6 | Market Commentary, Questions to Understand Companies, and Danny Meyer
"Value is where you find it"
Happy hump day! Welcome to issue #6. Like usual, I’m excited to share what I’ve been reading, learning, and compressing.
Here’s the format of today’s email:
Part 1: Market Commentary - Bulls, Bears, and Inbetween
Part 2: Questions to Understand a Company
Part 3: Under the Spotlight: Danny Meyer
Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen.
Market Commentary - Bulls, Bears, and Inbetween
Is market commentary just noise? Or timely and relevant wisdom?
Whether the bull case or bear case ends up playing out, I think it’s wise to try to understand both sides and form your own opinion. But what do I know, I’m 24 with little life experience!
Baupost’s Seth Klarman compares investors to ‘frogs in boiling water’ [FT Link] [Reddit Link]
With so much stimulus being deployed, trying to figure out if the economy is in recession is like trying to assess if you had a fever after you just took a large dose of aspirin. But as with frogs in water that is slowly being heated to a boil, investors are being conditioned not to recognise the danger.
Loved this quote from the Reddit comments too, just some food for thought:
Market participants will always find reasons to justify trends continuing.
For the nifty fifties, no price was too high because those companies were the best and would dominate the world.
For the dotcom stocks, no price was too high because the internet meant "new economy".
And now, it seems that no price is too high because yields are nowhere and the FED will protect from any type of downside.Something about dancing until the music stops…
Some other Reddit comments are kinda heated, and I think this tweet sums up some of their frustration:
Devil’s Advocate — The Bull Case [Link]
This piece is from May 2020, but damn it’s had some eerily good timing. At the time, it would have been incredibly hard to come out with a bull case thesis.
It basically came down to three points, but so far, seems to have played out.
The virus and its impacts are increasingly socially normalized and tolerable for Americans after 2 months stuck inside. A re-shutdown appears unlikely unless there is a radical increase in lethality / risk from the virus. If deaths are steady, the cumulative death toll that is socially allowable may be quite high (>500K over 18 months).
Monetary policy has collapsed discount rates globally, with risks more to deflation than inflation. The Fed has made it clear a liquidity crisis will not be allowed.
Fiscal stimulus has made consumers more than whole, with aggregate consumer purchasing power now UP versus pre-COVID. Short term, the market is presuming additional significant fiscal stimulus. If it does not come, the market will try to force it. This is a major risk + downside trigger, but it requires you to presume the Democrats or Ron Paul type Republicans will have both the will and the ability to gamble the economy for election plays.
At a high level, all of this feels so, so, so wrong. It feels that it should not be this way. The economy should not be simply a function of immense government money, right? Or has it always been that way and we are bound by the comforts of having invested in the United States? But it is now, and the cognitive dissonance here combined with the immense amount of financial liquidity equates to the perfect setup for a massive bull move / equity bubble until such a time there exists a feedback loop to stop these dynamics.
Either way, the market (S&P 500) has gone up 60% since posting. ¯\_(ツ)_/¯
Memo from Howard Marks: Something of Value [Link]
Some might argue this memo of growth vs value is a bit basic and repeating a broken record. But you have to remember this is primarily for his investors.
But I think his latest memo is valuable because Marks seems to acknowledge that it’s important to recognize how the world has changed and how we as investors should adapt to these changes too. The below quote highlights just how important intangibles are now, more than ever:
As developing and scaling new products is much easier in the digital world (often requiring little more than engineers and code), it’s never been more possible for companies to develop completely new avenues of growth, further extending their runways (Amazon’s AWS and Square’s Cash App are two notable examples). This gives real value to intangibles such as exceptional management, engineering talent and strategic positioning with customers.
And also on the point about times changing…
To summarize, businesses are both more vulnerable and more dominant in today’s world, with much greater opportunities for dramatic changes in fortune, both positive and negative. On the positive side, successful businesses have much more potential for long runways of high growth, superior economics, and significant durability, creating a huge pot of gold at the end of the rainbow and seemingly justifying valuations for the potentially deserving that are off-puttingly high by historical standards. On the negative side, it also creates immense temptation for investors to overvalue undeserving companies. And companies with here-and-now cash flows and seeming stability can see those evaporate as soon as a bunch of Stanford computer science students get funding and traction for their new idea.
I once asked a well-known value investor how he could hold the stocks of fast-growing companies like Amazon – not today, when they’re acknowledged winners, but rather two decades ago. His answer was simple: “They looked like value to me.” I guess the answer is “value is where you find it.”
I’m a pretty big Howard Marks fan. So he’ll be undoubtedly featured in the Under the Spotlight section at some point in the future.
My thoughts on the current market
I don’t know which side I’m on for this one. I’d currently describe myself as cautiously optimistic (75% invested basically). I think it’s good to be sceptical. Good to show caution when others abandon it. Good to believe that things don’t get consistently better forever. But I always come back to Jason Zweig’s quote:
Without a saving faith in the future, no one would ever invest at all. To be an investor, you must be a believer in a better tomorrow.
The only thing I’m certain of is just how uncertain I am on what the future holds.
Questions to Understand a Company
What I like about these questions is that they can be applicable to a range of styles. Not just a VC interviewing a seed candidate. I think these are great questions that you should be asking yourself when researching a company. Great questions to ask friends who run their own companies. Great questions to ask yourself before you start a business.
I’ve made a Google Doc checklist if you want it as well. [Link]
I’ve compiled the answers in the above tweet into the two BizCards below :)
Under the Spotlight: Danny Meyer
Each week I provide a little spotlight on an investor or operator I admire.
Danny Meyer is this weeks focus, in a nutshell:
Born in 1958 in St. Louis, the middle child of three.
During college, Meyer worked for his father’s business as a tour guide in Rome, starting his passion for hospitality. Danny credits his mom who taught him the most about hospitality and his dad teaching him about gastronomy.
At 27, Meyer opened his first restaurant, Union Square Cafe.
Today he is the CEO of Union Square Hospitality Group, which includes restaurants like Gramercy Tavern and his original Union Square Cafe. He is also the founder of Shake Shack, one of the largest fast casual restaurants in the world, and valued at $4B+.
The Power of Hospitality [Link] [Apple Link]
Five A's of Mistake Making
Awareness of it. So many people make mistakes and don’t even know they’ve made it.
Acknowledge it.
Apologize for it. And make it clear it won’t happen again.
Act to fix it.
Apply additional generosity. To the people hurt by your mistake, make up for it.
People are blown away when you do those things. Because unfortunately in our society, there is so much, either shame or just natural muscle reflex to be afraid of acknowledging that you made a mistake or shamed to apologize or whatever that it blows people away when you do those five things. And you can actually end up in a better spot with someone for how well you embraced and overcame a mistake than if you had never made it in the first place.
It’s not about what you do, but more about how you make people feel.
And in order to make it your favorite restaurant, we not only had to be really good at what we did, but we had to be even better at how we made you feel. We had to make you feel like we were on your side, which is hospitality, but then to take it a step further, we had to really make you feel like you belonged. And it was this unlocking of human emotion, which is that more than anything else, I think human beings long to belong.
You first get to belong to a family. Then you get to belong to whatever school you grew up going to and whatever team they rooted for. And maybe you had an organized religion and you belonged to that congregation. Maybe you were in a fraternity and you belonged to that fraternity. But whatever it is, it's such a deep drive to belong to something. It's really the reason that our industry exists.
Six Key Emotional Skills for Hospitality
Kind optimism.
Intellectual curiosity.
Amazing work ethic.
Highly empathetic.
Highly self-aware.
A high degree of integrity.
Setting the Table [Amazon Link]
Only 50 pages in, but this quote explains where he thinks his success has come from.
My appreciation of the power of hospitality and my desire to harness it have been the greatest contributors to whatever success my restaurants and businesses have had. I’ve learned how crucially important it is to put hospitality to work, first for the people who work for me and subsequently for all the other people and stakeholders who are in any way affected by our business—in descending order, our guests, community, suppliers, and investors. I call this way of setting priorities “enlightened hospitality.” It stands some more traditional business approaches on their head, but it’s the foundation of every business decision and every success we’ve had.
How I Built This With Guy Raz [Link] [Apple Link]
A podcast more about the story of how Shake Shack came to be. As an Aussie with zero experience with Shake Shack, very interesting.
Some sage advice from his grandfather:
(Danny’s grandfather) “Do you want to be a lawyer?” And I said, “nah-uh”. And he got really, really mad. And he asked me probably the most pivotal question of my life, which was, “do you have any idea how long you're going to be dead?” And I said, “no?”. And he said, “I don't either, but l'll tell you one thing a hell of a lot longer than you're going to be alive. Why in the world would you do something you don't want to do?”
Bonus Quirky Content
Something to read: The Michael Scott Theory of Social Class [Link]
Last week I shared Venkatesh Rao’s (@vgr) post on The Gervais Principle. So this post by Alex Danco (@Alex_Danco) is pretty timely!
As more of the language surrounding you becomes Posturetalk and Babytalk, the more conclusively you will double down on being “serious” about whatever you’re pursuing, as both a defence mechanism and in pursuit of real praise. This drives the cycle forward again, as your values and environment become increasingly defined by doing Triathlons or whatever. Eventually, you become Michael Scott.
Something to watch: BOOKSTORES: How to Read More Books in the Golden Age of Content [38 mins]
I love books. I probably love bookstores even more. It’s just a wicked YouTube doco. With a guest appearance by Tim Urban (@waitbutwhy) too!
Okay, you're awake about sixteen hours a day. That's thirty two half hours a day. […] If you allotted one of these (half an hour) of every day to reading, you will become a major reader who'll read a thousand books (during your lifetime) instead of fifty-five. Someone will be like, "Oh my grandfather. He's this great reader He's read everything." That's you versus being like, "Yeah, my grandfather literally has not read anything ever."
Something to listen to: Gilbert Arenas and Nick Young on Road Trippin’ [Apple Link)
One of my all-time favourite podcast episodes. Had me literally in stitches. Gilbert is a different cat and him bouncing off of Swaggy P is perfect. Highly recommend the uncut version because a few (hilarious) stories got edited out.
Allie Clifton: Were you a coaches nightmare?
Gilbert Arenas: Okay yeah but I worked hard. So they had to look past that. It’s not like I talked back. It’s just that I did what I was gonna do.
Below quote applies to me big time.
I’m a Malibu cranberry pineapple type of guy. I haven’t graduated to wine yet.
I’d love to know, what have you been watching this week?
Until next week, have a good one!
- Kalani
You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com and on Twitter @scarrottkalani.
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