Zero to One - Book Review

When a risk taker writes a book, read it. In the case of Peter Thiel, read it twice. Or, to be safe, three times. This is a classic.

- Nassim Nicholas Taleb

Zero to One is written by legendary venture capitalist Peter Thiel on building companies and forward looking thinking. Half this book is on business/investing and the other half is on startups. Most of the points below are from the first half of his book. I recommend this as a fine book to own and read in your investment toolkit.

Below are the top 3 takeaways I have that are useful for us to have as investors.

1. What is technology, what is zero to one?

• Technology is any new and better ways of doing things.
• 0 to 1 involves vertical progress while horizontal progress involves copying new things. An example of the former would be having a typewriter and building a word processor. The latter would be taking a typewriter and building another 100 more.

Reflection 1: As investors looking towards the future, technology is definitely a key component of what powers a startup. 

• One should consider how Apple didn’t invent the mp3 (Creative did) but they made it better and from that ecosystem of music came many other wonderful things from a platform of software distribution. Today, music is just one element on the device we call iPhone. 
• What the iPod/iTunes did was create a new and better way of hitching onto the value chain of music distribution and origination creating what is today known as a network effect / flywheel effect (suppliers coming on board with their products because of large customer base and more customers coming on board because of the wide product offering).

2. Competition is not ideal. What you want is a monopoly.

• Competition is good for the consumer but as investors, the monopoly is what generates the dollars because of pricing power and it also allows you to maintain and develop good products to maintain that edge.
• An example of this in the technology world is the battle between Microsoft and Google. Windows v Chrome OS, Bing v Google search, Explorer v Docs, Surface v Nexus etc.
• Competition is costly. The war costed Microsoft and Google their dominance as Apple came along and overtook them. By Jan 2013, Apple was worth US$500B while Microsoft and Google were US$467B combined.

Reflection 2: Focusing on the competition will not give you a great product, focusing on customers does. Additionally, avoid crowded fights (red ocean) and seek out blue oceans (W Chan Kim) to find super normal profits.

3. The moats that make a monopoly (my favourite chapter) 

Peter list 4 moats that matter

i. Proprietary Technology

Technology that nobody else has that can meet and serve the customer needs. Be it through patent protection, secret formulas or complex algorithms that are hard to replicate.

ii. Network effects

Value of a business increases as more customers are on boarded.

iii. Economies of Scale

Fixed Cost of products are spread across a higher volume allowing the company to have an advantage in cost and therefore pricing to win market share.

iv. Branding

A strong brand attracts a following and this creates a repeated consumption pattern that can be measured in lifetime customer value.

A business value of a company is the cash flows generated between now and judgement day discounted at the appropriate rate and probability (how sure are you) - paraphrased from Warren Buffett.

• Frame in this manner, a company with high cashflow but in decline is certainly not an ideal company because the cashflow gets less over time. I can think of printed newspaper advertising as an example.
• On the other hand, a business with tremendous cashflow ahead but making a little money now is what could be a very valuable company. An example quoted was LinkedIn where the cashflow was only expected 5-10 years down the road.

And the reason for this high level of cashflow growth is related to the 4 moats mentioned above. They have a differentiating value proposition to solve and meet the customer’s needs taking market share and being the best.

Reflection 3: Look for signs of pricing power by identifying if companies have 1 or more of the 4 moats of a monopoly. Take a position and be patient.

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Bonus point: Attending a conference the other day and listening to GGV Capital Jenny Lee (a Singaporean who has done very well in the VC space). The management also matters. Because an entrepreneur may be able to take a company from 0 to 1. But from 1 to 10, that may require a different skillset. (And I remember the two Google founders Sergey Brin and Larry Page hiring Eric Schidmt to be CEO very early on). 

Management is after all, a good source of where future moats could come from.

Invest well.

Joel Siew

Book review - Psychology of Money

Here is a first of many. 

As many know, I do enjoy reading books and I think writing the insights gain from each book helps distill what we learn. After all, everyone can pick up a book but not everyone picks up the same takeaways. 

This is a fine read on finance in a different lens. Highly recommended!

The Psychology of Money by Morgan Housel

An excellent book discussing fundamental concepts of life, investing and mindset. It will tickle your senses, and add the most useful tool to your toolkit, understanding the psychology of what makes us human and why we do what we do.

Here are my top 3 takeaways.

1. Finance is the greatest show on earth, how else would a JCPenny janitor known as Ronald Read accumulate US$8mil at the time of his passing at 92 while a former Merrill Lynch CEO David Komansky ended bankrupt in 2008 when a court declared him so.

Lesson 1: It is not mere education or career success that determines our end point but living within our means, avoiding outsized debt and investing for the long run that builds wealth.

2. Never enough. What is enough for you? By any standard being the CEO of McKinsey and being worth US$100m should have been enough for Raj Gupta. But he didn’t stop there, playing insider trading on news of a Goldman-Berkshire deal, he ruin his reputation went to jail for a mere additional 7% to his networth (which he probably couldn’t keep either).

Lesson 2: Don’t wage what you can’t lose for what you don’t need. The hardest thing is to get the goalpost to stop shifting and this may have a lot to do with peer pressure and culture influences, like what it looks like to be a “success and being of importance to society”. Warren Buffett is a primer of this discipline as he never moved to New York, never upgraded beyond his old Cadillac and house.

Ultimately, there are some risks that are never worth taking despite the upside.

3. Compounding is confounding. Warren Buffett’s wealth just crossed US$100b, of which US$97B of that came after his 65th birthday. A little less known fact was that once upon a time, there were 3 individuals running Berkshire Hathaway, Warren, Charlie and Rick. Rick was just as smart as the other two, but he was in a hurry. When the 1970s recession hit, he was over leveraged and forced to sell his assets. 

Lesson 3: Having an edge also means surviving. It is the one that survives over a long period of time that allows the compounding of wealth to happen. Don’t disrupt the compounding unnecessarily.

Till next time. Invest well.

Joel Siew

Why I am skeptical of Aztech global IPO

 A short article with not too much detail.

The two good things:

1. IOT segment has grown tremendously at 30% CAGR over the last 3 years making up over 80% of revenue to date.

2. Plenty of cornerstone investors including JPM Asset management.

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The not-so good things:

1. Track record of management is disappointing - Company previously was listed at $1.00 and delisted at S$0.42.

2. Company interests in business outside electronics is odd - purchasing of Kay Lee Roast Meat by the parent group seemed like a strange detour from electronics focus.

3. A deep dive into the company found the following:

- LED segment is falling significantly over the years making up about 15% of revenue now

- Annualized revenue for FY20 likely fell y-o-y meaning that while some parts of the company flourished in 2020, some didn't, that is not good for a manufacturing company (supposedly less impacted by COVID-19 demand fall)

- No moats. The top 4 favourite moats of mine are Proprietary Tech, Network Effects, Brand and Economies of Scale - yet I don’t see that they have any of that. I would think at best they have some EoS.

- High concentration risk, top customer makes up nearly 60% of sales (most of its growth is from the one customer) while the top 3 make up about 82%. A further dive into the top customer make it seem that it is probably Amazon's blink whom they manufacture security cameras for. There is always a possibility of losing this contract in the future damaging the company significantly.

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Summary: I normally don’t take the opposite side of cornerstone investors. But the business, management, lack of moats and high concentration risk makes me think the business at S$990m is not worth the money. As such, I would advice friends to avoid this.

Evolution of an investor - from value to growth (Part 1)

 In 2020, this was quite a formative year for me.

My banker hat

As a banker in a large local bank, I do credit analysis for a living. In a nutshell, this means

1. Looking at the company business and deciding whether we want to be a part of it

2. Looking at the financials and seeing if its capital structure is sound and can support the loans.

3. Looking at the business risks and figuring out what mitigating factors there are.

In some way, lenders or bond holders are in the "negative art" business" being we are looking to avoid losses of any sort rather than make a huge upside which is the opposite end of that an equity holder holds. All that really matters is 2 things (Operating Cash Flow / Free Cash Flow and Shareholder Equity Cushion)

So to say I understand a balance sheet and profits is quite natural as part of my daily job.

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My value investor hat

As a lifelong learner, I have taken up many financial education (Finance Degree, CFA, FRM (in progress), Moody Corporate Credit Certification etc.). But nothing beats learning from having the skin in the game.

For years, I did not find much success fishing in the small local pond of Singapore. Imagine buying things like hyflux bonds, noble, viking offshore. I have been there and done that.

I found some success in buying value stocks looking at PE, PB and buying things like Guocoland, Keong Hong, Ho Bee, IREIT, Lendlease Reit, Mapletree NAC etc.

So imagine my shock when I checked out the company "Yihai International", a company I briefly read about and understood as a distributor of condiments of the hotpot brand Haidilao.

I saw it at 3.80 in 2017, it double to 7.60 in the same year.......and kept going - see chart below.

That is when I realized, it is not that value investing is broken but that there may be a better way. That was when the lightbulb lit up. An eureka moment for me.

Think of it - one may be quibbling about that 5% yearly dividend return or sitting on a stock for years when there are companies that have appreciated 20x.

Just 5% of your portfolio in that would double your whole pot. Let that sink in.

And that's just what is wrong with Singapore stocks where the majority of STI stocks are in the old economy (high cash input and low returns - think like a power plant)......the digital economy requires a different lens where a small investment churns out a lot of money (e.g. Developing a super app like facebook and distributing it across billions of handphones)

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My growth investing hat

So I read about the two philosophies - Value and Growth Investing and found that both had similar beginnings being born in the post depression era of 1930s of USA. 

 - Value Investing was conceptualize by Benjamin Graham and brought to much forefront by Warren Buffett who is an extremely disciplined, focus investor on core business principles.

- Growth Investing was conceptualized by T.Rowe Price. A lesser known legend but with solid groundings. He believed the best time to invest in a company was the point it was in rapid growth and sell when it is at the tail end of maturity or declining.

In other words (from the Corporate Finance Institute picture above) - buy early at the start of the growth stage as seen from the red arrow and sell at the black arrow (Decline segment).

Cigar butts with a few puff left or companies with a huge runway that can keep going....like a snowball rolling down the hill, if a runway is long enough, it could get quite big...maybe huge.

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I can hear thousands of questions ringing in your head.

1. How do I know what is a growth company?

2. How do I know when it is in decline or just a temporary bridge?

3. Growth? That's just a company with no earnings and all dreams!

4. It is just the flavor of the month/year/decade....value will return at some point!

I will answer all these questions in the next segment, but most importantly. One must be open-minded to understand how each strategy works. After all, there are more than one way to become wealthy.

- Some do it through buying Bitcoin

- Some do it through hardwork in a 9-5 job and rising in their careers

- Some just inherit it

- Some build it from scratch (entrepreneurship)

For me - it is going to be from investing. Since you are here, I assume we are heading the same direction. 

Till next time. Invest Well.

Joel Siew