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18 Nov 2021 - Why this market would freak out a Martian
Why this market would freak out a Martian Montaka Global Investments 09 November 2021 If a Martian arrived on planet earth today, the global stock market would freak them out. This market is full of peculiarities. Mr Market - the personified term value investing legend Benjamin Graham used to describe the emotional swings of the market - is currently excited about narrative stocks, particularly 'reopening' and 'defensive' companies, and rewarding them with rich valuation multiples despite questionable fundamentals. At the same time, it is punishing companies with reliably growing profits and cash flows, particularly the world's leading mega techs, because of overblown concerns about inflation and regulation. On any given day, the market appears to be swept up in the prevailing narrative. What is missing is an objective outside examination of the facts that anchor sound investment decisions and underpin strong, long-term performance. Three examples of stocks in the reopening, defensive, and mega tech narratives highlight a market that would baffle a rational Martian. Are 'reopening up' stocks good investments? The first thing the Martian would see when he arrived on earth is that, as COVID-19 cases subside around the world, 'reopening' stocks are trading at very generous valuations. One is Royal Caribbean Cruises, the Florida-based cruise company that was severely impacted by the pandemic. When 'no sail orders' were introduced last year, its revenue literally fell to zero. With the reopening, around two-thirds of the company's fleet are now sailing and that should move to 100% over time. But the company's stock price is still one-third lower than pre-pandemic. The 'reopening up' narrative is often persuasive to Mr Market. Surely this investment represents easy money for the taking? Our Martian would say no. For a start, the company's balance sheet has become financially stretched: the ratio of net-debt-to-book-equity has more than doubled from 0.9 times to 2.2 times. So while its stock price is below pre-pandemic levels, its enterprise value (EV) - the company's total value including borrowings - has well and truly reflated back to pre-pandemic levels. So the company is not as cheap as one might think. Royal Caribbean Cruises Source: Bloomberg If our Martian assumed that earnings will return to pre-pandemic levels relatively soon (the company is currently loss-making), they would see that based on its current enterprise value, the company has an EV ratio of 20 times this recovered level of earnings (EBIT). A rational Martian would be bewildered that the market has put such a high valuation on this company. Why would Mr Market be willing to pay such a high multiple of fully-recovered earnings for a heavily-indebted cruise business that remains years away from pre-pandemic profitability - in an industry that will also expand capacity at double-digit rates over the coming years, adding downward pressure to ticket prices? All kinds of 'reopening-exposed' businesses, from airlines, travel agents, and live entertainment businesses, have seen their EVs fully-recover to pre-pandemic levels, despite earnings being years away from their fully recovered levels. Are 'defensive' stocks safe? Meanwhile, our Martian would also hear a narrative around markets being 'stretched' and observe some investors turning to defensive stocks which have become similarly irrationally overvalued. In California, The Clorox Company, a large producer and marketer of branded household cleaning products has a great, defensive business. Households continually buy their bleach, sanitizer, and stain removers irrespective of the natural ebbs and flows of the economy. It makes sense to Mr Market, therefore, that if the markets are feeling toppy, hiding out in companies like Clorox provides some safety. But our Martian would not think this company's stock is particularly safe at all. Its growth has recently turned negative. During the pandemic, its business grew rapidly when Americans rushed to stock their homes with cleaning products. But today that growth is naturally much harder to come by. It is hitting the inevitable 'air pocket' that follows such a drastic pull-forward in demand. The Clorox Company - Revenue Growth Source: Company Filings The company is also being hit by higher costs. The rising costs of commodity inputs and transport are materially impacting on profitability. In the company's most recent quarter, for example, its gross margin fell 10 percentage points relative to the same period in the prior year. Yet Mr Market has awarded the company a valuation that implies strong performance for years to come. Its ratio of EV to next year's earnings (EBIT) is 23 times - a materially higher ratio than even before the pandemic. Our Martian would once again be confused: this hardly feels like a safe investment offering protection from 'stretched' stock prices. Again, this dynamic is not isolated to Clorox. We are seeing similar dynamics in a wide range of branded consumer packaged goods businesses, as well as utilities - all of which are considered by Mr Market to be 'defensive' today.
Are mega-tech's best days in the past? While our Martian sees 'reopening up' and 'defensive' stocks trading high, they would also see mega tech companies with great fundamentals being punished amid the 'mega-tech is dead' rotation due to concerns about inflation, regulation or other reasons that seem to justify the narrative Shenzhen-based Tencent is one example. It owns the most widely used digital communications applications in China. With 1.2 billion members in its mobile community, this business owns a privileged platform for social communication (both personal and professional) as well as gaming, news, music, video, e-commerce, and payments.
Tencent - A Platform of Platforms Source: Company Presentation This company also happens to own China's second-largest cloud computing business. It is rapidly building out leading enterprise applications and platform tools, which are the Chinese equivalent of Salesforce, Shopify, Zoom and Microsoft Office. These are not monetised today and, instead, represent valuable future growth options. But despite this powerful position, our Martian would see the stock is seriously undervalued. The ratio of enterprise value (excluding a large portfolio of equity investments) to next year's operating earnings (EBIT) is just 16 times. Unlike the reopening-up and defensive stocks above, our Martian would find this stock very interesting. A business of this quality, growing 15-20% per annum for at least the next five years and beyond, with an attractive collection of large, high-probability future growth options, yet trading at a reasonable price. And it's not just in China where these disconnects between the valuations of mega techs and their high business quality are occurring. In the US, for example, Mr Market is willing to sell you Facebook at less than 18 times next year's operating earnings. To our Martian, buying Tencent and Facebook from Mr Market - and selling him Royal Caribbean and Clorox seems logical. What is an investor to do? So how should an investor play a market that would baffle a rational Martian? It depends on your investment time horizon. Investors looking to make money next week, next month, or even next year have their work cut out for them. Anticipating Mr Market's mood swings - which change on a dime - is not easy and may well be impossible to do on a sustainable basis. But for investors, like us at Montaka, who are seeking to compound capital over the long-term - think ten, 20 years and beyond - the answer is to always let your investment decisions be guided by the facts, such as the strength of business advantages, the long-term growth of industries and the fair mappings of business earnings drivers to present values today. As Benjamin Graham famously told Warren Buffett:
Let the facts liberate you from the short-term mood swings of Mr Market. In the current market that means not getting sucked into short-term reopening and defensive narrative trades and focusing on owning the long-term winning businesses in the world's most attractive markets. Investing for the long-term by looking through the short-term noise means that your portfolio will perform differently to that of your peers but staying the course - as challenging as that can be - will yield the long-term rewards. Funds operated by this manager: Montaka Global 130/30 Fund, Montaka Global Fund, Montaka Global Long Only Fund |

17 Nov 2021 - Australian Equities Market Update & 2022 Outlook
Australian Equities Market Update & 2022 Outlook Sage Capital 12 November 2021
Portfolio Manager, Kelli Meagher and Chief Investment Officer, Sean Fenton provide an update on the Australian equities market and the outlook for 2022. |
Funds operated by this manager: CC Sage Capital Absolute Return Fund, CC Sage Capital Equity Plus Fund |

16 Nov 2021 - Japan Edges Closer to Confronting China
Japan Edges Closer to Confronting China Arminius Capital 05 November 2021 A change of Prime Minister usually doesn't result in much change in Japanese policies, because almost all Prime Ministers are created by the Liberal Democratic Party machine, which pursues power rather than policies. But the new PM, the 64-year-old Kishida Fumio, has made some Cabinet appointments which might lead to major changes. Of course, all the top Cabinet posts went to long-serving party stalwarts in order to pay Kishida's debts to the faction bosses who supported him, but he also added several of the LDP's rising stars to his Cabinet. The most surprising appointment was to a newly created job - Minister of Economic Security. Kishida described the role as "securing strategic technology and goods and preventing technology leaks so we can achieve a self-sufficient economic structure." That translates to ensuring semiconductor supply and innovation, strengthening cyber security, and thwarting Chinese theft of Japanese intellectual property. The new Minister has of course denied that the economic security measures have anything to do with China. What is really interesting about the job is that its theoretical functions cut across several existing ministries, which will cause vicious turf wars with entrenched bureaucracies. The new Minister will only be able to do his job if he has the firm support of the Prime Minister. Fortunately, the new Minister seems to have all the right qualifications and connections. Kobayashi Takayuki is the product of an elite education (Kaisei Academy, Tokyo University Law School) and an elite career path (Ministry of Finance, Japanese Embassy in Washington). On the way, he also picked up a Master of Public Policy degree from Harvard's Kennedy School of Government. We will watch Minister Kobayashi's progress with great interest. Funds operated by this manager: |

15 Nov 2021 - Managers Insights | Collins St Asset Management
Damen Purcell, COO of Australian Fund Monitors, speaks with Rob Hay, Head of Distribution & Investor Relations at Collins St Asset Management. The Collins Street Value Fund has a track record of 5 years and 9 months and has consistently outperformed the ASX 200 Total Return Index since inception in February 2016. The Fund has returned 19.50% versus the Index's annualised return over the same period of 11.23%.
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15 Nov 2021 - Two COVID-19 trends no one is talking about
Two COVID-19 trends no one is talking about Firetrail Investments October 2021 Two interesting trends have emerged from the pandemic. Australians are having more babies and they are swapping out their city lifestyle for the beach and bush. In contrast to short term phenomena such as the hoarding of toilet paper, these shifts have potential long lasting implications for the economy and listed companies. In this article we discuss these two trends and the opportunities they have created for companies in the Firetrail Australian Small Companies Fund. COVID baby bump or boom?When large mortality events occur including diseases, earthquakes and wars, birth rates decline and on average, reach a trough some nine months later. As shown in Figure 1 below, this pattern holds for events such as both World Wars and the influenza outbreaks of 1918. Following an initial drop, fertility tends to rebound. Birth rates begin to recover ~11 months after an epidemic and then increase in the subsequent 1-5 years. The end of World War II sparked one of the biggest baby booms of the 20th century. Could we be at the start of a post-COVID generation? Estimates by academics regarding the post-COVID birth recovery vary widely. The Institute for Family Studies notes that COVID has the potential to boost births over the next four years by anywhere from 0.3% to 40%. We admit this is a wide range to draw a conclusion from just yet. However, recent trends in birth rates and anecdotal evidence provide reason for optimism:
The increase in IVF volumes has benefited portfolio holding Monash IVF. During FY21, Monash recorded a 40% increase in new patient stimulated cycles and there are no signs of a slowdown. New patient registrations in 2H21 were up 8% compared to 1H21, and up 35% on 2H20. ~70% of patient registrations are converted into patient treatments within ~3-6 months. COVID-19 has sparked a behavioural shift amongst Australians. Restrictions on travel and a greater focus on family, health and wellbeing is resulting in a re-direction of priorities. While it is still early days to call it a baby boom, recent birth rates and trends IVF trends indicate we are at the onset of a baby bump. Looking beyond the headline impacts of escaping the cityFor decades the lack of job opportunities in regional areas has seen many Australians relocate to capital cities. Then the pandemic hit. The sudden shift to working from home has made a tree change or sea change possible and more attractive for many Australians. ABS data shows net migration to regional Australia is the highest since records began two decades ago. In the 12 months to March 2021, net migration to regional areas increased 87.1% year-on-year. The impact of demand for housing on prices in regional towns has been widely publicised. Digging beneath the headlines, second order impacts are more interesting and perhaps even more important. Demand for products and services across some industries increase as more people move to regional areas. Regional houses are larger and hence require more bricks to build and more lights to illuminate. For listed companies with strong brands, regionalisation has created an avenue to expand store footprints, increase sales, and grow market share. Portfolio holding Beacon Lighting is capitalising on this opportunity. It plans to open three additional regional stores this year including Ellenbrook (WA), Butler (WA) and Melton (VIC). The City of Melton, where Beacon Lighting is expected to open a new store in FY22, is one of the fastest growing areas of Australia. 11 new suburbs have been proposed to be added to it! In 2020, the city recorded a population increase of 4.6%, more than double the increase for Greater Melbourne which grew at 1.6%. Increased sales in regional areas often come hand-in hand with supercharged margins. This is a direct result of limited competition and lower costs of doing business. A key cost line for many retail companies is rental expense. Bendigo is over 150km away from Melbourne CBD. Looking at recent advertised rents, it is ~50% cheaper to rent a large retail space in Bendigo than it is in areas close to the Melbourne CBD like Southbank. Going regional also comes with less competition from smaller niche retailers that often compete on price. Regionalisation has created an opportunity for companies like Beacon Lighting to increase sales, grow market share and generate better returns on a per store basis. ConclusionThere are many interesting phenomena that have emerged from the pandemic, many with direct and lasting implications for listed companies. Restrictions on travel and a refocus on family has contributed to a spike in birth rates and IVF volumes. The sudden shift to working from home has driven many Australians away from the cities to regional areas. The baby bump (or potential boom?) and regionalisation trends have created an opportunity for many companies in the Firetrail Australian Small Companies Fund. Disclaimer This article is prepared by Firetrail Investments Pty Limited ('Firetrail') ABN 98 622 377 913 AFSL 516821 as the investment manager of the Firetrail Australian Small Companies Fund ARSN 638 792 113 ('the Fund'). This communication is for general information only. It is not intended as a securities recommendation or statement of opinion intended to influence a person or persons in making a decision in relation to investment. It has been prepared without taking account of any person's objectives, financial situation or needs. Any persons relying on this information should obtain professional advice before doing so. Past performance is for illustrative purposes only and is not indicative of future performance. Pinnacle Fund Services Limited ABN 29 082 494 362 AFSL 238371 ('PFSL') is the product issuer of the Fund. PFSL is a wholly-owned subsidiary of the Pinnacle Investment Management Group Limited ('Pinnacle') ABN 22 100 325 184. The Product Disclosure Statement ('PDS') and the Target Market Determination ('TMD') of the Fund is available at www.firetrail.com. Any potential investor should consider the PDS before deciding whether to acquire, or continue to hold units in, the Fund. Whilst Firetrail, PFSL and Pinnacle believe the information contained in this communication is reliable, no warranty is given as to its accuracy, reliability or completeness and persons relying on this information do so at their own risk. Subject to any liability which cannot be excluded under the relevant laws, Firetrail, PFSL and Pinnacle disclaim all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage), however caused, which may be suffered or arise directly or indirectly in respect of such information. This disclaimer extends to any entity that may distribute this communication. The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of Firetrail and its investment activities; its use is restricted accordingly. All such information should be maintained in a strictly confidential manner. Any opinions and forecasts reflect the judgment and assumptions of Firetrail and its representatives on the basis of information available as at the date of publication and may later change without notice. Any projections contained in this presentation are estimates only and may not be realised in the future. Unauthorised use, copying, distribution, replication, posting, transmitting, publication, display, or reproduction in whole or in part of the information contained in this communication is prohibited without obtaining prior written permission from Firetrail. Pinnacle and its associates may have interests in financial products and may receive fees from companies referred to during this communication. This may contain the trade names or trademarks of various third parties, and if so, any such use is solely for illustrative purposes only. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with, endorsement by, or association of any kind between them and Firetrail. Funds operated by this manager: Firetrail Absolute Return Fund, Firetrail Australian High Conviction Fund |

12 Nov 2021 - 10k Words - November Edition
10k Words - November Edition Equitable Investors November 2021 We kick off with Australia outpacing Hong Kong in IPO activity, as highlighted by Bloomberg. We can't avoid the inflation discussion and FactorInvestor charts US inflation expectations, while we go back to Bloomberg for a look at inflation-protected treasury yields, which have not followed the script of 2013. IFM Investors looked at how Australia's monthly inflation (using the Melbourne Institute monthly inflation gauge) was still accelerating in year-on-year terms, despite decelerating in terms of month-on-month increases. Then we turn to equity valuation where Redpoint's Tomasz Tunguz explores the phenomenon of Software-as-a-Service (SaaS) valuation multiples rising to 100x their Annualised Recurring Revenue (ARR); while Axios charts the explosion in valuation of rental car companies, aided by hype around electric cars. Finally, Kailash Capital shows that S&P 500 stocks analysts dislike are priced at a 34% discount to the market, based on a multiple of sales, while stocks that are analyst "darlings" trade at a 17% premium to the market. The unanswered question is whether the pricing is caused by analyst popularity or whether analysts tend to like stocks that are already strongly supported by the market (Kailash suspects there is "self-reinforcing price action as high average returns... force analysts to shift to buy ratings").
Australia outdoing Hong Kong in IPO activity Source: Bloomberg Tracking US inflation expectations Source: FactorInvestor
Yields on Treasury Inflation-Protected Securities (TIPS) now v 2013 Source: Bloomberg Australian Bureau of Statistics (ABS) quarterly headline inflation v Melbourne Institute inflation gauge Source: IFM Investors Listed Software-as-a-Service (SaaS) valuation as a multiple of Annualised Recurring Revenue (ARR) Source: Tomasz Tunguz of Redpoint Market capitalisation of rental car companies Hertz & Avis Source: Axios, FactSet Disclaimer Nothing in this blog constitutes investment advice - or advice in any other field. Neither the information, commentary or any opinion contained in this blog constitutes a solicitation or offer by Equitable Investors Pty Ltd (Equitable Investors) or its affiliates to buy or sell any securities or other financial instruments. Nor shall any such security be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction. The content of this blog should not be relied upon in making investment decisions.Any decisions based on information contained on this blog are the sole responsibility of the visitor. In exchange for using this blog, the visitor agree to indemnify Equitable Investors and hold Equitable Investors, its officers, directors, employees, affiliates, agents, licensors and suppliers harmless against any and all claims, losses, liability, costs and expenses (including but not limited to legal fees) arising from your use of this blog, from your violation of these Terms or from any decisions that the visitor makes based on such information. This blog is for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. The information on this blog does not constitute a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Although this material is based upon information that Equitable Investors considers reliable and endeavours to keep current, Equitable Investors does not assure that this material is accurate, current or complete, and it should not be relied upon as such. Any opinions expressed on this blog may change as subsequent conditions vary. Equitable Investors does not warrant, either expressly or implied, the accuracy or completeness of the information, text, graphics, links or other items contained on this blog and does not warrant that the functions contained in this blog will be uninterrupted or error-free, that defects will be corrected, or that the blog will be free of viruses or other harmful components.Equitable Investors expressly disclaims all liability for errors and omissions in the materials on this blog and for the use or interpretation by others of information contained on the blog Funds operated by this manager: |

11 Nov 2021 - Three key topics dominating global equity markets
Three key topics dominating global equity markets Antipodes Partners Limited 27 October 2021 Three key issues - inflation, the power crunch, and China's economy - reverberated during the third quarter of 2021 and continue to present a complex backdrop for global equity investors. As we move into 2022, we think it will be critical that global equity portfolios are appropriately positioned to provide exposure to the potential opportunities while providing protection against risks that may emerge such as an economic growth shock (perhaps from a hard landing in China), or an inflation shock. There's also the possibility of a combination of both - the stagflation scenario. InflationAntipodes has been saying for some time that we think inflation is going to be more sticky than transient, while central banks have taken the view that near-term inflation will fade.
It's almost a certainty that tapering will begin before the end of the year and rate hikes may start from late 2022 as opposed to 2023. The risk is that the Fed is tightening as economic growth is slowing, which may compound the problem. A power crunch?Europe's gas price is at a record high, the US gas price has more than doubled over the year, and oil is back above $80 per barrel, the highest level since 2014. Energy is becoming another pressure point. Europe is facing a shortage of gas due to a strong rebound in economic activity, coupled with supply issues and an underinvestment in power infrastructure. In recent days Russia declined to pump extra gas into continental Europe which compounded fears. Moscow's position may change in the coming months, but even if Russia does decide to supply some additional gas, Europe is unlikely to find enough volume from traditional suppliers to fill the deficit. With LNG and European gas prices equivalent to $150 per barrel of oil we're seeing a shift to burning oil in Asia. This shows how the gas rally is also fuelling an oil rally. Consumers are going to start to feel this. The cost of filling the tank will rise, as will the cost to power and heat homes in the northern hemisphere's peak winter demand season. At the same time, power shortages have hit China. China's power demand has been strong due to domestic and global activity, but hydropower output - which is almost 20% of total power in China - has been hit due to low rainfall, and coal production has also been subdued due to capacity controls and tightening policies around mine safety and emissions. We've started to see shutdowns in high energy intensive industries, and if this accelerates through the broader industrial sector there will be implications for domestic and global economic growth.
The Chinese economyChina has been tightening property policies on and off over the last five years. Growth had become unsustainably high again in the first half of this year, so policy was tightened again to curb speculation and house price inflation. Housing starts began contracting in August, which quickly exposed the weaker property developers. We all know the Evergrande story - but the Chinese banking system can handle an Evergrande default, if it comes to that.
The bigger question is whether an Evergrande default seizes up financing for other developers, which spills over into weaker housing prices and a broader economic slowdown. Residential development accounts for around 10% of GDP, so it's a material contributor to China's economic activity. There would also be implications for commodity prices, particularly commodities where China is a major consumer but an immaterial producer. Copper and iron ore look the most vulnerable here. However, with Government debt less than 70% of GDP, China has the firepower to re-stimulate - and we think it's a question of when rather than if. This time around we think stimulus will focus on consumption, reinforcing the social safety net and decarbonisation. China wants to accelerate its transition to a consumption and services driven economy. To do this, household spending needs to grow at a faster pace than incomes via running down China's extraordinarily high savings rate. With changes in the regulatory backdrop now well-progressed, investors are going to start to re-focus on long-term opportunities, particularly around consumption trends. Funds operated by this manager: Antipodes Asia Fund, Antipodes Global Fund, Antipodes Global Fund - Long Only (Class I) |

10 Nov 2021 - Net Zero - Offsetting our carbon emissions

10 Nov 2021 - We are our own worst enemy
We are our own worst enemy Ty Archibald, Aoris Investment Management 29 October 2021 Most of us read about behavioural biases and acknowledge they exist, yet there is no evidence the financial community is any better at dealing with them. Understanding the impact of biases improves our ability to apply guardrails and combat them, leading to better decisions and investment outcomes. With that in mind, let's look at three of the most common biases, where we come across them in everyday life and investing, and how we can minimise their impact. Optimism biasIt is natural to take the view that good things will happen more often than they do. While positive thinking makes life more pleasant, the evidence suggests excessive optimism can be to our detriment. Optimism bias regularly appears in investment thinking. For example, the graph below shows the change in analyst earnings per share estimates for the S&P 500 across each calendar year from 2006-2020. Of the 14 years included, 10 showed meaningful downgrades. On average, analysts overestimated EPS growth by about two times. The high proportion of downgrades illustrates analysts repeatedly overestimating business prospects at the beginning of each period, demonstrating optimism bias in practice.
Optimism bias can be exaggerated when investing in companies with a wide range of outcomes, where little past information is relied on for the basis of bold future assumptions. By focusing attention on the large potential gains, it can be difficult for investors to visualise potential losses. For example, the electric vehicle market is in its early stages, and it is difficult to gauge how stable the market will be and which manufacturers will ultimately succeed. How can we combat our natural optimism bias without turning ourselves into killjoys? Paying attention to history will help keep our expectations grounded. Social proof biasSocial proof is a phenomenon that involves people copying the actions of others in situations of uncertainty. Humans naturally believe there is safety in numbers and want to fit in with the crowd. We also avoid confrontation, so going along with what others think provides the path of least resistance. Humans feel there is safety in numbers. Investors can panic amid a sell-off and follow the crowd, even if selling is contrary to the information they have on hand. In contrast, at the peak of an economic cycle investors can flock to well-performing stocks in an attempt to ride the momentum wave and avoid the dreaded feeling of FOMO (fear of missing out). FOMO and the impact of herding behaviour can have very real consequences. For example, in Singapore in the 1980s an unexpected bus strike had created an abnormally large crowd at a bus stop outside a bank. Local customers mistook the gathering as people waiting to make a withdrawal, so they too lined up thinking the bank must be in financial trouble if there were so many customers waiting. The bank was forced to shut its doors to prevent an actual bank run. How do we counter social proof? A simple (but not easy) way to combat this behaviour involves developing independent thoughts and conclusions, with reference to objective reasoning and facts and not the "sway" of the herd. Anchoring biasAnchoring bias causes us to rely too heavily on the first piece of information we are given about a topic. We then typically adjust slightly away from the original anchor point when making decisions, even if it has little relevance to the problem we are trying to solve. Anchors are used in negotiations every day. Take the used car salesperson for example, who will always give you their best price upfront. They have now dropped an anchor, and any price you can get below that will seem like a better deal to you when it could still be a price well above the car's value. This will now play a larger role in your decision, rather than more relevant indicators of value such as the age of the car and its current condition.
Similar behaviour regularly occurs in equity markets. Investors have a tendency to anchor on the current stock price and use that as a gauge on where the stock will go in the future, or use current multiples compared to historical values. Like the car salesperson example above, this single indicator has little relevance and offers no insight into the value of the underlying business. How do we deal with anchoring? Dropping your own anchor is an effective way to combat this. Thinking about the value of a business independent of the current price or purchase price can keep the focus on business fundamentals. Key takeawaysIn conclusion, let's reinforce the key considerations for investors when dealing with the three behavioural biases mentioned above. Optimism bias: If we participate in parts of the market characterised by narrower ranges of outcomes, it mitigates the chances of excessive optimism. Exciting themes, emergent markets and unproven technologies are fertile grounds for optimism bias. Social proof bias: Maintain independent thoughts and conclusions. Be wary of herd following behaviour and think carefully about the reasons for a purchase or sale. Anchoring bias: Delay decisions and drop your own anchor. Slowing down our decisions allows us to develop a more holistic view of the problem we are facing and can avoid anchoring off that first piece of information we receive. We can make more informed transaction decisions if we focus on the value of the underlying business, without reference to the current price or our original purchase price. Funds operated by this manager: |

9 Nov 2021 - Revolution in Art
Revolution in Art Michael Frazis, Frazis Capital Partners 01 November 2021 This is a strange moment in crypto. Some are still debating the extent to which the entire complex is a Ponzi scheme, while at the same time many of the smartest people I know are quitting incredible jobs and going all in on Web31. And for good reason. There are simultaneous revolutions in all kinds of fields going on right now and it's all so exciting and moving so fast it's hard to keep track. NFTs2 confer and prove ownership backed by the strength of globally distributed crypto networks. As is so common in Web3, this codifies and strengthens behaviour that already exists: people were already paying up for signed album prints! The human impulse is the same, only Web3 signatures are better, as the resulting NFTs are tradable all over the world and verifiably secure in a way that a signed baseball cap simply can't be.
Art When future generations write their version of the 'Story of Art', this moment in time will feature heavily. This book needs a new chapter or two
For thousands of years, with rare exceptions, a life spent making art was a life spent in poverty. Now, for the first time ever, artists are making the kind of coin that puts financiers to shame. Earlier in the year an artist called Beeple made a digital artwork every day for 5,000 days and sold the lot as an NFT for $69 million as '"Everydays: The First 5000 Days".
This seemed large at the time, but volumes have exploded on exchanges like Opensea and ImmutableX. NFTs, which use the security of crypto to confer ownership, have gone up seven-fold to over US$10 billion over the last three months alone. New things are now possible. An artist can now sell an NFT and receive an ongoing share of future sales. In the past, a young artist might sell work for a pittance and receive no ongoing royalties as their career progressed, with all profit accruing to collectors. Many NFTs are conventional artworks, but there has been an explosion of creative activity. The current craze is for collections of say, punks, the cheapest of which are now priced in the hundreds of thousands of dollars. These are an extremely exclusive club right now - which of course is the point. There are all kinds of copycats of varying quality, like Bored Ape Yacht Club, (you might pick one up for $100,000). Part of the attraction of these is their link to personal identity. These go on your twitter handle, your discord, and wherever you represent yourself on the internet. How on earth are people paying for all of this? One way is through the ~$2.5 trillion of crypto wealth sitting on the personal balance sheets of some of the strangest and most forward-looking people on the planet. It's not surprising they are spending a small portion of that on art. The trick to understanding all this is that art has always been ludicrous and illogical. Why pay more for this painting than that? On the surface it looks like some mix of fashion, history, and aesthetics. But the real answer is that it has been that pricing simply comes down to what people choose to do with their wealth. Understand that - and you understand what's going on in NFTs. The next level, of course, is realising that NFTs enable all kinds of entirely new models such as in photography.
Photography Stock images are terrible for everyone except a small group of gatekeepers. Firms like Adobe charge a small fortune for photo catalogues and pay photographers next to nothing. Photography is widely plagiarised and to be honest, selling it upfront or charging commissions to anyone who makes use of an image online isn't practical in today's world. Enter NFTs, where in a single sale you can generate vastly more than stock image sites will pay, while giving true, verifiable ownership to the purchaser. Cath Simard for example sold one NFT of her widely copied photograph and then made it free for all to use. Everyone wins, and no doubt the value of that NFT is higher now for all the publicity.
Cath Simard's image can now be downloaded and used for free, guiltlessly
Music The Web2 era of YouTube and Spotify has not been great to musicians, apart from the very most popular. Companies like Spotify pay pittances to most artists while building tens of billions of dollars of equity value, (though to be fair at least part of this is to do with rent extraction by art labels). Less than 14,000 artists out of 8 million make more than $50,000. In other words, the vast majority can't make a living. Only 12% of industry revenue goes to musicians. The annoying thing is that most of us love music, listen to it for significant parts of our days, and in other parts of our lives, pay much more, for less. Some musicians are already making more out of NFTs than the paltry pennies thrown their way by Spotify. One artist sold one NFT and made as much as ~7 million hours of Spotify streaming. RAC made more from a single NFT than ten years of album sales. Web3 allows the coding of all kinds of different business models. For example, artists can sell album NFTs that offer a share of future streaming revenues. So those hip enough to find artists before they are cool can both support their development and also share in their future success. This is the closest thing to this is equity ownership which revolutionized capital and financed the last few centuries of extraordinary progress. The beauty of Web3, which we'll see in context after context, is the ability to code any kind of new business model. This is very much needed. This is better than what we had before
Did these pathways exist in Web2? Yes, but really no. Photographers, artists and designers could indeed create a page on Instagram or facebook and have access to a significant part of the global population. But they would be posting their work for free, and it was Facebook and the like who accrued the hundreds of billions of dollars of value. None of this went to the content providers. Perhaps artists could include a link to a page or something. Apple is similarly exploitative. You can't buy books on Kindle app because Apple demands a 30% rent. In fact, Apple charges a 30% tax on all digital goods sold through their platform, as does Google Play. It's a good thing there are now globally distributed alternatives. Web2 companies exploited visual art for their own commercial aims, and in doing so, spammed us with advertising, of which far too much was political. And by focusing on attention and advertising, promoted increasingly radicalising and enraging (engaging) content. The possibilities of Web3 simply didn't exist before crypto.
Why this matters When I was younger, art and music seemed like subjects to be taken for fun. There never seemed a serious prospect of working in the space in the adult world. In 2021 going into 2022, it's hard to think of a skill set more valuable than an eye for design, understanding of colour, and the energy to create something new and exciting. As a teenager I knew many who were obsessed with making art and music. The majority are now working in uncreative industries. At the critical moments they simply had to get a job. Today's teenagers, digitally and increasingly cryptonative, have other options. You only need a handful of fans to make a living, and with crypto, there is now a pathway. The result of all this is an explosion of creative energy. Think of all the talented musicians and artists that never found an audience and ended up spending their lives doing something different. Web2 gave everyone access to an audience, but value was captured by a small number of companies. Web3, with all its unexplored potential, and over $2 trillion of internet-native capital behind it, has enabled more people than ever to get the early financial wins necessary to spend their life making art. And that is great news for the rest of us. 1 Web1, Web2, Web3: three stages of internet growth. Web 1.0 - connecting information and getting on the net. Web 2.0 - connecting people / social participation. Web 3.0 - use of machine learning and artificial intelligence to create more open, connected, and intelligent websites or web applications; includes decentralised apps that run on blockchain. 2 A non-fungible token is a unique and non-interchangeable datum stored on a digital ledger. NFTs can be used to represent easily reproducible items such as photos, videos, audio, and other types of digital files as unique items, and use blockchain technology to establish a verified and public proof of ownership. Funds operated by this manager: |