The Rubicoin Podcast: Investing for Everyone
Recorded on the top floor of Rubicoin HQ in Dublin, Ireland, you can now listen in as Rubicoin’s investing team discusses our unique approach to investing in the U.S. stock market.
Catch up on all the latest episodes of the Rubicoin podcast below or via your preferred podcast platform (iTunes, Stitcher, Acast, Overcast, Pocket Casts, etc).
This is investing for everyone.
Rubicoin operates a full disclosure policy. Rubicoin staff may currently hold long positions in some of the companies mentioned in this podcast series.
JAMES: Hi there, welcome to the very first Rubicoin podcast, coming to you from the top floor of Rubicoin HQ in the heart of Dublin city. My name is James Dunne; with me here today we’ve Rubicoin CEO and co-founder Emmet Savage, and our head analyst Rory Carron. This is the very first podcast we’ve done here at Rubicoin; I suppose we’re not quite sure exactly what we’re going to talk about, but we have such good conversations here about investing—and life in general—that I suppose we decided we want to get it down on record, maybe.
EMMET: Exactly; there is no shortage of opinions in this building. On the subject of this building, we are, as James said, in the loft of number 5 Merrion Row, which is slap bang in the middle of Dublin City. As most people know, Dublin is synonymous with pubs; it is the morning time, so there’s a good chance that we’re going to be hearing the delivery of kegs of beer outside our window as we make our way through the morning’s podcast, but I’m delighted we’re doing this. It’s great. The whole purpose is to put our personality down on record and talk through our strategy and our philosophy, and it’s going to take a lot of time for us to totally capture it, but it’s great to get started.
RORY: Yeah, I think none of us really know where this is going to go. Rather than plan it out too much, it seemed like it was best to just get in here, start talking; and then, if people let us know how they felt about things, we can try and improve next time.
EMMET: Exactly; the great thing about it just being the three of us is there is no kind of committee. We can just take feedback and act on it if you feel it’s fair.
Everybody’s out to find the next best stock, that’s what we’re all in the game for; there’s a lot of different ways in which you can go about finding great investments. In preparation for this, I thought better “how do you actually go about finding great businesses to invest in?”
The OCD approach is alphabetically; starting with the letter A, researching every stock right through to letter Z, and that’s going to take a long time. You can start to cut up the world of companies by their size, also known as market caps. You can start at small-cap companies and go all the way through to the giants of the world today; Apple, Amazon and so on.
You can go to blogs and services. You can talk to family, friends, colleagues, or indeed you can have sector knowledge, so you might come to the table with an understanding of a certain business & sector and bring that knowledge to bear to your investing life, as Peter Lynch espouses in his famous book “One Up on Wall Street”.
But I suppose our whole approach to finding the next great investment and the great investments of today is underpinned by something that Einstein said. He said “there are five ascending levels of intelligence; the first is smart. The second is intelligent. The third is brilliant. The fourth is genius, and the fifth level is simple.”
So Einstein himself, possibly the greatest thinker of all time, espoused simplicity, and that’s what underpins our business; you do not need an MBA, you do not need to be a CFA and you don’t need to have worked on Wall Street to beat the majority of people and professionals out there.
What you need is discipline, and you need a discipline that is brilliant in its simplicity.
Rubicoin’s strapline is “Brilliant Investing Made Easy” and it’s possibly going to be ”WAS Brilliant Investing Made Easy” because we found the word ‘investing’ is quite a cold word. But the premise of our business is to find great businesses, wonderful business models that have attributes that we look for.
What we look for in attributes are businesses that have qualitative attributes, such as a founder with a track history of excellence, a product that appeals to you at an emotional level, for example. Then we look at those quantitative attributes, and there are attributes you can measure with numbers; that could be inside ownership, it could be sales growing quickly.
We’ve put together a formula in the business that we apply to that giant world of stocks and listed companies, and we use it as our filter to bring down a shortlist of thousands of companies, down to the 90 that we’ve featured at this moment in our app. What’s great is that it works, and it will continue to work. The reason our formula works is we’ve back-tested it, it’s underpinned by the greatest teaching of investment masters, and it’s also very logical; as Einstein said, it is simple.
That’s really what we do, and we’ll dive into the specifics of how we do it as our podcasts progress, but effectively there is a very nice graphic on our website, ‘How we pick our stocks’ was wonderfully articulated in that web page; that’s what we do when we roll up our sleeves and say, “right, where are we going to find the next great investment?”. We don’t go from A to Z, we don’t go large or small, we don’t specifically start with a view; we start by looking at businesses that are out to address a joint opportunity, and have already got momentum in doing so.
JAMES: Leading on from that, is the approach yourself and Rory, in particular, take to narrowing down the vast majority of stocks into a more approachable selection. As consumers, we all go out every day; we go into stores, I see people buying beverages from Coca-Cola’s range or going to Starbucks around the corner. What role do you think an everyday consumer can play in identifying stocks on the market?
EMMET: People discount their own experience. People somehow think that because they’ve lived their own life, that the lessons they’ve accumulated are somehow less worthy than those on Wall Street, and that’s completely incorrect.
The book I mentioned already, ‘One Up on Wall Street’—by Peter Lynch, famous fund manager—describes how the average woman and man on the street has one up on the professionals on Wall Street by applying what they’ve learned in their lives.
So to your question, James, it’s a case of looking at a product. Peter Lynch describes a motel chain of the time; he went and dipped his toe in the pool, he lay on the bed, and he basically applied the thinking of a consumer. I’m sure there are juices that you’ve bought, there are candies you’ve consumed, there are clothes you’ve worn that had an edge over the competing products, and if you’ve picked up on it, chances are the mass market has picked up on it too.
The greatest, overused, most cliched example of all that everyone can relate to is, whether it was in the subway or on the streets, you started to notice the white cables of the iPod at the time. People could see it; it was a visual identifier on the streets; it was a beautiful product, and people at that time could see that this was a really cool product, but they somehow, en masse, overrode their own insights thinking “well, you know Apple, I need an expert to tell me to buy it”. There was something that stood in the way of going and buying shares in Apple, and I’ll tell you, had we all just bought Apple shares when we saw that beautiful product starting to appear; the horse clearly had not bolted. It was only a birth, and you know what, arguably it’s the biggest business in the world today and it still is a good investment.
So people override their own hunch—their own intelligence—because of fear, and that’s something that we really are going to break down.
RORY: Just to add to what Emmett said, I remember when I started with this company, I had an interest in finance, but I hadn’t ever done a deep dive into stock analysis and I remember Emmet was teaching me everything he knew-
EMMET: It took 10 minutes. [LAUGH]
RORY: Took a little longer than that. But he was trying to teach me, you know, his philosophy and how he does things.
And I remember doing what I now see a lot of our own users doing, which is that I thought it was too simple. I started trying to get deeper into things like PE ratios and yield curves and PEGs, and what I’ve discovered very quickly is that a lot of that stuff, it’s a useful tool, but actually if you go back to the philosophy that we propose, which is “find great businesses; with great visionary leaders; with great management teams; hold them for the long term”, you’re going to outperform all that stuff.
EMMET: Yeah, it’s a temperament game. It’s not that Rory, James, or I have looked at the academic side of investing and decided it’s not for us. In fact, we all went back to university and got our Masters in various areas from finance to strategy to support what we do, but what is that expression – ‘Through discipline comes freedom.’
For anyone has ever learned a musical instrument—and I speak as a lifelong student of the guitar—the guitar can be as simple as three chords or it can be at a mastery level, whether it’s Joe Pass, Joe Satriani. So the whole thing about music and how it applies to investing is that you can learn enough to have a very productive and satisfying musical life with the rudiments, or you can decide to go for mastery.
I would like to think that here in our business we’ve gone for mastery, and presented it outwards to our very cherished user base as something that is simple for them. The greatest complexities of products are kept away from the customer. It’s like that stage production; you sit down, you’re there to be entertained, the complexity is backstage—you don’t even think about it.
There is complexity in every business backstage. There’s a lot of complexity at Rubicoin backstage, but where we are absolutely obsessed is, as Einstein said, keeping it simple. Making sure that our customers look at our product and there is no instruction book required, which was I guess a function of doing something in a mobile environment. You have to make sure there are no instructions required.
JAMES: I suppose that the focus on the simplicity has another benefit in terms of investing, in that you don’t have to wait until you understand all the small intricacies of investing. We often say it’s not timing the market, it’s time in the market, and if you’re waiting to do a three-year degree in investing and finance— things like that—that’s three years of your investing life gone. It’s important if you go into investing and start doing the simple things first, it gets you into the market.
EMMET: Yeah, absolutely. Everyone remembers their first—virtually everything; whether it was their first CD, if you’re of that age, or first album, or first day studying.
If you go to university, most people just basically are there for fun for the first while, and then realise “I’d better open a book”. That first day you open a book is a day that a lot of people remember, as they remember the first day they walked into college.
The whole thing is getting started; it’s a far bigger event than people credit it for. It is burned into your mind; and to your point, James, getting started means deciding you are going to undergo a lifelong journey as an investor, finding a business you believe in right now, today, and putting some money into that stock, and not overthinking it.
Just as that person who goes to the running track for the first time, they’re not overthinking it, they’re gonna run. And that’s what they’re there to do. They’re not there, at that moment, to get to the Olympics; it may happen, but really the first day of a running track, the first day at the gym, the first day you lift a guitar, is really about just getting started.
We’re very emphatic that we want our users to find a brand that they sympathise with, that they like; that they can kind of get started, put some money into that business now and don’t overthink it. Sure, the market is at an all-time high and you know what, that’s a statement that has been used many, many times in my life, and will be used many more times in my life.
The market will always hit new highs. What really matters is putting some money into a business you believe in now and you’re on the road, that’s actually a very important moment in your investing life; which for those of you who bought shares through Rubicoin, we celebrate with confetti. When you click to invest and buy a share there is a shower of confetti that falls across the screen, which I think is one of the most brilliant innovations in the history of investing.
RORY: There’s a lot to be said for dipping your toe into companies. If you’re interested in a company, you can buy a very small amount of stock in a company without harming yourself financially or otherwise. You’ll just be more interested in that company, and it’ll push you to learn more and to read more about it; to get more interested in that business. You can then keep investing over a number of years and build a position.
EMMET: That’s right, that’s a very good point. One of the things we’ve repeatedly heard is “Would you build a product that allows people a false account for paper trading?”
There is no substitute for doing; it’s like, will we build a guitar simulator, or would you just pick it up there and play an E chord? It’s better to do than to read about doing. You can read a thousand books about plastering a wall, but there is no substitute for just going and doing it.
To your point, Rory, you buy a small amount of a business—20 bucks worth of Facebook—and you are more hardwired to the performance of Facebook stock than had you added it to a watch list, or some trading paper trading account.
RORY: Not to go off topic here, but simulators as well. You’ll never behave the same way in a simulator as you will in real life. That’s true for poker, any of those casino games where people play with fake money; they throw all their money in. It doesn’t harm them, they have that kind of temperament. When it’s real money, that’s when you really get tested, and you should practice that way.
JAMES: On that point then, talking about real money; Emmet, you mentioned that the markets are at all-time highs at the moment, but I suppose maybe a lot of people were feeling that maybe wasn’t the case last week when it took a bit of a stumble.
Some people might be listening thinking “It’s all well and good us telling them ‘you need to getad your skin in the game, there’s no point in thinking about it for a long time'”.
But when the market goes through a period of uncertainty, like last week, is it a case of easier said than done? It might be quite difficult for people who want to make the very first investment, because of the volatility of last week. What would you advise them?
EMMET: Yeah, I agree. The thing is, when you’re in a moment, you are in that moment; I know I’m stating the obvious here.
One of the things our listeners will learn is I draw parallels and analogies all over the place, and I equate A to B and try and draw parallels. It’s like if you’re in an airplane and you hit clear air turbulence, and that thing is getting slammed around. No matter what you’ve learned or no matter what the pilot might say to you about “this is normal”, it’s scary.
If you’re up there, you’re the one being thrown around; you’re in your seat and it’s an unpleasant moment. And it happens every day; as I’m speaking right now, there is, I don’t know, how many dozens, hundreds of planes at this moment in clear air turbulence with passengers holding on to the edge of their seats.
It happens, and when you bring that back to the stock market; when you’re in the moment; when you’re sitting in the chair of the airplane that’s going through that turbulence, or the markets taking a downturn, it is unpleasant.
A pilot saying to you, “Hey look, this is how the markets behave” doesn’t really help. Your rational mind is grappling with facts and saying “OK, that’s fine, but my stocks are going down”. And that’s actually the moment you’re in.
I’m speaking from the heart. I felt it, I’ve seen it. In fact, I’m speaking as a guy who lost everything by the time I was 26 through the dotcom meltdown, and that’s another story which I’m sure we’ll come back to.
When you’re in the moment it hurts, but you will get through it and that is just a fact; so you really have to allow the rational you to understand that your stock folio might drop 5% in a day, or worse. That’s just the way it goes, that’s the game we’re in.
However, the strategy that we’re employing is a long-term buy and hold strategy, and all you need to do to comfort yourself that it works is to look at data; past performance, 120+ years of data.
I think the S&P 500 launched in 1953 or thereabouts, and it’s been synthesised backwards as if it existed from 120 years. You just have to look at that data to see that there are moments of rapid downturn, there are moments of prolonged downturns, but long-term buy and hold always wins, and a diversified folio of quality businesses will always beat the alternative.
This isn’t just me speaking from experience; my all-time favourite article was written by Warren Buffett, no surprises. I think it’s an excerpt from one of Berkshire Hathaway’s annual statement letter to shareholders. It was repurposed in Fortune magazine, it’s called “Why stocks beat gold and bonds”. That’s freely available on the Internet, and it’s a magnificent study of why stocks beat gold and bonds, articulated in only the way that Warren Buffett can articulate things. He brings things down to beautifully simple complex subjects, and rather than make a mess of it and prove to our listeners how bad my recall actually is, I suggest people go off and read it; but the long-term buy and hold strategy works.
JAMES: Speaking about simplicity, and I suppose with last week’s stumbles in the market, it’s also earnings season around now. This is a time that a lot of investors kind of become unsure because stocks have a habit of either dropping or spiking depending on the news in the last three months. In the grand scheme of the company, three months is a very short period of time.
So looking at a few of the stocks from our showroom, a few them had pretty good earnings; a few them not so much. Why don’t we have a chat about some of the ones who didn’t really perform as well as the market has hoped over the last few weeks?
I think probably one of the first ones we saw was Paypal. They reported two weeks ago with pretty good earnings and pretty good figures, but the big news, I think, was the decision of eBay to split away from using them as their main payments provider, which had quite a negative effect on the stock. Rory, do you want to talk a bit about that?
RORY: Yeah, so Paypal have had an agreement with eBay since they split. it was going to run up in 2020 anyway; eBay has now pushed that forward, and they’re moving to a long-term deal with a Dutch company called Adyen.
Just to give you some scale, Adyen’s net revenue in 2016 was $178 million. Paypal was $11 billion. So they’re definitely going with the underdog here, the smaller company.
Few thoughts on this, eBay and PayPal used to be very close; at one point 30 percent of PayPal’s revenue was from eBay. It’s now down to 13 percent, so it’s not that big of a player. Users are still going to be able to make payments through PayPal, it’s just not going to be as deeply integrated into the eBay website.
Personally, I think people are going to stick with PayPal. PayPal’s a giant company—bigger than American Express now—the first company in the e-commerce world that really gave people that trust to put in their credit card details online. eBay recently has made a couple of very strange decisions, this being one of the most recent; another was giving up their stake in MercadoLibre a few years ago, right before it rocketed up a few hundred percent. I’m not so sure about eBay. I would back PayPal on this one, and they’re going to be all right over the long term.
JAMES: I was doing some online shopping recently, and I forget sometimes how easy it is to use PayPal. Having your details saved and just the one-click checkout, it just makes things so much so much easier. Other stocks we were kind of looking at recently; Wynn had quite a good earnings recently, but then, of course, there was some negative news came out about Steve Wynn which ultimately resulted in his retirement.
Wynn is one of those companies we have in our app; one of the big determining factors was the iconic CEO in Steve Wynn. How much of an effect do you think his departure is going to have on company stock, or will it have any at all?
EMMET: I’m of the mind it will have—in the medium term—minimal impact. Even though Steve Wynn’s name is over the door, and even though he set the scene if you like, within the business, it’s now big enough to keep going. The fundamental strategy of the business will remain intact and the incoming CEO will make sure it remains intact.
It’s again analogous to a Royal Caribbean cruise liner vs. a small little dinghy; it is now a Royal Caribbean cruise liner. Whether it’s Captain A or Captain B, I believe this particular situation won’t really have an effect. Vegas will always be there, Macau will always be there; Wynn will be synonymous with luxury. And I believe it will continue to deliver as a performing luxury resort casino.
RORY: Yeah, out of all the stocks in our showroom I’d say maybe only Tesla & Facebook would be so reliant on their CEO as the public face of their company.
Wynn had built the Mirage, the Bellagio. He was a veteran of the gaming world. At his time in the Mirage, he delivered 24% compounded annual returns for 20-odd years. So he’s built two multibillion dollar companies.
Interesting note about his resignation; I thought the obvious choice to replace him was Linda Chen who is the CEO of the Macau operation. Instead, he’s gone with Matt Maddox, who has been his right hand man for about 14 years. He’s a young guy, in his 40s. Sounds to me like it might be a resignation in name only.
JAMES: I suppose then maybe two of the laggards of our showroom as of late; first, GoPro. Kind of towards the end of 2017 we had—talking to yourself Emmet, and Rory, around the office—we’ve been seeing some green sprouts at GoPro, although they had themselves warned of an expected weak holiday season; but then after the holiday season it all appeared a lot worse than expected, and there’s rumours of them looking for a buyer. What do you think, who would want to buy them?
EMMET: They have a huge brand. There are a couple of approaches I could take to answering this question. I might just start by saying we have 90 stocks in our showroom; we won’t get them all right. And I believe GoPro is a shining example of what went wrong. We obviously put everything into our showroom with the best of intentions and best of research, and really what you look at in a business is, you’re buying its strategy.
The wheel came off the GoPro strategy wagon, it flew off! The business suffered a lot of missteps that it did not seem to learn from; the notable one was the Karma drone—which was a story unto itself—with the greatest of fanfare, unveiled with the most beautiful viral videos that you could imagine.
And the story quickly unraveled that the product just simply wasn’t fit for market and couldn’t ship. They had missteps along the way; pricing amongst their various cameras caused confusion. I can’t even recall, but when you looked at all the cameras side by side, even the pricing seemed illogical, which would cause a consumer to question their own understanding of what it is; “what am I missing?”.
So there were multiple points where the business made mistakes, but what GoPro did do well was in a very short time—what Nick Woodman did very well, and the team around him—was build an internationally recognised brand.
One of the things here in Dublin, Ireland—where we’re recording from—is we’re a small island country lodged somewhere between the U.K. and the United States, and when products make it here you can take it as granted they’ve made it significantly in the UK and in America.
GoPros are everywhere. What GoPro has to sell—if it indeed is successful, and I’d imagine it will be—is a photography brand or a camera brand that’s more relevant to a younger generation. Canon and Nikon and all these other giants who just basically let them at it—as they say here in Ireland, just watched them go—can now swoop in and buy them at bargain basement prices if they wish.
I mean, the other strategy that Canon could go with is let it die because the giant camera companies—which mostly originated from Japan—have the competencies. They could have gone into direct competition; perhaps they did, I haven’t noticed, the brand is strong for GoPro.
So there are potential suitors there, but really, what are you buying? You’re buying a brand. The actual supply chain; if you’re big enough to buy GoPro, it’s quite likely you already have your distribution chain laid out and you have the capability to manufacture cameras.
It’s an unfortunate one, but I think what supremely went wrong with GoPro was strategic; confused products, confused direction, inability to deliver, and that really was the death knell of the business. What do you think, Rory?
RORY: I mean, I’ve got a GoPro. I love it. I think it’s a great product, and just on your note about pricing; this is the third holiday season that they’ve made a mistake with pricing, which at that point you’re kind of screaming “learn from your mistakes!” They’re haemorrhaging executives at the moment; there’s only one that has to go, I think, and that’s Woodman.
EMMET: Yeah, exactly. It’s true.
JAMES: Speaking of companies making mistakes, the final company I wanna talk about is Chipotle. We saw increased revenue this quarter; I think it was mainly driven by price hikes across restaurants, and they seem to be just having an eternal problem with declining footfall. Emmet, I know you spoke recently about it; you were recently in New York. You were outside Chipotle at lunchtime on a weekday, and it was a ghost town.
EMMET: Yeah; actually, John Tyrrell (my co-founder) and I were at a New York Chipotle, and we thought it was shut. We thought “Isn’t that odd, look at that fine big restaurant closed”. Sure enough, it was open, and that’s really where we looked at each other. I’m the stock guy and John is masterful at building businesses, but even John said “That doesn’t look good”, so I thought “Wow, it can’t be good.”
An anecdote is not data, and I try to always remind myself that my own experience of something does not multiply up a millionfold into the entire story, but that was certainly stark. I thought “this is strange”. Across the road was Shake Shack and I said “c’mon John, we’ll go over.” Honestly, we abandoned mission; the lines were out the door, it was like the last feeding day on earth. It was unbelievable.
So really, the challenge with fast casual dining is, it’s not a million miles from fashion; as in apparel, it can be a fashionable thing. Two years ago going to Chipotle was the thing you did. People tweeted about it, posted pictures of their burritos on Facebook and it was on trend. Despite the fact that it is the utility of eating, those trends move, and those trends moved across the street into Shake Shack; that’s just the way.
But we’ve spoken about three of our laggards, and I’m gonna borrow from the co-founder of Motley Fool, who spoke at something recently (David Gardner) and I thought it was really inspired where he said “We learn from our winners, not our losers.” We watch our losers, because there are learnings there, but as a business we derive far, far more learnings from our winners.
There was, once upon a time, this school of thought and education (in Ireland anyway) that you’re only as good as your greatest weakness, and then I think the school of thought (no pun intended) turned around to say “Look you will always be good and bad at certain things, better at certain things, and you should really nurture the things you’re good at.”
Bringing that into our investment world, our showroom has absolutely trounced the market in every timeframe since we launched it. We have unfortunately picked some dogs; badly timed, they might be wonderful businesses, but bad timing. So if the question became “Do I still believe in GoPro, Chipotle and Wynn?”, I’d have a different answer for each one. Ask Rory. [LAUGHS].
JAMES: Maybe here’s an easier question for you; do you still believe in Amazon? They just seem to go from strength to strength, and apart from their earnings, the biggest news recently was Jeff Bezos, Warren Buffett and Jamie Dimon forming a healthcare supergroup. What effects, Rory, do you think this will have on the healthcare sector in general?
RORY: Well, it’s certainly going to shake things up; these are three businesses with three very distinct attributes and skill sets.
If you think of Jeff Bezos as kind of an operator, Buffet’s in the insurance game, Dimon’s in the finance game; there’s a lot of skills that those three people can bring to tackling a major issue like healthcare. We don’t know much about it—we don’t even know the name of the company yet—but it’s going to be nonprofit; they’re looking to innovate; looking to use technology for transparency; and there’s a couple of stocks in our showroom that are along those lines as well.
Maybe we’re about to see a shift in how healthcare is tackled in the United States, maybe led by these big companies, having seen that the providers aren’t doing the job.
EMMET: As Rory said to me a while back, maybe a year ago, no fund manager was ever fired for picking Amazon; it will never fail to amaze me. Amazon just simply has the ability to keep surprising me. Even parking the health care play, there are so many aspects of their business that’s visionary, and you didn’t see it coming, like the acquisition of Whole Foods. There’s probably more enlightened people in retail than me saw that coming, but to me, that was a complete shock.
Then when you see what they’re doing with this new concept store in California, Amazon Fresh; the one where you just pick up the stuff and put in your basket?
JAMES: Yeah, it’s in Seattle.
EMMET: That’s really amazing. That is absolutely amazing; the business just disrupts and disrupts and disrupts. It’s just wave after wave; a fact of life from the beginning of time is the strong get stronger, whether it’s nations our businesses, and one can look at Amazon, as they can with Apple or Google and go “I’ve missed it.”
Are you kidding me? No, you haven’t, unless you’re 85, and you basically just want to go lie in the beach and enjoy the autumn of your life.
But truthfully, Amazon is in a position now that you just can’t see what could affect it, what could really tear it down. It’s so diversified, it’s so innovative. These things are just going to happen, such as the healthcare collaboration that they’ve come up with, and that you couldn’t see it coming. It makes perfect sense as well.
JAMES: Interesting notice from the earnings; Jeff Bezos said that they’ve seen great results with Alexa, their home assistant, and that they’re gonna double down on it. There’s now 4000 smart devices that can connect with Alexa from 1200 different brands, and there’s over 30,000 skills that are similar to apps that you can use with Alexa. I think the pace that they got into that market, and how quickly they dominated it was very impressive. I think it’s gonna be a big money spinner for them in the years to come.
EMMET: Absolutely, and they had the first-mover advantage; a strategic advantage that some businesses enjoy. It’s characterised, as the name suggests, by being out the door first, and it’s a time-limited advantage; I often say it’s better to be the brilliant second best, but I think with Amazon and Alexa they really did leave Apple far behind.
Was it one in three homes in the US now have an Alexa? It’s an absolutely ridiculous number, it’s just beyond belief. Again, another magnificent product that will only get better and better.
Tying in the point we made earlier about the iPod; the first-gen iPod was a wonderful device, and now we’re looking at the iPhone X as the latest version, if you like, of that very first iPod.
What is the Alexa going to be in five years and ten years and in twenty years? It is going to evolve into something that right now is sitting in the year 2018; we can take guesses at that, but the iterations in that product will just make it better and better and better. This is going to become inextricably linked with your day-to-day life, just as your smartphone is.
JAMES: Speaking of companies that constantly surprise us, Twitter had quite a nice surprise for its shareholders with this quarter; its first profitable quarter. Emmet, you’ve always been quite bullish on Twitter.
EMMET: I got bullish the right time; one of the attributes that we look at is Past Price Appreciation (a tongue-twister). We prefer to buy into stocks that have already shown and proven to the world that they are growing and have positive momentum, and Twitter has rarely had positive momentum.
But when I sat down to properly analyse Twitter; I suppose about a year ago, at least whenever Jack Dorsey returned –
RORY: Maybe two years ago.
EMMET: – the passionate founding CEO’s returning to the helm. He’s got a vision, and he will make sure it’s delivered.
A lot of the numbers that one evaluates a social business/ network with come in the form of new users—daily active users, monthly active users—and Twitter had stagnated. Its user base is quite flat; there are small movements in the Rest of World category, and small movements in the US category.
But really what I liked about Twitter was that they had a clear strategy to get to profit, which is an invariable milestone that every business someday must decide they’re gonna go for. Jack Dorsey laid out those steps, and you could see them.
Here in Dublin we’re very privileged actually, because this is the Silicon Valley of Europe; or as it’s known locally, the Silicon Docks, because Dublin is historically a dock city/town. At Silicon Docks, we house the European wing of a lot of/most of the giants. I know it’s a great big conversation in America at the moment about repatriating taxes, but we have Twitter here in Dublin, as we do Facebook and Airbnb and Uber, and all the other darlings of Silicon Valley.
As a consequence, we can go and talk to people who work in those businesses. Twitter is one of the examples where we had the great opportunity to speak to some of the key people in that business, and get a view of life on the inside. We were of the mind that things were turning around in the business; there’s several attributes to a business in turnaround mode that are quite identifiable, textbook. They’re written in MBA books, strategic books. They range from, a new CEO comes in and basically clears the deck; fires everyone around her/him and puts in a new team; goes into drastic cost-cutting mode; decides to basically cut underperforming products—features and products—and all of those attributes that are available to study anywhere you wish, were suddenly prevalent in Twitter.
That’s why I got very interested in the business; I could see from life in Dublin that people were being let go. They were cutting cost, they were focusing/refocusing on driving revenue, they were focusing on bringing the best attributes of the product up and killing off the ones that were non-core, eg Fabric.
RORY: Sold to Google, I think.
EMMET: It was a non-core asset. It’s a great tool, by the way; it’s not relevant to our podcast but we use it quite extensively. So Twitter is a business that went into turnaround mode, and that’s why I got excited by it.
JAMES: There is, as you mentioned, the profitable quarter, but they’re still not out of the woods yet; user numbers remain flat. One company that doesn’t have a problem with users is Netflix; they just seem to grow and grow. I remember you mentioned to me about speaking to someone involved with Netflix a few years ago.
EMMET: Yeah, I managed to get through to Netflix HQ and speak to one of their—I don’t know if it was founders, but one of their very first senior execs.
Her name was Leslie, and as far as I recall she was in charge of marketing. At that time, the vision was for Netflix to get to 6 million subscribers in total.
When you look now, in the last quarter they on-boarded 8.3 million new subscribers alone. That’s really unbelievable.
Bringing back in that “One Up on Wall Street” parallel that we discussed earlier (Peter Lynch’s), that you have an edge; you’re sitting at home in front of your TV, you’re paying X to your cable provider, you’re paying a few bucks to Netflix, and most people have sat at home at this stage and thought “Why am I paying anyone except Netflix?” Now of course there are substitutes; Amazon Prime, Hulu—and Disney soon as well—but what I think everyone has felt in the last half year is an acceleration of Netflix’s original content. Rare is the day now where you sit down, switch on Netflix and something new is not shown to you. You’ll find there’s a whole new season of something that you haven’t even heard about, and based off your own user behaviour, it’s very difficult to dump Netflix once you’ve gone in, because you’ll get invested in a series; whether it’s Narcos, The Crown, or something else. You’ll go “You know, for a few bucks a month I’ll stick with it. I want to see how this plays out.”
JAMES: Just to lead on from that, Netflix is a holding you’ve had for quite a while, and you actually wrote about it. In the Invest app every month, you write an Expert Opinion Piece, which is, I suppose, insights into your mind and your thoughts on investing. Netflix actually became quite a milestone for you recently.
EMMET: Yeah, it was my first 100 bagger—the first stock I bought that’s gone up 100-fold in value since I bought it—so it has a disproportionately high percentage of my overall portfolio. As you slice your folio up into slices of a cake, it’s a big one. It’s possibly nearly half my folio—it’s approaching it anyway, so it’s giant.
Portfolio theory is a “very” exciting subject on how one should balance their portfolio, but simple as this; let your winners win. Let them run; buy and hold forever. All the mistakes I’ve made as an investor have been sells, and I’ll deep-dive into that point and support it with facts another time; but as I point out on that Expert Opinion Piece that I wrote recently, I nearly hopped off the Netflix show once and for all.
I bought some 15 years ago and sold later on that year for approximately double my money. I felt good at the time; that was a great return, but a doubler—a two-bagger as it’s known (100% up)—it’s fine, but it doesn’t hold a candle to 100!
If you look at professional investors from the venture capital community, or VCs, everyone who manages money realises the math of it is as follows: For every 10 businesses you invest in, a minority of those will be giant winners; maybe three, two or even one of them will be disproportionately giant winners, maybe six or so of them will be average, do okay, and a couple of them will fail.
One of the things about building a great portfolio is filling it with businesses that are addressing a giant opportunity; you don’t know which one is going to end up the 100- bagger, but when it happens it’s great. I expect, as I said in that very piece, there will be more.
JAMES: You discuss a few other stocks in the piece that you think might hopefully reach that impressive milestone again. As I mentioned, that Expert Opinion Piece is available to read in the Invest app right now.
I think we’ll leave it there for today, guys. Thanks very much for joining me, Emmet and Rory. I hope you enjoyed the very first Rubicoin Podcast; there will hopefully be many more in future.
If you’ve got any questions, comments or anything you’d like to let us know about today’s podcast, make sure you get in touch; make sure to rate, review and share the podcast with your friends as well.
From me James, from Emmet and from Rory; thank you very much.
Rubicoin operates a full disclosure policy. Rubicoin staff may currently hold long positions in some of the companies mentioned in this article.
This month, Rubicoin’s investing team discusses the potential for a Miss Piggy -vs- Darth Vader movie, Jeff Bezos in your wardrobe, and a new Star Stock that looks a bit like Microsoft Office for coders.
JAMES: Welcome to the Rubicoin podcast, coming to you from the top floor of Rubicoin HQ in Dublin, Ireland. With me this week is Emmet Savage, the CEO and co-founder of Rubicoin, and Rory Carron, our head analyst. I’m James Dunne, and this week we’re going to be talking about the potential for a Miss Piggy vs. Darth Vader film in the future, Jeff Bezos in your wardrobe, and our new Star Stock, which looks like the Microsoft Office of the coding world. February isn’t usually a month we associate with big blockbuster hits at the cinema, but the big news from last weekend was that Black Panther, the latest release from Marvel, has crossed the 1 billion dollar mark in the global box office. This means it’s the first film of 2018 to do so, but I think a bigger fact for me is that it’s the biggest superhero movie of all time with no Batman and Iron Man in it.
EMMET: I don’t know if I’m gonna see it now! I mean, what good is a superhero movie without a man in a flying iron suit?
JAMES: It’s really just another huge win for Disney though, when you think of their latest releases; things like the new Star Wars movie, Coco, Thor, all of these huge releases. It’s just been, already, a blockbuster year for Disney.
EMMET: Yeah, well I’m definitely gonna be in the line to see Black Panther this weekend with my sons, as I am for most of the blockbuster movies. Really, when Disney put their sights on producing and distributing something, they do it so well nobody can really come close. For example, Disney acquired Pixar in that family of movies, that Pixar production house, has returned so far eight billion in revenue. They’re into profit on the Pixar acquisition. Marvel was bought in ’09 for about 4.2 billion dollars, and it has returned an incredible almost 14 billion in revenue; that’s just box office revenue, that’s incredible. Then Lucasfilm or Star Wars, they’re at breakeven. They paid about 4.4 billion and it’s generated about 4.1 billion so far. What it really says is that when Disney acquire a studio, whether it’s Pixar, Marvel or Lucasfilm, they are going to use their tentacles that wrap around this world to make sure that those products, those movies, are distributed more efficiently and more beautifully than anyone else can do. Really, that’s why Disney is the king of entertainment, and as far as I’m concerned, always will be. They’ve shown an appetite to acquire whatever is out there that’s on trend, that is recognised mostly around the world, and they do that very well. For example, Disney bought Muppets way back in 2004 for a paltry 75 million dollars. That was a very astute move when you think about it, but they learned how to acquire and how to bed down those assets into their family. So followed Pixar, Marvel and Lucasfilm, but the business is so much bigger than just movies. It is a business of theme parks, cruise liners, real estate development, hotels, retail stores; it is, in fact, the stock that I would possibly consider reducing my entire folio down to. If I had to reduce my entire portfolio down to one stock, to hold for 50 years – and here’s hoping I live for another 50 years – I think Disney is the one that is most likely to just keep producing, year in and year out, because it is committed to keeping its entertainment relevant. Black Panther is the latest and most relevant version of that story.
JAMES: Not bad for a 95 year-old company, really. Speaking of the pipeline and what’s coming for Disney, the big thing that’s coming for Disney, I think, is their new streaming service.
RORY: Yeah, that’s going to be a big one. They’re bringing out a Disney streaming service that originally was going to be cheaper than Netflix; Bob Iger said a few months ago the price would be significantly below Netflix’s subscription price. The reason he gave for that was, the amount of content wouldn’t really be up there with Netflix, but as we see, they just keep adding more and more stuff; they’re talking about an acquisition with 21st Century Fox – that’s been agreed between the shareholders but it hasn’t been finalised yet. That would add things like the Simpsons, Modern Family, Family Guy, to Disney’s portfolio of intellectual property, and as you pointed out there Emmet, when they acquire intellectual property they have a very good track history of monetising it and expanding on it. Even in the Star Wars world, they’ve got the Han Solo movie coming out this year, they’ve got the final instalment of the current trilogy; there’s already another trilogy in the works, and they’ve got the creators of Game of Thrones signed on for a new series of Star Wars films in that universe. It just shows the power of Disney; when they have something, how well they can monetize and distribute it. Black Panther has been around from 1966 – when he first made his appearance – and up until now he’d probably have been restricted to hardcore comic book fans. Now that character is now part of the global zeitgeist; I’m pretty sure we’re gonna hear about a Black Panther 2 pretty soon, based on the success already. Hasbro, I’m sure, will do well out of sales of the toys, and it’s going to be another great piece of property that Disney owns and something that they’re just going to keep adding to.
EMMET: The thing about Disney entering the streaming services business; a question might arise, is this now suddenly a substitute product for Netflix? Perhaps, but I think it’s more a complementary product. In your home, the product that Disney offers is invariably a very family-orientated product. It’s less House Of Cards and more Black Panther, and I think that homes are gonna start to layer on different streaming services that they prefer; Amazon Prime, Disney, Netflix and so on. Ultimately, with the battle for entertainment in the home, Disney of course are working their way in there and will absolutely succeed when we look at the portfolio of characters that they own. I look forward to a movie perhaps of Elmo versus Emperor Palpatine or Darth Maul versus Kermit the Frog; they have them all there and they can do it if they wish. I’ll tell you one thing, I’ll be right up the front of the line to see Miss Piggy versus Darth Vader in the next big release.
JAMES: Speaking of companies that are constantly getting into new areas (maybe weird new areas), the Wall Street Journal is reporting that Amazon is in talks with big banks like JP Morgan Chase and Capital One finance about releasing a new checking account-type product. Is this just Jeff Bezos trying to scare another industry?
RORY: [LAUGHS] I don’t know. What can you say about Amazon? Every week it seems like they’re eyeing up another industry. I don’t particularly know if they’re gonna go full in on the banking; it’s highly regulated, something that maybe they want to keep away from, but partnering up with someone like JP Morgan is probably the wiser decision here.
JAMES: Jeff Bezos and Jamie Dimon are already BFFs.
RORY: Yeah, they’re already good friends, having already formed a health care company with Warren Buffett – the name of which we don’t know. Another interesting story about Amazon this week is they’ve acquired a company called Ring; which if you don’t know, they make video doorbells systems so you can see who’s at your door; you can talk to them through your smartphone. It seems like, whether it’s banking or doorbells Jeff Bezos just wants to get into every part of your household. I don’t know if anyone has read anything by Professor Scott Galloway, but he has some very interesting thoughts on Amazon – on a lot of businesses – and I’m gonna kind of paraphrase his theory here, which is that Jeff Bezos basically has divided up our homes into tiny little segments, and he just wants to be in every single one of them you know. He started in 1998 getting himself on the bookshelf, and since then he’s in our living rooms, he’s in our bedrooms he’s in our garages, he’s in our gardens. If you think about even the laundry room, there’s a little Amazon Dash button there, and as soon as you push it, the next day someone turns up at your house with detergent. So this Ring acquisition, it’s getting into the idea where your delivery man could just show up at your house, you can look through your smartphone and see them ringing the doorbell, and you can let them in.
EMMET: So you could basically say to the guy “Put the ice cream in the fridge, and while you’re in there could you empty the dishwasher. It’s my least favourite job and I hate coming home to it.”
RORY: Well, I don’t know if I’d be comfortable with that, but I’m sure some people would be now. Professor Galloway was the person who actually predicted that Amazon would buy Whole Foods, which was how he saw Bezos getting into our fridge/freezers, and his latest theory is that they might try and buy Nordstrom, which as we know is in a bit of trouble at the moment. That’s probably a little less likely when there’s a family involved; the Nordstrom family still owns a massive share of that, so who knows if they’re actually willing to sell, but I just love that theory of Jeff Bezos just being everywhere. Popping up somewhere here and there, he’s got his fingers in every pie of your house.
EMMETT: You open the fridge and Jeff hands you the Ketchup. It’s an odd concept, isn’t it? “Jeff’s in your wardrobe, Jeff’s in your garage.”
RORY: It’s almost dystopian, but it’s incredible, and every week we watch to see what’s the next place they’re gonna go. I think things like the Echo are going to make it a lot easier for them to stretch into the house; you’re actually talking to Amazon nearly on a 24-hour basis at this stage.
JAMES: So speaking of companies that embed themselves into our everyday life, these generally tend to be pretty good investment opportunities. In our Invest app, we have one category in particular called Star Stocks that generally tend to display many of these qualities. Emmet, do you want to describe what our Star Stocks are?
EMMET: Absolutely. Star Stocks is a name we’ve assigned to businesses that you’re less likely to encounter in your everyday life. When we started to look at how we could carve up the world of investing opportunities to an investing community, we could see that there are those brands that everybody knows, such as Facebook and Amazon and Activision, and then there are those that are lesser known; our Star Stocks. The name is something that needs a refresh; as you well know, James, internally here we’re trying to figure a better
name for Star Stocks, and indeed if any of our listeners have a suggestion we’d love to hear about it, but a Star Stock at this moment is a lesser known brand, but nonetheless an outsized opportunity that it has a great momentum in addressing. Typically it’s a business-to-business model, so you wouldn’t encounter it as you walk down the street, but they have the attributes that we look for in great investments. Those attributes are something that we three will discuss in far more detail as our podcasts progress, but for now our description of our Star Stocks is a list of businesses that are lesser known to the average man or woman on the street.
JAMES: We’ve spent the last few weeks mulling over this month’s Star Stock. Rory, do you want to give a brief intro into the lucky stock for this month?
RORY: Yeah, the stock we went with this month is called Atlassian. The ticker symbol is TEAM, and the reason for that ticker symbol is because Atlassian are the makers of productivity tools for development teams. So if you’ve got a business that runs on any form of coding, it’s likely you’ve come across at least one of their tools. They currently have just over a hundred and ten thousand customers; that would be big businesses and small businesses (we use them in here). Part of their business is really – as someone who doesn’t know about coding, doesn’t do coding, it’s hard for me to really express how important a business like this is to coders. You imagine the amount work that goes into developing websites, apps, video games, anything you can think of, and all that data, all that info, all that work has to be stored somewhere, it has to be reviewed somewhere, there has to be a way of communicating any changes, any reviews, and the tools that Atlassian have are really developed specifically for that purpose. Emmet, they’ve got Jira, I think?
EMMET: Yeah. I’m a big fan of the stock, having spent some time researching it over the last couple of weeks, and in fact it’s been on my watchlist almost since they floated. The tools that Atlassian produce are Jira, Confluence, Stride, Bitbucket, and my personal
favourite which is Trello. Trello is a great tool; it was originally developed by Frog Creek Software in New York City and was acquired by Atlassian. It’s a very simple productivity tool that requires no instructions; it basically allows an individual, a small business, or a giant organization to arrange the sequence in which things are done, what has to be done and by when. It’s very, very elegant, it’s so simple it’s stunning. Actually, our co-founder here at Rubicoin (John Tyrrell) for a while was organising his home with Trello, and as he said to me this morning he couldn’t get user buy-in; which basically is codespeak for, his wife refused to move Trello cards around on what was or wasn’t in the fridge, and I take my hat off to Marylin on that. When you look at these tools and you see when a developer or a coder sets up their environment, they realize that – and anyone who’s gone through a journey of developing something that requires code, whether it’s a very simple website through to a very complex, technically-centric business – there are very many players, there are very many inputs and there’s an awful lot of tools required. What Atlassian have done is they have acquired, or developed, tools that run from end to end; from concept right through to a digital product, such as Invest by Rubicoin being out there and managed and looking beautiful. When I looked at the business, it struck me really; it was an incredible number, that 98% of Atlassian’s customers remained as paying customers a year later. So the first thing that says is that their tools are very sticky; once you’re in, you stay in. The second was that 90% of customers who spent 50k or more purchase three or more of their tools; so the second thing that that says is that their tools are highly complementary, that is a fact and we know here in Rubicoin running our business, that they all click into each other, so to speak. Once you’re in there, once you’ve started to build your business with an Atlassian base/foundation, it’s very, very difficult or almost
impossible to swap out. I’m not saying that all their tools are loved by all their users, but what is loved by their user base is how they’re all integrated, that’s huge. There are parallels, I believe, in Atlassian today with Microsoft in the early 90s, where they had a suite of office tools – where there was PowerPoint, Excel and Microsoft Word – that everyone knew were to a point interoperable. You could have one operating system on all computers in the office and everyone spoke the same language, so to speak, whether that was PowerPoint or Microsoft Word. This is the equivalent, I believe, in the coding/code based world, and the project management of all things to do with coding. I think it’s a magnificent business, and what I might even add is that 50% of the revenue that Atlassian derived in 2017 was spent on R&D; so they take the understanding of their customer very, very seriously, and they’re spending more than virtually all their peer competitors – and actually non-competitors – but their peers in the software world. That is a business that’s taking it’s future revenue streams very seriously.
JAMES: Just the of power a good ecosystem, I think. You’d need to look at other, probably more consumer -facing brands like Apple; if you buy a Mac, buy an iPhone, they all link together so well it’s very hard to get out of that ecosystem.
EMMET: Very good point. In our Invest App, in the comment section you’ll find the top six takeaways from Atlassian’s 27 Investors Summit, and it really is well worth reading, because I think in those six bullet points you’ll find a storyboard that’s cohesive and tied together, but very visionary. If you were to sit in a room alone and figure what are the six things you’d most want a software a business to do, I think you’ll find that those six as Atlassian have outlined are the ones you’d want to see.
RORY: Just on a note of their stickiness, there’s an a writer called Pat Dorsey who says elevator companies are a great investment, because once you put an elevator into a building, it ain’t coming out. It’s staying in there until that business is torn down. So the elevator company gets to lock their customers into these really long service contracts. Talking about Atlassian, I was talking to some of their customers – some of them who work in here – and I asked one guy, “What would happen if Atlassian called us tomorrow and said the prices just doubled?”, and without skipping a beat he said “Pay them.” Because basically our entire business has been built on this tool, and the pain and disruption of dropping it, or trying to move to another system – of which that person said there is no other system, so we wouldn’t have the option anyway – but it would be so disruptive to the business. So even if a competitor did come along and said “Look, we’ve got a better, cheaper, more integrated system”, we still wouldn’t drop them as a business, and that’s incredible when you think about how much recurring revenue you can derive from customers like that.
EMMET: Absolutely. It’s analogous to foundation on your home; it’s possible that you could swap it out, but it just seems like a headache beyond reason to try and swap it out. Even as small as some customers are, whether it’s home coders who are tomorrow’s superheroes – the next Mark Zuckerbergs – are using Atlassian, there are giant businesses who are using it; for example, Apple’s open-source projects are hosted with Atlassian software tools, as are Tesla’s, as are Virgin Media over in the UK. These are big brands who have the resources to build something internally if they so wished, but they’re going with Atlassian, and that’s a very powerful effect, that they are now the go-to shop, if you will, for all the tools you need to build something based on software and team
RORY: That’s just incredible; that a company like Apple with all their resources and all the talent in that business have decided that Atlassian are the guys they’re going with. That kind of just says it all.
JAMES: It really does. So Atlassian is this month’s new to the Star Stock showroom, but when we’re selecting Star Stocks it’s never just “pick a company and go with it”, there’s a rolling shortlist of Star Stocks. I think you probably got a good idea of the kind of attributes that we look for in a Star Stock, but are there any other companies we’re keeping close tabs on at the moment?
EMMET: Yeah, the great thing about being a stock investor is that you can you can find the greatest visionaries and dreamers of this world, and buy a little bit of their vision and dream. One such new area in this ever-evolving world is a technology called CRISPR, and I know it’s been on the radar of some of our users for a while, but the majority of our Invest customers up until recently had never heard of CRISPR as a technology. It effectively is gene editing; it’s mindblowing really, what the ability to cut and paste a human being’s gene implies. It implies an awful lot of things; the ability to remove chronic illnesses from humankind, the ability to change the attributes of a human being, or indeed the ability to bring back from the dead a creature that’s long gone, à la Jurassic Park. We might some day go to a zoo with a woolly mammoth in it, but CRISPR is a technology that is very early. There are three players in the space at the moment, and one thing that I’ve very often said is that I try to avoid Banking and Pharma as two areas for investing; or at least I select players from those industries very, very carefully, because it really requires a huge, huge level of specialist knowledge. Very often the CEO of a bank
can’t even tell you what’s going on, to a level of detail, in their own organisation, and the same goes for pharmaceuticals. When we look at CRISPR as a technology, the stock that – of the three businesses that are in lead position to capitalise on that immense, mind-blowing opportunity – the one that I think is marginally in lead position is called Editas. I’ve been looking closely at Editas; I’ve become a kind of an amateur expert on CRISPR as a technology, and I’ve done quite a lot of reading on it. Very often, most people relate to the fact that the more you learn the less you know. Every time I turn the page and read a little more about the technology, it unveils to me my ignorance in the overall area, but I’m at a personal level I’m starting to get a grasp on how the technology works, and how immense the opportunity is. But I might also add that I’d say about eight or ten years ago, I went out – was it North or South Carolina? – I went to their headquarters of 3D Systems, who at the time were the leader in 3D printing technology. I spent a day with the CEO, Avi Reichental, who was the CEO at the time, exploring that technology, and it was quite incredible what I saw. A conversation that was going on around the world at that time was, 3D printing was going to change everything. And indeed for the two years that followed my visit, 3D Systems was the top performing listed stock in the US, bar none. It really was the right time to get invested; at that time, I did invest because my mind was blown, as they say. But being too early is sometimes as bad as being too late. What really happened with 3D Systems was that there was a hype that drove the stock up; haven’t seen that level of hype with CRISPR or Editas, but my life has taught me a couple of lessons, which is “Let’s just try and get the timing as right as we can”, and that’s why I personally haven’t invested in Editas just yet. It might be too early, I don’t know, because frankly the technology (the Med Tech) hasn’t yet cured a human being
of anything huge.
JAMES: So just massive potential, really.
EMMET: Absolutely, it is truly wonderful, and I think it will happen, but we might be looking at something a little too early, I’m not sure. My mind may change in the next few weeks but for now that is one example, James, to your question of a stock that is on our watch list, and one that we three here discuss quite regularly.
JAMES: It’s really one of the hidden joys, I suppose, of investing; learning about these industries and these sectors that you would never encounter otherwise. I think that’s about all the time we have for today; just to remind you there’s plenty of other content in the Invest App added recently, we have the new Star Stock which we talked about today. The latest stock of the month is in there too, as well as the last Expert Opinion piece, in which Emmet reflected on the recent stumble in the market and gave us some much-needed levity on that. Thanks for listening to this month’s podcast; if you’ve any questions or any topics you’d like us to discuss in the next episode, please get in touch with us at firstname.lastname@example.org.
This month, the Rubicoin team looks at the future effects of Mark Zuckerberg’s mea culpa, Spotify’s alternative route to the stock market, and how the revamped Learn app is opening up financial literacy to the world.
Emmet and Rory also give a 30-second ‘elevator pitch’ about the one company in the Invest app they’re looking at closely this earnings season.
JAMES: Hello there, and welcome to the Rubicoin podcast, coming to you live in the top floor of Rubicoin HQ here in Dublin, Ireland. I’m James Dunne, and this month, joining me is Emmet Savage, our chief investor and co-founder; Rory Carron, our head analyst; and Meabh Redmond, the head of customer design here at Rubicoin. Meabh, welcome to the Rubicoin podcast; I hope you’re prepared for this.
MEABH: I am, I’m cautious and also excited.
JAMES: So this month we’re gonna be looking at Facebook, and in particular Mark Zuckerberg’s mea culpa; we’re gonna take a look at Spotify and how they took an alternative route to the stock market; we’re also going to discuss our Learn app, which got a revamp this month. Unless you’ve been living under a rock for the past few weeks, you’re probably aware that Facebook has been in a bit of trouble recently. In the middle of last month, it was revealed that more than 50 million Facebook users had their personal information
compromised by a third party, Cambridge Analytica. They then casually upped that figure to about 87 million users, including CEO Mark Zuckerberg himself. Rory, I suppose the first question is, what exactly happened?
RORY: (sarcastically) It’s shocking, isn’t it? There’s actually companies out there harvesting our Facebook information, who knew? [LAUGHS] No, this is actually a bit darker than what we all kind of expected was going on anyway. What happened was about 270,000 people agreed to participate in an online personality test; in doing so they gave the company conducting the survey, which is called Global Science Research, the right to scrape their personal information. Unfortunately they also gave them the right to scrape all the information of their friends, so you can see how 270,000 quickly turns into many millions. Global Science Research then sold that information to another company called Cambridge Analytica, who then used that information for political advertising for the Republican primaries, the 2016 election and the Brexit referendum. Cambridge Analytical was founded by Robert Mercer – he’s a Republican billionaire – and Steve Bannon, who was on Trump’s election campaign and was then his chief political strategist. Reports suggest Cambridge Analytica also had ties to a large Russian oil company, which of course then had ties to the Russian intelligence agencies. To make matters worse, there was a Channel 4 documentary put out a few weeks ago where the CEO of Cambridge Analytica, a guy called Alexander Nix, was secretly filmed admitting to blackmailing people and sending sex workers to politicians’ houses in order to entrap them. So you can see these really aren’t the kind of people you want having your personal data, and that’s what’s causing all the fervour at the moment.
JAMES: It’s not exactly what you think you’re getting into when you sign up to Facebook, I don’t think. So then Mark Zuckerberg notably appeared in front of Congress last week, voluntarily; Emmett, do you think it was a good idea for him to volunteer himself to go in front of Congress?
EMMETT: I think it was a good idea for Mark to appear in front of Congress; I think in fact, had he not appeared would be far more stark. It allowed him to, in public, address all the queries and fears and questions that Congress actually had. I think it was an insight into how Congress actually operates; in fact, too many cooks spoil the broth, as they say. There were so many questions put to Zuckerberg it was difficult for key findings to be apparent easily. I heard one particular senator asked Zuckerberg when he would bring fiber to North Carolina, which I thought was fun.
JAMES: Yeah, it struck me; the misunderstanding a lot of the Senators seem to have about technology in general, never mind Facebook. But it also lends the question, what’s gonna happen now for Facebook? Are we gonna see a more regulated future for the company?
RORY: I think we have to accept that there’s a bigger conversation going on here. Whenever we consume content on the internet, we have to understand that the currency behind that – what’s powering that – is paid advertising. So anytime you consume content, whether it be on Facebook or Twitter, or if I’m reading an article on CNBC and I see an advertisement for a brilliant investing app called Rubicoin, I understand that that’s part and parcel of what’s going on, and it’s quite innocent; it’s the way people have been advertising to us since the Nielsen ratings came out. On the other hand, you see something that’s
a lot more upsetting, which is a company like Cambridge Analytica actually weaponising our data – our personal data – to spark up political fervour and to actually kind of brainwash us into acting certain ways. Facebook stock took a hit, because the multiple investors are gonna be willing to spend on a company in acceleration mode when regulation is threatened is going to decrease – that’s just going to happen – but as a business you think of its four native apps; they are ubiquitous, everyone uses them. I read someone say that the switching cost of Facebook is quite low; they’re really not, they’re quite high actually. If you want to totally remove yourself from Facebook, you’re talking about not using Messenger. There’s a huge amount of companies that you probably log in to through Facebook; there’s a taxi app here in Dublin that my login is my Facebook account. So taking yourself away from that’s going to be very tricky, and I think the business is gonna continue to succeed. I don’t like it myself – the stock – but I think investors could hold their noses and watch it grow pretty happily for the next ten years.
EMMETT: I think the minute Zuckerberg opened by taking full accountability and responsibility, everything after that point was kind of subordinated to the fact that he was being sincere and open; or at least purporting to be sincere and open, taking that full accountability. The minute he said those words – I don’t have the quote exactly in front of me – but from the moment he said “This is my business, I founded it, I take full responsibility” you could just tell the stock was going to recover, because the founder is putting his hands up and is very clearly showing that he’s willing to do whatever it takes to put this situation right.
JAMES: For new investors, Facebook is often probably one of the first investments they consider, because it is such a consumer-facing
brand. Even if you don’t use the native app, you’re probably using Instagram, you’re probably using Whatsapp, you’re using Facebook in some way; so it’s a very attractive first investment for users, but is there thinking that maybe Facebook is like the banks now, it’s too big to fail? Meabh, what do you think?
MEABH: I don’t know if any of us can be fully sure on that one; we’ve touched on important points about Facebook and just how ubiquitous it is. I know that I use it heavily to keep up with various internet dogs; very important, high level stuff. On one hand it feels like it’s kind of an unstoppable force, and then, we’ve already made points on just how dark this really was; this was kind of beyond the usual data breach. One of the whistleblowers from Cambridge Analytica – Christopher Wiley – I have a quote here from him that says that for the U.S. election they were not targeting voters, they were targeting personalities. That’s stepping it up to a place where, actually, this is worrying; not only are they making money out of us, but we’re getting to a point where our data’s been used as a dark force. That tips over for me into a frightening place, and I’d wonder whether other people might feel the same; I might come to a point where the market sentiment on Facebook flips or changes.
JAMES: It could come to a point that it becomes an ethical consideration rather than just purely investment. Emmett, you deleted your Facebook last year; or deleted parts of your Facebook.
EMMETT: I think my new year’s resolution 2017 was to erase as much of my Facebook and online history as possible, with the exception of Twitter, and it was a far bigger undertaking than I expected. I wasn’t gutsy enough to delete my Facebook account, funnily; I still wanted access to do basic things, like connect with
friends from far away, but I must have deleted several hundred photographs and pretty much every status update I’d written in the ten years prior, and I was absolutely amazed at how much of my life I’d actually put out there. As you go through a process of deleting it one at a time – which is a slow enough process – you do find you’ve slowly and steadily shared a huge, huge amount of your life. That’s not a revelation or an insight, and it’s only one person’s journey, but even deleting or unliking the pages I liked, there were hundreds of venues, gigs, restaurants, and even towns and cities that’d I’d liked in ten years. It was like a thumbprint of who I was in those ten years, and I’m glad it’s been deleted; or at least, I hope it has.
JAMES: It’s all a bit Black Mirror, isn’t it? Another popular consumer-facing brand that’s been in the news over the past month is Spotify, who listed on New York Stock Exchange just over two weeks ago. Spotify is far and away the most popular music streaming service out there at the moment, with over 70 million paying subscribers counted earlier this year. Just to put that into some comparison, Apple Music reported just reported just 38 million paid subscribers early last month. When Spotify went public, though, it wasn’t the usual way; they decided to forego the usual IPO process in favour of direct listing. Rory, what exactly is a direct listing?
RORY: It’s another way of getting your stock out there. The typical way is an IPO (Initial Public Offering). That’s when a company hires the big boys – Goldman Sachs, JP Morgan, the big banks – as underwriters, and essentially what they do is, first of all they try and figure out what price the stock should be; they work with other financial institutions to come up with a realistic price; they provide a guarantee to sell a certain amount of shares; and they’ll purchase any excess shares. The issue with this is, it’s very costly. They charge
about 2-8% of the full offering, which means that the company gets less capital and shareholders are then stuck with higher share prices. So what Spotify have done is, they’ve gone for what’s called a direct listing; I’m pretty sure that they’re the biggest company that have ever done this, it’s usually reserved for smaller companies. What they’ve done is, basically they’ve just put their shares on the market; there’s no big roadshow, there’s no big hype, they didn’t issue any new shares, didn’t raise any more money, and there’s no lockup period. Basically, one day employees and investors weren’t able to sell shares; the next day they were.
JAMES: So despite the New York Stock Exchange mistakenly hanging out a Swiss flag on the day (Spotify are actually a Swedish company); Emmett, yourself and John (Rubicoin’s other co-founder) were recently in Sweden.
EMMETT: Yeah, I’m a big fan of Sweden; some of the most appreciated and loved brands that the world has seen of the last generation have actually originated in Sweden. Those brands include Absolut Vodka, Ericsson, IKEA, H&M and even ABBA [LAUGHS]. Great band. Sweden produces quality in so many different ways, and Spotify is the latest big brand to emerge from the country. John and I went up; about 11 years ago Nasdaq purchased the Swedish Stock Exchange – which is branded as First North now – and we were up there for a listing of an Irish company and got to explore the listing process. It’s an amazing country, because its population is around double that of Ireland – so it’s probably around nine million people – and it has a very, very high culture of share ownership. It made sense to me after visiting the country, in the exchange, why Spotify went for a direct listing; I’m actually very interested in Spotify at the moment, and as you mentioned it’s not only the world’s most popular music streaming service, it’s the largest and has 71 million premium users – as far as I know, 71 – which is about 46% up year on year, it’s growing very quickly. What I think’s amazing about Spotify is its conversion funnel. Most businesses are a funnel, so if you think of your local grocery store, it’s effectively a funnel; you walk in the front door, you go down the back to get milk, you walk to the front, and in that journey, the more items you put in your basket before you walk out the better. Spotify’s funnel is, you download their app, you become an unpaid freemium user; they have a hundred 59 million monthly active users and they have 71 million premium users. So what this actually means is that 45% of Spotify users are premium, and they account for 90% of the business’ revenue. It’s not really an advertising business per se; sure, 10% of its revenue is derived from advertising. 90% of its revenue is derived from those 45% of users who are paying a monthly fee, and I’ve taken particular interest in that business model because we – Rubicoin – are an app you can download, and ultimately we are through a funnel; it’s a very interesting business for us to look at and learn from.
JAMES: As Spotify is a streaming – albeit a music streaming company- could we compare them to Netflix in the video streaming space, or would that be a false comparison?
RORY: It’s a tough one because they are basically the music version of Netflix, but one of the things, not worried me, but made me kind of question it as an investment was, the revenue’s growing like crazy; it’s up 39% last year, on average 54% over the last four years, but for every dollar that goes into Spotify at the moment, they’re only keeping 21 cents in gross profit. That’s before they pay sales and
marketing; research and development; any general administrative fees; all of that money is basically going into keeping the platform going and paying royalties. We talk about Netflix all the time and say “Look at all this money they’re spending on creating content”, but all that money that they’re spending on creating content, they’re building new IP; they’re creating Stranger Things and House Of Cards and Orange Is The New Black and the New Queer Eye, whereas Spotify’s not really creating anything; they’re paying musicians money that they’ve already made. They’re not gonna own the content at any point. So I don’t know; it’s gonna be tough to see how they leverage that revenue growth into actually making enough money to compete against the likes of Apple and Amazon and Google Play when it comes to advertising and attracting users. It’ll be interesting to watch play out over the next few years.
JAMES: On that point, Meabh, how do you think Spotify, over the long term, can keep their edge against Apple? They have a fairly big head start at the moment, but Apple is Apple; they’re coming for them.
MEABH: I actually use Apple Music.
JAMES: I’m a Spotify person. [LAUGHS]
MEABH: They might have me pipped to the post with the playlists though, because people share them with me regularly, and that’s one part that I think, maybe, I might switch, but I have a question. I think possibly people listening might like to know about the direct listing, because I think we’ve covered the what and the why of it, but it still feels very unique. Is this something we’re gonna see happening again, is this gonna be a regular thing, or is this totally unique to Spotify in their situation?
RORY: I mean, it’s happened before, but the fact that such a big company is doing it, maybe the impetus is for us to see it a lot more. Spotify didn’t need the cash; they didn’t need to raise the cash, they recently sold some convertible notes to some of the big banks, so they have money in the bank. It’s not the big payday that early investors usually look for. It’s a very Spotify thing to do: it’s a bit off-kilter; it’s quite cool in comparison to the usual IPO roadshow. I wouldn’t be surprised if we see other companies going down that route in the future.
JAMES: So is Spotify on our longlist, shortlist or no list?
EMMETT: They’re certainly on the list; they’re on our internal watchlist as you know, James, we discuss them quite regularly.
JAMES: I’m a heavy user; I really like the product, and they’re only in 61 countries at the moment. In those 61 countries, only 13% of people with smartphones have them, which I thought was quite low; I think nearly everyone I know has Spotify or perhaps Apple Music. So there is room for them to grow; huge room for them to grow. It’s just, I don’t know if they’ve proven the model yet, that it’s gonna be a highly profitable business going forward.
EMMETT: I’m one of those people who actually subscribe to both Apple and Spotify; I have a family plan for Spotify and I had already subscribed to Apple Music, so I use both interfaces. I’m not mad about either, as it happens; I think there’s still a way to go on the UI journey, but the bottom line is, I can get to whatever music I want within seconds with both. If I have to choose one, as a user of both I’d choose Spotify just for the user interface.
JAMES: As many of you might know, April is Financial Literacy Month in the US, so we thought to ourselves, what better time to release a brand-new version of the Learn app? For those of you who might not know Learn is our free app that teaches pretty much anybody everything they need to know about investing in the stock market. It’s pretty popular. It’s already had more than 1 million downloads since we released it, and we’ve gotten some pretty good reviews back about the new version of Learn. Meabh – you’re Head of Customer Experience Design here at Rubicoin – do you want to explain a little bit more to us about why the Learn app is such an important part of a user’s journey from complete novice to investor?
MEABH: Sure. The Learn app, I think we’d probably all agree, is one of our most beloved assets; any feedback or reviews that we got from Learn are usually glowing, and a common theme within them is gratitude, so if we’re talking about financial literacy, I think an important point to make is that we’re really allowing people to feel like they are teaching themselves quite basic and rudimentary things about your approach to finance. That sounds kind of obvious and straightforward, but within the world of finance it’s really not; that kind of grasp on your own saving, and your approach to your own money, can feel out of reach depending on who you are and where you are in the world. For Learn, and for the customer journey within Rubicoin, it’s the ideal place to start; it may not happen that way for every user, but I think it’s empowering. That’s a touchy word, but I think when you read learn, if you engage it in the right way, you come
away feeling this is totally possible.
JAMES: Yeah, it really opens up the scary world of finance and breaks it down. Rory, as a survivor of the QFAs, you can probably give us some information or shine some light on the complexity of financial literacy.
RORY: As someone who’s actually studied this stuff in a professional qualification way, I can tell you my biggest learning is that this is stuff that everyone has the brainpower to understand. There’s nothing in there that’s too complex for people to understand if they have the time and interest to study it. If I ever meet someone who’s studying it just for fun, I’ll think they’ve probably lost their marbles, because it’s purposefully made so complicated and that no one really could do it themselves without seriously dedicating years to figuring it all out. That’s the Irish system; I’m not sure what it like in America, and that’s the problem. There’s only a certain amount you can teach people, whether it be in school or whether it be in higher education, about their personal finances before it gets so complex that you’re actually setting them down a career path, where this information would only be useful to professionals.
JAMES: You mentioned ‘purposefully’; why do you think it’s purposely made so complex?
RORY: Well, it’s a complex situation, trying to create progressive tax systems and so forth, but it also creates an entire industry of people who you have to pay money to sort this stuff out for you.
JAMES: I believe that’s called regulatory capture.
MEABH: That’s kind of a hangover from the world of banking in general, isn’t it? What us and other people are setting out to do is to try and create products that tear down those walls down; make it less awful, more straightforward and mobile.
JAMES: That’s an interesting point, Meabh; there’s kind of a global shift with the rise of apps (in particular FinTech) towards really simplifying complex processes like banking, or even hailing a cab with Uber, just putting all the nasty stuff behind a nice user interface.
EMMETT: The first stock market, as far as I recall – and I’m sure our listeners will Google this and get it far more accurate – but I think the first stock market opened in Antwerp in around 1461 under Philip the Good (or Philip the Great) [LAUGHS]. We’ve had around six hundred years of that industry evolving, and that’s a huge, huge amount of legacy that’s building up; just in the area of the commercial world that we (Rubicoin) are interested in, which is publicly listed companies. When you take all the other areas of finance – banking and related industries – they too have had a multi-hundred year legacy which has built up. Those banks that you can look at, all those old dinosaurs – whether it’s Bank of America or other giant businesses – they’re dealing with legacy systems, processes, products, software and systems that younger, more agile businesses don’t have to deal with, so there’s an absolute distinct advantage for smaller businesses to take a crack at something. They’re free and unencumbered by legacy.
JAMES: To take it back to the Learn app then; Meabh, in your role here at Rubicoin you regularly use something that the whole team really enjoys; you talk to very active users of the Learn app – and indeed the Invest app – and create Customer Stories, so the whole team here at Rubicoin gets a good sense of the people who are actually using our apps, which is important. Do you want to explain a bit more about the Customer Stories and the diversity you’ve encountered with the people using our apps?
MEABH: Absolutely. The Learn app is one where we see a real spread of different types of people; and they’re there all over the world at this stage. If you’re talking about people who are really taking their financial literacy into their own hands, the Learn app is a really interesting use case; we’re in April/May now, so I think over the last four weeks – from mid-March to now – I’ve talked to a young student Michelle in the Philippines, who used Learn to basically tweak her interest and get her going towards her own investment plans. That hasn’t happened yet, but she feels like she can do it. Another female user, April, is based in the States. She was on the other side of the coin of Michelle, so she wasn’t starting; she was at a later stage of life, had sold a property and had basically never felt like she could do this on her own before, Learn was her first touchpoint. And then somewhere in the middle was a student called Keith who’s based in London, who is studying and who doesn’t have the right earning power at the moment to invest regularly, but Learn is one of the touchpoints that we offer that makes him feel like he’s still in the game; he’s still reading content and keeping up with the whole idea of one day owning more and more shares.
EMMETT: I think that’s something that I personally get a sense of from a lot of people we talk to that use Learn. A lot of people feel like – or they mention the fact that they feel like – they weren’t the type to start investing. I always think that’s quite interesting that they felt cut off from this whole world, because of knowledge or just feeling like it wasn’t for them.
MEABH: I can relate to that. Rory, you mentioned the financial qualifications that are out there, they seem so full of ‘needing huge brainpower’ and being a certain type. I guess they are still pitched as that, depending where you’re based, but as a woman, people had never approached me about the idea of investing before I was [in my] midtwenties. What Learn does is, it tries to get in there to users when they’re teenagers; they can use it from when they’re starting off and it’s just a concept. I think that flips the whole landscape of what’s possible.
EMMETT: It’s a product we’re very proud of here at Rubicoin, because there is no registration; there’s no cost of using it; there’s no adverts, there’s no hard or soft sells. It literally is a product like you would expect had you paid 20 or 50 bucks for and it’s free to use. We know from our insights and from usage profiles how customers are using it, when they’re using it, and we improve it all the time based on what a person values. I think it’s the greatest digital financial product out there.
JAMES: And the new version of the Learn app, as I mentioned already, is available now on iOS and Android. It’s quite hard to believe it, but we’re staring down the barrel of another earning season already. Emmett and Rory, before we finish this month’s podcast I was hoping to get a quick 30-second elevator pitch off both of you about a company you might be looking at in depth before this earnings season starts. Emmett, you want to start? I’ll time you and be strict.
EMMETT: Well, I’m gonna tell you what I’m liking at the moment. I’m liking Tesla again; just to give the elevator pitch, Ford has produced 100 million vehicles in its lifetime and is currently valued at about 45 billion by market cap. Tesla has produced and distributed about 200,000 cars – or 0.2 of a million – and is valued at 50 billion, so it’s about 10% higher valued, if you like, shoulder to shoulder by Ford. What we are looking at with Tesla is the ultimate smart device; people are not looking on it correctly, they’re looking on it as a car company. It is a smart device company. Tesla is in the business of energy generation, energy storage, energy distribution; the business knows where you are, where you’re going; autonomous vehicles, driving on their own; it is truly a data business and it’s being undervalued at the moment. Is that thirty seconds?
JAMES: I’ll give it to you. So strong case made for Tesla there, ahead of their earnings. Rory, who are you looking at?
RORY: I’m gonna go for (like Emmett) an app that’s already in our showroom, one that I’m really looking forward to seeing how their earnings perform this quarter, Under Armour. They’re definitely one of the laggards of our showroom, they hired a new management team a few quarters ago – one of them was a guy called Patrick Frisk who’s now the president/COO. Read up on his resumé, it’s incredibly impressive – last quarter, the direct-to-consumer business started showing signs of life; internationals growing well. I think a good quarter this time could be the signal for a real turnaround at that company.
JAMES: Cool, you stayed more within time. That’s all we have for you this month on the Rubicoin podcast; remember there’s lots of new content in the Invest app, though, over the past few days. This month’s new Star Stock was actually published this week; Emmett, I believe you described it as a boring company with some very, very interesting fundamentals, so it looks like one right up Peter Lynch’s Street. This one’s Stock Of the Month was also written by our friend and fellow analyst Jason Moser over at the Motley Fool – it’s a really, really interesting read – and we’ve also got a new Expert Opinion Piece coming out sometime next week, which will be available as always in the Invest app. This Thursday (the April of 19th), Emmett, you’re also hosting a live Q&A session on Twitter, so if you want to get involved in that, simply follow our Twitter – that’s Rubicoin on Twitter – and the hashtag #rubichat to ask any questions to Emmett, I’m sure he’ll be delighted. As always, if you’ve got any questions or topics you’d like us to discuss on the next Rubicoin podcast, you can get in touch on social via Facebook or Twitter; you can email us at email@example.com; or you can get in touch with us through the Invest app – just tap on the Talk To Us section in the new section of the app. As always please rate, review and share the podcasts with anyone and everyone. From me, James, and from the rest of the team, thanks for listening.
In this month’s episode of The Rubicoin Podcast, the team talks about the Match Group swiping left on Facebook, why Elon Musk is getting prickly with investors, and why Emmet is adding more cash to his portfolio at the moment.
Recorded on the top floor of Rubicoin HQ in Dublin, Ireland, listen in as Emmet, Rory, Meabh, and James discuss our unique approach to investing in the U.S. stock market. This is investing for everyone.
Rubicoin operates a full disclosure policy. Rubicoin staff may hold long positions in some of the companies mentioned in this podcast.
JAMES: Hello there, and welcome to the Rubicoin podcast, coming to you from the top floor of Rubicoin HQ here in Dublin, Ireland. With me this week is Emmet Savage, CEO and co-founder of Rubicoin; Rory Carron, our chief analyst; and Meabh Redmond, the head of customer design. I’m James Dunne, and this month we’re gonna talk about Match swiping left on Facebook, why Elon Musk is getting prickly with investors, and why Emmet is adding more cash to his portfolio this month.
JAMES: We’re just emerging from the business end of the latest earnings season, and over the last few weeks we’ve gotten some insight into how most of the 97 companies in our 1% showroom have performed in the first quarter of 2018. It’s been a pretty good start to the year for most of them, but there was some big stories to emerge in the earning seasons too; none more so than a new rivalry between the Match Group and Facebook. Two weeks ago at its annual Developers Conference, Facebook announced that it is set to release a new dating service on its native platform, causing Match shares to plummet more than 25 %; but then last week the Match Group posted strong quarterly results itself, and management said that they have no fear of Facebook competition. They even went as far to say that Facebook’s product would be great for “US and Russian relationships” and that users typically want to keep their dating life separate from their family and friends. Shares in the Match Group have recovered since these comments; Emmett do you think that it was somewhat of an overreaction, the initial drop?
EMMETT: I’m absolutely sure of it, James. We need to compartmentalise aspects of our life, and romance and dating requires a specialist product as opposed to social networking. You don’t want to go onto Facebook for multiple purposes; I think you go there to post a picture of a hotdog or a cat. Go onto Tinder to swipe left or right. I particularly liked Match’s results of their last quarter; in the recent Q1 numbers subscribers are up 87% year-on-year, but what I find particularly interesting about Match is that they have a renewed focus on user safety/security and engagement. For example, on the safety side of things, they’re implementing controls that allow women specifically to decide who sends the first message; in-app, they have a timeline which is designed to increase engagement and is actually cutting through; and as a team here who runs a business based on a mobile product, we know the importance of making sure your product’s engaging and brings people back without calling them. So very interested in Match; I’m not particularly worried about Facebook as a threat. We’ll see, time will tell, but with Match there’s absolutely dozens of apps for every specific need or desire; I don’t think Facebook can really compete with that.
JAMES: Leading on from that; you mentioned user safety, but there’s the data safety question too, I suppose. Rory would you trust Facebook with your dating data?
RORY: Absolutely not! Just to echo some of the things that the Match management said, when that first heard this I thought this was bizarre; no one really wants to link their social media accounts to their dating apps. Having used dating apps and met some very nice people, I’ve also met some people who, I hope, never find me; there are strange people out there, and I’m sure a female point of view would say the same way about some men, so you want that distance. On top of that, doing it on the Facebook native app seemed very strange; if they’d said Instagram dating, I’d have thought “Yeah, that actually sounds plausible”. Instagram has a lot less of your personal information on there; it’s a lot more image-based yeah, and it’s what people are using. I don’t know many 18-35 year olds who use the Facebook native app for much anymore.
JAMES: Good point. I certainly am in the dark about what this product actually is. Meabh, what is Facebook offering that’s different than what’s out there already?
MEABH: Well, I had a look at the actual video demo of what the feature will look like; it’s gonna be called Dating Home; it will be accessed from the native Facebook; it will be opt-in, so it’s something that you’ll very much decide to do, although I do agree with Rory that there are privacy and identity concerns; but my interest is slightly more piqued than Emmett and Rory’s. I know that they’re gonna use local events to try and link people together, which is getting slightly more close to how we would have met people in real life. I use Bumble sometimes as a dating app; that’s very much set up so that the woman sends the first message, but it would be nice to think there would be a feature where you can meet people and events you would have been at anyway, because you’re getting slightly closer to social circles there. I’m slightly more curious, but also fairly cautious.
JAMES: Yeah, they seem to be approaching it that it’s a different way of finding people who maybe share the same interests as you.
RORY: On that point as well, the user experience is very different; it doesn’t look like Tinder or Bumble at all. The other point is that it’s not a zero-sum game; most people have a couple of dating ups so they’re not just gonna ditch one to use the other, I think. They can live side by side with each other.
JAMES: To put our investment hats on; Emmett, is this a chance to buy the Match dip, maybe, or should we wait and see what transpires?
EMMETT: Over long term, I’m a buyer on Match; like the business, like the prospects. I like the vision.
JAMES: Interesting. Other big stories in the earning season include Chipotle, surprisingly. We got some good news from Chipotle this earnings season; Brian Nichol, the new CEO, got his tenure off to a great start with the company smashing through earning estimates – a 7.4% rise in sales, an average check size rising by 4.9% – during the quarter. Going forward, the new boss has said he’ll be focusing heavily on digital marketing and menu innovation. Rory, does this mean that we no longer have to worry about a power struggle between Nichol and former CEO and co-founder Steve Ells?
RORY: Well, Ells didn’t even go on the earnings call, which I think surprised a lot of people; I thought he was gonna make an appearance, that probably is addressing those fears. My sense from the call was that Nichol is an excellent choice for this role; he’s a guy who’s known for menu innovation, he’s a guy who’s known for his ability to integrate technology into the restaurant space, and these are two things that Chipotle have been very weak on in the past. Moreover, I think we think about Chipotle as a higher standard of food, certainly relative to someone like Taco Bell, but if you compared the companies’ two safety records over the years, it’s easy to see who’s winning that battle. Listening to him, he’s trying to expand delivery, he’s planning on expanding catering, and that’s all well and good, but it doesn’t sort out the image problem that Chipotle has, and it certainly doesn’t get those customers who have left back through the door. For that they need two things; they need a sustained period without these food-borne illnesses, for one, and secondly, if they get to give people a reason to come back and try the food again – that’s where menu innovation comes in – Chipotle has been known in the past for having a very simple menu, but consumers these days are very fickle and there’s a huge variety of options out there. What Nichol was great at was bringing in new items at Taco Bell; it wouldn’t be the kind of food I’d go for, but it got people talking about the brand and they generated foot traffic into the stores. I don’t think they’re gonna be able to go down the same route with Chipotle, in terms of doing things like fried chicken skin taco shells or something like that, but introducing something as simple as tacos would be a big move for the company. Further down the line, Nichol brought breakfast into Taco Bell, so why not breakfast burritos at Chipotle?
JAMES: Good. I know it’s quite short term success we’ve seen at Chipotle over the last few months, but it leads to the wider question of, at what point should a co-founder step down – a co-founder like Steve Ells – and let a professional CEO into the space?
EMMETT: That’s true, James. It’s horses for courses, really, and as it is in sports, there are people with defined roles and skills. Specifically in baseball, for example, you have clear roles, responsibilities and strengths that are playing to the pitch; same in the world of business. We have CEOs that are ideal, from brainchild to building an early-stage or growth-stage brand, and you have CEOs of speciality and taking a brand that’s already recognised to the next level. It’s very, very rare that you’ll find a chief executive who brings a brand from their bedroom, if you like, right through to global domination. It takes different people for different stages.
JAMES: Speaking of famous co founders and CEOs, another company that had some interesting news this earnings season was Tesla.It was a pretty mixed quarter for Tesla, posting its heaviest loss ever, but they’re finally starting to hit those production targets, albeit a few months late. The real talking point from this earnings season was CEO Elon Musk. He’s getting increasingly prickly towards reporters; in the earnings calls he said that “boring, bonehead questions are not cool” and that “these questions are so dry. They’re killing me”. Emmett, you picked Tesla as your company to watch this earning season the last podcast; what do you make of this?
EMMETT: Well, I have a strong opinion on it. We focus on investing in the vision here at Rubicoin; we find businesses that are looking to the horizon, and indeed, who are saying “there is no horizon; we are actually going beyond that horizon”. However, the stepping stones to a vision are quarterly reports and results, and it’s just a fact of life that a CEO who has decided to go the Wall Street route must answer questions from Wall Street, whether she or he likes it or not. I guess fusing a planet changing vision with quarterly or annual financials is difficult, but I think Elon Musk is gonna have to just, you know get on with it. I wasn’t overly impressed; I could understand why he found it irksome, but it wasn’t, I think, his most enlightened moment, but he’s a visionary.
JAMES: Meabh, you’ve always been an “outspoken fan” of Elon Musk; what do you think? Do you think it’s a case of, he’s the brain behind Tesla but perhaps not the tact?
MEABH: I think you should be able to do both at this stage of the game. I’m still observing things he does that makes me slightly unsure about him, and of course the innovation is astounding and it’s all very exciting, but if you’re gonna go and talk about flamethrowers on Twitter, then you should be able to also row back and be the type of leader who can answer questions about profitability and production numbers. After a high cash burn like Emmett mentioned, you should have distinct answers to those questions for analysts, and you should have no problem in doing it; it’s your job.
RORY: I think he feels like he’s probably answered these questions an awful lot before. In one way he’s right; they are boring, they are dry questions, and I say that as someone who lives off this stuff. So I can sort of see why he flipped a little bit.
RORY: It’s incredible.
EMMETT: It is, but how much cash do you need to revolutionise an industry that’s been around for a hundred years? That’s all very philosophical, but they’ve lashed through the cash. However, revenue did grow 26.4%, so revenue came in at about 3.4 billion, versus what analysts were expecting; about 3.3 billion. So trajectory is going in the right direction, and that’s actually the trajectory that’s pointing at that vision.
JAMES: As long as they can keep producing those cars, the next few months are gonna be very, very interesting. We’ve talked about some of the bigger names in our showroom, but there were varying fortunes for two of the smaller companies in the Invest app too. Shares in MINDBODY, a provider of management software for the wellness industry, dropped off a tepid outlook for 2017 and remain down about 10% from last week. On the other hand, one of our other smaller companies The Trade Desk smashed through its earnings estimates on Friday, sending stock rocketing about 43% in just one day; I think that was actually the biggest one-day jump for any stock we’ve experienced in our showroom so far. Rory, when you see such varying fortunes for two different companies, how do you approach it as an investor? Is this just the risk of investing in smaller-cap companies.
RORY: I suppose the problem with these kind of companies is they don’t get the same news attention that you’d expect from someone like Amazon or Tesla, or Google. You do really have to dive in and see what’s causing a sell-off, or what’s causing a jump; I suppose when you see a jump, you don’t really care what’s causing it, you’re just happy to see it, a lot of investors would say. These two; yeah, two differing outcomes for them over the week. MINDBODY, what happened is they beat their earnings results pretty handily, but their guidance was a lot lower than was expected, and that all seems to stem from this recent acquisition they made of a company called Booker. Booker is a network of over 10,000 spas and salons, which is an area MINDBODY’s been in the past, but they’ve never really been very strong in it; so they decided to buy out Booker rather than compete, essentially. What happened was, Booker last year had revenue about 25 million dollars; you would just then expect MINDBODY to add at least 25 million dollars to their guidance for the year. Basic maths; you’d hope, at least, it would be the same if the company is growing, and what happened is, they only added 16 million to their guidance. That caused a bit of confusion, and management didn’t really help matters by not explaining to the analysts on the call where that divergence was. They refused to look at Booker as a separate entity anymore; they explained that Booker was only being part of the business for three quarters rather than four, and some of the clients that Booker had wouldn’t really be their target market, so they wouldn’t be serving them anymore. I think it just brought a bit of uncertainty over what was causing that drop. Is it Booker that’s not performing? Is it organic growth that’s not performing? If there’s one thing that investors don’t like, it’s uncertainty, so that caused the drop. I think, listening to the call, management were just being very conservative; it’s two big companies they’re trying to combine now, and they’re just taking the very cautious approach in terms of what they’re guiding for. On the other hand; The Trade Desk, definitely, I’m confident it’s definitely the biggest jump we’ve ever seen in a stock. 43% in one day; it’s not the kind of move you tend to see in companies like this, even though The Trade Desk is a small-cap company. You usually see a drop of 43% if a company missed or gave terrible guidance, but to see a jump like that is usually reserved for small-cap biotechs who just had a massive success in a clinical trial. Seeing it in The Trade Desk was unusual, but not undeserved. They had an incredible quarter; revenue was up 61% year-over-year, they almost doubled their adjusted earnings per share expectations, and the real story here was spend on Connected TV, which went up 2000% year-over-year. On its new channels, you saw spending on audio increase 650%, and on connected TV, spending surged more than 2000% year-over-year. So the story here that investors are looking at is that, we talk a lot about companies like Netflix and Amazon and their over-the-top streaming, but what we don’t remember is that there’s still a huge television advertising business out there, and it’s not going away. There will be over-the-top streaming (supported by ads) which will be free; so just looking at another company that is in that realm, there’s a company called Roku. In their first quarter they’ve 5.1 billion hours of streaming through their platform; it was up 56% year-over-year, and the fastest growth from that came from ad-supported content. The Trade Desk is the company powering this ad-supported content; they’re the ones getting the ads in front of us and telling companies where to put those ads for the best results.
JAMES: So it’s really a different model from the Netflix streaming many of us might be used to; this is no subscription feed, but you’re paying through watching the ads, essentially.
RORY: Totally, and people are happy to do that; it’s great to not have ads in front of your Netflix shows, but if there’s a show you want to see, I think people are happy enough to sit through two or three adverts beforehand.
JAMES: To go on to a wider investing question, if we compare the movements between MINDBODY and The Trade Desk; at the time of recording MINDBODY was down by 10%, The Trade Desk up over 40%. Emmett, it’s interesting that from investors, we often get a lot more questions about why a stock might be down 10% rather than why a stock might be up 40% or more.
EMMETT: Absolutely; the pain of loss is far greater than the pleasure of gain, I think. Loss Aversion Theory states that, in fact, the pleasure of getting something is only half that of losing something; or in other words, pain is twice as felt as pleasure. If you win 50 bucks, you feel a certain way; if you lose 50 bucks you feel another way, and generally the negative’s twice that of the positive. It’s unbelievable, really, because it’s illogical; if you look at the showroom that we’ve built and a performance of the stocks that we’ve published, it’s quite exceptional really, if we can just throw roses at ourselves for a second; but it’s just human nature that someone will run to the bottom and say “Right, so you’ve a dozen-plus stocks that are up 100+%, but what’s going on at the other end?” So you buy a stock, and as the world has it, generally it will go below your buy price within a few days; that’s just the way it works. And that hurts, because you question your logic; clearly with hindsight you see you should have waited, but at the point of buying you can’t feel that. So we are usually quite inundated with questions when the stock goes down but what I would say at the moment; the market is responding to news quarterly results, as it always does, in an exaggerated way. What we’re seeing with MINDBODY and with The Trade Desk is an exaggerated response to just another day at the business. Granted, as I said already the quarterlies are a stepping stone to the vision, and our businesses have a vision; they’re both on the right track, but money flows in our out based on the news of the moment.
JAMES: Another question we actually frequently get in from members of our Invest community too is a pretty simple one, but when you dig under the surface it gets a lot more complicated; when do I buy? Emmett, I know that you’ve been adding some new cash to your portfolio recently for the first time in a while. Why now?
EMMETT: Simply because I’m in a position to do so; that is the rule of thumb, you buy shares when you have some cash accumulated in your life that isn’t destined for an obligation. I haven’t been in a position to add new cash to my portfolio for a couple of years; starting a high-tech business in Ireland, it’s not cheap, and as it happens I’m now in a position where I can start to add money. There has never been a bad time to buy stocks, just some times are better than others. Really, I have spare cash available at the moment, I’ve decided to deploy it. I’m alive now; there’s great businesses now; I see more great opportunities today then I’ve really ever seen before, and I acknowledge that the market is at or near its all-time high, but that has been the storyboard for a hundred years-
JAMES: The last two years especially.
EMMETT: This is true, the last two years especially; but in any adult lifetime, there is a point at which you can say “the market’s at an all-time high”, and that’s just the way it goes; businesses get more productive, they get more profitable and the market ultimately goes upwards.
JAMES: Interestingly, I know – I’m sure you don’t mind me saying – that one of the stocks I know you’ve recently added to your portfolio is Teladoc, which also happens to be our most recent Stock Of The Month. Do you want to explain it a little bit more about Stock Of The Month to our listeners? How does the Stock of the Month differ from other selections in our Invest app?
EMMETT: Absolutely; so we’ve published, we call it, our 1-percenter showroom, which is a hand-selected 1% of the listed businesses out there. It is a short list! Our Stock of the Month is a shortlist of the shortlist, and effectively is the one stock that we three – you, James, Rory and I – feel most optimistic about at this moment in time. We pitch to each other our ideas for stock of the month, and I think the three of us always feel comfortable that if our kind uncle was to hand us 10,000 bucks, that we would be happy to invest it immediately and at this moment into our choice of Stock of the Month; and we need to be able to explain to each other why that is, in fact, the case. What I would emphasise is that we won’t get it right every time; that’s actually impossible. No investor has ever gotten it right every time, but over the long term – which for the sake of conversation is about seven years – we’ll get about seven out of ten right; seven out of ten will beat the market, is what I mean by right. Three will have underperformed at the market, so what we’re simply doing is, we’re putting our finger down on one of our published stocks to say “this is the one that at this moment in time is most appealing to us”, and the reasons for that are explained in the write-up.
JAMES: Rory, I suppose the next question people might have is; for a company that advocates long-term investing so much, how does recommending a certain stock on a certain month fit into our long-term philosophy?
RORY: I’d say the first answer to that is, people should be investing regularly. It can be investing month in/month out, that’s great; if not, they should invest whenever they can. The other point is that it’s not necessarily a “buy this stock right now because we told you to buy this stock”; what we’re trying to do with the report – and I think that comes across – is trying to give an insight into our thinking as an educational tool as much as every other part of the app, “why do we like this stock now”. That’ll help other investors to clarify their thoughts as well.
JAMES: Meabh, as the member of our team who converses most with the outside invest community, how do you find people react to Stock Of The Month?
MEABH: They like it. From talking to Rubicoin customers regularly, I can tell it’s one of the more focused regular pieces of content that they dig. I think we were talking about this recently, and we used the term it’s the ‘dish of the day’. You’re presenting a shortlist of a shortlist; it’s very nice when you get a short menu because you see the thing you like straight away. I think because it’s a focused piece of content on one stock, it also allows them to make the decision on whether they want in or not. Also related to the previous conversation on when to buy and then when to feel bad if there’s a dip, I think with Stock Of The Month and when to buy, one thing I know our customers – and, actually, I learned from personal investing experience – is when you have cash flow, fund your account so that you’re not in a position where you might see something that we either publish or release and that you want in on that you can’t get. Just on loss aversion, and feeling like if we were to publish a stock and there is a dip, for me, what I’ve learned and what I feel fully comfortable with now is, it will be an unrealised loss if you’re in long. That makes me feel much better now when there is a stock that I buy in on, and then there’s a dip; of course, long term, things may not work out exactly how you wanted, but I think people panic regularly, and I think what Rubicoin tries to do is just keep endorsing this idea that this is a long hold position, things will change and you’ve got to wait it out.
JAMES: I know that’s something you’ve mentioned a few times, Emmett: the power of always having dry powder at hand.
EMMETT: It’s a fact; every professional investor out there knows from experience that you keep some cash on the sidelines. Personally, over 20 years I have never been more than 5% in cash, which means I’ve been highly exposed. In fact, practically speaking in my life when the market has gone south, as it has done – I’ve been invested through two of the three biggest downturns of the last hundred years – when the market does go south, I just go looking for new cash. It’s not that I have money hidden under my pillow, but when things are on sale you kind of go and figure it, so that’s how I did in the early stages of my investing life. Keeping some cash on the sidelines is one of the secret weapons to getting bargains when they present themselves. A case example was the other day; we saw Match getting crushed, I think it was around 13% an hour or so after Facebook made their announcement. That’s an example of, if you ask me, an irrational response to rational data.
JAMES: Interesting. In the last episode of the podcast, Emmett and Rory, I asked yourselves to give me a quick 30-second elevator pitch about the one company you would be looking closely at this earning season. For this episode I want you to give me a company that’s outside our showroom that you’re looking at now; perhaps one that’s on our short list, or a long list, for possible addition to the app. Myself and Meabh are gonna judge you on your pitches after to see which one we would be most invested in. Rory, I might get you to go first; the stopwatch is on. 30 seconds.
RORY: Stock on my radar is Constellation Brands (Ticker Symbol STZ); it’s a 42 billion dollar company, controls a huge portfolio of alcoholic brands. In particular, they own the US distribution to Corona and Modelo; that’s two brands that are very popular in the Hispanic community, which is the fastest growing demographic in the United States. They also own Ballast Point, which make some very tasty IPAs, and more recently they took a 9.9% stake in Canopy Growth Corporation, which is a Canadian company involved in medical marijuana. So one of the big questions we have from you is how to invest in the marijuana trend, and my usual answer is don’t; but this seems like an interesting way to get into it, with the huge risk that comes from investing in some of those over-the-counter stocks.
JAMES: Perfect, interesting company. Emmett, are you ready?
EMMETT: I am indeed. So I’m lukewarm on this one; it’s an outlier, but speciality retailers – that is, shops that you go to for speciality purchases – I think, has been unduly punished in the wake of Amazon. Speciality retailers include The Tile Store, for example, or Camping World Holdings, but the one I’m just moderately interested in at the moment is Lumber Liquidators, provider of hardwood flooring. The reason I’m interested in them is, they’ve gone through hell and back, frankly, and they have refocused their strategy. Their revenue per employee, from what I can see, is about the highest in the speciality retailer space; they had a pretty good quarterly result recently, and I think more’s due to come thanks to this new strategy refocused on renovations and finding the right customer for their product.
JAMES: I think we’re gonna have to extend our elevator pitches to 60 seconds in future, but it’s good. Meabh, which one? If you had a grand on the table right now to invest.
MEABH: I’m not quite sure; I wasn’t expecting either of those types of businesses. I might go for Lumber Liquidators, Emmett, I’ll put one in your corner. I have friends at the moment who are putting lots of time and energy into hardwood floors and what type of woods it’s gonna be, so I’ll go with that one.
JAMES: I think myself, I would go with Constellation Brands; seems like a very interesting company.
EMMETT: By the way, we’ve to vote. [LAUGHS] I’d probably go with Constellation Brands.
JAMES: Sorry, Maebh. As I’ve already mentioned, the latest Stock of the Month report is in the Invest app now. We’ve also actually added a new Star Stock to the Invest app this week too; this month’s edition is a software-as-a-service or SAAS company that helps some of the world’s most recognisable brands to embed different types of media into their platforms. I have to say, it’s actually a really interesting company, and it’s worth checking them out; if for nothing else, their values, which are very, very interesting. Emmett, you’ll also be publishing a new Expert Opinion piece next week. You’re gonna continue your discussion on the key areas for an investor to be wary of; this time you’re focusing on the healthcare industry. In the meantime, though, you can check out the full archive of Expert Opinion pieces – there’s twelve in total – in the You section of the Invest app. That’s just about all the time we have for today; if there are any other questions or topics you’d like us to discuss on the Rubicoin podcast, let us know. You can get in touch with us on Twitter or on Facebook; you can leave comments on the podcast episode itself; you can get in touch through the Learn or the Invest app, or you can email us at firstname.lastname@example.org. From myself, James; from Emmett; from Rory and from Meabh, thanks very much and we’ll see you again next month.
It’s June, and in this month’s episode of The Rubicoin Podcast, we talk about Howard Schultz leaving Starbucks, Amazon making a move onto the soccer pitch, and some very new – and very random – ideas that we want your opinion on. Recorded on the top floor of Rubicoin HQ in Dublin, Ireland, listen in as Emmet, Rory, Meabh, and James discuss our unique approach to investing in the U.S. stock market. This is investing for everyone.
Rubicoin operates a full disclosure policy. Rubicoin staff may hold long positions in some of the companies mentioned in this podcast.
JAMES: Hello there; welcome to June’s episode of The Rubicoin Podcast, coming to you live from the top floor of Rubicoin HQ here in Dublin, Ireland. With me this week is Emmett Savage, CEO of Rubicoin; Rory Carron, our chief investor; and Meabh Redmond, the head of Customer Experience Design. This month we’re going to talk about Howard Schultz leaving Starbucks, Amazon making its move onto the soccer pitch, and we have some very new and – very, very random – ideas we want your opinion on at the end of the show. Last week, Howard Schultz announced that he plans to step down from his role as chairman of Starbucks, bringing an end to his 36-year relationship with the company. Emmett, how instrumental has Schultz been creating the global coffeehouse that we all know today?
EMMETT: His influence has been significant; I’d call it significant. As Maebh just said, I’d love to buy the guy a coffee! What was the story; he bought the Starbucks chain of six coffee shops for $4 million, is that right?
MAEBH: I don’t know the amount, but that’s how the story goes. I think he was interested in coffee culture, and had an actual genuine interest in coffee as a core product – I did some research initially – and that’s why I like the guy. I’m interested in his beginnings and his personality; there’s a really good episode of How I Built This with Guy Raz that Rory put me onto, and I re-listened to it. It’s just a really enjoyable area. He’s a very likeable character for a billionaire: one of the most successful entrepreneurs in the US.
EMMETT: You don’t get less likeable because of your billions!
MAEBH: True, but sometimes you feel like you’re forced to like them because of their kudos; whereas this is a guy that I actually really wanted to listen to more of.
RORY: He did bring Starbucks revenue from 57 million in 1991 to 22.5 billion this year.
EMMETT: Not bad. See, I told you he was significant.
RORY: He’s obviously a massive figure. I think he’s been out of Starbucks’ main game for a while now; he stepped down before, actually, and came back in 2008 when he realised the company was going to pot. They were expanding too quickly, the coffee had really died down in quality, and he came back in, closed down a lot of stores, stopped a lot of expansion. I think he closed all the stores down to teach the baristas how to make coffee and got back to the core focus of the business. Maybe he’ll be back again, but it seems like he’s slowly been edging his way out of the business. He took over their premium brand recently as executive chairman; he’s left Kevin Johnson in charge, a veteran of the company who already seems to be doing a good job. He was quite proactive in the most recent scandal, where two black men were arrested while they were waiting for their friend in Philadelphia. I think he’s handed over the company to someone with good clout.
JAMES: I think he took a large role in the philanthropic efforts at Starbucks. This has led a lot of people to speculate that he’s eyeing up the White House for his next venture. What do you think the possibility of that is or is it just rumour?
RORY: He said before he wasn’t interested at all; he softened that stance recently when he said all options were open. He’s a staunch Democrat, and I suppose anything’s possible these days.
EMMETT: We here in Dublin don’t really have a good view of who the Democrats are cultivating as a candidate for the next election, but certainly Schultz carries so much brand and clout; along with other personalities, such as Dwayne Johnson.
MAEBH: The mention of brand when it comes to Schulz is important; the anecdote about the cheese toastie that Starbucks put on the menu. Did you say 2008 was when he came back, Rory? That was the time where he walked into a regional Starbucks and they were frying melted cheese for a sandwich; the smell of the burnt cheese was basically contaminating the smell of the excellent coffee, so he just pulled them from the menu that day. Fairly severe, but it just shows you how much he believes in the core brand and the product, which I think is always a good sign if someone is that strong about it.
JAMES: I don’t mind the smell of melting cheese, to be honest. As many of our soccer fan listeners might know, Amazon recently bought the rights to a limited amount of English Premier League matches, starting from the 2019-20 season. Rory, I know you’re a big Manchester United fan; although Amazon has only bought the rights for about 20 matches per season, how big of an upset do you think this could be for soccer fans this side of the Atlantic?
RORY: I wouldn’t call it an upset. For years, soccer rights have been dominated by two companies – Sky Sports and BT Sports – and what’s happened is, in order to see a limited number of matches every year that your team might be involved in, you’ve had to pay really outlandish prices; it’s all been bundled together with one package, a similar story over in the states with ESPN. I think times are changing; I Have Never Done This Myself, but I’ve heard it’s very easy to illegally stream sporting events through the internet.
RORY: If you’re an Amazon customer and you haven’t got Prime yet, this might just be the little push you need to get into it. They’ve got 20 games for the season, 10 of which on Boxing Day which is a huge sporting day; all 20 teams play, people have been cooped up with their families for the last five days and they’re dying to get away from them.
JAMES: It’s the day after Christmas, for our American listeners who might not know; it’s a big day for English soccer. It’s kind of a disruption, I feel, that they got one of the biggest days of soccer exclusively.
RORY: Definitely; this is a dip-the-toe investment for Amazon, I think. The value of the deal was something like $90 million, which is absolutely nothing to them. It’s expanding their live sports streaming, which includes the US Open and some NFL games in the States. Something that they’re definitely looking into; if they see any uptick in Prime membership due to it, I’m sure it’s something they’ll expand in the coming years.
EMMETT: I guess what we’re looking at is another proof point that Amazon is everybody’s competitor, or at least can become anyone’s competitor. We saw this in action when they acquired Whole Foods; where suddenly the world woke up and realised that Amazon was now in the grocery store business, and I guess now we’re looking at Amazon entering the distribution of streaming sports business. As Roy said, they’re just going in light, at a wedge – 20 matches – and in no time at all, they will either dominate or have a significant portion of that market if it’s feasible for their business model.
JAMES: It could create a very disjointed customer experience though, having those now providers of English soccer matches for users to jump between, especially if you’re trying to follow your favourite team.
EMMETT: But the Premiership is a competitive bidding process; you would not want to be bidding against Amazon if they’ve decided they’re gonna do something. Right now Sky have the rights; if Amazon have proven to themselves that this is an asset worth acquiring, they have deep pockets.
MAEBH: Does that mean that customers do actually have to buy into Sky Sports, BT and Amazon to see the full Premier League?
RORY: That’s the fear; that we’re getting away from these big cable bundles and what you’re gonna end up with is something similar to having multiple subscriptions, if you want to get the entire package. I think that is a worry for consumers down the line, but at least there’s another player involved now which is evening up the playing field.
JAMES: A bit of competitiveness might help. As this is the fifth episode of the Rubicoin podcast today, we decided to throw the rule book out the window this month and introduce a few new segments into the show. I think it’s fair to say that none of us really know how any of these might work – if they do work at all, that is – but this is where you guys listening might help us out. After this episode, we’re gonna ask you to vote for the parts you’d like to Kill and the parts you’d like to Keep for the next episode. I’ll explain more about how you can do that at the end, but to start off we’re gonna pick our Company We Never Talk About. With over 90 stocks featured in the Invest app at the moment, it’s inevitable that some like Tesla, Facebook or Google get talked about a lot more than others; so before we came into the studio today, I asked Emmet and Rory to pick one stock that they feel doesn’t get the attention it should and explain why it deserves its place in our 1% showroom. Emmett, what stock have you picked to give a bit of love and attention to today?
EMMETT: Actually, love was the appropriate word; the stock I picked is Tiffany. Tiffany is an old-world business, and buying diamonds for your loved one is almost as old as love itself; but what’s very interesting about Tiffany is that it is in essence a retailer. They have points of sale, and in the last year they’ve actually reduced their store count from around 314 to about 310 stores; however, they have grown the comparable store sales by about 7% in the last quarter, which is absolutely huge. If we look at some of the restaurant chains in our app, we know that 7% is really phenomenal growth. Tiffany last quarter netted a billion in quarter one of this year; it had sales of $1 billion, which is up 11% from a year ago. When you think about what they’re doing – selling diamonds, which has always been done – it’s extremely impressive with fewer stores, and what they really are exploiting now is their brand. I think the world’s awareness of ethical diamonds has increased, and when one goes to buy from Tiffany, not only are they getting an experience; not only are they getting that turquoise green/blue box, but I think an average buyer will feel that the supply chain is cleaner, that there are no blood diamonds in that. When I look at Tiffany as a stock we rarely speak about, I see one that is positioned to further grow their brand. They’re getting more and more relevant, they’re using icons of today to grow their brand; for example, Lady Gaga as part of their poster campaign down in Sydney. When I was down there last year I saw that she was the figurehead.
MAEBH: One thing on Tiffany’s for me is, it’s not just diamonds. Their more modestly priced pieces of jewellery, I think, are iconic; when it comes to occasions, I know my first Tiffany was a gift for graduation. It was from a family member actually based in the States, so there was even an air of exclusivity from the box and from the unboxing. I think I’ll probably gift the next person in my life that I know who’s graduating – or who’s young going through a milestone – a piece of Tiffany’s jewellery; the brand’s embedded as a gift for me.
JAMES: Emmett, you mentioned brand there a few times; it obviously has a very, very strong brand – that teal blue box that’s very recognisable – but as we’ve seen with other companies like Tiffany’s, notably Michael Kors, brand is a very hard moat to protect in some ways. Obviously as a retailer you want to sell as much of your product as you can, but the flip-side of that is if everyone has a Tiffany’s, the brand is diminished in some way.
EMMETT: Absolutely. The whole thing about a premium brand or a luxury brand is exclusivity, and Tiffany’s have positioned themselves as an exclusive product that’s rare and also expensive. If you look in the last year as I mentioned, they have fewer stores now than they did one year ago, which is not the Michael Kors path. Michael Kors, in my opinion, lost strategic direction; the exclusivity was traded off to go into every other shopping mall in the US, and that exclusive quality diminished, Look at Tiffany; sales in the Pacific region in the last year grew 23%, in Japan grew 12%. We have new markets that they’re growing their brand into, using that huge teal blue box that is instantly recognisable. Just as Ferrari Red is a colour that immediately evokes emotion, the Tiffany Teal evokes an emotional response.
RORY: Just a note on Tiffany; in order to protect their brand, I think the vast majority of their sales come from items under $200. You have to go into the shop and ask for those products; they don’t put them out front and centre, they’re hidden down the back. If you walk into a Tiffany store, what you see is the really expensive diamonds, the gold jewellery that cost a couple of thousand; that protects the brand, keeps that dilution of the brand down.
EMMETT: Interesting. They have a new CEO, by the way, and about $220 million cash on the balance sheet, so the business is in very good shape and the CEO has a very clear focus on what he wants to achieve. I think he has six priorities, which are 1: Evolve the brand message, 2: Enhance the in-store presentation, 3: Have seamless omni-channel, 4. Get a more efficient operating model, 5. Inspire within the organisation, and 6. Strengthen their competitive position, which is a nice rounded view of a business that’s multinational and growing.
JAMES: Rory, which company have you picked that you feel needs a bit more attention?
RORY: There’s lots of them, really, but one that really stood out for me was and Vail Resorts, symbol MTN; it’s the stock that I can’t remember talking about in a long time, but it’s actually doubled in value in the last two years. Over the last five years the stock’s up 333%; for people who don’t know, Vail Resorts own a number of ski lodges around the United States and one in Australia. Not a highflying tech company by any means, but when we talk about moats, things that protect your business, there’s very few moats stronger than owning mountains; they’re not making any more of them anytime soon. The last earnings report, their profits were up 42% year-over-year; they raise guidance as usual – this company just performs on every metric; their season passes, which is where all their money is really generated, are up 12% in unit volume; they’re up 19% in sales dollar volume. I think that really demonstrates that not only is there increased demand for these passes, but the people are willing to spend more year-on-year; they’ve got better pricing power there.
JAMES: The obvious question may be, what happens if there’s no snow?
RORY: It’s a great question; we often make fun of restaurant chains that blame poor results on bad weather, but this is a company that really does have a solid excuse. The weather was poor at the start of the season, picked up in the second part of it, and they made up for the slow down at the start, which shows people just want to go skiing; if the weather’s bad at one time of the year, they’ll go at the next available opportunity. Your question to what they do in the summer is, they have an Australian mountain, which they bought two years ago. That’s bringing in ski revenue during the Northern Hemisphere summer months; they’ve also launched Epic Discovery, which is using the mountains for non
skiing purposes – mountain biking, ziplining, nature trails, that kind of thing – it’s not a major part of their business just yet, but it’s a long-term vision that the company has for generating revenue year-round.
JAMES: It’s venturing much further into adventure sports, as opposed to just skiing. That was the Companies We Never Talk About section; the next section is one that I can safely say I have no idea what’s about to happen, because Emmett has refused to tell us. I might hand it over to you here and let you take it.
EMMETT: This section, folks, is called I Read A Book. [LAUGHS]
MAEBH: Tell us more!
EMMETT: I’m glad you asked! Every month we’ll try and pick a book we read and talk about it, so I read a book; specifically, I re-read a book. Before I tell you about the book I re-read, I have a little pop quiz; most of us know the number one, and occasionally the number two, performer in every field. For example, who was the first man on the moon?
RORY: Neil Armstrong.
EMMETT: Very good; five points Rory. Who was the second man on the moon?
JAMES: Buzz Aldrin.
EMMETT: Eight points; well done James. Maebh, who was the 20th century’s most successful stock investor?
MAEBH: That would be the Oracle of Omaha, Warren Buffett.
EMMETT: 27 points Maebh, well done. Here we go; who was the 20th century’s second most successful stock investor?
JAMES: Emmett Savage?
EMMETT: I wish I had those years and tenure and results, but alas, no. The second most successful investor was Shelby Davis; we wrote a blog piece about Shelby Davis about a year ago, but I reread the book “The Davis Dynasty” by John Rothschild over the weekend, and I found it to be a great book. What it brought was a lot of insights from a man who effectively turned an investment of $50,000 in 1947 to $900 million by the time he died in 1992. That’s one heck of a return, so as much as we all know who the great Warren Buffett is, the second-great Shelby Davis is somebody we should cast a light on now and again to understand what was the attributes that made him such a great investor. Basically, Shelby Davis invested almost exclusively in insurance stocks, which has a shadow from the great Warren Buffett, who also has a leaning towards insurance stocks. Specifically, he invested in US and Japanese insurance companies; he started off as a CBS radio reporter in New York, and also worked in the insurance business, so he developed an understanding of the insurance business. Just like Warren Buffett, he was very frugal – as you read his book, you realise a little too frugal – and despite croaking it with 900 million in the bank, his family didn’t enjoy many of the trappings of his great wealth; I suppose that’s a polite way of saying they really, really were frugal. There was a lot of nice quotes from the book, which I particularly enjoyed; one was “Bear markets didn’t rattle Shelby Davis any more than a fire sale at Bloomingdale’s rattles the smart shopper.” I took a lot from that; we in our lives are going to see a market downturn, and the human, the visceral fast reaction is to panic, when in fact, the enlightened investor will actually relish these moments to buy great businesses at discounted prices. As lifetime investors, these are things we’re going to have to do. There were nine tenets to Davis’s investment philosophy, and I’ve written them down because I Read A Book. They are as follows; he said Avoid Cheap Stocks, and you might see that manifested in our app. We don’t look at penny stocks – which by definition, are broadly speaking are stocks that have a share price below $3-5 – and that’s a dangerous place to go fishing for investments, for reasons that we’ll elaborate upon again. His second was Avoid Expensive Stocks. His third guideline was Buy Moderately-Priced Stocks And Companies That Grow Moderately Fast, which is something we’re trying to do in the market environment that we have at this moment. He believed in Waiting Until The Price Is Right; he sat on cash, he had a price target in mind for his businesses – which is easier to do in older-world businesses such as insurance, to wait for a price target that you believe is fair representation of business. His fifth guideline was Don’t Fight Progress; there’s a lot in that, there’s virtually a whole chapter on it. We’re living in very exciting times now in 2018; progress is all around us, we can see it in every field. We’ve discussed how Amazon are now moving into the Premiership football territory, and this is an example of just one daily news story we’re seeing of progress. Don’t Fight It; which leads into his next one, Invest In A Theme – his theme was insurance stocks – and have thematic investments in your life. Buy what you believe in; understand what you own, or at least have a view that is supported by something you’ve learned.
JAMES: Does that go against – in some ways – the idea of diversification, though?
EMMETT: No it doesn’t, actually. Investing in a theme doesn’t necessarily mean that you’re only gonna stay in one sector or industry. I’ve always believed that one’s portfolio is effectively an autobiography of your beliefs. If I saw any advanced or intermediate investor’s portfolio, it’s as good as telling me what that person believes in. If you just look at someone’s stock portfolio – six-plus stocks – that is telling you if they’re an active investor; what their vision of the future is; what type of person they are. It’s incredible; the more you look at people’s folios and the more you get to learn the person behind that folio, you start to see “this is actually the perfect folio of that person”, if they’re practicing it. I don’t believe it’s anti diversification. The seventh rule or guideline that Davis went with was Let Your Winners Ride; that’s a really important point, because there is this compulsion – at least this voice in one’s mind – to sell your winners when they’ve banked some profits. I looked at my folio recently; I think almost half of it is made up of Netflix. That faces me with a decision – should I divest some of my Netflix shares? – but I’m gonna let my winners ride. When you sell, you’re going to incur taxes if you’re not in a tax protected structure, and you also have to basically deploy that cash in an investment that will grow to the value of the taxes you’ve just paid. He said Bet On Superior Management; that’s something we do here. As we know, we spend a lot of time evaluating management with the tools at our disposal, to make sure that only the stocks in our showroom have superior management. His final guideline and piece of advice to investors like us was Ignore The Rearview Mirror, and it’s really important. I have to overcome this human bias every day; when I look at a great business – for example, Chegg, which just yesterday went into the Invest app – the rearview mirror shows me that stock has had a run, but in fact we’re looking forward to that business’ opportunity. The rearview mirror could cause you to do something that’s not really informed about the future; history just helps us evaluate what’s coming.
JAMES: What’s the name of that book again?
EMMETT: It’s called the Davis Dynasty: Fifty Years Of Successful Investing by John Rothschild.
JAMES: That was Emmett’s Book He Read This Month. The last section we’re adding into this month’s podcast is – Maebh, I think I’ll let you introduce this one.
MAEBH: Hello Listeners, and welcome to a new segment we’re testing called Random As [BEEP].
JAMES: I really hope we put the beep in there. This is a new segment where Maebh takes the lead and decides on a topic that’s in some way related to investing or the business world for us to for us to talk about for a few minutes.
MAEBH: Maybe slightly more left-of-field. The topic this week is around any of the stocks that live in the Invest app, and it’s going to be us tearing down some of their logos. In conjunction with the design team in Rubicoin, I had a quick check-in to see if there were there any logos that we all felt were less than good, and three companies in particular were repeated over and over again; apologies to these logos.
RORY: Is this just in our app now?
MAEBH; Just in our app; we can go outside the universe, but I thought we’d start here because we all know them.
RORY: I think I know one.
MAEBH: It’s gonna be difficult for anyone listening. Hopefully you’re aware of the stock in the logo; if you’re not, you’re gonna have to just take a leap of faith and listen to us describe it. The top one that everyone on the design team here said they weren’t exactly enamoured with was Mazor Robotics.
RORY: I wouldn’t have guessed that one; it’s not as offensive as I thought.
MAEBH: It’s not offensive; there’s some mixed-weight fonts in it. [LAUGHS]
JAMES: Spot the designer!
MAEBH: Mazor Robotics is a spinal surgery robotics company; very impressive innovation, but for some reason they’ve gone with – I think they’re supposed to be nodding to incisions – there’s two wisps to the left of the logo that just didn’t do anything for anyone. I’m sorry to the Oracle of Omaha, but it’s Berkshire Hathaway; the tracking and the typeface is incredibly dated.
RORY: Have you seen the website?
MAEBH: I have, and it’s inspiringly outdated. I don’t know how they’ve kept it on the Web for as long as they have.
EMMETT: There’s no ‘About Us’ with fancy pictures?.
RORY: No, it’s like someone took a picture of a Word document.
MAEBH: I don’t think there’s any pictures. Then this one is one that everyone in this room will agree with; I remember when we added it to Invest, there was a conversation. It’s Ctrip.
RORY: That was the one I guessed; the weird-looking dolphin.
MAEBH: It’s a sinister-looking dolphin; there’s something in its eye.
RORY: That’s China for you.
JAMES: Have we got any more to add
EMMETT: Hain Celestial. It’s not coloured in properly; I don’t know what the correct design term is, but the edges on it are not clean. I’ve always had a problem with it; we did in the best of our capability get the best version of their logo, but the edges are a bit rough. I don’t know if anyone’s listening from Hain; could you get on that, please?
JAMES: What were the other two?
MAEBH: The other two were – this was more my voice, but people nodded along – Planet Fitness has a strange thumbs up.
RORY: Oh my god.
JAMES: [LAUGHS ] I just googled it, that is really awful.
MAEBH: Look, I get it, it’s Fitness – it’s a thumbs up, it’s trying to get you to feel motivated – but for me it’s slightly cringe.
RORY: That’s awful. I can’t – it’s been a while since we added that stock.
EMMETT: But thumbs up are in at the moment; you look at the president of America, it’s a thumbs up-generation.
MAEBH: Does he do a thumbs up? I know he does a baby finger.
EMMETT: He does a thumbs up. Quite a lot of pictures with thumbs up.
MAEBH: I’ll go and check. There was some others floating around; the last one I’ll mention is Activision Blizzard’s. There’s a very mixed style between the top and the bottom word.
JAMES: They’re very, very different. Like business in front, party in the back.
MAEBH: Exactly. That can be understood because of the nature of the company and the actual product.
RORY: Can I mention one that’s not in our showroom? It always comes up when people ask me the worst logo; Sherwin-Williams. They’re the biggest paint company in the world; their logo is an outline of a globe with someone pouring a bucket of red paint over it, and it says “Paint The Globe”.
EMMETT: Oh, God.
RORY: Or “Paint The World”, I can’t remember, but it’s absolutely awful.
JAMES: Sounds a bit grim.
RORY: Yeah; pouring paints into the into the seas, basically. It’s really, really bad.
EMMETT: If we’re straying off our app, I think Checkpoints Software.
MAEBH: I know that logo, and I’m actually going to probably defend it. I think it’s so bad that it’s charming.
RORY: It looks like a child drew it.
MAEBH: I know; something about it, I find quite nice.
RORY: For a security company, it doesn’t really inspire confidence.
MAEBH: Paired with the actual offering of the company, we have a problem; but I do quite like the logo.
JAMES: That was our Random As [BEEP] section; I don’t exactly know what’s come up next month if we keep it, but it was definitely interesting. One segment we have kept from the previous episode is our Elevator Pitch, where Emmett and Rory give us a 30-second pitch on a company they’re keeping a close eye on at the moment. Last month you guys picked a company outside of our showroom you’re interested in; this month I asked you both to pitch a company that you think is coming back from the dead, so to speak. Emmett, we’ll go to you first; just a reminder, at the end, myself and Maebh are gonna pick which pitch we like best. 30 seconds; when you’re ready.
EMMETT: All right, I’ll try and stick with 30 seconds when I’ve finished this sentence, which is going to last the next 25 minutes. My turnaround is a stock that’s not in our showroom – it is very risky and that’s why it’s not in our showroom – and it’s that old chestnut from the world of mobile; Blackberry, which was once synonymous with presidential telephones, mobile phones and enterprise-level security. Blackberry is a Canadian company; they put in a turnaround specialist CEO recently called John Chen, and the business has completely pivoted into the world of software for cars. They have a technology called QNEX technology which all the major car brands are deploying; about 40 of the automotive original equipment manufacturers (OEMs) are using QNEX technology. It looks like a business that is successfully implementing a whole new strategy – with software that is now in 140 million vehicles and growing – and I think it looks like one that is getting ready for a whole new wave of growth.
JAMES: Cool; didn’t expect Blackberry, I have to say. Rory, your turnaround company,
RORY: I wouldn’t call it turnaround just yet, but the stock of this company is up 65% year-to-date. That stock is TripAdvisor. After a few missteps over the recent years, they’ve delivered two really solid quarters; it’s really demonstrating that the company still have a strong network of engaged users, that stands currently at about 450 million monthly visitors. They’re drawn to Trip Advisor because there’s over 600 million high-quality reviews on the site; they’re seeing good growth in their non-hotel segment, which saw an increase of 36% year-overyear; and while competitors like Trivago are really struggling, the prices on TripAdvisor’s Metasearch platform are stabilising, which I think shows the quality of the service they offer.
JAMES: Cool. Maebh, TripAdvisor or Blackberry?
MAEBH: I rely heavily on TripAdvisor for research purposes, before I go away, so I’m gonna buy in with Rory this time and go for Trip.
JAMES: I despise TripAdvisor – just the platform, I don’t like using it, I think it’s awkward – so I’m gonna go with Blackberry, just to give it a blast from the past.
MAEBH: I couldn’t by principle go with Blackberry, because I got burned last time with Emmett’s business [LAUGHS]. The hardwood floors – what was it called?
EMMETT: Lumber Liquidators.
JAMES: He threw you a curveball in the last episode.
EMMETT: I voted for Rory, I believe. [LAUGHS]
JAMES: That brings us to the end of today’s episode; as I’ve mentioned already, we want your help in deciding which parts to Kill and which parts to Keep for the next episode. If you go to the Rubicoin Twitter page now, you can vote on each of our three new sections, to let us know if you’d like to hear it again next month. If you miss out on the Twitter poll, however, you can still let us know what you think across the month; get in touch with us on Twitter or Facebook; leave a comment on the podcast episode itself; message us through the Learn or the Invest App; or email us at email@example.com to let us know what you think. If you’ve any other suggestions as well – completely brand-new sections we could include – we’d love to know, so get in touch with us for those. That’s about it for us for this month; as always, there’s plenty of new things to check out in the Invest app too, including a new Star Stock, Chegg – which Emmett already mentioned – that we added on Monday of this week. Thanks for listening in; please make sure to rate, review and share the podcast if you enjoyed today’s episode. From myself, from Emmett, from Rory, from Maebh; happy investing and we’ll see you next month.
Episode 5: Amazon, PayPal, and 'The Netflix of China'
In July’s episode of The Rubicoin Podcast, the team discusses the potential for Amazon to become a digital monopoly, an interesting customer experience decision made by PayPal, and the correct pronunciation of ‘The Netflix of China’ — iQiyi. Recorded on the top floor of Rubicoin HQ in Dublin, Ireland, listen in as Emmet, Rory, Meabh, and James discuss our unique approach to investing in the U.S. stock market.
This is investing for everyone.
Rubicoin operates a full disclosure policy. Rubicoin staff may hold long positions in some of the companies mentioned in this podcast.
JAMES: Hi there, and welcome to July’s episode of the Rubicoin podcast. I’m James Dunne, and with me this month is Emmett, Rory and Maebh as usual. We’re coming to you from a different location than usual, because it is very, very hot here in Dublin-
RORY: So hot.
JAMES: And the recording studio was just too warm.
MEABH: It’s hot, guys, we promise, we really mean it; Ireland doesn’t usually get this type of heat.
EMMET: But if you come from a normal country, with normal temperatures, it’s quite nice.
JAMES: It’s about 25 degrees Celsius; I don’t know what that is in Fahrenheit, but our pale Irish skin just isn’t used to this heat. Emmett, what are you talking about this month?
EMMET: Amongst other things, I’m gonna talk about Amazon’s position as a possible digital monopoly.
RORY: I’m going to teach people how to pronounce the name of a Chinese company.
JAMES: Maebh, what are you talking about this month?
MEABH: In a segment about Paypal, I’m going to touch on a very interesting customer experience decision that they’ve made.
JAMES: After last month’s episode we received a few listener requests asking us to discuss some topics on this month’s podcast. On Twitter, Michael Jurado asked us to talk about the effects that large economic events can have on the stock market as a whole, and what better economic event to talk about than the multiple trade wars rolling at the moment. With 25% tariff slapped on Chinese imports, steel and aluminium taxes slapped on Canadian and EU imports, it seems as though things are just gonna get worse for American exporters. Harley-Davidson already announced that they’ll have to move some of their production internationally, and Brown-Forman are already set to hike the price of some famous whiskeys like Jack Daniels and Woodford Reserve by about 10% in Europe. Emmet, with all the news and coverage about this trade war, what should we do as long-term investors?
EMMET: Well, I think we should ignore news. There will always be news; just a steady stream of news, from hundreds of thousands of news agencies around the world whose job is to fill the airwaves, print pages and publish websites with the latest stories. I think a mistake you can make as an investor is trying to take what’s current at this moment and transpose that news into your folio or your decisions. There will always be news, and I could list off multiple stories – dozens of stories that have come at us in the last 10 years alone – that have come and gone, and at the moment were very real; but they’re over and done with, and sure enough the market has progressed. Right now and forevermore, my personal position is, news is something that I am going to – for the vast, vast, vast majority of time – ignore.
JAMES: You mentioned news there, and that’s probably very relevant to the point. Rory, how much do CNBC, CNN, Fox News – how much do all of these play a part in heightening the coverage of such events?
RORY: Well, that’s just their business. It’s in their interest that people are interested in what’s going on in the world. It’s a lot more interesting to talk about things like trade wars, fill those 24-hour news cycles with sensationalised stories, and that’s how they make their money. Like Emmet said, you can look back over the last 10 years of this bull market that we’re currently in: there was swine flu; there was ebola outbreaks; there was US government shutdowns; there was Brexit. Even just a couple of months ago we were all worried about the interest rates for the ten-year Treasury notes. I haven’t heard anyone talk about that in the last few days. These things are usually temporary. ‘Trade war’ sounds awful – I don’t know whether the current administration actually wants a war.
MEABH: The word war is an interesting choice when it comes to news, isn’t it? Global trade, I suppose from my point of view, could be considered a drier subject than it is so I think the word war is – I understand why there are ripple effects here, consequences on world trade, but really it’s just because two or more entities are inflicting a type of pain on each other. But they’re using the word war – so the pain is the tariffs in this case – but it is sensational. It doesn’t directly affect me or my investments in a way that I need to run outside and shout about it today. I think the word war is the thing to tune into and consider there.
JAMES: You mentioned there it doesn’t affect you or your investments, but what if it does? What if you’re a Brown-Forman shareholder now, Emmet – should you be selling on the fact that the share price is probably gonna fall under the pressure they’re under with these tariffs to Europe?
EMMET: Yeah, and I’m not suggesting that all news doesn’t in fact influence the movement of a share price in the short term; it absolutely does. What we are investing in is management teams that are considering the environments in which they’re operating, and they’re strategically placing themselves to prosper in those environments; so whether it’s Brown-Forman or Harley-Davidson or any business, they will take the news of the moment or the environment of the moment and run their business accordingly. An example was GDPR – the rather dull subjective GDP – was the latest equivalent of Y2K if you ask me, but a lot of businesses were forced to think about how they contained their customers storage and used customer data if they operated in the European jurisdiction, which is for digital businesses more or less every digital business. For example, I understand that almost overnight, Facebook moved their entire data records out of our very own lovely Ireland, across to the US for data farms there, so that they could manage their business in the manner that they felt was correct. That’s what Mark Zuckerberg and his team are paid to do, just as the management team of Brown-Forman and Harley-Davidson and every other business is paid to do. They look at the environment and they make decisions. We’re trusting that they’re making decisions in the best interest of us, because that’s in fact what they’re doing.
RORY: Just a final note on short-termism in the market: just yesterday, Twitter announced that they were deleting 70 million fake accounts, and the stock market drops somewhere along the lines of 10%. That is classical short-term thinking on Wall Street; this is a company that’s actually making the platform better, it’s going to increase engagement, increase ad spend on making it a better platform, and the stock plummets 10%.
EMMET: In fact, the numbers – the 70 million they purged were in fact baked into their numbers that they had already discussed, so you’re absolutely right; it’s reactionary, it’s knee-jerk.
JAMES: Another listener @GASDAWG asked us to discuss iQiyi on this episode. iQiyi is a Chinese online video platform that’s been on a pretty impressive run recently. Rory, I know it’s been on your short list for a while. My first question is probably, am I pronouncing it right?
RORY: You might be, I’m not entirely sure. I looked up it online and the phonetical pronunciation I got was I-Chi.
JAMES: What would we do without Google?
MEABH: I-Chi is better. That has a better ring to it.
RORY: They went public on March 29. It was a quite a hyped-up IPO, and yet, on the day, the share price actually went down – listed at 18, closed around $15. Since then, though, it’s gone up more than 100% in a month. It’s been called the Netflix of China – which if you ask me, are the two buzziest of buzzwords in the investing lexicon – so anytime anyone comes through with something like that, you definitely do have to approach it with a bit of skepticism. Looking into it, they do share a lot of characteristics with Netflix: they’re the biggest TV streaming service in China; they were formerly part of Baidu, which has been called in the past the Google of China; 554 million people have the iQiyi app on their mobile device, and they’ve got 420 million monthly active users. So a lot of eyeballs on this company and easy comparisons to make with Netflix. However, they’re not exactly like Netflix, in that just about 12% of their users are paying subscribers, the rest of which get the content for free and it’s paid through advertising. Not a bad business model, it’s been proven in the past many times. Really what they’re trying to do is increase that membership, and they’re creating more exclusive content to try and bump up those membership pairs. In the last quarter, that increased 67%, so they’re getting there – they’re doing a good job. They’re a big thing, and I think the thing they pride themselves on is their use of AI to drive the kind of content that they purchase and create. It seems to be working; in 2017, 42 of the top 50 most popular shows were done through IQiyi. It seems like a very interesting company. Whether it’s gonna be as successful an investment as Netflix is anyone’s guess.
MEABH: I tuned into iQiyi – I’d say later than you, Rory so it’s relatively new to me. My research was interesting because I tuned into the ways it’s not like Netflix – so established as a content company has a number of series the Chinese users watch there, but it is also a technology company. You mentioned AI; one piece of reading that I found was, they have a 4k VR headset that has panoramic video capabilities. So, that’s going towards a place where they’re trying to do more with technology than Netflix is. It’s a bit of an immersive technology experience as well as being a content platform – which is, I suppose, maybe predictable because we’re talking about a Chinese company – but that’s going a little further away from the Netflix of China comparison.
EMMET: I recently bought an Oculus Go, and I have to say it blew me away – I loved, loved the experience – and it was after going to see Ready Player One, Steven Spielberg’s latest movie, with my kids. Really, the scene/scenario that Spielberg lays out in the movie, I think, is closer than he actually proposes. I think the 4k headset will be a bigger hit than people who haven’t tried VR understand just yet, it really is a blowout experience.
JAMES: It’s really differentiating itself from other competition. Some other big news in the past month has been PayPal, and the incredible acquisition binge they’ve been on. Most people will be aware that they’ve recently bought a Swedish fin-tech company called iZettle for 2.2 billion dollars; they’ve also bought three other companies in the past few months though: Hyperwallet, Simility, and Jetlore. Over the weekend, CEO Dan Schulman said that the companies could spend as much as three billion dollars a year on acquisitions going forward. Emmet, what should we make of such an aggressive acquisition strategy by Paypal?
EMMET: I think it’s very exciting that PayPal are going for such a land grab, because there’s a velocity – there’s an acceleration – in payment solutions around the world. The race to rid the world of plastic and credit cards and paper money is evident. What PayPal are doing here is accelerating that, just as Facebook back in April 2012 acquired Instagram. They paid a billion dollars at the time, and the general commentary around that acquisition was that it was an absurd valuation when, in fact, Facebook knew well what they were doing. We can take the same logic and superimpose that on top of PayPal now, who have gone into an acquisition mode to accelerate their place as the one-stop solution for all payment solutions.
JAMES: Rory what do you think of PayPal expanding their current offering in this way?
RORY: They recently announced that they’d sold a huge portfolio of consumer credit to a company called Synchrony Financial, so this is just the deployment of that after money that they raised. I think they got about 7.6 billion for it. But just the way that PayPal is expanding its offering in general is great. I just read a few days ago that they are now offering free returns on items bought through PayPal. If you buy something using PayPal, and you don’t like it, they will pay, I think, up to $30 for it to be returned.
MEABH: That’s a serious move.
RORY: Totally, it goes back. One of the big factors holding people back from online purchases is this notion that, if it’s not the right size or if I don’t like it or it’s the wrong colour, I’m gonna have to return it, and that’s gonna cost me anywhere between 20-30$. So I think this is a great move. This is them just pushing further into the e-commerce space and saying “Look, we’re here to protect consumers if you want to buy online.”
MEABH: That particular move of them offering to pay any returns or packaging or posting is really touching on something that I’m very interested in when it comes to brand – which is customer experience, obviously, but it’s the cognitive side of it – so that’s really touching on feelings, and it’s taking away the fear factor and giving you this comfort that they do care about you. They’re gonna go to that level of detail where they’re actually gonna make your life easier, and I think any brand who starts to make customers feel like their lives are getting easier are just onto something monumentally big.
JAMES: Speaking of free returns and acquisitions, who else can we mention but Amazon? Every time we go to record a new podcast, there’s been some massive news about Amazon. Recently the e-commerce giant purchased the online pharmacy company PillPack, and it’s huge because it has kick-started Amazon’s long-rumoured move into the online pharmacy/drug industry. How important is this acquisition, Rory? If you were a Walgreens or a Rite Aid, would you be worried at the moment?
RORY: Absolutely. One of the big things holding Amazon back from getting into this area was regulation – it’s a highly regulated area – and Pillpack was regulated to deliver drugs to people in 49 of the 50 states. What they’ve done, I think, is very clever; they’ve basically said “We’re gonna bypass the regulation and just buy into a company that’s already done the legwork.”
JAMES: Is there a risk, though, that Amazon is too big? When are they gonna start running into the government getting involved, antitrust concerns and the like?
EMMET: Antitrust is defined as the prevention or control of trusts or other monopolies, and so promoting fair competition and business – I’m reading from a sheet here – but really: is Amazon a monopoly? Amazon represents, I think, a new kind of monopoly in the digital economy. Between one in three and one in four US adults are now Prime members. Or globally, a hundred million people are subscribed to Amazon Prime. So they are the de-facto choice in homes around the world for purchasing. Lina Khan, who’s the Director of Legal Policy at the Open Market Institute, compared Amazon to a 19th century railroad company, who decides which oil drillers and wheat farmers could actually ship on its track and at cost. More than half of everything sold on Amazon now actually comes from third-party sellers; the company owns goods and is selling well, according to Bezos, and last year was the best for Amazon hardware sales like Echo and Fire but ultimately you could liken Amazon today to those railways of the nineteenth century. Amazon say it’s a co-opetition – it’s a combination of competition and cooperation – but there is no doubt that they are the dominant force in all our lives for buying pretty much anything that we need regularly, or even occasionally. Are they monopolistic now? Clearly the laws or the government – the powers that be – have decided they are not, but if they partnered with someone like Alibaba or Tencent, I think we’ve got a whole new world order that we have to consider.
JAMES: So it could really need a change in regulation down the line to deal with a company like Amazon that we’ve never really seen before – we’ve never seen a company operate in this way before – that maybe it’ll take a case of the regulation catching up?
EMMET: Absolutely. It is interesting, the fact that when we sit down just before our podcast and talk about the big stories of that month, it’s very hard to ignore Amazon: “welcome to the Amazon podcast, live from Dublin.” It’s just a fact that Amazon genuinely have huge stories every few weeks, the pace of stories; whether it’s the acquisition of Whole Foods or Pillpack, it’s just incredible. They are strengthening and fortifying their position in everyone’s lives, and I guess that’s what we’re looking at. I don’t know if I’d like to see regulation slow them down, but I have the caution that one should have in our business about than such a huge position.
JAMES: In last month’s podcast we asked you to vote on some of the new segments we introduced; whether you’d like to Kill or Keep them for the next episode. We’re gonna do the same again this month, giving you the power to control what you want to hear on the Rubicoin podcast. To start off we’re gonna go back to our Companies We Never Talk About section; this is one you all voted to keep on Twitter, and it’s where Emmet and Rory pick one stock each that they feel doesn’t get the attention it deserves and exactly explain why it owns its place in the 1% show room. Emmet, we’ll come to you first: what stock have you selected?
EMMET: I’m going with Texas Roadhouse, which is a restaurant chain that started in 1993 by Ken Taylor – who, in my books as a Dubliner, is a cowboy. He looks like a cowboy, wears a cowboy hat all the time, and is a very charismatic and inspirational leader.
JAMES: I think ‘cowboy’ has a different meeting in Dublin.
MEABH: That is true.
EMMET: The first Texas Roadhouse was in Clarksville in Indiana. Their customer promise is “We like to brag about our hand-cut steaks, fall-off-the-bone veal ribs, made-from-scratch sides, and fresh-baked bread.” That’s a nice thing to own, but today Texas Roadhouse is a restaurant powerhouse. They have around something like 440 locations, mostly across all the US states, and then some in Dubai, Kuwait, Jeddah- the places you go for vacation. They’ve had 33 consecutive quarters of same-store sales growth, and since inception of the dividend program in around 2011, they’ve repeatedly increased their dividend by an average of around 18% per year. What we’re looking at with Texas Roadhouse is a growing restaurant chain that people love. They recently reported a nearly 11% growth in revenue and a 5% growth in same-store sales – guests up 4% on the year – so they are growing. They try to be the second-best everywhere they open. They leave the local mom-and-pop place to be the favourite restaurant. They want to be the second favourite restaurant. Ken Taylor is somebody I’m looking forward to meeting. He’s a great CEO, and I think it’s a stock we rarely talk about, as a safe restaurant that I think one can buy. I regret not buying shares, and in fact I’m very interested in it right now.
MEABH: It sounds great and you’ve made me hungry. So why do you think it’s a stock we never talk about?
EMMET: Well it’s funny, restaurant chains are… back to the subject of news… there’s usually less to talk about: just slow and steady growth. Unless you’re Chipotle.
MEABH: Unless you make people extremely sick.
EMMET: There’s a company called the ACSI who runs surveys of consumers, who recently in the last week or two just published the favorite restaurants of America. It’s a survey based on interviewing about 23,000 customers, and they talk about the product of food, the service, the satisfaction. Texas Roadhouse came out top of the league once again; amongst the full-service restaurants, Texas Roadhouse is now ranked number one amongst US consumers. Second is Cracker Barrel and third is LongHorn Steakhouse – these are formidable competitors – but Texas Roadhouse is loved, and I think it will continue to be loved. I happened to visit one once, after visiting the CEO of 3D systems, a stock long-since departed from my portfolio. I walked across the road and went for some lunch, and I thought it was a great experience. I’m looking forward, as I mentioned, to meeting the CEO which I hope to do in the months ahead, and I think it’s a great investment.
JAMES: Rory, then. What stock are you shining a spotlight on this month?
RORY: The one I went with this month was Intuit, the maker of multiple taxation software systems.
JAMES: Sounds fascinating.
EMMET: We should talk about it every month.
RORY: It’s a very boring company, but it’s been an incredible stock for people who’ve owned it over the last 20 years or so. It’s actually up 136 since we added it to the showroom back in September 2015, if I’m correct. One of the reasons I really like the stock – and people will have heard me give out about this before – doing your taxes is something that is so over governmentally mandated, and you have to do under the potential of incarceration, yet few people actually know how to do it. They are solving a clear problem in the world today. It’s a clear market leader, and they’re building out a real ecosystem of brands. They went through a transition period a couple years ago where they moved everything over to the cloud, and that’s going to be a great move. They’re going to be able to help them in terms of selling add-ons and what-not. Their Quickbooks Online Subscribers just in the last year has grown 45%. I think really key to this company’s success is the switching costs. If you are a small business or you’ve been using QuickBooks for a few years now, there is no way you are going to move off their system. The training it takes to use it, the operational disruption that’ll be caused by trying to move over to competitors is just too big, so people who are going to continue to pay for it. They’re never gonna think about it, and I think they’ve got a real wide economic moat there. They’ve also got 1.5 billion dollars on the balance sheet – that’s in net cash – and their CEO Brad Smith is a visionary leader, regularly listed as one of the top CEOs on Glassdoor. I recently saw an article said Intuit was ranked fourth on Barron’s list of the 100 most sustainable companies in the world, so I think they’re great long-term investment.
JAMES: And one we should talk about a lot more. Another segment we saved from last month’s show was I Read A Book. Emmett, last one you discussed the Davis Dynasty. This month, Rory decided to read a book for us, and it is…
RORY: The book I read is called Sapiens A Brief History Of Humankind by Yuval Noah Harari, and I read this book shortly after reading another book called A Brief History Of Everything In The Universe by Bill Bryson. Everyone’s read that book; that’s a history of the stars and how the universe came into being, and how we discovered these things over the years. This book’s a lot more about humans, how we’ve taken over the world, and the ways in which we did –
MEABH: The ways in which we’ve messed it up.
RORY: I found it really interesting. It goes through the systems that we created to try and create culture: religious systems, empires, technology, all the different ways humans have come together on this world, basically created economies and societies. I thought was a really interesting book. It’s a few years old now. I’m sure some of our listeners will have already read it, and I think there’s a sequel that I’m gonna have to take out sometime. Just a couple of things I noticed… It’s not an investing book, but when you do this job you always read things with your investor-head on… One of the things I really thought was interesting was, he did a chapter about money, and I’m just gonna read a small segment over here so people get a grip of what he’s talking about:
“Christians and Muslims who could not agree on religious beliefs could nevertheless agree on a monetary belief, because whereas religion asks us to believe in something, money asks us to believe that other people believe in something.”
“For thousands of years, philosophers, thinkers and prophets have besmirched money and called it the root of all evil. Be that as it may, money is also the apogee of human tolerance. Money is more open-minded than language, state laws, cultural codes, religious beliefs and social habits. Money is the only trust system created by humans that can bridge almost any cultural gap, and that does not discriminate on the basis of religion, gender, race, age or sexual orientation. Thanks to money, even people who don’t know each other and don’t trust each other can nevertheless cooperate effectively.”
That was a little quote I pulled out; I thought was quite interesting. Like you said, we do think of money as an evil system as we work in the capitalist structure. It’s looked down upon a lot, but it’s actually just another way in which human beings work together in the world. I thought that was an interesting insight.
JAMES: It’s very rare you hear trust and money in the same sentence.
RORY: I know. That’s exactly what it is. It’s the ability to trade with each other and to trust each other, that we’re all gonna behave ourselves when it comes down to that.
JAMES: It’s very interesting to get back to the very root of it. I suppose we all take money for granted, growing up with money in some shape or form, and it’s interesting to think that at one point these bartering systems, or what have you, were created at one point.
EMMET: I agree in the point you made there that virtually everything I read, I try and transpose back to understand “How can this make me a better investor?” I’m reading a book at the minute called Flawless – I know it’s not about my book at the moment – but it’s about the biggest diamond heist in history, which was carried off in Antwerp in 2003 by a guy called Leonardo Notarbartolo. I’m reading Flawless on this diamond heist, thinking “You know what? Actually, I’ll stick with the investing.”
JAMES: It might be more profitable.
RORY: Another thing that I noticed in Sapiens: he talks about chaotic systems. There’s two types of chaotic systems. Apparently there’s Level One chaotic systems, which would be these things like the weather. We can predict as much as we want about the weather; we can actually get it down to 100% of how it will be and it won’t change anything, but actually there’s another level of chaotic system called Level Two, where the prediction actually affects it. The market is a good example of a Level Two chaotic system. So if we were to predict with 100% accuracy what’s gonna happen in the market next week, it would actually happen today because people would want to get ahead of it, and then we wouldn’t know what would happen.
MEABH: I find that really interesting. It’s like self-fulfilling chaos; we can’t help ourselves. It’s to do with the market. It’s do with some decisions in your personal lives. We just can’t seem to grasp that idea that – actually – we need to not panic in order to not have chaos.
EMMET: I did my final thesis on chaos in electronic circuits, way back when. Chaos theory.
MEABH: I’m being totally sincere, I would like to read that.
EMMET: That’s the first time I ever heard that; thank you so much.
RORY: On next month’s podcast…
JAMES: A dramatic reading.
EMMET: But chaos mapping is unbelievable. It’s incredible. And I’m definitely gonna read Sapiens now, based on that.
JAMES: Cool. Rory, the name of that book again was?
RORY: It was called Sapiens: A Brief History Of Humankind, by Yuval Noah Harari.
EMMET: I noticed it’s also on Audible, which is probably the way I’m gonna consume it.
JAMES: Out of the three new sections we introduced in last month’s episode, one was voted to be Killed. That was unfortunately, Random As [BLEEP]. Maebh, do you want to explain what we’re gonna do this month?
EMMET: Explain yourself.
MEABH: Well, the first thing is a disclaimer: we did say that we would Kill it, but we’ve changed our tune slightly in that we think we’re gonna break up with it. We’re gonna make it a graceful breakup. Random As [BLEEP] is gonna slide out of our podcast, but we got some great feedback from a couple of listeners – two in particular. Shout out to Owen and Brenda, who gave us the reason why it didn’t quite work. We all sensed it as we talked about it, but definitely when we listened – it was a visual segment in a listening podcast, so that just didn’t add up. We’re gonna try it again in the new incarnation. I’m gonna say it’s gonna be Random As [BLEEP], and what we’re gonna talk about is something less visual and easier to grasp, which is the worst company names that we have ever heard.
RORY: That’s a good one.
JAMES: Where do we start?
RORY: That’s a long list.
MEABH: I think we have two that we’ve floated; what’s nice about them is there’s a theme emerging. They both have a name that’s fun to say. There’s a bit of onomatopoeia happening. Rory and Emmet, I think you floated them, so I’ll let you say the words.
EMMET: The company name that I really just find hard to read is Splunk; it’s a floated company. It’s not the worst stock I’ve ever seen – actually, it could be a good one – but I have to say, whenever I’m reading through the Investor Relations Website, it just jars every time I read it?
RORY: Can I defend Splunk? I didn’t like it either when I first heard it, and then when I dug into why it’s called Splunk, I actually really did start to like it. The company’s a big data mining company, so the word Splunk comes from the word spelunking, which is cave diving. I thought that was just really cool use of the word.
MEABH: Diving for Data.
RORY: Yeah, I liked it. It brought me around to it. Has it changed your opinion, Emmett?
MEABH: Do you not like saying it?
EMMET: I just don’t – there’s something about it that just isn’t graceful. I’m not saying that it has to be, but it just doesn’t sound right. Splunk.
JAMES: Rory, what company name do you have that you hate?
RORY: The one I hate the most is Tronc. Actually, it’s lower-case t: ‘tronc’. Which is even worse.
EMMET: They thought about it at least.
RORY: It was the Tribune.
MEABH: That was a rebrand.
RORY: Yeah, it was the Tribune newspaper company, which did the Chicago Tribune, the Baltimore Sun – the New York Daily News, I think, as well – and they changed the name to tronc. The tronc stands for “Tribune Online Content”, which just to me was like “Look how new we are, how digital we are!” I just hate it. I think it was like a name that someone dropped on the floor.
MEABH: They’re both playing on this idea of phonetically imitating a sound that you might see a splash of humour; Splunk made me think of ‘kerplunk’. I don’t what you think, James; as one of our main analysts and content writers here, you’re probably one of the better ones at English, but I suppose, what’s in a name really? Does a name really matter? Does a company name actually affect whether you’re gonna buy in or not? I’m not so sure.
JAMES: I actually think it does. Everyone has a certain few words – which I won’t mention on air – but a certain few words they can’t stand. My own is one – beginning with ‘m’, ending in ‘oist’. It’s a word I hate so much.
MEABH: Hey, is this to do with cakes?
JAMES: You can pore over financials, how the business is doing or where it’s going, but if you have to read that name or say that name multiple times, it’s gonna sway your judgment, definitely.
RORY: There’s also a branding element to it; Coach recently renamed themselves Tapestry.
MEABH: Not a fan?
RORY: Well, if this is a company that’s aiming for the millennial shopper, Tapestry doesn’t mean anything to them.
JAMES: Sounds like something that hangs in your granny’s house.
RORY: Exactly, yes.
EMMET: But as they say, there’s something in a name. I remember, in the 90s, looking through Golden Pages – might have been in the 80s, the Golden Pages in the US – and I was struck by the number of businesses that had started with three A’s, in order to get prime listing in the Golden Pages: “AAAA”, “Aardvark Upholstery Cleaning”. It was just strange logic, but if you look in our showroom now – Amazon, Apple and Activision – I have wondered, is there something in having a name that’s easy to recall, that isn’t offensive and begins with A.
MEABH: Good point.
JAMES: Myself and Meabh just before the podcast, we went through a list – of I don’t even know if these are publicly floated companies, I don’t even know if they exist anymore – but some company names. I just have to mention my personal favourite; it’s an upholstery cleaning business and it’s called Spruce Springclean. I don’t even know if that’s a bad name; I actually think that might be a great name.
MEABH: I like it.
EMMET: I like it. I think possibly from the age of 20 downwards, the joke is lost, but it was a great for a generation.
MEABH: There was one I quite licked as well; it was an off-license, for our Irish or European listeners, and a liquor store for anyone in the US. It was Tequila Mockingbird, which I got a kick out of. I think the overarching point is that there definitely is something in a name, the same way there is something in a brand colour. But yeah, Splunk and tronc are definitely trying to have a bit of fun with it.
JAMES: We’re running short on time in the episode, but before we finish up I want to get to our elevator pitch. This is where Emmett and Rory give a 30-second pitch on a stock within a given topic. Seeing as it’s painstakingly hot here in Dublin at the moment, I decided to go with a desert island portfolio. If you had to buy one stock in the knowledge that you were stranded on a desert island and had to hold it for 20 years, what would it be? Rory, I’ll come to you first what stock is your desert island folio?
RORY: Anyone on Twitter who follows me will know this answer already; it’s my biggest holdings, MasterCard. I think the move to cashless societies is happening very rapidly; MasterCard currently has about 26% market share of the payment systems. For a company their size, their last quarter revenue was up 27%, which is just unbelievable; I think the company is doing great things building extra ancillary offerings to merchants – so consumer data links is one thing; which is, by the way, GDPR compliant. I also think in the digital payment space, trust is going to be everything, and MasterCard as a brand has hundreds of millions of consumers and merchants that trust them, sometimes more than anyone else. The payments industry is changing very rapidly. I think whether we do things versus phones or magnetic strips, or just purely digital means, I think Mastercard’s gonna have a hand in it somehow.
JAMES: Very, very interesting. Emmet, your Desert Island Stock?
EMMET: Well, if I was going to a desert island for 20-25 years, you really want to have a stock that will survive across the ages, and I think MasterCard is a great one. Nonetheless, the one I’d go with, and one I’ve always gone with, is Disney, because I have a high level of faith it will be there long after we’re all gone. Recently in March, Disney announced a reorg, under four business units who are going to report going forward. The first is Direct-to-Consumer and International, which is basically how they’re going to deal with the multiple assets that they are bringing to our home, whether it’s Disney, Pixar, Marvel Lucasfilm, ESPN, Plus and Hulu; they have so many digital assets that they are going to be bringing a pay-TV service, which as yet has to be named. The second business segment is their Parks, Experiences and Consumer Products. That’s, as they say, where their characters and franchises come to life. Their third business unit is Media Networks and the fourth segment is Studio Entertainment, where they make the movies and where live-action and Pixar, Marvel Studios, Lucasfilm all produce the content. I think Disney is a bellwether; I think it’s going to survive through thick and thin.
RORY: That was a long elevator ride. Should be disqualified.
JAMES: So, Meabh: MasterCard and Disney – which do you vote for?
MEABH: This was an easy one for me, because I already own it and it’s one of my larger positions; even the fact that the segment was called Desert Island Stock worked for me to speak, because that’s the type of investor I am. I bought three years ago now; I don’t check it so often, and it’s Disney. Emmett, you’ve done a great job of outlining the core reasons why someone should consider it long term, but for me it’s about the brand as well. Always loved it, always did; went back to Disney World when I was an adult, and hopefully will do again.
JAMES: That’s interesting. My pick of the two would be MasterCard, because it’s my biggest holding as well, so it’s funny. But Disney is one I’ve been looking at coming up, especially with the new streaming service coming up – I think that would be very interesting. The same as last month’s episode. We want your help in deciding which parts to Kill and which parts to Keep for next month’s episode. If you go to the Rubicoin Twitter page now, you can vote on the three new sections – that’s Company We Never Talk About, I Read A Book, and Random As [BLEEP] – and you vote which one you want to hear again next month. If you miss out on the Twitter poll, though, you can still let us know what you think. You can get in touch with us on Twitter or on Facebook, leave a comment on the podcast episode itself, message us through the Learn or the Invest app, or email us at firstname.lastname@example.org to let us know what you think. If you have any suggestions for completely brand new sections or topics you’d like us to talk about, please let us know.
That’s about it from us this month. As always, there’s plenty of new things to check out on the Invest app, too – including our new Star Stock DocuSign that was added on Monday. Thanks for listening in, and please make sure to rate, review and share the podcast if you enjoyed today’s episode. From myself, from Emmett, from Rory and from Maebh – happy investing.
Episode 6: Facebook, video games, and the things you can buy with $1 trillion
In this month’s episode of The Rubicoin Podcast, our investing team discusses Facebook’s $120 billion drop, looks at the changing face of the video-game industry, and figures out just how big $1 trillion actually is.
Recorded on the top floor of Rubicoin HQ in Dublin, Ireland, listen in as Emmet, Rory, Meabh, and James discuss our unique approach to investing in the U.S. stock market.
This is investing for everyone.
JAMES: Hi there, and welcome to August’s edition of the Rubicoin podcast, coming to you from the top floor of Rubicoin HQ here in Dublin, Ireland. I’m James Dunne, and with me as usual is Emmet, Rory and Meabh. This month, we’re going to talk about the changing face of the video game industry, just how big one trillion dollars is, and boost some interesting jargon in our new section.
One of the biggest stories from the past month was Facebook’s earnings day massacre. The social media giant shed almost $120 billion from its market cap, after reporting a miss on earnings and forecasting slower growth over the next few years. Rory, do you think such a sell-off was justified or was just a bit of an overreaction by the market?
RORY: Yeah, that’s a hard one; it was the single worst drop in market history for a single day in dollar amount. Considering a quick look at the actual earnings reports; they grew revenue for the quarter (42%), which for a company this size is incredible. They’re talking about revenue growth slowing down to about 25-30% for the remainder of the year, which is a drop of course; still making a lot of money. Their operating margin is gonna fall from 50% to somewhere in the mid-30s; again, just to put that in perspective, mid-30s means this is an incredibly profitable company, by far the most profitable of the FAANG stocks – way better than Apple or Google, I don’t think Google’s ever reached that operating margin before – and I think what was most surprising about this release was just how surprised everyone was. Facebook have been telling us for years that this kind of thing was coming; in mid-2016 they talked about their ad-load and how they’ll have to pull back on advertising, because it was making the experience poorer. I think they were too late at that stage, personally, but even in previous releases they’ve been saying the same thing. Just last quarter, they said they’re gonna be investing heavily in safety and security, basically doubling the amount of staff in that area to 1,400. They told investors that this was gonna cost money, that the expenses were gonna rise to 50-60 % over the next few quarters. They also said they were playing around with the algorithm, in order to reduce the amount of spam and clickbait users see. The problem with that is that’s where a lot of their advertising revenue is coming from, so I think the real question here is; is the message from the market that Facebook needs to clean up its act and reinvent its business, or is the message from the business world saying “Hey, all this cleaning up you’re doing is costing a lot of money, and we thought there was a lot of cash left in this cow?”
JAMES: Yeah, it’s trying to find that balance between making money and fighting fake news.
EMMET: But I think a lot of novice or new investors haven’t seen many of their stocks hit speed bumps, and it’s just a natural progression in business life; that as you grow and get larger, something has to be done to correct the trajectory of your business. That’s what we’re looking at here with Facebook; there isn’t a business that I can think of that didn’t have an equivalent moment that Facebook is facing right now, so for me it’s almost not news. It’s just the way it goes; that’s all the rite of passage on its way upwards.
JAMES: Yeah, but on the flip side of that, perhaps, these fake news concerns and privacy concerns are a huge concern for many people. Meabh, maybe you can elaborate more on this; has investing in Facebook in some ways become more of an ethical concern for investors?
MEABH: Well, we talked about this in a previous podcast around the time of Cambridge Analytica, and I think I said something along the lines of “Personally, I wonder whether the privacy breaches will start to affect market sentiment.” Rory, you just used a phrase there – I think you said “clean up their act” – so in which way are they gonna clean up their act? My thoughts at the moment on Zuckerberg and on the platform is, what exactly are they cleaning up? There’s a show, Dispatches – it’s on Channel 4 for anyone listening, that’s a very popular British TV channel – and it had an exposé of the content moderators working for Facebook and unaffiliated Facebook companies in their Dublin office. I’m not gonna get into the detail, but that’s a tough job. The platform has huge problems when it comes to illegal, offensive and upsetting content, and it is not being moderated in an aggressive way. That is Zuckerberg; he is not governing it with an iron fist, he’s not doing what I believe he should be doing. The platform now has dark tendencies; we’ve seen it in influencing voters with Brexit and other voter electorates, and I’m just curious about Facebook’s, not ethics, but future when it comes to making sure that the platform is not politicised, that it’s damaging market sentiment.
RORY: Yeah, totally. You hit the nail on the head there. Facebook’s business model is based on this idea that, first of all, outrage sells – people enjoy getting outraged online. There’s also an element-
MEABH: I think we’re addicted to outrage.
RORY: Totally, and also Facebook naturally puts people into these echo chambers where they only hear what they want to hear. And then finally, in order for advertisers to be able to target people, they end up fine-slicing people into these tiny groups. Think about those three things and how someone with more nefarious purposes could use that information in a wrong way. But just on Zuckerberg, I think it’s interesting that he’s one of the few public CEOs in the world who’s basically un-fireable, because of that sweet deal share that they’ve got.
MEABH: Yeah; in that Kara Swisher Recode interview that we chatted about before this – Rory, you brought it up – he mentions if there’s anyone to fire based on the privacy breaches, it would be him. Isn’t that a bit ironic?
RORY: I don’t know; he is un-fireable, essentially, and he’s in a very weird position there where he can do what he wants. Most public CEOs have to answer to shareholders; he doesn’t. It comes down to Zuckerberg’s motivations. Do you think he just cares about money, or is he more egotistical in terms of trying to create this fantastic platform and be known as this amazing business leader? I’m not sure about him, but I think he probably leans towards the latter, and in that sense he probably has a bit of scope in which he can clean the thing up.
MEABH: I wonder.
JAMES: Another major upset from this year’s earnings season was Netflix, who dropped more than 15% after reporting a miss on subscriber numbers. Emmet, though the share price has recovered somewhat since then, is it time to start worrying that the world’s hit peak Netflix?
EMMET: Well, Reed Hastings and his team have been remarkably good at meeting and exceeding guidance to date. I’ve watched the story closely for a long time, and we’re all used to seeing Netflix smashing all numbers. In the last quarter we heard from management that they expected to meet the target a 10% profit level for the year – which is up from 7% last year – and it came in at around 12%, in Q2 or 11.8%. But the real question – to use movie parlance – when we ‘cut to wide shot’, what is in store for Netflix? I believe the growth story will continue; I believe they’ve seen a reduction in planned numbers in the US. It’s a big world, there’s a lot of broadband, and this year they’re spending $10 billion – ten billion dollars – an incredible amount of money on content that only they will own. Therefore they will keep subscribers; they will acquire new subscribers; and while the stock fell from something 400 to mid-300s as you said, it’s back up again. Netflix has a share in the wallet of millions of people, hundreds of millions of people around the world, and that’s something that I see growing.
JAMES: That’s a good point, that they’ve got a lot of subscribers; and you could make the argument – particularly in the U.S – that they’re reaching a saturation point of some level, but as you mentioned it’s a big world out there with a lot of broadband, and a lot of people getting onto broadband, or even just acquiring Internet. That leaves Netflix with a lot of room to grow internationally.
EMMET: We’re witnessing the rebirth of how television is consumed; between Disney and Hulu and Prime and Netflix, of course, these are the channels of today. We all grew up with cable channels, and we’re basically looking at the business model being redesigned. The whole value chain has been re-engineered by Netflix, starting at distribution, which typically was the last step in a movie home or house. Warner Brothers would start with the movie and then push it outwards; Netflix, by design, started with how movies were distributed, and now they’ve gone right through into the heart of Hollywood and are producing fabulous productions – box sets, TV series and movies – and we’re all addicted at some level.
JAMES: Meabh, I know myself and yourself were having a conversation before we came in here today; you were talking about not just how good Netflix are at getting subscribers, but how good they are at keeping subscribers.
MEABH: Yeah, I think it was a conversation that came up in the office around their decision, from an experienced design point of view, to personalise the artwork that you see on the content. By that I mean when you go to choose something new to watch, or if you skim past something that you’ve watched before, some people – depending on what A/B test you’re in – will notice that the actual cover artwork has changed. I have a very brief thing to read here which is probably not going to be totally understood, but just to give you an idea of how much they’re thinking about this from a design point of view; they use something called a ‘contextual bandit’-
JAMES: Sounds ominous.
MEABH: Would anyone like to know what a contextual bandit is?
EMMET: Rory, you’re not allowed to answer!
RORY: Bear with me, colleagues and listeners. For artwork personalisation, the specific online learning framework that Netflix uses is called Contextual Bandits; rather than waiting to collect a full batch of data, they use contextual bandits to skip the need to gather big data. The contextual bandits go ahead and basically present an unbiased model, and then will give each member personalised artwork based on previous choices and contexts.
MEABH: Now, I’m not expecting anyone to understand what I just read.
EMMET: I said wow there just to sound intelligent. “Wow, I don’t know what you just said.”
MEABH: This piece is probably a couple of thousand words long; it goes through the amount of effort they put into this artwork personalisation process. I experienced it in real life, noticing that every time I scan past Mad Men – which is a show that I’ve watched a number of times – they present a different image of Don Draper, which is nice. I’ve also watched the Crown – which is a very popular Netflix original show about the royal family – twice; what it did for me recently was present cover artwork of the three corgis.
JAMES: They know you so well.
MEABH: I thought it was becoming sentient, but no. I think what it does is, it studies what people click on and what people hover on – so whether you like a more illustrative style, or whether you like more of a photographic style – that is the detail that they’re going to to make sure that subscribers are retained, and that is just one of the design details. That’s serious.
EMMET: It is absolutely; not only do they own $10 billion worth of content in this year alone, but they have customer analytics at a level that we don’t even know.
JAMES: Moving on then; last Thursday two of the video game publishers we featured in the Invest app – that’s Activision Blizzard and Take-Two Interactive – reported on their earnings from the last quarter. Rory, how does the world of gaming look at the moment?
RORY: Yeah, you mentioned those two companies; they both reported and there wasn’t huge news from either in particular. They’ve got future releases coming up, which is what people are really looking forward to. But just looking at the gaming in a broader sense, I really think gaming at the moment is experiencing a kind of, almost, Renaissance period on a couple of fronts. For one thing we’ve talked in the previous podcast about microtransactions and how these are driving revenue for companies years after the release. Activision Blizzard have been pretty good at this, and Take-Two, if you look what they’ve done with Grand Theft Auto 5, you see just how successful they’ve been in this space. Last I looked, they’d brought in $6 billion from that game; that was released five years ago now and it’s still making a huge amount of money for them. The other side of that is eSports; every company now is talking about getting into eSports, and with good reason. I’m sure a lot of our listeners will think it’s bizarre – the idea that you would sit down and watch other people playing video games – yet eSports already has a much bigger audience than most traditional sports. It’s predicted to be the second most watched sport in the world in a number of years, just behind soccer. I think it’s interesting this is happening – to your Netflix point, Emmet – it’s happening in conjunction with the rise of over-the-top streaming. For years we had these gatekeepers in the television companies telling us what to watch, and when we give people the option of watching whatever they want, whenever they want, it’s funny that a huge amount of people gravitate towards eSports. It’s got 380 million viewers worldwide; that’s growing about 20% per year. It really mimics traditional sports in a lot of ways; you’ve got professional teams – some are geography-based, some are clubs where they pay players to play for them. You’ve got leagues, you’ve got superstar players with their own fan bases, and you’ve got big sponsorship deals. It’s not just gaming hardware companies that are sponsoring these, you’re talking about big companies; Coca-Cola, MasterCard, all the major automakers are getting involved. You’ve got to remember, the people who are watching this are a very tough market to reach; you think about the outlandish valuation that was put on Snapchat when it first went public, the whole bull argument there was that these are millennials and you can’t get near them. If you look at who’s watching eSports, they’re mostly young males, but with the growing number of females they’re more highly employed than the average Internet user, and make more money than the average Internet user. These are highly prized eyeballs, especially in the world of marketing and merchandising; so if you’re a publisher right now, it’s a great time for you because you own the content that is driving all this, and it’s still very early days, particularly from a monetisation point of view.
JAMES: How do you feel about watching people play video games?
MEABH: I’m not sure on this one, but what Rory just ran down through there has given me a better appreciation of it, because now I understand the demographic. Would it be a wild guess to say that a lot of these people are working in games or technology?
RORY: Probably, yeah.
MEABH: I have an interest, but I have watched some friends play computer games for hours and it’s led me to want to go crazy, so I’m not sure.
EMMET: It’s a movement – or an industry, if you like – that you almost have to see to believe it. If you’re not a participant or if you don’t have somebody close to you who’s completely addicted to it, it probably doesn’t feel real; but then when you hear the numbers that Rory has spoken about, it just dawns on you that this is something giant that might be outside your scope of interest, but doesn’t detract from the facts.
RORY: Well, remember when we were playing video games when I was a kid, you were over your friend’s house; and if it was a one-player game you’d be sitting there sad because you’d have to watch someone else play. I’m sure anyone who has a brother has felt this experience before; watching your friends play is very boring. The people who these guys are watching are very highly skilled competitors, and if you want to see the best of the best in a game that you’re interested in, this is where you go to watch it.
MEABH: Watching together almost makes it an immersive experience, so that changes it; maybe I’ll be into eSports, you know?
RORY: It’s definitely transforming gaming from a media space to a social media space; so yeah, I think there’s a lot of growth for these publishers.
JAMES: Finally then, we couldn’t take a look at the past month without acknowledging that the world’s most famous fruit company has finally hit the trillion dollar market cap. Can anyone tell me exactly, how big is a trillion?
EMMET: So Webster dictionary – [ALL LAUGH] – Webster dictionary has two definitions, the second of which is “It’s an indeterminately large number”, which I thought was quite funny. It’s very indeterminate – it’s one thousand billions, or 1 million millions – but a trillion is a number that is very hard to grasp, because it’s just a word that you just know is huge or indeterminately large. Wall Street Journal two years ago wrote a piece on the Freedom Tower, that magnificent, majestic giant building that now commands centre stage in New York City. The Freedom Tower is 104 floors high, or 541m up; it cost $3.8 billion to build the Freedom Tower, which by the way is the exact same rate or price for the New York Yankees team. If we went to buy New York Yankees today, the most valuable sports brand in the world, we’d pay about $3.8 billion, so you could say that the Freedom Tower is equal to the New York Yankee team. When we take a trillion and divide it by 3.8 billion, we get 260. You could build 260 Freedom Towers for the price of Apple today, a trillion dollars. That is an entire city; and that is not just a normal building in a normal site, it is the middle of New York City and the proud centrepiece of the city at the moment. To imagine what a trillion dollars is, if you’ve been up to the top of the Freedom Tower – if you’ve stood at the base and looked upward, and realised what an absolutely incredible structure it is – imagine 260 of those complete. Another way of looking at a trillion dollars and bringing it back into our world is in our Invest app; if you bought all the small-cap businesses in our showroom in their entirety, it would come to something like 28 billion. If you bought all the mid-cap companies in our app, the total bill would come to something like 400 billion. We’re not even at a half a trillion yet, and you’ve bought two-thirds of the companies that we have researched and put into our app, so let’s keep going. We have seven ETFs – and I’ll speak a little more about ETFs in a while – if you bought all the ETFs in our Invest app, and all the mid-cap companies, and all the small-cap companies, you would still have over a hundred billion dollars in change to buy some nice stuff for yourself. A trillion dollars is… it is truly a ginormous number. It is massive.
JAMES: That’s pretty incredible when you put it like that; it’s quite funny, because soon after Apple hit the trillion dollar market cap I saw a news article come up. I think the headline was “How Apple Will Reach The Two Trillion Dollar Market Cap”; I think it was maybe a few hours after they hit a trillion, so the pressure’s on for them now.
Over the last few episodes of the Rubicoin podcast we started asking you to vote under segments you’d to Kill or Keep for next month. We’re doing it again this month, and giving you the power to control what you want to hear in our next episode. To start off we’re going back to our Companies We Never Talk About; this is where Emmet and Rory pick one stock from our showroom that they feel doesn’t get the attention it deserves. Rory, we’ll come to you first this month; which stock do you want to shine a spotlight on?
RORY: The one I’m looking at this month is Planet Fitness. I remember looking at this business first and thinking it wasn’t a very attractive investment. It’s gyms – there’s loads of gyms out there, and there’s very little each of them can do to differentiate themselves – but we looked a bit closer, and I’m very glad we did and quickly came around. The founders of Planet Fitness realised – pretty much long before anyone else – two things. One, most gym users only use a small subsection of the equipment; so while other gyms were racing to get the most elaborate stuff in there, they were filling the places up with treadmills and exercise bikes. The second thing they realised is that a lot of people only go the gym casually; and if you’re one of these people, the gym can be quite intimidating. So they created this notion of the judgment-free zone; which I think someone’s gonna have a question for me after this. What they did is they carved out a blue ocean of opportunity for themselves – one which had fewer competitors – and because now, even though they’re just selling gym membership, it’s a totally different thing appealing to a totally different type of consumer. There’s no doubt this strategy’s paid off for them. Last quarter was their 45th consecutive quarter of positive comp growth, up to 11%. It’s led to a 33% increase in overall revenue, and they now have over 1,500 locations. Just one final point I’ll make is, retail as we know has been going through a tough time. This means there’s a lot of vacant, cheap property out there; Planet Fitness, all they have to do is wash, rinse and repeat at this stage. The stock’s up 130% since we recommended it, it’s worth acknowledging it’s a fantastic management team; I think it’s at a premium valuation right now, but any pullback could be a great buying opportunity.
JAMES: I have a question, and I’d like to dispute your judgement free zone claim. I read a story recently about a certain gentleman who decided to exercise nude in a Planet Fitness gym.
RORY: We all read it [LAUGHS]. Funnily enough, the stock actually popped the next day on the belief that this was going to become an internet sensation.
MEABH: A viral thing.
RORY: Similar to the Keke dances going on at the moment. I don’t know, we’ll wait and see if that pans out.
JAMES: Emmet, what company do you want to shine a spotlight on this month?
EMMET: I’m going to talk about Dividend Aristocrats ETF. I mentioned ETFs a moment ago; just for our listener’s sake, an ETF or exchange-traded fund is a collection or a basket of tens or hundreds – or sometimes thousands – of stocks or bonds in a single fund. An ETF is traded on a major stock exchange, like the New York Stock Exchange or Nasdaq, so ETFs are a wonderful way to diversify instantly; they come with less risk, less work and lower costs. We often talk about the S&P 500 ETF here, and Vanguard is the daddy of ETF makers if you like; it has a family of ETFs that anyone can buy through their full service or online brokerage firm. Dividend Aristocrats is an ETF; its constituent parts are businesses that have increased their dividend payouts for twenty-five consecutive years or more. The reason that I’m particularly keen on the Dividend Aristocrats is that here in Rubicoin, we look for growth opportunities – we focus on businesses with great management, great track history of performance, a unique product, a diverse customer base etc – and we’re looking for appreciation and stock price; we very rarely think about “Are these businesses paying a healthy and regular dividend?” The Dividend Aristocrats allows an investor to immediately buy the top-tier dividend payers, and a whole basket of them in one fell swoop. The Different Aristocrats was launched by Standard & Poor’s (S&P) just around thirteen years ago, and it has historically outperformed the S&P 500 index, with lower volatility over longer investment time frames. To be a little clearer on that, over the past ten years on an average annual basis, the S&P 500 Dividend Aristocrat has returned 3% more than the S&P 500 index; and businesses that we know and love are in there, such as Coke and Colgate, McDonald’s, Pepsi and Walmart. Big, established businesses, that at the end of their year have money left over in the bank account and return to shareholders like us through a dividend; and a wonderful way to diversify your portfolio in the dividend world is with this ETF, which I think is my all-time favourite ETF, one that I’m a huge fan of.
JAMES: It’s a good way/foundation to put at the bottom of your portfolio, I suppose.
EMMET: Absolutely, and very simple; the criteria is that businesses within have increased their dividends for a quarter of a century, and there’s a big bundle of them; so if any of them discontinued, dropped their dividends or stopped paying dividends, there are enough businesses in the Dividend Aristocrats to smooth that effect out.
RORY: I think it’s a sign of diligent management as well; a lot of these companies have gone through two major recessions or two major stock downturns, and not only have they managed to keep paying their dividend, but they’ve increased it.
JAMES: Absolutely. That’s the Companies We Never Talk About; next we’re gonna move on to I Read A Book. Meabh, I think you’re gonna give the intro here.
MEABH: I am, because you’re the person who read the book.
JAMES: I am. [LAUGHS]
MEABH: Which is good news, and also reminds me that it may be me who is talking about a book that I read next month, which is a nice refresher. I know what the book is; James, I’m gonna let you take it away but I’m gonna say what it’s called. It’s called Bad Blood by an author called John Carreyrou, and I just want to ask you one question which I think is quite important. Can you please tell us whether this book proves whether we cannot trust someone who commits to a turtleneck?
JAMES: Well, I think that should be a rule you live your life by; perhaps with the exception of Steve Jobs. The book I read this month was Bad Blood by John Carreyrou – he’s a Wall Street Journal reporter and a two-time Pulitzer Prize winner – and the book is about the famous Silicon Valley unicorn, Theranos. For those of you don’t know, Theranos was a biotech company founded in 2003 by a 19 year-old lady called Elizabeth Holmes. Holmes was a Stanford dropout who wanted to create a way to test blood in a variety of different ways, using a significantly smaller amount of blood than you would get from a typical intravenous draw. This might not sound a massive development to anyone not in the in the medical industry, but one of the big things I learned from the book about drawing blood was that you need quite a big volume to do the multiple different tests. And there’s wastage and spoilage and stuff; that’s why when you typically get a blood draw, so much blood is taken. Theranos was groundbreaking because they were taking a minuscule amount of blood through their finger-prick technology, and they’d signed partnerships with Walgreens & Safeway. By 2014 this company had raised more than $400 million, and was sitting on an estimated value of $9 billion; ultimately though, none of the equipment they produced actually worked.
MEABH: That’s a bit of a humdinger.
JAMES: It’s a bit of a problem. The equipment they produced wasn’t reliable. It actually emerged that Holmes had bought equipment from another blood tester and was using that equipment to get the results, not using their own equipment. They were also diluting the blood they were taking with saline solution, which was giving back false results. There was a lot of interesting aspects to this book, not least the massive fraud that was carried out; there was also a huge amount of dysfunction in the company. Holmes was notoriously paranoid and secretive, and there was a huge employee turnover; many people who raised concerns about small things – like the fact that the equipment didn’t work – were fired on the spot.
RORY: Just a small thing. “By the way, boss-”
MEABH: “Get out, you’re fired, how dare you ask a question.”
JAMES: Anyone who raised ethical concerns about the fact that there was real people here testing the blood and getting back false results, they were also fired. It was pretty incredible, but for me – not to ruin too much of the book for you – but for me, the most interesting part was the cult of personality that was built around Elizabeth Holmes. If anyone’s ever watched an interview with her, she’s cuts quite a striking figure; she’s got these really large doe eyes, really blue eyes. She wears the turtleneck we’ve already mentioned, and she speaks in this very, very baritone voice; which according to the author of the book, was put on in order to give her an air of authority.
MEABH: Margaret Thatcher did that too.
JAMES: It’s pretty incredible to listen to. But if that wasn’t enough, what struck me about this was the board of directors she built up. Coming around 2012/2013 – the heyday of the company – sitting on the board of directors was George Shultz, who was the former U.S Secretary of State; Henry Kissinger, also former U.S Secretary of State; a guy called William Perry, who was the former U.S Secretary of Defense; and a name that many people might know is General James Mattis, who’s the current U.S. Secretary of Defense. All of these people were sitting on the board of this company that was ultimately committing massive fraud. This was by no means a partisan board either; Holmes was well known to the Obama administration, she was invited to numerous White House events, and she kind of created what Carreyrou describes in the book as this reality-distortion field that causes people to momentarily suspend disbelief. In other words, she cut such a striking figure, she obviously was able to convince people well that what she was doing was right and visionary and breathtaking, that they decided, I suppose not to perform due diligence; go in and see it for themselves. Now granted, there was fraud committed in the fact that results were fudged and things were hidden, but it’s just unbelievable to think that such a massive company was built up essentially on the personality of one person. I think we can probably take a lot of lessons from that today.
EMMET: That’s incredible. It’s one of the few books that when I looked on Amazon had something like 700 reviews that were virtually all five stars, and I think this is number seven in the charts. I hadn’t heard of it until you mentioned you read it.
JAMES: I suppose probably what’s so interesting as well is that it’s still an ongoing case; Theranos as a company still technically exists. Now, I think they’ve laid off pretty much all of their employees – and Holmes and her business partner have been indicted by a federal grand jury at the moment – but she still maintains innocence; she’s still fighting against this.
RORY: It seems like – and I haven’t read the book – but is it one of those things where if you tell a big enough lie, and tell it frequently enough, people will believe it?
JAMES: Yeah, I think it’s very much a snowball effect; that you over-promise, and then you have to keep that up and it just spirals out of control. It’s a brilliant book, it’s well worth the read; it’s very, very readable – Carreyrou is a well-respected journalist, and it’s written as such, it’s a real page-turner – but yeah, pretty incredible story, and I think a warning to maybe us as investors, that when we’re investing in companies, to not just go on the cult of personality. That was I Read A Book, and the book this month was Bad Blood by John Carreyrou.
Over the past month we got some questions in from users about various phrases and terminology used in investing. We decided to make a section out of it called Jargon Busters; in this section of the podcast we’re gonna go through some of the most commonly used phrases in investing, pull them out a bit Meabh, this idea was yours.
MEABH: Yeah, I think we’re probably sticking to the knitting a little bit more with Jargon Buster than some previous segment attempts, because we think you guys listening want to talk about anything and everything to do with directly investing. We get user and customer requests that say “Hey, I don’t particularly understand this phrase”, and we also get people saying “What can I read or what part of the Invest app can I learn about the things that I wouldn’t know as a novice investor?” What I did was I thought about some of the phrases and terminologies that for me – when I was a novice investor, about three, three and a half years ago – took me by surprise or I found interesting. As a nice segue into this, I read a question on Quora that said “Can someone explain to me why it’s called the bull and the bear market?” I had always assumed it’s because the bull is an animal who’ll push forward, and the bear, possibly when cornered, will retreat, but I was wrong. It’s quite a nice explanation; it’s to do with the way in which the animal will attack. A bear will attack by swiping downward – depreciating market – and a bull will always attack by driving upwards with its horns; an appreciating market. That’s not exactly Busting Jargon, but it’s getting close to talking much more about investing in a way that will pass on knowledge for what things mean. The first ticket that we got in to try and bust jargon is someone who doesn’t understand what we mean when we say “double bagger’ or ‘two-bagger’.
EMMET: The term was introduced certainly to my consciousness, and perhaps to everyone’s, by Peter Lynch in his book One Up On Wall Street – which we I think all agree is the perfect starting point for new & intermediate investors, if they want to read a book from one of the investing masters – but anyway, to the point it’s a terminology that Peter Lynch refers to as a stock that doubles in value. Two-bagger or double-bagger is a stock that doubled; three-bagger went up threefold, and so forth. It’s a very simple way of just referring to a stock that has doubled in value for you. You buy it for twenty bucks; if it’s currently at forty, you’ve got a two-bagger.
JAMES: Another ticket we got in was from a user who wants to understand what the phrase ‘adding to their positions’ meant. Rory?
RORY: That’s if you start a position in a stock – maybe you see a stock at $40, and you buy a couple of hundred quid’s worth later on – six months down the line you might see that stock at $50 or maybe $30. Rather than entering a new position in a different stock, it just means that you’re using your current money to add to your positions; you’re just adding more of the same stocks to your portfolio.
JAMES: To your mind, is there any difference between positions and holdings. I know those phrases are often used quite interchangeably, but-
RORY: I’d use it in the same way.
EMMET: I would too, and adding to a position is a standard practice across every type of investment manager, from Warren Buffett through to the latest, newest starter in the investing world. It’s just good practice, because if you liked it at a hundred bucks, you should like it at eighty.
MEABH: Can you tell me what a reverse split is?
EMMET: Absolutely; there is a generally accepted trading range in which people like to see a share price, and it’s evolved over time; in the U.S. especially, a stock that’s lower than five bucks a share is commonly referred to as a penny share. It is incorrectly perceived as a cheap business – might necessarily be true – and stock shares that are several hundred dollars in value or more are seen as inaccessible. So a new investor might look at a single share in Amazon and say “That’s too expensive for me”; which isn’t actually correct logic, but let’s pause that for now. What managers of businesses do is, they occasionally try and keep the share price trading within a range. If we had a share – if we issued shares in Rubicoin and it went up to $10,000 per share – it will by default exclude a lot of investors, because a single share costs $10,000, so what we might do in that situation is issue a stock split. That means that the math of the business stays the exact same, you just have more shares at a lower share price. So if we did a 2-to-1 share split in that situation, we would have double the number of shares in Rubicoin, but they’d be $5000 each, and so it continues. Nothing changes, but it just brings your share price down to a range – or up to a range – that puts your business and therefore your shares onto the radar of investors. Stock splitting is simply – as its name suggests – splitting something there in the middle; if you take a sandwich and split in two, you still have the same sandwich in two halves. It’s the same volume.
JAMES: That was a slightly extended version of Jargon Busters. To move quickly on as we’re quite pushed for time this month’s podcast, we’re just gonna get to our Elevator Pitches before we finish up. The theme for this month’s elevator pitch is a company listed on a US exchange that was founded outside of the US. Rory, I’m gonna come to you first; give me 30 seconds. I’m going to have to be strict on time this month for once.
RORY: I’m going for Diageo. It’s the world’s largest beer maker, based in the UK. They own Guinness, which is just made up the road and a favourite amongst Rubicoin staff, not naming any names. They also own Johnnie Walker, Smirnoff Vodka and Tanqueray Gin to name a few; over the past few years the company has been trading up their middle shelf brands to more top shelf brands, and this is working out very well for them. Those brands grew 14% in the last quarter, and I think this premiumisation is going to be a long tailwind for the company. Just quickly, I know I’m short on time, but I can’t talk about a UK company without mentioning Brexit; obvious it’s gonna cause a bit of short-term volatility, but Diageo sell to 118 regions in the world – the majority of which aren’t in Europe – and with the British pound so low, their costs are depreciating and it’s more attractive for foreign buyers to buy the product.
JAMES: We’ll give it to you. Right, Emmet, 30 seconds – go!
EMMET: Shanghai-based Baozun provides end-to-end e-commerce solutions for brand partners in China. It’s a three billion dollar business with a $100 million in cash, and is led by its founder, whose name I won’t attempt. It’s 36% owned by the founder. Big brands try to enter China and fail, such as Barbie from Mattel, and Home Depot and eBay and countless other businesses. Chinese e-commerce spending is giant, it topped a trillion dollars last year; there’s that number again. Baozun allows people or businesses to do it very easily/seamlessly, and they’re integrated with the biggest marketplaces and social networks in China like Alibaba, JD.com, Weibo, Tencent, WeChat, and so on. Their revenues are growing like mad, and it’s one of my favourite stocks at this moment. 45 seconds.
JAMES: Meabh, which elevator pitch have you been sold on this month?
MEABH: Emmet, you said the word trillion – Baozun.
JAMES: Yeah, there was nice uniformity there. I like that.
EMMET: Aw, he’s just left.
MEABH: For those who can’t see, Rory is slowly turning around in his chair!
JAMES: So, in the same way as last month’s episode, we want your help in deciding which parts to Kill and which parts to Keep from today’s episode. If you go to the Rubicoin Twitter page now you can vote on two three sections – that’s Companies We Never Talk About, I Read A Book and the new section Jargon Busters – to let us know if you’d like to hear it again next month. If you miss out on the Twitter poll you can still let us know what you think; you can get in touch with us on Twitter or on Facebook, leave a comment on the podcast episode itself, message us through either the Learn app or the Invest app, or email us at email@example.com If you’ve any other suggestions for completely brand new sections, we’d love to know.
That’s about it from us from this month; as always there’s plenty of other new things to check out in the Invest app, at the moment including our brand-new Stock Of The Month report that was added on Tuesday of this week. Thanks for listening in, and please make sure to rate, review and share the podcast if you enjoyed today’s episode. From myself, Emmet, Rory and Meabh – happy investing.