Weekend Reading

2 December 2016 | by Paul Perrino, CFA

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

While We Weren’t Looking, Snapchat Revolutionized Social Networks (Farhad Manjoo, @fmanjoo, NYT)

Most people over 25 have heard of Snapchat, but haven’t given it much thought. However, it has quietly surpassed Twitter in the number of daily users. Usually, this kind of news would get a lot of media attention, but it’s been largely ignored. This could be because their user base is primarily “teenagers and 20-somethings.” The structure of Snapchat, from disappearing messages to the order of posts, has captivated their users and caused them to behave differently. It’s perceived as sharing (and viewing) a more authentic version of your life with your network, than on Twitter or Facebook. Facebook has started playing catch-up, with the development of their Live feature.

Cut the Top U.S. Corporate Tax Rate to 22% (Gene Epstein, Barron’s)

There is much anticipation for a decrease in the corporate tax rate. Barron’s determined that a 22% tax rate (down from 35%) would be revenue neutral to the US Government. The rationality for the tax cut being tax neutral for the US government is driven by economist Art Laffer’s research. His analysis is driven by two factors: “if the tax collector claims a lower share of income, there is an incentive to produce more income. Second, a lower rate means there’s less incentive to spend time and effort avoiding the tax.” The corporate tax system is also plauged by tax avoidance strategies which have caused many firms to have large cash balances that remain overseas. Lowering the corporate tax bracket could cause these funds to come back to the US and filter their way through the system.

Does Decision-Making Matter? (David Brooks, @nytdavidbrooks, NYT)

The drive and motive behind how we make a decision may be more important than the process used to make a decision. Economic models were built on the assumption that we’re all rational actors. “Kahneman and Tversky demonstrated that human decision-making is biased in systematic, predictable ways. Many of the biases they described have now become famous — loss aversion, endowment effect, hindsight bias, the anchoring effect” Mr. Brooks adds that curiosity can be a powerful driver in how we make decisions.

Sustainable Sources of Competitive Advantage (Morgan Housel, @morganhousel, Collaborative Fund)

Analyzing competitive advantages is a primary factor in how we invest at Ensemble Capital. Business is a brutal game. If there is a good idea making money, people will notice and attempt to replicate it. The ability for a company to structure their business to minimize someone’s ability to replicate it and steal its margins can have a material impact on the value and success of a business. The author offers five characteristics not typically found in business school text that can help maintain a competitive advantage.

Stock Returns Versus GDP (David Merkel, @AlephBlog, The Aleph Blog)

While over the long-run the growth in business earnings and GDP are correlated, this doesn’t necessarily hold true in the short-run. A short-term rise in economic growth doesn’t mean stock prices will rise. David Merkel argues this could “happen to stocks in the US if there is enough demand for capital from the US government to rebuild infrastructure.  Let the US government try to borrow more than $1 Trillion per year.  Watch interest rates rise, and watch stocks fall, as government borrowing crowds out private investment.”

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