Author Archives: SMS

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EBITDA Is Not A Good Proxy For Cash Flow

Reading Time: 5 minutes

Do not say “EBITDA is a good proxy for cash flow”1

I worked as a cash flow lender for quite awhile and never heard a colleague at our institution ever say anything to that effect.  In the business world, I do hear the folks make the simplification.  It’s a shortcut that can get you in trouble.

I am a firm believer that you can tell a lot about a person’s knowledge of financial statements by understanding where they focus their attention.  More on this later.  

However, I find that managers, business unit leaders, and maybe even C level executives tend to spend a lot of time on the income statement, and not much else.  And when focusing on the income statement (a.k.a., P&L, profit & loss), most attention is paid to revenue and EBITDA (earnings before interest, taxes, depreciation, and amortization).  Also, business folks like to adjust EBITDA by removing non-operating items or other one-time, non-recurring items.

Again, I am not going to opine on how I utilize financial statements right now or where I spend the majority of my time.  But the other statements are there for a reason.  The balance sheet and statement of cash flows provide information not available on the income statement.

But let’s address why you should not make the statement that “EBITDA is a good proxy for cash flow.”

EBITDA is a good proxy for operating income.  It focuses the readers of the financial statements on what generally accepted accounting principles (GAAP) say the accounting profit (or loss) of the business is for the period.  It does this by ignoring certain items (i.e., push them below the line):

  1. Interest – interest is typically paid on debt.  Debt is a financial engineering / capital structure decision for most businesses, not an operational one.  Also, some companies have debt and others don’t.  Setting aside interest payments helps look at the operations of the business regardless of capital structure.
  2. Taxes – a note of caution here, read your debt covenants carefully, as this is generally read as income taxes.  In my opinion, taxes such as commercial activity taxes and other “taxes and fees” are very much a part of operations and most lenders agree.  However, taxes on income can be heavily influenced by interest payments, depreciation, amortization, and other deductions.  So, setting income taxes aside let’s you focus on the operations of the business, without those distortions.
  3. Depreciation – this one is a bit more murky in my mind.  However, depreciation on capital spending is generally considered not part of operations.  And it is highly dependent on the type of business and accounting policies in place.  
  4. Amortization –  this one can be extremely murky as well.  Commonly, intangible assets and goodwill, such as those created during an acquisition, lead to amortization.  Also, capitalizing certain software development costs can also create amortization.  And with the introduction of ASC 606, capitalizing certain contract costs (i.e., commissions) will create amortization.  I personally have some difficulty calling some of these non-operational – especially software companies that capitalize software development costs or really any commission expense based on selling contracts (please show me something more operational than selling your products).  But typically all amortization is excluded from EBITDA.
  5. Non-Operational Adjustments – oh, what a slippery slope this one can be.  But many “non-recurring” items are excluded or “added back” when calculating EBITDA, creating “adjusted EBITDA”.

But EBITDA may not approximate cash flow for quite a few reasons.  It’s also a little unclear what people mean when they say “cash flow”.  The cash flow statement has three major sections: 

  1. Cash Flow from Operations
  2. Cash Flow from Investing
  3. Cash Flow from Financing

But setting that aside, the cash flow statement is explaining why the amount of cash changed and by how much.  So let’s stick with that spirit and ask is EBITDA a good proxy for “the changes in cash” in a business.

Like all things, it depends on the business a bit, but let’s look at a few elements excluded from EBITDA that can help explain why EBITDA does not serve as a good proxy for cash flow:

  1. Interest – debt investors generally like to be paid in cash.  Bummer, I know.  So, depending on how much cash interest is being paid, this one can cause EBITDA and cash flow to diverge pretty substantially.
  2. Taxes – yep, Uncle Sam, likes cash too.
  3. Depreciation – generally non-cash, but the thing that causes depreciation, capital spending, typically involves cash.  Capital spending does not show up on the income statement.
  4. Amortization – many of these items are non-cash, although some are cash events.  Software developers, regardless of whether you are electing to capitalize their salary expense, typically like to be paid in cash.  And, so do sales people.  Especially sales people.
  5. Non-Operational Adjustments – yep, many of these are cash events, regardless of whether or not you consider them operational.  Shove enough cash events “below the line” and you will create some large variances.

What else could cause EBITDA and cash flow to diverge?  Here are a few big ones.

  1. Subscriptions – many subscriptions are billed in advance.  So the company receives all the cash upfront, and then ratably recognizes revenue over the term of the agreement.  Depending on the term and how it spans reporting periods, this can create some really large variances between EBITDA and cash flow.  For example, let’s say a company signs a one year subscription agreement for $100,000 with a customer on July 1, 2021 through June 30, 2022.  According to the terms of the agreement, the customer will pay upfront.  
Revenue / EBITDA$50,000$50,000
Cash Flow$100,000$0

Side note: You can see why in a growing subscription business, cash flow would be overstated vs. a business in more of a steady state stage.  Also, you can see where a declining subscription business could encounter some cash flow issues not apparent by only looking at the income statement.

  1. Prepaid Expenses – same concept as above but with expenses.  The company pays upfront, but ratably recognizes the expenses over some longer period.
  2. Accruals – this whole article is predicated on using the accrual based accounting method.  So, let’s say you accrue year end incentives but pay those out some time after year end.  Depending on how large those are (they are high six figures in most my businesses), that will cause EBITDA and cash flow to look different.
  3. Distributions – this one is a bit grey based on the definition of cash flow, but if a business is making distributions to owners / shareholder (i.e, dividends), these are not going to show up anywhere on the income statement.  Those types of activities show up in the Cash Flow from Financing section and are generally not considered operational.  However, it does mean you could have a business where EBITDA is significantly higher than cash flow depending on the size of the payments.
  4. Financing Events – either selling securities or redeeming them won’t show up anywhere on the income statement.  Similar to distributions, these events are not considered operational.  But they certainly impact cash flow.

I guess you could amend the original statement to say “operating cash flow”, but I would argue, this just makes you less wrong.

So, I would encourage you never to say “ EBITDA is a good proxy for cash flow.”  Instead, avoid the shortcut altogether, and get to know the statement of cash flows.

  1. This article is predicated on using the accrual based accounting method.  

Influential Reads – April 2021

Reading Time: 2 minutes

“You’re free when no one can buy your time.”  – Farnam Street

April was an interesting month. The biggest realization for me – which seems to be happening to lots of folks – is that “working from home” has some downsides that appear to be accumulating over the last twelve plus months.  These, I think, are exacerbated by quite a few exogenous stressors still out there (no, the pandemic is not over).  These have be gradually wearing on me, hopefully hit a low point in April, and have made me evolve my thinking on permanent work from home.  You will see quite a few reads below relating to my exploration of some of those topics and the broader influence of the pandemic.

Updated stats through April:


Here are my most influential reads – in no particular order:

  1.  First-Quarter Roundup: Boom for Small Stocks, Bust for Treasuries – “Various reports put Hwang’s losses at $8 billion in just 10 days, perhaps the biggest hit ever taken in so short a time.”
  2. Lessons on winning and losing as an investor from “The Art of Execution” – “Shor’s most powerful point is that investment performance is largely dictated by what an investor does after they buy a stock, specifically by how they deal with both losing and winning positions over time.”
  3. Outgrowing software – “At a certain point, everyone has grown up with this stuff, everything is a software company, and the important questions are somewhere else.”
  4. Affluent Americans Rush to Retire in New ‘Life-Is-Short’ Mindset – “Their potential exodus from the corporate world, combined with a sharp increase in the number of business owners seeking to retire sooner than they anticipated, is a worrying phenomenon for companies that rely on their accumulated expertise.”
  5. Welcome to the YOLO Economy – “Raises and time off may persuade some employees to stay put. But for others, stasis is the problem, and the only solution is radical change.”
  6. The discard pile – “Walking away from something that we’re used to, even if it’s unjust or inefficient or ineffective–it usually takes far too long. Fear, momentum and the status quo combine to keep us stuck.”
  7. A Hater of Passive Investing Joins an ETF Firm to Wage His War – “In a nutshell, his theory is that passive investing is inflating a historically-unprecedented equity bubble that will crash when inflows inevitably flip to outflows.”
  8. 3 Valuable Techniques To Stop Yourself From Overthinking – “Our delayed return environment strongly influences our modern lives. We face lots of uncertainties every day, and being worried and overthinking is part of our nature.”
  9. An uncertain future – “I love old houses but my personality isn’t suited for them. They stress me out. (My ex-wife and I owned an old house too — she still lives there — and it caused me endless stress, as well.)”.
  10. Delight in Uncertainty – “Commit to dancing with it. Turning away from the uncertainty gives you certain predictable results in your life. What would it be like to do something different? Commit to doing something different: face it, be with it, dance with it.”

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.

Operating Model Tips

Reading Time: 4 minutes

I am not sure any real people actually visit this site.  I am pretty convinced the only visitors are bots.  However, the bots seem to like the post on my views on the difference between operating models vs. financial models.

So, here are some more thoughts on operating models in the form of tips for building an operating model that I have refined over the last decade or so.  Also, for clarity, my operating model and forecasting process is all Excel based.  I realize there are some fancier tools out there, but this process gets the job done at much lower cost than any of those and is extremely versatile.

  1. Budget In the Same Form as Your General Ledger

The first two steps work together, but in many ways, you should start here if you can. Your budget inputs should be in the same form as your general ledger (GL) / enterprise resource planning (ERP) exports. If you did not do this for this year, plan to use this as a template for your budgeting process next year.

I send out budget template packages to all my business leaders to guide their budgeting effort that are based on our ledger exports.  The package presents historical data and asks for inputs, by month, for the upcoming year.  In many cases, a business unit leader only has a few major line items they need to worry about, outside of headcount driven ones like salary, wages, and benefits.  

You can utilize helper sheets to aggregate detailed assumptions:

Sample of Detailed Department Budgeting Assumptions

A little prep work can save everyone a bunch of time and make your life a lot easier going forward.  Having your budget and your actuals in the same detailed form will make Actual to Budget comparisons much, much easier.

  1. Utilize Inputs from Your General Ledger / ERP System

Again, step one and two are very much related. I highly recommend driving your historical inputs off of exports from your GL / ERP system. This will make importing data on a monthly basis systematic and mostly a copy and paste exercise. It will also let you know if your Controller added any accounts to the GL that you need to peek at.

The exports should be monthly.  And, you will likely need separate worksheets for each department, so that you can have that granularity in the model and related operational reporting.

Operating Model Ledger File with Department Tabs
  1. Summarize Accounts Into Categories for Analysis & Department Reporting

The ledger exports are generally fairly granular, and in my experience, too granular for most of your audience (business users). You can use some higher level categories to summarize these into easier to digest format.

Ledger File Export with Helper Categoriers

Examples of the operating expense categories I use are:

Expenses Using Higher Level Categories

So, for example, if you see that Software increased over prior month, you can dig in and go find where and which department.  For a really detailed review, you might need to go back to the ledger, but you have all the tools to easily get that done.

  1. Use a First Look Report

Once we have our accounting close done, my first step is to review what I call my First Look report.  This is a comparison of the month across revenue, cost of goods sold, operating expenses, and other items to:

  1. My Forecast (more on this later)
  2. Budget
  3. Prior Month
  4. Prior Year

This is a great way to spot things that need more review, before I actually issue financials out to my team and our investors.

  1. Keep The Census Separate

I use a modular approach in building my operating model. My operating model is actually several linked files:

  1. Financial Model – A working, monthly financial forecast model
  2. Ledger File – feeds the Financial Model for both historicals and forecasted expenses
  3. Census File – fees salary wage and benefits information into the Ledger file

As a banker, I abhorred linked files.  As an operator, they become a way of life.  

Keeping these separate allows me to share the Financial Model easier.  The model file is small.  And in the case of the census, there is no confidential or sensitive payroll data.

Generally, I turn off comments on my site.  Most comments are spam.  However, I am going to leave comments open here.  If you have some questions, please post them.  And if you would like some help setting up an operating model, drop me a note.

Packed for a Week. Stayed for Three Months.

Reading Time: 4 minutes

We went on a ski trip on March 14th, 2020.  It turns out, the timing of the trip left a little to be desired.  Or maybe, everything happens for a reason.  What do I know?

Despite the rapidly deteriorating situation related to the COVID global pandemic, we decided to go ahead and fly out to Utah to meet some friends for Spring Break in Park City.  We took precautions.  We wore masks and gloves, washed our hands, etc.  People looked at us like we were aliens.  N95 was not in the general lexicon yet.

Before masks were cool…

We skied half a day at Park City Mountain Resort.  Then the world shut down.  In response, the Vail Company closed all their ski resorts.

In hindsight, I commend the Vail Company for making that decision in order to protect the ski towns in which they operate.  At the time, I was pissed off.  So we did what any conscientious citizens would do.  We drove up to Snowbasin the next day – along with two thirds of Utah – and skied our last inbounds day of the year.

This is no longer a vacation. It is a quest.

We returned to Park City that evening.  Most folks – including our friends from Florida – fled back to their hometowns.  The entire town emptied.  

On the home front, work went remote.  School went remote.  Toilet paper became scarce.

Mrs. SFTE and I looked at each other.  And collectively said, why go back to Ohio?  We’re on vacation.  Besides what are we going to do in Ohio anyway?  The last question isn’t necessarily pandemic related.

At the end of the week, we called Delta and pushed our return flight back to Columbus out a bit.  We called the vacation rental place.  Yes, we could stay in our space.  In fact, we could pick any place in the whole complex we wanted.  We upsized.  

Another week went by.  I found a bigger place in lower Deer Valley with an office loft, hot tub, and refrigerator that cost more than my car.  Yes, the owner would be glad to do a long term rental.  She would send me an invoice through PayPal (sorry AirBnb, I still think you are beautiful unicorn).  

We had Deer Valley to ourselves.  We walked up Solamere Drive every night.  Through neighborhoods of multi-million dollar houses – totally empty.  We bought snowshoes.  We demoed touring gear.  The ski patrol shack at the top of PCMR was an eerie reminder – like an archaeological site where the inhabitants just disappeared without a trace – tools and belongings left perfectly undisturbed.

The snow started melting.  We walked more.  I broke down and ordered some running shoes.  The trails dried.  We became best friends with the folks at Park City Bike Demos.  Turns out that board shorts over base layers is a perfectly good riding option.  

Board shorts and base layers.

We did laundry frequently.  In May, I doubled my clothing options by ordering a pair of pants and a shirt from Stio.

Finally in June, we headed back to Ohio.  We had to.  Our lease was ending.   And we thought it was a good idea to get my wife’s car out of airport parking.  It actually started.

We had to get our stuff. Stuff that we had done without for three months.  Stuff we had nearly forgotten about.  It was sort of like a bizarre Christmas morning when we got home.  We stepped back into the life we had left almost four months earlier, and sort of no longer existed.  

Dress shirts sitting in a dry cleaning bag (they’re still in that bag – but moved to a new house).  Dress shirts worn to an office that was no longer open for business.  In a dry cleaning bag for a dry cleaner that I hope had long ago stopped coming by the house looking for a pickup.

We were almost overwhelmed by our own stuff.  After three months of just a few pieces of clothing, we had closets full of stuff.  I only had two t-shirts on my trip.  Generally, one was clean, one was dirty.  Easy choice.  Now I had to choose between twenty.  Socks.  Oh my god.  On my trip, I had three pairs of non ski socks.  At home, three drawers full.  Shoes.  On my trip, one pair of snow boots and my newly acquired running shoes.  At home, I could wear a different pair every day for weeks without repeating.  Why?  Why do we have all this stuff?

Packing for a week long ski trip, but staying for three months, really opened our eyes to how little of our stuff we really need or actually miss.

Influential Reads – March 2021

Reading Time: 2 minutes

Whoa.  Where did the first quarter go?

There looks to be a light at the end of the COVID tunnel.  One vaccine down; one to go.  Apparently, there are some benefits of living in a state where a majority of people don’t believe in science.

It will be curious to see how people react to the potential end of the COVID pandemic.  I do fear a bit of a false reality though until further progress is made on the vaccine administration front.

And, don’t forget there are kids too.

Updated stats through March:


Here are my most influential reads – in no particular order:

  1. POWDER, GROOMERS, AND BUMPS – “Truly, there are two kinds of powder skiing: resort powder and wild powder.” Stephen here: And wild powder kicks my ass.
  2. Ski Tulsa – “I’m not aware of any city that does the reverse, but if Summit County floated a bond issue to pay people to leave, I would vote for it.”
  3. Your Thinking Rate Is Fixed – “If you’re a knowledge worker, as an ever-growing proportion of people are, the product of your job is decisions.”
  4. Beware of the Bubble – “A bunch of kids on Reddit have formed a gang called “Wall Street Bets” to manipulate stock prices in an ongoing series of pump-and-dump schemes.”
  5. How Many ‘Shortage’ Anecdotes Equal Data? – “There is an old saying that the plural of anecdote isn’t data.”
  6. The Employment Situation is Far Worse than the Unemployment Rate Indicates – “Employment in January of this year was nearly 10 million below its February 2020 level, a greater shortfall than the worst of the Great Recession’s aftermath.”
  7. Not a Housing Bubble – “In a normal market, it does not take much of a shift to create an imbalance. Housing here is both too little supply and too much demand; these look like temporary issues, not a longer lasting condition.”
  8. Speaking, the Family Business – “Over the last five years I’ve given about 400 talks, and around 2% of the time, it all comes off the rails.” Stephen here: Been there.
  9. Question #9 for 2021: Will inventory increase as the pandemic subsides, or will inventory decrease further in 2021? – “In 2020, inventory really declined due to a combination of potential sellers keeping their properties off the market during a pandemic, and a pickup in buying due to record low mortgage rates, a move away from multi-family rentals and strong second home buying (to escape the high-density cities).”
  10. The Opposite of 2008 | Epsilon Theory – “In 2021, the US housing market – together with a Fed that thinks inflationary pressures are “transitory” – risks delivering the mother of all inflationary shocks.”

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.

Book Report: Fortune’s Formula

Reading Time: 3 minutes

“The sad fact is, almost everyone who gambles, goes broke in the long run.” – Fortune’s Formula, pp. 49

This is meant to be more of a book report, than a review.  In particular, I want to highlight three lessons from the book, Fortune’s Formula by William Poundstone, that I found impactful.  This also serves as a way for me to recall influential points in the book.

I enjoyed the book, which was an introduction into a few folks I did not know much about – Claude Shannon, Edward Thorp, and John Kelly, Jr.  And it covered topics that I always find entertaining – investing, making money, math, and even had a section titled “Entropy.”

However, three topics that did alter my perspective were:

  1. Correlations

“LTCM goofed by greatly underestimating the chance of a panic in which its trades would become highly correlated.  The fund was making hundreds of simultaneous bets.  It operated on the assumption that these bets had low correlation.” – pp 294

It has been awhile since I have spent time on Long Term Capital Management (LTCM), although When Genius Failed by Roger Lowenstien is still sitting on my bookshelf after many moves.

The above quote caught my attention.  

As I have written previously, the increasing correlations between asset classes in today’s market seem like something folks should be taking into consideration.  The same rising tide has caused all boats to float.

  1. Survival 

“The Kelly bettor cannot be ruined in a single toss.” – pp. 297

“It is that even unlikely events must come to pass eventually.  Therefore, anyone who accepts small risks of losing everything will lose everything sooner or later.” – pp .297

“This illustrates the ‘paranoid’ conservatism of Kelly betting.  The chance of hundreds of coins simultaneously coming up tails is is of course astronomically small.  No matter – the ideal Kelly gambler’s ‘survival motive’ precludes taking any chance of ruin whatsoever.” – pp. 295

The theme of always ensuring you live to fight another day in the Kelly system reminded me of a main theme in Antifragile by Nassim Nicholas Taleb.  To paraphrase, if the action undertaken has the risk of ruin or death, then the overall probabilities can be a little pointless.  In other words, once you are ruined or dead, the probabilities of future gains are irrelevant.

“This fragility that comes from path dependence is often ignored by businessmen who, trained in static thinking, tend to believe that generating profits is their principal mission, with survival and risk control something to perhaps consider – they miss the strong logical precedence of survival over success.” – Antifragile, pp. 160.

  1. Overbetting

“For true long-term investors, the Kelly criterion is the boundary between aggressive and insane risk-taking.  Like most boundaries, it is an invisible line.” – pp. 298

Investment sizing or “bite size”, as well as appropriate levels of diversification, is something I have been spending time on.  The entire Kelly system is designed around the appropriate way to size bets based on the ratio of the edge – how much you expect to win – compared to the odds – the public odds.

“A fractional Kelly bet doesn’t sacrifice much return.  In case of error it is less likely to push the bettor into insane territory.” – pp. 233

But given where the market seems to be and the increasing correlations, I have been keeping bite size small.

“Risk management is a tough lesson to learn on the job.  It can take years for ruinous overbetting to blow up in a trader’s face.” – pp. 303

This would be called “resulting” in the terminology of Thinking In Bets by Annie Duke.  Giving too much credit for the outcome, regardless of the process.

Book Report: The Hard Thing About Hard Things

Reading Time: 2 minutes

“That’s the hard thing about hard things—there is no formula for dealing with them.” – Ben Horowitz

This is meant to be more of a book report, than a review.  In particular, I want to highlight three lessons from the book, The Hard Thing About Hard Things by Ben Horowitz, that I found impactful.  This also serves as a way for me to recall influential points in the book.

This was another book that I did not know much about going into it.  While I am not a CEO, I sit close enough to that seat, that I got a lot out of this book.  I have spent a good portion of my career in early and growth stage companies and could appreciate a lot of the author’s experiences as well.  The book also gave me some perspective to look back at the CEOs that I have worked closely with and evaluate why some of their behaviors and styles worked and why others fell short.

However, three topics that did alter my perspective were:

  1. Reward Employees for Identifying Problems 

“The resulting action item for CEOs: Build a culture that rewards—not punishes—people for getting problems into the open where they can be solved.”

This one kind of flew in the face of a common maxim – “don’t bring up problems without solutions.”  The point being that in many cases the employee identifying the problem may not be in a position to provide a solution.  Or maybe finding a solution is going to take a broader effort or a larger organizational decision.  It makes a lot of sense, especially in the context of a start-up or growth stage business, to reward employees for raising issues.  There are going to be lots of challenges and problems.  Get them on the table so the organization can solve them.

  1. Hire for Strengths

“Hire for strength rather than lack of weakness.”

“You hired for lack of weakness rather than for strengths. This is especially common when you run a consensus-based hiring process.”

I am really not a big fan of consensus driven hiring processes.  For most hires, I think the hiring manager should have a lot of latitude in picking the person she feels best fits her team.  This is also where having an HR team in place that understands the team culture and the role can make a lot of difference.

For executive hires, I agree here as well.  I think the executive team or portions of the executive team should be consulted, but more on a confirmatory basis.  However, this is really the CEO’s job to build the team.  It’s ultimately her decision, and her decision alone.  

  1. Build A Good Company 

“If you do nothing else, be like Bill and build a good company.”

Sometimes I can get a little tone deaf on some of the softer organizational things.  This was a good reminder that building a good place to work should be a top priority.  This is not to say that I think for one minute that gift cards, swag, snacks, and other “perks” will make a company a good place to work.

At the end of the day, what else are you going to have, if you haven’t built a good company?  In my opinion, this is hiring the right kind of people, providing challenging work, rewarding the right kinds of behaviors, minimizing politics and bureaucracy, and having fun.

Influential Reads – February 2021

Reading Time: 2 minutes

February had a lower reading count for a few reasons.  First, we had a much needed week of vacation that kept us busy and on the road a bit. It’s the first time we’ve really traveled outside of the area since October. Second, work has just been busy.  Third, I am reading Digital Minimalism by Cal Newport, which I am enjoying but it’s taking me some time to get through the book.  The book is recommending a deliberate disconnection from digital distractions and I am beginning to feel that reading the news falls into that category for me. I am going to spend a bit of time reflecting on that.

Updated stats through February:


Here are my most influential reads – in no particular order:

  1. Democrats eye big ACA changes in COVID relief bill – “Any attempt to control the cost of care would quickly erode any support from the health care industry.”
  2. AOC Won’t Stop Haunting Ted Cruz and Josh Hawley – “You’re not ‘muzzled,’ Hawley. You’re just deeply unpopular, and aided insurrection.”
  3. Normalcy – “The damage of social media and Fox News propaganda remains: 73 percent of Republicans still believe the 2020 election was marred by widespread voter fraud. The hate machines whir on.”
  4. Eventual Failure of False Beliefs – “I don’t even has to name the players, sites, or brands — you know exactly who I am referring to, the enablers of all those people who exist within a bubble of their own making, while steering utterly clear of reality.”
  5. Google’s next big Chrome update will rewrite the rules of the web – “When Google does remove them [third party cookies] in 2022, it won’t be first – but its huge market share does mean it will have the biggest impact.”
  6. A Subtle Mistake About How to Acquire Useful Career Skills – “A different style of project, however, does seem to work better: benchmark projects.”
  7. A Global Stock Fund That Couldn’t Care Less About the Growth-Versus-Value Debate – “For Global Focus, he starts his research by looking for structural change—either new companies doing something different or older companies doing something new.”
  8. Calculating the Rule of 40 – “Weighted Rule of 40 = (1.33 * Revenue Growth) + (0.67 * EBITDA Margin)” – Stephen here: I hate a charade.  Can we just admit that investors don’t care about profitability.  Growth, growth, growth!
  9. Texas seceded from the nation’s power grid. Now it’s paying the price. – “There are, in the contiguous United States, three major interconnected systems — one covering everything east of the Rocky Mountains, one for everything west of the Rocky Mountains, one for Texas.”
  10. Yoga for Cyclists: Five Poses to Make you Faster – “A strong core and back are essential capabilities for cyclists. Chaturanga is an exercise that can easily be integrated into your routine to target core strength, back strength, and upper body strength.”

Note: This is based on when I read the article, not necessarily when it was first published.  Unfortunately, my backlog of things I would like to read always seems to dwarf the amount of time I can devote to reading.


Reading Time: 2 minutes

There’s been volumes written on the topic of diversification.  The pros, the cons.  What diversification really means?  How many positions one needs to hold to be diversified?  

Here are some good quotes. I doubt I could add anything useful if I tried. However, I mostly agree with the below statement.

“Being truly diversified means that there almost always will be a part of your portfolio that is sucking wind. (Big note: if every piece of your portfolio is working really well, it means one of two things: you’re incredibly lucky or you are not actually diversified. I would assume the latter.)” – De Thomas Wealth Management

Here’s what the holdings look like in my account where I attempt to deploy a broad, diversified, ETF strategy.

Not too much pain here…

I assure you this is a broad mix of ETFs representing equities, fixed income, real estate across U.S., international, emerging markets, etc.  Most would call this a well diversified portfolio.

The fact that almost every fund is pegged up against its 52 week high makes me more than nervous.  The issue is not that these aren’t funds holding diversified assets.  The issue is almost every asset is moving up together and correlations among asset classes are increasing. 

“He notes that the correlation between the yield on the Barclays Global Aggregate Bond index and global stocks currently sits at 0.24—a correlation of 1 means two assets move in lockstep—and has been fairly steady since the market stabilized after the coronavirus meltdown. If the correlation turns negative, which would mean that stocks and bonds move in opposite directions, it could be bad news for equities. “ – Barrons

When did stocks and bonds start moving in the same direction? It used to be, they didn’t.

So how do you diversify when correlations are increasing? 

Well, if most asset classes are going up, then you probably don’t care about diversification as much or the fact that correlations are increasing. Higher correlations mean assets are moving in the same direction. If that direction is up, then I guess higher correlations are good.

However, you will probably start to care about diversification and correlations more if the wheels start coming off. I’ve found this chart helpful in thinking through that problem historically.

Although as the chart says, past performance is not an indication of future performance.

Mask Wearing Point System

Reading Time: < 1 minute

The purpose of a mask is to cover the airways to the lungs.  

Parts of the human body that part of the respiratory system and are airways to the lungs include:

  1. Nose  +5 Points
  2. Mouth +5 Points

A total of ten points is available.

For the avoidance of doubt, here is a list of things that are not airways to your lungs:

  1. Feet
  2. Ears
  3. Hands
  4. Elbows
  5. Knees
  6. Belly Buttons
  7. Arm Pits
  8. Chins
  9. Pets
  10. Other Inanimate Objects

There is no extra credit for covering any of these items. 

Additional points are deducted (-5 points) for covering these items in lieu of the either or both the nose or mouth.  Additional points (-100 points) are deducted for being a leader of this country and not knowing this.