Investing in Tech Stocks and Reconsidering Hannah Arendt on Totalitarianism, Revolution, and Adolf Eichmann

Sunday November 7, 2021

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Transcript

What Happens Next is a podcast where experts are given just SIX minutes to present their argument. This is followed by a Q&A period for deeper engagement.

This week’s topics include Reconsidering the political philosopher Hannah Arendt on subjects of totalitarianism and Adolf Eichmann. The second presentation will be on Lessons on how to invest in tech stocks.

This is truly a variety show as these topics are so different.

Our first speaker will be Richard Bernstein who is the Vera List Professor of Philosophy and the former dean of the New School for Social Research. Richard is also the author of Why Read Hannah Arendt Now?

Hannah Arendt’s ideas remain relevant. In this Weekend’s Wall Street Journal Book Discussion, there is a review of two new books about Hannah Arendt. One is on the dispute been Arendt and Isaiah Berlin about the Adolf Eichmann trial and the other book is about Arendt’s disagreements with the famous sociologist Theodor Adorno. Seems like she had trouble making friends with some of the other leading European intellectuals of her time.

I want to learn from Richard what is original about Hannah Arendt’s views on totalitarianism and what other of her ideas are worth further investigation.

Our second speaker today is Mark Mahaney who is the top ranked Institutional Investor equity analyst for internet stocks. Mark covers this sector including some of the best-known names like Amazon, Google, Microsoft, Facebook as well as Spotify, Shopify and Zillow. Today, Mark will discuss his new book Nothing but Net: 10 Timeless Stock-Picking Lessons from One of Wall Street’s Top Tech Analysts.

I want to learn what these investment lessons are and then apply them to a particular stock like Spotify so we can learn how to implement his stock picking technique.

Since I started this podcast in March 2020, I have commented on each of the employment reports released by the Bureau of Labor Statistics. I do this because the US employment report is the most important economic statistic globally and reflects the economy’s rate of change towards recovery.
This Friday’s economic announcement was another surprise. The labor report was strong and better than forecast. Using the Establishment survey, employment increased by 531,000 jobs in October. The surveys for August and September were revised upward by a combined total of 250,000 and averaged 400,000 for those two months.

The demand for workers remains near record levels with 10.6 million job openings.

According to Casey Mulligan who spoke on this program, employment should improve now that the government reduced its payments for not working.
Employment is up 18 million since the trough of the economic downturn in April 2020 but still down 4 million since before Covid.

I want to highlight a paper just released by Miguel Faria Castro, an economist at the St. Louis Fed that focuses on early retirement by older workers. He finds that since Covid there have been 3 million more retirements than were otherwise expected. And that this explains most of the decline in employment.

What is discouraging about this problem is that it is likely that these early retirees will not return to the labor force. Some older workers may have been scared of contacting Covid and others felt like maybe given the poor state of the economy in 2020 that accelerated their retirement plans. And I suspect, when workers recognized the joys of retirement that they won’t return to work.

Historically retired persons return to the workforce when they face an unexpected decline in wealth, but with the stock market and real estate at all-time highs, I don’t think lack of savings will be the issue in the near future.

The implication of this early retirement is that if the Federal Government uses fiscal stimulus through spending like the $1.2 trillion infrastructure legislation that passed the House yesterday, there may be an insufficient number of domestic unemployed workers to do the job. This will cause wages to rise and be inflationary.

                                                              
 
 
 
 

Richard Bernstein

Topic: Hannah Arendt on Totalitarianism, Revolution, and Adolf Eichmann
Bio: Vera List Professor of Philosophy and former Dean of the New School for Social Research
Reading: Why Read Hannah Arendt Now? Is here

Transcript

Richard Bernstein.
Okay. My name is Richard Bernstein. Most people call me Dick. I am a Professor of Philosophy at the New School of Social Research and I was a former Dean. And I want to talk to you about Hannah Arendt and the little book that I’ve just been written, which has now been translated into a dozen languages.

I think most people have heard, know the name Hannah Arendt, and many people associate her with the controversy based on her report of the Eichmann trial in the early sixties and many people associate her with her phrase the Banality of Evil. Some know that she wrote about totalitarianism without knowing much about her.

Hannah Arendt was born in 1906 and she died in 1975. When she died, she was known mainly by New York intellectuals, but something remarkable has happened between 1975 and today. She is now recognized as one of the most important political thinkers of the 20th century. I can tell you from my own experience, wherever I go in this world, whether it be Korea or Shanghai or Belgrade or Lima, there are people who are passionately interested in her work.
Before I begin talking about some of her ideas, let me say something about her life, because I think it’s relevant and interesting. She was born in 1906 in Germany and that’s where she grew up. She is born into an assimilated Jewish family, but she tells us the word Jew was not even mentioned in her family when she was growing up. It’s only in the 1920s with the rise of antisemitism that she became much more aware of what’s going on politically and historically.

Some friends of her, she was quite Bohemian and quite left. She never joined organizations, but some friends of her who were Zionists asked her to do some research on antisemitic propaganda in the German library. She was apprehended because it was considered propaganda. She was interrogated for eight days, but she had the good luck of being released. The reason I say that is good luck is because we know other people in a similar situation were murdered in the basements of the Gestapo.

On the basis of her experience, she made a decision to leave German illegally, and she did so in the Spring of 1933, making her way first to Prague and ultimately to Paris where many German exiles, particularly German Jews, resided for a number of years thinking that France was relatively safe. When the second world war started, the French government made the decision to put old German exiles into a camp, and she was sent to a internment camp in the Southern France named Gurs. And when the Germans actually marched on France in 1940, there was chaos and she managed to escape from the camp.

I don’t want to tell the whole story, but she really was continued to be lucky because she managed to get a visa to the United States, even though she was a stateless Jew. In order to come to the United States to New York, you had to cross France. It was illegal to leave France without papers, cross Spain and take a boat from Portugal. Fortunately, and she always liked to speak about Fortuna, her luck, and she had good luck, and she arrived in this country in New York in the spring of 1941.

Hannah Arendt had never been in an English-speaking country before, but almost immediately, she began writing articles mainly about Jewish and Zionist issues. In some of these are early articles, about refugees that have now become classics. After only being in the country for three years, she submitted a proposal for a manuscript that ultimately became The Origins of Totalitarianism that was published in 1951. Now, you have to remember that she worked on odd jobs. She was not a university professor, and she wrote this book on her own time. But when the book was published in ’51, it was not a best seller, but it gained her an increasing recognition. And from that time on, she went on to write a number of extremely important books, like The Human Condition and On Revolution. And then of course in 1962, she wrote the Eichmann and Jerusalem.

Now, I want to mention two major themes that make her such a significant thinker. I should say this. After the Trump election in 2016, she virtually went viral. She was all over the social media and is still on a lot of social media. One of the reasons is that she had a remarkable insight into tendencies towards fascism, totalitarianism that are very much still with us. She spoke of the time as dark times. And when she spoke about dark times, she wasn’t referring exclusively to totalitarianism

Let me give you a brief description of dark times because you’ll see how relevant it is. She wrote the following. She said, “If the function of the public realm is to throw light on the affairs of men by providing a space of appearance in which they can show in deed and word, for better or worse, who they are and what they can do, then darkness has come when the light is extinguished by credibility gaps and invisible government, by speech that does not disclose, but sweeps it under the carpet, by exhortations more and otherwise that under the pretext of upholding old truths, degrade all truth in meaningless triviality.”

Well, that’s a perfect description of what began to happen dramatically after the Trump election. She understood how propaganda works. She understood why people are not always interested in the true facts. What they want is a story that speaks to their anxieties, even if it is not true. The idea of alternative facts was not a surprise to her. It’s something that she anticipated that could happen and could happen again. At the end of her book on totalitarianism she wrote that even all the totalitarian regimes have disappeared, meaning Hitler and Stalin, totalitarian methods will be with us when people cannot deal intelligently with human affairs. We see how much of those techniques are still with us, not only lies, not only trying to distort facts or to make facts to all opinion, but in the torture. I don’t know if some of you have read recent military judges, sharp critique of the use of torture in this country.

After WW2, never again, but since then, we’ve seen torture. We’ve seen genocides. We’ve seen all kinds, and what we also have seen that Hannah Arendt understood is the increasing number of millions of refugees. It’s not only for the darkness that I think that she’s famous for, there’s another side to Arendt. Arendt was a deep believer in what you call new beginnings. She had a technical word that she used for that, which was natality, but she thought that if people come together and act that empowerment can grow and they can create something new. This is a very deep theme in Arendt. She saw that this coming together, and she sometimes called it the revolutionary spirit, is something that happened over and over again in history. I mean, in other words, she would’ve understood.

She died before something like solidarity movement in Poland, but she would’ve understood how people sitting around the kitchen beginning to talk that it could grow into a movement that became nonviolent and that would ultimately overthrow communism. She was a great advocate of the revolutionary spirit. The truth is she also had a strong, positive view about the American Revolution. The American Revolution was not primarily what we call the American Revolution, what happened in 1776, it would happen after, how people created themselves a new constitution, a new Republic, something that had never existed before. She thought this was a fantastic achievement, and she praised it. Although she was always double edged. She was critical because she thinks that soon after the constitution was written, there was a kind of forgetfulness and a failure to create the kinds of institutions in which people could participate and be free itself.

Arendt is, I’ll tell just a little anecdote of how this book out to be read. I was speaking to my editor shortly after Trump got elected, when her name was all over social media. He turned to me and he said, “Why don’t you write a little book about Why Read Hannah Arendt Now,” and that is the title of my book. I wrote it for people who are intelligent, who are not professionals, who are interested in Hannah Arendt and want to know something of her main ideas. I’m enormously pleased to say that of all the things I’ve ever written, this is really the most popular book, translated now into many different languages, because I do think that she is a thinker that speaks to many people. I think I’m going to end my remarks here. I’m happy to answer any questions about Hannah Arendt, about totalitarianism, about the Eichmann book, about her views on Zionism, whatever you want to ask me. Okay.

Questions for Richard Bernstein

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Mark Mahaney

Topic: How to Invest in Tech and Growth Stocks
Bio: #1 Institutional Investor Equity Analyst in Internet Stocks at Evercore
Reading: Nothing but Net: 10 Timeless Stock-Picking Lessons from One of Wall Street’s Top Tech Analysts is here

Transcript

Larry Bernstein:
Mark Mahaney is a senior managing director at Evercore and is the head of internet research. Mark is a five-time, number one ranked institutional investor internet equity analyst. You previously met Mark on What Happens Next when he discussed various internet stocks, such as Amazon and Spotify.
I asked Mark to chat with us again because he’s publishing a new book to be released November 9th entitled, Nothing but Net, about how to invest in tech and growth stocks.

Mark Mahaney:
All right, Larry. Thank you very much for having me on and it’s nice to reconnect. I really wanted to talk about Nothing but Net. That’s a book I’ve got coming out November 9th, already available for pre-order at your favorite online bookstores.

What led me to write this book is that I’ve seen a mistake made over and over again is the impetus to trade rather than to invest in high quality tech stocks.

I tried to put together 10 lessons from both the big wins and the big losses in the consumer internet space. Have there been big wins? Absolutely. Facebook’s up over 600% since its IPO. Google’s up over 3000%. Netflix up over 45000% since its IPO. And wait for it, Amazon’s up over 160000% since its IPO. So, there’ve been some phenomenal wins in here, phenomenal successes. But there’ve also been some phenomenal blow-ups like Zulily or Blue Apron or names that are even better known, Groupon.

But you could also look at the failed opportunity of eBay, Yahoo, and even AOL Time Warner. I think there are lessons from both the successes and the failures in the group I’m the oldest and longest lasting internet analyst on the street, and so with plenty of mistakes along the way. If you’re picking stocks, it’s an odds business. You’re going to make plenty of mistakes. And I try to learn from those, too. I go through these 10 lessons in the book.

First is, if you look at it from a long-term perspective over the last five, 10, even 20 years, we’ve been in a very consistent bull market, especially since 2008, 2009. I want to start off with the warnings, which is that there will be blood, or you can lose a lot of money when you pick the bad stocks.

In the book, I go through the examples of Blue Apron and Groupon. Groupon’s down about 93% since its IPO. But I do try to remind people, Groupon at the time of its IPO way back in 2011, was a “guaranteed sure thing.” All that’s in quotes. This was a company that it rebuffed a $6 billion offer from Google, had a business model that was so innovative there were hundreds of copycat imitators and was the fastest company to reach a billion-revenue run rate in history. Like, wow, what could go wrong? Well, a lot of things went wrong and there are lessons in there, particularly in terms of the quality of the management team. I think that was really the big Achilles heel.

Lesson number two, even if you get the best companies, even if you pick the best stocks, you can still lose money from time to time. Even the best-in-class stocks aren’t immune from major selloffs. The companies that I think are just phenomenal outperformers and that objectively have been over the last 2, 5, 10 years, the FANG stocks, Facebook, Amazon, Netflix, and Google, they’ve all suffered corrections that have ranged from 20-44%,. Either that’s because of the massive selloff in NASDAQ at the end of 2018, or for company missteps.

I always refer to Facebook’s face plant, when in the middle of 2018 in the wake of the Cambridge Analytica scandal, you had a 43% correction in Facebook stock because Facebook reacted aggressively to that scandal by massively increasing its operating expense spend and warning the street about the material revenue deceleration. This lesson is even the best stocks can suck at times.

Third is don’t play quarters. Stay focused on the long term and ignore short term stock price fluctuations. I think they’re so hard to do it’s almost a fool’s errand because you got to match fundamentals and expectations. And it’s a very hard combo to get right. Invest in the high-quality assets.
Lesson number four, revenue matters more than anything. I’ve become a very dye-in-the-wool fundamentalist when I think about tech stocks and growth stocks. I have found that the stocks follow fundamentals. When it comes to growth and high-tech stocks that matter the most are revenue, revenue, and revenue.

I love this example of Netflix over the course of the decade, 2010 to 2019. Netflix as a stock was the single best performing S & P 500 over that time period, up almost 2000%. Yet free cashflow, what happened to it? It deteriorated dramatically. The free cashflow burn went from 20 million loss in 2013 to over 3 billion in 2019. Free cashflow burn continued to worsen each and every year. There was a massive disconnect between the stock and the free cashflow.

Where was the connect? The connect was with the revenue growth. The company was able to sustain pretty much 30% streaming revenue growth for almost a decade. That’s what the market bid up and the company was also able to accelerate its net subscriber additions almost every single year…

Yes, of course, earnings matter. But the leading indicators, revenue growth, and sub ads. And especially if you can find these companies that can do these wonderful things like maintain 20% revenue growth. It’s one of the markers I look for with high quality names. And I’m talking about doing that from scale from a couple of billion in revenue. It’s a very hard thing to do. I think only about 2% of the S & P 500 is able to consistently do that.

I also look for companies that have got, what I call GCIs: growth curve initiatives. Things that a company, and I’ll stick with the Netflix example, at the beginning of 2018 revenue growth materially accelerated because they expanded into the Asian markets, because they successfully implemented a dollar price increase, and because they rolled out local original content in the US. It shows 13 reasons why overseas they’ve had different shows like Casa de Papel, which we all know is Money Heist. So, I definitely look for growth curve initiatives that they can get me to that 20% revenue growth.

Lesson number five, it don’t mean a thing if it ain’t got that product swing. You really want to focus on companies that have been successful at product innovation. I mean companies that have the ability to generate numerous successful product innovations. There’s usually something in the water there, either the management team or the corporate structure.

I know when it comes to investing, past performance is no guarantee of future performance, but I don’t think that’s necessarily true when it comes to management teams and product innovation. Amazon is the wonderful poster child for this point. There’s a company that showed the ability to innovate in at least three dramatically different areas: online retail, cloud computing, and in devices with the Kindle. When you see a company that can do that, and that evidence was clear by about 2007, 2008, there was plenty of investment gains to be made after that, and plenty more innovations that came after that. So, focus on companies that have got this great product innovation.

Lesson number six was the importance of TAMs. So, with TAMs, the bigger, the better. They matter. They can be expanded. They help drive growth. They can lead to scale, and scale wins.

And what I particularly like to see are companies with small market shares with large TAMs. I know it sounds simple, but that’s what you’re looking for. Google, the fact that Google was able to sustain 20% revenue growth for a decade after hitting a 25 billion revenue run rate, a feat that only two other companies in history have ever been able to achieve, the fact that they were able to do that is precisely because for a good chunk of that period, they were a single digit percentage share owner of a trillion-dollar TAM, a T-TAM, as they call it, an end market, a global advertising that’s in excess of $1 trillion. So, look for that low penetration, big TAMs stories. That’s what you want to look for.

Lesson number seven is following the value prop, not the money. It’s the companies with compelling customer value proposition that beat the companies with the great business models. Another way to think about this is look to invest in customer-centric ones as opposed to investor-centric ones. Amazon versus eBay. One company that focused on customers, the other focused on the investors. eBay used to have the major market capitalization advantage. It was six X, the market cap of Amazon as late as 2006, but that all changed because Amazon had a much better customer consumer value proposition when it came to price, selection and convenience, and its market cap now is 50 X that of eBay’s. There’s also the example of GrubHub and Door Dash. The first company had the great investor-centric model. The second one had the great consumer-centric model. The latter one now is worth dramatically more than the first one was taken out for.

Lesson number eight, management matters an enormous amount. You get the management team and you’ll likely get the stock right. I go through a series of case studies in the book to try to cull out a couple of the things we’re really looking for as signs of really good management team. If you work backwards and you look at the largest tech companies in the world, almost all of them are founder-led. So, I definitely have a bias towards founder-led companies, companies with long term orientation, great industry vision. And I also throw in here the point about the companies to be forthright with employees and investors about mistakes and challenges.

I’m a big fan of Uber. I think that’s one of the next stocks, major tech stocks, that can get a lot bigger. I still think that can go up something like 10 X in market cap over a five-to-10-year period, which is a huge increase. And one of the reasons is I’ve got a fair amount of confidence in the CEO. Now, he’s not the founder, so ding the stock for that. But he’s got a very good track record with me in terms of being very upfront.

When Expedia, during the great financial crisis, Dara Khosrowshahi, he was the first and just about the only tech executive I came across who was willing to say that, I think his literal expression was, “It’s a dog’s breakfast out there.” I remember that because I put it in the title of an earnings note. And when Dara a decade later became the CEO of Uber, I called that up. And I said, “Here’s the person who was willing to be forthright about when times are tough. This is the kind of person you want running a business,” because times did get tough for Uber, it turned out, just a year and a half later with COVID. And then I’ll just finish up with two other points that I detail in the book, how to handle valuation of high growth, high tech stocks. Sometimes it’s pretty simple when you get robust earnings like Facebook does, and then there’s a debate over where that should be 18 or 20- or 25-times earnings, but people can reasonably argue over that. In the case of Netflix, you could even argue at 70 times earnings, Netflix was an attractively valued stock because for a five-year period, the earnings growth there came closer to 90% year-over-year. But then I go through the really tough edge cases of what do you do when companies have no earnings?

In tech land, you’re going to come across these examples a lot. There’s a good number of the new, IPO NASDAQ listings that are profitless companies. I go through and use as a screen to decide whether a valuation argument can actually be made. One, are there public companies with similar business models that are already profitable? Two, if the company as a whole isn’t profitable, are there segments within the business that are? Three, is there a reason why scale can’t drive a business to profitability? And four, are there concrete steps that management can take to drive the company to profitability? If you have an unprofitable public company, but you can answer yes comfortably to two or three of those questions, you can probably make the valuation argument.
And then finally the last lesson it is to hunt for DHQs.

Not DQ, that’s Dairy Queen. DHQs: dislocated high-quality companies. So, what I’ve tried to do is summarize in the book through these different chapters what are high quality companies that have this premium revenue growth, that 20% revenue growth tick. Companies that have large TAMs, relentless and successful product innovation, compelling customer value props and great management. And then buying them when they’re dislocated, that allows you to minimize valuation risk.

So, what’s a dislocated stock? One that’s traded off 20 to 30% or stocks that are trading at a discount to their growth rates. And what I found in the last 25 years of covering these companies, that dislocation happens to the best stocks, those FANG stocks. They’ve all had their fair share of dislocations. I have not yet seen a high-quality company that didn’t dislocate at least once in a year and a half period. So, if you can identify the high-quality companies and be patient, those dislocation opportunities will come. Take advantage of them. That’s the single biggest takeaway from the book. DHQs, hunt for dislocated high-quality companies. That’s it. That’s the book, Nothing but Net: 10 Timeless Stock-Picking Lessons from One of Wall Street’s Top Tech Analysts.

Questions for Mahaney

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