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Circle of Competence Issue #70


"If a man knows not to what port he sails, no wind is favorable." - Seneca


Not all revenue is created equal: the keys to the 10X revenue multiple club (Bill Gurley)

This is an oldie but a goodie. Gurley gives a solid quantitative and qualitative explanation of why some (software) companies are worthy of the incredible 10X revenue multiple. More importantly Gurley's points can be expanded and applied generally to all industries and all investment opportunities. He covers the whole gamut: sustainable competitive advantage and strategic position of a company (and what that means in the software industry), predictability of cash flows (applied to software), and the financial metrics of business model (growth, margins, and cash flows). This is one of the better evergreen pieces of content I've seen in a while. The only puzzle piece I'd add to the conversation would be management - what is their track record, what is their record at the company, and what is their character?

Sub-zero yields begin to take hold in Europe's junk bond market (Bloomberg)

Signs of the times. 14 junk rated bonds are now trading at sub-zero yields in Europe. I always wonder why people even bother to buy these, but when your deposit rates are negative, it might look somewhat attractive? The ECB is literally forcing, through policy actions, institutional investors to purchase investments that will cost their investors money with mathematical certainty if held to maturity. The world is a strange place.

Ted Talk on the paradox of choice (Barry Schwartz)

Do yourself a favor and listen to this psychologist explain why having too many choices in life is bad. He cuts through what he calls the 'western civilization dogma' that we must maximize our freedom and welfare by maximizing our choices. This is a funny and very illustrative talk on how having too many choices can produce high expectations and lead to great disappointments. This mental model can be applied in almost every category of human life from dating to a job search to shopping. It is one of the most flexible and reliable mental models I have come across.

Many times there is a point at which too many choices bogs you down, reduces your focus on what you are actually after, slows your progress towards the ultimate goal, and produces unrealistic expectations that eventually lead to disappointment. This even applies to social media where you have SO much information about your friends' 'best' lives that it seems everyone is living a better life than you. This leads to higher expectations, which leads to a lower self esteem. I have written about the power of focus here, and the paradox of choice is a very tangential issue - the number of choices in any given situation is inversely related to the amount of focus you bring to the problem. As choices go up, focus will wane, and vice versa. Having too many choices in life - jobs, products, etc. - produces paralysis rather than liberation. So, focus is paramount in the world of infinite choice that we live in today.


TOP READ: Not all revenue is created equal: the keys to the 10X revenue multiple club (Bill Gurley)

Sub-zero yields begin to take hold in Europe's junk bond market (Bloomberg)

Houston's entry level housing is being gobble up by data-driven institutional investors (Houston Chronicle)

Rich Barton has a $700M stake in Zillow and plans to turn it into a home-flipping machine (Forbes)

Amazon at 25: the magic that changed everything (Seattle Times)

Virgin Galactic is going public (Washington Post)

China is forcing tourists to install text-stealing malware at the border (Vice)

Opportunity zones were meant to help the poor, but one billionaire may cash in big time (Pro Publica)

There will be buyouts: a history of the Texas oil and gas private equity industry (PitchBook)


TOP LISTEN: Ted Talk on the paradox of choice (Barry Schwartz)

From Red Robin waiter to 250 units with James Dainard (BiggerPockets)

Senior housing and opportunity zones - a winning investment formula (Real Estate Guys Radio)

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