REQ Capital's Letter; Antiwork #125
Reflecting on a few interesting reads and listens over the past week
REQ Capital’s Letter
This is a phenomenal letter from REQ Capital, a Norwegian investment fund that focuses on investing in serial acquirers. I'd strongly recommend reading through this one.
There were a few excerpts that I found to be quite interesting.
Attractive Serial Acquirers
To add to the chart below, I'd say that the blue column is a direct product of long-term incentives whereas the grey column is a result of getting quick wins.
Hyperbolic Discounting
This is a super interesting concept that applies to any investment that consistently spits out long-term cash flows (think multifamily real estate, mature software businesses, big tech).
"In hyperbolic discounting, valuations fall very quickly for periods close to the present because we want instant gratification, but they then fall slowly for longer periods that are deferred. The hyperbolic model discounts more than the exponential model at the beginning and less than the exponential model for very long-term events.
Applied in finance, the present value of short-term cash flows is lower than in the exponential model, but the present value of longer-term cash flows is higher than in the exponential model. Consequently, the terminal value in hyperbolic discounting for companies with durable competitive advantages will be higher than in the model we know from business school.
The reason why we find the topic very interesting is that hyperbolic discounting might be one reason why very strong companies with highly predictable cash flows long into the future deserve to be priced much higher than other companies in the stock market. We think that market participants, in aggregate, price these stocks by discounting their cash flows with a discounting mechanism that is closer to the hyperbolic discounting method than the exponential discounting method.
By using traditional exponential discounting to value very long-term cash flows you might actually undervalue these strong long-term compounders that we invest in significantly."
Book Recommendations
They also share a fantastic list of books that are worth diving into. Looking forward to reading a number of these books myself.
Antiwork
This was an interesting read from the Financial Post on the antiwork Reddit forum. It put me down a ~2-hour rabbit hole of trying to understand what exactly was going on. Check out the actual forum here if you're curious or more specifically the FAQ page.
The article itself is an interview of one of the moderators who share her personal story and how 'antiwork' has grown over the past several months.
The premise behind this forum is to 'encourage followers to work as little as possible in traditional jobs or abandon them altogether for self-employment, with the goal of prioritizing leisure time.' Its membership has grown from ~180,000 members to 1.6M since October 2020.
The results of a survey from ~13,000 members in December give an interesting sense of the demographics of this group. Before reading into antiwork, it would have been easy to assume that the vast majority of people were young, unemployed people - however, the survey shows that this is far from the case. Most members come from the 25-34 age group and are employed full-time.
Before we dismiss this as a 'local' phenomenon that's taking place in the U.S., take a look at this article on the lying flat trend in China.
"The “lying flat” movement calls on young workers and professionals, including the middle-class Chinese who are to be the engine of Xi Jinping’s domestic boom, to opt-out of the struggle for workplace success, and to reject the promise of consumer fulfillment.
For some, “lying flat” promises release from the crush of life and work in a fast-paced society and technology sector where competition is unrelenting.
For China’s leadership, however, this movement of passive resistance to the national drive for development is a worrying trend—a threat to ambition at a time when Xi Jinping has made grand ambition the zeitgeist of his so-called New Era."
Over the next few months/years, I suspect we'll see 'antiwork' emerge as a theme/group to be a force to be reckoned with when it comes to policy-making, elections, and more importantly the way we think about the broader population. Unlike other groups (e.g. WallStreetBets), antiwork has far more potential to be a significant global force given the current macro environment and the growing divide between the 'haves' and the 'have-nots.' I also think it won't be long before businesses also start catering to this group (e.g. providing job opportunities, financial services and etc).
In any case, it would be a huge mistake to overlook the power behind the antiwork group over the coming months/years.
Once again -- great finds and post! Always collect new and great "letters" to read and I'll add this to my queue.
Your write-up about the concept of thinking in hyperbolic discounting reminds me very much of what your CEO has spoken to previously in a Q&A: https://www.csisoftware.com/docs/default-source/investor-relations/shareholder-q-a/qa-september-2018-final.pdf (the very last question and answer), on the "very special case of value investing..."