21 | Portfolio Turnover, China's Growth and Indra Nooyi

"Nothing beats this shit"


What’s 9 + 10? #211. As usual, keen to share what I’ve been reading, learning, and compressing. But first, a quick quote from DeMar DeRozan:

If you want to stay on the island with me, I’m going to be the one to get the pineapple first… whatever the hell that means.

Here’s the format of today’s email:

  • Part 1: Portfolio Turnover

  • Part 2: China's Growth

  • Part 3: Under the Spotlight: Indra Nooyi

  • Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen.

Portfolio Turnover

Warren Buffett said “Our favorite holding period is forever”. Is that realistic? Is that applicable for us plebeian private investors? Let’s find out.

Just in case, what is portfolio turnover? A measure of how quickly securities in a fund are either bought or sold by the fund's managers, over a given period of time. Portfolio turnover is calculated by taking either the total amount of new securities purchased or the number of securities sold (whichever is less) over a particular period, divided by the total net asset value (NAV) of the fund. The measurement is usually reported for a 12-month time period. h/t Investopedia.

A Vastly Misunderstood Concept [Link]

Honestly an amazing write-up by John Huber (@JohnHuber72). Helps break down some arguments for different holding periods. Hard to summarize this one. Just read the full thing!

Walter Schloss was akin to the low margin grocery store that didn’t produce exciting margins on any one product, but collectively across the store it was able to effectively turn over the merchandise fast enough to make exceptional returns on the assets it employed.

Some other investors might be more akin to the higher margin, lower turnover businesses that might produce much lower asset and inventory turns, but still generates very attractive returns on capital because of its very high return on sales (profit margin). These investors hold stocks for longer periods of time, but find big winners that rise 3, 5, 10 times in value over many years. A business can produce incredible profitability on lower asset turnover if it can wring out a large amount of bottom line earning power from its top line revenue.

Huber on why Investors usually think high turnover is bad:

I think the reason for this negative connotation is that portfolio turnover is often associated with excess, or inappropriately high levels of trading, which is often done for emotional reasons without regard for the fundamentals of the business.

And yet:

Peter Lynch is famous for the term “10-baggers”—investment that rise 10 times in value. But in fact, when Lynch started running the Magellan fund and was producing incredible 50%+ returns in the early years, his turnover exceeded 300% every year for the first 4 years (in other words, the average length of time he held a stock was only 4 months). I think in reality, his fantastic track record is much more because of higher portfolio turnover and much less because of the famous “10-baggers” that he cites in One Up on Wall Street.

Portfolio Turnover is the Price of Progress [Link]

Dare I say similar to Huber’s post, yet still raises some great points:

I believe there is an over-glorification of buy and hold investing among active managers.  With the rise of private equity and venture capital, everyone is trying to invest in public markets with the same permanent capital mantra. The lower the turnover, the more cerebral and thoughtful you appear to be with initial investment decisions. Nothing looks better than being right from the very beginning. More often than not, a low turnover is shown as a badge of honor. 

And some more background on famous investors with high turnover:

Peter Lynch had 300% turnover per year in the early years of the Magellan Fund. Joel Greenblatt had similar turnover at Gotham Capital. Even Warren Buffett’s public company portfolio ranged between 50-100% turnover per year during his first three decades. In fact, contrary to what most believe, many of the greatest long-only investors had their best performance when they had higher rates of turnover in their portfolios. And these were investors that invested in larger, more established businesses where low turnover is much more achievable. 

The Warren Buffett Paradox [Link]

Nothing better than an obscure PDF! This paper reviews two of Buffett’s tenets of portfolio management [turnover and concentration] and illustrates that the majority of active equity mutual fund managers disregard Buffett’s advice. These two tenets are just examples of the wide disconnect between Buffett’s investing methodology and accepted practice on Wall Street.

High levels of portfolio turnover create a significant hurdle for active investors to overcome in the form of transaction costs and capital gains taxes (if applicable). Frequent trading generates high commission costs and more difficult to observe market impact costs. It is estimated that trading costs range from 0.63% for large-cap stocks to over 4.00% for small cap stocks for a portfolio with high turnover (>100%). Over time, such costs compound and act as a significant drag on wealth creation. Taxes are an even bigger headwind. Roughly two-thirds of mutual fund assets reside in taxable accounts.Robert Arnott and Robert Jeffrey find that turnover rates of 50-100% cost investors approximately one-third of their pre-tax returns

I dunno. Felt like I was starting to get a bit too positive on high turnover so this was a handy inclusion.

Portfolio Turnover the Warren Buffett Way vs. the Peter Lynch Way [30 mins]

This video is a decent enough breakdown of some of the best key points of both sides of the argument.

This is why I think Peter Lynch did well. High turnover is not actually a problem but low selectivity is a problem. So if you had very high turnover but you were working 24 hours a day learning everything you could about every company, visiting every company, never taking a day off, never taking your mind off investing theoretically you could have much higher turnover than other people do because you'd be just as selective as some of the best investors in terms of how much work you were putting into each stock that you decided to buy.

The problem with high turnover that for the average person is they're turning things over meaning that they have a high level of activity buying and selling things while also having a low level actual work going into thinking about stocks. So that ratio is the really important thing you do not want to think very little about stocks and act a lot. But Peter Lynch was thinking a lot about it and acting a lot about it. […] Buffett is a really extreme example of that because he's focused on it all the time and yet he rarely does anything. And that's the most likely way to get really good decisions obviously is if you spend a ton of time learning about things and actually doing very very little.

My Portfolio Turnover Summary?

If you invest in a dud, and your holding period is forever, chances are it will always be a dud if not worse later down the track. You can't polish a turd. Wow, what investing knowledge Kalani Sensei I hear you say. But what I’m trying to get at is, having a long term holding period isn't a guarantee of returns. Sometimes investors (me included) get excited at a beaten down, cheap looking business, when in reality it may be cheap because it’s meant to be cheap because it’s a stinker of a business. Doesn’t matter if I hold it for ten days or ten years. Still gonna stink.
Holding long term you might get the tax advantages and lower trading costs (which is much less of a factor than 20 years ago). But if you can make a high portfolio turnover strategy work, more power to you.

I hope all my rambling has made sense. Overall, this feels like a classic investing problem where there’s no definite answer of what works. And that’s cool. Plenty of ways to skin a cat. Myself? I prefer buy and hold. Suits my personality better. You do you.

China's Growth

I love studying foreign countries. How they do things. Why they do things. How quickly they can do things. Always something to learn and takeaway. I did my minor at Uni in Mandarin so China has always been of interest to me. So time to marvel and understand more about their growth!

The Road Network

In 1988 China had no motorways at all. And now 30 years later it has 84,000 miles of them, that's more than any other country in the world.


Since 2011 they've been building 6,000 miles of motorway every year. 6,000 miles a year! And it's not like the terrain is easy!

My only concern? Maintenance. Seriously hurts my brain imagining how the hell you maintain these highways on stilts.

High-Speed Railway

China in 2007? “Hold my beer”.

Having used China’s HSR, it’s a phenonaml feat of engineering. So how does China do it?

The first reason is demand. The US has eight cities with more five million people, India has seven, Japan has three, the UK just one. China has 14. The Shanghai-Beijing line alone serves more than 300 million people. This unprecedented rate of urbanisation, combined with rising household incomes creates a need for the fast delivery of people and goods across the country. At the same time, China’s heavily congested airspace often causes flight delays and high speed rail is not only cheaper but hugely more reliable. The high levels of demand allow the Chinese government to make massive investments in high-speed technology and infrastructure. […] In Europe, high-speed rail costs around USD $25M to $39M per kilometre, while in the US it totals around $56M. In China it’s down at $17M, up to two-thirds lower than other countries.

Under the Spotlight: Indra Nooyi

Each week I provide a little spotlight on an investor or operator I admire.
Indra Nooyi is this weeks focus, in a nutshell:

  • Born in 1955 in Madras [now Chennai], to a father who worked for the government-run State Bank of Hyderabad; and her mother, “a driven housewife, pushed the children to get the best grades.”

  • Nooyi earned a bachelor’s degree in chemistry from Madras Christian College in 1976 and a master’s degree in business administration two years later. Then moved to the US, where she received an additional master’s degree in public and private management from Yale in 1980.

  • For the next six years, she worked as a consultant for BCG and later held executive positions at Motorola, Inc., and the engineering firm Asea Brown Boveri (now ABB). In 1994 Nooyi would join PepsiCo as senior vice president of corporate strategy and development. In 2001 she was named president and CFO.

  • Nooyi became PepsiCo CEO in 2006, and was the first woman to lead them, and one of only 11 female chief executives of Fortune 500 companies. In 2018, Nooyi stepped down as CEO after 12 years at the helm.

Parting Words as I Step Down as CEO [Link]

Some lessons learned as PepsiCo CEO.

1) Have a clear vision

Whether you work in operations, sales, R&D, or any of our functions, always have a clear, compelling vision for what you want to accomplish. As it is written in the Book of Proverbs, ‘Where there is no vision, the people perish.’ And I’ve found that to be true for all of us, no matter our role in the company.

2) Play the long game

Yes, you need to hit your short-term targets, but always try to do so in a way that’s sustainable over the long haul, a way that balances the company’s level — and duration — of returns, a way that generates a profit while also making a difference, always advancing the values of Performance with Purpose.

3) People are everything

No matter how smart your strategy, success or failure usually comes down to one thing: the team. In everything you do, find teammates who can help execute your vision and empower them to succeed.

4) Listen

When someone gives you feedback, assume positive intent. Assume they’re genuinely trying to help. Think their words over, and be willing to challenge your assumptions. I promise, it will make you better associates and better people.

5) Be a lifelong student

Our world is changing rapidly all around us, and if you want to continue to thrive in the years ahead, you’ll need to continually educate yourself. […] listen to podcasts or search Google—however you do it, make your ongoing education a priority.

Indra Nooyi on Freakonomics Radio [Link]

Interesting chat that covers a lot of topics. Interetsting thoughts on changing a company’s culture:

When people say culture eats strategy, I lived it first-hand, because I saw how many people sort of said, “Why should we change our company that’s been so successful for a future we don’t quite understand?” One had to paint the future in a very personal way. I mean, I had to use our own employees to say, “Look, your own eating and drinking habits are changing. If your eating and drinking habits are changing, as evidenced by A, B, C, and D” — which I was observing at work — “why do you believe the rest of the consumers out there, their habits are not changing?”

Importance of STEM is an interesting one:

One of the things that my experience has taught me is that if you are trained as a scientist in your youth — through your high school and college — if you stay with the STEM disciplines, you can learn pretty much all of the subjects as you move along in life. And your scientific disciplines play a very important role, and ground you very well as you move into positions of higher and higher authority, whatever the job is. It’s very hard to learn science later on in life. One of the pleas I would have for most young people today is, “stay with STEM as long as you can.” 

And lastly, answeringto what’s something that you believed to be true for a long time, until you found out that you were wrong.

For a long time, especially given my cultural upbringing, I thought you just listen to your parents and you did whatever they asked you to do. Until I had my own kids. And they told me, “No, we are people too. We have our own mind, we do our own thing.” And I learned the tough way, that the rules that applied to me, from my parents to me — I mean, I was a very dutiful kid in many ways. And if the parents said, “Jump over this line,” you jumped over the line, and you didn’t ask questions. As I had children here, and my husband and I, we learned that they’re people too. They have their own thoughts and ideas, and we have to jointly evolve a point of view, as opposed to, “You will listen to me.” In life I’m learning a lot of lessons that are different from my own cultural upbringing.

I’ll finish with this (Source is Nooyi’s LinkedIn article mentioned above)

Think hard about time. We have so little of it on this earth. Make the most of your days, and make space for the loved ones who matter most. Take it from me. I’ve been blessed with an amazing career, but if I’m being honest, there have been moments I wish I’d spent more time with my children and family. So, I encourage you: be mindful of your choices on the road ahead.

Bonus Quirky Content

Something to read: Sacred Hoops: Spiritual Lessons of a Hardwood Warrior by Phil Jackson [Amazon Link]

Honestly, if you don’t like basketball, might not be the book for you. But if you are interested in Phil Jackson, prime 90’s Chicago Bulls, and basketball, worth it. Freaking love Jacksons thoughts on losing and the culture around it. Inb4 someone chimes in ‘but that’s a loser’s mentality. No it ain’t you dung-beetle, life ain’t black and white.

Our whole social structure is built around rewarding winners at the perilous expense of forsaking community and compassion. The conditioning starts early, especially among boys, and never stops. "There is no room for second place," the late coach Vince Lombardi once said. "It is and always has been an American zeal to be first in anything we do, and to win and to win and to win." How can anyone, from sports figures to entrepreneurs, possibly maintain their self-esteem when this attitude dominates our cultural mindset?

And again:

Our culture would have us believe that being able to accept loss is tantamount to setting yourself up to lose. But not everyone can win all the time; obsessing about winning adds an unnecessary layer of pressure that constricts body and spirit and, ultimately, robs you of the freedom to do your best.

Something to watch: Behind The Scenes of The Dark Knight Trilogy [77 mins]

Okay, not a short video, I’ll admit. But if you love The Dark Knight trilogy as much as me, it’s so bloody worth it. Lowballing here, but I reckon I’ve seen The Dark Knight at least 15 times. I don’t know why. I’m addicted to it. (F&F: Tokyo Drift I think I’ve seen a similar number of times).

The below quote is not specifically from this doco, but is entirely applicable:

I think audiences get too comfortable and familiar in today’s movies. They believe everything they’re hearing and seeing. I like to shake that up.

Something to listen to: Richard Branson on How I Built This [Apple Link]

On why Branson has so many companies:

If you have one company and then something goes wrong, you don't have any companies. If you have 250 and one goes wrong, you've got 249. So, I mean, I try a lot of things. Um, and sometimes I fall flat on my face. Sometimes they succeed and sometimes they succeed overwhelmingly. Um, but also, you know, life is a lot easier. Um, in that I found great people to run things on a day-to-day basis. And I can, uh, sit back and look at the bigger picture and, and, um, you know, dream about exciting new projects, which is what ready and entrepreneurs.

And a classic case of why and how to start a business:

the best businesses come out of frustration. So if you have a bad experience with another business, somewhere in your life, and you think, you know, screw it, we can do it better than this. Even if you don't know much about it, just do it, you know, get in there.

Shoutout to Audiograph for the transcripts for this episode!

Resource / Rabit hole to dive into: Hedge Fund Letters [Link]

Exactly what it says it is! A number of hedge funds letters every quarter going back to 2016. Also, it’s in Dropbox too so you can batch download for data hoarders like me.

Final thought for the week:

Until next Wednesday, 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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Source for those who think I’ve gone off the deep end