Xero and Intuit follow up

Xero recently published its half year report, so it is time to update our figures. The following table summarises the salient metrics:

	2014	2015	2016	1H2017
Revenue	143m	207m	295m	187m
COGS	30%	24%	23%	20%
R & D	50%	48%	41%	49%
General	20%	15%	13%	11%
Marketing	75%	72%	56%	38%
Total	175%	159%	133%	118%

Once again, the figures are headed in the right direction. Although the company announced operating cash flow positive, adding in the impact of capitalised R & D still resulted in cash burn of $34m, leaving roughly $84m left in the bank, implying a steady runrate of just over 1 year. 

As a matter of comparison, let's look at Intuit's 2017 metrics:

Revenue USD$5.18 billion up 10% from 2016 (note: XRO growth is much higher)
COGS 15.6% of revenue
R & D 19% of revenue
General 10.7% of revenue
Marketing 27.4% of revenue
Total 72.7% of revenue (versus 74% for 2016)
Operating cashflow= $1.6 billion

The current market cap for XRO is roughly NZ$4.6 billion (a rise of nearly 45% since my last update). Still too rich for my taste. As a matter of comparison, Intuit's market cap is currently USD$39 billion.

Pip Watching

Imagine a hypothetical portfolio. This portfolio has a very healthy performance of 15% pa. The volatility/variance of this portfolio is roughly 10% per annum. Despite this, the probability distribution of price moves for any short time periods between one second to one day is just slightly better than 50-50. If an investor is assiduously following the price moves of this portfolio more than once per day, the statistical expectation is not much better than watching the outcome of a flipped coin.

Various studies have shown that the emotional impact of a loss is nearly 2.5 times the impact of a gain. Accordingly, the consequence of pip watching is net emotional deficit. And the absolute net impact gets bigger with increased frequency of pip watching, and also increased number of portfolio positions.

Bear in mind that 15% pa with 10% variance over a long period of time is a great performing portfolio. This means that a lesser performing portfolio will not be any better for the constant price checker. It may in fact be far worse. Further, there is also a feedback loop in place. The net emotional deficit may feed through into deteriorating performance, which will increase the emotional deficit, leading to a vicious cycle. At the same time, the random nature of punishment and rewards in pip-watching gives rise to addiction similar to the process in gambling. 

The physical consequences of chronic stress from pip watching include high blood pressure, diabetes, hormonal imbalances, possibly brain damage, eye problems and a whole other variety of ailments. An investor that keeps at this bad habit for long periods of time may actually be accumulating money at the expense of health. Wealth, happiness and well-being arise from a well-lived life, not just the bank balance at the end.

In other words, pip watching can severely affect your health, and also your wealth. 

Don't do it.

Stay healthy, enjoy and prosper,

Yours One Legged