No.30: ROI on Humour, Inflation Continued, In-Housing Silicon Part 2
ROI on Humour
As a "value" fanboy, watching Mohnish Pabrai videos is always good fun. In this latest one he talks about the Tencent business model.
It dawned on me why I enjoy these videos. It's not necessarily that they’re full of the greatest investment wisdom - but more that Mohnish Pabrai has an incredible sense of humour. Then I thought about all the good results I've seen people achieve (including my own). A lot of good things come to funny people. In my own experience I attribute a huge amount to luck, but also an equally large amount to being able to make people laugh and lighten the mood.
Donald Trump actually studied comic timing and stand-up comedians, as he explained in his seminal "Art of the Deal". In addition, an an old boss of mine could warm up to people and clinch mega deals with his ability to entertain.
In Mohnish's case, I wonder what his ROI on humour has been. There are so many non-funny investment managers out there - and I've got the feeling that if 5 managers pitch an investor for cash, the investor is probably going to choose the more charismatic or entertaining one, regardless of track record (which can bemisleading anyway if they are only a few years long). Additionally, how many sales calls did he clinch because of humour in his early entrepreneurship days? And how many great connections does he have because people find conversations with him hilarious?
It's hard to tell, but I think having humour can be just as valuable as being a good stock-picker - since more than half of the business involves talking to people and building a network.
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Inflation Continued
It seems that we really might be heading into a period where some inflation is structural. I don't think it was sustainable to run European supply chains on cheap Eastern European labour. Brexit highlighted that weak link in the chain, and now we're paying the price for underinvestment.
As I've detailed in past posts, this means higher inventory needs and higher SC costs for consumer goods companies to guarantee enough stock. This means lower ROIC for these companies (absent dramatic drops in raw material costs or pricing/mix changes).
If COVID persists there will be rising healthcare costs combined with worse outcomes vs. the same dollar spent pre-COVID. Combined with production disruptions (caused by employees either sick or in touch with COVID), this could result in structural cost increase and quality reduction.
I went to a restaurant over the weekend and they served me a small bowl of fries for $5. There were quite literally 10 fries in the bowl. Therefore, it seems "shrink-flation" is on the rise, with companies reducing portion sizes while holding prices flat. My latest bowl of fries represented something like a 70% price increase.
Over the long term I'm optimistic that each sector of the economy will work towards efficiency. After all, if companies have a growing cost item, then efforts are put in place to control that cost or eliminate it. I therefore see a larger-than-ever case for widespread warehouse/handling automation. And if a restaurant entrepreneur can find a profitable way to serve me more than 10 fries for $5, I'll happily switch to the new competitor.
In-housing Silicon Part 2
This article is another example of Apple taking aim at pesky semiconductor oligopolies which take huge bites out of Apple's P&L.
For tech companies, semiconductor spend represents a large portion of capex - as we saw with the recent Facebook capex announcement, which basically means "We're writing a multi-billion dollar cheque to AMD".
The growth of foundries, such as TSMC, has made it easier for tech companies to design their own chips and get them contract-manufactured at scale - thereby reducing reliance on the existing oligopoly names such as Qualcomm, Intel, NVIDIA etc. The size of prize is well worth the investment in semi design capability as the existing semi oligopoly (Qualcomm, NVIDIA, Intel, AMD etc) extract tens of billions of dollars from the Big Tech consumer companies each year (Apple, Google, FB, Amazon etc.).
None of these large companies is going out of business any time soon. However, the major takeaway is that the competition in the semiconductor space is increasing because of Big Tech presence in the space.
We've seen an increase in semi in-housing in the last couple of years with Apple's M1 chip - reducing reliance on the traditional CPU, GPU and SoC players. Also with Google's TPU which apparently has saved billions of dollars that would have otherwise been paid to NVIDIA.
The only ones that can can make a business case out of in-housing are the large consumer tech names. After all, investing behind semi design capability probably costs in the hundreds of millions just to get the ball rolling - which means you have to have billions of annual semiconductor spend to enable large enough savings to justify the program.
In my view, this means there will be increased competition in the CPU/GPU/SoC space. However, demand for these chips exceeds supply so there's probably enough pie for everyone. The other theme is that consumer Big Tech will continue to win, as they can drive their COGS down below new entrants and unleash massive operating leverage through their own hardware investment programs.