Transcript: Interview with David Kim a.k.a. Scuttleblurb (2023 Edition)
Transcript: Interview with David Kim a.k.a. Scuttleblurb (2023 Edition)
Transcript of Podcast #19
This is the transcript of this podcast:
Liberty:
David if once is a data point and twice is a trend, I guess three times makes it a tradition. Let's continue this tradition of having a yearly interview looking back at 2022. Thanks for joining me, man.
David Kim:
Yeah, sounds good. I'm a little bit outside of my element here doing the podcast instead of a written interview, but yeah, happy to be here.
Liberty:
Yeah, actually the first interview we did, the written one was the first interview I ever did on the site.
David Kim:
That's right.
Liberty:
Two and a half years later, it's still one of the top five most popular posts of everything on the site, right? People like to hear what you have to say. Just today I was rereading part of it. I was quoting some excerpts, some gems that you gave in there, so no pressure, right? You don't have to match that one, but that was a great one. Let's start at the beginning, because some people listening to this won't be familiar with you. Maybe they haven't read the past interviews. I'm going to put them in the show notes. If you could just begin with a little introduction about who are you, where are you from? It's the first day of school and you're the new kid, right? Just to give us an idea.
David Kim:
Yeah, sure. My real name is David Kim. I go by ScuttleBlurb on Twitter. That's also the name of my blog. I have a pretty conventional background. My investment career started at Fidelity on the credit side. I was looking at insurance companies. Went to business school, turned at Citadel between my first and second years, then worked at a long-short equity fund coming out and then launched my own thing in 2016. Today I managed some outside capital and I also write the ScuttleBlurb blog, which is about analyzing the competitive strengths of various companies and looking at them from an investment standpoint.
Liberty:
I'd like you to tell this anecdote because you're one of the granddaddies of the modern online newsletter, subscription website, deep dives type of thing, right? You told me about how when you started in 2017, did you try to get the word how... I know postcards were involved. It really wasn't like today, right?
David Kim:
Yeah no, that's right. I didn't even know that there was a finance community on Twitter. I didn't know that that was a place where people shared ideas and links to different things. That just wasn't on my radar at all. When I was first starting this, it was really... I remember just cold emailing various money managers and giving them coupon codes to the site and doing very old school customer acquisition tactics. Really, my main focus when I was starting this was to manage money. I didn't have a network of wealthy family or friends to tap into, and I didn't really have a professional track record of my own. I knew that it was going to take a long time to get the scale if I ever got to scale at all, and to find the right investors.
I needed some way to bring an income in the meantime. Writing has always been part of my investment process. I thought maybe I could put this stuff online and see who would pay for it. You called me the granddaddy of investment blogging, but really, that title goes to Ben Thompson, right?
Liberty:
Yeah.
David Kim:
He was-
Liberty:
He's the great granddaddy.
David Kim:
Yeah, he was really the inspiration for me because my perception of investment writing at the time was that it could be bifurcated into two categories. On the high-end side, I've worked at funds where we would pay $10,000 or more for investment research and a lot of this stuff for independent investment research, not through sell-side shops. A lot of this stuff wasn't even particularly good or insightful. It was just thick. It had a big FUD factor, so they could charge a lot of money for it. That was like the high-end of things. Then at the low end, once you got to research that was charging less than $200 a year, I found that a lot of that stuff was just sensational schlock. I think Ben Thompson, that was the first blog I had read that was priced low enough that I could afford it and that was also just consistently insightful. Yeah, that was like the spark and it let me know that you could charge an affordable low price for high quality research and build a business off of that and generate income through that. Yeah, most of that credit goes to him, I got to say.
Liberty:
Well yeah, he inspired me too, but I've got to give you some credit and some thanks because when I started, I think it was you and Brooklyn Investor and Andrew Walker and probably a few more that I don't remember, but you guys inspired me to say, "Hey, maybe I could try this thing too, right." Before Substack, the friction going into it was bigger because you have to set up your own website. If you want to charge something, you have to figure out how to hook up all the payments and everything, but once Substack was there, it was like, "Okay, I press five buttons and I have a site and then I got to figure out what I'm going to put in there." I think so much financial stuff is very... I don't know the way you wrote and the others I mentioned wrote was more like you're thinking along with the readers. You're bringing them in your thought process.
You're not trying to sell them something. You're not putting all of the weight on the valuation and trying to convince you it's a good idea. It's more like, "Let's learn about this business together. Let's level up our knowledge of this industry, the dynamics, the competitors. How do they make money. What are the problems?" Then you can make up your own mind about is it the type of stuff I understand? Is it the type of opportunity right now at the price it's trading at that I'm interested in because everybody has a different hurdle rate, right? That's one of the reasons I never write about valuation. First of all, I find it boring. Second of all, how can you generalize it to everybody that's reading what you're writing, right?
Everybody has a different level of knowledge about this industry. Some are going to freak out at the first sign of trouble while others will hold for years and years, no problem, right? Some have high hurdles, some have low hurdle rates, some are super diversified, some are super concentrated. All these factors make it very hard to make a recommendation like, "This is cheap right now. This is expensive." It depends on these other factors. Focusing more on the actual business itself was super inspiring and that's one of the things I love most about your writing.
David Kim:
Yeah no, that's great. Thanks for saying that. Yeah, I think all good investing is qualitative at the end of the day because there needs to be some kind of theory or basis backing the numbers that go into this spreadsheet that people use to come up with their valuations. Yeah, I don't want to come across as a mentor or some kind of guru, that's like the last thing I am. It's a discovery process for me learning about these companies. It's just putting those thoughts out there in the public and getting things wrong and learning and growing. By no means am I trying to come across as somebody just who knows it all because certainly I don't. I'm glad you pointed that out. Yeah.
Liberty:
I'm curious. One effect I found after putting my stuff in public, because I used to write tons of notes, but they were just private notes from everything I was reading, excerpts and links and thoughts and everything. Putting them out there, the double effect is like on one side I'm thinking about them more clearly, because if someone else is going to read it, you can't skip steps. You can't hand wave away a few things, right? You have to think about it a bit more deeply and that forces you to be better, I think. I don't know if you have sudden effect. The other effect is just putting stuff out there, means you are going to get feedback. Once you have enough readers, well, someone's always in some interesting position to give you information. You write about aerospace and some guy who is going to email you, "I work for TransDigm. You write about some software company and a bunch of software engineers are going to write you. These two things are so valuable. I don't know if that's your experience too?
David Kim:
Yeah, for sure. This goes back to the Bezos six-page memo thing. There's a lot of nuance that can't be captured in a PowerPoint slide in bullet points. Sometimes you just need to write it out to see if you understand the idea. Also, I found that just the process of writing tends to conjure new avenues of exploration that you just wouldn't have thought to look at. Yeah, it's a way to help clarify what you're thinking. Also, I think it [inaudible 00:08:04] creativity too.
Liberty:
I often say that writing is thinking. The writing is not just putting on paper what you were already thinking, but the very act of writing itself is creating new thinking, right? You're going to think about stuff you weren't thinking before you were trying to put it down. That's another super powerful aspect of it to me.
David Kim:
Yeah.
Liberty:
Those that don't do it much, it may look easy, but I don't know. Writing is hard.
David Kim:
It's hard. It is.
Liberty:
I'm curious, this is kind of the annual review. Let's talk about 2022. I'm curious to hear-
David Kim:
Do we have to? Yeah, I guess. Okay, no, let's skip this year, right? This year is a write-off. I'm curious, let's talk about 2022 for ScuttleBlurb, because I'm curious about the past interviews we did about how the business is going. What's new? What are challenge is. Any new opportunities? It's also after that I talk about 2022 in investing in the market. Let's start with ScuttleBlurb. How was 2022?
Yeah, I think that 2018, 2019, 2020 were the golden years for ScuttleBlurb, and then growth began to tail off and then declined probably in the second half of 2021. It mirrors what's happened in the markets, I guess. Maybe people feel poorer or they're switching industries, I don't really know. It does seem like a lot of writers in this genre with more than a thousand paid subs has felt some kind of deceleration last year. I also think that maybe there are just structural things in play that are specific to me. If I look at my investment portfolio, it's a hodgepodge of different companies. I've got Upwork, which is an online freelance marketplace. I've got Wizz Air, which is low-cost airline in Eastern Europe. SiteOne landscaping, which supplies-
Liberty:
Very sexy.
David Kim:
... Landscapers. I also got compoundery stuff like Charles Schwab and Amazon and Texas Instruments. These companies, they're in different industries. They've got different growth profiles, different margin structures, and I like it that way. I think that when you try to take that same approach to a subscription blogging business, you run into some difficulties because most peoples interest graphs aren't that kind of random or all over the place. If you're interested in data and observability companies, you're probably also going to be interested in cybersecurity because those two domains are fusing together. There's also going to be probably some imperfect overlap with semiconductors and the FANG stocks and that kind of stuff. There's probably going to be almost like no overlap with less than truckload carriers.
Liberty:
Sherwin-Williams.
David Kim:
Yeah, Sherwin-Williams, which I also own. I think that can be a little bit jarring. I think two or three years ago it maybe wasn't such a big deal because there was just less competition, right. If you were somebody who was interested in semiconductors, you might come across my blog and you might see that I've written a few things about it. I wrote a two-parter on Nvidia. I've written about Cadence and Synopsys, Analog Devices. You might say, "Okay, I might pay $210 a year just for this stuff." There's some other loosely related stuff that I might be interested on this blog, because there just weren't a lot of other options out there, right? Today there are probably 10 different Substack's just devoted to semiconductors, right?
Liberty:
Yeah.
David Kim:
If you're really interested in semiconductors, you're probably not going to spend your money on ScuttleBlurb, you're going to subscribe to Fabricated Knowledge, right? Which is a long shoot out there.
Liberty:
Doug’s excellent site.
David Kim:
Yeah, that's a good site. I think there's some of that in play. Basically, I'm being unbundled, I guess. I find that some of the more popular sites in this genre, they do a good job of mixing timely and timeless content. Just to go back to Ben Thompson, I think he does a very good job at this. If there's some big news story in tech on any given day, you can be sure that Ben's going to write about it, right? He's not just reporting the news. He's going to write about it. He's going to put it in a more durable strategy framework, right. Whereas the timely part doesn't matter to me. I'm more focused on the timeless stuff. I think where that runs into issues is like let's say you subscribe to my site, you're looking through your email inbox and you see I've written something on Old Dominion Freight Line, and you might be interested in that, but there's another email that you've got about ChatGPT.
Which one are you going to read? You're going to read the ChatGPT one, because everyone's talking about that. It's like this big new disruptive technology and you're going to say, "Well, okay, I'm going to read this stuff and then I'm going to save the Old Dominion post for later today. But of course, you don't get to it. The day passes and then there's some other big new timely news story that everyone's talking about. Then before you know it, that Old Dominion post, it's gone. It's just off the radar and it's-
Liberty:
Down the memory hole.
David Kim:
... down the memory hole. Exactly. Those are more, I think, too structural challenges to the way that I write. The reason I started the blog in the first place was because it was something that I could do that was complimentary to the investment side of the business. The two parts were synergistic, right? If I were to actually treat ScuttleBlurb as a business and I was really interested in growing it and making a big thing, there are different choices I would make as far as contact goes, and were I to make those choices, suddenly the two businesses wouldn't be quite as complimentary, if that makes sense.
Liberty:
Right.
David Kim:
It would be more like I would have to divide my time between these two things instead of feeling one thing was reinforcing the other.
Liberty:
Yeah, but now you can use the same inputs to produce two outputs.
David Kim:
Yes. Right.
Liberty:
Yeah. That's super interesting. As someone who writes something that's also hard to describe to a new reader, I don't even know what I do. I write about whatever I find interesting. I have all these different topics, and almost everybody is a specialist today, but there's a few of us kind of generalists. Our only advantage is being really curious and trying to find stuff at the intersections of the other fields or doing a bunch of 80-20s, when all together add up to something decent, right? Because you're never going to be the specialist at their own field.
David Kim:
Yeah.
Liberty:
But I find that your strengths are often your weaknesses. You may see it as a weakness that it's hard to compete against specialist sites on certain topics. Another way to see it is that your target audience is people trying to expand their circles of competence. Trying to learn about new businesses and new industries. If you were only focusing on one, you would probably have a lot of competition because as you say, there's like 50 Substack writing about every popular niche. There's not that many of them that are doing what you're doing, right? That are writing about tons and tons of different things that can expand. That may not be as popular by itself, but it's also much more differentiated as it's much harder to do well, right?
David Kim:
Yeah.
Liberty:
Someone else trying to do the same thing that you're doing needs a lot more general knowledge and just having the curiosity to keep going for years and years. Doing that is very hard if it's not really coming from inside, right? If it's not intrinsic motivation, clearly you're not doing this because you think it's the best, most popular marketing thing, because that's how you learn about things and you're sharing it with us.
Well, if someone looked at ScuttleBlurb and said, "Oh, that's a popular newsletter, I'm just going to copy the model." Well, they're going to burn out after six months if it's not really coming from inside, if it's not really how they think about learning about businesses and industries. I have a lot more timely stuff in my newsletter. I think that helps me there to almost always have something that's more popular in the moment. I would find it difficult too if I was out of sync for a while with the side guys, right? If everybody's talking about ChatGPT, and I'm like, "Okay, this month I have Sherwin-Williams. It's going to be a great deep dive." It's not quite in sync, right? While maybe six years ago or something, Sherwin-Williams was actually very real and authentic, right? Bluegrass... All these guys were talking about it.
David Kim:
Yeah, that's right.
Liberty:
Once in a while you're in sync, but once in a while you're not. That's a trade-off.
David Kim:
Yeah, there's different ways to categorize things. I think most people, their interest graph is related to industry, I guess, right? You're interested in tech broadly, or you're interested in industrials broadly. There's a class of investors who are interested in compounding companies. We all know what those are, right? It's the usual suspects. It's like Moody's, Constellation Software and that kind of stuff. They're different industries, but they all fall within that same category, like compounder category.
Liberty:
It's like a meta category,
David Kim:
Yeah. People are interested in that stuff. They're not going to want to read something on Teladoc, for example. There's different ways that you can slice and dice this. Yeah, I guess it just goes to the point that I'm not here trying to claim any expertise here. Certainly I know a lot about the stocks that I own, for the accounts I manage and personally, but that's a fraction of the companies I actually write about. I certainly can't claim to be an expert on all of the stuff that's on the blog. I'm a generalist trying to figure things out, I guess.
Liberty:
Yeah. Well, I'd like to see who's an expert on all those companies. I don't know if it exists. I think the value is in learning along with you. That's one thing I love about your writing is not pretending to be like a Wikipedia page about the company. It's like, "Oh, I'm thinking about this. I wonder about that. I found this, but I'm not sure." It's all probabilistic and nuance, and the questions you're asking yourself are probably the same questions I would ask myself if I was looking at the thing. It's a way to think along with you. You're bringing people along and part of the value of that, it's not only the actual facts that you're learning about the company, is that after you read a bunch of those, you learn to learn, right? You learn to learn about new companies. You learn, "What questions should I ask about?" What should I look at?
You can never look at everything. There's just too many things that you could spend a year on just one company if you look at everything. Some things are more important than others. After a while you find patterns like, "Okay, what kind of stuff should I look at with competitors? With industry dynamics? Is there a secular trend in there?" Stuff comes back again and again? That to me is part of the... No, you're not a guru, but there's still a little bit of a T-shirt thing going on. There's an education that your readers are getting, and that's part of what I love about it.
David Kim:
Yeah, well, that's great. There are, I guess, common frameworks that apply to all these different industries. I talk about scale economies a lot and scale economies can express themselves in different ways. There are some kind of framework that apply across different companies and industries. It's not totally random, I guess.
Liberty:
A lot of people will learn about a bunch of frameworks and then they'll try to apply them everywhere and over apply them everywhere and see the patterns where they're not. The next step is like to learn when the frameworks apply and what the base rates are for them, and to stop basically having the man with a hammer seeing nails everywhere thing, right?
David Kim:
Yeah, you don't want to be creating epicycles everywhere and try to make everything fit into your preconceived way of thinking about the world. Yeah, that's right.
Liberty:
To go back to what you mentioned about the newsletter cycle following the market cycle, our friend MBI also published his annual letter recently, and I was looking at his... he shared this metrics and you shared some of your metrics too. I think it's the Visa-MasterCard post. Looking at those side by side, you can see the very similar curve. I'm on some group chats with other newsletter writers, and I've seen some of their metrics and it feels like there's a macro thing going on here. I don't think any newsletter writer can't put too much blame on themselves for what's been going on in 2022 because it seems to have happened across the board. I don't know if it's what you said. Some people just blew up or they're like, "Screw this. Investing is not for me anymore." They're just tightening the budget a little bit, unsubscribing from a few things, but it definitely feels like there's a macro trend.
The question I can't help but wonder is what's the normal trend? Was 2020, 2021 a bubble kind of off trend, weird temporary thing, and now we're back to a more normal environment? Or maybe 2021 was too much, but 2022 too low, right. Is it somewhere in between? It's very hard to know, but I can't help but wonder what's the normal trend.
David Kim:
Yeah.
Liberty:
2022 for me was... It wasn't terrible. My pay stubs mostly went sideways, but just the change of trend was strong enough that I changed my business model. I used to have everything free like voluntary payment, just pay if you want to, but you still have access to the same stuff. About a year of that, at some point it just didn't feel as good to be working just as hard and to go sideways, right? I changed the model a bit.
David Kim:
How has that gone, now that you've changed the model? Have you noticed anything different? Are you happy that you made that change?
Liberty:
I did change in mid-November. It was right before US Thanksgiving, and then after that it was the December holidays. I feel like the picture is muddy because of all these things. I think I'm going to start seeing now in the beginning of the year, what's the new normal really is. So far it's been really good. The trend that's moved back up to what it was in 2021. I've got a lot of feedback of people telling me it was the right thing to do. It was just basically normal. Everybody did it. I was the one trying to do the weird model, trying to make it work. To me, it was working until 2022. I know it's not a rocket ship. I know it could convert more people and all that kind of stuff, but it felt like enough. It felt like if I keep going on that trend, it would've felt like enough for me. I liked having the extra reach that not having a paywall gives you, because that's one of the trade-offs. I'm sure you feel the same sometimes, right? It's like, "Oh, I wrote something great. I wish everybody could read it." But I also have to pay the bills and feed my kids.
David Kim:
Yeah.
Liberty:
It's always a trade-off between reach and monetization.
David Kim:
you've been writing your Substack going on three years, right?
Liberty:
About two and a half. I started in July 2020.
David Kim:
Has there been anything so far that you've been surprised by either positively or negatively?
Liberty:
I think everything surprised me. Humans are such that you get used to stuff really quickly. Now it seems normal, but if I try to put myself back in how I was at the time, when I started it, I had no idea where it was going. It was just a side hobby. It's like, "Oh, if I have 1,000 subscribers at the end of the year, I'm going to be happy." It was much more than that. It's like, "Oh, wow, okay. Some people like the same kind of stuff I like. That's cool."
David Kim:
You're more eclectic than I am, because you bust out side of the business and finance category entirely and you read about TV shows and the arts. Which parts of your writing do you think are get the most traction or the most readership? Is there any way to know that?
Liberty:
I can't be sure. I did a survey once and a few polls where I ask people rank your favorite subcategory, and is there something you read every time? You read business every time? Do you read science and tech every time? I also ask, "Is there one that you skip every time? From the survey I know that about 50% of my readers work in finance, so I'm guessing that this is the main thing. Most people follow me on Twitter, probably follow me for finance stuff, and so they get in for finance. It seems pretty varied. If I go by the polls and the feedback I get, there's no category I could remove and everybody would be happy. There's an audience for every sub-category. Some people, they're really into the weird intros. My wife skip businesses every time, but she loves the art section at the end.
I got a bunch of feedback every time I write about a book or a TV show. I feel like probably the central one is the business section, but some people probably are into the weird intros. Some people are really into the art stuff or the science and tech stuff. The service I'm trying to provide is, most people, as I was mentioning it earlier, are specialists. The way to get ahead in life and your career. To specialize in something. Most people don't have a ton of time to explore everywhere else. I'm like exploration as a service, right? I'm like, "Okay, I'm going to spend my days looking at all kinds of stuff. Whatever I find interesting and I'm going to put in there, and hopefully it's curated in a way that resonates with you, and if it does, you're going to discover stuff you may not have found otherwise, or maybe you have found it, but I summarize a five-page thing and I gave you the highlights so you're saving some time." That's like the service I'm trying to provide.
David Kim:
Yeah no, that makes sense. How do you consistently find content for your Substack? Do you have a defined reading list every day that you're going through, certain sources that you reliably tap into, or is it just like you're going through Twitter and you're coming across things in a more haphazard manner?
Liberty:
I think it's Will from In Practice would describe me as this serendipity engine. It's like just random. It's purely like I have a tons of tabs open and one thing leads to the other. I have some favorite websites that I check again and again, and I tend to find more stuff there. I have this notion file where I'll bookmark stuff I find interesting, and this always grows faster than it shrinks. It's trending towards infinity. Whenever there's a slow week where I'm finding fewer things just organically that week, I'll look in there and I'll find some older evergreen things I can write about. I feel like I could write five editions a week and still not run out of stuff. Everybody has different skills, and one of my skills is just finding stuff. Finding interesting stuff, finding people, finding blogs, finding books, finding-
David Kim:
Yeah, well, you actually discovered me. I think the whole reason I joined Twitter... I think you... What was the post? I think maybe it was my Moody's post, and I think you sent a link out on Twitter, and that's what got the snowball rolling. This was back in 2017, I think. Yeah.
Liberty:
That's great.
David Kim:
I remember that. Thank you.
Liberty:
Happy it happened the way it did, man.
David Kim:
Yeah.
Liberty:
Yeah, it's probably the same reason why it's hard to describe what I do because I don't really know how I do it. It's just an extension of my personality, basically. It's like if we're sitting at a table with a ball of peanuts and some Scotches and chatting about random stuff that we find interesting. Well, that's like the same stuff I'm putting in a newsletter.
David Kim:
Yeah.
Liberty:
There's no method to the madness, really.
David Kim:
Yeah. I like it.
Liberty:
2022 was like a bad year overall. We'll talk about the market, but for newsletters it was hard. Partly, it's probably what you said. There's more competition, there's probably fewer people willing to as easily subscribe or pay for things. All that was hard. You have plans like, "What's the next move?" I know you recently launched a new thing. Do you want to talk about it? Are you going to launch a TikTok channel with dances or top of funnel stuff or the next move?
David Kim:
[inaudible 00:27:17] that segue there. Yeah, I recently launched a Substack. There's a Substack version of ScuttleBlurb. It's going to run alongside the WordPress version of ScuttleBlurb. It's going to be the same exact content. Yeah, I'm a big fan of Substack. I really like what they've done with the product. The app is one of the first things I open in the morning. Just from a consumer's perspective, I really like what they've done. Then I've started to just in the last five or six days, I'm porting over my content and I'm just tweaking a few things in Substack. I just really like the experience from a creator standpoint.
I don't think I realized how... Right now the WordPress site that I use, it's like an amalgamation of a dozen different plugins that make it work. I've got to plugin for subscriptions for the e-commerce store. It's a mess because sometimes they don't play well together, but it was a mess that I thought was tolerable and something I could put up with. Now I'm using the Substack and it just such a good experience and it just makes what I was doing before seem much more difficult by comparison. Yeah, just really happy with a product. I've got that out there and we'll see how it goes.
Liberty:
You say it's the exact same content. Any plans to expand to a free list or something? I know our common friend MBI used to be on the same model as you. Actually, I think he said that you were the inspiration for MBI Deep Dives. Recently he started to build the free list. He has this newsletter where even if you're not a paid member of MBI Deep Dives. You can still get updates when you posts. He has earning analysis and he has a bunch of free stuff once in a while, right? He plans to do something similar... My newsletter is more personality based. By that I mean I have this framework in my head where it's like every type of content is on the spectrum between utility and personality.
A bunch of people think that all they want is utility, right? Give me ideas. I want to invest, I want to make money like, "Give me facts and advice." I think people mostly lie to themselves. I think most of them are more on the personality side than they will admit. Most people, I think, they subscribe to Ben Thompson because they just like him and like reading his stuff and listening to him on podcast and they like the way he thinks, and there's the optionality that they're going to have ideas about FANG and about these companies and get investment ideas. They generally mostly do it just because they find it fun, they find it entertaining and interesting and they learn stuff. Even if they don't make investments based on Ben Thompson stuff, they're probably still subscribing. Right? Yeah. I feel like I'm a little [inaudible 00:29:55] that direction where, because my stuff is hard to say like, "This is what it's about." It's more like, "If your Venn diagram of interests are overlapping with mine, maybe you don't know what I'm going to give you, but you may be interested because we are similar. We have similar curiosity."
David Kim:
Yeah, right.
Liberty:
I feel like Deep Dives, like you and MBI are a little bit more on the utility side than what I'm doing because it's more specifically about company X. It's about one very specific thing and like, "Okay, this month I wrote about Visa and then I'm going to write about Cloudflare and then so on. I feel that even the people subscribing to your stuff because they think they want the utility, they probably are still looking for some of that personality, right? If you read a bunch of your stuff over time, you can start to know your personality and how you think about things. That's part of the appeal, I feel like. If you had more of a free thing, people could get to know you a little bit more, trust you enough to press the subscribe button with the payment. I feel like that would be very good for you.
Because your stuff is good, it would be good for your readers too, right? That's one thing I've been discussing with MBI a lot is a bunch of us are a bunch of nerds and we're introverts, and it feels really weird to promote our stuff and market our stuff and try to tell people like, "You should subscribe. You should pay for..." It feels super weird. If you are really convinced that what you're doing is good work and useful work and that it's providing a lot more value than 10 or 20 bucks a month or whatever, because most of your readers are investing much bigger sums, right? Most of them are not tiny investors. If it's really good and it's really helping them, then it's almost like a disservice you're doing to people not to promote it, not to market it, not to make it easy to find and easy to subscribe and all that kind of stuff. It's like you're keeping a good thing away from them, right? That's how I try to think about it when I have to do this marketing stuff that feels weird to me. All that to say, I think if you had more of a free thing, if people got to know you a little bit more, they didn't have to pay to see your stuff, I think it would really help.
David Kim:
Yeah, I've been thinking about ways to do that without, I guess, taking up too much of my time because-
Liberty:
Could it be a preview for a post?
David Kim:
Yeah, exactly. That's something I was exploring because one of the cool things you can do on Substack is you can impose the paywall anywhere on the post. That's a really nice feature. It might be one of those things where I put that paywall in a third of the way through the post or 20% of the way through the post, or maybe I start taking things that are a few years old off the paywall. There's different ways to do it. I don't think I want to produce more content though.
Liberty:
Right.
David Kim:
I just have to think maybe more creatively about the stuff I'm already doing, I think. Yeah, Ben Thompson, he's playing a different game, right? He's become the standard in tech. It's just something you have to read if you work in tech.
Liberty:
Yeah. He's a shelling point by now.
David Kim:
Exactly. Yeah, because everyone references him and people talk about his posts, and he's doing all these podcasts now. He's really top of mind and so that's a little bit of a different. Yeah, he has higher ambitions than I do.
Liberty:
Well, actually I feel like in the past year, he's reinvented himself. I don't have a good sense of time, so I can't exactly say what period, but there was a period where I think he got lost in a certain direction that he himself didn't like that much, so he ended up writing almost all the time about Facebook regulation and the EU and like, "Okay, Congress is passing this bill." It's all super important stuff and it was great that he was doing it, but at some point it felt like he wasn't as into it. I don't think he knew how to get out of it for a while. Now I think he's done it brilliantly. I think he's found a way to get up from that jam and the podcasting stuff. He's launching new creators around him like Sharp China and all that stuff.
His daily stuff has gotten more varied. Now that he's not like the new guy, the underdog, now that he has access, he's using it to do these interviews with Jensen from Nvidia and Satya from Microsoft. He's using his newfound access and power and distribution. Now if he's launching a new podcast, even if he's not on it all the time, he has the distribution. He has the audience to make it instantly much more successful than if the thing was starting from zero. He's creating a Ben Thompson bundle. That's interesting.
David Kim:
Yeah no, totally. Yeah.
Liberty:
As a generalist, you were asking me where do I find my ideas? I'm curious about the same thing for you, and if your research process has changed over time? Is it still just something's interesting, you make a note and next month I'm going to write about this? Or is there more of a method to it? Has it changed much since 2017?
David Kim:
The research process itself hasn't really changed at all, to be honest. As far as how I find stuff to write about on the site, it's mostly just building on stuff that I've written about before. I feel like if you're doing this right, when you're researching a company, you're never researching just that company. You're looking at their competitors, their suppliers, the overall ecosystem in which that company operates. You're looking at four or five different companies at least. If you're writing about Visa and MasterCard, you're probably also going to tiptoe into merchant acquirers and issuer processors and wallets and pay facts. Payments is a particularly rich space with lots of veins to mine. Even something like Moody's, you might look at Moody's and then learn about standards based moats, that's also relevant for MSCI or Verisk. You might write about those companies and apply that same framework. I've probably got dozens of write-ups that are in various states of completion that I just haven't published.
Liberty:
Oh, that's interesting. I didn't know that.
David Kim:
Yeah. Some of these date back to 2018 or 2019.
Liberty:
And they dead or are they all still just in various stages of progress and you go back once in a while or sometimes you finish something and instead of starting something new, you look at the old pile and you revive something? How does that work?
David Kim:
Yeah, sometimes I'll go back, but for the most part they're kind of just in cold storage. The reason I don't publish those is because ultimately I just don't think I have a point of view or I don't feel like I'm adding anything to the conversation. You can't know that ahead of time, right? It's just hard to know that you don't have anything interesting or thoughtful to say until you start to actually do the work.
Liberty:
It's the classic line. If we knew what we were looking for, it wouldn't be research.
David Kim:
Yeah, right. Exactly. It's interesting because when you're going for timeliness, like Ben's doing, you have the prompt already served up to you. The prompt is whatever people are talking about that day. When you're writing about a company, the prompt isn't very well defined. In some sense, that gives you more freedom to move. There's more service area as far as things that you can actually discuss, but you also have to be careful not to rehash things that everybody already knows. If I were to write about why Meta is a good business, and I spend most of the writeup talking about network effects. That's not wrong, but it's like, "Thanks, 2010 wants [inaudible 00:36:47]," You know what I mean?
Liberty:
Yeah.
David Kim:
That's like an obvious case. Sometimes I just find with these write-ups that the right answer and the relevant answers also the very obvious answer that everyone knows. There's not something like an ATT or a ChatGPT that potentially that changes the game for this company or this industry in a big way. It's like, "Why am I writing about this at all?" I just end up with a lot of write-ups that just don't make it.
Liberty:
Yeah no, that makes sense. That was a question I wanted to ask you. Is it ever the case that you were going to spend a ton of time researching something and at the end of it you're like, "Okay, I don't have anything usable here. I can't write about this. I just don't have an opinion, or I just don't understand the industry or the company or just all this research just didn't lead anywhere."
David Kim:
I think close to 70% of my subscribers are professional investors. I just think if it seems boring and obvious to me, it's probably going to be boring and obvious to everyone else. I might reference those write-ups for my own private use, but I see no reason why to clutter the conversation and publish it.
Liberty:
Speaking of publishing, I'm curious of what you published in 2022. Is there anything that stood out? Any companies that you know found most interesting or you found most perplexing? I was looking at the list, and as we were saying earlier, it's super varied, right? It's like Dexcom, GFL, Texas Instrument, Trupanion, Salesforce, Verisk. It's like super wide scope, super wide range of industries and companies. Any of those stand out to you as partially interesting or you're prouder of the write-up or anything stands out looking back?
David Kim:
Yeah, I guess Carvana would be one that'd be interesting.
Liberty:
That was eventful.
David Kim:
Yeah, I think my knowledge here is going to be a little bit dated because I think I wrote this thing almost a year ago and I just haven't really kept up with the story. Somebody sent a tweet a little while ago, and I think I shared it with you, and that said, "Well, the red flag here was they were generating negative adjusted EBITDA." I felt like, "Well, there are red flags at Carvana for sure." I think negative adjusted EBITDA, I don't think that would be the thing I would use to disqualify it, because by that criteria-
Liberty:
But it sounds right.
David Kim:
Yeah, in the early stages of scale, Snowflake, Amazon or Walmart early on would've been uninvestible, right? I think the more important thing I think with these companies that are in the early stages of scale is just the trajectory of unit economics. You can have a situation where a company has positive and improving unit economics and it's still burning tons of cash and generating negative EBITDA. Those things are not incompatible. If you're doing that as a company, you either have to have the balance sheet to support that, or you're just going to be dependent on the charity of the markets. I think back when I was looking at Carvana, it had close to six billion, this was pro forma for the Odessa acquisition, but close to six billion of unsecured debt. That excludes all the asset back stuff and less than a 100 million of EBITDA. If you look at a business like TransDigm, they sell these small mission critical maintenance components. In the aftermarket, they realize huge margins on that stuff. It doesn't require a lot of capital to run. Yeah, you could put five or six turns of leverage on that business-
Liberty:
Or more, and they do.
David Kim:
More yeah, and probably be fine. If you're missing a valve to a fuel pump or whatever, the plane can't fly. Every piece needs to be there.
Liberty:
If you don't have the parts, it's going to cost you a lot more than the price of the parts, right?
David Kim:
Yeah, totally. TransDigm, I think for 80% of the components they sell, they're the only supplier. Carvana is the opposite of that. It's operationally complex business that became even more complex with these supply chain snarls and labor shortages post COVID, plus they're entering a period of rising rates and a funding sensitive business, which reduced demand and sent [inaudible 00:41:02] economics going the other way. It's very capital intensive. When you heap a ton of debt onto that, it becomes a very precarious situation. Yes, you can say that there were all these unforeseen events related to the macro, but unforeseen events happen all the time. Something like this was going to eventually happen, and Carvana was not built for resilience. There was a reason I wrote about this company is because I actually thought it was an interesting business model. The equity could be a zero, probably is a zero, but the business model itself is interesting and there's probably positive enterprise value here. I think this was a case where the business model was interesting. I think that their ego was just writing checks that their balance sheet couldn't cash.
Liberty:
The thing with these probabilistic, it wasn't 100% that it was going to happen this way. There's an alternate history somewhere in a different universe right now where Carvana is fine, because the market just went a different way that was worked better with the way they were geared, and they were able to transition out of it somehow over a few years. But in this universe, well, they ran out of time.
David Kim:
Yeah, I looked at this as an investment. I ultimately put this in the too hard pile because I was scared of the leverage and I was scared of the valuation, but as it was selling off, I thought it was, maybe, a binary bet. Maybe it was a zero, but it could be a 5 or 10X, and maybe this is backward looking, but now I'm thinking that disaster was maybe inevitable because at some point, just because the management team was just so aggressive, we often think about a large addressable market as this unalloyed positive thing. In the wrong hands, I feel like the bigger the tam, the more rope you can give a company to hang itself, right? Because the way that you get yourself in the position where you've got this big unsustainable debt load and huge cash burn and negative profits, is that you're able to justify that by saying, "Well, we only have 2% of the tam." Right?
Yeah, I think the write-up, I could have done that a lot better. I think I focused way too much on the business model and how that could be interesting at scale, but it doesn't really matter if you can't get to the finish line. I spent maybe a paragraph on the balance sheet, but I should have devoted a lot more time to that.
Liberty:
Yeah, though it's not like it's the only business that ran into problem in the past year. Bunch of much better businesses than Carvana are down almost as much. It was hard to single out as a particularly bad mistake, I guess.
David Kim:
Yeah. Well, this is what I do think was a particularly devastating outcome. The stock, I mean.
Liberty:
Oh, yeah, for sure. No, I'm not trying to sugarcoat it, I'm just trying to think of the alternate history where the market is doing great and Carvana is down 99% or something. It's like, "yeah, you really picked the wrong one." Right now there's hundreds and hundreds of businesses down like 60, 70, 80%. It's done more, but there were so many ways to lose money in the past year.
David Kim:
Yeah no, that's right.
Liberty:
I'm curious to talk a little bit about what I know more, because I don't know much about Carvana except what I read in your piece. What do you think about Texas Instruments? That's a fun one, I think. That's a very, very old school, very interesting business.
David Kim:
I think there are a lot of parallels with something like TransDigm. They sell a lot of these small... It's the kind of stuff that's absolutely necessary for almost any electronic product to run, you just wouldn't even think to know was in there. They manufacture these analog chips that convert analog phenomenon into digital signals that... Your thermostat or anything that runs on electricity
Liberty:
A car, washing machine, a dishwasher, a TV, anything.
David Kim:
They're found pretty much everywhere. I like a business with those characteristics where it just runs in the background and you take it for granted, but they're essential to the functioning of everyday life.
Liberty:
Yeah. I think one interesting thing about them versus other semiconductors is analog is like its own thing, right? It's on the side and analog engineers are not the same as digital engineers. It requires different training. It's almost like people keep calling it black magic, but it's like it's more esoteric. You almost have to learn it by doing for a while. You need the experience. There's not tons of analog engineers coming out of university all the time ready to have a new startups to compete with Texas Instruments and Analog Devices and all these companies. The catalog is so wide, they have hundreds of thousands of cues, and they sell every one of them for 50 cents, couple a bucks, right? If you want to compete, you have to recreate these cues one by one by investing up front a bunch of money, and then you are selling these chips for pennies. Then you have to do that thousands and thousands of time to even make a dent in the catalog.
It feels almost impossible to compete with, right.
David Kim:
Exactly.
Liberty:
Of course. I'm sure China is spinning up a bunch of trailing edge fabs and they're going to do a bunch of data, especially now that they can't do much on the cutting edge because of all of the restrictions placed on them by the US to get ASML and TSMC and all these critical parts of the supply chain to do leading edge nodes. Still, even if competition goes up there, it feels very, very hard to attack.
David Kim:
Yeah. I agree.
Liberty:
I love that. Management is so rational, it's one of the only companies, they have a yearly capital allocation call and they're going to put up slides and explain how they think about allocating capital between different segments of the business and they're running off certain segments that are not giving enough ROIC, and all they care about is free cash flow per share. They're not optimizing for margins or for growth. I wish we could clone some of these guys and sprinkle them over other companies so that they could inject some of that culture everywhere because it's rare.
David Kim:
Yeah, absolutely. They're going through a big CapEx cycle now. The returns on these fabs that they're building are just enormous. They're not building the leading edge chips, they're kind of on prior generation nodes for the most part. Yeah, they might invest six billion up front for a fab, but these fabs run for 30 years. I think the one they're shutting down has been up and running for 50 years. They're getting six billion at capacity each of these fabs at probably 60%, 70% type margins. It's just massively positive NPV, that I feel good about their prospects.
Liberty:
Yeah, and whenever they have unsold inventory, the life of these chips is so long that they just pile them up and sell them later. These things don't age very quickly. It's not in [inaudible 00:47:42], right? If they order too many cutting edge chips from TSMC and they can't sell them, well, in two years, they're not going to be cutting edge anymore, right? The value declines rapidly, but some chip that was made 20 years ago, maybe the exact same one that they're putting in cars or washing machines today.
David Kim:
Yeah, that's right.
Liberty:
Cool. Last thing I wanted to talk about is I'm curious if you had any advice to give to someone starting and investing. I sometimes get friends of friends, or people ask me what I do, and I tell them a little bit, and then they start wanting to talk about investing. My advice is similar to Buffet. It's like, "Go buy some index funds and don't touch them." If it is not something you want to do full-time, not passionate about, you're not getting intrinsic value out of just doing it's probably not worth trying to even be fancier than that. Apart from that, if someone comes to you and says, "Yeah, okay, I understand that, but I want to do more. I want to learn more." Apart from maybe reading ScuttleBlurb, is there any advice you'd give to these people to get on their path?
David Kim:
Yeah, there's just so many different styles of investing. They can all work. Somebody like David Tepper, he seems to take more of a macro approach and express those views through equities. Someone like Citadel will do bottoms up work, but they'll do it to try to call the quarter. Somebody like acre capital will also do the deep fundamental work, but they're thinking like business owners that they want to own these companies for forever, essentially. Some people will say the long term is just the series of short terms, and that's something that people say more often when the markets are down. In 2021, it was never sell. Then than last year it felt like more
Liberty:
Never recover your shorts.
David Kim:
I think that's technically true. The long term is a series of short term, but it changes the nature of the questions that you ask. If you're wrestling with both long-term questions and short-term questions, the short-term questions are always going to win. They just will. If you think about a 10-year time horizon as just a series of 120 months, you're not going to ask 10-year questions. You're going to ask one-month questions. Yeah, this is going to sound pretty cliche, I guess, but you want to go with an investment style that suits your personality because that's the one you're going to be able to stick with. Yeah, I feel like just most of the longer term lessons in investing, they sound pretty... We all know what those are, right? It's like pick a style that appeals to you. Think of volatility as changes in opportunity costs rather than changes in the scorecard. Don't over extrapolate. Think for yourself.
It's just consistently applying those lessons in practice, that's the hard part and takes experience. I would say that in my younger years, when I was in my 20s and first getting started, I used to be really attracted to complex ideas. I used to think of investing as mostly about IQ. I think over time as I've transitioned from an analyst role to more of a risk taking role, I've come to appreciate the relevance of emotional intelligence. It's things like, "Can you change your mind? Are you capable of hearing counterpoints without being defensive or losing your temper? Are you consciously aware of your emotional state as you receive certain types of information?"
Also, the kinds of intelligence maybe changes as you age. I was listening to this podcast, I don't remember which one, but the guy being interviewed was just talking about the difference between fluid intelligence and crystallized intelligence. I think he was saying that in your youth, in your teens and 20s, fluid intelligence is maybe more dominant where it's about processing power and memory. Then as you age, that diminishes, but you're crystallized intelligence becomes more a factor where that's more about pattern matching and wisdom and that kind of stuff. I think all of that stuff, the pattern matching, the wisdom, the emotional awareness, that just rolls up into judgment. I think judgment is the thing that is maybe the key thing of separating analysts from risk takers. There are two different kinds of errors that you can make in investing.
I think the first kind of error is you have a thesis about a company and it just doesn't play out. A few years ago, there's thesis about Twitter like, "Okay, they're refactoring the ad server. That means that they're going to be able to go down funnel and do direct advertising easier instead of brand advertising, realize more revenue per user. They're going to be able to roll out products faster. That's going to draw in more users, and that creates more inventory for ad." There's that thesis and that was a thesis I bought into as well and I think that was pretty much wrong. That's one type of error. The second type of error is just misunderstanding the nature of the bet that you're making, right?
Liberty:
Right.
David Kim:
Usually the way that instantiates itself is in position sizing. The company that comes to mind there might be something like Coinbase. If you're looking at Coinbase, you're not just having a view on crypto trading volumes, but there's also so much competition around that space and just very valid questions about whether their margins are sustainable. The thing about that is there's no amount of diligence that you can do today. You could talk to everybody in the space. You can talk to everyone at that company, but there's no amount of diligence that's going to give you a firm handle on what all that looks like in 5 to 10 years. There's just this insurmountable amount of uncertainty. That should give you pause. That doesn't mean that you can't have Coinbase as a position, but maybe it's more of a 3% position instead of a 30% position. With the first type of error, which are more analytical, I think more information can mitigate that to some degree.
When it comes to that second type of error, information can sometimes be hazardous. I sent a tweet a little while back. It was something like, "Lots of diligence plus poor judgment can lead to terrible outcomes." This is what I meant by that. It's not just sunk-cost fallacy where because you've put in a lot of work, you feel compelled to own a stock. It's more just that you're doing all this work and that gives you a misplaced sense of confidence. You think that you know more about a company that is actually knowable, and that's how you get into these positions where you find yourself in a position where you're making some of these names a lot bigger as a percent of your portfolio than they should be and then you're doubling down on them as they trade down. That's how you find yourself caught in a real problem, I think. Yeah, I don't want to sound like I'm getting on a high horse here and moralizing or whatever.
Liberty:
No, it's great stuff.
David Kim:
I've certainly made a few of those errors on my own. I own this company Upwork, and my entry price into that stock was 16 times gross profit. I think at one point in time it was a high single digit percentage of my portfolio. We're all subject to it. It's not like there are some people who have good judgment or bad judgment. It's more that people apply good and bad judgment to different things. It's a hairy topic.
Liberty:
It's a lot of the same things I've found over time. The more I think about investing, the more I realize that when you get started, you think there are all these secrets. "I just got to learn how to do it. The pros must know the real..." Most of the lessons are pretty simple. They're just very hard to do consistently over time to remember. You have to learn them again and again and again, over and over.
David Kim:
Learn them again and again. Exactly. Yeah.
Liberty:
That's the thing, right? It's like for a human a couple years is a long time, but the metabolic rate of businesses, it's not the same, right? We have plenty of time to forget a bunch of important lessons during 2021 when everything is going up, and then we relearn them again a year later. In hindsight, it all looks pretty simple, right? A bunch of people overpaid for a bunch of really good companies that were overvalued because interest rates were low and FOMO and this and that. All that stuff is super obvious except when you're in the middle of it and you have all these other psychological factors that are pushing you in ways that make you forget the lessons. The other thing that you mentioned and I keep learning is when you get started, you're trying to copy other people's styles, right? "Oh, I'm going to invest Buffet. I'm going to do deep value like Prem Watsa. I'm going to be like Druckenmillerr and Tepper." People pick heroes and mentors and they try to imitate them, right? I've read Seeking Alpha pieces of people who think they're George Soros.
Figuring out what works for you matters a lot more than figuring out what's the best way in the abstract right out there, because you're not Buffett, you're not Soros, you're not Druckenmillerr. Figuring out who you are, right? The way I invest would be different if I was smarter, if I knew more about biotech or other industries, but I know the things I know. I have the limitations I have. I also have limitations that I decide to have. If I decided to shut down a bunch of stuff that I'm doing in my life, I would've more time to learn about X, Y, Z. But if I don't want to do that, I should be aware of those limitations and not overextend myself in those directions. Yeah, figuring out what works for you and what your limitations are, this is worth the bunch of IQ points, as Buffett would say, just learning your psychology. Will you freak out when everybody else is freaking out? Knowing that stuff about you is more important than you doing fancy math on Excel spreadsheet.
David Kim:
Yeah, totally agree.
Liberty:
All right. I guess it's the 2022 exit interview.
David Kim:
Yeah, I think this was a good one. Yeah, this was good. I like it.
Liberty:
Thank you. I'm going to put all of your links in the show notes.
David Kim:
Yeah. Thank you, Liberty. It's great to talk to you.
Liberty:
Bye-Bye.