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  • Career Update: Joining the Team at IA Capital Group

    Today is day one! I am thrilled to share that I am starting a new position as an analyst at IA Capital Group, a Fintech and Insurtech VC firm based in New York City.

    I never would have expected to be able to say “I work in insurance.” But, the truth is, I could not be more excited about this opportunity. While there is no such thing as the perfect job, based on my interests and curiosities, I feel this is cutting pretty close.

    First of all, I am really excited to invest in financial services. In particular, I am most curious to learn more about entrepreneurs innovating at the intersection of climate change, weather risk, and insurance. On this front, IA has a few startups in its portfolio I find incredibly exciting — including Demex, a parametric-based insurance provider, and Delos, a startup underwriting for wildfire risk. An important part of navigating climate change is developing resiliency and mitigating damages at the outset of extreme weather events.

    The way I see it, there are two types of venture funds: those that are tech-led, and those that are industry-led. The distinction is subtle, but broadly, the process of an industry led-fund starts with industry and ends with technology — whereas a tech-led fund does just the opposite, starting with tech and ending with industry. I believe industry-led funds to most exciting and opportune. In the case of IA Capital, the industry focus is financial services and insurance. To be successful requires one to accumulate a deep understanding of these industries and how entrepreneurs may operate within them. The need to develop expertise through focus and depth is in line with my personal philosophy of achieving greatness through mastery.

    Another thing that excites me deeply about the firm is that they also have an incubator program. To date, they have incubated five startups, including Boost and Marble. My interest in venture capital was born out of a curiosity for entrepreneurship — and so I feel fortunate to be in a position where I might get to also satisfy this itch in an active way, alongside my investing work.

    —

    On a personal note, I am really excited to have landed my first full-time gig post undergrad in New York City. I have actually spent most of my life within a one-hour radius of the city, but I feel like I’m about to step foot into a whole new world.

    It’s funny — I remember in the middle of high school, as I was beginning to develop an interest in entrepreneurship, I visited a relative out in California for a few weeks. He’s based in the valley, and is a tech entrepreneur. From this experience, my interest in doing stuff related to entrepreneurship was tied to the idea of going out to California eventually (I remember I considered schools out there). But, things are changing and there’s other great cities to do venture in other than SF. And for Fintech, there’s perhaps no better place than New York.

    I’ve stayed on the East Coast for pretty much my entire life (despite a brief intermission in France), and I really do like it here. Yeah, it moves fast and it gets cold, but I don’t mind. The city is big and exciting — perhaps unmatched in its sheer opportunity and raw energy — and exactly where I want to be, for now at least.

    —

    A great piece of advice I have held onto goes as follows: Always think about what you are optimizing. As with any point in life, there’s a spectrum of possibilities and practically infinite answers. For me, I felt it was most important to optimize the potential to learn from talented people who have done it before me.

    At the end of the day, that is what excites me most about this opportunity. More than being thrilled about landing a full-time gig in venture, being engaged with a Fintech thesis, or being intoxicated by the allure of New York, I most deeply value the opportunity ahead of me to work with inspiring, ambitious and talented people. I am confident it is this element that will provide an outsized opportunity to learn, a key ingredient in long term success.

    Thanks for reading. More to come!

  • The Little Book That Still Beats the Market — Book Review & Discussion

    The Little Book That Still Beats the Market by Joel Greenblatt is a concise guide for building a market-beating, stock-picked investment portfolio. Greenblatt, an influential investment professional at Gotham Capital and Columbia Business School professor, distills the principles of value investing and provides actionable steps relevant for beginners and masters alike. The book offers sophisticated advice in an easily digestible, accessible manner.

    The Value Investing Philosophy

    Greenblatt bases his investment strategy upon the value investing philosophy, which was pioneered by industry legends David Dodd and Benjamin Graham, and most famously epitomized by Warren Buffet. Value investing is a strategy that looks to purchase good businesses at bargain prices. Good businesses are those which are able to generate a high return on capital invested. A bargain price is one where the market value is less than the intrinsic value. The difference between the purchase price and actual value is what is known as the margin of safety. Key to the value investing philosophy, this provides a degree of comfort, should business returns turn out to be less than expected, and provide extra returns should things turn out well.

    Throughout the years, many practitioners have had their own methods for applying the value investing philosophy. For example, Benjamin Graham, famously emphasized the margin of safety, even if the business was mediocre. So long as the value of the assets, when liquidated, proved to be more than the price, Graham would invest. This makes sense, considering Graham’s context coming out of the Great Depression. Buffet, on the other hand, has written many times in his annual shareholder letters about how he has learned the hard way the importance of investing in a good business. Buffet has found that a lackluster or mediocre businesses, even if offered at a bargain price, are not a worthwhile investment. Most notably, Buffet had his own run with a US textile business — which although offered at a great price at the time, proved to be increasingly difficult to operate within the US in face of global competition.

    Greenblatt’s philosophy, most broadly, is more in line with Buffet’s than Graham’s. Indeed, Greenblatt is looking to purchase great businesses (as measured by a return on invested capital) at great prices (as measured by the earnings yield). The key difference in his strategy, say to Buffet’s, is that Greenblatt suggests a fair degree of diversification and advocates for yearly churn. Buffet, on the other hand, advocates for investing in relatively few companies, which would each be understood deeply. Furthermore, Buffet was generally a buy-and-hold investor — unconcerned with trends or price changes between years and refusing to sell winners in most cases.

    Greenblatt’s Magic Formula

    In the book, Greenblatt prescribes his own magic formula. He asserts that over time his formula can significantly outperform the market when indexed by the S&P 500. As mentioned, the key tenet of value investing is buying into good businesses at bargain prices. Therefore, the key to understanding and value investing strategy is digging into the framing of these issues: how does one evaluate if a business is “good” and how does one know if the price offered is at a “bargain”?

    For Greenblatt, a good business is one that has a high return on capital, per the following ratio…

    EBIT/(Net Working Capital + Net Fixed Assets)

    EBIT is essentially Operating Earnings, which allows a business’s profits to be considered, without the distortions that arise when using net profit from variable tax rates and leverage ratios. Net Working Capital + Net Fixed Assets is Tangible Capital Employed, which is a metric that assesses how much capital is actually needed to run the business operations. Net Working Capital is the difference between current assets and liabilities; Net Fixed Assets factor in the asset value against the cost of depreciation over time. In sum, this formula is used to understand how much is earned relative to the cost of running the business.

    A bargain price is one where the market price is at a low multiple relative to annual earnings. The ratio he uses…

    EBIT/Enterprise Value

    Enterprise Value is used over Market Capitalization (aggregate value of outstanding shares), because it also factors in net debt, which may be used to help generate earnings. Similarly, EBIT is used to place firms with different leverage ratios and tax rates on equal footing when comparing earnings yield.

    Once these formulas are crunched for a list of stocks within a given market capitalization, the companies are then afforded rankings commensurate with each of their scores. Two ranked lists emerge: one ranking companies with highest return on capital, another ranking companies with highest earnings yield. To be successful, the investor should select a basket of around 20–30 of these stocks, aiming to maximize across both metrics to the fullest extent possible.

    Greenblatt advocates for a simple strategy, which involves recalculating these numbers on an annual basis, and churning the investment account in accordance with the updated scores. For tax reasons, the investor should sell losers just before a year elapses, to maximize tax loss harvesting, and winners just after a year, to afford themselves a lower, long-term capital gains tax rate.

    Per the calculations laid out in the book, from the backtested 17-yr period between 1988 and 2004, the average return was 33%. This is considerably more than the S&P 500 average annualized return during the same period, which sits at 14%.

    My Take On This Strategy

    While I don’t doubt that the results Greenblatt achieved with his magic formula were impressive, and it goes without saying his track record of market-beating returns is outstanding, I think that any investor should read this book with a grain of salt. For one, from a little bit of research I have done, it seems that this strategy has not performed as well in recent years as it has historically. This may be due to a number of reasons, perhaps connected to the outset of the GFC.

    Though some investors are able to achieve outsized returns for a number of years consistently, there is a difference between sustaining 33% annualized average returns over a 17-year period and doing it over a 50-year period. The latter feat being, obviously, much more difficult to achieve. We might say, as a comparison, would it be easier to run an X-paced mile in a half marathon, or in a marathon?

    It is more difficult to achieve substantially outsized returns over a longer period because the world develops and markets change. Strategies that may work during some periods may fall out of favor later — Warren Buffet, for example, iterated upon Benjamin Graham’s strategies. Moreover, if there is a simple strategy that can allow individuals to achieve significantly above-market returns in the future, assuming they can stomach added volatility and be patient, then everyone would do it. And if everyone was doing it, then it would be impossible for these returns to be anything but average. Even Greenblatt acknowledges this very principle in the book.

    There is certainly a lot more I do not know than I do know — and perhaps I am in part naive to critique Greenblatt at this stage of my career — but I think this book presents as a little too good to be true. And I think the average retail investor would be foolish to follow the advice laid out in the book, word for word.

    Where the book does succeed is that it lays a great foundation for value investing, and may lay out a basic strategy that can serve as the foundation of a revised investing strategy, or as a component of a larger one. Even if this strategy is far from as magical as the author professes, it is still sound and valuable.

    I would recommend taking a crack at this book. It’s a quick read, accessible, and enjoyable while being particularly accessible to beginners. But, if part of you ends up thinking it’s perhaps too good to be true — well, it probably is!

  • The Great Transition: The Personalization of Finance is Here — Book Review

    This past October, I attended a panel in New York City for the release of Emmanuel Daniel’s first book: The Great Transition: The Personalization of Finance is Here. Emmanuel Daniel is a singapore-based entrepreneur, journalist and global thought leader within the world of finance. He is perhaps best known for launching the Asian Banker Summit, one of the largest annual meetings for commercial banks in the region.

    In his book, Daniel outlines how the banking industry is undergoing a transition from the platform era to the “Personalization of Finance.” He highlights the role that technologies such as Crypto and Blockchain will play in this transition, and how financial institutions and markets will be forced to adjust in the network age. While the book is about banking and finance, it also explores more holistically a future where everything becomes “financialized.” With each day, the value of an asset becomes less about the asset itself, and more about the data attached to that asset.

    Tracing the Transition Towards Personalization

    Before I engaged with the text, I found myself wondering what exactly the word “personalization” means. The title “the great transition” certainly invokes excitement by suggesting some momentous change… but the word “personalization” was not one with which I could obviously derive meaning. Before opening the book, one may also wonder: “why does a book about finance have a melting ice cube on the front cover?” These two things, incidentally, operate hand in hand.

    Daniel theorizes an ongoing transition in the world of finance that operates analogously to a previous transition that occurred in a now defunct industry: the ice trade. I found this example to be quite compelling, aside from being a neat historical reference.

    Workers dividing a pond into a chess-like pattern, yielding two-foot square ice blocks

    Ice used to be harvested in ponds and lakes in the North and traded by ice merchants throughout the world. In this old industry, ice merchants were the intermediaries, controlling the flow of ice so that it may eventually end up in a cocktail glass in Havana. The trade peaked at the end of the 19th century and eventually collapsed, in part due to the invention of chlorofluorocarbons. Colloquially referred to as freon, this compound enabled consumers to conveniently and safely manufacture their own ice from the comfort of their own home — within their refrigerator.

    We might understand this as being the personalization of the ice cube.

    Indeed, certain technologies can precipitate a transition, which impacts not only business and industry, but the world more broadly. In this case, consumers transitioned from buying ice through the ice trade to producing it at home, largely cutting out the ice merchants in the process. By the time freezers were commercially available, this simply made the most sense for consumers.

    And so, if freon was the technological innovation that shook up the the ice trade, what future innovations may lead (or are leading) to a shake up within financial services ? Daniel’s thesis asserts that the advent the likes of cryptocurrencies, AI, Blockchain, IoT and 5G have the potential to reimagine the financial industry, disintermediating the “ice merchants” of finance in the process, and allowing for a greater degree of personalization. If today, we operate by using a number of different platforms — tomorrow we will each become the platform owner.

    Personalization goes even beyond mere business or technological concepts. It is not just about the ability of technology to change the life of the consumer or impact society. The significance of the ice trade story goes beyond the notion that a technology can disrupt legacy industry, so as to allow you to make your own ice at home. There is a broader theme in these transitions, which he lays out in chapter one…

    “The personalization of technology, business, the economy, finance, and society itself are all expressions of the continued march of civilization towards a realization of the full potential of the individual.”

    – Emmanuel Daniel

    From his perspective, humanity is unshakable in its pursuit of optimizing the individual experience. Although there are roadblocks ahead, and the platform era may still run its course for some time, we have already embarked on a future towards personalization in the financial realm. This future, however it may come about, is inevitable.

    Thanks for taking the time to read this short book review. If you have read, or are reading (I would highly suggest this compelling, if difficult, book), I would love to hear your thoughts in the comments!