Month: August 2024

August 26, 2024

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The early Brit catches the US tech boom

Dear Reader,

Stock pickers tend to get screwed.

​The S&P Scorecard makes it clear: 79% of active management large cap funds lagged the S&P 500 over the past five years.

Over the longer term, the numbers get worse — only about 12% of them beat the market over the past 15.

What about small-cap funds? Nope — about 90% lag the market’s performance.

Value stock funds? Even worse — 94% of them can’t beat the market.

You get the picture.

It’s statistically highly unlikely that you can earn better returns by selecting stocks than if you just bought an index fund.

Passive, long-term investing, which relies on the market’s 10.64% annualized return to slowly, but surely, lift all boats over time, has more evidence going for it than ever.

Seldom do modern investors aspire to strike it rich discovering the next big thing before everybody else.

Which is why you need to know about reclusive fund manager, Nicholas Sleep.

This mysterious investor did something few big players dare in today’s market — particularly those managing other people’s money.

And particularly, those from his side of the Atlantic.

Regulation hell vs. innovation heaven

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​This explanation gives you a pretty good idea of the difference between Europe’s and the United States’ markets:

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Increased regulatory burden has hampered Europe’s competitive position, hindered innovation and is particularly burdensome for small and medium sized companies.
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The root cause is hard to identify. There are, of course, cultural differences between Europe and the US, but Europe also has more complexity with regulation, from both individual countries and the single market.
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The formation and growth of Silicon Valley firms through the 2000s to the rapid growth we are seeing from AI firms today is evidence that the US has created an environment that fosters innovation.
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While countless hours are being spent by software engineers in the US trying to outcompete each other for the next AI breakthrough, European law makers are apparently burning the midnight oil to prepare the first AI Act!

See how European stocks rebounded after the 2020 pandemic compared to US stocks:

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You get the picture.

Innovation and growth happens faster in the US than it does on the continent.

It’s no coincidence most of the great investors and fund managers of our time all come from the same country.

Bogle, Buffett, Dalio, Graham, Lynch, Munger. All Americans.

So how on earth did a British fund manager manage to spot one of the highest-performing investment opportunities of the past two decades, before US investors cottoned on?

Here, Reader, you enter the myth of Nick Sleep.

Betting big in the early tech wilderness

Nick Sleep first worked as a fund manager at Marathon Asset Management. In 2006 he set up his own fund, Nomad, with partner Qais Zakaria.

Eight years later, they’d made a sufficiently gargantuan enough return for their investors that they closed the fund, returned the money to their clients, and disappeared.

How much money are we talking?

Here’s a snapshot of Nomad’s performance in 2013, a year before they shut up shop:
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Before performance fees, they were outperforming the great Warren Buffet’s annualized 19.8% return.

As in, beating the greatest investor of the past 100 years, by picking stocks.

They did this, in large part, thanks to Nick Sleep’s visionary approach.

He pioneered something called ‘scale economics shared‘.

His thesis was basically that large internet businesses would use their rapidly growing revenue to make their services progressively cheaper for their customers — as opposed to simply paying it out to investors, or reinvesting it into their business (read more here).

But in the post-Dot Com bubble world of the early 2000s, Nick Sleep saw a way for the next generation of internet businesses to achieve massive growth by returning their profits to their customers in the form of ultra-competitive prices.
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The early days.

Fund manager mic drop

At the time, this view was far from popular. It was too new, too unfamiliar — even to the historically visionary investors in the very country where such businesses were taking root.

But Nick Sleep saw the game evolving, and made his play.

Nomad bet big on a company called Amazon, while the rubble of the 2000 tech collapse still smouldered around him, buying in at less than $30 a share.

By 2007, the fund owned $55 million in Amazon stock.

By the time Sleep and Zakaria closed Nomad, that position was worth $1.2 billion.

At the time of writing, Amazon shares trade for $178 — nearly six times the price at the time Nick Sleep started betting big on his scale economics shared thesis.

Stock picking might be out of fashion, and notoriously difficult. But this story shows you that it’s not impossible — not even for a British fund manager, let alone a Wall Street heavyweight.

Nick Sleep virtually disappeared after Nomad closed in 2014.

His annual Nomad investor letters have become legendary among those who know about them (read all of them here).

Here’s 15 highlights:
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Compounding Quality
@QCompounding
Nick Sleep is one of the greatest investors of all time.
People who invested with him achieved a yearly return of 20.8% (!).
Here are 15 things I learned from reading his annual letters:
8:48 PM • Aug 8, 2024
10
Retweets
70
Likes
Read 7 replies
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Here’s one of my personal favourites, addressed to some guy named Warren upon Nomad’s closure:

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New video reveals how to never worry
about ETF AMIT statements again

While you’re here, if you’re investing in ETFs in Australia, you’ll want to watch this new video.

He walks you through the ‘extremely important’ numbers you get with your annual AMIT statement from your ETFs — and the simple way to deal with them without having to stress at tax time.

Click the preview to play:
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That’s it for The Benchmark this week.

Forward this to someone who’d enjoy reading.

If one of our dear readers forwarded this to you, welcome.

Until next week!

Invest in knowledge,

Thom
Editor, The Benchmark
​Track & report on your portfolio like a pro​

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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

August 19, 2024

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The Mexican carry trade

Dear Reader,

‘Most people thought black beans were olives,’ Steven Marks said of the average Australian’s knowledge of Mexican food in the early 2000s.

Over the next 20 years, Marks and fellow New Yorker, Robert Hazan, would change that.

In the process, they’d build a massive fast-food business that is now approaching $1 billion AUD in annual revenue.

Just this year, the business they founded to ‘educate the market‘ on good Mexican food became Australia’s most successful initial public offering since 2021, and the third-best for half a decade.
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This week, The Benchmark takes a break from Wall Street to show you how a simple idea changed the Australian fast food landscape and became a stock market darling in the process.

‘Selling burritos and delivering on our strategy‘

Steven Marks was 23 when he landed what, for most aspiring finance bros, would be the dream gig.

He was one of two graduates to join Steve Cohen’s New York equities team.

Forbes estimated Cohen to be about the 30th richest person in the United States 10 years ago. ‘The hedge fund king’, as he was known, at one point personally raked in about $1 billion a year.

Marks had his feet under the desk for one of Wall Street’s heavyweights.

Fast-forward four years, and he was running a London trading desk, living the high life in Chelsea.

But, fast-forward another three years, and Marks was done.

The ultra-intense hedge fund life had taken its toll and lost its appeal.

So, he did what any self-respecting talented young professional does when their personal desires no longer match with their professional circumstances; he booked a one-way ticket to the other side of the planet with very little idea of what he’d do when he got there.

Initially, he wanted to build a hotel. That proved tougher than Marks expected. And while struggling to get this plan off the ground, he found he missed something from his New York days — good Mexican food.

Seeing the gap in the Australian market, Marks went all-in on enlightening his adopted country on the pleasures of authentic Mexican food.

Wall Street cash = main street smash hit

​Steven Marks​

Marks did four key things to get Guzman Y Gomez — named after two friends from his childhood in Brooklyn — up and running in 2006.

1. He invested ‘everything‘ he’d managed to save from his seven years earning mega bucks in the hedge fund world.
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2. He ‘poached the best staff from Latin American restaurants and brought in chefs from Mexico‘.
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3. He convinced his childhood friend, Robert Hazan, who had a background in fashion and retail (and therefore boots-on-the-ground knowledge of a type of business Marks did not) to become his business partner.
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4. Marks and Hazan set up Guzman Y Gomez restaurants in ‘triple A real estate‘ locations, building a premium fast food brand rather than a ubiquitous, spread-too-thin empire like much of their competition.
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The first store in Newtown, Sydney, spawned openings in Bondi Junction and Kings Cross within 12 months.

​The first Guzman Y Gomez restaurant in Sydney​

Six years later, GYG had 12 locations, expanding to Melbourne.

Another six years later, Australians were flocking to buy premium Mexican takeaway food at 100 spots across the country.

In 2013, Singapore got its first Guzman Y Gomez, and in 2020 the Naperville suburb of Chicago began serving customers.

Today, there are ~200 Guzman Y Gomez locations. The business has broken into Australia’s top 10 most popular takeaways, and makes $760 million a year.

Careful investment strategy paves
way for rare ASX IPO success

Marks and Hazan didn’t rush to accept money from investors.

Marks’ Wall Street experience taught him about being careful who he took money from.

He actually rejected several offers because he didn’t feel those looking to invest shared his vision for the business and brand.

Rather, he and Hazan kept hustling, running the business with their own money and its growing revenue.

‘So we just had to make it work, even when we were running out of money,‘ he said.

Finally, though, they struck a deal with the team behind McDonald’s Australia. This helped them fuel Guzman Y Gomez’s international expansion.

Then, investment firm TDM Growth Partners bought a $44 million stake in 2018, followed by Magellan Financial Group’s $87 million investment (Magellan subsequently sold its stake for $140 million — a 60% gain).

Then, this year, what started as a burnt-out ex-hedge funder’s reaction to Australia’s dire lack of quality Mexican food in the early 2000s hit the Australian Stock Exchange.

GYG packed full in Woolongong, NSW

Guzman Y Gomzez listed A$335.1 million of new stock (about a sixth of the company) for public trading.

It became the biggest first-day gainer by a large Aussie company since 2021 and the third best performing IPO in five years.

At the time of writing, GYG is up 4.61% since IPO, with a total market cap of A$3 billion — it was A$2.2 billion before it debuted.

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Guzman Y Gomzez forecast a second consecutive net loss for 2024, but a profit in 2025.

The company plans to match the current McDonald’s Australia store count in the next 20 years.

That’s about 1,000 stores.

If you didn’t know what good Mexican fast food tasted like already, you’re about to.

To really get into the numbers behind GYG, check out this deep dive.

Quote of the week

‘Luck is the dividend of sweat. The more you sweat, the luckier you get.’

― Ray Kroc

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy reading.

If one of our dear readers forwarded this to you, welcome.

Until next week!

Invest in knowledge,

Thom
Editor, The Benchmark

P.S. join me over on X where I post daily about the stories in The Benchmark, plus breaking financial news and events (click below):

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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

August 12, 2024

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Panic on the streets, or just in the markets?

Dear Reader,

Last week, panic struck.

This is what the internet looked like for investors last Monday:

​Source​

Rough.

​Source​

Brutal.

​Source​

Heavy.

But, we know the media gets plenty of mileage out of hype — particularly the negative type.

So, let’s look at the facts.

Last Monday:

• S&P 500 fell 3% — its worst day since September 2022
• The Dow was down more than 1,000 points, or 2.6%
• The Nasdaq wiped out nearly $1 billion in market cap

To top it off?

The Volatility Index hit levels not seen since the 2008 Financial Crisis and the 2020 pandemic.

Then again, Wall Street’s ‘fear gauge’ has been running haywire of late, so it’s not as straightforward as it might first appear.

But, all up, a pretty decent dose of fear, uncertainty and doubt for the stock market.

A week on from this bolt of panic, let’s look at the factors at play — and, of course, the bigger picture.

To fight inflation is to fuel unemployment

The cost of living crisis that took hold over the past couple of years stemmed, in part, from inflation.

Here’s US inflation over the past century:

​Source​

By mid-2022, inflation was the highest it had been since the 1980s.

In other words, the value of money eroded, sharply.

Which meant it became more expensive to live.

Which meant central bank intervention.

Interest rates, which had trended down since the 1980s — falling sharply after the global financial crisis and then the pandemic — rose again.

You can see in the chart below, we’re only just now back to pre-2008 interest rate levels:

​Source​

The Federal Reserve (the world’s most influential central bank), goes to war on inflation — too much inflation, at least — by raising interest rates.

According to Phil Rosen:
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The Fed’s stated goal is a 2% inflation rate. But it’s currently more than triple that level, which means the economy is running too hot and consumers are spending too much.
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​The Fed doesn’t explicitly say it like this, but a sure-fire way to crush spending is to raise unemployment — that’s why it’s bad news when the Fed sees more and more Americans joining the workforce each month.

In other words, central banks sometimes try to coax the economy into recession in order to reign in spending and bring inflation back to their target figure.

They expect unemployment to rise. But, in terms of what happened last week:

61,000 new jobs ain’t enough

On Friday, August 2, the Bureau of Labor Statistics reported that the US economy added 114,000 jobs for the month of July.

On the face of it, you’d think more than 100,000 new jobs would be a good thing.

That’s 3,225 Americans starting a new job every day of the month.

That’s growth, right? Wrong.

The part of this equation that spooked the markets last week was the gap between economists’ projections, and the reality.

Everyone thought there’d be 175,000 new jobs created.

Instead, they got a 61,000 shortfall.

It’s like when a listed company forecasts its quarterly profits.

They might tell investors they expect to make a billion dollars.

But if they then only make $750M, it’s the $250M shortfall that makes the headlines, not the actual profit.

And this, of course, is in part down to the stock market being a place where people bet on the likelihood of future outcomes.

Hence the fear, panic and swift erosion of billions of dollars in valuations across both stocks and crypto.

A perfect storm, or a bump in the road?

There were other factors driving Monday’s crash.

Japan’s stock market collapsed 12% — the most it’s fallen in a single day for nearly 40 years — wiping out all its 2024 gains.

This came as the Bank of Japan hiked interest rates. This, in turn, impacted the substantial ‘carry trade’ whereby US investors had become accustomed to borrowing Japanese currency at near zero interest rates and then buying up US-listed stocks in a bid for better returns.

Higher Japanese interest rates = less Japan/US carry trade = less money flowing into American stocks.

Add to this a (probably overdue) cooling in the hype around AI and the Big Tech companies that have been riding that wave since late 2022.

And, of course, let’s not forget Warren Buffett, whose Berkshire Hathaway announced it had sold half its Apple shares, preferring instead to boost cash reserves.

The Wall Street Journal published a fantastic piece last week weighing up whether this is a 1987-style market-only event, or the signs of a deeper, broader economic collapse.

According to James Mackintosh:
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‘Just like today, in 1987 investors were on edge and ready to sell to lock in the unexpected profit. The losses are smaller so far, but lucrative trades have reversed, just as they did for the market as a whole in 1987.‘

Bear in mind that there are people pretty high up in the financial world who are convinced we’re in a secular bull market.

Check the chart below and read more about that here.

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Thom Benny
@The_Benchmark_
This chart shows the 1950 and 1980 secular bull markets with the 2013 (current) one overlaid:
10:0 PM • Aug 5, 2024
0
Retweets
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That’s enough heavy charts and quotes for this week.

I’ll leave you with one of the more insightful pieces of coverage I saw about last week’s short-lived (for now) market bloodbath, from satire news website The Betoota Advocate:

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The story is meant in jest, of course. But make no mistake, the stock market has a lot of people on edge right now.

As always, only time will tell whether the bulls or bears are correct this time around.

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy reading.

If one of our dear readers forwarded this to you, welcome.

Until next week!

Invest in knowledge,

Thom
Editor, The Benchmark

P.S. join me over on X where I post daily about the stories in The Benchmark, plus breaking financial news and events (click below):

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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.

August 5, 2024

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Google: 1998 — 202?

Dear Reader,

Alphabet is undisputedly one of the biggest and most influential businesses on the planet. For now, at least.

The holding company controls a group of tech firms that turn over $300 billion a year — about as much as the Finnish or Portuguese economies, and a fair chunk more than New Zealand’s, where I’m from.

Chief among Alphabet’s subsidiaries, of course, is Google.

Google has dominated the internet search landscape since the turn of the millennium and — for now — controls about 90% of the market.

Alphabet’s campus (source)

I say ‘for now’ because, like all stati quo, Google’s dominance is under threat.

This week’s edition of The Benchmark takes a look at the tectonic shift threatening Google’s place at the top of the tech pecking order.

Because now that the initial hype around artificial intelligence has receded, the reality of this new technology’s deep, permanent disruptive potential is dawning on big tech.

‘Senator, we run ads.’

To understand how Google attained its omnipresence, you have to understand its business model.

When you understand Google’s business model, you can understand why analysts think the company could be in trouble.

In 2018, this happened:

​Source​

Meta Platforms (née Facebook) founder Mark Zuckerberg (pictured above, smiling smugly) answered 84-year old Utah senator, Orrin G. Hatch’s question ‘how do you sustain a business model in which users don’t pay for your service?’ with the now infamous ‘senator, we run ads’.

The Facebook platform, of course, isn’t really free. Nor is Google’s search service. Or its email service. Or its mobile app store. The list goes on.

Alphabet makes about 77% of its money from advertising.

The model is to provide massively useful things to massive amounts of consumers for free, and then capitalize on this critical attention mass by selling it to business customers.

Google’s 90% of the search market equals 90% of the search advertising market. And, again, this dominance accounts for 77% of the parent company’s revenue.

Zooming out, Statista estimates that Google owns about 39% of the total global advertising market.

How long will that last?

The search wars begin

Large language model, or LLM, AI hit the mass market in the form of ChatGPT in November 2022.

Today, you have ChatGPT, Claude, Gemini (owned by Google, it’s worth noting), Perplexity, Bing AI, and more by the day.

And of course AI is hardly limited to chatbot form — it’s transforming pretty much every market and industry.

But where the AI revolution poses a problem for Google’s business is that LLMs mean people no longer need to manually use a search engine.

Hence headlines such as these:

​Source​

​Source​

Why sift through a search engine result page, clicking links and visiting pages to find what you’re looking for (viewing several paid ad placements while you do so)…

When you can get an LLM like ChatGPT to do that ‘manual search labour’ for you, and serve you the exact answer you want in seconds?

One of the signals that Google had prevailed in the early 2000s search engine race, was the company’s name became a byword for searching.

You don’t ‘search’ for something. You ‘Google’ it.

The same thing is happening with AI.

If you’ve not heard it already, it won’t be long before you hear someone tell you they ‘ChatGPT’d it’.

And Google’s search market and advertising market share isn’t just under threat from other companies and their AI tools.

It has, naturally, been forced to join the AI race itself, with its ChatGPT competitor, Gemini.

Which means that one part of Google’s business could soon threaten the part that’s made them one of the biggest companies on the planet over the past 25 years.

And it’s not just Google under threat.

Stack overflow, a tech forum, had its search traffic cut in half once its users realized there was a faster, more direct way to find what they needed:

​Source​

What does the market think of this?

AI sends investors hunting for small-caps

AI, as you probably know, has played a huge role in the so-called Magnificent Seven’s (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla) massive run-up over the past few years.

Take a look:

​Source​

Tech stocks well and truly took the share of the market’s gains.

​NVIDIA even grew to be the eighth biggest country in the world.

Now, it seems, the market is rebalancing a little.

In part, this looks to be about investors feeling that the mania surrounding AI has sent some of these tech giants a little too high.

But also, per the Bloomberg headline below, it seems that AI is creating even more exciting disruptive opportunities at the other end of the market.

​Source​

According to Axios, the Russell 2000 small-cap index spiked by more than 11% over just five trading sessions. The S&P 500 information technology sector sank 8%.

And, small-cap stocks remain well below their 2021 highs.

But the big tech stocks have made new highs for many months, almost forming their own market.

Watch this rotating, evolving, potentially status-quo shattering, space.

Quote of the week

‘Innovation accelerates and compounds. Each point in front of you is bigger than anything that ever happened.‘

— Marc Andreessen

That’s it for The Benchmark this week.

Forward this to someone who’d enjoy reading.

If one of our dear readers forwarded this to you, welcome.

Until next week!

Thom
​The Benchmark

P.S. join me on X where I post daily investing insights and breaking financial news (click the banner below) ↴

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All information contained in The Benchmark and on navexa.io is for education and informational purposes only. It is not intended as a substitute for professional financial or tax advice. The Benchmark and any contributors to The Benchmark are not financial professionals, and are not aware of your personal financial circumstances.