No.3: COVID was a warm-up round, Offline to Online 2nd Order Effects, Curing Public Sector Incompetence
Maria Konnikova’s most recent book about poker contained a surprising fact: based on a set of online poker data, the best hand only wins 12% of the time. This means that behavioral quirks drive most game results. This rule of thumb seems to apply everywhere.
As an amateur investor I know that even if I make a rational move, the market must agree with me and bid the stock price up. If this doesn’t happen in an acceptable timeframe then I get a bad result despite an otherwise correct decision. I am dependent upon the mercy of the other players in the game.
An 18-year old high school dropout can possess more intelligence and raw talent than an MBA – but unless they can convince employers of this, they will not be allowed to play the game. In my case I had more raw energy and business savvy when I was 18 than I did after my master’s degree, but it was hard to convince anyone of this at the time.
Though there is nothing to suggest that an MBA or MS itself is a sound financial decision (based on 2 years of lost income + fees paid), it is recognized as a signal of intellect and talent to employers, offering high salaries to graduates. MBAs also become part of exclusive alumni networks which allow the MBA to obtain friends in high places, facilitating better opportunities over time. In other words, MBAs or other business degrees get people tickets to play games with better outcomes because of a signaling effect at play.
It was the same when I used to watch tennis. When Roger Federer was in his prime, he won matches as soon as he stepped out onto the court and the crowd chanted his name. The other player had to play not only against Roger, but against a crowd who loved Roger. Not a fair fight – even if raw odds suggested that the other player had a shot at winning. Player psyche sometimes mattered more than the actual game at hand.
Mind games determine results more than we think.
COVID was a warm-up round
Recently I read an interesting book, Blockchain Chicken Farm, by Xiaowei Wang, who journeyed through China’s countryside and documented its rapid economic development. There were many interesting topics covered in the book, but one that stuck was the topic of industrial farming in China’s countryside.
According to the WHO, approximately 70% of viruses are zoonotic – that is they transfer between animals and humans. China’s rapid development is bringing about more meat consumption, and of this increased consumption around 70% is pork – according to Wang. China produces herds of pork to feed its growing affluent population through industrial farming. However, these new farms are subject to inconsistent and sometimes non-existent hygiene regulation by provincial governments. Dense breeding combined with lack of regulation creates a recipe for pig-to-human virus transmission.
If we add to this the effect of fresh meat markets in parts of China and the widespread habit of frequent international travel this means that further pandemics could be around the corner.
Climate change isn’t the only reason we should go vegetarian...
Offline to Online 2nd Order Effects
I found an E-commerce investment discussion in this Patrick O’Shaughnessy podcast with Fin-twit member Modest Proposal quite interesting.
Before COVID, E-commerce was an afterthought for most physical retailers around the world. The pandemic lockdowns forced major retailers to ramp up investment in their E-com capabilities and many brands invested more in their D2C capabilities to have direct customer relationships.
Overall investors reacted in two ways which ignored second-order effects of this transition.
1) They assumed that the business models of pure-play E-com businesses would strengthen and therefore applied much higher valuation multiples or earnings.
2) They assumed that customer acquisition costs and logistics would remain similar.
Customers may cost a lot more to acquire if every retailer goes online and starts offering discounts/perks to drive traffic. The impact on profitability might be dilutive as all retailers take the same amount off the price tag at once – or invest behind membership and repeat purchase plans at the same time. This means that even though incumbents like Amazon benefit immensely from the offline to online transition brought by COVID, it may not attract incremental customers as cheaply, all other things being equal.
The same goes for logistics. Retailers moving online have to re-design their warehousing and delivery network rather than just serving click-and-collect customers within their existing stores. Trucking, warehousing and distribution capacity can be built over time, but unless warehouse/DC construction and truck driver training increase faster than growth in e-commerce this may result in cost inflation for all D2C and e-commerce players, except those that have captive, unutilized capacity.
All considered, Amazon remains an awesome company and it would be foolish to count it out, given its dominant position in many different verticals. But for riding this offline to online wave, I am also looking at logistics companies, warehouse automation companies and other players that provide digital infrastructure to these new e-commerce players to ride the e-com wave. After all, I like being the guy selling pickaxes to miners during the gold rush.
Curing Public Sector Incompetence
An acquaintance of mine recently received a demand letter in Germany for 2020 tax that he didn’t owe. I was shocked to discover that the tax department had not only lost records of this person’s tax payment status, but also that they only maintained paper and fax records of information – no digital. When this person moved from one state to another, the old state tax department sent a physical ring binder of paper in the post to the new state, rather than putting it on a shared database.
How does a great country formerly famous for its administration get to such a pathetic state? What could potentially be done to rectify it? I believe part of the answer lies in incentives. I looked at Lee Kuan Yew of Singapore for the answer, and he mentioned in his book ‘From Third World to First’ about how Singaporeans in the public sector were paid on par with the private sector. Though this policy might have appeared to outsiders as an excuse to jack up politician pay, it attracted very good minds to public office which helped Singapore build first world management systems. Now, much like my homeland New Zealand, Singaporeans can file tax returns in a few minutes, rather than in Germany where you must fight to even receive your tax number within 6 months of application!
But understandably, behaving like Singapore is tough. A lot of governments are cash-strapped, and leaders waste most of their time raising cash and garnering public support rather than being able to think rationally about what is best for the country. And even if money becomes available to pay people well, citizens must value public service as a prestigious career option rather than the sexy private alternatives like Microsoft, Google and Amazon. As such I don’t see Germany’s administrative system being overhauled in the short term.