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G’day guys, gals and galahs. We’ve got #44, the tip rat1. Big week for me. Planning a few big profile stories for future issues of CbK (Li Lu is one), setting up a paid offering (I welcome any feedback), and working on some big guests for the podcast. Anyway, a quote from Josh Wolfe to start:
Chips on shoulders put chips in pockets
Here’s the format of today’s email:
Part 1: This week on Compounding Curiosity
Part 2: Predictions vs. Probabilities
Part 3: Bonus Quirky Content - Something to Read, Watch, and Listen
Michael Norris on Compounding Curiosity [Transcript] [Apple Link]
Instead of hiding my podcast in the Bonus Quirky Content section each week, decided from now on I’ll put it on blast at the start of each email. After all, I put a butt tonne of effort into it and wouldn’t plug it if I didn’t think you’d get value out of it.
This weeks guest is Michael Norris, who is a China-based analyst and is currently AgencyChina’s Research & Strategy Manager. Michael has written in-depth analyses, warnings and predictions about fast-growing Chinese companies. This includes a (now infamous) three-part series on Luckin Coffee’s shonky corporate governance – a full year before the company admitted to sales fraud. I was beyond lucky to have Michael on the pod!
I am so so grateful Michael shared his thoughts and his story with me. I’m still thinking about our conversation weeks later.
When I was growing up, I was in and out of hospital a lot, so I had a couple of different operations, couple of different things not quite right. And, from that I think I learned the value of luck, really, that it plays in your life. And, being lucky enough to be born in a place where some of these procedures are possible, to be lucky enough that a test comes back and it says that a tumor is benign rather than malignant. And so, these are things that I carried with me, I think, from a young age, to say that when you evaluate your life, or evaluate other people’s lives, there are so many of these lucky moments, lucky breaks.
My takeaways and lessons:
Chinese consumers aren’t as patriotic as you think. They just want to buy the best possible product at the best possible price that meets their needs. Naturally, Chinese companies are better positioned to offer that than foreign competitors.
Tired: Tiered Cities. Wired: City Clusters. Rather than looking at cities as tiers and comparing them, using the nine clusters is a better tool for comparison when comparing things like disposable income, purchase channels, and information channels. FYI the nine clusters: The Yangtze River Delta cluster, the Shandong Peninsula cluster, the Chengdu-Chongqing cluster, the Western Plain economic cluster, the Pearl River Delta, Central China, Western Taiwan Straits, the Beijing-Tianjin-Hebei cluster, and the Northeast China cluster.
Predictions vs. Probabilities
Cats and Dogs. Celtics and Lakers. Kalani and a deadline. All natural enemies. Well now you can add predictions and probabilities to that list! What got me started down this rabbit hole, was in Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, Will Bonner writes:
…you don’t win by predicting the future; you win by getting the odds right. You can be right about the future and still not make any money. At the racetrack, for example, the favorite horse may be the one most likely to win, but since everyone wants to bet on the favorite, how likely is it that betting on the favorite will make you money? The horse to bet on is the one more likely to win than most people expect. That’s the one that gives you the best odds. That’s the bet that pays off over time.
So what do some of the best investors think about predictions? Friend or foe? Useful or useless? John Kenneth Galbraith pulls no punches sharing his thoughts on predictions and forecasting:
“The only function of economic forecasting is to make astrology look respectable.”
In The Alchemy of Finance, Soros credits his success not to making correct and accurate forecasts, but rather by correcting his false ones. Super interesting passage:
Even in predicting financial markets my record is less than impressive: the best that can be said for it is that my theoretical framework enables me to understand the significance of events as they unfold—although the record is less than spotless. One would expect a successful method to yield firm predictions; but all my forecasts are extremely tentative and subject to constant revision in the light of market developments. Occasionally I develop some conviction and, when I do, the payoff can be substantial; but even then, there is an ever-present danger that the course of events fails to correspond to my expectations.[…] My approach works not by making valid predictions but by allowing me to correct false ones. With regards to events in the real world, my record is downright dismal. The outstanding feature of my predictions is that I keep on expecting developments that do not materialize.
Measurement Not Prediction [Link]
Kris raising some great points here. And what it all comes down to is: Investment edge is about measurement not prediction.
Predicting means you make a probability-weighted opinion of future states of the world. This is typically built up from logic and reasoning.
Measurement is counting. Usually with an intent to rank. The idea is simple but not easy. Accounting is an entire field devoted to trying to create a meaningful picture of a business by normalizing quantities across industries.
These are of course not mutually exclusive activities. Measurement is done in current time and then projection leads to predictions. The prediction eventually becomes a point in the past, gets counted, and iteratively fed into the next projection. […]
there is so much to measure. Once you accept this, your gaze shifts from the future to the present. The focus becomes finding the variables that matter, harvesting and cleaning data, and normalizing across markets. Every one of these steps leaves tremendous opportunity for creativity, discretion, and disagreement.
There’s a line later that sums up the argument pretty bloody well.
“I don’t know what is going to happen but these prices are self-contradictory compared to the future state of the world.”
I don’t agree 100% with Kris’ thoughts, but it’s good to read conflicting opinions. And when he argues his points so well, it’s hard to not take them on board!
You are either a casino or a tourist. So if you claim you can count cards I need to be convinced they are countable. Can you measure?
If you’re going to predict stuff anyway, beware of the recency bias!
When making a prediction, people tend to give disproportionate weight to whatever has happened most recently. In investing, there is a strong tendency to buy stocks that have done well or to place bets on a money manager who seems to have a hot hand.
The GOAT (AKA Wazza Buffett)
I mean, this wouldn’t be complete without a weigh-in from old mate Warren:
I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections, but we care very much about, and look very deeply at, track records. If a company has a lousy track record, but a very bright future, we will miss the opportunity...
Most forecasts don’t allow for alternative outcomes.
- Howard Marks
Predictions, overrated. Probabilities, underrated. Predictions just seem like so much extra work for so little return. Some motherfuckers are always trying to ice skate uphill. Sure, coming up with predictions is fun and makes you feel smart. But playing the probabilities is where the moneys’ at. And would you rather be smart or rich? Like a zombie, I choose brains.
Something to read: Jim Chanos: China’s “Leveraged Prosperity” Model is Doomed. And That’s Not the Worst [Link]
Every man and his dog has been sharing this on Twitter and for good reason. Doom news is always catchy, but Chanos explains his reasoning well.
In the late ‘80s, everybody thought Japan was going to surpass the U.S., but they had the same problems – a banking system that was bloated, real estate prices too high, too dependent on exports, and they’ve had 30 years of muddling through. The idea that China is going to be growing 6 or 7% while the rest of the world is growing 2% just has to be revisited. It’s not gonna happen. That realization is going to be the bucket of cold water that’s going to force them to rethink next steps. The population has been used to this leveraged prosperity, and everybody has borrowed money to buy real estate. What are the next steps? It’s otherworldly what they have done with real estate. Whatever happens, it’s going to be severe somehow. Whether it’s politically or financially — whatever it is, it’ll be severe.
See also: The Emperor is In His Underwear [Link]
Something to watch: How GCash Became the Super App of the Philippines | The History of GCash [12 mins]
Brand Origins is doing some great work highlighting Asia-Pacific businesses. Seriously, he’s on par with Business Casual. This one covers how GCash got started and grew so fast, its rivalry with Paymaya, and why GCash has an edge. You’ve got GCash with some serious backing and help from Alibaba’s Ant Financial, yet GCash’s closest competitor Paymaya has a similar relationship with Tencent. So GCash vs Paymaya is almost Alibaba vs Tencent in a very small way.
Something to listen to: South Korea: The Tech Powerhouse on the Cyber Frontline [Link] [Apple Link]
Highlighting the rise of the tech sector in South Korea through its transformation of the economy, the influence of Chaebol, and what the tech scene in Korea might look like going forward.
Rabbit hole/resource to dive into: The Peter Lynch Playbook [Link]
This is awesome. 23 pages but super easy to read, and a great refresher on Peter Lynch’s style of investing.
Bonus links that don’t fit anywhere else:
The death of SE Asia’s democracy icons [Link]
“The fortunes of Southeast Asia’s three pro-democracy icons [Sam Rainsy Anwar Ibrahim, and Aung San Suu Kyi] have imploded. Rainsy has been in self-exile since late 2015, Suu Kyi is now once again under house arrest and Anwar faces calls to retire as the leader of Malaysia’s opposition coalition.” and “the real work of building democracy is building representative institutions that provide real accountability and electoral systems that provide real choice”
Why Nobody Invests in Japan [Link] (Paywall)
“In 2019 (the latest data available), the United Nations Conference on Trade and Development (UNCTAD) ranked 196 countries in terms of cumulative inward FDI as a share of GDP. Japan came in dead last—just behind North Korea.” and “If Japan hopes to reverse its stagnant economic growth, increasing FDI is an essential ingredient in the recipe. Japan’s struggles are rooted in decades-old formal and informal hurdles placed in the way of foreign enterprises’ efforts to acquire domestic firms.”
Fintechs and traditional lenders do battle across Southeast Asia [Link]
Why is this space so lucrative? “about half of Southeast Asia's nearly 400 million adults do not have a bank account. Over 90 million more are "underbanked": They hold a bank account but lack sufficient access to investment products, insurance or credit.”
Alan Kohler: Prepare for inflation and higher interest rates [Link]
“Wages can and should rise. Some of it will come out of the profit margins of companies, some of it will be passed on in higher prices, but it’s very unlikely to result in higher unemployment.” and “while the current burst of inflation directly caused by the pandemic might be transitory, we should prepare for more persistent inflation in the longer term. And the RBA will have to get ready to tap the brakes sooner than it thinks. But not too hard, mind.”
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