Closet Indexing, My Information Diet, and Stripe
It gets easier
Heya! Mamba issue, #24. Shorter one this week as I’ve been swamped with podcast work, but I’m always keen to share what I’ve been reading, learning, and compressing! First, a quick quote from Kobe:
I don't fuck with bees, man. Other than that, I'm not afraid of nothing.
Bonus: I need your feedback. It’ll be quicker than a trip to the dunny. But the feedback will be very valuable to me in making this whole shebang better. I’ll also summarise the feedback in a future issue (anonymously of course). To say thank you for this, I’ll send out a book to three of the most helpful responses. I can send you a book I recommend, or it can be one of your choice, subject to a maximum value of $35AUD.
Here’s the format of today’s email:
Part 1: Closet Indexing
Part 2: My Information Diet
Part 3: Under the Spotlight: Stripe
Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen.
Unconventionality risk: The risk of being different. Howard Marks in The Most Important Thing mentions that some money managers want to achieve average performance, rather than aim for outsized returns and run the chance of being unsuccessful and out of a job. This all leads to Closet Indexing.
Closet Indexing is where funds claim to actively choose investments but end up with a portfolio not much different from the benchmark. By doing this, they achieve returns similar to an underlying benchmark, without exactly replicating the benchmark.
Put it this way, imagine you’re from France and choose to travel to China because of its uniqueness. But (somehow) you end up at Hangzhou’s fake Paris city. You’ve travelled to China for the uniqueness aspect but are given an imitation that is nowhere near as good as what it’s imitating. You could have saved time, effort, and money just by going the OG route!
Who loses? The investors. Paying higher fees for an average performance. When they could have just paid low fees for average performance in an index fund.
Why do managers closet index though? Closet indexing means not being contrarian. Which means receive less judgement because you’re no different. Which means it’s easier to explain to investors. Sure you might suck. But at least you won’t suck bad.
As in The Expensive Lesson of Closet Indexing: Avoid Low Active Share and High Expenses, just look at the Magellan Fund. Peter Lynch hit it out the park in the ‘80s, and maybe the pressure caught up? The chart below shows the Active Share percentage against the portfolio managers who ran the fund:
During the Stansky years...regardless of the direction the market went, Magellan investors were likely to do poorly relative to the benchmark, because they were - in effect - buying the benchmark at high cost.
One can only beat the benchmark by deviating from it, so given the fund’s modest active bets, it was virtually impossible to obtain stellar returns. Instead, Magellan’s performance was just what we would expect from a closet indexer: always very close to the benchmark, minus a drag of about 1% per year for management fees and other expenses.
Overall, this was just a short and sharp rant on what grinds my gears. And hopefully, something that you’re now aware of! Or at least now you’re as annoyed as I am…
My Information Diet
Had this question from a reader a couple weeks back, so thought it might be of interest to share what I basically read and listen to. I’ll give a short spiel and provide some best of content so at least you have a launching pad!
To see my full list of Substacks I follow, you can visit my Substack profile. But a few of my favourites are:
Asian Century Stocks by Michael Fritzell - At least 1x per week.
Love this one. Not too many Substacks focusing on Asian investments (especially obscure non-tech businesses), so inject this straight to my veins. Some recommended posts: Simple tricks to spot fraud, Mapping Asia's defense industry, and Deep-dive: Delfi Ltd.
Neckar’s Notes - Sporadic but consistent.
He describes it as a “personal and open exploration of life and the money game” which is fair. But he just writes so damn well. Love reading his thoughts and deep dives. Some recommended posts: Attempting the Impossible, Divorce, Denial, Dissonance Reduction, and The Scarcity Struggle.
Sinocism by Bill Bishop - Free Post every fortnight? Paid posts 4x a week.
I’m the stingiest bastard alive. I have never paid for a subscription to a newsletter in my life. But I’m thiiiiiiiis close to breaking that for Sinocism. Relevant analysis, commentary, and curated links of Chinese and English language news and reports. My favourite way of keeping up with what’s going on in China.
The Transcript - Weekly.
They pull interesting and important quotes from earnings call transcripts about the economy and industry trends. Doing all the work so we don’t have to! I find them a great way to keep up with what’s going on.
Only going to give a spiel on my lesser-known podcasts. Popular ones I listen to are JRE (Bourdain, Goggins, and Armstrong are good eps), Invest Like the Best (Hinkie, Varty, and Urban), The Knowledge Project (Ackman, Sivers and Kahneman), Masters in Business (Marks), and Tim Ferriss (Seinfeld, Hackett and Phelps). But here are a couple undervalued gems:
What Got You There with Sean DeLaney [Link] [Apple Link]
Okay, I’ll admit I pump this podcast a bit in this newsletter. But it’s seriously the most underrate podcast going in my opinion. I listed a few “gold standard” podcasts above that basically everyone knows about. But WGYT should be included too. I love it. High-quality guests, great questions, and Sean has a great curiosity that comes through. Some recommended interviews: Yen Liow, Robert Cialdini, and Scott O’Neil
Indo Tekno [Link] [Apple Link]
Basically, everything I want from a podcast. Transcripts, interesting, and obscure guests! I just wish the episodes were a tad longer. Some recommended interviews: Adrian Li and Kevin Aluwi.
What’s your information diet look like? Reply to this email or leave a comment and lemme know! I’m always looking to expand my sources and honestly appreciate your input. I truly believe I have some of the smartest and most switched-on people signed up to this, so would love to know what you consume!
Under the Spotlight: Stripe
Something a little different this week, Stripe is under the spotlight. Hoping to highlight a couple points of what makes them great, strategies, and lessons. But first, Stripe in a nutshell:
What it do babyyy? Strips sells payments infrastructure for internet businesses. Stripe helps bill customers, process payments, and work with payment data. Basically building economic infrastructure for the Internet.
Who started it? John and Patrick Collison. Two brothers from Ireland. Stripe was their second company after selling their first company for $5 million when they were only teenagers.
The numbers? Currently valued at $95 billion, and has nearly 2 million active websites using Stripe. Stripe has raised a total of $2.55 billion in funding and Elon Musk was an early investor. Source
How Stripe Built a Writing Culture [Link]
Stripe is well known for its writing culture. And this article helps explain it a little:
Leaders lead with quality writing: Patrick has been known for emails with footnotes and structuring his emails like research papers.
Give a starting point with sample docs: People use sample docs to understand what type of language to use, to see what types of visuals are most effective, and to learn how to structure their writing for better comprehension
Know when to standardize and when to give autonomy: Standardizing how your team documents shared knowledge ensures content is easy to understand and streamlines the writing process.
Make documentation easy to read by:
- Keeping paragraphs short (3–4 sentences). If possible, make the first paragraph of a document 2–3 sentences.
- Use subheads and bulleted lists to break up walls of text.
- Consider your audience when writing. Some audiences value complex words — some don’t. Find the most compelling language for the audience you need to reach and act on your document.
- Edit frequently. Edit your own work, and ask peers to edit it as well. Editing is the key to getting the best clarification of your idea.
Create a support system: Feedback, feedback, feedback! Ask for it and improve your writing.
Patrick McCkenzie on Stripe’s writing culture:
Stripe is a celebration of the written word which happens to be incorporated in the state of Delaware.
Stripe’s Culture [Link]
A primer on their culture. A couple of my favourite points:
Think Rigorously: Stripe cares about being right and it often takes reasoning from first principles to get there. When criticized, seek the truth in the accusation rather than activating defensive shields.
Trust and Amplify: Many companies have a “no asshole” rule. We think that bar is far too low. We want to work in a company of deeply good people who treat their colleagues exceptionally well. No matter how talented, we won’t hire jerks.
Optimism: Micro pessimists but macro optimists. Stripe’s always thinking about what’s broken and which problems could lie around the corner. But believe that Stripe will be far better in the future than it is today.
Bonus Quirky Content
Something to read: Give it five minutes [Link]
This is super timely for me. Often when presented when ideas it’s easy to critisice immediately or find flaws. But as Jason mentions, ideas are fragile. New aim of mine is less pushing back, more questions. This section is the perfect summary:
There are two things in this world that take no skill: 1. Spending other people’s money and 2. Dismissing an idea.
Dismissing an idea is so easy because it doesn’t involve any work. You can scoff at it. You can ignore it. You can puff some smoke at it. That’s easy. The hard thing to do is protect it, think about it, let it marinate, explore it, riff on it, and try it. The right idea could start out life as the wrong idea.
So next time you hear something, or someone, talk about an idea, pitch an idea, or suggest an idea, give it five minutes. Think about it a little bit before pushing back, before saying it’s too hard or it’s too much work. Those things may be true, but there may be another truth in there too: It may be worth it.
Something to watch: The Most Astounding Fact - Neil deGrasse Tyson [4 mins]
Wow. This one made me feel things. I know some people have some gripes with Tyson, but this is too fucking good.
When I look up at the night sky and I know that yes, we are part of this universe, we are in this universe, but perhaps more important than both of those facts, is that the Universe is in us.
When I reflect on that fact, I look up- many people feel small because they're small and the Universe is big - but I feel big, because my atoms came from those stars.
Something to listen to: Chip Wilson on The Tim Ferriss Show [Link] [Apple Link]
This episode was my first encounter with Chip, and it’s a great launching pad into him, Lululemon’s history, and some great stories thrown in.
When I was 60 years old, I went to my dad and I went, “Dad, if you had to give your 60-year-old self any advice, what would it be?” And he went away for a day and he had the whole family around the table the next day. And he goes, “So I’ve thought about it, and here’s the advice I’d give my 60-year-old self. ‘Do it now. Do it right fucking now.'
Rabbit hole/resource to dive into: Industry Primers [Link]
Not my Google Drive. So if the link dies/goes down/you have a problem. Don’t ask me. Just found it on Reddit, courtesy of /u/SirVeryImportington. My favourites being Sustainable Cities, eSports, and commercial aerospace. I love the internet.
Final thought for the week:
Until next week, have a good one!
- From someone who is surprised and grateful you’ve read this far down!
- Mega apologies for the shorter issue, trying to keep my head above water rn.
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