Microsoft vs Google : Strategy wars

With the launch of ChatGPT and open declaration of war on Google from Microsoft CEO Satya Nadella, we are living in one of the most exciting duels in most recent tech history. Lets analyze relative positioning and odds of who will come out on top in this epic Satya vs Sundar. Behind this lies a fascinating tale of the careers of these 2 Indian American executives who rose up the ranks to head these behemoths in Mountainview and Redmond.

Declaration of war

Microsoft has been making steady progress in the Deep Learning space through its investment in Open AI and the release of Dalle-2 and ChatGPT. While that is regular part of innovation and other companies like META has also been making steady progress in this field, Microsoft went a step ahead with product integration with Bing and open declaration of war. Here is what Satya said : 

Google is the 800 pound Gorilla in the room. This new Bing will make Google come out and want to show they can dance, and I want people to know that we made them dance

With that let us revisit how things go to here.

Google and its search monopoly

While Google is often credited for its technology, Google is able to retain its market share and monopoly in search due to its product strategy. The average user doesn't have much incentive to go and change the default search engine from settings. Google has successfully gated the entry points to search via Android OS for mobile, Chrome browser on desktops and by paying $20B to Apple for staying as the default search option on MacOS. No wonder Sundar Pichai (and not some engineer) became the CEO of Google because he was the Product Lead(read gatekeeper) of two of this products(read gates) : Chrome and Android. This virtually sealed Google's monopoly status on search. 

Monopoly and culture

What happened after Google became the monopoly it is today is exactly what a monopoly would need to do to stay a monopoly : lower profits so that they are not perceived as a monopoly. What better way to do it while stiffling competition by raising costs for competition by hiring developers at premium prices thus increasing cost and reducing supply of engineers. While the strategy was sound and paid off in the last decade, the recent ad recession of 2022-23 has exposed the flaws. Overhiring engineers, paying exhorbitant RSUs, lack of any need to deliver anything at all, delusions of exceptionalism, leads to a level of entitlement and lack of self awareness in engineers unseen in a while in Silicon valley. There are 2 high level problems with this

• [Financial Mismanagement]As pointed out by investors/hedge funds TCI and Altimeter
• Rapid headcount growth has led to reckless empire building. Managers reporting to Managers reporting to Managers..... Bloated org structures, title inflation, redundant levels - basically investors in Wall Street paying for the Sushi bar in Mountainview
• The median compensation at Alphabet was 67% higher than Microsoft and 153% higher than the 20 largest technology companies and there is no justification behind this enormous disparity
• [Cultural Trainwreck] Google engineers lost the ability to ship because for the last 10 years they didnt really need to. As pointed out in Mice in a Maze Google has 4 cultural problems : 

The way I see it, Google has four core cultural problems. They are all the natural consequences of having a money-printing machine called “Ads” that has kept growing relentlessly every year, hiding all other sins.

(1) no mission, (2) no urgency, (3) delusions of exceptionalism, (4) mismanagement.

Challenge from Microsoft - surprise ?  

In the meantime Satya Nadella has been playing 4D chess. Nadella was the boss of Bing before he got elevated to CEO in Redmond. So Bing vs Google is close to his heart. While Sundar has been enjoying his Sushi in Mountainview financed by monopoly taxes, Nadella has been plotting Bing revival one step at a time. Key milestones being investing in Open AI, Integrating it to Azure and then Launching Bing+Edge+ChatGPT in a bid to reinvest search. 

Microsoft CEO not only did the product announcements in Redmond, but also openly launched war on Google Search with its ChatGPT + Bing integration : 

“There is such margin in search, which for us is incremental. For Google it’s not, they have to defend it all,” he added, referring to the competition against Google as “asymmetric”.

Microsoft says for every point of share gain in the search advertising market, it’s a $2 billion revenue opportunity. 

There are several upsides of this strategic play from Microsoft. 

Microsoft Strategic Upsides

• Asymmetric battle : This is all for Google to defend and any incremental market share win for Microsoft has a huge revenue upside as Amy Hood (Microsoft CFO pointed out)
• Microsoft doesn't need to gain any market share at all to make Google lose. If it can change customer behavior to expect Search results from 10 link clicks(legacy search) to some mix of legacy search and some mix of conversational AI through ChatGPT(10-20% of the queries), it will be a big win. Conversational AI queries wont be monetized and the change in the mix of the search queries means, Google would also have to serve the unmonetized queries through Bard in order to stay competitive. Even if Google maintains its market share, it will put further margin pressure on Google and thus exacerbate the financial mismanagement and the cultural trainwreck issues highlighted above. This point is very important. It is not a matter of which AI is better, what matters is how will the user behavior and expectation change with the new form of search. Any deviation will hurt Google.
• Here is rough math to prove the point
• Google search queries : 300k queries per second
• Revenue : 160B in 2022, 1.6cents per query
• Cost : Apple 20B, 24% services margin, roughly 1.06cents per query
• So Google has 50 cents margin per query which can go to inference costs of an LLM

• Deploying current ChatGPT into every search done by Google would require 512,820.51 A100 HGX servers with a total of 4,102,568 A100 GPUs. The total cost of these servers and networking exceeds $100 billion of Capex alone

• Essentially 30B $GOOGL profit could evaporate overnight

• Looks like Microsoft knows how to flip a monopoly if not beat it
• Flipping Search monopoly is beneficial for Microsoft because it reduces competition for Azure as Google cannot funnel its monopoly riches to money losing Google Cloud investments any more. 
• What Google is facing is classic innovators dilemna

how large incumbent companies lose market share by listening to their customers and providing what appears to be the highest-value products, but new companies that serve low-value customers with poorly developed technology can improve that technology incrementally until it is good enough to quickly take market share from established business.

• ChatGPT is doing free marketing for Azure AI Services which hosts ChatGPT thus increasing cloud adoption
• Satya Nadella looks like a mastermind wartime CEO who looks like a peacetime CEO

Google Strategic Upside

• Yes you read that right, Google has an upside here too. While Google bungled its latest Bard announcement and the picture looks bleak right now, the biggest upside is that it could get support that it is not a monopoly in its latest department of justice lawsuit due to this competition from Microsoft. 
• Google has investments in Cloud hardware and TPUs could get more investments in the future to compete with Nvidia GPUs. So essentially the battle of search could be won or lost on the hardware front which could lead to significant value capture and also change the winners and losers of search

The next 1 year will be an interesting battleground for these two companies in Tech and how the personal lives, successes, failures and tales of two Indian American CEOs influence how they carve out the tech future for their companies. 

Irvington high school 2017-2021 College admissions

IHS Berkeley Admissions

• Irvington high is the second best high school in Fremont behind Mission San Jose
• Last 5 years, Irvington has sent a whopping 8%+ of its class to Berkeley every year on average. Acceptance rates from Irvington high to Berkeley range between 20-25% - meaning almost 1 out of every 4-5 applicants get accepted into the top UC
• Another 4% on average go to UCLA and 12% on 5 year average go to UCSD
• So total 25% of the class size has offers from UCB, UCLA and UCSD
• Irvington high school has relatively small class sizes of less than 600 as of 2021 - this makes it easier to get electives compared to other high schools with larger class sizes
• The 5 year % of class is using the class size of 600 to compute what percent of class gets admits from which university irrespective of how many are applying
• Irvington high has been beating arch rivals Mission San Jose in 2021 and 2020 - two consecutive years
• Irvington high sent similar number of kids to Berkeley as Evergreen, Branham and Leigh combined over the last 5 years
• Irvington got more admits to Berkeley as Harker + Bellarmine combined over the last 5 years
• In 2020, Irvington high got more admits to Berkeley than entire Los Altos school district (Mountain view high and Los Altos high combined)
• In 2018, Irvington high got similar admits to Berkeley(57) than entire Los Gatos Saratoga Union high school district (58) (Los Gatos high and Saratoga high combined)
• In 2020, Irvington high got more admits to Berkeley than entire Palo Alto unified school district (Palo Alto high and Henry Gunn high combined)

Execution vs Strategy

Impact = (Execution ^ Strategy) × Market

Obviously, this is not a formal mathematical formula. Its goal is to help us understand & explain to others the *relative* roles of the factors that determine long-term impact. To understand it, it’s useful to assign a value of 0 to each factor (while keeping the others non-zero). 

Let’s start with:

Strategy = 0 (others non-zero)

You get:

Impact ≈ Market

What it tells us:

A very bad strategy won’t kill you. But if you don’t fix it, it will severely limit the impact of your execution over the long term.

Now let’s set:

Execution = 0 (others non-zero)

You get:

Impact ≈ 0

What it tells us:

Abysmal execution almost always assures zero long-term impact, regardless of our strategy or market.

That is why I’d rather have some execution with no strategy, and not the other way around.

Finally:

Market = 0 (others non-zero)

You get:

Impact ≈ 0

What it tells us:

Lack of a market (or at times, a rapidly shrinking market) also kills our future impact over the long term.

As I said above, I’d rather have some execution and no strategy. But also note that strategy has an exponential effect on your execution. So I’d rather have excellent strategy & just OK execution vs. excellent execution & just OK strategy. This is counterintuitive for many people

In practice, if you make superb strategy choices i.e. how you differentiate your product and/or distribute it to create lasting competitive advantage, you can afford to have OK execution and still end up in a very good place over the long term.

Of course, the very best teams nail both strategy and execution. And that is what you should aim to do too, as a leader of a product team. When your business and your team’s future is at stake, why become dogmatic about an extreme position just for some Twitter likes & retweets?

As a leader, you need to obsess over both your strategy and your execution. How much you obsess over each of them depends on your product’s context. That also changes over time as you assess current reality and decide what it will take to reach where you want your product to be.

Last thing: 

(for leaders who are very good at strategy)

When you’re just starting to build a team, it is usually a better idea to hire people such that your team will be excellent at execution, even if that comes at the expense of your team being somewhat weak on strategy.

Because it is easier to add strategic discipline to a team that's excellent at executing than to add execution discipline later on.

How a new team executes sets its early culture a lot more than how (or if) it strategizes. 

And that early culture is very hard to undo later.

Youtube 2021 Priorities

2020 Lookback

• During the first quarter of last year, we saw a 25 percent increase in watchtime around the world.
• 2020 was YouTube Gaming's biggest year yet, with over 100 billion hours of gaming content watched on YouTube.
• In the first half of the year, total daily livestreams grew by 45 percent.
• first time streamers accounted for more than 10 million streams on the platform.
• They included Brazilian artists like Jorge & Mateus, who live streamed a concert from their garage that’s been viewed over 40 million times.

Creator Communities

• YouTube's creative ecosystem contributed approximately $16 billion to the U.S. GDP in 2019, supporting the equivalent of 345,000 full time jobs.
• The UK in 2019 saw approximately £1.4 billion contributed to the British GDP and the equivalent of 30,000 full time jobs. And in France, there was an estimated €515 million contributed to the French GDP and the equivalent of 15,000 full time jobs.
• The number of channels making the majority of their revenue from Super Chat, Super Stickers or channel memberships on YouTube tripled.

Future

• Youtube shorts is receiving an impressive 3.5 billion daily views! 
• Currently testing a new beta program with a group of beauty and electronics creators to help people discover and buy the products they see in videos. 
• TV was our fastest growing screen in 2020. That’s why we’ve worked to improve the look, feel, and performance of the Living Room app.

FIRE and Time Billionaries

Last week I came across a concept called time billionaire. In the context of FIRE, this has stuck in my mind. I have been a FIRE enthusiast over the last 5 years and this idea helped me put things into perspective. The goal of this article is to show you the tradeoff between time and money. 

The life expectancy of a normal healthy adult is around 80 years.

A billion seconds almost equals to 31 years. So on average every 20 year old has 2 billion seconds of time left. We work hard, spend our time to earn money, save our money to buy capital. The capital appreciates over time and gives us money. That is how we convert our time into money. 

Taking the returns of the US stock market over the last 100 years and assuming it doubles every 10 years, earning the capital early in life pays dividends in terms of that capital will give more money and time back to the owner to enjoy. 

Hence, 1 million USD earned at 30, will be 8 million by 60, if the owner doesn't need to depend on that capital for day to day expenses. As this post calls out, there are different brackets of numbers and where each individual lies in the bracket is a deeply personal question and the answer will vary based on lifestyle and choices. But the point is the faster you get there, the more you time you have from life. 

This point can be really driven home by this following question : 
If you got a chance to exchange your position with Warren Buffet today, would you do it ? You would be both the richest person on earth and also be 90+ and wont have long enough to live from hereon. 

For folks, for whom the answer is No, you already have the most valuable resource on earth which is time. Use it wisely and you can generate both time and money. 

Types of FIRE - Financial Independence and Retire Early

 Types of FIRE

1. Lean FIRE - 1-1.25 million USD
• At 4% withdrawal rate, this leads to 40k to 50k annual income
• At 3% withdrawal rate, this leads to 30k to 37.5k annual income
• At 2% withdrawal rate, this leads to 20k to 25k annual income
2. India FIRE - 1.5 million - 10 crores INR
3. FIRE - 2.5-3 million USD
• At 4% withdrawal rate, this leads to 100k to 120k annual income
• At 3% withdrawal rate, this leads to 75k to 90k annual income
• At 2% withdrawal rate, this leads to 50k to 60k annual income
4. FAT FIRE - 4-5 million USD
• At 4% withdrawal rate, this leads to 160k to 200k annual income
• At 3% withdrawal rate, this leads to 120k to 150k annual income
• At 2% withdrawal rate, this leads to 80k to 100k annual income
5. Silicon Valley FIRE - 8-10 million USD
• 3 million+ is tied up in the primary home
• Rest is same as FAT FIRE

The Professor, the banker, the suicide king : Book Review

1. A few notes on professional poker players and parallels I see with investors from the book The Professor, the Banker, and the Suicide King (about a series of high stakes poker games between Vegas pros and renegade real estate investor/banker Andy Beal)
2. “The best players walk a tightrope between their business sense and their passion. As professionals, they seek out the most profitable opportunities. As gamblers, they want the risk and excitement of having something important on the line."
3. “Elite players are drawn from a pool of gamblers, not problem solvers or people readers. They start off losing like everybody else." Ingredients: competitive drive, risk tolerance - and "a lot of losing." It's ok to pay your dues, that's how you learn.
4. “The pro is developing a recognizable edge. From that point on, she has more in common with the casino than the other bettors." "Professionals merely have to allow enough trials to even out the role of luck." (and stay in the game long enough)
5. "There are a lot of poker players who aren't gamblers. They find a level where they can win and they make their living. But if you don't have that need for action in you, you don't push yourself to move higher up. It takes a certain amount of gambling mentality to keep pushing."
6. Keynes: "The game of professional investment is intolerably boring to anyone who is entirely exempt from the gambling instinct; whilst he who has it must pay to his propensity the appropriate toll."
7. For the dealmakers: maximizing your advantage vs. being someone people want to play with. Professional gamblers faced this all the time, choosing between the conflicting goals of maximizing their advantage and marketing themselves, so people would gamble with them. After all if the members of the group somehow demonstrated to Andy Beal that their advantage was so big that he had no chances whatsoever, he would never sit down to play with them. Likewise, if they would play only under conditions that favored them in every way, he would eventually be frustrated by their inability to give him a fair chance and give up. 
8. Poker was a game of skill, but if you played it for a living, you also had to be willing to gamble. 
9. "The true professionals were those whose attitude might sometimes cost them, but who had the skills to handle the bad gambles while cashing in on all the favorable situations their "let's gamble" style brought their way."
10. "Confidence bordering on arrogance. Players would crack under the pressure unless they truly believed they were better."
11. Munger: "In my whole life, nobody has ever accused me of being humble. Realistic is probably a better word. We understand our limitations better than others."
12. A common characteristics of high stakes poker player is confidence bordering on arrogance. Playing against other pros and skilled amateurs night after night was so competitive that players would crack down under the constant pressure unless they truly believed that they were better than everyone else. 

Amazon's 2020 review

 In the beginning of the pandemic, I had published a post on "How Coronavirus will expedite the Amazonification of the world" and also had put my money where my mouth was, ie invested in Amazon. The other day I was reading an article on how marketplaces faired in 2020 and here are few highlights on Amazon

• 3P Amazon marketplace added eBay's worth of sales to its GMV in 2020. 3P went from 200bn to 295bn. Overall GMV was up 42%. Marketplace share of Amazon GMV grew to 62%. 

• Revenue for all business categories grew by 25%+ in Q3 demonstrating across the board strength

• Amazon's marketplace is even more concentrated than Parreto principle would suggest. Just top 852 (.05%) of the sellers contribute 10% of the GMV, and top 12% of the sellers contribute 80% of the GMV. 

• 18% of US GMV came from 2015 seller cohort showing stickiness in the platform

• Investors pour 1bn into buying up small merchants on Amazon. The capital pouring is validation about the robustness of Amazon marketplace as a platform to grow businesses. Also as the 3P sellers get better capitalized, this line of business can continue to see eye popping numbers. 

• Amazon launched in 3 countries this year - Netherlands - March 10, Saudi Arabia - June 17 and Sweden - Oct 28th. Using auto-translated catalogues and reviews, the cost to launching new countries seeded with sellers already serving similar countries is too small. This will only expedite Amazon's international expansion. 
• Ads revenue came in at 20 bn and advertising revenue as a share of marketing expense is steadily rising. This is similar to what Chamath had previously pointed out, Amazon thinks about making every expense item a revenue bullet point. 

References

• Marketplaces year in review 2020
• Investors pour 1bn into buying up small merchants on Amazon
• Inside the whale : an interview with an anonymous Amazonia
  
  

Indian Asset Allocation

All Weather Portfolio

1. Equities - 60% 
1. HDFC Sensex fund - 35%
2. ICICI Nifty Index fund - 20%
3. ICICI Nifty Next 50 - 5%
2. Bonds - 20%
1. ICICI Gilt fund - 20%
3. Gold - 20% - thesis
1. HDFC Gold fund - 20%

Post Covid Strategy : moving the 20% bonds to equities. Reasons

1. Federal reserve is going to create a mother of all asset bubbles
2. Dollar devaluation helps Emerging Markets
3. Stock market is not the economy
4. Indian case count will only rise and no moving back from here, most likely course is herd immunity. It doesnt seem like any lockdown is going to come back. 
5. 20% Gold hedge can help counter any shocks - remaining 80% will capture bull run
6. Bonds have already run up in the last 6 months. Time to capture the gains. Yields set to stay low in the forseeable future as government will do everything to get the economy back. 
7. Gold has also had a nice run up, but with fiscal and monetary stimulus may benefit further. 

* Full disclosure : My posts are not investment advice. Its your money, so do your own homework. 

Gold thesis

• Negative real interest rates
• Increasing money supply in the economy as the FED goes in with a bazooka
• Dollar devaluation 
• Probability of inflation in the near horizon
• Chances of another shock to the stock market. Gold is the flight to quality trade
• A lot of bad outcomes are still possible due to COVID (like bankruptcies)
• Inflation in asset prices
• Helps to diversify asset allocation (all weather portfolio)

Historically Gold prices almost doubled from 2008-2011 during the great financial crisis

Stock market is not the Economy : Unemployment numbers

Few things to note from the table

• During the 2008 financial crisis, unemployment rate went from 4.9% to 5.6% during Jan-June, 2008. S&P500 was at 1278 on June 27, 2009, down 14% from ~1500 peak
• Unemployment rate increased more rapidly during the later half of 2008 to end at 7.2% in December. H2, 2008 saw the fall of Lehman. S&P500 was at 887 on Dec 19, 2008 down 30% from June, 2008 and down 40% from ~1500 peak.
• Unemployment bottomed at 10% in October 2009
• Stock market bottomed at 683 in March, 2009 when the unemployment was at 8.7%

Stock market reflects the rate of change of bad news. 

• Rate of change of unemployment in H1, 2008 = -.15% per month
• Rate of change of unemployment in H2, 2008 = -.23% per month
• Rate of change of unemployment in H1, 2009 = -.28% per month
• Rate of change of unemployment in H2, 2009 = -.06% per month

The rate of change of unemployment numbers clearly show that the rate was highest in H1, 2009 which co-incides with the market bottom. The absolute unemployment percentage kept getting worst in H2, 2009, but the rate of change of bad news kept decreasing. So the market had already started increasing when the economy still kept shedding jobs. The economy hit bottom in terms of unemployment in October 2009 when the S&P500 was around ~1100 which was about 57% above the lows in March 2009 and still 33% below the ~1500 market top.

The stock market is a forward looking vehicle. During a recession, in order to look for the bottom, look for the point where the market starts ignoring the bad news.


Reference

• https://www.ncsl.org/research/labor-and-employment/national-employment-monthly-update.aspx

Market, economy and the investors

1. Market in the short term is the rate of change of news - like a popularity contest
2. Market takes the elevators on the way down and takes the stairs on the way up
3. The economy may be doing bad, but the market may be doing well. 
4. Market is forward looking and the economy is current looking
5. Some job losses may be good for the economy and market, because that may clean up the old economy jobs and the antifragile
6. Economists may not be great investors
7. At the bottom of the crisis, any good economist should be able to say all the risks facing the markets and outline why the market may go down
8. Investing needs a healthy dose of optimism and faith during these tough times
9. Pessimists might sound smart, but optimists will make money
10. However, I don't want to imply that being a forever optimist and overlook your risks. Investing is personal and risk is always measured from a frame of reference which is life situation. The answer should be different for everyone. Here is an essay to analyze your mortgage and tail risks

Bulls vs Bears

Psychology of a bear

1. There is a chance that prices comes down and the bet is that prices will stay down for a long time
2. Higher probability of buying low because of lower price and larger time
3. Fear of not being a price taker in a bear market

Psychology of hold

1. Even if the price goes down, it wont stay down for a long enough duration. So not worth selling
2. There is a low probability of prices going up in the near term, but if I get out, it may be hard to get back in 

Psychology of a bull

1. Prices will go up in the short to medium term
2. The current prices are a bargain factoring in future earnings and revenue growth
3. Even if there is some short term variance, in the medium term the asset will be worth more and there is no reason in the horizon to liquidate this asset

Investing essays during crisis

Musings of an investor during a crisis

Insurance

1. Insurance is cheap before the crisis (Gold prices)
2. Once the crisis is clear, insurance becomes expensive (gold prices shot up)
3. Insurance is not free. Insurance can be a drag on portfolio performance during good times. Hence asset allocation and rebalancing is important.

Range of outcomes

During this covid crisis, the absolute range of outcomes still says vast

Negative outcome

1. The reopening of the economy can cause a huge second wave, leading us to close back again. That could be devastating for the economy. The Fed may have prevented a short term collapse, but the medium term uncertainty remains. Also that could lead to much more long lasting permanent damage in the economy. At this point, markets are probably pricing in a lost quarter. The crisis started in America in March when cities started to shut down. Hence, Q1 results were not really hampered. But the lockdown effect will be visible in Q2. Market is hoping that the economy opens up and by Q3, results start trending back to normal and we have a great Q4 like last year. I think that is what is baked into the prices and we have already seen a swift recovery from 35% lows. 
2. However, if the reopening is hampered by a huge second wave of the virus, the market would start pricing in more than a quarter and up to a year of lost revenue. Things would be interesting when the market starts to price between outcomes like
1. A quarter of lost revenue
2. Multiple quarters of lost revenue
3. Multiple years of continued revenue compression due to more permanent damage caused by a second wave 

Positive outcome

1. There is a possibility of a vaccine by the end of the year and several companies are already pre-scaling production in anticipating. This would definitely be the fastest vaccine ever
2. However, if it were to happen, it would be easy to say "long human ingenuity" or this is what you expect to happen if the whole world gets behind one common goal
3. Don't fight the FED. The Fed has done all that is their in its power to remove tail risks
4. American capitalism may have changed forever. With the Fed buying high yield bonds, we may be entering an era of Government Sponsored Enterprises. 

Both the positive and the negative outcomes are equally likely. At this point, it remains hard to say which one is more likely vs the other and in what timeline. The FED continues to mitigate tail risks in the short term. 

Sectors impacted 

1. Travel
2. Hospitality
3. Airlines
4. Cruises
5. Retail stores
6. Malls real estates
7. Oil

Sectors at the risk of contagion

1. Commercial real estates
2. Hospital industry
3. Mortgage banks
4. Junk Bonds

Commentary on Big Tech

1. The economy continues to migrate from atoms to bits
2. Big Tech stock prices indicate that
3. Silicon valley housing prices still correlated with big basket of tech stocks
4. User behaviors that would pan out in the next 5 years have been expedited within a span on 2 months
5. However, more short term revenue may be hit if the more companies get hit (ads could be more vulnerable than cloud revenue followed by retail)

Mortgage and tail risks

First let me start with what this post is not about. I dont plan to cover whether to pay off a mortgage early or to keep it. There are lot of articles in the internet covering that aspect. I plan to cover how to manage tail risks of owning a home, given real estate prices can be sky high in the coastal areas of the US. How to manage the mortgage dance with a balanced portfolio that can be resilient when tail events do occur.

This post outlines some of the tail risks pertaining to home ownership

1. Losing job and having too low emergency funds(~2 months) to cover cash
2. High debt equity ration of the assets (huge mortgage and equity prices crash leading to inability to service mortgage payments). This is more risky in case of multiple mortgages and rental businesses
3. Losing job and losing immigration status - a reasonable emergency fund(~6 months) may also fall short
4. Mortgage may go underwater (2008 recession)
5. Natural calamity (earthquake, cyclone, infectious disease affecting cities - 2020)
6. Having a huge mortgage towards the end of a short term or long term debt cycle

How can you structure your portfolio to account for such risks

1. Have significant emergency funds in short and long term treasuries
1. Account for 1-2 years of mortgage payments on primary residence
2. Account for 6 months - 1 year of rental payments per unit in case of moratorium on rents
3. Account for personal and family expenses in case you are out of job and rental income for a while
4. Account for medical emergencies in case of health insurance loss
5. This is what a healthy balance sheet looks like. Google had 120bn in cash, Microsoft had 130 billion in cash, Facebook had 60 billion in cash going into the covid crisis. For all these companies it stands for ~10% of their market cap. 
2. Diversify your equity holdings 
1. Dont have stock concentration risk in the similar companies. For eg : google and facebook both make money from ads
2. Dont have concentration risk through index funds and individual stocks overlapping. For eg : Google Facebook Amazon Microsoft make up ~50% of QQQ and 20% of S&P500
3. Dont have correlation between index fund and home price. For eg : QQQ and bay area home prices are correlated
3. Buy insurance when it is cheap and VIX is low
1. Hold some alternate asset classes like Gold, bitcoin
4. All weather portfolios. If you had one at the beginning of the crisis, then your portfolio hopefully rose during the crisis. Also you are probably deriving healthy income from your portfolio. 
1. 40% Long term treasuries
2. 15% Intermediate term treasuries
3. 7.5% Gold
4. 7.5% Commodities
5. 30% Large Cap Equities
5. Diversify when it is cheap to build your portfolio for the future. Some areas to look into
1. Commercial real estate
2. Emerging markets
3. Oil
6. End of short term and long term debt cycles lead to deleveraging across the economy. If you have made money during the current credit cycle expansion, it may make sense to take some chips off the table

PS : the pessimist sounds smart, the optimist makes money

Lockdown review (Feb 2020 - April 2020)

Stayed home and acquired a lot of knowledge.

• Courses taken
• Deeplearning.ai - 5 courses by Andrew Ng
• Deep Learning with PyTorch - Udacity
• Privacy aware ML - Udacity
• Re-inforcement learning 
• Skills acquired
• PyTorch
• PySyft
• Books read
• Antifragility
• The subtle art of not giving a fuck
• The Intelligent Investor
• The Manager's path
• Blogs read
• Ray Dalio's notes on changing world order, debt cycles
• Amazon's investor letters
• Guggenheims weekly articles
• Blogging
• Blog reached 21k views within 3 months
• Recession call - March 8
• Coronavirus lockdown prediction in bay area - March 1
• Engineering Manager series published
• Coronavirus series published
• Financial Investing series published
• Deep Learning Learner series published
• 
  

I also enabled Amazon shopping ads on the blog because I started book reviews. Here is how that started

How would you rate my lockdown till now ? 

100 years of financial history

Reference 

1. Paradigm shifts by Ray Dalio

Coronavirus will expedite Amazonification of the world

Coronavirus is expediting the Amazonification of industries worldwide. Here are the first order effects of shift of usage to Amazon

• People are staying home instead of visiting malls and ordering essentials on Amazon. This is expedited by the large scale closure of malls and retail complexes. 
• People are ordering groceries on Whole Foods for home delivery inspite of higher prices compared to their local grocery store. For a lot of families, the grocery budget is moving to Amazon. Given the large scale closure of restaurants worldwide, this will only increase. 
• People staying home are watching videos on Amazon Prime Video for entertainment purposes. Given Prime membership benefit is already providing so much value, netflix and disney could be a discretionary expense and Prime video could be a necessary essential
• Businesses going through the sudden demand and revenue shocks will need to rethink their expenses and specially fixed cost expenses. Technology and IT will be a big fixed cost expense waiting to be cut at this point. This will expedite the move to Cloud (AWS is rightly positioned for this) as it provides the value proposition of making this a variable cost - pay as much as you use. If there is no demand, dont pay. This will put Amazon into a strong position with respect to the shift to Cloud. 
• Audible has made 100s of kids audiobook free. This will expedite adoption and usage of Alexa. Parents at home juggling kids, job and a pandemic will find this great value. 
• Amazon Care, the healthcare arm of Amazon will work with Bill Gates to delivery Coronavirus tests to homes in the Seattle area. If it works, this could be scaled globally in collaboration with Governments and could put Amazon in prime position to enter healthcare. 

Data points supporting the above trends

• Amazon hiring 100k new workers to meet demand 
• Amazon pantry temporarily closes as online shopping surge amid coronavirus outbreak
• Amazon AWS launches 20 million initiative to fight the coronavirus

All the above viewpoints and facts show that how Amazon has grown in value during these unprecedented times the world is facing through the pandemic. There is the other side of the equation, which shows that malls, commercial real estate could be in dire shape and there could be a lot of bankruptcies.

At the time of this writing, US already has more than 100k coronavirus cases and given the exponential spread, it doesnt look like stopping. In fact, things will get a lot worse, before it gets any better. 

Cheesecake factory, Subway and other major retailers have told their landlords that they cannot pay rent. The restaurant industry has already gone through unprecedented layoffs. Given that the US response to the crisis has been delayed, the closures will last as cases will continue multiplying. This will have cascading effects onto the landlords, malls, commercial real estate players who have these retaurants as renters. There will be cascading bankruptices which will spread through the economy. Malls will find it hard to find replacements during these tough times. Even if the economy were to open up today, people who are seeing widespread deaths in their communities arent going to rush to restaurants/malls anytime soon. 

This will complete the other side of the puzzle and will expedite Amazonification of the world.

Update July 24, 2020 

Putting my Money where my mouth is :

The Intelligent Investor - Book Review

Introduction

• Obvious growth in physical prospects of a business do not necessarily translate to profits for investors
• It was easy to forecast that the value of airtraffic would grow spectacularly over the years. But despite the expansion in revenues at a pace far greater than the computer industry, a combination of technological problems and overexpansion in capacity led to disastrous profit figures. 
• Same happened for Uber in 2015. Even though the rides volume grew massively till 2020, any investment in late 2015 saw negligible gains at the time of IPO. 
• Experts do not have a dependable way of selecting the most promising companies in the most promising industries
• The pendulum in stock markets swings from irrational exuberance to unjustifiable pessimism

Investment vs Speculation

• Investors judge the market price by establishing standards of value
• Speculators base their standards of value based on the market price
• The intelligent investor has no interest in being temporarily right. To reach your long term financial goals, you need to be reliably and sustainably right.

The Investor and Inflation

• As recently as 1973-82, the US went through one of the most painful bursts of inflation. As measured by CPI, prices more than doubled during that period rising at the rate of nearly 9% annually. In 1979, inflation raged at 13.3% paralyzing the economy in what is known as stagflation, and many leading commentators began questioning whether America could lead in the global marketplace.
• In times of deflation, it is better to be a lender than a borrower, which means that investors should keep atleast a small portion of their investment in bonds, as a form of insurance against deflating prices. 
• The stock market lost money money in 8 of the 14 years in which inflation exceeded 6% and the average returns of these years was a measly 2.6%. 
• While mild inflation allows companies to pass on the increased costs of the raw materials to customers, high inflation wreaks havoc forcing customers to slash their purchases and depressing activity through the economy. 
• Asset classes for inflation protection - REITs and TIPs. 
• Commentary for 2020 recession : At the time of this writing, REITs may be risky. As we get more clarity into how shallow/deep this recession is going to be, there is a fair chance that commercial REITs may suffer heavy losses as the lockdown extends as the virus will now spread to new hotspots into the heartland of America. 

A century of stock market history

Healthcare crisis - Global Recession 2020

This time it is different.
2000 - we had the tech bubble burst
2008 - we had the housing crisis which led to financial crisis
2020 - we will have the healthcare crisis which will lead to a financial crisis

Here are the factors playing into the recession

1. Healthcare crisis due to Coronavirus will impact ~10% of the world population
2. Supply side pressure due to reduced workforce, factory shutdowns due to coronavirus
3. Business and pleasure travel will reduce by 80% due to coronavirus scare
4. Demand side pressure 
5. Coronavirus will become a global epidemic
6. The world is already slow to react and has lost valuable time to prevent this crisis
7. Supply and demand side shocks will take at least two quarters and will lead to quarter over quarter contraction
8. Oil prices will drop precipitously due to supply and demand shock
9. Situation may be exacerbated by health crisis -> job loss -> insurance loss -> financial loss -> depression -> health loss. This could be a vicious loop. 

Trends

1. This will lead to new work from home trends and companies that support it
2. Several startups which have been fueled by cheap capital in the past decade will have a existential crisis and will need to expedite path to profitability
3. Steep valuation cuts in travel stocks - it is bad, it will get much worse before it gets better

References

1. Coronavirus - the blackswan of 2020