This week’s reading/links:

Interview with Luis von Ahn: Founder of reCAPTCHA and Duolingo.

This is well worth a listen. Luis von Ahn is an associate professor of computer science at Carnegie Mellon. He was also one of the pioneers of crowdsourcing and used it in a unique way to build the business model for both his ventures. Take reCAPTCHA, for example – rather than charging companies for the authentication software, von Ahn gave away the product for free. This dramatically increased adoption and made reCAPTCHA the default authentication option for most websites.

In turn, he was able to leverage the work that millions of people were already doing every day (a few seconds of small word identification puzzles) and get them to digitize years worth of content across books, magazines and newspapers. He then charged for this service – for example, helping the New York Times to digitize all its back issues at US$42,000 per year of content. Because of the scale of the user base, he was able to digitize nearly 20 years worth of newspaper issues in just a few months. He eventually sold reCAPTCHA to Google, which used it to build their Google Books library and identify street names and addresses for Google Maps.

He then did the same thing with Duolingo – a language learning app where people can practice their skills by translating text phrases and sentences. The platform is free for the learner, but in using it they are helping to translate digital documents for content owners, which Duolingo monetizes by charging per translated word. The business model has since evolved and they are now looking at other ways to generate revenue (certification, testing, charging users in developed countries but keeping the product free in developing countries etc.). 

You can read more here (I’ve tried to summarize/paraphrase above).

Antipodes Partners: Could extreme market cap/performance concentration signal a turning point? There is also a link to their webinar on the stages and challenges of reopening, if you scroll to the bottom of the article.

Market breadth, or the % of stocks outperforming the index, has never been so low in the S&P 500. This pattern is not unique to the US market of course and, in their view, suggests there are potentially more growth traps (where you are paying too much for secular growth) than value traps in the market today. By contrast, cyclical sectors are priced at more than two standard deviations cheap versus the more obvious economically defensive or secular growth sectors.

The key is obviously identifying the attractively priced cyclical businesses with embedded growth opportunities that the market is currently overlooking. Easier said than done as we all know, but I think the broader point is those are perhaps the more promising areas to be looking for ideas, given how much investors are prioritizing safety and predictability in today’s market.

Platinum Asset Management have also written about this topic, see here for more.

Arisaig Quarterly: April 2020 edition.

This is a very good read, and it is perhaps even more interesting to think about their approach in the context of the trends described above. My own view, which of course no one has asked for, is that I would probably be more comfortable holding many of these high quality consumer companies if I had already owned them for many years and had bought in at attractive entry valuations (like Arisaig has), rather than buying them today and at current valuations.

Having said that, while it might be intuitively appealing to look at cyclical businesses today given the valuation divergence, there are also several challenges for investors: business and capital cycles can take many years to develop, you have to identify whether the capital cycle process in an industry is functioning properly (sometimes not so well given government and, increasingly, central bank intervention), there may be risks in going outside your circle of competence and, finally, you have to eventually think about reinvesting the capital once an idea or trade plays out (vs. holding a correctly identified compounder for the long-term). 

“Better days will come”: Swiss collector Uli Sigg on why even a less free Hong Kong remains the best home for his peerless Chinese art collection.

Interesting conversation with the world’s largest private collector of Chinese contemporary art (or at least he was prior to his donation to the M+ museum). He shares his perspective on awarding his collection to Hong Kong in the context of the new proposed national security law, the future of Chinese art and the unintended impact that growing anti-Asian sentiment could have on art.

Japanese gins become worldwide hits: Global boom in spirit has combined with national reputation for craft alcohol.

When my wife and I visited Kyoto last year on holiday, we tried several Japanese gins, including the Ki No Bi, and they were all excellent. That’s about the extent of my expertise on the subject. But it has been interesting to observe this trend of premiumization within various spirit categories over the last few years and the Japanese have certainly been at the forefront of it in Asia.

I’ve had friends make small investments in independent premium spirit brands, but it is hard to pick the winners. The adjacent investment opportunities might be more prospective – for example, who is supplying the flavours and fragrances that go into these spirits? And also the mixers to go with them? As Fever-Tree were quick to recognize, if your drink is 25% gin and 75% tonic, you don’t want to be mixing an expensive gin with Schweppes.