The US is trying to shoot itself in the foot again, with this move

Yesterday, the Trump administration announced new immigration policies that concern specifically international students or F-1 visa holders. Per the new policies, if students already in the US attend only online courses in the upcoming fall semester, they will face deportation. To avoid that horrible fate, students can transfer to another institution where in-class sessions are available and take those classes. For prospective students who are coming to the US for online-only programs, they can no longer come here. The policies sparked an outrage by anyone who has a vested interest or those who really care about this country’s competitiveness moving forward.

Let me tell you a personal story. 3 months after I came to the US, my two Belgian friends and I joined a 4-day hiking trip with some American friends to Badland National Park. It was my first hiking trip ever. We spent time before the trip getting to know each other and learning the ABCs of the adventure. During the hike, we spent the whole four days talking and doing various activities together. It brought us closer. Towards the end of the trip, on the last night, we sat around a bonfire and had to identify one person in the group that we learned the most from during the trip. Half of them chose me.

The point here is not to boast, I just don’t know any other example, but to say that international students can help Americans gain exposure to other cultures. I was really surprised that some people I met in Nebraska had never boarded a plane before, let alone going overseas. If there were no immigrants here in the US, how else could they gain real-life exposure to other cultures and widen their horizon? That’s one of the benefits international students bring. Well, unless you don’t think knowing about another country or culture is a good thing.

Another real benefit is the contribution to the economy. A study estimated that international students contributed $45 billion in 2018 to the US economy. That’s a significant sum. This policy wouldn’t normally affect that sum too much, I suppose; however, given the pandemic still raging on in the US, a lot of schools now have to offer online courses to protect both students and staff. The current situation makes this policy more dangerous and seriously more harmful to the economy that already took a hit from Covid-19.

For years, the US has benefited greatly from brain drain and the arrival of immigrants. Many immigrants founded great startups here after school, created jobs and contributed to the economy. Many immigrants came to study and stayed to contribute to the academic and scientific advances for the US. Many immigrants are still running the biggest tech companies in the US.

With these policies, the US basically says no the future influx of skilled immigrants. In the past, the country might get away with it, but globalization made the competition for international talent fiercer. Other countries with immigrant-friendly policies such as France, Canada and Germany are more than happy to pick up skilled workers that the US turns away.

While I was still in school, I met two Americans who were roommates to my Belgian friends and I am not exaggerating when I say this: they don’t know how to do basic maths as 20-year-olds. What does it have to do with the newly announced policies? 1) the presence of international students shouldn’t affect the learning of Americans. Whether we are here or not, Americans should be able to learn unimpeded or affected. 2) If some Americans don’t know how to maths while in university, how can they compete with skilled and educated immigrants for high-paying and technical jobs? If some local students refuse to get educated and work in STEM fields, how would the absence of international students help technology companies and other businesses in the US?

In summary, I don’t see a single one beneficiary of these policies. Universities will suffer financially because foreign students pay much higher tuition fees than locals and contribute greatly to the student communities. The economy will suffer financially because those $45 billion contribution will be reduced significantly. Businesses will suffer because there will be less talent. If schools force staff and students to go back to the classrooms under the government’s pressure, don’t be surprised that we will still have Covid-19 decimating our communities at the end of the year. Think about 5 months ago. Did anyone of us imagine that by July we usually break record for the number of cases in a day?

All of this is nothing more than a couple of xenophobic, cruel and terrible policies whose sole objective is to fire up a support base at the expense of the country and to hide the failure in dealing with the pandemic. Sadly, the US is shooting itself in the foot, again.

This company affects your life every day. Get to know it!

FICO

Most of the US consumers should be familiar with FICO. Credit score is a metric that tells lenders how likely you are going to pay back loans. The score is widely used by banks or lenders in the country for credit cards, mortgages and other types of loans. The most popular score is FICO and it’s developed by a company called Fair Isaac & Company. Take the initials of those three words and you arrive at FICO. Typically, FICO ranges from 300 to 850. The higher your FICO is, the more trustworthy you are in the eyes of lenders and hence the lower interest rates may be.

Figure 1 – FICO Range. Source: MyFICO
How FICO Scores are calculated
Figure 2 – How FICO is calculated. Source: MyFICO

The current version FICO is FICO10, but there may be other clients that are still using legacy FICO9. According to FICO, the new score was developed off of FICO9 and offered significant benefits

We also announced some innovations in our Scores business, the release of the FICO Score 10 suite. The suite has 2 new scores. FICO Score 10 relies on credit bureau data and is consistent with previous FICO score versions that are in the market today. It reflects a normal model development cadence, extending features that were introduced in FICO Score 8 and FICO Score 9. FICO Score 10 is designed to be backward compatible with previous Score versions. FICO Score 10T incorporates a broader set of credit bureau data, including trended data, which captures unique aspects of the consumer’s financial profile over time. While the blueprint design is similar, it uses new characteristics to enhance predictive power. Both FICO Score 10 and FICO Score 10T demonstrate greater predictive power over all previous versions of the FICO score and were developed on recent data sets. By adopting the FICO Score 10 suite, a lender can reduce the number of defaults in its portfolio by as much as 10% among newly originated bank cards, 9% among newly originated auto loans compared to using FICO Score 9. The reduction in default is even higher for newly originated mortgage loans at 17% compared to the version of the FICO score used in that industry. These improvements in predictive power can help lenders safely avoid unexpected credit risk and better control default rates, while making more competitive credit offers to more consumers.

Source: FICO’s Q1 2020 Earnings Call

FICO is pretty popular among consumers and lenders. According to a presentation by FICO in 2019, 90% of the US credit lending decisions involved FICO scores and 90 out the largest 100 US lenders use FICO scores. 300 consumer accounts have access to free FICO scores

Fair Isaac & Company

In 1956, an engineer named Bill Fair and a mathematician named Earl Isaac founded a company together on the belief that data could improve business decisions, if used properly and wisely. They were ahead of their times, weren’t they? In 1992, FICO risk scores were made available to three major reporting agencies: Equifax, Experian and TransUnion. In 1995, Fannie Mae and Freddie Mac recommended the use of FICO in evaluating mortgage loans. (Source: FICO)

The company generates revenue from both consumers and corporate clients, but most of the pie comes from the latter. In addition to the popular scores, Fair Isaac & Company also offers other services such as Applications and Decision Management Software (DMS). While the names may indicate the same services, there is a major difference. Applications refer to FICO’s packaged software that meets specific-industry needs whereas DMS consists of tools that clients can use to build tailored apps that have the same function as applications. In 2019, Applications and DMS combined for 64% of FICO revenue (52% and 12% respectively) while Scores was responsible for the other 36%. In terms of YoY growth, the company recorded 16% growth in 2019, compared to 7% in 2018. Applications revenue was about $605 million, a 7% growth. Scores notched about $421 million in revenue, a 25% growth, while DMS brought home approximately $134 million, a 34% growth.

Figure 3 – FICO 2019 Revenue Breakdown. Data source: FICO 2019 Annual Report
Figure 4 – FICO 2019 Segment Revenue Growth. Data source: FICO 2019 Annual Report

Under the three main segments, there are three sub-segments: transactional & maintenance, professional services and license. Transactional & Maintenance Bookings are on transaction basis. The more transactions there are, the more revenue FICO has. Professional services refers to “he estimated number of hours to complete a project multiplied by the rate per hour” while “Licenses are sold on a perpetual or term basis and bookings generally equal the fixed amount stated in the contract.”

The composition of the main segments differs from one to another. Transactional & Maintenance made up the most revenue for Scores in 2019 while Professional Services and License occupied 33% and 29% of DMS’s revenue. Growth behavior of each sub-segment under the main segments also varied. While license recorded the biggest expansion across all segments, Scores’ 2nd biggest growth came from Transactional & Maintenance and that of DMS came from Professional Services

Figure 5 – FICO Sub-segments’ Revenue Breakdown in 2019. Data source: FICO 2019 Annual Report
 ApplicationsScoresDecision Management Software
Transactional & Maintenance6%25%8%
Professional services-4%14%38%
License47%62%86%
Segment Total7%25%34%
Figure 6 – YoY Revenue Growth of Sub-segment under the main lines. Data source: FICO 2019 Annual Report

Although FICO doesn’t break down operating margin for the sub-segments, it does provide operating margin for the main business lines. Scores is the most profitable while DMS is the only unprofitable line. Looking at the composition of the lines, it’s not surprising that is the case. Transactional & Maintenance should have low marginal costs. FICO only generates more revenue and operating income as it signs up more clients and records more transactions. As Professional Services tend to have low gross margin due to high labor costs and Professional Services makes up a third of DMS’s revenue, it’s entirely possible that high SG&A and Sales & Marketing expenses sunk the segment’s profitability.

Figure 7 – Operating Margin in 2019. Data source: FICO 2019 Annual Report

A few other notable stats:

  • 34% of FICO revenue came from outside the US
  • Banking industry is responsible for 87% of its 2019 revenue
  • Commercial agreements with the three main reporting agencies made up 29% of FICO’s revenue (13% from Experian)
Figure 8 – Deal information. Data source: FICO Q1 2020 Financial Highlights Presentation

As a customer myself and somebody who works at a bank, FICO is instrumental in not only risk management, but also marketing. Given the popularity of the FICO risk scores and the proprietary nature of those scores, the company should be able to reap benefits for a foreseeable future. With regard to its solutions, FICO has some stiff competition and frankly, I have no idea how it will fare in the future. I like to get to know different types of business because that’s part of my investment effort and because I am just curious. I hope this post offers you a helpful primer on a company that is under-radar, yet plays a role in our life.

Corporations and social issues

Corporations are expected to wield their power and voice their positions on social issues more than ever. You have seen it lately with Black Lives Matter, racism, police brutality, hate speech or privacy, to name just a few. Failure to satisfy customers on social issues may result in backlash and material harm to their business. Take Facebook and Twitter as examples. Facebook’s stock price dropped quite a bit after a slew of advertisers announced their pause on advertising on Facebook’s platforms for a month or longer. Twitter became a target of Republican lawmakers and the President after it hid and put a label on some of Trump’s tweets.

In societies that are as divisive as what we are in now, companies are in the “damned if I do, damned if I don’t” position. These are tough decisions that are almost guaranteed to piss off some people. To those who take a stand on issues, kudos to you. As to those who didn’t, I want to make a case that we should exercise judgement on a case-by-case basis and give them some understanding.

Later last year, Daryl Morey, the general manager of Houston Rockets, tweeted his support for Hong Kong’s independence from China. The tweet didn’t sit well with the Chinese authority which quickly took actions including suspending games and planned cooperation with the NBA. The backlash from China resulted in Daryl walking back of his comment, Houston Rockets distancing itself from the saga and the NBA issuing a statement to cool down the situation. Another example concerns Apple. It took down a popular podcast app called Pocket Casts from the App Store in China. The main reason is because The Cyberspace Administration of China forced it to. Despite being a $1.4 trillion company whose core belief is that passionate and creative people can change the world, Apple complied with the demand.

The decisions above showed that the executives believed it was in the best interest of their companies to succumb to pressure from China and compromise. Some may frown on China’s demands, but they know they must not upset the Chinese government if they want to do business in China. And what international company doesn’t want to do business in a country with the second biggest economy in the world, fairly cheap labor and more than 1.3 billion people in population?

As the decision makers, executives have fiduciary duties to shareholders and responsibilities to their employees while having their own personal virtues as a person. In the perfect world, there would be no conflict between being an executive and being a human. Unfortunately, the world we live in is anything, but perfect. Different stakeholders have different points of view which, in many cases, are truly irreconcilable. That puts executives in an unenviable position. They have to make a decision no matter what, knowing that they simply can’t please everyone.

There is a saying in racing that goes: to finish first, you first need to finish. To meet these social responsibilities, these corporations need to make sure that they can exist financially first. We all respect those who stand up to the strong for the weak. Corporations’ voice is a lot more powerful than that of an average person, but even they are not all too powerful against governments.

In summary, critics and consumers are entitled to criticize corporations and keep them honest. Misbehavior such as tax evasion, use of slaves or child labor should be universally condemned. But when it comes to highly controversial topics and issues, while we all can have opinions and to some extent, may be right to criticize corporations, it’s important to know that none of us would likely make a better judgement ourselves if we were in the shoes of the criticized executives. Big changes often require a lot more than just a single individual or company to take place.

Weekly readings – 4th July 2020

What I wrote

I wrote a bit how relying on one metric, such as revenue, can be very misleading

A feature that I wish were available in iBooks

A very excellent and inspiring speech of Steve Jobs

I reviewed this book on Essentialism and this book on Personal Finance

An excellent conversation between Patrick O’Shaughnessy and Brad Gerstner

Business

New Competition Poses Limited Risk to Tesla’s US Marketshare

More than two-thirds of McDonald’s business is earned through its drive-thru operations. And internal figures suggest that nearly ten percent of many franchisee’s 2018 sales were attributed to third-party deliveries from: Uber, Amazon, Delivery Hero, Zomato, Postmates, Deliveroo, Swiggy, DoorDash, and Grubhub.

Source: 2pm

Apple’s Relentless Strategy, Execution, and Point of View

The house servant who pioneered the franchising business model

Average Target store generated $300 in revenue per square foot. The top 25% stores averaged $430 per square foot

Google revealed that news publishers kept 95% of ads revenue when using Google Ads Manager

The fall of Quibi: how did a starry $1.75bn Netflix rival crash so fast?

The real cost of Amazon

Harvard Business Review on rewards

In order for a rewards program to be a profit center instead of a cost center, the payout must be inextricably linked to desired behaviors

Investing in the unknown and the unknowable

Technology

After iOS 14, there’s almost no reason to buy an Android phone anymore

The Fasinatng… Fascinating History of Autocorrect

A cool tool to work with numbers, build models and share them more easily

What I think is interesting

The Consultant: Why did a palm oil conglomerate pay $22m to an unnamed ‘expert’ in Papua?

The value of downtime and enoughness

The true cost of dollar stores

An unprecedented investigative report by Reuters on the misconduct of judges and how the system is unfairly lenient on those judges. Have a read and see if you are not enraged by what is currently going on

How the Chinese government allegedly hacked the then leader in wireless technology from Canada and led to the demise of that company.

A good piece on how money flowing to the local police is invested. Police serve and protect the people, but they are equipped with gears and tools for wars. Who are they going to wars against internally????

“A Lesson on Elementary, Worldly Wisdom” by Charlie Munger

Why revenue doesn’t tell the whole story and why we need comparables in retailers’ financial reports

This post addresses these two questions

  • What do you think when you read on the news: Retailer A’s sales increased by 9% this year compared to last year?
  • What does “a 7% jump in comparables/comps for a retailer” mean?

In addition to revenue growth, look at gross margin as well

The first thing that jumps out of an income statement is revenue or net sales. That’s why it’s often referred to as “top line”. Does a change in revenue say a lot? Not so much. Let’s say if there is a year-over-year decrease in revenue, it’s safe to say that the company goes backwards directionally. If there is an increase year-over-year, the only conclusion that can be made at this stage is: well, at least this year isn’t a disaster, yet. Because there are a lot of factors that can contribute to the increase in revenue and can make such an increase pretty meaningless. It requires further investigation.

Let’s look at an example. You sold 10 tomatoes last year, each of which was bought at $7 and sold at 10$. The total revenue last year was $100 and the gross margin was ($10 – $7)*10 pieces = $30. Gross margin ratio is $30/$100 = 30%.

This year, you sold 15 tomatoes for $12 each, but the cost of sales for each tomato went up $10. The total revenue this year went up to $180, an increase of 80% compared to last year. However, gross margin stays at ($12-$10)*15 = $30 and the ratio, as a result, decreased to $30/$180 or 16.7%. You can see clearly that the unit economics worsened and your business is actually in a worse shape than it was last year. Of course, this doesn’t even take into account other expenses such as Sales and Marketing, Selling, General and Administrative Expenses (SG&A) or R&D. I don’t want to go off track too much and this example should show you that relying on revenue growth alone isn’t anywhere close to being enough.

If gross margin isn’t an issue and revenue increased, does it mean that it’s all good? Not really.

Why do we need comparables?

For instance, if a retailer that operates multiple stores has an 8% YoY increase in revenue, it means that it brings 8% more this year than it did last year. There are two important factors that can contribute favorably to that and potentially mask the true performance of the retailer

  • Time: sometimes the comparison is between 52-week and 53-week fiscal years. As a result, it’s not surprising that the 53-week fiscal year brings in more sales. You can see from Figure 1 below Target highlighted the fact that 2017 had 53 weeks and they removed the results of the 53rd week from comparison to make it fair
  • Number of stores: if this year’s performance is derived from more stores that last year’s, it’s then not a fair comparison.
Figure 1 – Source: Target

That’s why retailers use the comparables concept in their reporting. It reflects the increase or decrease in performance derived from the same stores over the same period of time. Such an approach will result in a true fair comparison and an honest reflection of a company’s health

Figure 2 – Source: Costco

Figure 2 is a table from Costco’s latest annual report. The changes in comparable sales are smaller than the changes in net sales, albeit that all are positive. It means that in addition to the growth organically from the same stores in 2018, Costco also benefited from opening new stores. Without the breakdown, investors would not be able to discern Costco’s true performance in 2019.

Another useful metric to look at is Revenue Per Square Foot. It divides the total revenue by total square feet and reflects how much money a retailer can generate per a square foot. A square foot’s size doesn’t change over time. Using this metric, investors can generally tell whether a retailer leveraged its retail space better, regardless of how many stores were closed or opened.

Figure 3 – Source: Target

In Figure 3, the first number column from left to right is for 2019, followed by 2018 and so on. As you can see, Target increasingly generated more revenue per square foot from $298 in 2017 to $326 in 2019. Generally, it should be a positive sign, but like the case of revenue above, it may still be a misleading metric.

Figure 4

Let’s run a scenario. This retailer ran two stores in 2018 and added one more store during the year of 2019. As you can see, the revenue per square foot in 2019 was higher than that in 2018, but it may not be cause for celebration. Sales in Store A and B declined and the increase in revenue and revenue per square foot came solely from Store C’s performance. It means that there was some trouble with Store A and B; which caused a decrease in revenue.

In conclusion, it’s hardly enough to use one single metric to judge a company’s health. It’s a combination of many. Hope you found this helpful. Have a nice 4th of July.

A feature I wish iBooks had

I read books on my iPhone nowadays. There are two main reasons for that

  • I love taking notes while reading. It helps build a note system which refreshes my memory quickly all the points that I deemed worth remembering. With physical books, I can’t do the same
  • Admittedly, I pay for books once in a while, but mostly I use gen.lib; which is a website that offers free ebooks in various genres. After I download books to my Mac, it usually doesn’t take long for iBooks on my phone to sync and have those books ready in the app

Much as I like the experience of reading on iBooks, I wish it had a feature that’d allow readers to quickly store or buy books referenced by authors. Take a look at the example below

With the current iBooks, I have to highlight the name of the “The Tao of Warren Buffett” book and save it in my notes section. Later on, if I want to buy the book, I’ll have to exit what I am reading, go to the Search function, type in the name from my memory and buy it. There is so much friction and the experience is anything, but ideal. What I’d love to have is that once I press on the name of the book, a pop-up will show on the screen that has the book information from Apple’s bookstore and I can just tap on my phone screen to add it to my to-read list. The list should be able to sort books by added date or alphabet.

In fact, links on iBooks are clickable as you can see below. So, I wonder why there isn’t such a feature for iBooks. If friction is removed, I think readers are more likely to buy more books; which means more revenue for Apple and publishers.

Steve Jobs’ excellent and iconic speech

I came across this speech from Steve Jobs and it’s absolutely amazing. It’s 20 minutes long and I urge you to have a listen. It’ll be worth your time and below are the reasons why I love it

  • When he returned to Apple, the company was weeks away from bankruptcy. Imagine one of the top 3 valuable companies right now, the Apple today, came so close to being bankrupt. That’s how dire the situation was. Steve talked about how he overhauled the entire product line, cutting it down from many to just four. It’s an example of Essentialism that I talked about. By focusing on the most important products, Apple not only avoided making consumers confused, but also directed resources to make sure those products were great, supply chain was great and marketing was great
  • Steve Jobs said that marketing is about values and who we are. I absolutely agree. People need to know who you are before they agree on any business transactions with you. At the end of the day, if they don’t know who you are, they unlikely will trust you. Without trust, can there be sustained relationships?

To me, marketing is about values. This is a very complicated world. This is a very noisy world. And we’re not gonna get a chance to get people to remember much about us. No company is. So we have to be really clear about what we want them to know about us. Now, Apple, fortunately, is one of the half a dozen best brands in the world, right up there with Nike, Disney, Coke, Sony. It is one of the greats of the greats. Not just in this country, but all around the globe. Even a great brand needs investments and caring if it’s gonna retain its relevance and vitality. Apple brand has clearly suffer from neglect in this area in the last few years and we need to bring it back.

Source: Steve Jobs’ speech
  • The way he talked to the audience was so easy to understand. There was no jargon. There were no big words. Even if you don’t have much business background, you’ll still be able to follow him and what he was saying. It shows that he both understands really well his message and knows how to convey it. Plus, his casual outfit made the atmosphere friendly, relaxing and light; which I think helps his delivery. On a personal note, I have tried really hard on this blog to keep it simple. First of all, I don’t think I have the vocabulary to be a sophisticated writer, as a non-native speaker. Second of all, I want to be a good communicator like Steve. I still have a long way to go, but I don’t plan to change the current approach
  • The latter part of this clip features three best points from his commencement speech in Stanford in 2005. The first point is about how we need to have faith in something and how we can only connect the dots in our life looking backwards. The second point is to continuously look for what we love to do. The last point is about the importance of death in making life decisions. It again goes back to Essentialism that I mentioned early. We need to figure out what’s essential in life and have the courage to take actions.

My third story is about death. When I was 17, I read a quote that went something like: “If you live each day as if it was your last, someday you’ll most certainly be right.” It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: “If today were the last day of my life, would I want to do what I am about to do today?” And whenever the answer has been “No” for too many days in a row, I know I need to change something. Remembering that I’ll be dead soon is the most important tool I’ve ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure – these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart. 

yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because death is very likely the single best invention of life. It is life’s change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true. Your time is limited, so don’t waste it living someone else’s life. Don’t be trapped by dogma — which is living with the results of other people’s thinking. Don’t let the noise of others’ opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

Transcript from The Guardian

Book Review: Essentialism: The Disciplined Pursuit of Less

The book is about essentialism, the idea that you should take control of your life, have the courage to choose to do what’s only the most important and essential to you and ignore the rest. In a sense, I think it’s pretty similar to minimalism because they both emphasize the need to remove what’s not essential and the need to keep what is. While minimalism seems to be associated more with design or art, essentialism seems broader as it can be applied to work or life. The ability to focus on only what’s important and maintain the power of choice in life will help make a person happier and more fulfilled.

The book has four main parts: 1) it discusses the concept in general, 2) it talks about how to differentiate the vital from the trivial, 3) it lays out how we can remove the trivial and 4) it offers tips on how to make the viral easier to practice. Under each part are some sub-chapters that discuss a factor that contributes to the big topic at hand such as the importance of sleep, the value of having a child-like mind, why we should build in buffer in whatever we do while anticipating for unpredictable trouble. Even though some may lament the various topics he touched upon as lengthy and unnecessary, I do think it’s helpful to break down a big topic into smaller chunks and look at an issue from different angles to have a better understanding. There’s nobody stopping audience from skipping a few pages, you know.

If a reader reads about minimalism or the value of focus, he or she will unlikely be wowed by the book. Experienced readers, especially in the topic that this book is about, will say that this book should be only 20 pages long, instead of 200. But if somebody hasn’t been very well-versed in essentialism, focus or minimalism, this book may be of value.

“Essentialism is not about how to get more things done; it’s about how to get the right things done. It doesn’t mean just doing less for the sake of less either. It is about making the wisest possible investment of your time and energy in order to operate at our highest point of contribution by doing only what is essential.”

Excerpt From: Mckeown, Greg. “Essentialism: The Disciplined Pursuit of Less.” Apple Books.

“The word priority came into the English language in the 1400s. It was singular. It meant the very first or prior thing. It stayed singular for the next five hundred years. Only in the 1900s did we pluralize the term and start talking about priorities. Illogically, we reasoned that by changing the word we could bend reality. Somehow we would now be able to have multiple “first” things. ”

Excerpt From: Mckeown, Greg. “Essentialism: The Disciplined Pursuit of Less.” Apple Books.

Essentialism the more clearly I have seen courage as key to the process of elimination. Without courage, the disciplined pursuit of less is just lip service. It is just the stuff of one more dinner party conversation. It is skin deep. Anyone can talk about the importance of focusing on the things that matter most— and many people do, but to see people who dare to live it is rare

Excerpt From: Mckeown, Greg. “Essentialism: The Disciplined Pursuit of Less.” Apple Books.

Before I sign off, here are a few examples of essentialism in business

Netflix

Read the following to see how Netflix is focused on only thing

Google

Do you notice how simple and completely focused Google’s interface is on only searches?

Apple

Notice the infinity screen on iPhone and the no-fee feature of Apple Card

Aldi

I wrote about the intense focus of Aldi to lower costs and pass on savings to consumers

Book review: The Wealthy Barber Returns

I saw a hedge fund manager recommend this book on Twitter, but accidentally grabbed the newer version instead of the recommended original. Nonetheless, here is my review. This short and easy-to-read book which is a compliment contains some common sense regarding personal finance. If you just begin to dip into the personal finance space, this book can be a good place to start, though I am sure there are better books. If you want to enrich your personal finance knowledge, there may be some ideas from the book that can be interesting. If you live in Canada, this book may even be more interesting as the author spent a significant part of the book discussing matters specific to the Canadian systems only.

The two main take-away points from this book, if that’s all you will leave it with, are this: 1/ live below your means and 2/ save early.

There is no surer way to approach financial independence than keeping your expenses below your income. In fact, the lower your expense is than your income, the better. It’s quite common to see folks who spend most or all of their income every month. Those are the paycheck-to-paycheck folks. When life throws them a twist as it very often goes, there will be no saving for a rainy day. If you look at the current pandemic (as it is still going on), not only is it not a rainy day, it is a freaking storm. People lose jobs and health insurance. Income is gone, but bills are still there to pay. In fact, 40% of Americans are reported not to have $400 for an emergency. That’s so crazy to think about. Even though the idea of living below your means is so laughably obvious, the reality clearly shows that it is a foreign concept to many.

The book emphasizes a key trick in making sure that you save money every month: save before you spend the rest, not spend and save the rest. Say, if you earn $3,000 a month, put 10-20% somewhere as savings and spend the rest. That approach allows you to save at least $300 a month. After two months, at least you can say that you are NOT among people who don’t have $400 in cash for an emergency. On the other hand, if you decide to save whatever is left after the first 28-29 days of the month, you likely won’t save much. As human beings, we are terrible in self-control.

“You don’t have to become a miser and live a life of austerity. You just have to exercise a little discipline and a little common sense. You’re probably wondering, “If that’s the case, why aren’t there more successful savers? Why haven’t we all been able to slightly reduce our spending?” The blunt answer? A little discipline and a little common sense are a little more than most of us can muster.”

Excerpt From: David Chilton. “The Wealthy Barber Returns.” Apple Books.

The second key take-away is that you should start saving early. The earlier and more consistent you save, the better. Instead of typing out why you should, I’ll let these charts from JP Morgan demonstrate the power of compounding interest, which is usually called “the 8th wonder of the world”

chart jp morgan retirement
Source: Business Insider

As you can see, the earlier and longer you save, the more compounding interest works in your favor. To reach $1 million at retirement, you can either save $361 monthly, starting at the age of 20, or save $1,400+ a month at the age of 40. Which one do you feel is more daunting? Especially given the more responsibilities and expenses that come with being older? Exactly!

There are other topics addressed in the book such as:

  • If someone asks you to do something that involves spending, practice saying “I can’t afford it”
  • When you should take out a line of credit
  • What is good debt and what is bad debt?
  • A basic primer on index funds and why you should strongly consider them as an investment vehicle

Overall, I think the book does offer value. I can see that it’s even more helpful to teenagers who are interested in building wealth and strategizing their life to financial independence and happier life. To those who may argue that saving fir the future will come at the expense of today’s sacrifice and the enjoyment of life, here is what the book argues, which I agree with

One of the most damaging misconceptions in personal finance is that saving for the future requires sacrifices today that lessen people’s enjoyment of life. Surprisingly, it’s quite the opposite! People who live within their means tend to be happier and less stressed. That’s true not only for the obvious reason — they know their financial futures look bright — but also because they’re not consumed with consumption. They’re not in the emotionally and financially draining race to acquire the most stuff they possibly can. A race that, it should be noted, has no finish line and thus no winner.

Excerpt From: David Chilton. “The Wealthy Barber Returns.” Apple Books.

Conversation between Patrick O’Shaughnessy and Brad Gerstner

I haven’t listened to podcast for a while. Simply because I read a lot more than I listen to podcasts. But this podcast between Patrick and Brad is very good, packed with insights, nuances and common sense. Though there are a few points that I don’t fully agree with him, I learned a lot from his talk. A few key highlights are quoted below, but do give it a try. It’s worth for time if you are interested in technology, business and investing.

Buffett, although he comes out of the quantitative school, he has a quote where he says: my highest returning investments, those that really made the cash register ring, have come from simple qualitative insights applied to a big business opportunity

Source: Invest like the best with Brad Gerstner

While we’ve been talking about the cloud, since really 2002 and 2003, and I remember by 2010 and 2011, we actually started decelerating rates of growth of a lot of cloud companies, people started wondering: Did we overestimate the cloud? Just as they wondered in 2005 and 2006, after the demise of companies like Danger, whether we overestimated mobile. And the reality is we weren’t even getting started. So, we look at, we break down the backend of cloud software really into system infrastructure, the infrastructure software that enables companies to do the things they wanna do in the cloud and the application software. When you look at the TAM (total addressable market) of all three of those, by our account, we are still a decade away from having 50% penetration to the cloud.

Source: Invest like the best with Brad Gerstner

For almost all investors, a hugely disproportionate amount of their career profits that they generate, whether in public markets or private markets, will come from a few bets, a few great investments. And if you succumb to the ego that is easy to succumb to which is if I study it hard enough, I’ll be able to figure it out. You look at your Bloomberg everyday, and you have 100 different opportunities you can go and invest everyday and maybe a couple of hundreds of opportunities. People tend to overtrade, invest in too many things. It divides their attention. And so the opportunity cost is they are not there when the fat pitch comes. So they don’t have capital available when the fat pitch comes. And I’d argue for myself at least to less happiness because I can’t go as deep on a particular subject as I want to go because I am managing too many things at once…

Source: Invest like the best with Brad Gerstner

Far more has been lost betting on the end of times, trading out of your good ideas, trying to hedge out of Covid than just making great bets on great companies and allowing them to compound.

Source: Invest like the best with Brad Gerstner

Right? Is going to this dinner, is having this coffee, is having this meeting, is joining this board, is making this investment, is it an easy yes? If it’s not an easy yes, then it’s an easy no. Organizing your life with less, but enriching the stuff you do choose to do. Your children, your interaction with friends and family, your time in nature, your time spent with a couple of management teams, instead of divided across 15 boards. I can’t promise that leads to maximum financial return for you. But I am pretty confident that your return on happiness is going to be pretty extraordinary

Source: Invest like the best with Brad Gerstner