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Comcast ($CMCSA) Q4 2022 Earnings - Mixed Earnings but a Light Is At the End of the Tunnel
Summary
On Thursday, 1/26/2023, Comcast ($CMCSA) reported fourth quarter earnings that beat most expectations despite a lack of strength in subscriber growth and losses from Peacock (their streaming service).

Performance
Earnings per share came in at $0.82 for the quarter, beating expectations of $0.77 by 6.4%. Revenues came in at $30.6B beating expectations of $30.4B and a previous quarter of $29.8B. Good news so far!
Unfortunately, Adjusted EBITDA fell by 15% to $8B from $9.5B from the prior quarter. This was mostly due to higher severance expenses as hinted at by CFO Mike Cavanagh in the third quarter call. He said, “As we enter the fourth quarter and look to our year ahead, we remain focused on driving long-term growth during an increasingly challenged economic environment… We expect we will be taking severance and other cost reduction-related charges in the fourth quarter in anticipation of expense reduction actions that will provide benefits in 2023 and beyond.”

Cable Communications

Comcast report 26,000 lost broadband customers for the quarter, attributing impact to Hurricane Ian which hit Florida and South Carolina in September. The hurricane caused severe damage and losses to the homes of subscribers. When looking at total customer relationships, the firm estimates the total number decreased by 36,000 and broadband increased by 4,000 when excluding the effects of the hurricane.

Though subscribers are growing, the pace has slowed compared to quarters prior to Covid. Competition from telecom and wireless providers are growing, and a housing slowdown in the US contributes to a lack of new customers as the shift to new homes. Total customer relationships of 34.3M increased slightly form 34.2M last year.

Comcast’s wireless segment, Xfinity, added 365,000 customers in the quarter, brining the total subscriber base to over 5.3M. Wireless customer growth has been consistent since jumping into the business in recent years. This was offset by a loss of 440,000 cable video subscribers as customers continue to cut traditional TV bundles in favor of streaming.

NBCUniversal
NBCUniversal is the business segment that contains the media (cable, streaming, and related advertising figures), studios (movie studios such as Universal Pictures, Dreamworks, and Focus Features) , and theme parks (5 Universal Parks and Resorts) businesses.

Revenues for Universal were up about 3% from the prior quarter to $9.8B. Revenues was boosted by the 2022 FIFA World Cup which aired on Peacock and their Spanish-language network Telemundo.

Though overall results are good, Peacock has continued to weigh on the business. Adjusted earnings fell by nearly 50% to $817M due to Peacock losses and severance expenses. $978M of that is attributed to Peacock losses compared to a loss of $614M last quarter.

This quarter, Peacock added 5M new paying Peacock customers to the subscriber base, brining the total number to 20 million. This increase could be attributed to the World Cup, football season, and English Premiere League. The company remains committed to earning a return on their Peacock investment, though next year doesn’t look like the year for it. Overall, Peacock’s losses for the year of $2.5B were in line with the company’s earlier outlook. Next year, Michael Cavanagh says they expect losses to be near $3B.

Theme parks remained a bright spot for the segment this quarter with $2.1B in revenue, right behind the studios revenue of $2.7B. Studios revenues were actually down compared to last quarter, however the segment ended the year strong with a #2 rank in the world wide box office for year thanks to movies like Jurassic World: Dominion and Puss In Boots: The Last Wish.

Sky
Lastly, Sky, the segment that holds one of Europe’s leading media and entertainment companies, reported 129,000 net customer additions. This was reflected in a revenue growth of $163M compared to last quarter. For the year, Sky revenues decreased 11.5% to $17.9B. When excluding the impact of currency, revenue only decreased $1.2%, highlighting the segment’s sensitivity to exchange rates.

Final Thoughts
These 4th quarter results won’t change any negative sentiment around the company, but it’s a step in the right direction. Broadband customer growth is still anemic. I believe the lack of growth in the broadband service is mostly an economic one. Comcast is well positioned to combat competition and maintain pricing power. Broadband business lost customers this quarter for the first time. Average revenue per customer, however, grew 3.5% year over year. The cable segments’s EBITDA margin was flat versus last year, but would have hit a record 45% if the higher severance costs hadn’t hit.

Peacock showed better growth this quarter with 5 million net adds, but still reported a loss, crushing the margins of the Universal segment. Universal faces more challenges, but a rebound in theme parks and the growth in Peacock is a good step in the right direction.

Free cash flows took a hit for the year, dropping to $12.6B from $17.1B. Expenditures were heavily tied to a rebound in content and higher cash taxes. Both items should show less of an impact for 2023. The company’s balance sheet is strong and has allowed the company to raise its dividend by 7.4% to $1.16 for 2023, their 15th consecutive increase. Approximately $17.7B was returned to shareholders this year through $4.7B in dividends and $13B in share buybacks.

Overall, $CMCSA still looks undervalued to me. It has the stability of a telecom stock with it’s focus of broadband, has potential growth aspects of similar streaming companies with Peacock, an impressive ability to bring in revenues at the box office, and a knack for stretching profits out of popular franchises with a growing theme park business. All of these items make them a diversified company that is hard to compete with and an attractive opportunity for long-term investors.

All information provided is available on Comcast's Earnings page with access to the earnings releases, presentations, and transcripts. Both the Q3 and Q4 2022 earnings materials were used in this article.
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2023 Market Outlook Major Banks
Soft or Hard landing is the question.

Below are links to the 2023 Outlooks by Major Banks. Most of them are in PDF format, and a couple is videos.

I shared them for educational and resource purposes. I will go through them and present any exciting findings in a separate note.

PDF's



Morgan Stanley - 2023 Investment Outlook












NatWest - Year ahead 2023: Tomorrow begins today (Link at the bottom of page)

Videos


Lazard Asset Management - Global Outlook 2023

See more of what you want

Peter Lynch is one of the most successful fund managers of all time.

Lynch's accumulated total return was an astounding 2,703% during his tenure at the Magellan Fund. Annualized return of 29.2%.

Here's how he did it 👇

Peter Lynch achieved his outstanding investment performance through a combination of factors. He was known for:

Investing in what he knew: Lynch believed that by focusing on companies in industries and sectors that he understood, he was more likely to identify potential winners early on.

Spotting disruptive trends and technologies: Lynch had a keen sense for disruptive trends and technologies and invested early in companies like Hanes and Cisco Systems, which went on to become leaders in their respective industries.

Strong brand names and consistently profitable companies: Lynch believed in the power of strong brand names and consistently profitable companies. He invested in companies that had strong fundamentals, such as strong sales and earnings growth, and companies that were undervalued by the market.

Understanding financial statements: Lynch was known to be an expert at reading and interpreting financial statements and used this knowledge to identify undervalued companies.

Long-term investment horizon: Lynch was a long-term investor, believing in holding on to his investments for the long-term and avoiding short-term market fluctuations.

Diversified portfolio: Lynch diversified his portfolio by investing in a variety of companies across different sectors and industries, which helped minimize the impact of potential losses in a single company.

By following this approach, Lynch was able to achieve an impressive 29.2% annualized return during his tenure as the manager of the Fidelity Magellan Fund.

Here are 10 quotes from Peter Lynch that provides further insight into his investment philosophy and approach:

"Know what you own, and know why you own it."

"If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes."

"In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."

"The person that turns over the most rocks wins the game."

"Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves."

"Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed."

"The real key to making money in stocks is not to get scared out of them."

"Nobody can predict interest rates, the future direction of the economy or the stock market. Dismiss all such forecasts and concentrate on what's actually happening to the companies in which you've invested."

"The list of qualities (an investor should have) include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic."

"All the math you need in the stock market you get in the fourth grade."

---

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Todor Kostov's avatar
$5.3m follower assets
Howard Marks (Co-Chairman of Oaktree Capital) - "The Most Important Question Is Whether We’re Going to Have Stagflation"
Howard Marks, Co-Chairman of Oaktree Capital, was the latest guest at "The Market NZZ". The interview was just published today with some great topics discussed, particularly focused on the long-term macro environment.

"... One of the most important things is patient opportunism: Try to avoid mistakes, and when there is nothing clever to do, the mistake lies in trying to be clever. So now is a good time to sit on your hands, read about how to be a good investor, ignore the noise, and try to get ready for the opportunities when they come." (The Market NZZ)

Source: The NYT

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Josh Kohn-Lindquist's avatar
$23m follower assets
4 Fast-Growing Dividends
While I love high-yield dividends (that are sustainable) as much as anyone, quickly growing dividends are more exciting to me over the long haul (also if sustainable).
I recently discussed four of my favorites in $ASML, $ODFL, $TSCO, and $ZTS.
These stocks have grown their dividends between 178% and 481% over the last five years.
Here’s my favorite thing about each stock:
  • ASML - Monopoly in the extreme ultraviolet lithography market and an ~80% share in the more mature deep ultraviolet market. The semiconductor industry would temporarily (indefinitely?) die without ASML, so I’ll happily pay a premium to own it and receive a growing dividend.

  • Old Dominion - Best-in-class profit margin of 22% and ROIC of 29% in the less-than-truckload industry. Wide moat around the complexity of its logistical operations and startup costs.

  • Tractor Supply - 27 million members in its rewards program and generates half of its revenue from pet and livestock sales which tend to be recurring and sticky. Dominating its rural/small town lifestyle niche.

  • Zoetis - Portfolio of over 300 pet and livestock vaccines and medicines makes the company a massive force in the $45B animal health industry. Human-pet bonds only continue to grow stronger with time and this is a recession-proof industry.
Would love to know - - what is your favorite quickly growing dividend out there?
Which performs the best through 2033?
19 VotesPoll ends on: 2/2/2023
At the end of the day, we really need to build more fabs outside of Taiwan. Also, we will also continue to invest in newer and better lithography machines. That's why i voted for ASML.

The rest, I don't know much about their growth potential.
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Roth IRA Watchlist Clean-Up
I maintain a Watchlist tab in my portfolio spreadsheet that uses the same methodology as my live portfolio Scorecard to track and rank potential new positions. Since I have built my spreadsheet to be fairly user friendly that requires minimal effort to maintain, I was adding a ton of companies to my Watchlist. My Watchlists had gotten so over-bearing that I did a little clean-up last weekend.

Here are the criteria I used to remove companies:
  • Keep all companies in my target (unrepresented) sectors (Utilities, Consumer Discretionary, Defense and Healthcare)
  • Delete all companies that had a "Low" conviction rating
  • Delete all companies with a rank lower than my live portfolio's weighted average (2.9)

I started with 106 tickers in my watchlist and removed 43. Now down to 63. Still a large number, but each of these currently have the potential to improve my overall portfolio. The Breakdown:
  • Removed 21 "Low" conviction tickers
  • Removed 22 tickers below my Portfolio Weighted Average
  • Kept 8 tickers that were either Low Conviction or below my Weighted Average but were in one of my target sectors (Utilities, Consumer Discretionary, Defense and Healthcare)

I will be doing my first Commonstock Watchlist update for 2023 in February to start my refined Watchlist of front-runners for next year's Birthday Buys.
If there's a type of green energy I'd advocate for on a wide scale, it's renewable natural gas (RNG)
For background:

Renewable natural gas (RNG) is a type of natural gas that is produced from renewable sources such as organic waste materials, including food waste, agricultural waste, and sewage. RNG is also known as bio-methane and is chemically identical to traditional natural gas, which is mostly composed of methane.

RNG is produced through a process called anaerobic digestion, which is a biological process that breaks down organic matter in the absence of oxygen. This process produces methane, which is then captured and used as a source of energy. Because RNG is produced from renewable sources, it is considered to be a clean, low-carbon fuel that can help to reduce greenhouse gas emissions.

RNG can be used for a variety of energy applications, such as heating, transportation, and power generation. It is also considered a cleaner alternative to traditional natural gas because it reduces the emissions of methane, which is a powerful greenhouse gas and is released when traditional natural gas is extracted and transported.

The use of RNG can also help to reduce the amount of organic waste that ends up in landfills, which can help to reduce greenhouse gas emissions and improve air quality. Hence why $WM has been investing a lot in its "energy" business. Meanwhile, $CVX is working with $CLNE and dairy farmers to take methane from cow waste and convert it into RNG.

RNG has the potential to be a significant source of clean energy, but it is not yet widely adopted for a few reasons.

One reason is that the technology for producing RNG is still relatively new, and it is not yet as advanced or as efficient as traditional natural gas production methods. This makes it more expensive to produce than traditional natural gas, which makes it less attractive to investors and consumers.

Another reason is that there are still many logistical challenges to be overcome in the distribution and use of RNG. For example, RNG is typically produced at smaller, decentralized facilities, which can make it difficult to transport and distribute to consumers.

Additionally, the lack of regulations and incentives to support the production and use of RNG is also a factor. Governments and regulatory bodies have not yet fully embraced RNG as a viable source of energy, so there are no specific regulations or incentives to support its development.

Finally, natural gas is still relatively cheap and abundant and has been a reliable source of energy for a long time, so there is not yet a strong economic or environmental incentive for many countries to invest in and adopt RNG on a large scale.

However, with the increased focus on sustainability and the urgent need to reduce greenhouse gas emissions, RNG is being researched, developed, and gaining more attention as a potential source of clean energy.

RNG-powered vehicles > Electric vehicles

While this is a bold opinion, hear me out on why:

When we use RNG as a source of fuel, we're incentivizing the use of organic waste as a source of energy. When we use it as a source of energy, we're helping reduce methane emissions into our atmosphere. This is a more practical way of reducing the buildup of CO2 in our atmosphere than converting every vehicle and other items from being gas-powered to electric-powered.

For the auto industry itself, many jobs will be saved as RNG engines will probably need many moving parts. From an ethical perspective, we're draining the amount of money that goes into promoting the slavery system in the African and Asian countries that provide the electric vehicle companies with cobalt and other metals they need to build their vehicles. From an environmental perspective, we will need to destroy less Earth to save the planet (aka less mining) and we also won't need to destroy more rainforests and other habitats that are sitting on top of rich metal reserves.

Also, RNG can be applied anywhere in the world as long as there are things emitting methane (like a landfill, a place where cows are raised, etc.). Energy independence can happen on a wider scale by promoting RNG. No need to double down on green energy and become immensely reliant on China for rare earth metals or do nothing and stick to the status quo and remain reliant on Middle Eastern tyrants who choose to pick fights with each other and take for granted the security that other countries provide them.

Nuclear power is great, but it will continue to promote the environmental damages created by the electric vehicle revolution as people will want to power everything with electricity and rely on batteries made with unethically sourced raw materials.

Solar is great to put on top of our roofs. I don't think we should fill up empty plots of land with solar panels when we can leave those plots of land alone and let the animals live there or turn that plot of land into housing and help alleviate the affordable housing crisis. Wind power is great too, and I'd prefer to have them offshore where the winds are more active, and not onshore where they take up space that could've otherwise been used for more productive purposes.

Geothermal energy is great. In ways, it reminds me of nuclear power as it too is abundant and technically, it can be implemented anywhere as long as the Earth's core remains hot.

Conclusion

I think there needs to be more investment and development of renewable natural gas (RNG) technology. Scratching the surface of it, it holds tons of potential of being a fantastic source of reliable energy and there are fewer environmental setbacks to RNG than many of the other sources of energy, in my view.
Biogas (RNG) is really interesting. Maybe Vow ASA is interesting for you. In their Greentech segment they‘re producing pyrolysis plants. Pyrolysis is another process to produce biogas & biochar. Vow is already receiving much higher interest from the industry for their plants, also as a effect of the US inflation reduction act.

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Luka 🦉's avatar
$104.3m follower assets
Archer Daniels Midland - We have a New King 👑
Following the Q4.2022 report published last Thursday, $ADM announced a +12.5% dividend increase, making it 50 years of consecutive dividend increases. As a result, this +100-year-old company is now in the same category of stocks as $KO, $PG, or $JNJ, to name a few.

Here is my take on this $46B business after it close FY 2022 👇

$ADM operates under four different units, and all of them stamped a Y/Y increase in profits, with the biggest result on the Ag Services & Oilseed, that is accounted for more than 65% of the total company profits.

The actual environment is for sure helping $ADM to produce such performance, but we also need to congratulate the management for being able to keep Capex at the same 2021 level; such a combination brings the result of much more cash available to reward shareholders, which mean $1.5B buyback program already executed and a great dividend hike for such a mature business.

Happy to see that also, for 2023, the goal is to keep Capex at the same level and also plan an additional $1B buyback.
With such a level of cash and no big debt dealing on the horizon, I think shareholders can sleep quietly for all of 2023 and even more.

The screenshot (eye punching, I know) below shows that only one bond of 600M EURO expires in 2023, and the next one is in 2025.

The company also holds an A/stable rating according to S&P Global and an A2/stable or Moody's.

I published a Video about the Q4.2022 report of $ADM yesterday, so if you want more details, you can check it out. 👇

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Dave Ahern's avatar
$4.5m follower assets
Visa $V Q1 2023 Results: Payment Gateway Continues
Pandemic Recovery
Q1 2023 Results for Visa $V were released January 26, 2023

Albert Kelly, outgoing CEO, replaced by Ryan McInerney on Feb 1, 2023.

In our fiscal first quarter of 2023, Visa grew net revenues 12% year over year as we saw stable payments volume and processed transaction growth and a continued cross-border travel recovery. We had 8% growth in GAAP EPS, 21% growth in non-GAAP EPS and returned $4 billion to shareholders. I continue to see a bright future for Visa and believe that we have the right strategy to invest in and capitalize on the opportunities ahead across consumer payments, new flows and value added services.”

Source: App Economy Insights

All charts and graphs courtesy of $V, unless otherwise noted

What we need to know:

  • $V grew revenues of $7.9B of 12%, with earnings of $1.99 up 8% YoY.
  • Payments volume grew 7% YoY, and processed transactions grew 10%.
  • The uber important cross-border volume totals grew 22% YoY, with cross-border volume, ex Europe up 31%.

Additional stuff to know:

  • Total processed transactions on the Visa network equaled 52.5 billion in Q1, a 10% YoY.
  • Operating expenses grew 25% in the quarter, driven by increases in personnel and litigation provisions.
  • $V returned $4B in capital via share repurchases and dividends.

Payments Volumes 2022-2023

Cross Border Recovery 2022-2023

Payment volumes credit vs debit

All in all, $V had a good quarter, and $V continues to
recover from the pandemic.

h/t @kostofff for the great format idea!!
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Ally Financial: A Clearer Roadmap
This is an extended preview of today's write-up, exclusively for Commonstock readers. To read the remainder of the post, please subscribe to the TSOH Investment Research service.


From “Past The Peak” (speaking about Ally’s auto loan book): “Is that sufficiently conservative? As always, it’s very difficult to say with anything close to certainty. Personally, as discussed in the deep dive, I take comfort in how this asset class performed during other difficult periods… That said, the world changes and this time may be different (for example, Ally’s shift to slightly higher risk content in auto). I think that concern may be overstated (properly accounted for in reserves), but time will tell whether I’m mistaken.”

Ally Financial reported its Q4 FY22 financial results on January 20th, and I think it was a big step in the right direction; specifically, management did a good job of addressing some important topics that speak to the current state of affairs in the business, in addition to laying out a roadmap for how they plan to navigate the next 12-24 months. To be clear, a difficult environment still lies ahead for Ally in 2023. After a period of rapidly rising used car prices, we’re now seeing a significant (albeit unsurprising?) move in the other direction. In December 2022, the Manheim Used Vehicle Value Index was down ~15% YoY - the largest decline in the 25+ year history of this data set. (That said, as you can see below, the value of the index as of mid-January 2023 is still meaningfully higher than where it stood in early 2021.)

In the fourth quarter, net charge-off’s (NCO’s) in Ally’s retail auto business increased to 166 basis points, pulling full year auto NCO’s to nearly 1% of outstanding loans. As shown below, the company expects NCO’s to remain elevated in each of the next two years, at roughly 1.6% - 1.7% of average loans (and pulling consolidated NCO’s to heights unseen in the past decade).

There are a few important points to address here.

First, a noteworthy assumption underlying the auto NCO estimate for 2023 is the future trend for used car pricing: for the year, management is assuming that used car prices fall another ~13% (a cumulative decline of ~30% from 2021 peak prices), which is more conservative / assumes a worse outcome than other industry estimates. (“The Manheim Used Vehicle Value Index is forecast to be down 4.3% YoY in December 2023.”) Second, Ally ended 2022 with $3.7 billion in consolidated reserves, equal to ~2.7% of average loans (~2x higher than their current estimate of consolidated 2023 NCO’s). Finally, given the decision to temporarily suspend share repurchases in the coming year, the company will also build up some incremental capital as we work through 2023 (rough guesstimate of ~$800 million). As those numbers suggest, management is approaching this period with some conservatism; given the importance of these assumptions, I think that’s a logical step.

And as discussed last quarter, credit risk should be considered in the proper context – specifically, with consideration for the price charged relative to the risk incurred. Retail auto origination yields at Ally were ~9.6% in Q4, up ~260 basis points YoY; as CEO Jeff Brown said at an analyst event in December, “we feel really, really good about the paper we're booking”.

While it’s evident from metrics like NCO’s and the 30+ day delinquency rate that Ally holds a lower quality / riskier book than peers like Wells Fargo and J.P. Morgan, the allowance for loan losses (coverage) aligns with that reality.

Capital One is another interesting comparison: their auto loan book is similar in size to Ally’s (~$80 billion), and their 30+ day delinquency rate averaged ~4.7% over the past four quarters, compared to ~2.8% at Ally (with identical NCO rates in Q4); despite this, Capital One had ~$2.2 billion in allowances for auto loan losses at the end of Q4 FY22, or ~$900 million less than Ally. Long story short, it’s unclear to me from looking at some notable peers that Ally is being aggressive on its assumptions (at least relative to the industry).

(End Of Preview)

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Yegor's avatar
$181.4m follower assets
“There is no such thing as intrinsic value. Its an abstraction. It's made up... If I had a glass of water and an ounce of gold on a table and said you could take whatever you thought was worth more, you'd take the gold.

However, if I change the setting - say you'd been in a desert for two days without water and knew you'd not get any water for another couple of days-then the calculus is different, isn't it?

As I say, it's all relative...

And it's not just true in markets. This is how we understand the world around us.”

From How Do You Know? A Guide to Clear Thinking About Wall Street, Investing, and Life by Christopher Mayer
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A Short Essay on Upward Mobility
Oftentimes, I see inequality being mixed into the upward mobility conversation throughout the social sciences. Even though inequality in the US started widening in 1971, it's important to note that upward mobility is also a major theme in this country.

Pew Charitable Trust published a research paper on upward mobility in 2012. They found that:

  • 84% of Americans have higher family incomes than their parents had at the same age, and across all levels of the income distribution
  • 93% of Americans whose parents were at the bottom fifth of the income ladder and 88% of those whose parents were in the middle quintile exceed their parents’ family income as adults

All of these amounts are adjusted for inflation.

Interestingly, the paper noted that the percentage of adult children who grow up to live in a household in the same income quintile as their parents are surprisingly small. As the Cato Institute summarizes:

"On average, 39% of those children as adults rose to a higher quintile and 37% fell to a lower one". Since the majority either stay in the same household income quintile or rose to a higher quintile, it speaks a lot that income mobility is still a big thing in American society.

Do the rich kids generally stay rich? Interestingly, not. As the Cato Institute notes:

"Of children reared in the top quintile, 62% fell to one of the lower quintiles, including more than 9% to the bottom quintile. A significant number of the children reared in the top quintile who stayed in the top quintile as adults had incomes far greater than their parents, but statistically they could not rise out of the top quintile."

Even if public schools are terrible, 63% of children who grew up in bottom quintile families rose to a higher quintile while 6.1% of them end up rising all the way to the top quintile. This speaks a lot for a society that thinks that formal education is the only way of obtaining upward mobility.

When taking a grander view of upward mobility, America’s real mobility is most visible over multiple generations. It's our parents that make sacrifices so that we can have the opportunities and education that they couldn't have. It's our parents that chose to invest more in us rather than splurge on themselves. This theme of parents sacrificing for their children is big when it comes to looking at how upward mobility happens.

From a long-term perspective, as long as upward mobility continues to be a big thing in America, we will be seeing the economy become:

  • more efficient as people invest more in themselves
  • bigger in terms of consumption as people have more disposable income to spend on things
  • more innovative and entrepreneurial as people become willing to take on more risks

However, if managed improperly, upward mobility can create more inequality throughout society. Even though income mobility grew since 1971, inequality expanded at the same time. For those wondering why, consider these factors:

  • The labor market changed from manufacturing-based to service-based, creating a decrease in the number of well-paying, middle-class jobs and an increase in low-paying, service-sector jobs. The end result is income stagnation for the overall economy.
  • Globalization increased competition for jobs and wages, hurting those with less education and fewer skills.
  • Declining union membership led to less negotiating power for workers
  • Tax policies incentivized manufacturers to offshore their manufacturing operations (i.e. changes in the way depreciation and R&D spending is capitalized) and have also allowed those, who got wealthy through inheritance, to keep more of their family's wealth through lower estate taxes.
  • Technological progress led to job displacement and wage stagnation
  • Changes in the education landscape increased barriers to more economic opportunities.

Overall, upward mobility is a big part of the American economy. While the country has benefited from the growth in economic mobility, it has also seen the consequences of improper management of upward mobility.

I hope this short essay has given you a new perspective on upward mobility.
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Benjamin Buchanan's avatar
$24.1m follower assets
Spit balling a new potential 100 billion + business that Meta might dominate in 2033
The year is 2033…

You slip on a VR headset that is light enough and comfortable enough to wear for extended periods of time. You don’t need an awkwardly shaped controller to navigate anymore. Instead you simply let your eyes focus on the application you want to open and then blink ever so slightly slower than you normally would. As you have come to expect, the application you were looking at is the one that opens. It’s called: “Elysian Simulator”.

Note*** Elysian Simulator is the most popular app on both of the major Virtual reality platforms (Apple’s and Meta’s), and it’s owned by Meta.

The interface of the app looks very similar to Netflix today. There are categories of things you can watch: comedies, scary movies and so on. There are games you can play, ranging from immersive role-playing-games (RPGs for short) to casual multi-player party games. The primary difference between the home screen and Netflix is that none of the movies were produced by a major studio. None of the games were created by Activision, EA Games, or any other game creator for that matter. All of the movies and all of the games in Elysian Simulator were created by you or your friends.

The last important icon is in the top right of the screen and it says “Create”, but you don’t select it because you already know what you want to watch.

You say, “Simulator, see if Pandora’s Star by Peter F. Hamilton is available?”

Pandora’s Star is an epic space-opera written by author Peter F. Hamilton. To set us up, here’s a brief description from the Author’s website:

It is AD 2380 and humanity has colonized over six hundred planets, all interlinked by wormholes. With Earth at its center, the Intersolar Commonwealth has grown into a quiet, wealthy society, where rejuvenation allows its citizens to live for centuries, by both rejuvenating their bodies, and transferring their memories into clones.

When astronomer Dudley Bose observes a star over a thousand light years away vanish, imprisoned inside a force field of immense size, the Commonwealth is anxious to discover what actually happened. As conventional wormholes can’t reach that far, they must build the first faster-than-light starship. Captained by Wilson Kime, an ex-NASA astronaut a little too eager to relive his old glory days, the Second Chance starship sets off on its historic voyage of discovery.

But someone or something out there must have had a very good reason for sealing off an entire star system. And if the Second Chance does manage to find a way in, what might then be let out?

Pandora’s star is your favorite book, but it was never turned into a movie or TV show. Fortunately for you Pandora’s Star is available and an icon of the book cover appears on your screen.

You say: “Simulator, would you recommend turning Pandora’s Star into a TV show or a movie?”

The simulator responds: “Pandora’s star has 288,000 words and features dozens of characters and subplots. The author spends enormous amounts of time on world-building and character development. It would not be possible to accurately transcribe the feeling of the novel into a movie, so my recommendation is to turn it into a TV show. If this recommendation suits you, how long would you like your first episode to be?”

You say: “Your recommendation suits me. Please make the first episode two hours long.”

The simulator says: “Very good. With your subscription plan it will take one hour and fifteen minutes to build your first episode to the point at which streaming can start.”

You say: “I don’t have that much time tonight, I’d like to start watching it as soon as possible, what will that cost?”

The simulator says: “With your subscription plan, the upcharge to have your first episode ready for streaming in five minutes is $2.99, would you like to pay the fee?”

You say: “Yes, in the mean time please start building the episodes for the rest of the season and Judas Unchained as well.”

Judas Unchained is the sequel to Pandora’s Star.

You get up to use the bathroom and make some popcorn. Then you sit back down, put on the VR headset, and the first episode begins.

Here’s where things get even crazier.

As you are watching the first episode the face-tracking technology picks up on subtle queues you give off. For example, it notices when something in the corner of the screen catches your eye. It monitors the rate of your blinking and how wide your eyes open. It monitors the tightness of your lips.

Whereas the experience of watching something in a movie theatre is the same for everyone, the experience of watching Pandora’s Star in the Elysian Simulator is entirely unique to you. You are - of course - able to turn your head in 360 degrees and get a view of anything you’d like to see, but for the most part you don’t actually want to have to move your head around while you're watching. So, you mostly let the simulator’s AI use queues from your face to determine the best viewing angle, the right volume, and when to zoom in on specific features. For example…

The first scene in the book is the following:

The star vanished from the center of the telescope’s image in less time than a single human heartbeat. There was no mistake, Dudley Bose was looking right at it when it happened. He blinked in surprise, drawing back from the eyepiece. “That’s not right,” he muttered.

The AI had originally planned to show you a third party view of Dudley peering into the telescope. When the star vanishes, the AI was going to show you Dudley rearing back from the telescope in astonishment, zooming in on his face.

However, the AI noticed that at the opening moment of the scene your eyes locked in hard on the telescope. It interpreted this as a desire on your part to watch the scene from the perspective of Dudley, peering through the lens yourself to see what he was looking at. The adjustment of perspectives was minor enough that the AI was able to update the episode in a few milliseconds, literally faster than you could blink.

You don’t ever learn that the AI was originally going to show you something other than it did, you simply experience…

We can imagine other customization features. For example if you were wanting to watch something along with young family members you could ask the AI to tone down sexually explicit content by removing the nudity.

Alternatively, if you were watching something with a friend who spoke a different language the AI could enable each of you to watch the movie together, but your friend would hear the movie in her language and you would hear it in yours.

I’ll close the introduction with a final thought. What happens when you have finished watching the sequel? There isn’t a third book…

This is where the aforementioned “Create” button comes into play. For an additional fee, you can ask the AI to create a “third season”. You can either let it have a go all by itself, or guide it by telling it which story lines and characters to focus on.

Or, imagine this.

Once you’ve finished the third season generated by the AI you decide that there are some plot holes that could be shored up. Or, maybe the AI introduced an interesting character but didn’t spend enough time building a plot line around that character. So, you start to collaborate with the AI, asking it to spend more time building its story. Or, maybe there was a character that simply wasn’t that interesting, and you ask the AI to update the character’s storyline to include more hardships and surprises.

You end up getting enthralled in the task of creating the best season possible, and before you know it you’ve spent hundreds of hours over the course of a six months going back and forth with the AI until the storyline is perfect. After you’re done you share the new season with some friends who are also Pandora’s Star enthusiasts, and they absolutely love it!

Since you’ve spent all this time you might as well see if you can monetize your investment. So, you do three things:

You list the season you worked on in the Simulator. Anyone in the future who queries the Simulator about Pandora’s Star will now see a “user created season 3” as one of the viewing options. Naturally, there would be a revenue split three ways, with part going to Meta, part going to you, and part going to Peter F. Hamilton.

You list the season you created to Meta’s movie/TV app platform.

You list the season you created to other movie/TV platforms like Netflix. In this case the only difference is that revenue is split 4 ways, with the additional platforms being the fourth recipient.

As it turns out it isn’t just the Peter F. Hamilton fans who like your new season. The season ends up going viral and you rack up 1 million views. Each view earns you $0.10, which translates to $100,000. You don’t know whether you will be able to re-create your hit, but with $100,000 in your pocket you decide to quit your job and give the creator life a shot.
Revenue per employee in Software
I published this chart in my weekly newsletter yesterday. Was quite well received.

I like revenue per employee metric a lot.

I know it has limitations but its useful when used to compare which cos. are running more productively.

Just looking at SaaS, we see some interesting findings:

  • There is a a big range but most cos. are below $500k per employee. This is very low compared to other tech peers (E.g. Twitter, as badly run as it was, was doing $680k per employee before Musk takeover)

  • Very slight correlation but faster growing companies have lower revenue per employee - likely as they are adding employees planning for future

  • 54% of companies are below $300k per employee. Not good.

Would love to know what others think of this - plus any feedback.
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Low Investment Turnover
In Fundsmith’s 2022 Annual letter, Terry Smith explains why having a low investment turnover is important.
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Great takeaway that we can apply to our own accounts. Minimizing fees can help us lower our fees which we can use to increase our compounding. Thanks for sharing 🙏
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Business potential of $SONO headphones?
It's tough to compete in the ear/headphones market with the dominance of Airpods, but I think this could be a unique, profitable niche for Sonos given their established presence throughout the home.
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Devin LaSarre's avatar
$20.6m follower assets
Peak Performance
“The game in climbing is cut that line as fine as you can, but you don’t want to take stupid risks. If you die taking a stupid risk, not only are you dead but you’ve embarrassed yourself, disgraced yourself. You’re not supposed to take risk lightly. You’re supposed to show that you're so good and so controlled, you can take it right to that line and go no further.” - Jon Krakauer

On May 29, 1953, Sir Edmund Hillary and Sherpa mountaineer Tenzing Norgay made history by being the first to reach the summit of Everest. It took them a grueling 16 days to reach the top, and once there, they stayed a mere 15 minutes before beginning their descent. Summiting the mountain, whose elevation is a near-incomprehensible 29,031.7 feet, was previously thought impossible, and all attempts for the prior 32 years had ended in defeat. The duo’s achievement echoes as an unquestionable testament to their persistence, determination, and capacity to suffer and exemplifies the human spirit.

Fast forward 70 years, and now hundreds attempt to emulate the feat annually. Piling into a narrow window when the Himalayan weather conditions are bearable, mostly in late May, they eagerly line up to make their way to the summit of Everest. The government of Nepal is eager too: the impoverished nation collects giant permit fees from each climber, incentivizing the country to become laxer on exactly how many permits it gives and who they are given to.

Even following a pre-defined route, with modern equipment, supplemental oxygen, and the hiring of local commercial trekking companies that provide veteran Sherpa guides, pre-fixed ropes, and pack animals to shuttle gear, most adventurers are forced to concede to the brutal environment and turn around. Others are much less fortunate. Along with the possibilities of exhaustion, exposure, heart attack, falling, falling ice, avalanche, and altitude sickness, inexperienced climbers threaten the safety of all they are with, and the recent occurrence of overcrowding has forced standstills. 310 climbers have died. Most of their bodies, too difficult to recover, now decorate the mountainside. Complementing them is a growing amount of trash and discarded gear.

Nevertheless, those who successfully make the ascent and return achieve something that relatively few will. All possible support still barely puts up a fight against the awesome powers of nature. Of all attempts, there have been just over 11,000 successful ascents made by just over 6,000 climbers.

However, for the elite of the elite, Everest is far from the pinnacle challenge. K2, a mountain in the Kashmir region of Asia, is the second-highest peak on the planet but is much more difficult. Annapurna I, another peak in the Himalayas, has seen 58 deaths in a mere 158 attempts. Yet, far beyond those is one that is truly in a league of its own: Meru Peak

Meru Peak, unknown to most, is also located in the Himalayas, northwest of Mount Everest and past Nepal, in the Indian state of Uttarakhand. It has three distinct peaks: the southern peak (6,660 meters, 21,850 ft), the central peak(6,310 meters, 20,700 ft), and the northern peak (6,450 meters, 21,160 ft). Counterintuitively, the higher two peaks were each successfully summited before the central peak. In 2001, elite Russian climber Valery Babanov reached the summit of the central peak by following the "Shangri-La" route. Even more impressive, he did it as a solo ascent. But even that is not the ultimate challenge in the mountaineering world. The central peak also has a separate route known as the Shark’s Fin. Just left of the snow slope centered in the picture above, it is unequivocally the most difficult climb in the world.

The Shark’s Fin’s difficulty stems from several sources, the first of which is its incredible complexity, with different parts requiring equally masterful levels of different climbing styles - ice climbing, snow climbing, rock climbing, aid climbing, and mixed climbing. Those technical difficulties necessitate different gear, which adds weight. Extra weight is exactly what you don’t want when a great deal of the trek is a vertical wall of pure rock, which is not only oppressive to climb but leaves you fully exposed to weather that can only be described as merciless. And if that wasn’t enough, there’s even a stretch that is overhanging - angled greater than 90 degrees. Pack animals won’t work. There are no Sherpas. If you attempt the Shark’s Fin, you are truly on your own. You’d have to be crazy to do it.

Some have tried.

The first attempt made on the Shark’s Fin was in 1986 by legendary American climber Mugs Stump. He failed due to an avalanche on the lower slopes. His second attempt, made in 1988, would be cut short by an intense snowstorm. 9 attempts from various teams were made between 1993 and 2006, to no avail.

In 2008, Conrad Anker, who had been mentored by Mugs Stump and previously attempted the feat in 2003, teamed up with Jimmy Chin and Renan Ozturk. They nearly made it, climbing to within 150 meters of the summit before being forced to abandon their goal - storms had pinned them down for 4 days in their portaledge tent, and they had run out of food. In 2009, a separate trio attempted the same route without success. These attempts pushed the climbers to their physical and mental limits and included frostbite, trench foot, lack of food, exhaustion, broken equipment, and broken bones, but somehow produced 0 deaths.

In October of 2011, the same trio who previously found themselves just shy of the summit, comprised of Conrad Anker, Jimmy Chin, and Renan Ozturk, set out to try again. Their entire journey, from first attempt to second, as well as near-death injuries in between, is a harrowing tale that paradoxically goes both better and worse than you expect and can be followed in the 2015 documentary with the only appropriate name: Meru. If you watch it, it will undoubtedly be from the comfort of someplace much warmer than Meru Peak, and yet, you will still feel the dark, biting cold snapping through you. The film juxtaposes the beauty and savagery of nature while exploring the true meanings of risk and sacrifice in a truly irreplicable way.

“They say the best Alpinists are the ones with the worst memory.” - Jimmy Chin

If the reward is greatness, what risks rest on the other side of the scale? For each vocation, that question may be answered very differently. But for those that reached the top, if asked what they were willing to sacrifice to get there, the answer may be simple: everything else.

Here are the return histories of many dubbed the world’s greatest investors:

Source: Excess Returns: A comparative study of the methods of the world's greatest investors

Reducing entire careers down to two numbers makes it easier to compare them, but the above results surely do not capture the true highs and lows each faced, hidden risks, or sacrifices made. I wonder how many people are currently climbing at an unsustainable pace in an effort to top such a list. They fail to realize that excluded from above are the countless people that lost everything chasing a notion of greatness that others defined.

There is no real peak. Guided by the idea of compounding wealth without limit, you can, in theory, keep climbing forever if you choose. Try to do it fast enough, and you will likely meet exhaustion. Too slow, exposure. And even if you have the skill and fortitude, there are always risks outside of your control - perhaps a storm or avalanche will find you, and gravity will have its way.

The most impressive aspect of the above list isn’t the rates at which they compounded but rather the duration of which they’ve done so. When heading out into the world and charting your own path, the reward of survival seems greater than any other. As Krakauer said: you’re supposed to show that you're so good and so controlled, you can take it right to that line and go no further.

Everyone has their own line.

I don’t know where greatness ends, but it starts with finding where that line is.

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Simon Handrahan's avatar
$19.7m follower assets
New Microcap Idea: $AEP.V Atlas Engineered Products
Rolling up a mom and pop fragmented industry is founder led Atlas Engineered Products.

This is a very illiquid microcap traded on the TSX Venture exchange. Listed since ‘17 and operating since ‘99, this is a business that buys small roof truss manufacturers (regional businesses because of shipping) and drastically improves operations. With an average price of 4x ebitda, they are able to get great returns by focussing on profit and efficiency with sales and marketing to boot!

While certainly some short term headwinds, longer term the industry will have the wind at its back with a supply shortage of housing in Canada and immigration continuing to boost new demand.

There is currently an opportunity to also increase organic growth over the next decade with an industry that is short on labor - in comes increased investment and interest in other manufactured products ready for onsite assembly. Wall panels alone could easily double the average revenue per build when the industry inevitably shifts in this direction.

There’s also an NCIB in place till end of the year for 4.7 million shares (10% of float).

Currently trades at 6 P/E.

I own shares. Check it out and signup for more free content like this one.

Cheers!

Simon

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