Weekly Notes #10
YTD performance, Lithium, living on a cloud, first principles and a crocodile eating Finland
I hope you are having a fantastic week and you are looking forward to learn something!
In case you want to re-read the previous weekly notes, here is the link
Without further ado, let’s start:
YTD Performance
Let’s start with this one: Buy great companies and ignore all the outside noise. That is the best approach to investing and also probably to life itself.
The general markets are having an incredible performance since the start of the year. Almost all large stocks are up double digits and the S&P500 is on pace for one of its best years. The previous years were also nothing short of astounding with 2021 +27%, 2022 -19% and 2023 +24%. So much for low volatility index investing.
After these high returns humans tend to extrapolate past returns in the future. I would be careful about that and I would expect some years with lower returns ahead of us. The PE ratio of the index is at the highest value in the last 10 years (if you exclude the Covid year). Reversion to the mean will come in one form (fast rising earnings of the companies) or another (falling share prices). Expect to see more of the latter.
Demand for Lithium and the effect on the price
Batteries are the most expensive component in EVs. If you want to make them more affordable, we need to get batteries cheaper. Luckily this is exactly what is happening. The average price per kWh fell by 73% since 2014. Expect further progress on this front and you will see a) cheaper EVs and b) EVs with longer range, which can finally compete with traditional cars. The limited range, especially in colder conditions, is one of the main reasons why people still prefer petrol over electricity.
This very trend is also one of the reasons why I don’t like to invest in commodities. The cure for high prices is usually high prices itself. It brings new competitors into the market, makes the search for new sources more interesting (see fracking for oil) and also fuels technology advantage. This technologies advantage comes in two forms: One is the optimization of the current material and the other is the search for alternatives. All taken together keep the prices of minerals flat or declining in the long run.
Looking at the growth of EV sales could lead to the conclusion that the underlying material for Lithium batteries must be in high demand and therefore drive up the price of this very commodity.
That is partially correct. There was indeed a price surge between 2021 and 2023, but today the price of Lithium is roughly where it was in 2016. How many people would have guessed this? Coming back: The cure for high prices are usually high prices.
Since I touched upon oil fracking beforehand: If you want to invest in one of the purest plays in the Permian Basin, which is the booming fracking region in the US, then check out my deep dive on Texas Pacific Land
Living on a cloud
Microsoft, Amazon and Alphabet have shown tremendous growth in their cloud segments. It is crazy to think about it how small the revenue in this segment was just 10 years ago and how much money these three companies are now generating with their cloud segments.
AI and the continues need for computing power will drive this trend further and in turn make me a happy shareholder of these companies.
Invest in capital light businesses
Capital light businesses; that means the company does not need to reinvest a lot of capital to keep its business running, do much better in the long run. This makes sense, since these very companies can use their available cash to venture into new fields, buy competitors or return money to their shareholder in form of dividends or share buybacks.
Asset heavy industries like commodities, freight shipping or automotive companies have a hard time and tend to under perform the broad market. This is one of the reasons why I love software companies. Each incremental unit shipped bears no or close to zero additional costs. Due to this fact these companies can scale fast and also continue growing at rates which were not possible in the past era.
Working from first principles
I hope you read last week’s episode and saw the video of SpaceX catching the rocket booster. This is the story of what Elon Musk did in 2002 in order to understand the industry of space rocket manufacturing. Figuring out the price of the parts of a rocket and then concluding that he can build one at a fraction of the cost.
Not just is SpaceX a fantastic example of how far (literally) you can go and also a nice example how products evolve and get more beautiful over time. The SpaceX Raptor 3 rocket engine looks like a piece of art and might as well stand in a museum.
Global fertility rates
The Western world has seen declining fertility rates for many years and it is well known, that the Japanese society faces serious issues due to its aging population. China drove down its fertility rate with the infamous one child policy. What surprised me, is that even India is now below 2. Keep in mind, that you need about 2.1 children per woman to keep a society stable. India shows the same trend as many other nations on the rise. With an increased amount of wealth, the births per woman drop. There are a couple of reasons, including: Women want to have their own career, better contraception methods, children are not needed to work on the farm and ideas such as: Let’s live our own life.
Celebrating 500+ followers on Twitter/X
Two weeks ago I managed to reach this milestone and it made we very happy. If you haven’t followed me yet, this is your chance. You can help me reaching more people to share my lessons on investing and life.
Crocodiles in the Baltic Sea
Some fun for the end: Since I saw this doodle, I cannot unsee it, when I look at a map. Let me know if it is the same for you
Enjoy your week and keep investing in great companies.
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Invest at your own risk, this is not financial advice! This is not a recommendation to buy or sell any securities discussed in the article.
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