Sunday Finds + 3 Thoughts From Last Week
LULU + EQIX
Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
1. The consulting disease strikes again
There was an interesting — and perhaps depressing — article in the LA Times this week about affordable housing projects in California. It is estimated that 7 new low-income projects are going to cost more than $1 million per apartment unit to build, a new record. A lot of this will come from inflationary pressures in supply costs and labor, but there’s also another culprit causing expensive price tags. From the article:
Most large states have one agency that hands out affordable housing dollars. California has five — with varying requirements for what gets funded. Those agencies report to different elected officials, leaving no one in charge of overseeing the system as a whole. A 2018 study by the U.S. Government Accountability Office found that 14% of the price tag for California’s affordable housing projects was made up of consulting fees and other administrative costs — the highest in the country and more than developers spend on land.
14% of costs go to administrators and consultants! How absurd. If this estimate is correct, these inefficiencies are a huge net negative on society. When dollars flow to unproductive sources (consultants, administrators, etc.) they are not flowing to productive sources (in this case more housing supply, and lower housing costs). This trickles through to all parts of the economy, hollowing out our middle class. Also, if these useless consulting and administrative jobs were eliminated, that would free up more people to work in useful jobs like nuclear energy, public transportation, or scientific research. We don’t need more MBAs in these consulting roles, we need more STEM degrees.
It also leads me to another question I’ve been pondering recently: why do housing prices have to go up over time? There’s no immutable law of the universe that says your dwelling needs to get more expensive (in real terms) each decade. Yes, I know labor and supply costs can go up, but that should be included in any inflation and netted out in real terms. If we built more houses and got more efficient at doing it, shelter costs per square foot should go down over time. Maybe they have, and our homes in the U.S. are just absurdly large now, I don’t know. I’m just spitballing at this point.
Just think of how awesome the world would be if we set a goal to not only keep housing prices stable, but through innovation and technological advances, try to make prices go down over time. I know our financial system would likely crumble if this happened, so everyone’s incentives are screwed up, but I believe our world would be a much more enjoyable and equitable place if that was our goal.
2. Roku’s Biggest Competitive Threat
I posed this question on Twitter this week:
There were some interesting responses from people:
YouTube is a competitor for CTV ad dollars, but there will be plenty to go around. Doesn’t really have any competition in the agnostic CTV OS space.
Gotcha, yeah for ad dollars it’s probably YouTube. I just never understood the obsession with ROKU since my smart TV has whatever app I want.
Even whitout revenue share, Roku makes money. If people start their Roku to watch YT, they go through the opening page.
While Roku does have the platform advantage for its 60 million and growing active accounts, over the long-term it will make money through these accounts from digital advertising. In 2022, the digital video advertising market is estimated to hit $50 billion in spending, with connected TV (CTV) ad spend projected to grow 39% year-over-year to $21 billion.
At first, this seems like great news for Roku. But I wonder where all these ad dollars will flow? YouTube is doing $7 billion in quarterly advertising revenue and is reportedly the only company that does not have a revenue share agreement with Roku. So when a YouTube advertisement gets played on Roku’s operating system, Alphabet keeps all of it to itself. Considering how popular the YouTube application likely is on Roku (it is definitely my most-used app), a lot of video advertising dollars might not make it onto Roku’s balance sheet, even if they get played on its devices.
Right now, this puts Roku in my too-hard pile. Especially because we haven’t seen consistent cash flow generation and margins at maturity are uncertain. I get the bull case, and I think this has a chance to compound at a high rate for many years, but there is a risk that not enough advertising dollars are there for Roku to gobble up.
3. Can doing too much research set you back? (yes)
There seems to be a concept that there is a direct correlation between how much research you do on a stock (or, how much conviction you can muster) and what your returns will be. I think this is a dangerous concept.
Why? Because the stock doesn’t care about how much research you did. The returns will be the returns no matter if you read a local report on that one supplier in Malaysia. Just because you put in hours and hours of work doesn’t mean you are entitled to make money.
I’ve mentioned this here before, but we need to appropriately answer three questions in the form of expecting 15%+ forward returns over five years before making an investment (from our 2021 letter):
How much cash will [X company] generate for shareholders over the next 3, 5, 7, and 10 years? How confident are we in our estimates of future cash flow?
What price do we have to pay for this future cash flow right now?
How confident are we that management will act rationally with the cash that is given to them?
It might take us 5 hours of studying to answer these questions, or it might take 25 (sometimes, frankly, it takes way less time than you’d expect). But at some point, if I can’t confidently answer these questions, it is probably more productive to just move on to another stock. In fact, I think it can be dangerous to know a company too well because it can give you a false sense of confidence that it is something you should buy right now (I’ve made this mistake with Spotify, for example).
It doesn’t matter if you do 10x the research as another shareholder. If you both hold on for the same time period, the returns will be the same. Of course, if you understand a business better than others it can be helpful psychologically during times of 30% or 50% drawdowns. But I don’t think putting in that extra 100 hours of research is all that helpful in getting to that point.
If you feel the need to put in 100 hours of research before making an investment, maybe the company isn’t that investable anyways.
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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Catch up on Our Shows From Last Week
3 Good Reads
The Biggest Disruption In The History of Education - The Atlantic
Zoom school in many cases amounted to no school in the next year as well. According to our best estimate, by the time schools let out for summer in May or June 2021, the average American public-school student had experienced 65 school days without any contact whatsoever from their schools or teachers—no in-person classes, no Zoom classes, no videoconferences, no telephone calls. That’s more than a third of a school year without schooling, full stop.
The losses, moreover, weren’t evenly distributed. Richer kids got more in-person schooling than poorer kids. And even when they were physically locked out of buildings, richer kids got more, and more effective, Zoom schooling than poorer kids. In public schools, students with household incomes below $25,000 experienced about 76 days, or nearly half a school year, without schooling at all. Students with household incomes above $200,000, in contrast, lost about 54 days—still considerable, but roughly a month less lost schooling than their lower-income peers.
Homebuying demand pulled back further as mortgage rates reached their highest level in over 13 years. Home tours, offers and other requests for agents’ help, as measured by The Redfin Homebuyer Demand Index, posted their largest annual decline in over two years. Sellers are not holding out. The weekly share of listings with a price drop reached a new high during the four weeks ending June 19.
“Mortgage rates near 6% have put a big chill on demand for homes,” said Redfin chief economist Daryl Fairweather. “With home prices still at record highs, the affordability crisis has been dialed up to an 11 out of 10. Home sellers are aware of this as well; a record share are dropping their asking price. Even though there are fewer home sales, prices have not declined any significant amount yet. But if the housing market continues to cool, prices could fall in 2023.”
Altria: Analysis, Valuation, and Pricing - Devin LaSarre
While the Master Settlement Agreement is the most well-known and cited of tobacco regulations, it was not the first nor the last. The information I present to you is not exhaustive but does cover majorly impactful legislation. It is essential to understand these dynamics, as tobacco and regulation will forever be intertwined. More importantly, it highlights that as society embraces continued and increased tobacco and nicotine regulation, so should Altria shareholders.
1 Good Listen
Something’s Rotten With French Nuclear - Decouple Podcast
With Europe held hostage due to its dependence on Russian oil and gas, France had the potential with its gargantuan nuclear fleet to defend Europe’s energy independence. Instead, in its moment to shine, the French nuclear fleet is performing shamefully. Why? Mark Nelson, managing director of Radiant Energy Group, breaks down how France, a world leader in CO2 emissions reductions and energy independence, has become an example of how NOT to manage a nuclear fleet, as mismanagement and unplanned outages threaten its future.
