A Guided Tour of the Market 3

Business Services

Because the business services sector is so varied, we divide it into three major subsectors based on how companies set up their businesses to make money. Specifically, we look at technology-based, people-based, and hard-asset-based subsectors.

Outsourcing makes sense to many business owners because it usually saves time and money, removes the hassle of dealing with noncore tasks, and allows management to focus on what's really important to the success of their company.

In business services, size does indeed matter. Companies can leverage size to boost both their top and bottom lines. By expanding the range of services offered, companies can increase total revenue per customer. By handling more volume – especially over fixed-cost networks – companies can lower unit costs and achieve greater profitability.

Size impacts the industry through branding as well. Often, brands play a major role in a business outsourcing purchase decision.

In general, technology-based businesses [...] require huge initial investments to set up an infrastructure that can be leveraged across many customers. These huge investments are a barrier to entry for new competitors.

Another desirable characteristic of technology-based businesses is the low ongoing capital investment required to maintain their systems. For firms already in the industry, the huge upfront technology investments have already taken place.

As a result of the high barriers to entry into technology-based businesses and long-term customer contracts, firms in this subsector tend to have wide, defensible moats.

The people-based subsector includes companies that rely heavily on people to deliver their services, such as consultants and professional advisors, temporary staffing companies, and advertising agencies. Investments can be attractive at the right price, but the model is generally less attractive than that of the technology-based subsector.

Brands, longstanding relationships with customers, and geographic scope can provide some advantages relative to competitors. But within most people-based industries, there are usually multiple competitors with similar strengths in these areas, and they tend to compete aggressively with one another.

Companies in the hard-asset-based subsector depend on big investments in fixed assets to grow their businesses.

http://books.danielhofstetter.com/the-five-rules-for-successful-stock-investing/

Online Porn Is Huge. Like Really, Really Huge. Who Knew?

Online Porn Is Huge. Like Really, Really Huge. Who Knew?
By Ashlee Vance on April 05, 2012

The good folks at ExtremeTech took it upon themselves this week to get at one of the Internet’s crucial questions—just how big are porn sites these days? The answer? Ron Jeremy big. To study porn sites, ExtremeTech turned to the DoubleClick Ad Planner tool from Google (GOOG). It’s a useful website where you can peek at information gathered by ad-serving cookies about how much traffic a website gets, the age and income of visitors, and the amount of time people spend on a site.

According to this tool, the online porn kingpin Xvideos feeds up 4.4 billion page views per month. That’s about 10 times as many as the New York Times and three times as many as CNN.com. YouPorn—another site packed full of stimulating content—notches 2.1 billion page views per month. And while people spend a few minutes per day on news sites, they tend to spend 15 minutes or more on porn sites, which would seem to say something rather definitive about, er, male stamina.

“But it’s not just men on the sites,” you shout. True, although the top porn sites count men as about 75 percent of their visitors. Breaking the stats down further, about half of the visitors make between $25,000 and $50,000 per year, while only 2 percent earn more than $150,000 per year. According to Google, the other interests of Xvideos visitors include Latin American music and gangs and organized crime, while YouPorn visitors like networking equipment and family films, so it’s an eclectic bunch.

While anyone can dig through these numbers, ExtremeTech did a nice job of adding some context to the incredible amount of data served up by porn sites. According to the Google estimates, Xvideos would record “29 petabytes of data transferred every month, or 50 gigabytes per second. That’s about 25,000 times more than your home Internet connection is probably capable of, which is a couple of megabytes per second.” Sliced another way, Xvideos will “serve up 50 gigabytes per second, or 400Gbps,” ExtremeTech writes. “Bear in mind this is an average data rate, too: At peak time, Xvideos might burst to 1,000Gbps (1Tbps) or more. To put this into perspective, there’s only about 15Tbps of connectivity between London and New York.”

Someone at YouPorn chatted with ExtremeTech and said the Google estimates are way below actual totals. YouPorn stores more than 100TB of porn and feeds up about 28 petabytes per month.

These types of figures put the top porn sites in a class that only Microsoft (MSFT), Google, and Facebook really surpass. My takeaway from this is that companies such as Dell (DELL) and Cisco Systems (CSCO) make a ton of money selling gear to the top porn sites and that these companies must have some very savvy engineers.

Vance is a technology writer for Bloomberg Businessweek.

Investor's Checklist: Technology Software

The software industry has economics few industries can match.  Successful companies should have excellent growth prospects, expanding profit margins, and pristine financial health.

Companies with wide moats are more likely to produce above-average returns.  But superior technology is one of the least sustainable competitive advantages in the software industry.

Look for software companies that have maintained good economics throughout multiple business cycles.  We prefer companies that have been around at least several years.

License revenue is one of the best indicators of current demand because it represents how much new software was sold at a given time.  Watch for any license revenue trends.

Rising days sales outstanding (DSOs) may indicate a company has extended easier credit terms to customers to close deals.  This steals revenues from future quarters and may lead to revenue shortfalls.

If deferred revenue growth slows or the deferred revenue balance begins to decline, it may signal that the company's business has started to slow down.

The pace of change makes it tough to predict what software companies will look like in the future.  For this reason, it's best to look for a big discount to intrinsic value before buying.


Ref:  The Five Rules for Successful Stock Investing by Pat Dorsey



Read also:
Investor's Checklist: A Guided Tour of the Market...

Buffett (1993): Staying within one's circle of competence and investing in simple businesses

A key mistake of investors was they never tried to fathom the relationship between the stock and the underlying business.
One should stick with the ones that can be easily understood and not subject to frequent changes.
"Why search for a needle buried in a haystack when one is sitting in plain sight?"

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In the darkest days in the stock market history, there is no better time than this to imbibe the lessons being imparted by the master in value investing, a discipline or a form of investing that we think is one of the safest around.

One of the key mistakes the investors who suffered the most in the recent decline made was they never tried to fathom the relationship between the stock and the underlying business. Instead, they bought what was popular and hoping that there will still be a greater fool out there who would in turn buy from them. We believe that no matter how good the underlying business is, there is always an intrinsic value attached to it and one should not pay even a dime more for the same. Alas, this was not to be the case in the stock markets in recent times for many 'investors', where no effort was being made to evaluate the business model and the sustainability or longevity of the business.

In his 1993 letter to shareholders, the master has a very important point to say on why it is important to know the company or the industry that one invests in. This is what he has to offer on the topic.

"In many industries, of course, Charlie and I can't determine whether we are dealing with a "pet rock" or a "Barbie." We couldn't solve this problem, moreover, even if we were to spend years intensely studying those industries. Sometimes our own intellectual shortcomings would stand in the way of understanding, and in other cases the nature of the industry would be the roadblock. For example, a business that must deal with fast-moving technology is not going to lend itself to reliable evaluations of its long-term economics. Did we foresee thirty years ago what would transpire in the television-manufacturing or computer industries? Of course not. (Nor did most of the investors and corporate managers who enthusiastically entered those industries.) Why, then, should Charlie and I now think we can predict the future of other rapidly evolving businesses? We'll stick instead with the easy cases. Why search for a needle buried in a haystack when one is sitting in plain sight?"

As is evident from the above paragraph, an investor does himself no good in the long-run if he keeps on investing without understanding the economics of the underlying business. Infact, even when one is close to cracking the industry economics, some industries are best left alone because they are so dynamic that rapid technological changes might put their very existence at risk. Instead, one should stick with the ones that can be easily understood and not subject to frequent changes.

http://www.equitymaster.com/detail.asp?date=1/24/2008&story=3

Buffett (1987): "If you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game."

We saw the master expand upon his concept of owner earnings and the only two basic jobs that he and his partner Charlie Munger engage in through his 1986 letter to his shareholders. Let us see what investment wisdom he brings to the table in his 1987 letter.

We are living in a fast changing world and every few years there comes a technology or a product that just brings about a revolution and spreads across the globe like a mania. Few examples that come to mind are the automobiles and aeroplanes in the US in the early 20th century or the recent Internet and dot-com mania. However, the fact that the companies in such revolutionary industries rake up equally impressive returns on the stock market is far from truth. While loss making abilities of the US auto companies and airliners are legendary, not less infamous either is the amount of wealth that has been destroyed in the Internet bubble at the cusp of the 21st century. No wonder this is what the master has to say on which companies end up winners in the stock market.

"Experience indicates that the best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago. That is no argument for managerial complacency. Businesses always have opportunities to improve service, product lines, manufacturing techniques, and the like, and obviously these opportunities should be seized. But a business that constantly encounters major change also encounters many chances for major error. Furthermore, economic terrain that is forever shifting violently is ground on which it is difficult to build a fortress-like business franchise. Such a franchise is usually the key to sustained high returns."

"Berkshire's experience has been similar. Our managers have produced extraordinary results by doing rather ordinary things - but doing them exceptionally well. Our managers protect their franchises, they control costs, they search for new products and markets that build on their existing strengths and they don't get diverted. They work exceptionally hard at the details of their businesses, and it shows."

Indeed, with technology changing so fast in industries such as auto and Internet, it becomes really difficult to zero in on a company that will continue to exist ten years from now and in the process still give attractive returns. This is definitely not the case with a single product company existing in an industry, where more the things change more they remain the same.

In an era when investing in equities had been reduced to nothing more than moving in and out of companies based on their quotations, the master was a breed different from the rest. He did not let fluctuations in stock prices influence his investment decisions but rather viewed investments from the point of view of a business analyst, judging companies on the basis of their operating results and viewing stock market not as a guide but as a servant. Laid out below is what perhaps is one of the most lucid yet one of the most effective explanations of how one should view the stock market.

The master says, "Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic - he doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice - Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game."

http://www.equitymaster.com/detail.asp?date=9/6/2007&story=4

Nasdaq 10 years on: how the tech sector went from boom to bust

A decade after the end of the tech boom, the sector is undergoing a renaissance – and fund managers and investors have sharpened up their stock-picking skills.

By Emma Wall
Published: 4:14PM GMT 10 Mar 2010

Nasdaq 10 years on: how the tech sector went from boom to bust Photo: REUTERS

A decade ago the technology bubble was about to burst, having reached a peak on March 10. The golden goose that had been so hyped up by everyone from independent financial advisers to first-time investors crashed and burned.

At the height of the technology boom in the UK there were 35 investment funds in the sector; now there are just 10, with the smallest holding only £3m under management. An outlay of £1,000 in the worst performing fund- Axa Framlington Global Technology, just before the crash a decade ago would now be worth a paltry £244.


At the start of the millennium investors could not get enough of technology. The huge returns that the sector had seen in the previous five years created a buzz that investors found irresistible. If you had invested £1,000 in the sector five years before the crash and cashed in your investment in March 2000 you would have seen your investment grow tenfold – and in the 10 years previously if you had picked your stocks right you could have turned £1,000 into £100,000.

By far the most popular fund at the time was Aberdeen Technology, the fund with the best track record. Ben Rogoff, now manager of Polar Capital's Technology trust, was on Aberdeen team during the technology rush. "Investors and managers alike were clamouring for technology funds," he said. "The attitude was that old investment truism- the only thing worse than losing money is watching someone else make it."

In the first three months of 2000, £567m was poured into tech funds- 10pc of all the money invested in unit trusts over that period. British technology funds totalled £3.4bn – £3bn more than the amount invested at the end of 1998, and with £1bn of the total being invested in February and March alone.

The deregulation of the telecommunications industry in both America and Britain in the mid-Nineties sparked the upturn as new companies were launched to rival BT and AT&T. Roads were dug up to lay cables and demand for technology increased. The launch of the Microsoft's Windows 95 software made the internet accessible to households and not just companies.

Telecoms companies' share prices increased as demand grew and technology funds returned profits. New internet browsers were launched and companies 'piggybacking' on BT lines were set up to cash in on the demand for the web at home.

The 'Y2K' phenomenon – also known as the millennium bug – forced companies to upgrade their computer systems as old systems' date functions were based the last two digits of the year and were said not to have the capability to work after 1999. This also generated cash for the industry, and led to a period of very rapid growth for the technology sector.

Hungry for their piece of the cash cow, 'blue sky' companies were launched, raising capital off the back of nothing more than a business plan and hugely inflated valuations.

Mr Rogoff recalls how in early 2000 Aberdeen saw as much money invested in just three days as half of the fund's total worth when he joined in 1998. "It seems unreal now, looking back. Unless you were there it is difficult to explain," he said. "I do have regrets."

The sector was flooded with capital and companies couldn't deliver their projected earnings. The industry reached saturation point and the market crashed.

"All our contacts were in IT departments," said Stuart O'Gorman, the manager of Henderson's Global Technology fund. "They were saying this and that were the next big thing. People got ahead of themselves and spending and projections were overly optimistic."

It wasn't just the technology funds that suffered in the dotcom crash. Many ordinary funds had high exposure to tech stocks. For example, Dresdner's RCM Europe fund, Invesco's European and Henderson Small Companies funds were among those to have almost three-quarters of their respective portfolios in technology-related stocks.

Of the companies launched during the dotcom boom, the vast majority are no longer around today. Similarly, most of the funds have merged or been closed. But in the past five years the technology sector has slowly been growing in value, outperforming the average unit trust and emerging unscathed from the global market crash of the past couple of years.

The technology sector is debt-free, and finally proving to be a driving force in the economy. When Amazon.com was launched, commentators assumed that it would mean the instant death of the high street bookstore. While that prediction proved to be overstated, Amazon has grown to be a retailing giant.

Mr O'Gorman said: "My mentor Paul Kleiser, former manager of the Henderson fund, always used to say, 'The problem with technology is everything that is predicted happens, but always five years later than promised.' I think that's definitely true."

One example that proves Mr Kleiser's point is 3G mobile technology. Five years ago 3G phones were bricklike, and consumers were being sold the idea that soon we would all be walking along the road video calling one another. This idea never took off but Apple's iPhone, which utilises 3G technology, has revolutionised the mobile phone market.

Consumers can now get home-speed internet on their mobiles, wherever they are, using technology that was developed nearly a decade ago.

http://www.telegraph.co.uk/finance/personalfinance/investing/7414651/Nasdaq-10-years-on-how-the-tech-sector-went-from-boom-to-bust.html