Bet your own money, not OPM, to learn and win

I was excited to attend my first class on investing principles in graduate school. I was finally with like-minded individuals who share my pursuit of investing excellence.

My first conversation with a classmate dulled my spirits.

We discussed everything about a stock that we both liked. Our knowledge on its business model, finances, history, management, and competitors overlapped yet complemented. I have a substantial portion of my net worth in the stock. Yet the classmate said:

Classmate: I have a little invested in the stock. I would never have much invested in it.

I was in disbelief. For heaven’s sake, why?

Classmate: I know a lot about this stock to prepare for a job interview at a [insert well-known company] fund. Why bet your own money when you can bet OPM (other people’s money), take a large salary, and avoid losing your own money if you’re wrong?

My classmate would be a highly-paid employee at a large fund. Yet it is unlikely that he would become an outstanding investor.

Investing one’s own hard-earned capital and investing OPM have subtle yet important differences. Capital fuels life in capitalistic societies. It pays for food, water, shelter, and education. It supports families, relationships, and self-esteem (to an extent, arguably). Investing one’s own capital is an undertaking of personal risk. Enormous stress is an understatement. Investing OPM reduces personal risk significantly.

Yet investing one’s own capital confers huge advantages to the bearer of risk. Because the drive to protect and profit from one’s capital is strong and tangible, one starts to learn the exacting means to do so. One inevitably begins to see the irrational practices of the market. Does the business value of the strong company fluctuates as much as its stock price volatility or market commentaries suggest? The investor of own capital would find the answer, struggle with it, lose money, choose to believe in it more, lose money again, believe in it enough to make it part of one’s being, practice it right, and finally survive price volatility. Repeat the grueling journey for other investing principles enough, and one finally profits.

By taking significant personal risk with own capital, the investor learns from a journey that the OPM investor would not. The OPM investor has a large salary and bonus (yes, bonus is due even in a losing year) which guarantees a high standard of living. There is little incentive to take personal risk by betting personal capital. Being a good employee would suffice.

Humans are conditioned to seek security now. Now, not in the long-run. The majority of “investors” would seek the stable paycheck of a large fund. What the majority is giving up in exchange is significant – the opportunity to go through near-term grueling self-doubt and learning to achieve long-term life-changing profits.

As an illustration, consider the stock of The Trade Desk (NASDAQ: TTD). As a provider of advertising technology, its IPO was unpopular. Predecessors have risen and fallen. The Rubicon Project (now Magnite MGNI after merging with Telaria) was a high-flying SSP (supply-side platform) before crashing because it missed out on the crucial transition to header-bidding technology. The pace of technology change was so fast that even a leader could not keep pace. Why would TTD do any different? To top it all off, large competitors include Google and Facebook, which owned more than half of the digital advertising market with their walled gardens. How likely would a newly IPO company win against the titans?

If the investors of OPM did not give up on TTD pre-IPO, they would have post-IPO. TTD stock popped 60% on day 1 and declined 20% in the next two months. In the next four months, the stock did nothing from its day-one pop (see chart below). To avoid explaining why the stock didn’t perform (while the S&P was up 6%) and how TTD could compete with Google and Facebook, investors of OPM would likely replace TTD with a stock that can be easily explained to clients and bosses.

If one had focused on business value, one would have understood the value of TTD as a leading DSP riding the CTV wave, armed with a technically-savvy founder-CEO with a 50% stake proven by a previous successful exit to Microsoft. I’ll leave the competition with Google/Facebook for another day (or for the reader to find out). Even with the knowledge of business value, one has to suffer multiple significant declines, ranging from 5% to 50%, to profit from TTD (see chart below for multiple rises and declines. Yet TTD returned about 15x from day-one close to now over about 4 years). Those who profit have taken to heart the lessons from multiple rounds of grating mistakes and missing out on other profitable opportunities, driven by their investing of personal capital and taking of great personal risk.

To AT&T and Comcast: take your head out of the sand

Fans of Roku and Amazon Fire might have been surprised when AT&T-owned HBO Max – the almighty channel featuring Game of Thrones and Southpark – would not be directly available to them (there is a workaround, albeit cumbersome). They might be shocked again upon realizing that Comcast-owned Peacock would likely be unavailable too. Roku and Amazon Fire reach 80 million households. Why would the media giants give up this reach if their objective is to reach as many subscribers as possible?

Their decisions appeared to be motivated by the fear of accelerating loss of cable subscribers. The rise of TV streaming and cord-cutting have caused the permanent loss of millions of cable subscribers. AT&T owns Time Warner Cable (now Spectrum) and Comcast owns cable assets under Xfinity. The cable business has historically been very profitable, producing north of 30% net margins. AT&T and Comcast are motivated to protect their cable business and stem the loss of subscribers by limiting streaming access to their most popular content.

However, the restrictions are akin to a shack in front of an enormous tidal wave. There is no way to prevent TV streaming from disrupting the cable industry (I argued in a previous article that cable was ripe for disruption). Hence little can be done to stop the outflow of cable subscribers. AT&T and Comcast are merely slowing down the inevitable with content restrictions and customer-hostile tactics, which would ironically accelerate the demise of the cable business in the long run by increasing the relative appeal of user-friendly streaming channels.

If it is impossible to stop customers from moving to streaming, it would be rational for AT&T and Comcast to position for and profit from streaming. Allowing Roku and Amazon Fire easy access to HBO Max and Peacock is a step in the right direction, yet is still insufficient to assure success in attracting and retaining subscribers. AT&T and Comcast are light-years behind streaming stalwarts like Netflix. Large content libraries, owned by the media giants, alone are not enough. The success of streaming champions (Netflix, Roku channel, Hulu etc) depend on both content and sophisticated technology. For example, Netflix has at least a decade lead in its recommendation engine technology that pairs users with content that they otherwise would not discover. The recommendation engine, named Cinematch, uses machine learning algorithms, so advanced and refined that it does not require users to rate content in order to recommend content (for more on this fascinating topic, read chapter 11 of this book). The Cinematch algorithm retains customers by facilitating discoveries of hidden gems. Therefore, it would be unwise for AT&T and Comcast to rely solely on large libraries of premium content for success in streaming. They would also have to consider matching the user experience and back-end technology of competitors. This is a formidable undertaking whose difficulty is compounded by constantly-improving competitors. Yet AT&T and Comcast are squandering precious time and resources over squabbles concerning content access.

Streaming is the future. Netflix is already worth more than AT&T and Comcast. Roku would eventually be recognized as the premier platform for streaming. The sooner that AT&T and Comcast position for streaming, the sooner they can start competing for a future that is increasingly likely to cast them aside.

Excellent progress made by this advantaged acquirer of healthcare IT

The story of MTBC Inc (NASDAQ: MTBC) keeps getting better. It is proving its potential to compound capital in the long-term as an advantaged acquirer.

MTBC has made plenty of progress since my previous article. It is executing its M&A playbook well. MTBC acquired Meridian Medical Management (a former GE Healthcare IT company) less than 6 months after its previous major acquisition of Carecloud. The acquisition is likely priced slightly above 1x sales. This is a cheap price compared to the industry average 2-3x, and is cheap likely because of the lack of profitability and sub-par topline growth. MTBC is the rare buyer who can solve both problems. It aggressively offshores without losing service quality to increase profits and retain customers. It is also bundling add-on services (eg telehealth) to its core RCM product to increase topline growth.

Investors are only starting to recognize the value of MTBC’s playbook. The stock moved from $6.50 pre-Meridian in May 2020 to about $11.00 yesterday after a series of sell-side commentaries. MTBC’s market cap has finally exceeded $100m, which is likely to attract more investors than when it was a nano-cap company.

Two weeks after acquiring Meridian, management guided to 30% higher annualized revenues and 600bps EBITDA margin improvement (from 12%). That management announced the margin improvement early in the integration process is a sign of confidence in cost reduction and a repeatable M&A playbook.

A notable feature of recent acquisitions involving Meridian and Carecloud is the addition of new services. Meridian added automation services and Carecloud brought telehealth services. Previous M&A had focused on strengthening MTBC’s core RCM products. The new leg of growth involving new services not only support organic growth, but also complement MTBC’s M&A playbook by broadening its target universe and accelerating inorganic growth. Investors should look forward to more sustainable growth as MTBC expands beyond RCM.

MTBC has already exceeded my target price in the previous article. I’ll provide a new target price after the company updates on its capital structure in the next earnings release.