What I learnt in May 2018

Grinding it Out by Ray Kroc 

• Read the truth vs the movie site as well.  
• Got a better understanding of how the franchise system started and how the alignment drives the entrepreneurial spirit.  The system is amazing in it's scalability and consistency.  
• He didn't like conflict in his biz like he won't be part of the supply chain to his franchisee (cf Tim Hortons).  That's admirable and smart in the long run.  
• Speed (service) and value is something that will never change.  McDonald is a disruption in it's era where they deliver good value in a speedy way (service).  JD/Amazon all stressing delivery speed these days.  Fast fashion, Funko, Nike, all the new biz models stress speed as an element.  What doesn't change?  Speed, service and value!  
• Ray Kroc's obsessiveness in work cost him his relationship (first wife and daughter).  But happiness is defined as achievement.  He worked till he dropped.  

Antifragile

• interesting book and planted the idea of looking at companies with an Antifragile element.  BRK is one of those, it thrives in volataily and distress.  In a sense, any companie that has the balance sheet and mindset to expand in bad time is Antifragile.  Companies with Antifragile capability is like a hedge, a hedge against bad time.  The opposite is also true, buying companies that are a function of the market or with reflexivity is dangerous, ie brokers, banks and insurance companies as they're usually the first victim in a market downturn - aka fragile
• key words/concept: TIME is a friend to the Antifragile and has sharp teeth to the fragile; Jensen's Inequality; Convexity; Complex System (fragile); Large System (which are usually complex, hence generally fragile); Domain dependence; Path dependence; Asymmetric payoff; Optionality; Non-linearity; Lindy effect; Naive Intervention
• Talking about Naive Intervention, watching market has the same effect as visiting the doctor for non-critical illness.  Chances are that the doctor will prescribed some sort of medicine or procedure to "do something about it".  An example of that is blood pressure.  Sometimes you might encounter a high blood pressure measure.  Non-sophisticated doctor might prescribed high blood pressure medicine as a result, resulting in naive intervention.  The market, when watching frequently, is likely to induce some sort of action similar to the doctor prescribing medicine for non-critical illness.  
• Random element is a plus.  Investment process should incorporate enough randomness in it for it to be Antifragile.  The author uses the education system as an example.  You remember the book you've read by your own choosing, you don't remember any text book chosen by the curriculum
• Moderate stress is good to some extent.  Like our bone needs it.  Maybe a moderate amount of stress at work is also good??
• The individual component of an industry maybe locally fragile but the whole is Antifragile. An example of that is tech, biotech (new drug by a company may be made redundant, but the whole industry keeps moving forward) , etc.  hence for fast changing industry, perhaps it's better to invest by an aggregate mean than trying to outsmart with individual components.  Indexing is not a bad idea.
• Optionality helps with anti-fragility.  He argues that optionality is a hedge against ignorance.
• "The thing about tennis is not how good you play in a good game, but how you get yourself out in a bad game!"  it's all about how you carry yourself in bad times.  that's so true to everything in life, not just tennis.  And how you carry yourself in bad times means how Antifragile you are!

Capital Return

• Great book to remind me to look at the supply side in an industry rather then just the demand side.  Total addressable market (TAM) vs the total supply equation.  Watch out for the whole industry CapEx pattern/trend and don't invest when CapEx is unduly elevated (CapEx/Depreciation ratio is a good one to watch).  Asset growth (think china, and thanks to cheap money) at the company/industry level can be detrimental to real return.  Supply prospects are far less uncertain than Demand and should be the starting point in company/industry research.  it is supply that drives industry profitability.  Bank asset (and credit /loan) growth is also a good indicator
• Companies in industry with a supportive stable supply side justifies higher valuation.  Time to invest is when few players in an industry all exert "pricing discipline"
• This book reminds me of the allocation decision SwirePacific made regarding CapEx in buying more vessels at the peak of the oil cycle, and getting into big oil hedging contract at the same time.  Hence, i gave Merlin Swire (Chairman to-be) a copy of this book at the AGM

Others stuff worth mentioning:

A new way to look at the PE ratio.  Stephen taught me that.  PE, especially forecast PE, comprises of 2 elements, growth and certainty.  Within that, the term structure of growth and certainty is very important.  This helps me in understanding how people look at high PE names. It's because high PE means two things (1) high growth, or (2) high certainty, or (3) both.  A long run way is more important than high growth for a short period as it has less reinvestment risk.  I finally understand (i think) John Neff's Total Return = Dividend + Growth.  

The Huber article on inflation is also helping me in understanding why high ROE stocks make good compounders.  It's because the reinvestment is at book book value despite the initial investment is at high PB multiple.  

I studied Nike this month and think i understand pricing power a little better.  At least the pricing power in Nike vs CPG.  Buffett mentioned a bit about the tussle in channels for the CPG.  And how the eco system is the key to investing in Apple.  It's the consumer behaviour rather than tech.

The three investment criteria: 1) 10yr holding (desert island), 2) buying whole biz mindset. 3) Understanding the biz.  How does JD fit?

Eventful month with BRK AGM, Ning's dinner, Steven Shen (Oceanlink) dinner (see notes separately).