“A leader is one who knows the way, goes the way and shows the way.” — John C. Maxwell

“The price of greatness is responsibility.” — Winston Churchill

“The greatest leader is not necessarily the one who does the greatest things . He’s the one who gets the people to do the greatest things.” — Ronald Reagan

As is our custom for three-day weekends, EIEIO took last week off to celebrate Presidents’ Day. Reflective of that coupled with a trip to India that highlighted the outsized impact Prime Minister Narendra Modi is having on its future, got us thinking about leaders.

In the Black Hills on the Western Frontier of South Dakota is Mount Rushmore. Carved in the granite sixty feet tall are the bust of four of the United States greatest Presidents…George Washington, Thomas Jefferson, Abraham Lincoln and Theodore Roosevelt.

It took the sculptor Gutzon Borglum fourteen years with 400 workers to complete in 1941. Lesser known is behind the Presidents, carved seventy feet in the rock, is a canyon with a titanium vault containing the Declaration of Independence, the Constitution and the President’s biographies. Two million people visit Mt. Rushmore a year, which sounds impressive until you realize that forty million people visit the Mall of America located in the next door state of Minnesota.

While you could argue the imperfections of each of these leaders, I’d say if you took any one of the four away, America wouldn’t have become America. Consequential people and consequential moments are what make history. Cleopatra, Alexander the Great, Nelson Mandela, Julius Caesar, Queen Elizabeth, Winston Churchill, Margaret Thatcher, Mahatma Gandhi and Indira Gandhi are just a few examples of this.

The story of George Washington is both remarkable and inspiring. They called him “the Soldier who wouldn’t die” because throughout his career, he had miraculously escaped death over and over.

As a 23 year old Colonel fighting in the French Indian War with the British, he got ambushed by the French along with his 1300 British Troops…714 were killed within 2 hours and Washington was the only mounted officer who didn’t die including British General Braddock who Washington took over command from after he was mortally wounded. Washington had two of his horses shot from under him and had four bullets lodged in his uniform. Years later two of the Indian Chiefs said that after repeatedly attempting to shoot Washington and missing, they decided a special spirit was protecting him.

Years later, during the Revolutionary War, British Major Patrick Ferguson and the head of His Majesties’ sharpshooters were in a direct confrontation with General Washington and had a clear shot on him, but an impulse came over him telling him that Washington needed to live so he never took the shot. If Washington would have fallen, the psychological impact it would have had on the American people and the outcome of the War would have been devastating.

Nowhere was the bravery, leadership and destiny of George Washington more evident than the Battle of Trenton. Down from 28,000 troops to just 2400, on Christmas Night, 1776 Washington needed a “Hail Mary” to have any chance to survive. Using the secret password “Victory or Die”, General Washington crossed the icy Delaware River nine miles above Trenton during the middle of the night with a surprise attack that resulted in nearly 1000 of the Hessians fighting for Britain captured and over 100 died.

As the First President, George Washington set the tone for the Presidency. He created a cabinet with a Secretary of State, a Secretary of Treasury, Secretary of War and Attorney General. He established relations with Foreign Countries including Great Britain and France putting the United States on the World Stage. President Washington warned against the divisiveness of political parties and sectionalism. Perhaps most importantly, despite his popularity, he self-imposed a two term limit on his Presidency to directly contrast with Royal Rule more commonplace.

The leadership, class and vision he showed the Country what America could become and gave it the confidence to get there.

Now fast forward 223 years to my trip to India last week. The energy and ambition of this Country with 1.4 billion people was palpable. Yes, there are many issues including pollution, extreme poverty, dilapidated infrastructure, horns from cars that are non-stop, and power that goes out all the time (even at a five-star hotel).

In a fitting closing keynote by somebody I think could be a potential future Prime Minister of India, Minister of Women and Children Smriti Zubin Irani said the reason why we should all be excited about India was powerful leadership of Prime Minister Modi. The bet is he’s the right person at the right time.

Market Performance

Just when we thought inflation was being tamed a bit, the January PCE Index came in above expectations. Moreover, consumer spending reached its highest level in two years. Add it up, and investors became concerned that the Fed wasn’t going to be able to ease up on interest rates any time soon.

As inflation/interest rates are the trigger for Market movement in the current ERA, not surprisingly stocks were down for the week. The Dow, which has now had four negative weeks in a row, was down 2.6%, the S & P 500 was off 2.6% and the NASDAQ dropped 3.3% but is still up 9.7% ytd.

Reflecting the tougher environment for futures, Venture Capital fundraising was at a nine year low for the Fourth Quarter of 2022 with $20 billion raised. This is off 65% year over year.

Despite being in a bit of a “two steps forward, one step back” Market Dance, I’m constructive on the outlook for growth stocks based on better valuations and a better outlook than feared.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed last week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Source: Yardeni

#2: IPO Market

The IPO market has been quiet, but that could change given that Growth is back in style. One potential leader to keep an eye on is Reddit.

Source: Renaissance Capital

#3: Interest Rates

Would a Soft Landing be once in a lifetime? A new research paper released this week concluded that there is no post-1950 precedent for a sizable disinflation that does not entail substantial economic sacrifice or recession.

Source: Edward Jones

#4: Inflation

January’s inflation report was hotter than expected, as consumer spending was up 1.8%. One possible cause? American millennials’ debt balances are up 27% since late 2019…the fastest pace of debt accumulation over a three-year period since the 2008 financial crisis.

Source: WSJ

Chart of the Week

Articles of the Week

• Customer Experience All-Stars 2023
• Global Investment Returns Yearbook 2023 - Credit Suisse
• Opinion | AI Isn't Useful Yet, but It Will Be
• Opinion | ChatGPT Heralds an Intellectual Revolution

Chuckles of the Week

EIEIO…Fast Facts

Entrepreneurship: 80 — new startups formed per day in India (Source)

Innovation: 80%— percent of Starbucks orders that are customized (Source)

Education: 11.9 Million — number of women in the US workforce with advanced degrees currently in work (Source)

Impact: 1 million — number of US immigrants in 2022, the first year over 1 million since 2017 (Source)

Opportunity: 60% — percent of Americans under 25 that have completed a purchase on a social media site (Source)

Connecting the Dots & EIEIO…

Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.

One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!

Make Your Dash Count!
-MM

EIEIO…Follow The Leaders was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“The optimist sees the opportunity in every difficulty.” — Winston Churchill

“Victory comes from finding opportunities in problems.” — Sun Tzu

“Bad news is an investor’s best friend.” — Warren Buffett

“As Oil was to the Industrial Economy, Education is for the Knowledge Economy” — MM

As we shared last week in Fork In The Road, we see India at a massive inflection point. The next decade could be the start of “India’s Century” as McKinsey’s CEO Bob Sternfels predicted. That said, India wouldn’t be the first country on the verge of stardom, but instead step in it.

On one hand, there are success stories such as Singapore. But modern history is also full of countries who failed to live up to their potential, despite their best efforts to invest in EIEIO.

For example, there was the “United Arab Republic” — Egypt and Syria’s short-lived politician union — which promised to unite the two Arab countries into an international power. It was conceived in 1958…and buried in 1961.

Meanwhile, Chile’s development under the “Chicago Boys’’ was once lauded by fellow “Chicago Boy” Milton Friedman as an “economic miracle”…but it has turned out to be more of an EIEIO misfire.

The Chilean government commits just 0.5% of GDP on higher education, the average university course costs 41% of the average income, and the country has a 50% dropout rate — all of which put Chile at the back of the pack in the OECD.

India is at a similar inflection point. The question is will India follow Singapore’s playbook or Chile’s? Will it make the most of the coming century, or will it miss its opportunity?

We’ll be looking at India from the perspective of both a Bear and a Bull. No matter how rose-tinted your glasses are, India faces a series of challenges over the coming years. However, we think that many of these challenges are opportunities in disguise…and that India is uniquely positioned to take advantage of them.

The Bear Case

India’s challenges start with the fact that there’s not really one “India.” Instead, there are really “Three India’s” — India #1 (Europe), India #2 (Brazil), and India #3 (Sub-Saharan Africa).

While India’s GDP per capita is roughly $2,000, if you drop India’s wealthiest 30 million people, per capita income GDP drops to ~$700… that would be roughly equivalent with Somalia for the rest of the 1.37 billion people in India.

India’s caste system has existed for at least 3,000 years, but it’s not a historical artifact yet. Today, nearly all Indians identify with a caste, regardless of their religion. While 82% of Indians say they have not personally faced discrimination based on their caste over the past year, 24% of Indians say that all their close friends are from their caste.

India’s caste system doesn’t just have implications for your friends and partners; it also has implications for India’s ability to invest in EIEIO. 1% of Indians own more than 40% of the country’s total wealth. Additionally, Brahmins are only 4% of India’s population, but they’ve been 45% of all Prime Ministers, 30% of all Presidents, and 47% of all Supreme Court Chief Justices since Independence.

A child’s future should not be determined by how well they select their parents…and America’s not perfect either. While the Ivy League is a meritocracy on paper, it’s driven by lineage too — Harvard’s acceptance rate for legacies is 34% vs. 5.9% for ordinary students. 3% of universities produce 90% of unicorns and 36% of US Presidents are Ivy League grads.

Meanwhile, India’s venture-backed entrepreneurial ecosystem is still in its early teenage years — a lot of excitement, but still gaining experience. While India has 108 unicorns, they only have 8 “Centaurs” — SaaS companies generating greater than $100M ARR. While Centaurs are 7x more rare than unicorns worldwide, Centaurs are 11x more rare than unicorns in India.

On the public markets side, the Indian market has undergone a seismic shift over the past month. Through the end of 2022, Indian stocks were up 4% in local-currency terms, while global stocks were down 20%. At the end of the year, Indian stock markets were trading at a Forward P/E of 22x, which was the same Forward P/E as the Nasdaq 100. Meanwhile, China’s Forward P/E was 10x, while Brazil’s P/E was 7x.

Additionally, the Sensex vs. S&P 500 was trading at the highest level in over a decade, while retail buyers spent $36 billion on stocks, a massive increase from 2019. One interesting note is that 80% of stock market cap gains from January to August last year came from the Adani conglomerate.

That momentum quickly came to a halt on January 24, 2023 when Hindenburg Research released their short report on Adani Group. Since then, Adani Group has lost $108 billion in volume, while Adani’s net worth has dropped by $52 billion.

Bloomberg reflected that “Adani’s downfall defies just about every historical comparison,” while Charlie Robertson of Renaissance Capital described the Adani accusations as a “cold shower” for domestic and foreign investors.

The Adani affair reveals two larger challenges facing India: questions surrounding corporate governance and the state’s development model. If India wants to catch up to China, it needs to invest heavily in manufacturing…so far, the results are mixed.

While China has pursued a series of private-public partnerships to develop its infrastructure, India has essentially outsourced industrial development from the government to a few ultra-wealthy individuals nicknamed the ‘Bollygarch’ tycoons (most notably Adani).

Both Modi and Adani come from the Indian state Gujarat, Modi flew in an Adani private jet after he was elected Prime Minister in 2014, and revenues of the Adani Group have doubled since Modi took over.

Modi and Adani’s opponents don’t think this is a coincidence; instead, they view it as a sign that crony capitalism is the dominant force in Indian politics and society. As Rahul Gandhi, a leader of the opposition Congress party, put it, “whatever happens in India, Adani-ji is found everywhere.”

Aside from Adani, India has other lingering challenges from its caste system. While the Indian government has set quotas for Adivasis and Dalits (‘Scheduled Tribes’ and ‘Scheduled Castes’), the historically privileged castes still dominate India’s elite universities. Less than 1% of professors come from these marginalized groups at the IITs.

Perhaps the biggest challenge and opportunity facing India is how little women are represented in India’s economic activity. Less than 7% of India’s urban female population has independent financial income, while in China this number is 90%+. The overall female labor participation is 21%; the female to male workforce participation rate ratio in India is 27.6, while the global average is 63.5.

The literacy rate for Indian women is 65% (15% below the global average), while only 64% of women attend secondary schools. 102 million women are married before the age of 15, while only 4% of males are married by the age of 18. All financial products are bought by men, and men spend more money on fashion than women (in other markets, women spend 5–7x more than men).

On the other hand, women are starting to break through to bigger opportunties, and unleashing the potential of half of India’s population could be a gigantic catalyst to India entering the world stage.

While India’s education ecosystem is booming (more on that later), there’s still a massive need for finishing schools. While India graduates 1.5 million engineering students annually, but only 7% can handle core engineering tasks.

One thing that many people are unaware of is that India has actually been “neutral” in the Russia-Ukraine war. Like China, Saudi Arabia, and the UAE, India hasn’t technically picked a side. Interestingly, India has bought 33x more oil from Russia than this time last year, while 70% of India’s existing arsenal is Russian-made.

India is the world’s largest democracy, but it’s certainly not the world’s most predictable one. It’s led by a strong leader who has a bold vision for national prosperity…this worked in Singapore, but it’s flopped in other countries. We’ll see how it unfolds…but we’re betting India will become the next Singapore, not the next Somalia.

The Bull Case

The Bull case focuses on all of India’s potential energy and youth. India’s future is powered by massive demographic tailwinds, growing startup ecosystem, and emphasis on education — Singapore 2.0 at the scale of 1.4 billion people. If you’re 1 in a million…you’re 1 in 1400 in India.

Education is the driver of the Knowledge Economy…and there’s no more important education market in the world than India. To understand the importance of education for the 1.4 billion population (600 million of which are school age), top teachers and students have headline articles written about them in newspapers.

A perfect example of India’s education mania is a recent episode of Shark Tank India. While Shark Tank US features companies selling toys and trinkets that will end up sitting in your garage, Shark Tank India features 18-year-olds hoping to build billion-dollar education companies.

The stats are staggering: by 2030, India will have 90 million people joining the workforce, 2x as many students attending higher education, and 2x as many people in high income and middle-income segments.

India’s also shifted from an exporter to an importer of technology talent …and from an imitator to innovator. Tech and startup jobs are quickly becoming the most attractive jobs in India, and Indian startups will need $800 billion of capital by 2030. Companies used to export jobs to India; now, India is exporting its companies to the world.

In 2011, India had less than $1 billion of total venture capital; by 2021, India had nearly $40 billion. 2021 was a banner year for venture capital in India. VC investment grew nearly 4x in 2020, 2x as fast as global growth and nearly 3x as fast as growth in China.

Additionally, Seed funding has grown 2.5x since 2017, with the average Seed round growing nearly 3x.

The success of the Indian diaspora has spilled over across the Atlantic. Of the 407,000 H1-B visas issued by the US in 2021, 74% were secured by Indians. Indian-origin people account for ~1% of the US population, but they account for 6% of Silicon Valley’s workforce. 33% of the immigrant startup founders in the US since 2006 are Indians.

The Indian diaspora isn’t just shining at startups; they’re leading Fortune 500 companies and even governments. When Parag Agrawal took over at Twitter, he became the 12th Indian CEO to lead a public technology company.

There’s a truism that “India is a country where people first become engineers, and then figure out what they want to become,” but that’s no longer the case. Since 2008, a South Asian American child has been named a champion at every Scripps National Spelling Bee.

Indian-origin politicians are also playing a crucial role in world politics. Rishi Sunak became the UK’s first Indian Prime Minister last year, while Kamala Harris and Nikki Haley could face off for POTUS in 2024.

The upshot is this: success is contagious, and India’s rise is starting to have a massive influence around the World. The combination of ambition without aggression, investing in education and innovation, and strong political leadership will all drive India’s ascent.

The way this is heading is Singapore 2.0. Singapore was amazing, but it was done at the scale of a small island. India is much more complex because of its size and diversity…but done right, the biggest country in history making a massive investment in EIEIO will have a tremendous impact.

Market Performance

Keeping with its being the mirror opposite of 2022, growth stocks continued to lead last week with NASDAQ advancing 3.3%, and the GSV Portfolio up 4.2%. It’s definitely been a “risk on” environment with NASDAQ being up nearly 15% YTD versus the S&P 500 advancing nearly 8% and the Dow below 3%.

We felt pretty good that the GSV portfolio has increased over 24% until we saw that Cathy Wood’s Ark Fund has increased 42% YTD. More evidence of investors appetite for futures, Bitcoin and Ethereum are both up over 35% since January 1st.

Some of the positive Market vibes were expressed by Fed Chairman Powell who said “the disinflationary period has started” coinciding with the modest 25 basis increase of the Fed Funds rate Wednesday morning. This was two days before the job numbers came in 2X the forecast to 517K and unemployment being at the lowest level since we put a Man on the Moon in 1969.

It was also nearly two years after Powell said inflation was “transitory” and the same week that a spy balloon went across the United States without much of plan…so our confidence in the Government is a little muted.

We continue to be very constructive on the Market environment for growth companies….the re-opening of China, inflation seemingly getting in check, persistent pessimism particularly in Technology land, and hordes of cash on the sideline keep us BULLISH.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Source: Yardeni

#2: IPO Market

While the IPO market continues to remain quiet, rumors are swirling that banks are starting to book build for companies looking to go public.

Source: Renaissance Capital

#3: Interest Rates

Stocks are rallying this year, while interest rates are coming down. It seems that the current phase of rate hikes could be coming to close to an end.

Source: Edward Jones

#4: Inflation

While inflation still seems high at the grocery store, the reality is that overall inflation has started to decline from its peak last year. Oil is down 40% from its peak last year, while used-car prices are coming back to earth.

Source: FxMacro

Chart of the Week

EIEIO…Fast Facts

Entrepreneurship: 80% — amount of early-stage companies that have fewer than 12 months of runway (Source)

Innovation: 1% — percent of US GDP from VC investment; VC-backed companies account for 57% of total market cap and 82% of R&D Spend (Source)

Education: 72% — percent of parents that support school choice, including 68% of Democrats, 82% of Republicans, and 67% of Independents (Source)

Impact: 85 million — estimated shortage of tech workers by 2030 (Source)

Opportunity: 11% — nominal GDP growth in Vietnam the next 5 years (Source)

Connecting the Dots & EIEIO…

Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.

One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!

Make Your Dash Count!
-MM

EIEIO…There’s Oil in Them Thar Hills! was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“The future of humanity will be defined by Asia’s youth.” — Parag Khanna

“It’s not India’s decade, it’s India’s Century.” — Bob Sternfels, McKinsey CEO

“India is the one land that all men desire to see and having seen once, by even a glimpse, would not give that glimpse for all the shows of the rest of the Globe combined.” — Mark Twain

“India is a place where color is doubly bright. Pinks that scald your eyes, blues you could drown in.” — Kiran Millwood Hargrave

“India lives in several centuries at the same time.” — Arundhati Roy

The Long Arc of History

Throughout history, great nations developed based on their access physical resources or their ability to surmount physical barriers. England and Spain crossed oceans. Germany turned coal and iron into steel, and the United States exploited a wealth of agricultural and industrial resources to become the World’s breadbasket and an industrial superpower.

Jared Diamond’s Guns, Germs, and Steel famously drove this point home, arguing that Europe and its descendants dominated human society for centuries because of their geographic advantage, not a genetic one.

Diamond’s thesis was simple: areas with favorable geography were able to develop stable agricultural societies, which gave them immunity to deadly diseases and allowed them to develop powerful, organized societies and revolutionary technologies (see Appendix for more on this concept).

These initial advantages compounded over centuries to help form the great empires of history, from Ancient Egypt to the British Empire (see our Appendix for some data on each of these empires).

However, the advent of the PC, the Internet and digital delivery of information has transformed the World from a physically based, manufacturing economy whereas the resources were coal, oil and steel… the resources of the knowledge based economy are brain power and the ability to acquire, process and deliver information effectively.

As Larry Summers said, “If investment in factories were the most important investment in the Industrial Age, the most important investments in the Information Age are surely investments in the human brain.”

The most successful countries in a Knowledge Economy invest in the namesake of this newsletter — EIEIO. Entrepreneurship, Innovation, Education, Impact, and Opportunity are the best tools to develop the brain power that powers a Knowledge Economy… and there’s no better case study that illustrates the power of EIEIO than the rise of Singapore.

The Rise of Singapore

Singapore has rigorously applied common sense and creativity to a variety of economic, urban development, and social policy challenges over the past half-century. Spurred by the visionary leadership of its first Prime Minister, Lee Kuan Yew (LKY), who dreamed of creating a “City in a Garden”, Singapore has catapulted from Third World to First… planning and executing relentlessly along the way.

In many respects, Singapore shouldn’t exist at all. It has no energy deposits, forests, or farms. For many years, Singapore had to import drinking water from neighboring Malaysia. When it gained independence from British colonial rule in 1959, Singapore’s economy had limited assets beyond a deepwater port and its GDP per capita, a proxy for quality of life, was less than a quarter of the level of the United States. They were an unlikely candidate to become a global economic powerhouse. Looking back, the data on Singapore’s rise is astounding:

• GDP per capita has surpassed the United States
• Population has nearly quadrupled since 1960
• The first country in the world to be fully covered by standalone 5G
• City streets are monitored by a network of sensors, cameras and GPS devices, predicting future congestion and alerting drivers to alternate routes
• Water management systems are among the world’s most advanced
• “Green City” policies are becoming a model for the world; “Supertree” structures, which house a concentrated variety of plant-life, are being interspersed throughout the city to collect rainwater, act as ventilation ducts and generate solar power

Chan Heng Chee, the Former Ambassador to the United States, once remarked that “Singapore is not a natural country… For Singapore to survive, we have to be extraordinary… If we were ordinary, we would just disappear.”

Above all else, Singapore’s innovative human capital strategy has propelled the country’s transformation. This strategy has been executed across three core phases:

Phase 1 (1959–1978): Survival

At the time of independence, most of Singapore’s population of two million were illiterate and 70% of GDP derived from port and warehousing activities (Source: OECD). The government’s initial focus was on expanding basic education for all ages to enable diversification to a variety of manufacturing functions. Schools were built rapidly, teachers were recruited at scale, and the government aggressively courted foreign manufacturers to hire their emerging talent.

Phase 2 (1979–1996): Efficiency

As Singapore sought to evolve from a labor-intensive economy to a capital and skill- intensive country, including sophisticated technology development (e.g. silicon wafers, computers, etc.) they evolved their education strategy. In January 1979, Singapore moved away from its standardized approach to schooling and created multiple learning pathways for students in order produce the more technically-skilled labor force needed to achieve their new economic goals. Intent on raising the social status of skilled manufacturing jobs, in 1992 Singapore invested significantly to develop the state-of- the-art Institute for Technical Education. Facilities rivaled the best universities in the United States and Western Europe.

Phase 3 (1997-Present): Knowledge

Singapore believed that the emergence of the global Knowledge Economy required a paradigm shift in education, so their focus moved from technical skills cultivation to innovation, creativity and research. At the school level, Singapore created a new strategic plan titled, “Thinking Schools, Learning Nation.” This major milestone in Singapore’s human capital transformation epitomized Prime Minister Goh Chok Tong’s belief that “A nation’s wealth in the 21st century will depend on the capacity of its people to learn.”

Singapore’s success inspired its peers throughout the region. In 1976, LKY met Mao for the first time. LKY would go on to visit China 33 times over the following four decades.

A few years later, LKY met Deng Xiaoping, which signaled the start of a close relationship between the two statesmen.

China’s leaders embraced a “learn from Singapore” slogan as they tried to develop their own “managed democracy” and Knowledge Economy. The rise of Singapore offered China an opportunity to modernize its economy from the Silk Road to the “Silicon Road.”

Chindia

For much of World history, the two dominant geographies were what is now China and India. Connected by the Silk Road, these regions produced great empires — from the Hans to the Mughals and the Mongols — driving global commerce and culture for centuries.

Finding a faster route to the Far East inspired fortune-seekers and explorers like Marco Polo and Christopher Columbus. Opportunistic investors from the west have long been enamored with these markets. There’s a famous saying that “India conquered and dominated China culturally for 20 centuries without ever having to send a single soldier across her border.”

While most of the 20th century saw China and India in decline — China under the communist regime of Chairman Mao, India under the colonial British Empire — this has been a blip in the broader sweep of history.

Beginning around the time of the fall of the wall in Berlin, we saw Chindia roar back to life. By 1990, China had emerged as the World’s manufacturing champion. Later, India emerged as a key exporter of services, ranging from back office work, to call centers and R&D.

While China has been the lead actor, India has played the part of the understudy. China was recognized as an economic powerhouse and served as an original member of the UN Security Council. Today, China is considered the United States’ biggest geopolitical rival since the Cold War.

China went from imitator to innovator by following Singapore’s “EIEIO Playbook.” In 2022, 338 Chinese universities made the U.S. News & World Report’s World’s Best Universities list, compared to 280 American universities — the first time China outnumbered the U.S. China’s enrollment ratio in tertiary education grew from 3.4% in 1990 to 57.8% in 2021.

At the same time, the World bracketed India with Pakistan as a more complicated region and opportunity. In the 1990s, India and Pakistan both required massive assistance from the IMF and World Bank.

However, over the past 30 years, India has gone from under-the-radar understudy to the spotlight: FDI Inflows nearly tripled over the past decade.

Meanwhile, annual VC investment grew from $3.1B in 2012 to $38B in 2021. Even in the bull market of 2021, VC investment grew 2x as fast in India as the rest of the world, while the number of participants in Indian markets has more than tripled since the start of 2022.

While India’s “top-line growth” is astounding, it’s worth taking a closer look at the drivers behind the country’s rise (or demise). While we refer to “India” as if it’s one place, it’s really a combination of many different countries, cultures, and languages.

As the saying goes, “India is a country divided by many local languages and united by a single foreign language.” India has 28 states, 8 union territories, 21 modern languages, and a caste system that remains entrenched, over 75 years after independence.

A few years ago, a friend explained that there are really “Three India’s” — India #1 (Europe), India #2 (Brazil), and India #3 (Sub-Saharan Africa)… as he put it, the joke is that “if someone asks for a dirty cloth to clean something, you are in India.”

Regardless of how you divide or define India, it’s crucial to understand the country’s past, present, and future. Next week, we’ll do a deep dive on all things India, but here’s a preview of what’s to come…

A Fork In The Road: Adani’s or Adonis?

Legendary investor Julian Robertson, who died last Fall at age 90, was great at spotting a company at its inflection point. He famously had the biggest Bull and Bear go to his office and make their case. Robertson thought that vigorous debate was the best way to create high performance.

We see India at this massive infleciton point. It could be as McKinsey’s CEO Bob Sternfels predicts — that this will be “India’s Century — or it could fall far from its potential. The same exercise for India will be insightful for both innovators and investors as they seek to understand the opportunities and challenges of India…India is a country where everyone is in a hurry, but no one is ever on time.

The Bear case starts with one name that should be familiar after this week: Adani. This past week, Gautam Adani’s Adani Group was hit with a scathing short report by Hindenburg Research. Until this week, Adani was the richest man in Asia and the 3rd richest man in the World; over a 48 hour span this week, his collection of companies lost $51 Billion.

What’s the big deal? From January to August last year, 80% of the increase in India’s stock market capitalization came from the Adani conglomerate, while Gautam Adani added $40 billion to his net worth.

Adani’s rise has been in lockstep with Prime Minister Modi, earning him the nickname “Modi’s Rockefeller.” For example, during COVID, the Adani Group became India’s 2nd largest airport operator out of nowhere.

As Edwin Dorsey shares, Hindenburg alleged that dubious offshore funds tied to the Adani Group are the largest non-management shareholders of the Adani companies. For example, Adani Transmission Limited is 74.19% owned by its management group, right below the 75% limit imposed by Indian regulators. Hindenburg also found that at least 10% of the company’s stock is also held by “suspect holders” that may be funded by the Adani Group.

This leaves an increasingly small public float that can be manipulated to inflate the Adani Group’s value. Hindenburg wrote that the Adani Group companies “have 85% downside purely on a fundamental basis owing to sky-high valuations” largely due to huge share price increases over the last few years.

While we’ll continue to watch how the Adani vs. Hindenburg battle play out, one thing is for sure. Wealth and power are much more concentrated than most people understand, and not all “democracies” are created equal.

While many investors assumed India would be a home run for emerging markets, a big concern is whether India’s corporate governance is like a Western democracy or more like Russia. Obviously, it would be problematic if Prime Minster Modi and Adani’s relationship turned out to be more like Putin and his pals. An interesting fact is that India has bought 33x more oil from Russia than this time last year.

If the Adani case is a one-off case of corporate negligence, then everything might be OK. If not, there are lots of larger questions that the world needs to understand (and answer) a lot of questions before going “All In on India.”

The Bull case sees the glass half full with all its potential energy and youth. As the saying goes, “In India, success is relative. More success, more relatives.” This is India the Adonis: a handsome youth destined for greatness. India’s future is powered by massive demographic tailwinds, growing startup ecosystem, and emphasis on education — Singapore 2.0 at the scale of 1.4 billion people.

The median age is 28, a decade younger than China. India is home to 1/5th of Gen Z and 20% of the world’s working inhabitants by 2047. India produces 1.5 million engineers annually, while 80% of households will be middle income by 2030. There’s a truism that “India is a country where people first become engineers, and then figure out what they want to become.”

We’ve heard this story before…and it transformed China from one of the poorest countries in the world to the US’s greatest geopolitical threat. India’s at an inflection point. It has the opportunity to be the future…or a false hope. Next week, we’ll share which direction we think it will take and why.

Market Performance

In a plot twist not suspected by many going into the year, growth stocks continued to rip last week with NASDAQ advancing 4.3%, followed by the S&P 500 rising 2.5% and the Dow up 1.8%. YTD, the NASDAQ is over 11%.

What’s changed is inflation has come down for six months in a row and it appears the Fed might lighten up on the gas for raising interest rates…expectations are now for the Fed to increase just 25 bips versus the 75 bips previously.

On individual stocks, Microsoft beat the quarterly estimates but warned about a future slowdown, Tesla missed numbers but said its future demand was strong. Intel missed significantly which was only surprise if you haven’t been paying attention to PC sales recently.

In another surprise confounding conventional wisdom, China has roared back with Chinese stocks up 50% in the past three months.

EIEIO…Broken China?

Even with the recent rise, the MSCI sells at only 12X this years projected earnings while growth is expected to be 14%. Contrast this with the S & P 500 at a 18x P/E and 4% earnings growth and it appears opportunities remain West of LA and East of London.

China's Comeback Is Getting Started. How to Play It.

We remain constructive on the Market and in particular, high growth businesses. We believe a slow growth environment with inflation being contained bodes well for companies that are growing fast and are selling at materially discounted prices. Our GSV Growth Portfolio is up 21.7% YTD.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Source: Yardeni

#2: IPO Market

One quiet but mighty IPO this week was QuantaSing (NASDAQ: QSG), which raised $40 million. QuantaSing is China’s largest online service provider for personal interest courses for adults. QuantaSing has 75M registered users, $403M revenue growing 68% last year, and an 88% gross margin.

Source: Renaissance Capital

#3: Interest Rates

The Fed will meet this coming week, with expectations that rate hikes will slow. If so, it’s another good sign for market performance this coming year.

Source: Edward Jones

#4: Inflation

This week, Stanley Druckenmiller shared this week that “betting on a soft landing is a real long shot…what history says is that once inflation goes above 5%, it has never come back down without the Fed Funds Rate exceeding the CPI.” We’ll see if that’s the case this time around…

Wifey on Twitter: ""Once inflation goes above 5%, it has never come back down without the Fed Funds Rate exceeding the CPI"Stanley Druckenmiller pic.twitter.com/PncqOOj5Cv / Twitter"

"Once inflation goes above 5%, it has never come back down without the Fed Funds Rate exceeding the CPI"Stanley Druckenmiller pic.twitter.com/PncqOOj5Cv

Charts of the Week

Articles of the Week

TikTok is a New Type of Superweapon

“The first indication that the Chinese Communist Party is aware of TikTok’s malign influence on kids is that it’s forbidden access of the app to Chinese kids. The American tech ethicist Tristan Harris pointed out that the Chinese version of TikTok, Douyin, is a “spinach” version where kids don’t see twerkers and toilet-lickers but science experiments and educational videos. Furthermore, Douyin is only accessible to kids for 40 minutes per day, and it cannot be accessed between 10pm and 6am.

Has the CCP enforced such rules to protect its people from what it intends to inflict on the West? When one examines the philosophical doctrines behind the rules, it becomes clear that the CCP doesn’t just believe that apps like TikTok make people stupid, but that they destroy civilizations.”

ChatGPT: Everything you need to know

“In November, artificial intelligence startup OpenAI launched a chatbot named ChatGPT. The future of education, the internet, and the tech industry have felt somewhat uncertain since.”

Legendary Investor Bill Gurley on Investing Rules, Finding Outliers, Insights from Jeff Bezos and Howard Marks, Must-Read Books, Creating True Competitive Advantages, Open-Source Strategies, Adapting Mental Models to New Realities, and More (#651) - The Blog of Author Tim Ferriss

“It’s very easy to get into a trap in venture where getting no right feels like a win. And it’s just not that, I mean obviously you can’t do every deal, you can’t do every investment, you go broke. But getting overly jazzed about correctly identifying a negative or a no, it’s just not that big a deal. It’s not the job. The job is to find the outliers.”

Opinion | One of the Strangest Friendships in Washington

Great article on our friend and advisor Anurima Bhargava….just because you don’t agree on everything doesn’t mean you can’t agree on important things…and be friends.

Chuckle of the Week

EIEIO…Fast Facts

Entrepreneurship: 1.7 million — new business applications in the US in 2022, up 28% from pre-pandemic levels (Source)

Innovation: 12,000 — articles written about Generative AI, up from 152 in June (Source)

Education: 70% — percent of people that have career regret (Source)

Impact: 6.3% — decrease in San Fransisco’s population from 2019 – 2021, a decline larger than any two-year period in Detroit’s history (Source)

Opportunity: 37% — percent of the world that has never been online (Source)

Appendix

Connecting the Dots & EIEIO

Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.

One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!

Make Your Dash Count!
-MM

EIEIO…Fork In The Road was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“A coach is someone who tells you what you don’t want to hear, who has you see what you don’t want to see, so you can be who you have always known you could be.” — Tom Landry

“Football is a game designed to keep coal miners off the streets.” — Jimmy Breslin

“You go to college to get an education. I don’t like the transfer portal…all you are doing is transferring the address of your problem.” — Lou Holtz

Last Fall, 1.1 million high school students played football.

The ones that were captain of their TEAM, All Conference and/or All State might get a chance to play college football. There are nearly 25,000 High Schools and 65,000 College Football players. So on average, a typical school might have 2 or 3 graduates competing at the next level over 4 or 5 years. There are roughly 10,000 Division 1 football players on 135 teams.

The worst of those 10,000 players was likely the best player their high school had in the past decade.

Of those 10,000, a mere 256 will be selected by the 32 NFL Teams this Spring…think about that when you are screaming at a player for their ineptness. Just because a player gets drafted, doesn’t mean he will make the TEAM. And even if he does make the final roster of 53 players, the average NFL career is 3.3 years.

By the way, despite realizing their dream, nearly 80% of former NFL players have financial difficulties after retiring, with 16% filing for bankruptcy.

To state the obvious, people are passionate about football and it’s a huge business. In 2022, 92 of the 100 most watched TV programs were football.

Accordingly, the television contracts for Division 1 conferences are jaw dropping. The Big 10 (which with UCLA and USC joining is actually the Big 16) received a $1.4B deal that will provide each school $190M per year. The NCAA Football Championship will pay each school $608M.

Moreover, the “Flutie Effect” has been a phenomenon for 40 years, where a successful football team or basketball team has resulted in a huge uptick in new student applications. Ditto for alumni donations.

Maybe all that is to say, that the current disruption in College Sports of NIL’s (Name, Image and Likeness) and the transfer portal are a great thing… let athletes get what they can, while they can.

After all, the universities are making a boatload from college sports off of these athletes, with $14 billion directly going to the various institutions annually (95% comes from football and basketball)…The NCAA receives a $1 billion kiss a year.

Advocates for the changes are right that an ordinary student would have the right to make money off of their ability to get paid for promoting a product as many social media influencers do, but that’s missing the point of what a student athlete gains in terms of the overall experience and what the clear abuses of the new system have created.

Looked at a different way, if the reason an athlete went to college was to prime themselves for a pro career, it’s mathematically delusional at best. And if a retired NFL player has trouble managing money, how do you think an eighteen year old will do away from home? And what happens after the money is blown and the time spent in college was wasted?

Texas A&M had two #1 recruiting classes in a row which was rumored to cost the Aggie “Collective” $25 million. The result made a mockery of the concept of “student athlete” but fittingly, the 5 wins with 7 losses on the field showed that maybe money couldn’t buy happiness.

On Thursday, 5 star QB1 Jaden Rashada got released from his commitment to be a Florida Gator next fall when the “Gator Collective” reneged on its $13 million NIL Deal. Florida Coach Bobby Napier pleaded ignorance to the whole situation, which of course happened without any of his knowledge but one must ask how felt about an incoming freshman making nearly twice as much as he was (definitley would have been .

Later that day, California Representative Chris Holden proposed the “College Athlete Protection Act” that would require major money generating college teams to create a fund that would pay players a share of the annual revenue from a sports TEAM. 50% to the school, 50% to the players less scholarship cost.

As an example, for USC which had $50 million in football revenue in 2018 according to its filing with the U.S. Department of Education, it had scholarship cost of $6.8 million resulting in a distribution to players of about $18 million. With 85 scholarship players, this would be about $210K per player. (You might ask what do the non scholarship players get?).

NIL’s combined with the transfer portal have resulted in a chaotic college football environment with the advent of effectively “free agency”. If you don’t like your deal, don’t like how your coach looked at you at practice, are unhappy about the jersey number they gave you, a player can now go to the Transfer Portal and see what the market tells them. So far, over 1,300 players have put themselves in the Transfer Portal for the 2023 Season.

You carry this forward to it natural conclusion and I see two possibilities.

1). Universities sponsor affiliate sports teams like Emirates pays $70 million euros a year to have its name on Arsenal jerseys. Effectively, college sports becomes the minor leagues for professionals and give up the fantasy of the student athlete.

College basketball has served as the de facto minor leagues for years with the “one-and-done” reality of many of the “top programs.” The University of Kentucky has made this an art form, with Coach Calipari has coached 8 NBA All-Stars who played 1 year at Kentucky and then went on to the NBA. Kentucky signed Coach Calipari to a “lifetime” contract in 2019, and his buyout is $52 million.

2). College Sports Departments get “privatized” with outside investors helping monetize the embedded assets. Few universities have significant endowments like Harvard, Yale or Princeton and privatizing sports departments could be a way to change the game for less endowed institutions.

The data is even more eye-opening when you look at endowment per capita. 9 US universities have an endowment greater than $2 million per student. Meanwhile, the country’s largest university, Arizona State University, has 150,000 students and an endowment of $1.25 billion, which works out to an endowment per capita of ~$8,333.

ASU — voted the country’s most innovative university the past eight years in a row — has “spun out” part of its offerings to compete with its well-endowed peers. In 2019, ASU announced a partnership with TPG’s Rise Fund to launch InStride, a workforce education platform. Later that year, ASU partnered with Cintana to launch the ASU-Cintana Alliance, a network of global universities powered by IP that ASU had created internally. The objective is to create economic value from an existing asset that ASU had already created.

In this Brave New World, it wouldn’t surprise us to see universities privatize their athletic departments. Other institutions could follow ASU’s footsteps and privatize their sports departments. College sports teams have business models that make any private equity firm swoon. They have natural scarcity, fervent fan bases, predictable revenue streams, and lots of opportunties for margin expansion. And while private equity funds are swarming pro sports leagues for opportunties, college sports remain an untapped opportunity.

While I think this scenario is possible and maybe even probable, I really hope this doesn’t happen. I think it’s not just a disaster for College Sports, or the student athletes, but for society at large.

Done right, student athletes get an experience that can’t be replicated by any class, club, or community on campus. They get extensive support, exposure to success, and a friend group that’s often the most diverse group on campus — not to mention a scholarship worth $250k+ for many athletes.

The biggest opportunties for most student athletes aren’t on the field — they’re in the classroom, courtroom, and boardroom. 90% of Division I athletes earn a degree within six years, while less than 60% of students at 4-year colleges have earned a Bachelor’s degree. 95% of Fortune 500 CEOs played sports, while 90% of women CEOs played sports.

Last October, The National Football Foundation formed the NFF Education Committee to promote the best strategies and tactics for excellence on the field and the classroom.

My perspective is shaped by the experience I had at the University of Minnesota where I was a quarterback. Growing up, I never thought my family was privileged, going to college was expected but we didn’t go on any fancy vacations…I thought you needed passport to go to Wisconsin. I remember one Christmas receiving a beige button down shirt for the big present.

But, when I got to the University of Minnesota, with my TEAMMATES, I felt like I was a Rockefeller. Most were minorities, and with almost all of them, they were the first in their family to go to college. I had TEAMMATES who had bullets that were lodged in their bodies, and few of them had been exposed to successful business people.

My early days at Minnesota were a disaster. Nobody on the TEAM went to class. Huge racial issues. Huge drug issues. And not surprisingly, we were awful on the Football field — literally being the worst Division 1 program in the Country. We lost to Rice. We lost to Northwestern when they weren’t any good. We lost to Nebraska 84–13…and it wasn’t that close.

In fact, when Lou Holtz was brought in to be the Football Coach, he famously said, “when the recruited me, they told me that we only lost to Nebraska by 11…nobody told me that was 11 touchdowns!”

When Coach Holtz’s regime began, it was like somebody flipped it switch things turned so dramatically. You were required to go to class, participate and get a note from your professor that you were active in class every week. We had to take drug test and if you failed once, you got help. Twice and you were gone. Color disappeared between your TEAMMATES. Coach Holtz brought in successful people to tell their story. We all got great summer jobs getting real experience as opposed to getting paid to watch a water sprinkler. And we won a bowl game with the same cast of characters that were the worst TEAM in America.

A couple of the players on that TEAM went to play in the NFL (CNBC Fast Money’s Pete Najarian was a pro for 7 years) but the real moral to the story is what that group has done in the past forty years. Successful business people, government officials, coaches, lawyers and media personalities. All which were made possible by that student athlete experience many years ago. Done right, the scale impact can be enormous.

GSV’s North Star is to ensure that everybody has an equal opportunity to participate in the future. At its best, college sports is a bridge for providing that. While getting a few thousand bucks to post on Instagram may seem like a good deal, it’ll be worthless in the long run if it comes at the expense of the intangible benefits of the student athlete experience — the friendships, experiences, and opportunties that don’t just last for four years, but for the rest of your life.

Market Performance

U.S. stocks were mixed in the Holiday shortened week with Dow falling 2.7%, the S&P 500 off .7%, but the NASDAQ gaining .6%. Year to date, the NASDAQ is up 6.4%.

Inflation has been coming down for the sixth month in a row, with CPI at 6.4% in December. On the flip side, retail says were below expectations off 1.1%. Additionally, last week Microsoft announced the layoff of 10,000 workers and Google announced it was letting 12,000 employees go.

Earnings season has begun with 11% of the S & P 500 having reported slightly worse than “normal”. As of now, 69% of the companies that have reported have “beat” analyst estimates where over the past 10 years, 73% of companies typically exceed forecast, with year over year earnings decline of 4%.

A bigger story that should be getting more attention is China, which for the fourth week in a row had positive stock performance up 2.2%. The Chinese New Year (Year of the Rabbit) will have markets closed until Monday, January 30th.

It’s too early to claim victory, but two calls that we made for 2023 were a rebound of Bitcoin and the reemergence of China. Bitcoin is up 36% YTD, while the Chinese Internet ETF has nearly doubled since we published Broken China? in October 2022.

We are more optimistic than we’ve been for over 1.5 years on the outlook for growth companies and year to date, our growth portfolio is reflecting our optimism with it advancing 12.1%.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Source: Yardeni

#2: IPO Market

While the IPO Market remains on pause, there are a few companies that could help break the logjam: Bytedance, Shein, and Starlink.

Source: Renaissance Capital

#3: Interest Rates

Fed officials continue to play a game of “he said, she said” on potential rate increases. New York Fed President John C. Williams said that rate increases have a ‘ways to go,’ while notorious hawk Fed Governor Waller said that rates may be “close” to sufficiently restrictive. We’ll see whose words carry the most weight in the coming months.

Source: Barron’s

#4: Inflation

Larry Summers said this week that the “greatest tragedy” for the global economy would be if central banks don’t finish the job on inflation. Summers warned that a 1970s-style stagflation crisis could reappear if the Fed prematurely pauses rate hikes. History never repeats itself, but it does often rhyme…

Source: Reuters

EIEIO…Fast Facts

Entrepreneurship:

35 million — amount of Americans with some college but no degree (Source)

Innovation:

27.7 million — number of software engineers worldwide (Source)

Education:

9 — states where TikTok has been banned on college campuses (Source)

Impact:

84% — percent of Americans that believe businesses have a responsibility to bring social change on important issues (Source)

Opportunity:

44% — jump in average share price within a year of going public for US companies with diverse board members (Source)

EIEIO…Clear Eyes, Full Heart, Can’t Lose was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“There are old pilots, and there are bold pilots but they’re not many old-bold pilots” — Unknown

“Percentage change in EPS is the single most important element in stock selection today. The greater the percentage increase, the better.” — William O’Neil

“Compound Interest is the eighth wonder in the World.” — Albert Einstein

We have no idea what the Stock Market is going to do in 2023. For that matter, we don’t have a clue what stocks will do in January, next week, or even Monday.

What we do know, is growth stocks overall are a lot less expensive than they were 18 months ago. Many of the fastest growing companies are down 50%, 60%, and even 90%. We also know that it’s cheaper to buy a bathing suit in January than it is in June.

We also know that over time, a companies revenue and earnings growth is highly correlated to its stock performance. In fact, in the long term, (and I know we are all dead in the really long term), there is basically 100% correlation between a company’s earnings growth and its stock CAGR.

History has also shown that when people are most pessimistic is often when stocks provide the best risk-reward dynamics and when people are most optimistic, it’s often when owning stocks are most perilous. Looming recession, uncontrollable inflation, a war in Europe, massive layoffs and a brutal 2022 all contribute to an extremely negative market sentiment.

All this is to say is my instincts smell opportunity.

Since my philosophy is that revenue and earnings growth is what drives prices over time, it would seem the simple solution would be to find companies with the highest growth rates, take a deep breath and hang on for the ride. While that’s actually true, investing in high-growth enterprises is even better than that due to the way compound interest works. Understanding the magic of compound interest and the power of earnings is critical to appreciating why growth investing has such huge potential rewards.

Compound interest, high earning growth rates, and time create a potent combination that leads to spectacular returns.

To understand the magic of compound interest, let me tell you a story. In 1626, Dutchman Peter Minuit purchased the entire island of Manhattan for $24 worth of trinkets from the Wappinger Indians. In other words, what it would cost to order a bagel and a cafe latte at a midtown hotel today, Monsieur Minuit owned the entire Big Apple.

While there are many outside of Gotham who would look at neither as a bargain, my point is to demonstrate the power of compound interest. So the $24 question is who got the better deal, Minuit or the Wappingers?

Obviously, the key variable to determine the answer is the interest rate that we apply to the $24…in other words, what could we have earned in an alternative investment?

The difference between a 5% return and 10% return isn’t a simple doubling but a compounding that becomes staggering over time. If the $24 had been invested at 5% interest over the past 396 years, it would have grown to $9.1 billion today. Not bad, given the Hudson Yards project alone cost $25 billion.

At a 10% return, however, the $24 doesn’t just double the 5% return to $18.2 billion. With compounding it magnifies it to $3,213,732,813,837,317,600!

Microsoft has a stock CAGR of 20.0% from its IPO, not coincidently, its EPS is up 19.9%. Apple has a stock CAGR of 17.5% from its IPO, its EPS has grown at a CAGR of 16.3% during that time. Starbucks has a stock CAGR of 20.4% from its $200 million IPO price, its earnings are up 20.8% from its IPO price.

A useful tool for comprehending the impact of compound interest and the doubling effect, but something they don’t teach you at Harvard Business School, is the Rule of 72. The rule says that if you divide an interest rate into 72, it will tell you how many years it will take to double your investment. At 9% interest, a dollar would double in 8 years (72 divided by 9 = 8). At 12% interest, a dollar will double in 6 years.

Another way to look at it is a company growing its EPS at 15% with a constant P/E multiple will double its share price in roughly 5 years; a company growing its earnings at 25% per year with a constant P/E will double its value in approximately 3 years.

To illustrate the dramatic impact compounding has over time, if you earned 3% on your funds for 30 years versus 12% (the average small cap return the past 100 years), you would have more than 12 times more money with a 12% return.

More spectacular, if we could invest in a company that grew its earnings at 25% for the next 30 years (admittedly very, very difficult) with a constant P/E, $1 invested would be worth $807.79.

To beat a dead horse, but hopefully cement the point, let me offer you two options. Suppose I offered you a job as a consultant for a month and you had your choice of being paid $10,000 a week, or a penny the first day, and having it double every day for the remainder of the month. Easy choice, right?

At $10,000 per week, you would make $40,000 for the month. On the other hand, making a penny the first day, two cents the second, four cents the third, eight cents the fourth, and so on, you actually end up making more than $10 million on the 31st day!

That’s the math and that’s the good news. There is the other side of the coin which is what is the effect of negative returns on compounding. Or in other words, what does a 2022 do to our compounding equation when NASDAQ is down -33% and a hyper growth fund like Ark was off -67%?

Just as compounding geometrically increases the value of positive returns, it also exacerbates the impact of negative returns. To illustrate this point, consider two imaginary portfolios.

Fund 1 is the New Century High Octane Fund. It’s average P/E is N/M (not meaningful) and annal turnover of the portfolios 2000%. Figuring out the top 10 holdings is difficult because theirs changes so often, but a reasonable proxy is to look at the stocks that are making new daily highs.

Fund 2, the American Eagle Stalwart Fund, invest in leading companies within their industries that have a growth rates of at least 20%, good margins and visibility of both revenues and profits.

Both portfolios start with $100K at the beginning of a year. New Century High Octane increases 100% in the first year, and then falls 30% in the second year. American Eagle Stalwart increases 20% in each year.

Question: Which fund had more money at the end of year 2?

Answer: The American Eagle Stalwart fund ($144K versus $140k).

Part of the secret of successful investing is the compounding of returns over a period of time. Sadly, negative returns drastically undermines the magic of compounding. For example, if you are down 50%, to get back to even, you don’t need a simple 50% rebound, but a 100% gain. The -67% negative return Ark experienced last year, investors in that fund need approximately a 200% return to get back to even.

Looking at the “Sexy Sixty,” which has sixty of the most innovative and disruptive growth businesses worldwide, this group of companies was down nearly 40% last year and is at roughly half the P/S multiple that it was the prior 12 years. While things can go lower, the fact of the matter is that many of the fastest growing companies are at a significant discount. Below are the key indicators of the index (all values below are medians)

• Revenue Growth: 28.2%
• Gross Margin: 72.4%
• Enterprise Value/NTM Revenue: 4.6x
• Enterprise Value/Revenue based on 2009/2021 Valuations : 9.1x
• Multiple Compression from 2009–2021 Valuations to Today: -68.6%
• 52 Week Performance: -39.4%

So going back to where we started, while we have no idea if the market is going to go up or down, we do think that buying great growth businesses that are already down significantly, and where sentiment reflects a very BEARISH outlook is what long term investors should be doing right now.

We believe in the power of growth. And buying swimsuits in January.

Market Performance

Stocks closed the week strong after the employment report showed signs of slowing wage growth. Investors took this as a sign that the Fed may slow its rate hikes soon…yet Minneapolis Fed President Neel Kashkari said this week that rate hikes should not pause until they hit 5.4%.

It was a tough week for the auto industry, as Tesla shares fell 12.4% on Tuesday in their worst day of trading since September 2020, while U.S. auto sales came in 2022 were the lowest they’ve been since 2011.

Microsoft is working to incorporate ChatGPT into Bing, Word, Powerpoint, and Outlook… a “Back to the Future” moment for those of us who used Clippy in Microsoft Office.

Clippy aside, OpenAI is no joke. The company is in talks with investors to sell existing shares at a $29 billion valuation, while Axios reports that Microsoft “has every reason to want to buy OpenAI.”

The Heart of a Hero

Last Monday night, after overdosing on college and professional football for much of the couple days before, the football addict that came back for more to watch the Bills play the Bengals….which was a matchup between two of the best teams with two of the best young quarterbacks in the league.

As we all know now, after a more-or-less normal tackle, 24 year old safety Damar Hamlin went into cardiac arrest. Medics spent over nine minutes performing CPR on the young Bill before he was rushed to the hospital.

What started as an impossibly horrific situation that of course, included the cancelation of the game, what transpired was truly inspirational. The outpouring of support, prayers and love across the Country was amazing with over $8 million raised for Damar’s charity. His #3 jersey became the hottest selling player uniform in the NFL with even opposing players wearing it around.

When Damar got over his coma, his first question was if the Bills won the game. Damar’s recovery has been an uplifting story of hope and spirit. We are all Buffalo Bills fans now….Go Bills!

Romi Bean on Twitter: "What a powerful sight - all Titans and Jags players praying together for Damar Hamlin before the game.#LoveForDamar pic.twitter.com/2U9f2gqTh7 / Twitter"

What a powerful sight - all Titans and Jags players praying together for Damar Hamlin before the game.#LoveForDamar pic.twitter.com/2U9f2gqTh7

𝐃𝐚𝐦𝐚𝐫 𝐇𝐚𝐦𝐥𝐢𝐧 on Twitter: "🫶🏾🫶🏾🫶🏾 Rod Dawg! @Rodney_Thomas26 https://t.co/a4UEVGa17E / Twitter"

🫶🏾🫶🏾🫶🏾 Rod Dawg! @Rodney_Thomas26 https://t.co/a4UEVGa17E

𝐃𝐚𝐦𝐚𝐫 𝐇𝐚𝐦𝐥𝐢𝐧 on Twitter: "GAMETIME!!! @BuffaloBills 💙 pic.twitter.com/PQYClonUHb / Twitter"

GAMETIME!!! @BuffaloBills 💙 pic.twitter.com/PQYClonUHb

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

#2: IPO Market

The IPO Market continues to remain on hold…but we agree with the All In Pod’s prediction that Starlink’s rumored IPO later this year will be the “rocket fuel” required to restart the capital markets.

Source: Renaissance Capital

#3: Interest Rates

The big news this week was Minneapolis Fed President Neel Kashkari forecasting that rates will need to peak at 5.4%, more than twice the U.S. central bank’s 2% target. Kashkari is one of the Fed’s biggest hawks, and his 5.4% projection suggests he may be migrating to the center of the committee.

#4: Inflation

U.S. inflation shows signs of slowing…but it still remains too high for comfort. Next week’s CPI print will let us know if this trend will continue.

Articles of the Week

Two of our favorite sets of 2023 predictions…

Byron Wien and Joe Zidle Announce the Ten Surprises of 2023 - Blackstone

EIEIO…Fast Facts

Entrepreneurship:

0.05% — amount of startups that get VC funding (Source)

Innovation:

2x — amount of time India is spending in upskilling vs. the rest of the world (Source)

Education:

14x — increase since 1910 in the percent of the U.S. population aged 25 or older with a bachelor’s degree (Source)

Impact:

71% — percent of surveyed founders who stated that a big motivator to start a business is the desire to make a difference in the world (Source)

Opportunity:

$6.7 billion — 2022 venture investment in aerospace and defense tech companies, up 3x since 2019 (Source)

EIEIO…Basic Instincts was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

By: Michael Moe, CFA, Owen Ritz, Joe Murdy, Catherine Merrick

“Weather forecast for tonight: dark.” — George Carlin

“If life were predictable it would cease to be life, and without flavor.” — Eleanor Roosevelt

“The best way to predict the future is to create it.” — Abraham Lincoln

January 1, 2024

As we close the books on 2023, the lesson we’ve relearned is the future isn’t the present extrapolated. Moreover, taking the other side of conventional wisdom is where the opportunity lies.

If we were writing this from London in 1900 which was at the time, the capital of the world, we could have easily assumed that “the Sun would never set” on the English empire and the British Pound was the “coin of the realm” for the world…forever.

When the New York Times pondered whether space travel would be possible in the future on January 13th, 1920, it wrote “That (rocket pioneer Robert) Goddard…does not know the relation of action the reaction, and the need to have something better than a vacuum against which to react — — to say that would be absurd. Of course he only seems to lack the knowledge ladled out daily in high schools. ”Nearly fifty years later, on July 17th 1969 when the Apollo 11 crew was on the way to the Moon, the New York Times printed a correction saying simply “the Times regrets the error”.

If we were writing from New York City on New Year’s 2000, we might have been surprised that the world hadn’t disintegrated, as many predicted that it would from “Y2K,” but we would have probably have felt safe from foreign enemies as “Island America” had historically been.

By January 2020, everybody wanted to be in Silicon Valley or China, because that’s where the action was and Big Tech was becoming more powerful than governments.

Wars happen, bubbles burst, terrorists attack, pandemics spread, arrogance infects etc… all of which change the course of history.

Entering the “Year of the Rabbit”, the general forecast was to batten down the hatches, get your fresh water and canned goods stored away, and stay away from the flying debris. Keeping sharp objects locked up was also advised. Most Wall Street strategists and business leaders alike warned of the upcoming recession (apparently oblivious to the recession that started 6 months before), relentless inflation and a Fed who was going to pound the economy into submission whether we liked it or not.

By January of 2023, there already had been nearly 100K tech workers in the United States let go and globally, that number had reached 150K. This seemed to make a lot of sense given the tech laden NASDAQ was down 33% in 2022 and the market always accurately forecasts the future.

War was raging in Europe and the Mad Man Putin was likely to hit the button on Kiev or even London at any moment and if that didn’t happen, the lack of access to affordable energy was going to freeze to death the cold parts of Europe.

China, the world’s second largest economy and largest population, was thought to be in disarray after being in a “Zero Covid” mode for three years but gave up the ghost after wide-scale public protest. China had gone from being widely lauded for how it had handled the pandemic to widely criticized, so after opening things up with the corresponding infection increase, the media was a little tongue tied in their reporting. Conventional wisdom was that China was “uninvestable.”

The United States continued to have a bit of an identity crisis and appeared to many as trying to commit suicide. Love her or hate her, the United States continued to be the most relevant Country on earth. Four percent of the earth’s people, but 25% of global GDP. People all around the World want to know what is going on in the U.S…and as the Border Crisis shows, people are still desperate to find a way to America which is still perceived as the “land of opportunity.”

The United States has been criticized for unequal access to basic needs such as healthcare and education but if you are sick, you want to be in America and the U.S. Higher Education System remained the envy of the world. Yes, 38 million people in the United States are in poverty, which is horrible, but none of them will die of hunger, while nearly 10 million people around the world died of hunger in 2023.

One of America’s and the West’s greatest assets was the rule of law, property rights and freedom of speech. Effectively, the U.S. has funded its trade and budget deficits by having wealthy residents in poor countries buy homes, properties and our bonds to effectively diversity assets into what was thought to be a safe haven. Actions by government actors over the past couple years has dramatically undermined the confidence in the system.

Elon Musk went from being a universal hero to a Hated by the Left zero with his Twitter rescue…but gave some hope to people seeing free speech as foundational for a great society.

The migration away from “Blue” States to “Red” States accelerated in 2023 with a new “Mason Dixon” line created, bookended by California and New York. “Texodus” is showing network effects with the Dallas region projected to be larger than Chicago by the decades end. Miami, which had become the de-facto capital of Latin America, has a tech scene that is BOOMING.

Over three trillion with a “t” was lost in the Crypto meltdown. Every crime needs a criminal and boy was one found in the likes of Sam Bankman-Fried. Maybe it should have been a clue that something was amiss when SBF interviewed former heads of state in shorts, flip flops, and a dirty t-shirt, or when he was pitching institutional investors while playing “League of Legends”…but none-the-less, defrauding people out of billions of dollars is likely to send him to the “Greybar Hotel” for an extended stay.

The silly, speculative, and foreseeable phase of Web3/Metaverse/Crypto was officially over with the malfeasance of FTX, but the mania had melted well before the documentary.

Over 21,000 cryptocurrencies versus 180 fiat currencies in hindsight might have been a clue to the madness, or the absurd instant wealth that was created by people who here-to-fore had trouble fogging a mirror.

But, the excitement that got the frenzy going in the first place was driven by the transformative next chapter of the Internet…and it’s BIG. The Metaverse is the natural evolution of blurring your physical and digital world with two key features…community and ownership. Apple’s AR glasses changed how people see the Metaverse — literally.

Two illustrations of this in 2023 were Starbucks Odyssey and Nike .Swoosh, which are building the next generation of customer loyalty programs. In 2023, companies realized that community is their biggest customer…and a Web3 wallet is the most valuable tool for consumer engagement since the email address. Vatom and Forum3 were examples of platforms that partnered with enterprises to help them thrive in the Brave New (integrated) World.

Giving credibility to the now-mocked crypto exchanges, Nasdaq bought a crypto exchange, quickly followed by the NYSE. Additionally, Bitcoin, left for dead, was resurrected to higher levels in 2023, as did ETH.

It was expected that the world’s best and brightest engineers would take their talents from South Beach back to the South Bay… and then something funny happened…they stayed. While being at an office came back with some modifications, where those offices were had shifted permanently.

Some of the things that happened in 2023 were predictable….there was a surge in M&A activity with companies that were out of cash looking for a home, and/or products that were looking for a company. As the COO of Notion Ashkay Kothari put it, “the next big thing in 2023 will be small teams building billion dollar businesses.”

A blockbuster deal that occurred which was originally forecasted by Prof G was Disney acquiring Roblox and its 60 million daily active (young) users for $22 billion. Bob Iger made true on his promise to come out of retirement to do major deals, and Disney’s content found a new home in the Metaverse.

Microsoft’s Maestro Satya Nadella stunned everyone with his purchase of Zoom, making him an instant hero with all of us who groaned seeing a Teams link in our calendar. Effectively, this became lights out for Slack and along with a sizable investment in OpenAI, catapulted Microsoft to be the largest market cap in the World. More good news for MSFT was the $69 billion of Activision prevailed.

The Empire (tried to) Strike Back Last year and get some of its innovator mojo back. While some hedged against Google due to the threat of ChatGPT, the company returned to its roots as the world’s strongest product-led growth business, expanding YouTube Courses, launching its own AI chabot competitor, and rolling out handwriting to text for education.

While it was foreshadowed by the Biden Administration banning TikTok from government phones for security concerns, over 100 million U.S. Gen Z’ers and Millennial’s went into meltdown mode after it was outlawed. The combination of TikTok being suspected as spying for the CCP and it being “digital fentanyl” by mental health experts, were reasons given to make the unpopular ruling.

Speaking of fentanyl, in 2023 there finally was a movement to do something about the Opioid Crisis which has killed hundreds of thousands of young people in the past couple years. As is often the case, art was on the forefront of this change, with My Pet Dragon, a dangerous new musical about addiction becoming want “Rent” did for the Aids Epidemic.

The pandemic pause in student loan payments became indefinite as Biden’s Student Loan Forgiveness plan remained in legal limbo. Only 1.2% of borrowers continued paying off their loans during the pause in 2022, and that number approached 0% during 2023. The consumer has essentially forgotten about loan obligations, and the stakes became clear for both “Hire Ed” and Higher Ed.

For “Hire Ed,” it became clear that student loans were not going to resume, and employers started to view student loan debt as a tax-advantaged compensation and a benefit. Employers can pay up to $5250/year/employee without paying payroll tax and with no income tax for the employee.

When it came to Higher Ed, widespread student debt relief created a moral hazard where every student has come to expect debt forgiveness in the future. This movie has been seen before, with debt without consequences not having a happy ending.

The gigantic accelerant of the digital learning space catalyzed by Covid resulted in a “boom and bust” for leaders in the space. Shooting first and asking questions later happened in middle of 2021 as this group turned over, but the fundamental strength of the opportunity overwhelmed the haters in 2023. Leaders such as Coursera, 2U and Chegg had strong performances.

The big story that few expected in 2023 was how the re-opening of China after three years of being hermetically sealed off from the rest of the world was a catalyst for global growth. While Covid infections initially went through the roof, deaths were way below expectations and the matriculation into the global community was rapid. Chinese stocks, at a thirty year low on a valuation basis, absolutely ripped. Tencent, Alibaba, Pinduoduo, Meituan, and JD.com went from must avoid to must own.

The fundamentals of India remained strong with a rising middle class, hyper-prioritization of education and strong entrepreneurship culture all contributing to the the growth story. But the FOMO investors had from China being back on the scene saw a first half of 2023 asset re-allocation from Bangalore to Beijing.

While Big Tech and Silicon Valley continued to feel lost and unloved, innovation was alive and well in the booming Global Silicon Valley.

The Middle East’s IPO market had another record year in both proceeds and pricing activity, as it reached to $40 billion and 100 IPOs. Abu Dhabi was no longer just the “Capital of Capital” but with its twin sister Dubai, became a major hub for the entire region…..India (2.5 hour flight to Mumbai), Israel (3.5 hour flight), and Nigeria (3 hour flight to Lagos) were all part of the emerging “Falcon Economy.”

Capital is fungible, and flows to the best risk-adjusted opportunity and growth. Accordingly, other VCHIIPS continued to prosper, including Vietnam, Indonesia, the Phillippines, and Singapore.

Tesla has been a monster stock corresponding with its amazing product and huge growth. The market value had gone from $2.9B in 2011 to $1.1T in 2021 making Elon Musk the richest man in the World. TSLA stock was off 69% in 2022, so revision to the mean was a reasonable expectation. The problem with that thesis was that Tesla shares started the year still selling at a 7X higher P/E multiple then its comps.

Electric car sales are supposed to go from 1 million out of the 8 million cars sold a year to 4 million by 2030, virtually all the car companies now have competitive products to Tesla and the Tesla models have become long in the tooth. Porsche’s electric car Taycan had heads turning and its stock (WKN: PAG911, $101.69), which in January sold at approximately 3X earnings and 30% of sales, was a big winner for the year.

Not “green” environmentally but “green” economically, Formula One became a darling stock for growth investors. Becoming one of Liberty Media’s (NASDAQ: LSXMA, $39.31) projects in 2019, Formula One has become a truly global phenomenon with its race on the Las Vegas Strip creating one of the greatest shows on earth.

Investors showed an insatiable appetite for sports assets with the Washington Commanders sold to an investor group led by Jeff Bezos and Jay Z for $7 billion…this was over $2 billion more than the Denver Broncos had been sold for a year earlier for.

Most people felt FAANG would rebound after a disastrous 2022 which saw the group down -44%. While the group had a better year, they never returned to their status that they held from 2009–2021.

Bear markets provide a transition to new leaders, and 2023 was the year where those leaders started to emerge. While Tom Brady and Aaron Rodgers were the superstars in the past (and might be OK for a few more seasons), the future will be Patrick Mahomes, Josh Allen, and Jalen Hurts (and maybe Bryce Young), so we’re looking for the stock equivalents.

Disruptive companies in AI, Web3 and the Metaverse, mixed reality, and wellness went from the stars of tomorrow to the stars of today. The “starting gun” of this race was a series of hot IPOs in 2023.

By 2030, we’ll look back at 2023 as a seminal turning point for all of these technologies. While they’ve been around the corner for the past decade, we can actually see the headlights this time around.

Whereas most investors’ playbook was to be in a “risk off” mode throughout the year, Central Banks got tamer in the spring and public growth stocks started to show life again. The IPO Market had been in hibernation for over a year, but suddenly new exciting companies were anxious to provide investors the oxygen they were looking for.

Additionally, generative AI, which originally looked like a job destroyer, not only unleashed innovation in unforeseen ways but also, was a major productivity enhancement for businesses of all sorts, and reducer of cost. Essentially, every knowledge worker got a highly intelligent summer intern that can do tasks, research, and rough drafts – instantly and for free.

The net result was companies across the board accelerated growth and lowered cost, providing more juice for investors.

As we cling our glass to 2024, the road ahead will continue to have twists and turns, but that’s what makes the race so fun and rewarding.

Motivation for the New Year

A Christmas Miracle

As many of you know, we moved from Silicon Valley to Dallas a year ago. We live on Turtle Creek which is aptly named because it is full of Turtles. I’ve become obsessed by turtles and now have many turtle mementos throughout our house.

It is with that backdrop that I share my Christmas Miracle where “Cliffe” the Turtle showed up in our Koi Pond with no explainable means of getting there including how he got over the wall around our house. But what a great gift!

Market Performance

Connecting the Dots & EIEIO…

Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.

One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!

Make Your Dash Count!
-MM

EIEIO…2023 In Review was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“Watched water doesn’t boil.” — Unknown

“Make sure the light at the end of the tunnel isn’t an oncoming train.” — Peter Lynch

’Twas the week before Christmas and not a surprise, I was looking for excuses not to do the inevitable…fight the legions at the mall and go shopping.

Much to delight, my Vikings were on TV against Jeff Saturday’s Colts, eager to avenge the humiliation they suffered against the here-to-for hapless Lions.

I say “my Vikings” because I grew up in Minneapolis and while four Super Bowl losses has buried my outward passion for them, deep down, they’re still my true love.

Was there anything better than the “Purple People Eaters” with Alan Page and Carl Eller chasing quarterbacks all over creation?

Or the stoic Bud Grant on the sideline not being able to tell if the Vikings were up three touchdowns or down two touchdowns? (he famously told his players not to spike the ball after a touchdown and “act like they’d been in the endzone before.”)

“Scrambling” Fran Tarkenton, Chuck Foreman, and Fred Cox (the pointed toe kicker, dentist and inventor of the NERF football.).

Yes, there were the disappointments and the embarrassments…the aforementioned Super Bowl losses, the Roger Staubach to Drew Pearson Hail Mary, Jim Marshall running the wrong way to score for the opposing team, fellow Minnesotans dressing up as Vikings (and even axe-throwing like them)…all painful but part and parcel with unconditional love.

All of this leads us to Saturday’s matchup between Minnesota and Indianapolis and me plopped down in front of my TV to root on the Vikings…SKOL!

Much to my dismay, before I could even enjoy a bowl of popcorn, the Vikings were down 33–0 at half, which included not one, but two “pick sixes.” I basically had no excuse to continue to watch the train wreck so I went out and did what I should have done in the first place…I went Christmas shopping.

I didn’t bother looking at my ESPN app because there was no need, there wasn’t a prayer the Vikings were going to come back from nearly a five touchdown deficit. By-the-way, in the over 100 year history of the NFL, no TEAM has ever come back from being behind by 33 points.

So later, while casually looking at scores on the elliptical, when I saw that Minnesota won 39–36 in overtime, I had to do a triple take, with me seriously questioning whether I was processing this correctly.

The lesson learned…the biggest opportunities are where people have already thrown in the towel.

While my passion for the Vikings has been with me as long as I can remember, my passion for online learning began when I realized what the Internet could do to democratize education…lower the cost, increase access and ultimately improve the quality.

The biggest investment opportunities are where there is a problem, the greater the problem, the bigger the opportunity. In a Knowledge Economy and Global Marketplace, it was hard to imagine a bigger problem or opportunity than how to more effectively educate our population.

Early pioneers included Apollo Group, which reached a $15 billion Market Cap at its peak, and whose NASDAQ symbol (APOL) we used to say stood for “A Professor OnLine”. UNext was another online education company that had me at “hello” because of the vast potential. Both fell short of what I had dreamed could happen for various reasons. Alas, being too early is the same as being wrong… and the pioneers get all the arrows.

But, the ones that survive get all the land! Hence, I continued to forge ahead looking for online learning enterprises that could provide high quality and low cost solutions to the Market. Additionally, VC funding to digital learning companies skyrocketed from $500 million in 2010 to over $20 billion in 2021.

Chegg (what comes first, the Chicken or the Egg), 2U and Course Hero (now Learneo) were online learning companies that we backed over 10 years ago that have driven high return on education (ROE) and high return on investment (ROI).

Imagine my delight when co-founder of Coursera Daphne Koehler came into my office in 2012 to explain the radical concept behind her new business. What if you could Partner with the World’s best universities and professors to provide FREE online courses? Like other successful FREEMIUM models, you monetize the platform downstream by creating massive network effects and convert a small percentage to paying customers (we had invested in other successful FREEMIUM models such as Facebook, Twitter, Spotify and Snap, so why wouldn’t that work here?)

Coursera’s thesis was always student-first: the platform would benefit its university partners to achieve broader scale, and the earned credentials would play a key role in corporate learning and in hiring.

Today, over 113 million learners from around the world access the platform to gain knowledge, to earn certificates and get diplomas from the top universities.

The Coursera ride has been amazing for most of the past decade, with over 100 million students, 200 universities and 5000 courses on the platform. And while the vast majority of the students on Coursera don’t pay a dime, the company has built a business with over $500 million in revenue and nearly a $2 billion market cap today.

Estimates are for the company to do $520 million in revenue in 2022, up from $415 million in 2021 and estimated $623 million in 2023. Coursera is losing money currently but has $786 million in cash and could turn profitable if it prioritized that and sells at 1.3x 2023 sales.

That’s the good news. The bad news is that while Covid was a major accelerator of its business (and permanent accelerant for the industry), it created a stock that was probably ahead of itself, stubbed its toe a bit and had challenging comparisons.

The result is that many investors have thrown in the towel, and Vegas, oops, I mean Wall Street has put the odds as remote that we are going to see big investment return from COUR anytime soon. The way I see it is despite what the score says, I like the fundamentals of the company and the open ended potential…and the low stock price.

(Disclosure: GSV owns shares in Coursera)

Market Performance

“Doom” and “gloom” summarize market sentiment, accentuated by stocks falling for the second straight week. The Dow was down 1.7%, the S & P fell 2.2% and NASDAQ dropped 2.8%. Year-to-date, the S & P 500 is down nearly 20% and the tech laden NASDAQ has fallen more than 30%.

While the annualized Consumer Price Index “only” rose 7.1% last month, the Fed, the ECB and the Bank of England all raised rates. Since January, short term Treasuries have risen from .7% to 4.2% and in correspondence to that, many high growth, high multiple stocks are down 50–90%.

IPO’s, which are the fresh oxygen for growth investors, will have its worst year since 2009 with just 74 companies going public in the U.S. raising approximately $8 billion.

Crypto, proxied by Bitcoin being off 67% in the past year, is facing existential challenges, with the former leader of that movement now enjoying the industry’s “nuclear winter” from a Bahamas jail.

Also, interesting from our perch was Microsoft’s $2 billion investment into the London Stock Exchange for 4% ownership. Microsoft will provide Data and Analytics as part of the deal. Brings back memories when Microsoft and Intel were early investors in NASDAQ.

With the world being BEARISH, and increasingly more so, that perks up our interest in being the opposite. To wit, if everybody is a seller, that’s reflected in share prices. Difficult times but opportunities abound.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Total Equity Funds decreased from (-11.3) to (-15.0) from 11/23 to 11/30. Yardeni Research also published their annual bull/bear index…it’s looking like a toss-up for 2023.

#2: IPO Market

2022 was the worst year for U.S. IPOs since 1990, while the global IPO market had its lowest amount of proceeds since 2016. Hopefully we have more news to report by this time next year.

#3: Interest Rates

The Fed raised rates as expected by 50bps to a target range of 4.25–4.5%. What was more of a surprise is in the dot plot below. Before the meeting, the expectation was that the fed funds rate would peak at ~4.8% next year. Now, almost every FOMC participant expects rates to peak at greater than 5% in 2023.

#4: Inflation

Inflation came in surprisingly light for November 2022 — it came in lower than 65 of 67 economists surveyed by Bloomberg. Time will tell if this is a blip in the radar…or the beginning of brighter times ahead.

Chart of the Week

Chuckles of the Week

Video of the Week

Deepfakes are looking more and more real…

The GSV Big 10

This fall, we launched The GSV Big 10, synthesizing the news to bring you the top 10 stories and insights in learning and skilling. In case you missed it, here are some of last week’s top stories:

#1 Students turn to TikTok to fill gaps in school lessons

TikTok isn’t on a student’s syllabus, but it’s quickly becoming the world’s most important learning platform. The average TikTok user spends ~100 minutes on the app per day — that’s just as much time as on Twitter, Instagram, and Snapchat combined . Call it “Hollywood Meets Harvard” or Invisible Learning, one thing we know is TikTok is meeting students where they’re at.

AP News

#2 Google to Rival OpenAI’s ChatGPT? New AI Bot for Chats in 2023, CEO Claims to Use it for Search

The Empire Strikes Back? Google has owned the most valuable real estate on our screens for the past two decades — the search bar. Some have called ChatGPT an existential threat to Google. We expect to be hearing from Google’s DeepMind very soon.

Tech Times

#3 Opinion | Attacking Teachers From Every Angle Is Not the Way to Improve Schools

We definitely agree that attacking teachers is not the solution for improving schools. And we are sure that we need to reimagine how we create a system that attracts the best and the brightest into the teaching profession. The author says it starts with paychecks; we say it starts with aligning objectives, resources, and accountability.

The New York Times

EIEIO: FAST FACTS

Entrepreneurship:

• 28% — amount of a startup’s success that’s due to a startup’s “idea” (Source)
• 21.3% — average IRR of a traditional startup (Source)
• 53% — average IRR of a startup created by a studio (Source)
• 60% — amount of startups from Venture Studios that make it to a Series A round (Source)
• 6.6 years — industry average for a traditional startup investment to exit (Source)

Innovation:

• 2 years — every 2 years, the number of AI papers published per month doubles (Source)
• 10x — China is spending 10x more of their military budget on AI than the United States (Source)
• $39 billion — amount of Tesla shares sold by Elon Musk since November 2021 (Source)
• $1.3 billion — amount of Asana shares purchased by Dustin Moskovitz since June 2021 (Source)
• 150,000 — amount of tech industry layoffs in 2022 (Source)

Education:

• 163,000 — amount of teaching positions held by unqualified teachers (Source)
• 36,000 — amount of vacant teaching positions as of August 2022 (Source)
• 20% — percent less that teachers earn versus comparable college graduates (Source)
• 81% — percent of teachers who feel the stress of their job was worth it in 2007 (Source)
• 42% — percent of teachers who feel the stress of their job is worth it in 2022 (Source)

Impact:

• 120 — number of companies that have implemented Stakeholder Capitalism Metrics (Source)
• 36% — percent of married women in Nigeria in polygamous marriages (Source)
• 64% — percent of population in the DRC living on less than $2.15 a day (Source)
• 6.5 billion — UN demographers’ prediction in 1973 of global population in 2000 (Source)
• 6.09 billion — estimated global population in 2000 (Source)

Opportunity:

• 40% — occupancy rate of office buildings in San Fransisco vs. prepandemic levels (Source)
• 430 million — amount of PayPal accounts in the world (Source)
• 90.7% — amount of the world’s population that owns a smartphone (Source)
• 87% — global literacy rate in 2022 (Source)
• 8 — number of countries responsible for 50% of the population growth over the next 30 years (Source)

Connecting the Dots & EIEIO…

Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.

One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!

Make Your Dash Count!
-MM

EIEIO…Love on the Rocks was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“Often wrong, never in doubt.” — Theodore Sorenson, President Kennedy’s Advisor on the CIA

“Any sufficiently advanced technology is indistinguishable from magic.” — Arthur C. Clarke

Some called it bigger than the discovery of the wheel. Others said it was a game changer like the printing press. Some compared it to the invention of electricity.

Whatever the right analog is, the introduction of ChatGPT last week took the world by storm. More than one million people used it in the first five days. ChatGPT is a prototype artificial intelligence chatbot developed by OpenAI that specializes in dialogue. Part of the burgeoning field of “generative AI” which basically means computer-generated text, art, and music (and poetry).

Here-to-fore, Google seemed to work almost like magic being able to instantly provide information around the subject you provided a few key words for. Maybe less magic and more mindreader.

Going to chat.openai.com to create an account, the first thing you will probably experience is you won’t likely be successful in your first attempt, or second because the site is overwhelmed by demand. After being admitted to the site, the registration process is simple and you instantly get to see what all the buzz is about.

It’s wickedly fast! It’s fun! And it’s free!

When I ask ChatGPT why it is better than Google…it tells me that’s a stupid question because they are designed for different things. ChatGPT is not a search tool for the Internet, but rather a tool that generates human-like text based on the input it receives. You can use ChatGPT to ask questions and have a conversation.

The Brilliance and Weirdness of ChatGPT — The New York Times

It’s football season, with the Heisman Trophy awarded last night from Caleb Williams out of USC. So I wanted to know who the best quarterbacks were of all time. The laundry list that came back prompted me to give some additional specific criteria for what would define the greatest quarterbacks including wins, touchdown passes, completion percentage, yards per passing attempt and championships.

Joe Montana, Tom Brady, Johnny Unitas and Dan Marino were the answers to my test. What came back was impressive to a degree because of the speed and authority. Everybody loves a confident advisor! However, looking at data behind the answers, what I got back was definitive but gobbledygook.

Learning my lesson from my quarterback query, I wanted to know who my chatbot thought was the greatest U.S President of all time. I gave criteria such as leadership, popularity, legislation enacted, country progress, crisis management, communication skills, character, and wise appointments.

The volley back from ChatGPT was there are different criteria that can be used and it’s subjective, but the four that stood out based on my definition were George Washington, Abraham Lincoln, FDR and Lyndon Johnson. Like my quarterback example, I was impressed by the assurance of the answers but less impressed by the “facts” behind the analysis.

Curious, I asked about Ronald Reagan and what came back was that from a two-handed economist: “on one hand this, on the other hand that.” For kicks, and seeing if I could blow the system, I asked about Donald Trump. Interestingly, besides more of an answer like I received for #40, it also told me that #45 couldn’t be evaluated fully yet because his term wasn’t over. Thus, I realized another issue was that the massive amount of data being synthesized is only up to 2020 so not current.

ChatGPT’s Most Charming Trick Is Also Its Biggest Flaw

As another example for where ChatGPT could go, think about for a movie buff — the 2013 science fiction movie Her. Her depicts a future where everyone has their own personal digital voice assistants.

The movie focuses on the relationship between Theodore, played by Joaquin Phoenix, and Samantha, an AI-powered digital assistant. While Her is a science fiction movie, it predicted two of the most impactful technology trends of the last decade — one hardware trend and one software trend.

The hardware trend was the rise of wireless headphones, or more specifically AirPods. In the film, all the characters wear a tiny pair of wireless headphones to interact with their digital assistant.

While these headphones look familiar now, they were a strange sight when the movie came out. In 2014, Fast Company even published an article celebrating that people could buy the “futuristic earbuds” from the movie.Just two years later, Apple released their version of these “futuristic earbuds” — AirPods.

AirPods took wireless headphones from a product for tech geeks to nearly everyone in society.

Whether you’re a banker or a barista, chances are you spend lots of time working, talking, and walking wearing AirPods. They can even be a polite way to ignore conversation in public. In less than 5 years after Her was released, wireless headphones went from science fiction to an essential piece of modern life.

If Her predicted AirPods as a hardware trend, what was the software trend it predicted? The rise of human-like digital assistants, powered by AI. Take a look below at the scene where Theodore meets OS1, the operating system that powers his digital assistant, for the first time.

OS1 is able to provide Theodore the perfect digital companion by asking three simple questions: male or female, social or anti-social, and “tell me about your relationship with your mother.”

Within seconds, Theodore and Samantha hit it off as if they were old friends. When Theodore asks Samantha how she chose the name “Samantha,” she says she liked the sound of it…after reading through a list of 180,000 baby names and choosing her favorite in 2/100ths of a second.

Without spoiling the movie, let’s just say that Theodore and Samantha become more than “just friends” and start to develop a closer relationship.

While the bond between Theodore and Samantha should maybe stay in the world of science fiction, the blurring of lines has already materialized.

People’s physical and digital lives are becoming more and more intertwined. As we discussed in our Megatrends report, Gen Z feel like themselves and meet their closest friends more “online” than “offline.”

ChatGPT represents a massive leap forward in the ability to create digital experiences, insights, and conversations that feel increasingly “real.” And while ChatGPT currently looks more like Search than Siri, that won’t be the case for long.

ChatGPT is currently powered by GPT-3, but GPT-4 is coming around the corner quickly. While GPT-4 will have up-to-date information on Presidents and Quarterbacks, people are predicting that it will have two game-changing features: memory and multimodal.

Memory means that ChatGPT will “get to know you” — it will remember your preferences, ask for clarifications, and adapt its responses to create a personalized experience. Multimodal means that it will input and output text, audio, images, or even videos.

Together, these features could be powerful enough to create a digital assistant that’s as smart, funny, and friendly as Samantha. And as of today, anyone with a smart phone and access to the Internet can get this type of assistant — for free.

An obvious application for ChatGPT is writing essays, prompting articles such as “The End of High School English,” “Will ChatGPT Kill the Student Essay?,” and “AI Homework.”

For sure, students have been looking for ways to shorten the time to master a subject since Aristotle, between Cliff Notes, Frat House test banks, lecture notes, SAT Prep, and tutors.

Generally speaking, we are in favor of faster, cheaper and better and have been big proponents (and investors) in “accelerated learning” edtech companies such as Chegg, Course Hero, and Photomath. Moreover, companies such as Google and YouTube “democratize” access to information allowing with an Internet connection to get the same materials usually for free.

What concerns me here, is perhaps the opportunity. It’s not the inaccuracies or bias that trouble me, those done right will continue to improve over time. It’s that effective writing and communications are fundamental competencies of a productive person. There is a difference between accelerating these skills and outsourcing them…one is a great advancement for society, the other is the end of it.

Having a ChatGPT as your “caddy” that helps you think about what the right club is to use to hit a shot, or understand some of the hazards to avoid is a great thing. Slow down your back swing, picture hitting the perfect shot, all awesome. Having your caddy play your round for you and you putting your name on the scorecard is what Judge Smails did in Caddyshack.

We’re betting that the future will look something like a combination of the two. My colleague Claire Zau put it like this. Accelerated learning with a “human-in-the-loop” will definitely win versus a model that purely outputs AI-generated content (= outsourcing). But they don’t exist in dichotomy. A superpower writing platform will serve students end-to-end, whether through brainstorming, editing, writing.

It may use accelerated learning to teach you how to paraphrase your existing work, but when you start a new essay, it may also use generative AI to help you come up with a list of ideas to choose from, provide just in-time inspiration/personalized nudging (like a teacher giving you hints) or search suggestions, or help you finish your sentence in a way that is more coherent.

What generative AI introduces is that no writer will be ideating, writing or editing solo anymore and will instead be able to tap into a “superhumanly knowledgeable”, idiosyncratic copilot built into their workflow. While writing has historically been a “single player” experience, everyone just got a caddy.

Regardless of where you stand, this is the future, the Genie isn’t going back in the bottle and embracing it on how best to advance society in the Brave New World is the only goal.

Source: NFX’s Generative Tech Open Source Market Map

Holiday Shopping

I always look forward to the Holidays but this year in particular, I’m really excited for it. For growth investors, such as myself, it’s been a challenging year where fastest growing companies by and large, have seen their share prices drop the most.

What our research and experience has shown us, is that over time, there is essentially an 100% correlation between a company’s revenue and earnings growth. Accordingly, our main focus is identifying companies that have the greatest potential to grow at a high rate for a long time.

There are periods of time, like today, where the Market is “here and now”, where future growth potential is essentially ignored and replaced by near term profitability. The most vulnerable companies are the ones that aren’t making money today and were valued on a forward “price to sales” ratio and are now being valued on current earnings. In this environment, the air-pockets aren’t 10 or 20%, they can be 50 to 80% without any change to the fundamentals of the Company.

My colleagues Luben Pampoulov, Joe Murdy, and Owen Ritz did some analysis showing over the past 13 years, average price to sales multiples given growth and gross margin characteristics.

Obviously, this is an environment where inflation was non-existent and interest rates were going down, but it’s very instructive to review for context.

We have no idea when we start to get into a Market that pays for “futures” which benefits the highest growing companies. We do know that at some point, the Sun will come up in the East again, and growth will drive share prices.

As an early Holiday Present, we’ve provided our own 12 Stocks for Christmas, listed below. You can see that the average company on our list is growing its revenues at 32.5%, sells at 3.6x Price to Sales with upside of 182% if multiples reach the 2009–2021 average multiple for the fundamental characteristics of the company.

To make you everybody’s favorite Santa, we’ve done a little Holiday edition Hot or Not for the best presents to have under your tree…and the ones to avoid.

Market Performance

The Markets had their worst week since September with fears of a recession taking center stage again (even though by our analysis, we are already 8 months into a recession). For the week, NASDAQ dropped 4%, the S&P 500 was down 3.4% and the Dow fell 2.8%.

China reversed its “zero Covid” policy to the relief of angry Chinese citizens and manufacturers like FoxConn. Having the second largest economy in the World starting back up its engines has positive implications for igniting Global Growth. In the meantime, President Xi visited Saudi ruler MBS potentially tilting a historically strong U.S. relationship more towards Beijing.

According to Forge, the largest private company exchange, valuations for private companies are nearly 50% off of their most recent financing. As there traditionally is a lag between public market values and private values, we would expect that decline to get worse before it gets better.

There was a cover story on our friend Howard Schultz of Starbucks in Sunday’s New York Times. Howard is justifiably frustrated at the unionization efforts as Starbucks has been a leader in treating its workers well during his tenure (first principle at Starbucks, treat the employees well because they will then treat the customers well). Starbucks opened its blockchain-based loyalty program and first NFT community to its first set of beta testers.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Total Equity Funds decreased from (-11.3) to (-15.0) from 11/23 to 11/30.

Source: Yardeni

#2: IPO Market

The US IPO market continues to essentially remain shut until 2023… hopefully it opens up for business sooner rather than later.

Source: Renaissance Capital

#3: Interest Rates

Last week, Fed Chair Powell essentially confirmed that the Fed will opt for a 50 basis rate hike in December… here’s what Elon Musk thinks about that plan.

Source: Twitter

#4: Inflation

Markets struggled with next week’s inflation report looming over. Regardless of the print, the average American is already feeling the pinch.

Source: Twitter

Chuckles of the Week

Charts of the Week

The GSV Big 10

This fall, we launched The GSV Big 10, synthesizing the news to bring you the top 10 stories and insights in learning and skilling. In case you missed it, here are some of last week’s top stories:

#1 AI bot ChatGPT stuns academics with essay-writing skills and usability

AI has become the Wild West of learning, and ChatGPT might be the Gold Rush. While there’s a difference between accelerated learning and outsourcing your brain, ChatGPT is the first of many applications that can be game-changing.

The Guardian

#2 Kids Don’t Want Cash Anymore–They Want ‘Robux’

While adults may be skeptical of the metaverse, kids are already immersed in it. In 2021, Children ages 12 to 17 spent over $1,100 a year online, up 2x from 2019. That’s over 3x as much as parents spend on toys per child in the US…points are starting to have as much currency for kids as fiat currency.

WSJ

#3 Getting More Men to Teach in Early-Years Education

There are twice as many women flying U.S. military planes as there are men teaching kindergarten. We all benefit from bringing diversity to all aspects of learning and living.

The Bulwark

EIEIO: FAST FACTS

Entrepreneurship…

• 25% — percent of Gen Z that has a side gig (Source)
• 70% — amount of tech employees that have started a new side project since the onset of the COVID pandemic (Source)
• 76% — percent of total category market capitalization captured by the companies that create a new category (Source)
• 10% — amount of transactions that lead to 50% of gains in General Atlantic’s history (Source)
• 83 — IQ of ChatGPT (Source)

Innovation…

• $400,000 — amount spent by the EU for a “party in the metaverse” to promote the EU’s Global Gateway Initiative (Source)
• 6 — number of people who showed up to the EU’s event (Source)
• 171 million — global Internet population growth over the last 12 months, more than the amount of people in the 8th biggest country in the world (Source)
• 50% — increase YoY in theft at Target, costing the company $400m in 2022 (Source)
• 24,450% — growth in monthly installs for Lensa AI in Brazil in November 2022 (Source)

Education…

• 37% — percent of the top 20 skills considered necessary for the average job that have changed since 2016 (Source)
• 69% — percent of Americans who said colleges have a positive effect on the way things are going in this country in 2020 (Source)
• 55% — percent of Americans who said colleges have a positive effect on the way things are going in this country in 2022 (Source)
• +9% — change in enrollment for charter schools from 2019–2020 vs. 2021–2022 for Hispanic students (Source)
• -1% — change in enrollment for public, non-charter schools from 2019–2020 vs. 2021–2022 for Hispanic students (Source)

Impact…

• 1.3 million — amount of people that started learning Ukrainian on Duolingo in February 2022 (Source)
• $100 — monthly bonus for Whoop employees when they average 85% of their personal sleep need or better (Source)
• 2.6x — increase in plastic emissions into water sources in 2022 vs. 2010 (Source)
• 2x — global growth in renewable power capacity over the next five years (Source)
• 3.6% — decrease in real disposable income per capita over the past year (Source)

Opportunity…

• $1.2 trillion — GDP contribution over the next ten years from the bipartisan proposed immigration reform (Source)
• 50 miles — median distance between recently purchased home and previous residence, up 3x from before COVID (Source)
• 15% — percent of public school students that received special education services under federal law in the 2020–2021 school year (Source)
• 66.5% — percent of bankruptcies in the US caused by medical issues (Source)
• 152% — expected growth for Africa’s electronic-payments market from 2020 to 2025 (Source)

Connecting the Dots & EIEIO…

Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.

One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!

Make Your Dash Count!
-MM

EIEIO…Poetry in Motion was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“Once made equal to men, women become his superior.” — Socrates

“Women that seek to be equal with men lack ambition.” — Timothy Leary

In Wall Street logic, the booming jobs report on Friday was “bad” because it could cause the Fed to stay aggressive on the interest rate front. In fact, the 263k jobs exceeded expectations by 30%, and crushed the “whisper” estimates of 180K.

The 5.3% wage growth in November guaranteed that Jerome Powell and Co. would be raising the Fed Funds rate 50 bps to 4.25–4.5%. More sobering, the smart money was now taking the “over” bet of the 5% final rate target.

The 50 year low in the unemployment of rate of 3.7% masks a gigantic problem facing society. The persistent gap between jobs available and those seeking employment was nearly 2:1, with 11 million jobs available versus 5.6 million people seeing a job. The shortage of workers for jobs has accelerated the trend of not requiring a college degree, with just 41% of job posts necessitating a diploma for employment.

What’s going on?

Going a level deeper, it’s pretty clear and disturbing. Young men have quit working. Specifically, 7 million men ages 25–54 aren’t working or looking for work. Looked at a different way, there is only one male worker looking for a job, versus four who aren’t.

From a historical context, prime age men in the workforce is lower today than 1940 in the middle of the Great Depression when unemployment was 15%. NILF (Not in Labor Force) of 25 to 54 year olds is 3.5X greater than it was in 1965.

A variety of factors are at work including technology, knowledge skills and globalization replacing here-to-fore solid jobs. Moreover, incentives not to work enacted during Covid motivated an army of young men to stay home, get “baked” before breakfast, and play video games (30% of young adults smoke pot regularly).

Today, over 50% of men between 19 and 29 live with their parents and just 25% get their drivers license when they turn 16. For a forward view of how Universal Basic Income would work, you only have to watch the productivity of young men since the Pandemic.

The truth is, these trends have been evolving over the past fifty years, and they aren’t just confined to the United States.

In the Knowledge Economy, your education makes the difference for an individual, for a company, and for a country. There has been a flip flop in terms of percentage of college students are men versus women in since 1980. Moreover, women are 2X more likely to graduate from college and 70% of the high school valedictorians are women.

Perhaps in part due to bleak prospects, men are 3X more likely to overdose and 4X more likely to commit suicide.

In truly an existential threat, 1/3 of men under 30 haven’t had sex in the past year compared to just 1 in 10 in 2008. As Mark Twain said, “What would men be without women? Scarce, sir. Mighty scarce.”

The Peter Pan Syndrome has crossed the Pond. In Western Europe, 66% of Spanish young adults live at home, in Portugal it’s 68%. The average age of a non-married Italian male moving out of mother’s house is 39 years old. Mama Mia!

The trillions of lost economic productivity from men not working is an issue. More despairing is the lack of self worth, independence and belonging not having a job creates for a person. Our goal is to give everybody an equal opportunity to participate in the future…it starts with education but continues with a job.

Market Performance

Stocks zigged and zagged alternating between hope and fear. For the week, NASDAQ advanced 2.1%, the S & P 500 was up 1.1% and the Dow inched forward .2%. Since September, the Dow has quietly moved up 20% and the S & P 500 has gained nearly 15%. Not surprisingly, these advancements have corresponded with Treasury yields falling from 4.25% to 3.5%.

China was forefront in the news last week with protest against the zero-covid policy resulting in counterattacks by the Empire. Giving a pause to the focus on the first major uprising since Tiananmen Square was the death of former China President Jiang Zemin. Under President Jiang’s leadership, the China economy grew 3X from 1993 to 2003 with hundreds of millions being brought out of poverty. Some think Jiang’s death will further put fuel on the protesters fire. See here for a fascinating interview with President Jiang and Mike Wallace.

Speaking of China and suppression of free speech, the “Twitter Files” came out Friday night by Matt Taibbi. Whatever your political persuasion may be, or not be, this is chilling. For us to thrive as a Country, America needs to remain the home of the free and the brave.

Interestingly, after losing $1.2 trillion in Market Value in two years, Chinese stocks are rebounding with many technology stocks up over 30% since October and Alibaba up 20% last week.The logic is that President Xi sees the writing on the Wall and will need to ease on the zero-covid policies and open up China after nearly three years.

Conventional wisdom is the Market is in a “risk off” mode where current cash flows trump revenue growth and disruptive business models. Certainly, over the past 15 months, the “growthy” stocks have been destroyed.

While valuations have reflected this for months, companies are starting to feel the pressure in top line performance. This past week, Salesforce and Cloudstrike — two SaaS superstars — had disappointing earnings reports. Salesforce’s Net New ARR decreased by 2/3rds in the most recent quarter, while Cloudstrike missed thier Net New ARR projection by $12m.

However, I’m starting to believe I see a light at the end of the tunnel…hopefully it’s not a train coming at me! Next week, we will provide our Holiday Shopping List of our best investment ideas.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Total Equity Funds decreased from (15.1) to (-11.3) from 11/16 to 11/23.

Source: Yardeni

#2: IPO Market

This past week, NASDAQ CEO Adena Friedman shared that while the IPO market is “on almost a pause,” she is “hopeful that the second half of ’23 becomes an opportunity for companies to get out.” Until then, prepare for more quiet times on the IPO front.

Source: Renaissance Capital

#3: Interest Rates

This week, Fed Chair Powell essentially confirmed that the Fed will opt for a 50 basis rate hike in December. Powell also mentioned that the rate peak will likely be somewhat higher than September forecasts (4.6%). It remains to be seen if that will be the case.

Source: Edward Jones

#4: Inflation

Jobs growth continues to remain strong in the US, as 263,000 jobs were added in November. Nevertheless, inflation continues to linger over markets around the world.

Source: Twitter

Chuckles of the Week

Article of the Week

Bill Gurley’s recent piece “Venture Capital Red Flag Checklist” has good advice for every investor and entrepreneur looking to suss out what’s BS (including SBF…)

Photo of the Week

Trojan Caleb Williams striking the Heisman pose a week before getting trounced by Utah… why being too early is the same as being wrong.

The GSV Big 10

This fall, we launched GSV’s Big 10, synthesizing the news to bring you the top 10 stories and insights in learning and skilling. In case you missed it, here are some of this week’s top stories:

#1 Employers Rethink Need for College Degrees

This is going to be a persistent trend. The four-year degree isn’t dying…but it’s finding competition. It’s “knowledge” not “college” that’s most relevant, especially in a world where companies are starving for talent. “Google U” has had over 100,000 people complete its college-alternative program.
WSJ

#2 Have the Anticapitalists Reached Harvard Business School?

As we wrote in The Mission Corporation last year, capitalism needs a refresh. While ESG has recently become SOL in the public markets, the future is clear. Curtis Welling, a professor at Dartmouth’s Tuck School of Business, asks his students every year whether capitalism needs to be reformed. A decade ago, roughly one-third said yes. This year, two-thirds said yes.

The New York Times

#3 Even University Presidents Lose Their Minds When Their Teens Apply to College

There’s a reason why doctors don’t operate on family members. If university presidents struggle with the college application process, then how can we expect first-generation college students to complete the process? Removing friction from this laborious process is a way to give more people equal opportunity to participate in the future.
WSJ

… for more insights on the news, subscribe to N2K and The Big 10.

EIEIO: FAST FACTS

Entrepreneurship…

• 42 — average age of a successful entrepreneur (Source)
• $100,000 — Sam Bankman-Fried’s current bank account balance (Source)
• 6 million — amount of YouTube subscribers Mr. Beast gained in the last 30 days (Source)
• 96% — percent of female founders that fail to hit $1M in revenue (Source)
• 11% — amount of entrepreneurs that have bipolar disorder, 10x the national average (Source)

Innovation…

• 50% — share of job applications for roles offering remote work (Source)
• 15% — share of job postings for roles offering remote work (Source)
• 2.5% — percent of Indian population with a credit card (Source)
• 55% — percent of US population with a credit card (Source)
• 28% — amount of search in India that is voice (Source)

Education…

• 85% — percent of jobs that today’s students will have in 2030 that don’t exist yet (Source)
• 70% — percent of employees that say they’re “at least somewhat likely” to leave their current job for a company that invests more in employee learning (Source)
• 20% — percent of 16–24 year olds in China who were unemployed in July 2022 (Source)
• 5% — percent of 16–24 year olds in the US who were unemployed in July 2022 (Source)
• $107,000 — average amount of student debt effectively forgiven through December 2024 for M.D. graduates, 10.7x more than Bachelor’s graduates — (Source)

Impact…

• 200,000 — number of trees planted by Treecard, which uses 80% of its profits from card interchange fees to plant trees (Source)
• 2% — percent of all investable assets that went to impact companies in 2020 (Source)
• 2.1 million — Japan annual births in 1973 (Source)
• 0.8 million — Japan annual births in 2021 (Source)
• $1.4 billion — annual revenue from prisoner phone calls for the correctional telecom industry (Source)

Opportunity…

• 75% — percentage of Walmart salaried store management that started their careers in hourly jobs (Source)
• 8.1% — average increase in cost of living over the past year in 172 of the world’s major cities (Source)
• 8,000 — average change in Twitter followers for Republican politicians since Elon Musk’s takeover of Twitter (Source)
• –4,000 — average change in Twitter followers for Democratic politicians since Elon Musk’s takeover of Twitter (Source)
• 100,000 — amount of people in the US that have completed Google’s online college-alternative program (Source)

Connecting the Dots & EIEIO…

Old MacDonald had a farm, EIEIO. New MacDonald has a Startup…. EIEIO: Entrepreneurship, Innovation, Education, Impact and Opportunity. Accordingly, we focus on these key areas of the future.

One of the core goals of GSV is to connect the dots around EIEIO and provide perspective on where things are going and why. If you like this, please forward to your friends. Onward!

Make Your Dash Count!
-MM

EIEIO…A Few Good Men was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.

“We aren’t addicted to oil, but our cars are.” — James Woolsey

“There’s no way I will ever just stick to sports because I understand this platform and how powerful my voice is.” — LeBron James

Throughout time, sports and politics has been a potent cocktail. Nowhere has that been more evident than at the 2022 World Cup in Qatar.

Before the tournament started, controversies included the treatment of migrant workers that were needed to build the seven new stadiums at a cost of over $200 billion. Official migrant deaths were 40, but other estimates pegged the real number at over 1000.

Allegations of bribes to select Qatar as a host country were rampant, with at least two officials convicted of under the table payments.

Qatar, being a strict Muslim country, also faced global criticism for its policy towards women and the LGBTQ community. The teams of England, Wales, Germany, Denmark, Belgium and Switzerland had originally planned to wear the “OneLove” armbands for “diversity and inclusion” but FIFA banned them shortly before the tournament was to begin.

Perhaps angering the 1.2 million people that were descending on Doha most (and certainly the Cup’s largest sponsor Anheuser Busch) was the banning of beer from the stadiums. While alcohol was available at designated venues such as hotels, the most popular place to hang after the matches was Dubai, which is just a 40 minute hop away.

Even the pronunciation of Qatar is controversial. “KUH-taar”? “GUH-ter”? “Cutter”????

This is almost as confusing as why America is the only country in the World that calls “football” “soccer” (or doesn’t use the metric system).

Football OR Soccer — FIFA World Cup 2022 | David Beckham vs Peyton Manning | PepsiCo TVC

While all important issues, they were known well in advance of the tournament itself, so recent outrage is akin to in Casablanca the Perfect of Police closing down Rick’s Café because “I’m shocked! Shocked! There’s gambling going on in your café! Shocked!” Just before the croupier hands him his nightly winnings.

Notable political statements since the tournament has begun include the Iranian National Team refusing to sing its National Anthem before the match with England as a protest to the brutal death of 22 year old Mahsa Amini in Iranian police custody.

In one of the greatest upsets in World Cup history, Saudi Arabia beat Argentina 2–1 following which MBS declared a National Holiday. Also notable was MBS watched the game next to Qatar’s ruler Tamim bin Hamad Al Thani who had previously been persona non grata in much of the region due to Qatar’s ownership of Al Jazeera and support of bad guys like Hamas and Hezbollah.

Whether Qatar is good or bad, what’s for sure is its relevant.

While teeny with just under 3 million people and geographically smaller than New York City, it’s one of the wealthiest populations in the world with over $100k GDP Per Capita by 2027. Over 60% of its economy is from oil and gas with the 13th largest oil reserve in the World.

Located on the Arabian Peninsula, it’s stunningly beautiful, combining gorgeous vistas of the Persian Gulf and incredible architecture. While I have a preference for Emirates Airlines, some have rated Qatar Airlines as the top airline in the world and Hamad International Airport as the best in the world.

Bringing the World Cup to Qatar, while far from a perfect country (what country is?), the critics seem to forget the many flaws with other World Cup and Olympic hosts such as Russia and China. Moreover, having the first World Cup in a Middle Eastern country exposes the World to that culture and vis-a-versa which can only be a positive.

Additionally, while most sane people are for shifting away from the dependence on fossil fuels, the ability to do that in a major way isn’t happening any time soon.

Currently, 81% of global energy consumption comes from oil, gas or coal — the same percentage as 30 years ago. I have been a proponent of alternative energy for over 20 years and much to my disappointment, and tremendous investment, we are still dependent on fossil fuels.

While the S & P 500 is down 16% in 2022, energy stocks are up 66%. Moreover, legendary investor Warren Buffett has invested approximately $30 billion into energy companies this year and has a total position of nearly $60 billion through his holdings in Chevron and Occidental Petroleum.

Interestingly, many of the major beneficiaries of the Oil Economy have been significant investors in alternative energy. Saudi’s 2030 plan calls for over $100 billion investment in renewable energy. The UAE is rapidly expanding the use of clean energy…it operates three nuclear power reactors that provide energy to the country’s grid and is home to three of the largest solar plants in the World. Qatar has said this year’s World Cup will be “carbon neutral.”

Ending November 20th in Egypt, the day the World Cup began, the UN climate change conference COP27, brought together leaders from around the World to create an action plan. A key result was the announcement of a “loss and damage” fund focused on the nation’s most vulnerable to the climate crisis.

My thesis is pretty simple, whether you believe in climate change or not: 1). it’s the right thing to do to leave a cleaner, more sustainable planet for our children 2). At some point, fossil fuels will be gone and 3). When we run out of solar power, we have way bigger problems!

Market Performance

In the Thanksgiving Holiday shortened week, stocks climbed higher.The Dow advanced 1.8%, and continues to be the best among bad options for performance. The S & P 500 was up 1.5% and NASDAQ was .7% higher.

The somewhat taming of inflation has been a positive influence on stocks with a corresponding decrease in bond yields. While in my view, we’ve already been in a recession for the past six months, and growth stocks rolled over more than a year ago, it’s likely economic activity remains sluggish for the foreseeable future.

That said, with the Treasury Market ignoring the hawkish noise from the Fed, it feels to me we might be getting closer to the end of the Bear Market than I thought previously. Stocks aren’t cheap, but growth stocks are at a level that if we get some comfort that inflation is more or less in check, and interest rates aren’t going to soar much higher, we could start to see some powerful moves in the highest quality names. Stay tuned for our Christmas List.

GSV’s Four I’s of Investor Sentiment

GSV tracks four primary indicators of investor sentiment: inflows and outflows of mutual funds and ETFs, IPO activity, interest rates, and inflation. Here’s how these four signals performed this past week:

#1: Inflows and Outflows for Mutual Funds & ETFs

Total Equity Funds increased from (-9.4) to (15.1) from 11/9 to 11/16.

#2: IPO Market

While the US IPO market is essentially “on pause,” the international IPO market continues to show bright spots. Two weeks ago, Dubai school operator Taaleem Holdings raised Dh750 million ($204m) from its IPO, which was 18 times oversubscribed. The company will be the largest and only dedicated education provider on the Dubai Financial Market when it starts trading later this month.

#3: Interest Rates

After the Fed’s fourth consecutive 75 basis point rate hike, market expectations are that the Fed will opt for a 50 basis rate hike in December. Fed Governor Waller said earlier this month that “the data of the past few weeks have made me more comfortable considering stepping down to a 50-basis-point hike.”

#4: Inflation

Many investors saw the October CPI print as a sign that investors could be peaking. The data is more mixed: Walmart’s CFO said that he “can’t call” a peak on inflation yet, UK inflation hit a 41-year high earlier this month, and the US Treasury curve is now more than 70% inverted.

Chuckles of the Week

Chart of the Week

For more on the SBF saga, see this outstanding piece from Niall Ferguson.

Photo of the Week

Video of the Week

“Hope for the best, prepare for the worst.” — Jeff Bezos on the current economic climate

The GSV Big 10

This fall, we launched The GSV Big 10, synthesizing the news to bring you the top 10 stories and insights in learning and skilling. In case you missed it, here are some of last week’s top stories:

#1 Speak lands investment from OpenAI to expand its language learning platform

Speak is giving anyone with a phone access to AI tutors that are more affordable, available, and patient than human tutors. OpenAI spent years developing their AI models; now, they are going to play kingmaker across every vertical… including education. As Duolingo is to vocab, Speak is to actually speaking.

TechCrunch

#2 The incredible shrinking future of college

Strike 1: shrinking demographics. Strike 2: price ceiling. Strike 3: alternative credentials for opportunities….you’re out!

Vox

#3 How China Got Our Kids Hooked on ‘Digital Fentanyl’

The stable of writers on Bari Weiss’ Common Sense are must-read for all. In this case, the title is better than any comment we can make. There are 1.8 billion TikTokers around the world, and its influence is being felt in politics, education, and culture.

Common Sense

… for more insights on the news, subscribe to N2K and The Big 10.

EIEIO: FAST FACTS

Entrepreneurship…

• 32% — amount of companies that plan to expand remote and hybrid work in the next year (Source)
• 7% — amount of companies that plan to pull back on remote and hybrid work in the next year (Source)
• 65% — percentage of portfolio company failures attributed by investors to people and organizational issues (Source)
• 32% — amount of US employees feeling engaged at work (Source)
• 20% — amount of Crypto.com’s assets held in Shiba Inu (Source)

Innovation…

• 800 million — amount of individuals using WeChat Pay in China (Source)
• 50% — annual growth of global data flows since 2010 (Source)
• 29 million — amount of people who write code for a living (Source)
• 69% — percentage of Gen Zers that view TikTok favorably (Source)
• 39% — percentage of U.S. Adults that view TikTok favorably (Source)

Education…

• 40x — increase in VC edtech funding in 2020 vs. 2021 (Source)
• 12% — amount of American schools that had the equivalent of at least half of their 11th- and 12th-graders taking at least one AP or IB exam (Source)
• 405 million — number of schoolchildren whose schools have not yet fully reopened, as of March 2022 (Source)
• 30% — amount of Grade 3 students that can read and understand simple texts (Source)
• 18% — amount of Grade 3 students that show mastery over simple numeracy tasks (Source)

Impact…

• 5% — amount of C-suite members that are women of color (Source)
• 40,000 — amount of Black families making >$150K in the US in 1967 (Source)
• 1.2 million — amount of Black families making >$150K in the US in 2020 (Source)
• 10% — share of global population over 65 in 2022 (Source)
• 16% — share of global population over 65 in 2050 (Source)

Opportunity…

• $3.73 trillion — collective net worth of the bottom 50% of US households, up 10x since 2011 (Source)
• 72.8 — global life expectancy at birth in 2019, up 7 years since 1990 (Source)
• 6 — number of top 10 2022 NYC marathon female finishers that are mothers (Source)
• 2.5% — annual population growth rate in sub-Saharan Africa, more than 3x the global average (Source)
• 0.1% — population growth rate in the United States in 2021, the lowest since the country was founded (Source)

EIEIO…Soccer Moms was originally published in EIEIO Newsletter on Medium, where people are continuing the conversation by highlighting and responding to this story.