Weekly Reading List for 11/14/2022

‘Qatar Is A Mistake,’ Ex-FIFA Head Says: Here’s Why The 2022 World Cup Is Mired In Controversy

The upcoming 2022 World Cup has been surrounded by controversy because of problems with the host country Qatar.

First of all, for a long time there have been rumors that FIFA officials were bribed into accepting Qatar as the host site dating back to when the vote took place in 2010.

• There is a four-part Netflix show titled “FIFA Uncovered” that dives into the possibility of Qatar official Hassan Al-Thawadi – who led bid campaigns for Qatar back in 2010 – offering bribes to each of the three FIFA voters from Africa.

The other major issue is Qatar’s history with human rights. Not only do they have extreme stances on social issues, but the working conditions during renovations in preparation for the World Cup have been noted to be abysmal for workers.

Additionally, Qatar is an extremely small country. It is slightly smaller than the U.S. state of Connecticut, and roughly 849 times smaller than the U.S.!

Not to mention this is the first time the World Cup will take place in winter due to the extreme heat in Qatar during summertime. Overall, a myriad of questions as to why Qatar was chosen as the host site.

• Back in the early 2010’s, many people were even calling for FIFA to award the hosting rights to the U.S. due to the controversy surrounding Qatar.

On a positive note, the United States did qualify for this World Cup after failing to do so in 2018. Action for the USMNT starts on November 21st at 2PM against Wales.

The U.S. has a very young and inexperienced team with relatively low expectations for this World Cup cycle. Perhaps in 2026 with some more years and world cup experience under their belts they will be primed to make some noise. Home field advantage will surely be a factor as the U.S. is jointly hosting the 2026 World Cup along with Canada and Mexico. Host cities within the U.S. for 2026 include Atlanta, Boston, Dallas, Houston, Kansas City, Los Angeles, Miami, New York/New Jersey, Philadelphia, San Francisco, and Seattle.

Over the past week crypto exchange FTX has been all over the news as the latest collapse in cryptocurrencies.

• Bitcoin falls over 10% after Binance (one of the largest crypto trading platforms) abandons acquisition of FTX (another crypto platform)
• CEO of Binance Changpeng Zhao offered to buy FTX and help rescue the rival company from its financial troubles but ditched the deal at the last minute after realizing the scale of the financial difficulties and potential wrongdoing by FTX
• FTX was experiencing financial difficulties and was on the brink of collapse before the ordeal
• FTX is also suspected of mismanaging customer funds according to “a person familiar with the matter”
• Some of the current accusations claim commingling of client and firm assets and off-book transactions involving client funds

This event comes on top of other recent events such as the Terra collapse of this past May/June, whittling away investor confidence in the sector

Of course we have this great commercial from a year ago to remind you that just because something has celebrity endorsement does not make it a sound investment

FTX Crypto: Tom Brady is In. Are you? – YouTube Perspective

Although this incident seems to be resulting in short term panic, crypto has gone through worse and it has recovered each time. Take for instance the Mt. Gox collapse of 2014, when Bitcoin crashed around 85% from over $1100 to around $150 after the exchange was hacked and 740k bitcoins were stolen. Now it’s over 10 times more than that all time high.

In this market, many investors are becoming more risk averse, and this event may have just been the final straw on the camel’s back for crypto. However, It is possible once market conditions pivot, investor confidence will increase, and money will flow back into riskier assets.

Why Fundamentals Matter – Canvas

Lessons and writings from history can be very useful tools to put things into perspective in volatile times.

• During periods of easy money and heightened speculation investors frequently ignore what drives long term growth of companies which is earnings, balance sheets, etc.
• “One advantage these unprofitable companies arguably have is that without existing profits, it’s impossible to compare the practicality of future profit projections.’
  • From Simple Principles of Investment published in 1919! “If there is nothing to compare, there is nothing to criticize”
  • “…there are a few instances where such ventures have proved highly profitable from the start, and the promoters are adept in stressing and emphasizing these exceptional cases..”
    • There is a reason why you can only name a few of the big tech names that survived the dot-com bubble. And everyone is always looking for the next Apple or Google. Because contrary to popular belief these stories don’t happen often.
  • From Spectator Magazine in 1896 describing the market state: “[an] inflated and flabby condition caused by a diet of cheap money.”
    • Sounds an awful lot like the conditions we were living in for the last 10+ years
  • It is important to remember eventually, every company is a business! Every business needs profits
    • Showing hypothetical growth and economies of scale can look good for board room and VC presentations. At the end of the day if you are losing money for many years it is extremely unlikely you will be successful long-term
  • Below is a breakdown of components to stock return for the last 150 years. Multiple expansion accounts for just 6%!

  

  • Compare that to the last 10 years. Multiple expansion has accounted for 24%!! Of the S&P 500 returns.

  

  • “Between 1963 – July 31, 2022, Multiple Expansion had no material impact on the US Large Cap Index Total Return. Yet, since 2012, Multiple Expansion accounted for a staggering 27% of total return.”
    • At the end of the day multiple expansion can lead to high share prices. But that does not create actual economic value. As liquidity diminishes so do these multiple expansions and having companies that have actual sources of earnings growth, dividends, etc is pivotal!
  • The paradigm from journalist Derek Thompson on page 9 is great. One snippet below really puts this into perspective.
    • “It was as if Silicon Valley had made a secret pact to subsidize the lifestyles of urban Millennials. As I pointed out three years ago, if you woke up on a Casper mattress, worked out with a Peloton, Ubered to a WeWork, ordered on DoorDash for lunch, took a Lyft home, and ordered dinner through Postmates only to realize your partner had already started on a Blue Apron meal, your household had, in one day, interacted with eight unprofitable companies that collectively lost about $15 billion in one year.”
  • Flashy narratives often fade, but robust fundamentals endure.