Sunday Finds + 3 Thoughts From Last Week
Rovio Entertainment, Ally Financial, Electronic Arts
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 (impossible?) cash position question
I’ve seen some people talk about how they still have a decent chunk of their portfolios in cash, even today. First off, bravo for the discipline. You are in a better spot than most with a lot of stocks down big this year.
However, here’s the problem I’ve always had with cash positions: when do you decide the right time to buy?
I don’t think there is one correct answer here, but there are clearly a few different methods that work for people.
First is the “buying in chunks” method where you continually add and build out a larger allocation as the price falls. This can help you stay disciplined on price and not buy too much of a stock if it trades at a premium valuation. The only problem with this strategy from my point of view is — if you will only increase your position if the stock gets to a better valuation — why buy any at the high price in the first place? This doesn’t make the strategy bad, but this is the one flaw I come back to.
The second is using the broad market’s valuation as a proxy for when you should get aggressive vs. cautious. This method would have worked wonderfully over the past few years where you would have raised cash in 2021 when the market was trading at an all-time P/E and could have used the cash today with it back to the long-term average. I think the only problem with this method is that it could prevent you from pursuing promising investments and hurt your long-term returns just because the broad market (not your portfolio) looks overpriced. Even though it might seem like it, the broad market does not determine your long-term returns. The assets in your portfolio do.
Lastly, you can ignore the broad market and only buy when you think there are enough opportunities afoot, leaving your cash position as a residual of how many good ideas you have at the time. I like this method because of its simplicity and because you don’t have to worry about the broad market, which can cause some headaches and a bad return on brain damage. The only problem with this method? It might lead you to a zero cash position when stocks start going on sale, as they are right now.
2. A product vs. a company
There was a hilarious exchange on Twitter this week when Docusign’s verified corporate account replied to a tweet joking about its product. Here’s the joke:
And the reply:
While strange (and telling?) that Docusign felt the need to reply to a tweet from an anonymous account, it also exemplifies the difference between a product and a business.
E-signatures are a product. A tool. Something that should be used by everyone because of how much time and money they save. But it is not enough to be a fully sustained company.
I think identifying this difference is important when looking to invest in software businesses. DocuSign’s products are easily replicable, exposing it to risk unless it can revamp its portfolio of products.
On the other hand, a business like Adobe is definitely a “company” and not just a “product.” It (not their tagline) builds software for people who create things (oh, and has its own e-signature tool as well). Or take Autodesk, which builds software for people who build things.
How do you determine whether a product is masquerading as a company? I think it is nuanced. But one hurdle you can ask is: could a team of 10 engineers at Apple replicate our offerings in a few months? If so, you might just be a product. E-signatures don’t pass this test.
3. Ineptitude of the podcast advertising market
It is amazing this is still happening in 2022:
Podcasters are always hunting for new, flashy places to promote their shows, ranging from billboards to floats in parades to airplane banners. Some networks, though, have uncovered a less-glamorous, yet highly effective way to gain millions of bankable listeners: loading up mobile games with a particular kind of ad.
Each time a player taps on one of these fleeting in-game ads—and wins some virtual loot for doing so—a podcast episode begins downloading on their device. The podcast company, in turn, can claim the gamer as a new listener to its program and add another coveted download to its overall tally.
The practice allows networks to amass downloads quickly by tapping into a wellspring of hyperactive video-game users. But it also calls into question who a legitimate podcast listener is and what length of time should be required to count as a download.
“Calls into question what a legitimate podcast listener is”
Yes, you could say that again.
(also, for anyone who’s wondering, we would never do this at CCM)
When learning about all these deceptive download practices in the podcast industry, it is no wonder that advertising rates on a per-listen basis are still so low. But who’s to blame? I don’t think we should blame the publishers like iHeart, who are incentivized to use these tactics because of the poor industry standards.
I think the blame should be placed squarely on Apple Podcasts. The Apple business unit has done minimal work to help podcast publishers over the last two decades and only seems interested in building products where it can have a fat take rate.
Whoever is to blame, the tracking problem needs to be fixed before the podcast advertising market goes mainstream. Who can solve this? Hopefully, Spotify. If they get a large enough market share and start tracking advertisements based on streams/impressions instead of downloads, advertisers will be much more confident in their ROI and likely be able to pay more.
If this happens, it will benefit all players in the market. Listeners will get better (and fewer) ads, publishers will get more money, and the platforms like Spotify will earn a cut of industry spending, similar to how YouTube operates.
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
Ally Financial: A Share Cannibal With a Growing Deposit Base (Ticker: ALLY) With Jacob Franklin
Investing Power Hour #26: Google Drops Stadia, Making Money vs. Being Right, Is Housing Doomed?
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3 Good Reads
Could We Power the World With Just Solar and Storage? - Matt Lozsak
The breakdown of cost in our $12B figure was (just by chance) 50/50 between storage and solar generation, so $6B each. If storage comes down in cost to $5 / kWh (which will be an engineering challenge!), then our best-case sunny city could be powered by a $6.15B solar + storage system. By the same token, our average city with some cloud cover would be powered by a $12.3B solar + storage system.
Fx Markets Are on Fire - The Macro Compass
Also, please allow me one word on the UK mortgage and real estate market.
Interestingly, the UK mortgage market has been historically skewed towards pretty short-term fixed interest rate mortgages: until 2017, roughly 70% (!) of the market was concentrated in < 5 years fixed mortgages.
The Mysterious Ad Slump of 2022 - Recode
n the old days, advertising was often bought well in advance of when it would run. The TV industry, for instance, built an entire calendar around pre-sales of ads: the spring “upfronts,” where TV networks show off programming they planned to run over the next year and try to convince media buyers to lock in a year’s worth of ad buys.
But now the majority of ad spending has moved to digital, where big platforms and smaller players have emphasized the ease of buying inventory whenever a buyer wants it — which also gives buyers plenty of chances to not buy ads.
1 Good Listen
Dave Johnson from Caligan Partners discusses his thesis on Evolus (EOLS). Evolus is a one product company. Their product, Jeuveau, is a Botox competitor exclusively focused on the cosmetics market, and Dave thithe market is underpricing Jeuveau's strong growth potential.
Smart and Funny Tweets:
