It’s been a few weeks since the last post. I’ve been following multiple threads simultaneously and have a number of thoughts in the queue, which hopefully should be released over the next few weeks. In addition, my wife and I are moving back to California in early December and have been busy wrapping up our work here in Bangalore.
A brief commercial break – I’m currently seeking employment opportunities in the investments field in southern California.
For now, here is a brief summary of what I’ve been working on.
- Cox and Kings: I mentioned in a previous post that I have been researching the tourism sector in India. The simple thesis is India has severely lagged the rest of the world in terms of per capita consumption of travel and is due to catch up over the coming decade. Last year, India accounted for only 17 million of 1 billion international tourist arrivals worldwide despite generating ~7% of the world’s GDP (on a PPP basis). There are only three tour operators of meaningful size in India, of which Cox and Kings is the largest. Although seemingly commodity in nature, I believe there are structural reasons why large winners are emerging in the industry. Cox and Kings’ stellar margins and returns on capital indicate strong competitive positioning and protective barriers. I have a favorable view of management as it has focused acquisitions on improving the customer experience and expanding into adjacent areas. Moreover, the metric management speaks the most of is return on equity. Today, you can buy fractional ownership in a business which should generate high teens ROE and grow owner earnings at 15% for the next 5-7 years, for ~10x earnings. I’m writing up a report which I will publish when complete. I am in the process of building a concentrated position.
- Bitcoin: I started studying Bitcoin in earnest a few weeks ago after watching some interviews of venture capitalists I follow. Bitcoin isn’t easy to understand, particularly for those without a strong background in math and computer science. I read a book, read articles, watched instructional videos, and discussed with some friends who are engineers. I still probably understand only 25% of what there is to know, but I know enough to appreciate the genius of the technology and its disruptive potential. Bitcoin is the first currency in history with a decentralized ledger. A decentralized ledger provides unparalleled security and eliminates practically all the royalties on money we pay daily on transactions – international remittances are a prime area for disruption. Bitcoin is also infinitely divisible and could facilitate a micro-payments economy which would see whole new business models emerge. Imagine if we could consume media for fractions of a penny, or pay micro sums for the right to send e-mail. These models could save publishing, journalism, and music, and fully eliminate spam. Bitcoin has a number of other advantages, including low inflation risk, low political risk, simplicity (transactions can be conducted via mobile phone), transportability, and anonymity. Bitcoin offers freedom from any one government, bank, or payment processor which today are all monopoly like entities. The blockchain – the underlying technology which maintains the ledger and clears transactions – has served the Bitcoin network for nearly five years without a single reported case of fraud. Bitcoin as a technology still faces a number of roadblocks to widespread adoption, but so did the Internet in the early 1990s.
- Solar: I bought a small stake in SolarCity to force my thinking on the solar industry. I’ve done a fair amount of research on rooftop solar over the past year and believe it has enormous potential. What I am not clear about is whether permanent winners will emerge. There are three critical questions to answer: (i) can solar achieve grid parity without government subsidies and low interest rates, (ii) how will utilities charge consumers to utilize the grid for energy export and power backup, and (iii) where in the chain will value be created and can real winners emerge. The problem with large markets is that it invites sufficient competition to drive returns down to the industry’s total cost of capital. SolarCity pioneered the leasing model which made distributed solar popular and through sheer execution has raced out to a large lead in the market. But, the market is catching fire and now there are a number of companies playing somewhere in the solar value chain. SCTY currently enjoys advantages in cost, financing options, market reach, brand recognition, a large referral base, and experience/best practices. The key advantage is cost and it’s unclear whether SCTY can maintain cost leadership for a long period of time. It’s an iterative function – cost depends on scale and scale depends largely on cost. As the industry grows, utilities and large financial institutions may enter. Utilities, due to size, will have an immediate advantage in cost of capital and marketing. NRG, with 3 million retail customers, will be a good case study as it is getting into distributed solar in a big way. SCTY has vertically integrated to drive down cost and provide a seamless customer experience, but it’s still not clear whether owning panel manufacturing will lead to sustainable cost benefits given the scale of overseas suppliers. I am digging into the cost dynamics at a very micro level. Nevertheless, if the world had to achieve 40% penetration of solar by 2040, it would require 400 GW of solar deployment per year for the next 25 years. Currently, SCTY has deployed less than 1 GW of total solar cumulatively since inception. There’s a potential exponential function here which is worth exploring.
Books I’ve recently read include Into The Plex – Steven Levy, How Google Works – Eric Schmidt, Mastering Bitcoin – Andreas Antonopoulos, The Second Machine Age – Erik Brynjolfsson, Jab, Jab, Jab, Right Hook – Gary Vaynerchuk, and Tap Dancing to Work – Carol Loomis. The Second Machine Age is perhaps the best economics book I’ve ever read. The authors propose that economic growth is driven primarily by one variable – productivity growth. Productivity is defined as output per capita. The way to achieve greater amounts of output per capita is through innovation – technical or process related breakthroughs which allow humans to produce more without additional labor. And innovation is a rare phenomenon typically achieved by a tiny fraction of the human population.
Achieving growth in real per capita GDP has always involved combining ideas with capital and labor to increase productivity. In history, the nations best able to foster this combination are the ones which created the highest standards of living for its citizens. For this reason, it’s better to look at how a country is enabling and incentivizing its innovators when evaluating economic conditions. Are the brightest students going abroad or staying in country? Are students encouraged to learn and think creatively or are they forced to memorize concepts? Does immigration policy allow bright individuals to obtain citizenship and contribute economically? Are contracts and property rights honored? Culturally, are individuals encouraged to pursue their ideas and will society welcome them back if they fail? Are industries protected due to strong political tie-ups and crony capitalism or is there a free market in which disruptive ideas can win? These are the key factors which seed future economic growth. Economic measures such as interest rates, inflation, unemployment, trade balance, etc., are mostly a byproduct of these cultural and political factors.