Can Turtles Fly?

Sunday Spectacle CXCVI

2013-03-04T19:14:00.001-05:00

Submarine Cable Map 2013

If you are interested in seeing how Internet traffic flows, check it out.

Click on image for larger picture; very high resolution of map available from source here. You can also purchase a map from the source.

(source: Submarine Cable Map 2013 by TeleGeography. Original mention by Fast Company FastCo Design)

Higher Education Losing its Value? Or Too Many Scientists?

2013-02-26T22:04:00.001-05:00

Writing for The Atlantic, Jordan Weissmann touches on a sad—kind of scary—situation facing PhD graduates:

First, the big picture. Here is the entire market for Ph.D.'s, including those graduating from humanities, science, education, and other programs. The blue line tracks students who have a job waiting for them after graduation. The green line tracks those signed up for a post-doctorate study program. The red line stands for the jobless (though a sliver of them are heading to another academic program).

The pattern reaching back to 2001 is clear -- fewer jobs, more unemployment, and more post-doc work -- especially in the sciences. A post doc essentially translates into toiling as a low-paid lab hand (emphasis on low-paid). Once it was just a one or two year rite of passage where budding scientists honed their research skills. Now it can stretch on for half a decade .

As the article makes clear, the charts aren't perfect and there are a lot of assumptions that went into the chart. Nevertheless, if we assume it paints a picture somewhat close to reality, it illustrates a potentially new trend.

The described situation—PhDs not getting jobs—is kind of sad for those pursuing higher education. Once upon a time, only some soft areas like humanities and arts graduates had difficulties finding jobs but now it looks like science and engineering is facing the same problem.

It's not clear to me if employers are starting to discount higher education (possibly due to too many degree-holders, who are not as skilled as several decades ago)... or if it is due to a skills mismatch (America graduating too many scientists). Leave your thoughts.

The Disastrous Outsourcing of the 787

2013-02-20T22:25:00.001-05:00

source: Boeing

The Boeing 787 Dreamliner is a technological marvel. It’s built largely of carbon-fibre composites rather than aluminum, which makes it significantly lighter than other planes. Its braking, pressurization, and air-conditioning systems are run not by hydraulics but by electricity from lithium-ion batteries. It uses twenty per cent less fuel than its peers, and so is cheaper to run, yet it also manages to have higher ceilings and larger windows. It is, in other words, one of the coolest planes in the air. Or, rather, on the ground: regulators around the world have grounded all fifty Dreamliners... The Dreamliner was supposed to become famous for its revolutionary design. Instead, it’s become an object lesson in how not to build an airplane.

— James Surowiecki, "Requiem for a Dreamliner?"

Don't have much time to comment on this but it appears that the outsourcing trend is probably near its end. Like all management concepts, outsourcing tactics over the last decade generated a lot of wealth and made companies more efficient, but it has resulted in some disastrous outcomes. The textbook example presently is Boeing and its 787 airplane; I am sure there will be even worse examples to come.

The following diagram illustrates the various suppliers of the 787:

It's still not clear if outsourcing may be the entire cause of the 787's problems but one can't deny that it played a major role.

The Economist once touched on the reasons for outsourcing:

But the business logic behind outsourcing remains compelling, so long as it is done right. Many tasks are peripheral to a firm's core business and can be done better and more cheaply by specialists. Cleaning is an obvious example; many back-office jobs also fit the bill. Outsourcing firms offer labour arbitrage, using cheap Indians to enter data rather than expensive Swedes. They can offer economies of scale, too.

Having said that, as is often the case for those trying to implement something well past its shelf life—Six Sigma approach in the early 2000s comes to mind—the incremental benefit of outsourcing appears to be declining significantly. It's difficult to say what went wrong with Boeing but James Surowiecki appears to suggest that Boeing outsourced itself out of its core business:

Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty “strategic partners.” Boeing itself ended up building less than forty per cent of the plane.

This strategy was trumpeted as a reinvention of manufacturing. But while the finance guys loved it—since it meant that Boeing had to put up less money—it was a huge headache for the engineers. In a fascinating study of the process, two U.C.L.A. researchers, Christopher Tang and Joshua Zimmerman, show how challenging it was for Boeing to work with fifty different partners. The more complex a supply chain, the more chances there are for something to go wrong, and Boeing had far less control than it would have if more of the operation had been in-house. Delays became endemic, and, instead of costing less, the project went billions over budget. In 2011, Jim Albaugh, who took over the program in 2009, said, “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home.” And the missed deadlines created other issues. Determined to get the Dreamliners to customers quickly, Boeing built many of them while still waiting for the F.A.A. to certify the plane to fly; then it had to go back and retrofit the planes in line with the F.A.A.’s requirements. “If the saying is check twice and build once, this was more like build twice and check once,” Aboulafia said to me.

The situation at Boeing isn't as bad as it could be. It is essentially an oligopoly, along with Airbus, in the large passenger aircraft market (as well as in some military aerospace markets) and hence will survive through turbulence. But I suspect it will be a different organization after all this is said and done: it may actually may end up building more than 50% of a plane by itself!

Warren Buffett's Heinz Acquisition

2013-02-15T22:08:00.001-05:00

Sorry about the lack of posts but have been busy the last few months—in fact, more like the last 2 years—but hope to be more involved in the future. Another reason I have been sort of out of the market is because I find it expensive and don't really see any great opportunities.

Anyway, just saw that Warren Buffett participated with private equity group, 3G, in the acquisition of Heinz (HNZ), and thought I would post my quick thought. As most of you may know, Heinz is famous for ketchup and various food products.

Similar to the railroad, Burlington Northern Santa Fe, that Warren Buffett acquired a few years ago, this deal to participate in the Heinz buyout looks expensive (the verdict is still out on the Burlington Northern Santa Fe investment). This Fortune opinion piece sort of has similar feelings. My opinion is that Buffett is running out of good opportunities and is willing to seek out slightly-above-average opportunities given the super-low interest-rate environment.

The deal is valuing Heinz at around 20x P/E for a low-growth, albeit very stable, business. However, Buffett is only putting up a portion of the funding in return for preferred shares yielding 9%, and a sizeable chunk that is owned by the 3G private equity group is going to be funded via debt. So, leverage is going to boost the returns for the buyout group, with all the debt risk being held by the 3G private equity group while Buffett only owns preferred and common shares.

From a risk point of view, this is a great deal for Buffett. Overall, this will produce above-average return but nowhere near superinvestor returns he had in his younger days. The investment likely yield 1% to 2% above S&P 500 in the long run and that is kind of Buffett's goal (he has alluded to this in his shareholder letters). Obviously, newbie and amateur investors trying to earn returns like 'Buffett Prime' won't learn much from this deal.

Sunday Spectacle CXCV

2012-12-12T22:21:00.000-05:00

Corruption Throughout the World

source: 2012 Corruption Perceptions Index, Transparency International

Sunday Spectacle CXCIV

2012-12-03T00:54:00.000-05:00

Is College/University Still Worth It?

(source: "Not what it used to be," The Economist. December 1, 2012)

Sunday Spectacle CXCIII

2012-11-25T12:18:00.002-05:00

Life

Sorry about the lack up of posts over the last few months. Life had been kind of (crazily) busy. I married recently so the wedding took a lot of time with preparations; and then took a honeymoon trip to South-East Asia (Cambodia, Laos, Vietnam), which was my first major vacation in a few years. I should be settling in to regular rhythm soon and hope to get back to focusing on investing soon :)

Painting: "The Tree of Life, Stoclet Frieze" by Gustav Klimt, 1909

Sunday Spectacle CXCII

2012-09-26T00:54:00.000-04:00

Dynamic Pricing of Goods

(source: "Coming Soon: Toilet Paper Priced Like Airline Tickets," by Julia Angwin and Dana Mattioli, The Wall Street Journal. Infographic. Sept 12, 2012)

Sunday Spectacle CXCI

2012-09-18T23:00:00.000-04:00

Very-Long-Term Silver Price Performance

(source: Charts R Us. Direct link to image here. Original source unknown.)

Sunday Spectacle CXC

2012-09-03T02:06:00.000-04:00

S&P 500 Sector Changes Over Two Decades

The following table and chart from Bespoke Investment Group from January of this year illustrate how the S&P 500 sectors have changed over the last 20+ years. Although the stock market isn't directly correlated with the economy, it does largely reflect the economy. The biggest increases have been in the technology, financial services, and energy sectors and one just needs to think about the number of people employed in those areas compared to what they remember from 1990; in contrast, materials, utilities, and telecom have shrunk and what used to be big employers in the 80's and 90's, such as telecoms, are now shedding jobs.

(source: "S&P 500 Historical Sector Weightings" by Bespoke Investment Group. Published Tuesday, January 17, 2012 at 10:27AM. Downloaded September 3, 2012.)

Sunday Spectacle CLXXXX

2012-08-28T14:02:00.004-04:00

The Longevity of Various Media

(click here for link to original, larger, image)

(source: "The Lifespan of Storage Media" by CrashPlan.com. Downloaded August 28, 2012. Originally mentioned by Cool Infographics)

Sunday Spectacle CLXXXIX

2012-08-23T23:42:00.000-04:00

A bit late, oh well...

The Changing Media Landscape in USA

(source: "Wordy goods," Daily Chart, The Economist. Aug 22nd 2012, 14:07)

Sunday Spectacle CLXXXVIII

2012-08-13T02:38:00.000-04:00

When Humans Were a Commodity

Image of Brookes, a British slave ship:

(source: "An American Time Capsule: Three Centuries of Broadsides and Other Printed Ephemera," Stowage of the British slave ship "Brookes" under the regulated slave trade act of 1788. [n. p. n. d.]. -- Piece 1 of 1. Library of Congress. Downloaded August 13, 2012. Original mention by Fastcodesign Infographic of the Day.)

Sunday Spectacle CLXXXVII

2012-08-06T04:21:00.000-04:00

NASA's Curiosity Rover Lands on Mars

(source: NASA rover lands on Mars, August 6, 2012)

Facebook Hits Attractive Valuation... If You Believe In Its Core Business

2012-08-04T02:50:00.001-04:00

Been busy with some important personal matters but I do keep tabs on the markets. It's hard to believe how the Facebook story has played out.

When I took a deep look at Facebook and social networks, I never imagined Facebook (FB) would fall so quickly without any major economic crisis or stock market crash. IPOs are often poor investments but large initial issues tend to be more efficiently priced so it's somewhat surprising to see investors bail—even before we hit the expiry of the lock-up period for insiders.

If you believe in Facebook's business model—that's a big 'if' for some—the stock appears to be entering attractive valuations. The following summary from Yahoo! Finance, whose numbers aren't always accurate, compares Facebook to Google.

Facebook Isn't That Expensive

I don't like doing relative valuation comparison (it can be misleading and I'm more of an absolute return investor) but I'm going to do it here and compare Facebook to Google.

I don't think Facebook and Google can be compared directly due to differing business models—for instance, Google is more vulnerable to Internet disruption by mobile devices, whereas Facebook has problems monetizing its users—but this is the best comparison I can come up with for now. Google is more mature and much larger so its growth will be more constrained than what Facebook faces.

Facebook has depressed earnings (partly because Facebook hasn't figured out how to monetize its users fully, and partly because the company is reinvesting heavily to expand its business) so a lot of its earnings-focused metrics cannot be relied upon. This is also one reason I suspect the Street has sold off the stock. If you just look at earnings, EBITDA, or FCF, the company looks wildly overvalued. Most of the buyers of the stock are likely growth investors, and such investors have historically bailed whenever earnings growth isn't obvious.

I think the best measure to look at is sales, which cleanly indicates how much money the company is able to earn from its customers. We don't have enough of a history but so far, sales have continuously increased, with trailing 12 month figure surpassing $4 billion. Facebook has around 800 million users (official number is a hundread million higher but some of the accounts aren't real accounts i.e. fake, duplicates, etc) so Facebook is generating around $5/user. A lot of the users are from poor, low-income, countries so Facebook is never going to earn as much as some developed-country-focused online businesses; but nevertheless, this figure should go up once Facebook convinces advertisers of the high-value proposition its platform offers.

Assuming Yahoo! Finance numbers are accurate, Facebook is trading at a Price-to-Sales value of around 8.7 whereas Google is at 4.8. Although some think Facebook is wildly overvalued, it isn't that overvalued on a sales basis compared to Google. If Facebook just doubles its revenue, which isn't that difficult for such a big company generating only $4 billion in sales, it will be at similar P/S valuation as Google. This isn't going to happen magically but I believe it is within reach.

On an enterprise value basis, Facebook is also not that expensive if you believe it can double its revenue in the near future. Enterprise-value/Revenue of Google is around 4 versus 6.5 for Facebook, or about 50% higher. I don't usually pay attention to enterprise value but it is important here because Facebook has sizeable cash (with no debt) on its balance sheet.

What May be a Reasonable P/S Metric?

One can never be sure what the future revenue will look like but what may be a reasonable P/S valuation?

Geoff Gannon (@GeoffGannon) had some thoughts on Facebook a while ago and his feeling was that Facebook may warrant a P/S of 5 (as usual, bolds in the quote are by me):

Let’s think about that $100 billion IPO price.

If Facebook ever had 5% of worldwide advertising spending it would justify the $100 billion IPO valuation.

As a no-growth business Facebook should trade around five times revenue.

Look at the company’s operating margins. In 2011, Facebook had revenue of $3.71 billion and operating income of $1.76 billion. That’s a 47% operating margin. At a 35% tax rate, that would put net margins around 30%. It’s pointless to talk about free cash flow right now because of Facebook’s rapid growth. But the owner earnings picture at Facebook is probably in line with something like Moody’s (MCO).

Basically every $1 of revenue turns into about 30 cents of after-tax cash. Divide that 30 cents of owner earnings by 5 and you get 6 cents. A free cash flow yield of 6% would not be odd for a big public company. Basically, that’s a P/E of 15. So that’s why I say Facebook would be worth five times revenue without adding any growth premium. (Of course an advertising supported media business with a wide moat should be able to manage 5% to 6% growth in nominal terms – basically it should match GDP over time.)

Every 1% of global advertising spending is $5 billion. So, with an enterprise value of five times revenue, a company with a 1% share of global advertising would be valued at $25 billion. This is only true if you have Facebook’s economics. Outside of local media (most of which is decaying), very few companies have anything like Facebook’s economics. Revenue is worth a lot less to them. I don’t want you to think five times revenue is the right value for all media companies – it’s not.

Facebook doesn’t really need working capital. And won’t use debt (media companies don’t need debt – they usually just use it when they buy each other up). So, that’s basically $25 billion in market cap per 1% share of the worldwide ad market you think Facebook will have.

For reference, the worldwide advertising market in 2010, according to GroupM is estimated to be around $490 billion (US market is around $143 billion out of that). Given how Facebook is truly a global business, I think it is reasonable to assume that it will get a piece of the global advertising market.

I agree with Gannon's estimates: 5x sales for a no growth business with high margins seems reasonable.

Final Word for Now

Facebook is trading at P/S of around 8.7 and EV/Revenue of around 6.5. I think it has hit attractive valuations. If it falls a bit more, it will definitely pique my interest. Beyond the valuation, investors need to believe in Facebook's core business. I understand how powerful the company's business is—the moat is truly massive—but I'm still thinking about how their business may evolve as mobile becomes more dominant.

Sunday Spectacle CLXXXVI

2012-07-29T12:56:00.000-04:00

Olympics & its Benefits

(source: "Is Hosting The Olympics Good For A City?" Original by Information Builders. Downloaded via Visual Loop on Pinterest.)

Sunday Spectacle CLXXXV

2012-07-22T05:29:00.004-04:00

(source: "Graphic: The richest teams in the world," by Jonathon Rivait, National Post. Jul 21, 2012 – 2:06 AM ET | Last Updated: Jul 21, 2012 2:16 AM ET)

Sunday Spectacle CLXXXIV

2012-07-16T23:53:00.003-04:00

USA's Electricity Grid

(simulated view)

(source: "The art of GPS: Secret corpse flights, pizza boy delivery routes and the daily commute revealed in never-before-seen side of America" by Lee Moran. Mail Online. PUBLISHED: 10:22 GMT, 19 June 2012 | UPDATED: 20:17 GMT, 19 June 2012. Original source: America Revealed)

Sunday Spectacle CLXXXIII

2012-07-08T03:11:00.000-04:00

Large Hedge Funds with

Good Long-Term Performance

This chart isn't very useful since it doesn't show return in percentage-terms (the bar chart shows dollar gains). Nevertheless, I thought it was worth seeing how large funds are behaving.

(source: "The Oracle of Boston," The Economist. July 7, 2012)

Sunday Spectacle CLXXXII

2012-07-01T03:00:00.000-04:00

How Educated is the World?

Education vs Age in the Modern World

Competitiveness of countries, and their standard of living, has historically been driven by education. This relationship may not be as strong in the future—my view is that higher education isn't as big of a distinguishing factor as it was in the past—but very-low education still prevents certain countries from competing on the world market.

The chart below from McKinsey Global Institute shows education vs age for key countries. It is obvious that the higher-educated countries are older. It's not clear to me if this is due to lower-educated populations having lower lifespans and/or having more kids. Those scoring low on the education scale are, as expected, poorer as well.

(click for larger image)

(source: "The world at work: Jobs, pay, and skills for 3.5 billion people," McKinsey Global Institute. June 2012)

Jim Chanos' Bearish Views on Some Value Traps

2012-06-29T22:34:00.001-04:00

I ran across the following presentation by Jim Chanos and thought you will find it insightful. Even if you aren't into short-selling—I am not—it is useful to see what sort of investments you may want to avoid. Value investors tend to ignore macro views but those who are more influenced by macro may want to pay attention to bearish views of any investments they are considering.

Back in May, Chanos gave this brief interview to Bloomberg briefly mentioning the topics covered in the presentation.

The presentation covers Chanos' bearish thoughts on what he feels are some characteristics of value traps. He goes on to list several investments that he views as value traps. Here are two summary slides from the presentation.

I share most of Jim Chanos' views and think investors should be careful with the areas he identified. For instance, I do think traditional PC manufacturers could lose big—he is bearish on HP—as tablets and mobile computing replaces PCs. Even companies like Microsoft could come under threat (he doesn't identify this).

He maintains his longer-term bearish view of some segments in the commodity complex, such as coal and iron ore miners. He is bearish on coal because natural gas, particularly from cheap shale gas, is replacing thermal coal in electricity-generating power plants. As for iron ore, it's a bearish bet stemming from a potential Chinese slowdown.

However, I'm not too sure about his short thesis for digital distribution. It could take a long time for companies like Coinstar, which owns Redbox, to materially suffer. For instance, even with digital e-books taking off, physical books are still selling reasonably well. Anyone betting on a collapse of the physical book market has been wrong so far (even though book sellers like Barnes & Noble and Borders have suffered).

The following presentation details his views:

VALUExVail 2012 - James Chanos

Thanks to GuruFocus for bringing the presentation to my attention.

Sunday Spectacle CLXXXI

2012-06-24T13:39:00.000-04:00

The Exponential Growth in Photos

Oldest Photo of a Person

Boulevard du Temple by Daguerre, Paris, France (circa 1838)

(source: Scanned from The Photography Book, Phaidon Press, London, 1997. Downloaded from Wikipedia Commons on June 24, 2012)

Growth in Photos

(source: "How many photos have ever been taken?" By Jonathan Good, 1000memories blog, September 15, 2011.)

Largest Photo Libraries

(source: "How many photos have ever been taken?" By Jonathan Good, 1000memories blog, September 15, 2011.)

Sunday Spectacle CLXXX

2012-06-20T20:23:00.002-04:00

A few days late but oh well... Great graphic by Asymco on the evolution of the computer industry...

Evolution of the Computer Industry

(source: "The evolution of the computing value chain," by Horace Deidu, Asymco. June 19 2012)

Sunday Spectacle CLXXIX

2012-06-10T03:53:00.001-04:00

Stock Buybacks & Dividends
1988 to 2010

Dividend payouts have not increased much over the 20+ years while buybacks have increased significantly. During the bubbly peak in 2007, more than $500 billion worth of shares were bought back—ironically at really high stock prices!!—whereas dividend payouts hit a little over $200 billion. Senior management and financial executives have no clue what they are doing when it comes to buying back shares (their buying is highly correlated with stock prices, which is not what you want).

Note that the figures are in millions i.e. In 1988, dividends of $100 billion were paid out while $50 billion worth of shares were bought back.

(I wrote a post on dividend payouts back in 2009 and some of you may be interested in that post as well.)

(click on image for larger one; quality isn't great)

(source: "Value Investing: Investing for Grown Ups?" by Aswath Damodaran, Stern School of Business, New York University. April 2012.

Electronic copy available at: http://ssrn.com/abstract=2042657)

Sunday Spectacle CLXXVIII

2012-06-03T06:32:00.000-04:00

A Look at
Unemployment in America
by Sector

You can get a feel for employment patterns in various industries in the following infographic. As always, keep in mind that some sectors, like manufacturing, are very large, so a 1% change has a bigger impact on GDP than, say, leisure and hospitality.

Some key points that stick out for me include:

Manufacturing was underperforming even before the recession (250,000+ job losses in 2004 and 2005, which were boom years. We are basically witnessing a secular decline in manufacturing in USA (and Canada too).)
Construction got hit hard during the recession (obviously driven by the real estate bust)
Government sector is starting to post job losses during the recovery over the last couple of years (this is likely due to government spending cuts)

(click on image for larger pic)

(source: "Rising UNemployment," Glassman Infographic. Design by Elefint. Downloaded from Fast Company, post dated May 23 2012.)