Addiction, the Dutch, and the Sea
This week we cover a range of topics, from addiction to earnings. We also observe hedge fund positioning as the industry chases the market.
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Addiction, the Dutch, and the Sea
Its been a few weeks since I last wrote so I’ll be covering a few topics in this edition of the newsletter. These topics range from a new habit I’ve formed to treat my addiction, my recent trip to Amsterdam, and Sea’s latest earnings (how could I not?!).
Addiction
While November has been quite the bull market (so far), I think investors quickly forgot how rough the preceding couple months have been. CNN’s Fear and Greed Index (a reasonable indicator of market sentiment) was regularly in the “fear” and “extreme fear” categories. I was talking to a fellow investor and commented on how when the market was bad, I found myself checking stock prices many times throughout the day, to which he commented “It's not the market, it's an addiction.” It dawned on my instantly that he was correct. First off, in bull times, I was checking stock prices just as frequently. Secondly, how could it not be an addiction? If you do something repeatedly during the day that is objectively bad for your mental or physical health – how could it anything but an addiction? Having prided myself for being ‘disciplined’ in my day-to-day life, I realized I was anything but in this aspect of my life.
A few years ago, I came across this Pie chart made by Vishal Khandelwal, about all the useless things we do when “investing” in the stock market.
I remember laughing at the above image and putting it away without internalizing it. But certainly, my price-checking addiction fell into the “indulging” bucket. Well, they say the first step to curing addiction is admitting you have a problem. I would check prices almost as soon as I got up every morning. check when respective markets opened, checked again before I went home, and then checked again before sleeping – and this was a good day. It was clear, I had a problem. So, a few months ago I took clear action (with significant guidance from the investor who first diagnosed my disease).
I decided to check prices of businesses I owned only once a week, on Monday mornings.
I set up price alerts to email me in-case any of my positions went up or down by more than 20% in a day (usually a sign that I need to investigate whatever caused such a move).
I regularly started to clear my cookies/history so that previously checked prices don’t pop up randomly in searches, etc.
I use TIKR almost every day for company info. They have a great setting called “business owner mode” which hides all prices so I turned it on and left it that way.
I obviously am allowed to check prices if I need to trade.
The don’t-check-prices thing is much harder during earnings season, so I adopted an additional rule to help me through those 4-5 weeks during the quarter.
I allow myself to check prices once after earnings are released (pre-market) and once the next day to see how prices changed. I find this useful as it tells me how the market reacted to what was said on the earnings call, and if there is anything I need to dig into (I mean in more detail, I would have already heard the earnings call). But I stick to the company reporting – I don’t check any other ticker.
This new behaviour has had some profound impacts on my psyche and daily routine.
While checking prices takes a few seconds, it’s the implications that bog your mind down for several minutes after (if not hours). Not checking means you have time to do more productive things (like studying businesses).
Checking once a week on Monday mornings (luckily in my morning most markets are shut) allows me to think through the implications of an entire week, and if anything is required to be changed in the portfolio in a calm and measured manner.
Because of the above I’m trading much less frequently, and when I do trade it's in more size. This is interesting because I’ve noticed even long-term investors struggle to sit on their hands and do nothing. Low-cost or no-cost trading fuels the urge to make minor ‘tweaks’ to your portfolio constantly.
I used to complain to my wife that those in the US had it a bit easier than us in Asia. As when they clock off on Friday evening all markets are shut, however they are still open for us on our Friday nights due to the time zone. So, I could only start to ‘switch’ off on Saturday. But clearly this was just an effect of my addiction. Since I check prices infrequently now, the market, to me, is open only once a week.
My mood during the day used to be determined by how the portfolio was doing. Now that I have no idea how my portfolio is doing, my mood is affected by healthier aspects of life like how productive I was on the day, my personal relationships, sleep/diet/exercise.
But before I extol the virtues of my newfound sainthood, I’ll be the first to admit it's not easy, as beating addiction rarely is. I still stumble at times.
Earnings season is still hard – when certain volatile stocks are reported, I checked prices four times, rather than the two allowed by my ‘system.’ Funnily enough – none of those stocks are in my top five positions, which I guess should tell me something.
I allow myself to check prices of business I do not own (from time-to-time) to indulge a bit of FOMO or schadenfreude. I understand this is also not healthy either (see “Envying” in the chart above) and I am trying to phase this out. I have another investor/friend who helps me with this by immediately asking me “why are you checking prices?” as soon as I comment on any stock move.
Sometimes a certain tweet will trigger my urge to check the stock price of a business I own. This might be a signal that I need to phase out Twitter itself.
It's still difficult to avoid all ‘market’ news. Articles/banners on almost all financial news sites will indicate how the broad index did the previous day. It takes an active effort to drag my eyes away from those sections on a webpage.
Certainly, the above is tough to implement if your job requires you to live/die by your daily profit or loss. However, if you are a long-term investor – checking prices regularly rarely does any good, and just feeds you with noise and false signals. Thus, if you too suffer from price-checking addiction, I hope this post was helpful.
The Dutch
I was in Amsterdam and Rotterdam last week for company meetings. Despite having lived in Europe (well… the UK) and travelled there many times I had never been to the Netherlands. So, some of my observations below are about the country as well as the companies I visited.
On the Companies:
I met all sorts of companies, from specialty chemicals to consumer discretionary and tech. One common thread is that they are all suffering from the effects of covid in one way or the other. Some over-earned during covid and saw their stocks get smashed in the years after. Others over-earned in 2022 due to the recovery and now having to explain to investors why their growth isn’t as high as it used to be. Long-covid indeed.
Stock/Investor management is a skill. It’s not enough to focus just on the business and hope your stock does well. In the short-term business performance and stock performance are not so related. You must make your messaging clear and make the information you present concise. I noticed some companies understood this to their core – it’s in the way they structure their investor presentations and annual reports. For an example – read IMCD’s annual report. In one read you know exactly what the company does, how it does it, and how it does from a financial perspective. On a separate but similar note, I’ve also noticed that successful entrepreneurs tend to really dislike this part of their job. They’ve built businesses from nothing to several billion dollars and must answer, at times, inane questions from inventors who haven’t built as much as a Lego house. But investor relations are part of the game, and a strong IR strategy is a must for a public company. You can get away with not having this function if you are a Berkshire Hathaway or a Constellation Software – but few companies are.
Low stock prices do affect morale – I’m not sure if this is just in my head, but I did get a different feeling of morale when speaking to companies whose stock prices were doing well and those that were down in the dumps. The ones who were doing well had a confident and defiant persona, the ones who weren’t showed frustration and dissatisfaction.
On The Netherlands
I didn’t get to do much tourism as the weather was unfriendly and meetings were back-to-back, but I did have a few observations.
Amsterdam was incredibly bike-friendly. Renting/owning bikes is inexpensive and almost every road has a bike lane. I really enjoyed this part of the local culture. It’s both a healthy activity as well as good for the environment. That said, the Dutch should never let me back on their roads, I was a menace.
The Netherlands has really adopted the ‘cashless-society’ mantra. Everything from restaurants to tram fare was payable digitally. In fact, many establishments had signs saying that they don’t accept cash. In one instance, I had some Euros on me that I wanted to spend, and tried to use them at a restaurant, and the staff was almost shocked that I had physical currency on me. No surprise that I saw Adyen terminals everywhere.
It was not a flashy society. Cars were plentiful but I saw very few supercars. Amsterdam is ranked #9 in terms of millionaires per capita. Singapore is #8, but I feel like every 15th car here is a supercar (I’ve counted). That said, it's not that the local population does not spend money. One night, I was walking around my hotel in West Amsterdam, and despite it being a Tuesday, low-tourist season, cold & rainy, every restaurant I walked by was packed.
Sorry for you cricket fans, but not one Dutch person I talked to knew that the Netherlands was playing in the world cup. Actually, there was one, but then I found out he migrated from Bangladesh five years ago.
The Sea
Ah, my favourite topic. I swear after this post, I’ll shut up about it… till next earnings. But I think the story of Sea’s earnings this quarter can be summarized in this one image below.
Since last quarter, Sea investors (myself included) have been passing around data from third-party provider Yipit, which showed that Shopee had been growing its GMV by leaps and bounds. Investors expected that GMV for the quarter would be around 12-13% and that it’s only been growing since then. In fact, we heard that in the second week of October, Shopee growth was a whopping +37% year-over-year. Colour investors surprised when Sea released earnings that Shopee GMV growth was a paltry 5% yoy. This was on top of the fact that Shopee burned nearly $350MM during the quarter. Clearly faith in Yipit data was misguided, and I imagine the customer service team at the company got many an angry call. That said, I thought that Sea’s Q3 earnings were decent enough. Gaming booking and revenue started to grow again. DFS growth continues to be strong and loan losses are coming down. While Shopee only grew GMV 5% it grew 11% on a sequential basis. Teasing info from management comments it seems that Q4 is trending just as well (with the 11.11 sale putting up a whopping $1 billion in GMV). If this is the case, then mathematically Q4 should show a near 25% yoy growth in GMV. This level of growth, in my opinion makes the cash-burn worth it in the short-term especially as Sea’s overall cash position remains strong. I do think the setup here is positive. Competition (ie TikTok Shop) has been defanged, Shopee GMV growth is in the 20%+, and all other business lines are growing. Valuation now depends on how you think about Shopee’s ability to deliver long-time profit. Depending on your view, Shopee is either worth a lot, or worth very little.
Thanks for reading and happy investing!
Farrer Fun Fact
Chasing Returns: This chart shows the positioning of US hedge fund recently. It implies that their allocation to mega-cap tech is the highest its been on record (2016). Given mega-cap tech has been leading the index higher this year, its a strong indication that the market is chasing returns. (source)
Links of the Week
Blackstone’s Byron Wiens passed away a few weeks ago. He was a great thinker, and his 20 Life Lessons is a must read.
Related to some of what I discussed above, this article about the Investor’s Last Remaining Edge was a fantastic read.
Despite the past two years Howard Marks still doesn’t care much about the macro economy when he invests - here’s why.
Behind a paywall - but this writeup titled “How to become an Asian Tycoon” was a really well researched and insightful piece of work. Spoiler - a good amount of cronyism is involved.
Totally random - but one of my favorite movies about finance/banking is 2011’s “Margin Call”. I thought it did an excellent job of capturing the essence of what the environment was like in 2008. I came across this clip recently and it is one of the movie’s best bits (sorry for the language!).
Tay-Tay’s effect is so powerful she is single-handedly increasing credit in our our tiny-island nation.
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