ETF Storm

By?Patrick Donley,?Matthew Gutierrez, and?Shawn O'Malley, edited by?Robert Leonard?· January 09, 2023

*LinkedIn newsletter is posted at a one-day delay.

The tech-heavy Nasdaq rose again Monday after rallying Friday on hopes that the Fed might dial back aggressive interest-rate increases.

But stocks closed near session lows after Atlanta Fed President Raphael Bostic said the central bank should raise rates above 5% by early in the second quarter, then go on hold for "a long time."?

Elsewhere, Goldman Sachs plans to cut 3,200 jobs as part of a wave of cost-cutting on Wall Street after a slump in deal-making.?

Goldman's layoffs amount to nearly 7% of the 49,000 employees on the U.S. bank's payroll.

Here's the rundown:

MARKETS

*All prices as of market close at 4pm EST

Today, we'll discuss two items in the news: Jack Ma cedes control of Ant Group and ETF inflows forge ahead, plus our main story on Ken Langone, Home Depot, and great businesses.?

All this, and more, in just?5?minutes to read.

IN THE NEWS

???Jack Ma Cedes Control of Ant Group (WSJ)

Explained:?

• The Chinese billionaire entrepreneur, Jack Ma, is stepping away from the business empire he created and will no longer control the fintech giant Ant Group. Although Ma doesn't hold an executive role or sit on its board, as a founder, he's assumed a "larger-than-life figure" at the company.
• Past agreements that enabled Ma to still exert excess influence on Ant will be terminated, according to a company statement. However, he will maintain some voting rights alongside nine other executives and employees.?
• Ant, which owns the popular payment platform Alipay, has overhauled operations dramatically in the last two years following a crackdown by Beijing that blocked the company's expected blockbuster initial public offering (IPO) at a $300 billion valuation.?

Why it matters:?

• The change in control will help Ant symbolically complete its transformation and new identity that minimizes Ma's role.?
• Ma fell out of favor with the Chinese government and vanished from the public after a controversial speech in 2020 laid into Chinese regulators, possibly contributing to the blocking of Ant's IPO.
• Ant could now revive its hopes for an IPO in the next year or so after revamping its business lines and becoming a financial holding company. This would subject it to regulations similar to traditional financial firms.?

???ETF Industry Storms Through 2022's Headwinds (FT)?

Explained:?

• Despite one of the worst years ever for global financial markets, the exchange-traded fund (ETF) industry pushed ahead, attracting net inflows of $867 billion, second only to 2021's record of $1.29 trillion. Note, fund flows reflect how investors moved their money around, not performance.?
• ETFs for a few asset classes, in particular, stood out, with inflows into government bond funds exceeding $180 billion, more than the previous three years combined. And emerging market funds sucked in a record $110 billion, while some defensive sectors shattered past inflows, including healthcare and utilities ETFs.
• Other strategies didn't hold up well, though. Inflation-linked bonds and emerging market debt funds saw record outflows, as did ETFs focused on the financial sector. European equity funds also saw large outflows of over $16 billion.?

Why it matters:?

• "As a global ETF industry, despite how difficult 2022 was for the market more generally...it has been a good year," said the head of investment strategy at BlackRock's iShares.?
• ETFs are gobbling up the asset management industry, often at the expense of traditional mutual funds, while more investors than ever embrace passive investing. While ETFs in the U.S. saw a $611 billion net inflow in 2022, long-term mutual funds suffered net outflows of $1.1 trillion.?
• One industry leader remarked, "I think we'll look back on 2022 as the year mutual funds formally passed the baton to ETFs. The mutual fund is now dying as an investment vehicle. The time of the ETF has arrived."

WHAT ELSE WE'RE INTO

WATCH: Semiconductor investment ideas, from Michelle Marki

LISTEN: The disciplined growth investor, with Fred Martin

READ: Warren Buffett's top holdings in 2023

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THE MAIN STORY: THE KEN LANGONE STORY

Overview

In 1978, Ken Langone invested early in Home Depot and became a cofounder with Arthur Blank and Bernard Marcus. They're now all billionaires, thanks largely to the enormous rise in Home Depot's stock price from $0.20 in 1983 to its all-time high of just over $400 in late 2021.?

I (Matthew) recently read his book,?I Love Capitalism?and came away with takeaways on business, markets, and life, including his view on what separates a good business from a great one like Home Depot.?

Much of the book centers on people and serving others. In 2018, Langone donated $100 million to help make NYU's medical school tuition-free for all students.?

He's served on the boards of General Electric, the New York Stock Exchange, Yum Brands, and Home Depot. He once turned down a last-ditch ask for $500 million from con man Bernie Madoff.?

At 87 years old, Langone has seen every part of the market cycle multiple times. He grew up in a working-class family, almost went broke in 1975, and then became a self-made billionaire. His story provides lessons for all types of investors and entrepreneurs.?

Invest in people

Langone made billions selling home improvement to the masses. The company's unmistakable orange branding is on 2,300 warehouse-sized do-it-yourself stores across North America, and Home Depot has a market cap of $300 billion. Annual revenue is more than $150 billion.?

Langone summed up his investment philosophy in two words: the manager. He invests in managers when he invests in companies, looking for people who are objective, kind, smart, humble, and direct.?

He wants leaders who take healthy risks to push the envelope. He wants to see people maintain the confidence and faith to take a leap. He wants to see leaders who bring positive energy to uplift rather than belittle their workers.?

So while Langone needs to see a quality business with a pristine balance sheet, he's really looking into the people who run it. He notes that a company usually succeeds because of its people, and substantial equity ownership among leaders is a good sign.?

A striking example of what he means by "quality leaders" lies in humility. At Home Depot, Langone writes about pushing carts into the store from the parking lot with co-founder Bernie Marcus.?

They also would pick up trash in the store, as they feel no task is beneath a leader in running a high-quality business.?

"Those are entry-level tasks for the kid who works in that store," Langone writes. "When he sees the top guy doing them, he can say to himself, 'If it's not too small them, it's not too small for me.'"

True love, resilience, and curiosity

Langone writes about the importance of truly loving what you do each day and finding a flow state so you lose track of time.?

"Loving what you do is one of the greatest joys in life," he writes. "I was at a place where I was having the time of my life."

There will usually be challenges and tailwinds. What distinguishes the "winners from the losers" is the ability to turn obstacles into opportunities, adversity into times of resilience and creativity, Langone says.

Langone credits not only hard work but sheer curiosity for his (and Home Depot's) enormous success. On boards, he says he's notorious for asking more questions than any other director to get to the truth.?

"I didn't give a s*** if my question showed how stupid I was," he remarks. "A lot of people are scared to ask questions because they don't want to know how dumb they are."

Other takeaways

Langone leaves readers with a few other lessons:

• Always dream big, be ambitious?
• Capitalism can be brutal, but it's rarely a zero-sum game
• Read a lot: Langone spent Saturdays at the library while his friends were partying
• Around the Flash Crash of 1962, Langone saw an opportunity to get his feet in the door on Wall Street while others panic-sold
• Think long-term in investing, relationships, career, and family
• Keep going: Langone said he almost went broke in 1970, when he was 35. He'd "weed the garden and cry," but he stayed in the game and didn't quit his investing career
• He says Home Depot has always paid employees $2-$3 above minimum wage because leaders believe minimum wage means "minimum talent."
• As a leader, you should lift morale: Put your arm around your team's shoulders. Recognize, appreciate, and praise quality work
• Langone places money near the bottom of his list of proudest accomplishments. His children and family come first. He once told a man, "My net worth is what good I do with what I have."

Dive Deeper

You can check out Langone's book?here.

What's your favorite business book? We'd love to hear about it.?

SEE YOU NEXT TIME!

That's it for today on?We Study Markets!?

See you later!

All the best,

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