my January selections I can only hope some of you benefited from its 391% growth. The same July blog post included Slack, which agreed to be bought by Salesforce at an 85% premium to the January stock price. So including these 3 in the final analysis would net a gain of 86% for 2020. 

As for 2021, here are my thoughts:

AirBnB: This IPO felt more “rigged” than any election. Technically the stock grew 113% its first day, but retail investors (that’s us) weren’t able to buy until after the stock had instantly doubled. I think it’ll be a long time before we can evaluate AirBnB’s stock, due to the IPO spectacle and because post-pandemic travel will be like nothing the world has ever seen. However, this company has a rock-solid competitive advantage and that tends to generate outperformance.  

Visa & Mastercard: To borrow from Charles Dickens, “best of times, worst of times” applies here. The pandemic created a massive slowdown in spending; as a result these historically stellar stocks look cheaper to me than they’ve been in a decade. I am starting to see the tiniest of signals that peak days of the Visa-Mastercard duopoly are behind us (and will write a separate blog post if things develop further). But for now I expect both firms to enjoy a big rebound in ‘21, and outperform the market even if their dominance begins to fade.

Cloudflare (+345% in 2020), Shopify (+185%), & MongoDB (+167%): I wanted to recommend these stocks last year, but candidly was too lazy to make a clear case for their business models, which are relatively technical. Each deserves a separate “Why Buy” post, but since this one is already longer than most you’ll have to trust me when I say it’s still early enough to buy each of these stocks, even after big gains in 2020.

Amazon: I continue to bet that Amazon will continue its thing, and never regret it. 

Stripe: This could become a repeat of the Zoom situation above. I want to put Stripe on everyone’s radar now, in case they decide to IPO before next January. Many companies have enjoyed successful stock market debuts in recent memory. Long term I think Stripe will be the biggest investment opportunity of them all.

Last but not least my mother requested this. Thanks for reading and good luck to you all. Hoping for speedy vaccines and better days in ‘21.

— Jan. 2, 2021

Instead of picking 3 new stocks last January, I recommended doubling down on my 2018 selections. Before I discuss 2020 let’s review how that strategy fared. 

The stock market grew 29% in 2019 (as measured by the S&P 500). So anything less than 30% growth for the year would have been unspectacular, according to the benchmark I’ve been accountable to on this site. 

Visa cleared that bar with 42% growth, Amazon lagged with 23%, and Alibaba nearly doubled the market’s return with 55% growth. If you invested evenly across these 3 stocks, you would have “beat the market” by 11%, with a one-year return of 40%. 

By now you’ve probably heard enough jokes about ‘20/20 vision’ 😉 but here are my recommendations for beating the market this year:

1. Keep what works (Amazon, Visa & Alibaba) 

I wish I could offer new ideas whenever asked, but I’ve always believed in making large bets on a relatively small number of winners. For most of my time investing I’ve targeted just 1 or 2 new stocks each year, and spent the entire 12 months buying the ‘stock of the year’ at varied price points. There are other names I considered recommending here, but the fact is few corporations wield such impervious competitive advantages, which ultimately produces market outperformance.

2. Mastercard (58% growth in 2019) 

Like Visa, Mastercard operates a virtual monopoly in the payment space and has been an exceptional stock for more than a decade. The business models of Visa and Mastercard are synonymous in that they own the ‘rails’ of payment infrastructure relied on by merchants, without having to deal with lending credit to consumers. (Note: this is critically different from both Discover and American Express).

While Mastercard may look expensive after a banner year in 2019, the company has plenty of growth drivers including international expansion and innovations in B2B transactions. We’ve yet to see any new payment solutions in the developed world gain notable traction without Visa or Mastercard. In 2019, the ‘Apple Card’ launched in partnership with Mastercard, not in disruption of it. Some may be surprised to know that Mastercard’s stock has outperformed Apple on a 3-year basis.

3. AirBnB (anticipated IPO in 2020)  

AirBnB has been on my radar for quite a while, and if the company’s leadership is to be trusted 2020 will finally be the year regular people like us can invest. To be transparent I have no idea how AirBnB will perform in 2020, as it’s impossible to predict what the broader market environment will be like on the day of the initial public offering. 

In 2019 the IPOs of unprofitable companies like Lyft struggled mightily, contributing to a frenzy surrounding the IPO of Zoom Video, which had already achieved profitability. I expect AirBnB to report profitable numbers when it files IPO paperwork in 2020 (though it is noticeably spending more on marketing — its “Host” ads are seemingly everywhere in my city). I also expect AirBnB to leverage its firm competitive advantages to outperform the market for the foreseeable future. 

— Jan. 16, 2020

On Life: 

For two semesters I enjoyed a unique opportunity to teach a group of college students, via a national volunteer program. Though the program emphasized I was more a facilitator than a ‘professor,’ I still joked about getting a tweed jacket with elbow patches, and reveled in the fact that students would earn actual college credit for navigating the course with me. 

The program is targeted to first-generation college students from disadvantaged backgrounds. It’s designed to help them understand nuances of the professional world they would not likely learn from parents or friends — things like networking, resume building, and corporate etiquette. 

I was eager to participate in this program because I’d experienced a bumpy transition to the professional world as a first-generation college student. I remember borrowing a friend’s car to get a $60 suit from Sears. No one told me to remove the temporary stitches in the back or in the pockets — I found out about those . . . during my first corporate interview. I also didn’t think to prepare any small talk, so the long walk to the elevator with my interviewer became awkwardly silent. 

Those are just a few of the anecdotes I hoped to share with students in the class. Like most volunteer opportunities I’ve taken on the experience came with a lot of disillusionment. Some students were wildly inconsistent with attendance, and the 1:1 “office hours” I scheduled ranged from incredibly rewarding to a complete waste of time. It was hard to strike a balance between being understanding, and helping them truly prepare for corporate America — a place where often there is no second chance. At times I was astounded by how much students of this generation seem to struggle with accountability, or expect people to do or make things easier for them.  

However there were good moments that made every challenge worth it — times I felt I was genuinely helping others grow, sharing important experiences, and preventing others from making mistakes that once held me back. The best students in the class were a pleasure to teach, and I enjoyed being their ‘professor’ even more than they enjoyed my contextual humor. 🙂

The program concluded with a Corporate Challenge reminiscent of “The Apprentice.” Each section of students in the class competed to solve a business case for a real-world corporation. Perhaps this was due to low expectations, but I was utterly amazed by how well my students performed on the final day of the competition. No longer a pretend professor, I felt like a proud parent. Perhaps there is hope for this rising generation, after all. 

On the Market: 

I plan to write more about stocks soon, but here’s a note on two companies that have gone public since my last post. The first is Zoom Video Communications (ZM) which skyrocketed on its first day of trading even after raising its initial offer price. The second is Slack Technologies (WORK), which is currently trading below its day-one price but is a worthy long-term investment. Both companies have recurring revenue models, something Wall Street tends to appreciate over time. Both also benefit from free marketing — Zoom customers invite their business partners to use Zoom for video meetings, which eventually generates more paying customers. Similarly, young employees joining corporations today are quite accustomed to using Slack for messaging and other functions; Slack is also integrated technically with myriad enterprise software companies. Initial market reactions aside I believe it is very early in the growth story for both companies, and recommend them to buy & hold investors with a three- to five-year time horizon. 

— July 19, 2019

Last January I chose three stocks as recommendations for 2018. Here’s how they performed after one year:

The Context

After solid gains in early 2018, the stock market closed the year with a series of massive declines, due to a range of factors including a U.S.-China trade war, political instability in Washington, questionable guidance from the Fed, and softness from companies capable of driving market sentiment (looking at you, Apple).

Overall, “the market” (as defined by the S&P 500) declined 6% in 2018. Therefore, any stock that did better than a 6% decline can be considered to have outperformed — including stocks that were flat and stocks that declined by 5% or less. Now that the context for performance has been framed I’ll review each of my recommendations.

Visa (+16% in 2018):

Visa is a ‘mature’ company that’s been as visible as they come, yet the stock continues to feel like a best kept secret. It astounds me how seldomly the media covers Visa, despite it outperforming the market year in and year out. That’s fine by me — if the government overlooks the fact that Visa and Mastercard are psuedo-monopolies, they will continue to generate outsized returns. For 2018, Visa was one of the top 5 stocks in the entire Dow Jones, so I feel pretty good about having recommended it last year.

Amazon (+26% in 2018):

Unlike Visa, one could never say Amazon’s performance goes unnoticed. Currently the most valuable company in the world, Amazon had a banner year in 2018. At one point the stock price eclipsed $2,000 and the company reached a trillion dollars in value. Like most stocks Amazon was affected by the broader market selloff in late 2018, but its overall performance should be rewarding to anyone who purchased it last January.

Alibaba (-25% in 2018):

This one is harder to spin positively. I expected Alibaba’s performance to cool after 97% growth in 2017, but did not anticipate the magnitude of the Trump administration’s trade war. As one of the premier vehicles for investing in the growth of China, Alibaba is particularly vulnerable to negative news selloffs — which occurred frequently in 2018 — in addition to slowing growth expectations for China’s economy. I certainly don’t feel great about recommending a stock that lost a quarter of its value. That said, if you invested equally across these 3 stocks, you would still have earned a positive return of 6%, and outperformed the broader market (and most professional money managers) by more than 12%.

What about 2019?

I only invest in companies I believe have clear competitive advantages and considerable long-term growth prospects. Currently I’m researching trends in video games, food delivery, artificial intelligence, and other emerging areas. I’m confident that AirBnB and GRAB are worth putting money into, but they aren’t publicly traded companies (yet). So in the meantime I would recommend doubling down on the stocks mentioned in this post. I expect all three to ‘outperform’ the market this year, again 🙂

— Jan. 20, 2019

The final month is a time for reflection. December often makes me pensive, as I ponder how much can change in one calendar year, and what surprises a new year will bring. While there’s a jolting awareness that ‘12 months’ passes so quickly, it’s also surreal to realize that forgotten events from January or February indeed happened in ‘this’ year.

I’m grateful for everyone who kept up with my journey this year, either in person or by reading this site. Your attention has been more of a gift than I could ask from most of you, but if anyone happens to know Santa Claus, please send these requests:

3 Things from “Life”

1. A way to instill a love for reading in the rising generation. This year I’ve probably spoken to more people under the age of 12 than I had since I was in middle school. Most conversations happened while volunteering in literacy programs, where it was disheartening to discover how few kids actually enjoy reading. Books have enhanced my life in manifold ways, and I thought I’d be able to inspire that passion in children I worked with. Perhaps it’s too early to tell or perhaps my expectations were naive, or perhaps video games are too gosh darn addicting. Regardless I consider this a challenging (but important) problem worth solving.

2. A cure for blindness. In January I could not name a single blind person as an acquaintance; now there are many I consider friends. Serving the blind has been one of the most powerful experiences of my life. Paradoxically I feel they have given me so much — because few things in life are better than gratitude. Every day I walk home grateful for the simple gift of sight. I’m more aware of the role that vision plays in life’s joys — including traveling, dancing, romancing, or even just imagining things that are said. I’ve been awed by how my friends pursue these things without sight, but really wish I could offer them the gift of it, somehow.

3. American gun control that mirrors other enlightened nations. This year too many lives have been innocently and senselessly taken by guns. I recognize it’s a complex issue, and there are people I respect on both sides of the debate. But it’s my wish list, so there.

3 Things from “The Market”

1. Initial Public Offerings. Uber and Lyft finally decided to IPO in 2019, after a dozen years of “unicorn” status. I wish it were AirBNB (or GRAB) instead.

2. Societal perspective on ‘Big Tech.’ This year included lots of backlash against companies like Facebook, Amazon, and Google. In Facebook’s case much of it is deserved. But in general, too many media and political resources have been wasted calling for these companies to change, or meet unscalable demands.

Instead of asking these companies to solve all the world’s problems because they’re wealthy, or pretending they haven’t already “won” their respective winner-take-all niches, society would be better served to recognize them as important platforms that create new economic opportunities, which are increasingly vital to our collective future.

I think the general populace overlooks how much opportunity these platforms create, and how much better things are than they used to be. YouTube enables artists to make money without traditional gatekeepers like record labels or radio stations. An aspiring clothing designer can earn money selling on Instagram without the investment (or uncertainty) that fashion school would require. Anyone can launch a product and reach its intended audience (however niche) via Facebook or Google advertising, without having to pay significantly more money for a national TV or newspaper campaign. And my favorite example is how someone used Amazon to self-publish a novel that became a major Hollywood film.

Success stories would be more common and commonly known if media and government better understood these platforms. But judging by 2018’s congressional hearings don’t hold your breath for this anytime soon.

3. An end to the trade war with China. This is not just because I have exposure to Chinese stocks. The trade war is bad for both countries and bad for the globe. To varying extents we are always pawns in larger political games, but if this one continues on its current trajectory, people may experience suffering of greater magnitude than a pullback in stocks.

Speaking of stocks, I’ll be back in January with a post on how the recommendations I’ve written about have fared over a full year. Until then, have a blessed Christmas and please consider who the day is about.   

— Dec. 18, 2018

On the Market:

As September rolls in and a school year begins, here are 3 trends worth “studying.” Although investment opportunities are still developing, I expect these areas to generate massive returns in the future.    

1. Video Games & “E-Sports”

Some facts to consider. . .  

• 2.6 billion people play video games. That’s more active users than Facebook.
• 400 million watch others play online. Twitch has a larger audience than Netflix and HBO combined.
• The Olympic committee is considering adding e-sports to the 2024 games.
• 50 colleges offer scholarships for video gaming.  
• This industry is expected to generate $200 billion in revenue — from game sales, e-sports tickets, broadcast rights, advertising, and merchandise. 

The rise of the cultural phenomenon ‘Fortnite’ — along with e-sports selling out NBA arenas while broadcast on national TV — is raising new awareness about video games. Personally I’d rather be reading books, but I won’t make any jokes about “gamers.” It’s no longer just about dudes in a basement (if that was ever true), as there’s increasing appeal across genders, ages, and other demographics. This trend is going to become much bigger, and it’s just getting started. 

The New York Yankees are currently worth $3.7 billion. I think e-sports franchises can become more valuable because video games are so global. The most faraway opponent possible for the Yankees is the Seattle Mariners. Meanwhile an e-sports team hailing from New York could face opponents from London, or Beijing — simultaneously — along with truly global audiences of millions. Imagine how much revenue this industry can generate if its events draw as much attention as the World Cup — and occur not just every 4 years, but several times in every year.  

That would certainly be remarkable, but so far I’ve found it challenging to identify sound investments. There are 3 public companies in the video game space that have been highly visible for a long time (Electronic Arts, TakeTwo Interactive, and Activision Blizzard). As far as I can see there is no clear winner with distinct competitive advantages, so their fortunes should fluctuate based on whoever generates “hit” video game titles.

I suspect Wall Street is throwing money at all 3 of these stocks, because it — like yours truly — does not yet understand this space. What is clear to me is this industry is worth paying attention to, even if the winners are still to be crowned.

On my radar for investing: Tencent, Huya, Valve. Also of note: Amazon owns Twitch, the world’s premier streaming site by a mile. It’s another reason I continue to recommend Amazon stock, a relatively safe way to gain exposure to this growth trend.

2. Hotel Disruption

Uber is credited for being the prime disruptor of the taxi industry. The firm benefits from a two-sided network effect — a service can’t compete with Uber unless it offers a sizable number of drivers, and drivers will only work for a service that already has lots of customers. For these reasons and more Uber is considered to be the world’s most valuable startup ($60 billion).

I would argue that what Airbnb has established is more unique, and potentially more valuable. It’s one thing to convince people to trust Uber enough to step into a stranger’s car in their hometown. It’s a whole other level of trust for people to enter a stranger’s house in a foreign city (not to mention sleeping unconscious for hours with passports and other valuables exposed).

The network effects Airbnb has forged with travelers and property owners across the globe will be extremely difficult to compete with. Relative to cars, physical buildings are much less fluid. There are many alternative ways to move humans around, but relatively few buildings that can sleep humans (especially considering the wants of lucrative travelers!).

While hotel brands struggle to differentiate, Airbnb has access to unique inventory including homes located in areas without hotels. It can thereby provide “experiences” that resonate with millennials much more than brochures at a concierge desk.

Airbnb is considered to be half as valuable as Uber (at $30 billion), though that number is higher than the world’s top five hotel chains, combined. I also think HotelTonight is worth keeping an eye on, though its competitive advantages are less robust. 

On my radar for investing: Airbnb, HotelTonight.

3. Food Delivery

Innovation in food has undergirded mankind’s progress since the days of creation. Concepts like agriculture, corporate farming, and modern refrigeration techniques improved life by unlocking time, in addition to bettering the consistency and quality of our diets.

I believe “delivery” will one day be considered the next major milestone in this pattern. Yes, people have been able to order pizza for decades. But what I’m talking about goes far beyond that, or even the convenient services offered by companies like Grubhub today.  

I expect that certain technology platforms will empower individuals to deliver increasingly niche food items to increasingly niche audiences in a way that is more efficient, instantaneous, and customizable than anything we’ve seen before. This will be accomplished by leveraging pieces of newly emerging infrastructure that have yet to be fully developed or integrated.

It used to be that an individual — let’s say “Grandma” — having mastered a personal cookie recipe, would have little chance to make money with it outside the home. Good luck getting distribution via traditional gatekeepers (packaged good companies, food distributors, grocery stores, or restaurants). The “food truck” model has brought some innovation to the space, as it requires less infrastructure to get a quality food item in the hands of consumers. But this has only unlocked a fraction of the potential that exists in smaller-scale food production.

Imagine a reality in which Grandma doesn’t need any business operation (beyond her kitchen) to make cookies for the world. She wakes up in the morning and logs into a front-end service like Grubhub, where she sees real-time demand for two dozen of her specialty cookies. Once made, the cookies are picked up and delivered by a transportation courier such as Uber.

The prices fluctuate in real-time based on supply and demand, as well as reputation. If Granny only feels like making two dozen, she can notify the system at which point the inventory will be “sold out” for the day. But if people across the globe really enjoy her cookies she will earn a following (similar to social media influencers) and can charge premium prices.

The increased competition brought on by plugging individuals’ recipes into a global food infrastructure will inevitably lead to better tasting food for all, at relatively fair prices. Imagine how many people across the world can make one truly fantastic dish, but simply aren’t able or interested enough to make a career of it. Am I the only one who thinks the possibilities are mouth-watering?  

Grandma’s cookies are just one example — the same concept applies to full meals as well. Kitchens are already getting smaller — I would venture to say that at some point in the future the concept of cooking in the home will be considered old-fashioned, experiential, or hobbyist.  

Perhaps this is just another of my “pie in the sky” aspirations for the future. Or perhaps it would take a long time to develop, especially if adjacent services focus on competition instead of integration. But I’m willing to bet that companies that execute toward truly bespoke food delivery will be able to aggregate lots of loyal users. That in turn, as we’ve seen with Uber and Airbnb, creates significant value for shareholders.

On my radar for investing: Grab, Grubhub, Go-Jek, Meituan Dianping.

Next Steps

My hope as I continue to learn about these trends is that clear winners will emerge (or IPO), with enough competitive advantage for me to recommend buying stock. Once that happens I’ll be happy to share more thoughts with you.  

— Sept 13, 2018

On Life:

Sometimes life doesn’t go according to plan. Among the places I chose to volunteer, the Reading Mentor program appeared the most promising. I began with the highest of hopes, which meant potential for grand disillusionment.  

If there’s one gift I wish I could give everyone in the world — besides an intimate spiritual encounter — it would be a genuine love of reading. The simple habit of reading books has enhanced my life in profound ways, which I could never express in a handful of words.

Instead I’ll share a story about the first time a book improved my life. As a young boy I tried a new sport — roller hockey — after enjoying the greatest sports film of all time, Mighty Ducks 2.

I was still a beginner (perhaps the worst player in the arena) when the first hockey tournament began. Back then I was fond of a children’s series called “Macdonald Hall” by author Gordon Korman. In one of the stories a boy in a similar situation scores a winning touchdown by carrying the football in a helmet. The lesson? 

Always have a plan in case things break your way — and — have courage to stick to your plan no matter how it sounds.

In a crystallized moment I’ll never forget, I found myself standing alone near the goal, while other players scuffled in a corner for the ball. With the Macdonald Hall book fresh in my 9-year-old mind, I thought “if the ball rolls over here, my plan is to lift it above the goalie’s shoulder.”

And then it did. And then I did. And that’s how the worst player in the arena scored the first goal of the game.

Reading has been changing my life ever since. The anecdotes and pearls of wisdom found in books have played a major part in so many of the good things I’ve experienced, and that awareness is precisely what I hoped to bring students in the Reading Mentor program, including a young girl named Rihanna.  

I thought — perhaps naively — that if I could do something to bring my stories to their stories, if I could somehow spark a love of reading, then seeds would be planted that would grow to positively impact their lives, long after the program ended. But how?

From day one it was clear that Rihanna and her classmates (at an underprivileged city school) had been dealt a tough hand. I witnessed many examples of broken window theory, and some days held such chaos I would’ve gladly dropped all reading goals for a few minutes of quiet.  

The experience did bring good moments; whenever a child appeared to enjoy reading it gave me a glimmer of hope. It also kindled lots of gratitude: for the parents who raised and read to me, the place where I attended elementary, and things I never had to endure (which some students revealed when asked about their weekends).

I also found a deeper appreciation for teachers — particularly at underprivileged schools — and the incredible amount of energy it takes to run a classroom. Positive energy is the only thing that seems to work consistently when kids are misbehaving — which drained me quickly (and I was just a volunteer!). So if you know a teacher who manages all this effectively they are truly a hero, and the least we can do is tolerate their grumblings 🙂  

But now that the program has ended, I have no idea whether my time there made any difference at all. If the goal was to inspire kids to love reading, then on some level I have to consider it a personal failure.

The only way I could think to make things better was to leave a message inside a book, during the last week of the school year. Maybe Rihanna will keep the book around, and perhaps the future will bring a day when the words resonate with her own life story. Isn’t that what all writers hope for?

Dear Rihanna,

Together we read some of your favorite books,
including “Fancy Nancy” and “Pinkalicious.”

This book, “Maniac Magee,”
was my favorite when I was your age.  

I hope one day you discover
the value of reading books —
they truly have the power to change lives.

Reading helps you learn from mistakes
without having to make them first.

And if you learn to read & write well,
you can do anything in this world.

Perhaps when you’re older you’ll discover C.S. Lewis,
or the best book I’ve ever read,
“The Little Book” by Selden Edwards.

And don’t forget The Bible,
which may be the most interesting book of all,
when you consider who the author is.  

For now, enjoy your youth,
and Maniac Magee!

— June 16, 2018

On the Market:

In my first job after college I worked as a junior financial analyst, covering media and technology stocks. Every month our firm held large “Investment Analyst Meetings,” where an analyst would present a point of view on stocks or trends they’d been researching.

It was somewhat like pitching on Shark Tank, as the goal was to crowdsource the truth by asking critical questions. But in this case the pitches were to a large audience of peers. Anyone in the department was welcome, so I tried to attend often — regardless of the topic — to learn as much as possible.

At one such meeting, an analyst was trying to predict how the smartphone market would develop. Today it feels like we’ve been living in the iPhone-Android world forever, but at the time there were at least 5 legitimate players in the market, including Microsoft Windows phone, the Palm Pre, and does anyone ever consider how popular Blackberry phones once were?

 

 

Back then the smartphone market was a wide-open space, and our firm sought to analyze which stocks would be the eventual winners. The analyst who covered Apple made a strong case for the iPhone, and the term “escape velocity” was spoken at least once.

I honestly can’t remember much from that meeting, but I’ve often thought back to how it could have developed, and perhaps should have developed. Imagine if someone had said:

“I think Apple is going to absolutely dominate this market. Soon the number of iOS competitors will diminish from more than four to just one, and Apple will own a lion’s share of the profits. Therefore, Apple stock is worth $2,000 per share, though it trades in the $150 range today.” 

Perhaps that person would have been laughed out of the room, but in the long run history would prove them right. (Note: due to stock splits the numbers above may not align with current charts, but they are accurate both directionally and proportionally).

The role of a stock analyst is essentially to make predictions about the future. Understandably it’s a very hard task. Perhaps that’s why so few offer unwavering convictions, or the simple courage of independent thought. There is also a strong “herd mentality,” whereby financial firms feel pressure to align with whatever Wall Street thinks.

I personally felt that pressure as a junior analyst, despite working at “an independent research firm.” Some of the stocks I covered were broadcast TV and newspaper companies whose prices were battered during the recession. All the tools at my disposal — including the firm’s valuation software — suggested one of the stocks was worth about $10 per share. However, Wall Street consensus was $3 per share.

After a few weeks of being “too far from the street,” my superiors more than gently encouraged me to revisit my thinking. Dutifully, I lowered some of the numbers in my model, which changed our published price target to $3. Within a year that stock was trading above $10, which meant following the herd cost our investors an opportunity to triple their money.  

Which brings me to Amazon. I think both stories offer lessons to be considered when evaluating Amazon’s stock. I’ve tried to offer real-life examples of how analysts skew conservative in predicting the future, especially when assessing something new or unprecedented.

Given that Amazon consistently offers new and unprecedented things, it follows — simply but powerfully — that analysts are likely to undervalue Amazon’s future success.

No one ever gets fired for underpromising. If Amazon “beats” expectations that are too conservative, investors will still be happy. Little attention will be paid to the gap between analyst predictions and actual results. The analysts will simply raise their price targets, and the Wall Street “herd” will live to graze another day:

Perhaps you were hoping for a deeper analysis of why Amazon is undervalued currently — based on today’s price — rather than the behavioral psychology underlying why I think Amazon will always be undervalued (so long as it continues to innovate and enter new markets).  

If that’s you I encourage you to read “Thoughts after 10 Years of Investing,” a thoughtpiece I wrote nearly one year ago to recommend Amazon to close friends & family. At the time Amazon stock looked expensive at $990; it has since grown more than 60%. If the price ever matches the image above, then anyone who invested near that time will have doubled their money. Imagine if my theory that analysts are conservative also turns out to be true. . .

— May 19, 2018