What I learned this week: Week 17

Here are my major learnings during the 17th week of 2017:

Freemium is an interesting business model, writes Tren Griffin:

  • The essence of the Freemium model is to reduce the price of acquiring a customer. At its core, freemium is a novel marketing tactic that entices new users and ultimately potential customers to try a product and educate themselves about its benefits on their own. By shifting the education workload from a sales team to the customer, the cost of sales can decrease dramatically.
  • Freemium describes a business model in which a business gives one product away for free or at a subsidized price and then either: (1) sells another profitable product to this user base; or (2) sells access to that user base to third parties (e.g., advertisers).
  • Three versions of the Freemium approach are – (1) Available Forever like Google and Facebook, (2) Premium Freemium – a basic free version, and a paid premium version, (3) Limited Freemium – free trials
  • Freemium phenomenon is on the rise as a customer acquisition technique as the world become more digital and networked. The defining characteristic of anything digital is its zero marginal cost.
  • Freemium works best when there are millions of potential customers since the conversion rate will not be high.

Operating leverage is a very powerful, yet under-stated concept. Capital-intensive businesses have high fixed costs. Seemingly smaller changes in revenues can have an out-sized impact on profits. Industries like airlines, amusement parks etc. face high fixed costs. Morgan Housel tweeted this on Southwest Airlines’ experience:

While I have not read Howard Mark‘s “The Most Important Thing”, here is a wonderful quote that I found while reading about Michael Batnick’s mentors:

First level thinking says “It’s a good company; let’s buy the stock.” Second-level thinking says, “It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.”

Howard Marks spoke at India CFA Society event:

I consume whatever Morgan Housel writes. Here are some brilliant notes from his post on “Short investing rules“:

  • Define what you’re incapable of and stay away from it.
  • You’re not proven until you’ve survived a calamity.
  • The biggest risks are things that aren’t in the news, as people aren’t preparing for them because they’re not in the news.
  • Reducing your desires has the same effect as leveraging your assets, but with no downside risk.
  • Study more failures and fewer successes.
  • Reject existing beliefs as easily as you are persuaded by new ones.

With many people getting scared “when the market will fall”, Barry Ritholtz an article on Judging the staying power of record markets. He refers to Paul Desmond of Lowry’s Research:

  • Desmond advises traders to look for “extreme selectivity” — a period of very narrow breadth, when few stocks are participating in market rallies even as the indexes go higher.
  • He notes that “in virtually every case the warnings appear as a persistent divergence between the S&P 500 making a series of new highs, while market breadth makes a series of lower highs, showing that stocks are consistently dropping out of the bull market.” This process has lasted anywhere from four months to two years.
  • Desmond notes that Nasdaq 100 and Nasdaq 500 advance-decline ratios are at new bull market highs. That sort of broad-based market participation isn’t indicative of the end of market cycles. “The bottom line,” Desmond said, “is that there are no significant early warning signs of a major market top at present.”
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