Lumen Technologies: An Old School Value Investor’s Favorite

It’s been a few months since my last write up on Seeking Alpha. Since October 2020 I think. You can read the full thing on Seeking Alpha. They hold the rights. Below are just quick notes and I suggest to read the full thing to get the proper picture of the company and opportunity.

Disclosure: I’m long Lumen Technologies (LUMN).

  • I found out about Lumen Technologies through a Globe and Mail article discussing Francis Chou’s Stonetrust investments. Stonetrust Commercial is an insurance company in the U.S. and like most insurance companies they make money through disciplined underwriting and properly investing the float. It turned out that Lumen is a large holding. Who still has a landline? Why would Francis want to own a dying copper landline business? I had to look to deeper into this.
  • It turns out that the stock is a favorite of some other old school value investors such as Dr. Michael Burry from Scion Asset Management, Prem Watsa from Fairfax Financials, and Mason Hawkins from Southeastern Asset Management. Something must attract them.
  • Lumen Technologies has 1.1 billion shares that trades at $12.70 a share with a market cap of $13.9b. Lumen distributes a fat 7.9% dividend yield or $1 annually which indicates that the market is not too hot on the company. Lumen distributes a fat 7.9% dividend yield. It looks safe. It’s covered by free cash flow of $2.8b-$3.0. That’s enough to cover the $1.1b in annual dividend distribution. Management has reiterated their commitment. Of course that’s never guarantee, but more a signal of confidence to the market.
  • The market is currently valuing Lumen at 5x adjusted EV/EBITDA, 8.2x 2021E earnings, and 4.7x price to free cash flow per share of $2.74, my preferred metric. This implies a 21% FCF yield. When it comes to a company like Lumen, that has a lot of debt and D&A, measuring the right amount of cash left should take precedence over earnings.
  • The depressed valuation, a market revaluation of their core assets, an improved profitability profile and balance sheet, and potential growth is what probably attracted these value investors.
  • Lumen Technologies, formerly CenturyLink, provides communications and network services as well as security, cloud solutions, voice and managed services. CenturyLink and Quantum Fiber for residential and small businesses. Lumen for enterprises.
  • The firm owns 450,000 miles of fiber. It’s one of the largest fiber optics network in the world. Most of it comes from their acquisition of Level 3 in 2017. It’s a Tier-1 network. That’s the network with the most connections. You need to pay for access. This is their competitive advantage. Lumen sells (wholesale) high bandwidth fiber optic long haul links to other carriers.
  • Remember the old Internet as a “superhighway” analogy, well Lumen is one of the major highways. Lumen is among the largest network providers in the world. If their network fails, it takes jump a huge part of the Internet with them.
  • Their massive fiber network and infrastructure acts as a moat. It’s too expensive to build and to develop it against the experts in the field. Fiber businesses are attractive because once it’s built, the “maintenance” or “sustaining” capex is relatively limited, and that drives FCF.
  • The value of Lumen’s fiber infrastructure network is not recognized by the market given the FCF yield of 21.5%. Lumen is looking to monetize their recently completed 3-year investment program and the 7.9% dividend yield looks safe. The downside is protected by the value of its fiber network (the cost to build a similar network is probably hundreds of billions) and recent large transactions for fiber peers were at double-digit EBITDA multiples.
  • Lumen is the new name for CenturyLink since September 2020. The rebranding comes with a new business strategy that goes beyond just offering connection services. They recently launched the Lumen Platform to run cloud and edge computing applications. Lumen is betting that the platform will fuel growth.
  • The Lumen Platform is a move beyond providing basic connectivity. It has the capabilities that go beyond providing just internet service. With the Lumen Platform, it will level its fiber infrastructure to provide software or other needs “as a service.” Practically, what we are seeing is the evolution from telecom company (CenturyLink) to tech company (Lumen).
  • A lumen is a measure of the brightness of light and the name pays homage to their fast global fiber network foundation.
  • It’s a myth that 5G will not kill fiber. Instead it will enhance it’s importance. 5G requires a lot more cell towers, a lot more bandwidth, and will need to be connected to a wired network. The explosion in data use, particularly mobile, could make fiber assets much more lucrative. 5G needs a fiber network that can power it through multiple contact points, and help it reconnect through physical barriers.
  • Edge computing. Of all the new products Lumen is launching, the Lumen Edge Compute will be one of the main drivers of future growth. I think there’s a part of the cloud story that’s overlooked and that is edge computing. With the 5G rollout, edge computing is two words we will be hearing a lot more in the coming years. Edge computing places processing power closer to where data is being created in the physical world. Edge computing is a complement to the cloud by solving issues of latency, bandwidth, autonomy, or compliance.
  • One great driver for edge computing is reduced latency (much faster computing speed means reduced waiting time). The more processing can do at the edge level, the less you have to rely on the cloud, and the faster the computing
  • Lumen has a lot of debt and makes up most of the enterprise value of $45b. With debt there’s what you owe and what you need to pay. They have been aggressive to pay down the debt over the years. Q4-2020 long-term debt stands at $31.8b. In 2020 alone Lumen managed to reduce net debt by approximately $1.6 billion and reduced leverage to 3.6x net-debt-to-adjusted.
  • If I applied a price to sale multiple of 0.8x to 1x on depressed sales ($19b vs $20b actual), you are looking at a 9% to 36.4% gain. If Lumen manages to grow their sales, it will warrant a higher multiple.
  • If we assume a 15% FCF yield (6.6x FCF), Lumen would return 34%. If Lumen manages to grow, it warrants a minimum multiple of 10x FCF, and this would imply a return of 115%.
  • It won’t happen overnight. I don’t expect a significant short-term boom in revenues from their investments. This is a long term play. Instead I picture a slow rising trickle of revenue growth as the country upgrades the wireless network to support 5G standards.
  • Three-pronged approach to higher stock price:
    1. Market revaluation of fiber network and assets to more reasonable level. The cost and importance of building it should be the floor.
    2. An improvement of the business. Growth + more profit + more FCF + less debt = higher stock price. Right now the market is not confident in Lumen. The mood is bad. Better results will change the mood.
    3. Financial engineering. Selling off assets at higher than market prices to pay down the debt. Refinancing expensive debt at cheaper interest rate. Synergies from Level 3 acquisition. NOL that’s in the bank etc…
  • Ultimately, results will drive the stock price. Even with a conservative approach, I think there’s material upside if Lumen converts on the opportunities it sees and little downside if it misses. The negative is already priced in. Meanwhile you have an opportunity to buy a company with irreplaceable assets that’s considered cheap on many different metrics.

This is the quick notes. Here’s the full thing.

Discovery – The Fire Sale

The Archagos fiasco forced a fire sale in companies such as Discovery (DISCA, DISCK), ViacomCBS (VIAC), GSX Techedu (GSX), Baidu (BIDU), Tencent Music (TME) and others. Forced-selling can produce distortions in the market and create buying opportunities. 

Here’s a chart from last week’s blood bath:

I decided to go quickly over the lot that got beat up. Take note that some of these shares bounced back from their lows.

ViacomCBS (-26%) – They own SpongeBob and recently got into a fight with Judge Judy, so I’m out. The shares had climbed to over $100 in recent weeks, well above the consensus analyst price target of about $60. After the past week’s fire sale, shares traded at around $45.50.

GSX Techedu Inc. (-56%) – MuddyWaters and other short-sellers are after them for fraud. I’m not touching it.

Baidu (BIDU) – The Chinese google. Baidu was part of a group of Chinese stocks that got unloaded. There might be something good there but we are not done with the Chinese government’s interference and the recent SEC action.

Tencent Music (-37%) – This one is intriguing and will require further reading. My hunch tells me that in the long-run it could be a winner but again, because of the CCP’s meddling into big Chinese tech and the SEC I’m staying out for now. 

Discovery (-27%) – My favorite from the fire sale. I bought some. When somebody (Archegos) is dumping shares of a good company at bargain prices, I’m a buyer. When somebody is in a desperate situation, and needs to sell, the buyer is in a good position. Discovery is the one that I’ve looked at on and off over the years. I’m not saying it’s the best one of the group, it’s simply the one I’m more familiar with. It always looked too expensive and they have some headwinds to deal with. The selloff forced me to look at it again. Plus the fact that I was already familiar with the company helped me pull the trigger. DISCA is trading around $41-$42 and is down from $77.27 on March 19, 2020.

Keep in mind this is not a full valuation exercise. I didn’t include the Advance/Newhouse preferred shares. This post is just a quick way for me to chop down some notes on the company.

Discovery didn’t fall off a cliff because of some bad news related to the company. It’s victim of a massive sell-off of shares related to the collapse of a hedge fund. Archegos Capital Management received a margin call and was forced to flood the market of shares.

Discovery themselves put out a press release on Friday during trading hours:

Discovery (Nasdaq: DISCA, DISCB, DISCK) today announced that today’s trading activity is not the result of insider transactions or transactions by Advance/Newhouse Programming Partnership or its affiliates.

The Company issued its outlook for the first quarter of 2021 on February 22, 2021 and provided additional guidance at the Deutsche Bank TMT Conference on March 8, 2021, and is comfortable reaffirming its outlook and the additional guidance. The Company is confident in and pleased with the execution of its strategy, both with respect to its traditional business and the direct to consumer roll out. It looks forward to releasing first-quarter results and hosting its quarterly investor call on May 10, 2021.

Source: 2020 Proxy

We know that the largest shareholder, Advance/Newhouse Programming, is not the seller and it’s reasonable to think it’s not John Malone. Vanguard and BlackRock are ETFs. So we had one guy, through a couple banks, dumping blocks of shares at whatever price to cover his debt. Along the way this probably triggered algorithms to sell too, which further fueled the downward spiral. 

Discovery has three classes of common stock:

  • Series A has one vote per share
  • Series B has 10 votes per shares
  • Series C has no votes.

Discovery is in an out-of-favor industry (cord-cutting), but is able to produce quality content for significantly less than other media companies and has a large subscriber base. Do not underestimate the creator of the 90 Day Fiancé. They bought Scripp (HGTV, Food Network) in 2018 for $15b and the Discovery has been a strong performer over the last couple years.John Malone also owns a good chunk of it and controls a good block of the voting power. If shares don’t rebound, it could be an interesting acquisition target. 

Discovery+ seems to be a hit. It has surpassed 11 million total paying direct-to-consumer subscribers globally and is on pace to be at 12 million by the end of the month. With cord cutting, Discovery+ is the future of the company. There’s an old saying: Adapt or die. Well if you don’t adapt to the digital world you die. 

Streaming is shaping up to be a tough business. The competition is heating up. It will be a war on price and content. Netflix has a first-mover advantage, Disney has content, great brands, sports and families, Amazon has AWS to pump money into Prime, Apple is a juggernaut with 40%+ of the device in people’s hands. AT&T’s HBO has premium content and will be fine. As for CBS/Paramount+, NBC Peacock and the rest I don’t know. Discovery might be a modest success. They have a loyal following with women in above-average-income households. Discovery boasts 3 of the top 4 women’s networks. They also have a good international presence. The trick is trying to find a  balance between growing streaming and not cannibalizing the cable cash cow too much.

However, the economics of streaming require significant scale to turn a profit. We are in the early innings of the streaming era. Disney’s streaming is not profitable yet and I think Netflix recently just turned free cash flow positive. The problem I see with the streamers is they are now on the content & technology treadmill. They need to spend a massive amount on content and technology every year to stay in the game. Discovery has the advantage of creating less expensive content. Where most of the streaming media business has gravitated toward scripted series and movies, Discovery has settled on the unscripted, home, food and travel shows that garnered large audiences but had relatively little high-profile competition in terms of content. Producing Property Brothers, Gold Rush, and the 90 Day Fiance doesn’t break the bank. And they have Shark Week.

Discovery has been a strong buyer of its own shares over the years. In 2020 they repurchased $965M of DISCK stock at an average price of $23.18. Given where the stock trades today this has been highly accretive. Share buybacks are a great idea if the market is failing to recognize the value of a current stock. If shares languish the future buybacks will be highly beneficials.  They also spend some FCF on reimbursing debt.

Discovery uses a metric called adjusted OIBDA – operating income before depreciation and amortization.It’s similar to EBITDA, except with OIBDA, the calculation is started with GAAP net operating income. In EBITDA, the calculation is started with GAAP net income. OIBDA is used to give a clearer picture of the profitability in continuing business activities without taking into consideration the effects of capitalization and tax structure.

Discovery’s market cap after the selloff is approximately $18.5 billion, with trailing free cash flow of $2.34 billion. I’m guessing FCF will be between $2.5b and $3b in the future. To stay on the conservative side, and I’m working with $2.3b. This works out to a FCF yield of 12.6%, or only 7.9x FCF on equity. This is cheap, despite the future opportunity ahead and the quality of the company. Decent companies these days are trading at sub 5% FCF yield. If you were a private acquirer, how much would pay for the whole company? Disney bought Fox for 13x EV/EBITDA. Comcast bought Sky around 16x EBITDA. Discovery could probably attract similar multiples in the event of a sale. The value of the firm is currently $31b, it would have to command a 30%-50% premium to compensate for the selloff and the take-over premium. The market is pitching you a fat pitch.

Now I know that, for the sake of time and simplicity, my FCF calculations are flawed. They are not based on a fully diluted basis. I didn’t include the full conversion of the convertible preferred owned by the Advance/Newhouse interests. So the real FCF per share should be lower. In a take over scenario I would have to use fully diluted numbers. In my head I know what’s going on, but please if you are serious about investing in this company make sure you include them. These back of the napkin numbers are to give me ballpark range.

Discovery is the one of the largest global media providers with over 2 billion cumulative subscribers in over 220 countries. When you buy Discovery, you get a piece of Discovery, TLC, Animal Planet, HGTV and Food Network.

Discovery prints money and has an interesting cost profile. If the price stays low it will be bought out for its great content. Meanwhile share buybacks and debt reimbursement will benefit equity holders.

I didn’t buy this stock to hold forever. It’s more of a trade. I’m buying shares from a good company from a desperate seller. I will probably resell when the mood shifts or when it hits a reasonable valuation. A 12.x FCF (8% fcf yield) multiple would imply a stock price of $57.62, which is 38.8% higher than post bloodbath price of $41.5 a share. Considering the shares peaked at $77, it’s a reasonable outcome.

Anthony ‘Tony’ Deden and Nick Sleep Links

*March 29, 2021 Update: I added another podcast link. I didn’t realized the Anthony Deden did a 2nd part with Grant William a couple years later. The first part was when Grant Williams was with Real Vision, and the 2nd part is on his own podcast

I added some links to the Investment Resources page. Once in a while I add something I like that I think deserves to be shared.

Below are new links from two investors that I like:

Anthony ‘Tony’ Deden from Edelweiss Holdings


Nick Sleep from Nomad Investment Partnership

Interest Rates, Inflation & Economic Confidence

With the vaccin being rolled-out and the economy gradually reopening we have seen rates rise higher. The benchmark 10-year Treasury currently yields ~1.7%. That is still low by historical standards, but higher than it started the year or what we have seen in 2020 (~0.50%). As a result we have seen the high flying Nasdaq correct 10% and the rest of the market bounce around. 

The next big debate is: Is inflation coming back? Are interest rates going up? Rates have been ticking upward. There’s a risk of inflation. Monetary supply has been expanding. We’re seeing commodity prices go up. Take oil prices. Last year oil prices dropped in negative territory and a barrel today is back to $60. But oil is always a wild card. There’s certainly inflationary pressure in other parts of the economy. Fixing my deck got more expensive. A treated 2x4x10 piece of lumber at my local lumber yard went from $4 to $15 in one year. I will never look at a piece of wood the same way. 

Commodity prices play a major role in the cost of living and our behavior as well. They make up the basic input costs to run our lives. Practically everything we consume has a commodity associated with it. How much of the rise will be transferred from suppliers to the consumer? Take tissue paper. The price of wood pulp plays a direct role in the cost to make a roll of toilet paper. Pulp prices are going up and that should contribute to higher prices for tissue paper products. 

The Fed has spoken last week and reiterated their new mandate to let inflation go above the traditional 2% target. They project a 2.4% bump in inflation for the year and then it will retreat. Put me in the skeptical category. The Fed also expects the GDP to grow 6.4% for 2021. Mild inflation is not to be feared. Indeed it’s in part changes in the market’s expectations of inflation that drive bond yields down in recessions and up in recoveries.

The government is not backing down from stimulus, the Fed is keeping rates close to 0%, and consumers are sitting on piles of cash waiting to be unleashed. Lockdowns have given rise to pent-up demand. The ramifications of such actions will be felt in the real economy. They will be felt in the markets too.

Higher Rates: Good or Bad?

Depends what you own. Bonds and equities compete for investor’s capital.

Before digging deeper into that let’s rewind a bit. To better understand the price of money, we need to distinguish short-term rates and long-term rates.Short-term rates are dictated by the central bank, the Federal Reserve in the U.S., which is responsible for monetary policy. By fixing short-term rates that banks can borrow at, it pretty much controls short-term rates. The current Fed fund rate is 0.25%. This is the interest rate at which banks lend money to each other, usually on an overnight basis. The thinking goes that low rates discourage savings and encourage investments which boost the economy.

Normally we should expect rates to rise over time due to the growing economy. The idea is to prevent the economy from overheating which could result in higher inflation. Most of the world’s central banks have a 2% inflation target.

Long-term (5yr-30yr) rates are generally set by the market. Numerous factors come into consideration but the state of the economy, future prospects, inflation, and balance sheet affect rates. For example the 10-yr US T-Bill yields 1.7% at the moment and the 10-year Turkish government bond yields 19%. Well a 19% yield looks really nice but you might want to think twice before reaching for this juicy income. The higher Turkish yield gives you an idea of what the market thinks of the Turkish economy – that it doesn’t have the same creditworthiness as the U.S. Inflation is raging (above 15%), the lira is collapsing, you have political risk with President Recep Erdogan, and you don’t have institutional credibility.

The recent rise in U.S. rates is in part due to better economic prospects, rising inflation, and the U.S. balance sheet. Rates also reflect confidence in the government. The U.S. government has to issue a lot of bonds to finance itself with an ever growing deficit. A February auction went poorly. There’s no plan to reduce the deficit or to tackle the national debt around $28 trillion (127% debt to GDP ratio). Now is there a demand for these bonds flooding the market? Well yes but at the right price. Nobody wanted to buy them at 0.5%, so you need to raise the price.

Having said that long-term markets are generally set by the market, that has changed somewhat in the last couple years. Long-term rates are manipulated by central banks buying long-term bonds to bring the rates down. They are often the biggest buyer and we have seen their balance sheet expanding. It’s another way to stimulate the economy but long-term effects are unknown. Among other things it screws up price discovery mechanisms, the market’s natural ability to auto-correct (invisible hand), and capital allocation decisions. Here’s a question no one seems to be asking: What will happen when they decide to unload their balance sheet?

In the U.S. the 10-yr T-Bill forms the foundation for the price of all other assets. It’s used as a benchmark for other interest rates and is thus a barometer of risk appetite in markets and of economic confidence more broadly. And it’s global benchmark. The sharp rise in T-bill yields from the start of the year was matched by yields on bonds in other places. Bond prices move in the opposite direction to confidence; bond yields go in the same direction as confidence. When the economic outlook is bleak, as it was in March last year, yields fall sharply as investors rush to the safety of bonds. As the outlook brightens, bond prices start to fall and yields start to rise again. Bond prices are thus countercyclical most of the time. This feature makes them very attractive diversifiers for equities, the prices of which are more procyclical, moving up and down in tandem with the economic cycle.

In Canada we rely a lot on the 5-year Government bond because we have 5-year mortgages. Because government bonds are the foundation for all other pricing, higher rates will be felt in mortgages, loans and credit cards.

Back to what I would own in a higher rate environment:

I wouldn’t own bonds. Bond prices fall when rates go up. Bonds promise fixed cash payments in the future. Those cash flows are worth less when inflation unexpectedly rises. And I never understood the desire to own bonds that paid less than 1 % (negative real rates). Investors are buying them for the capital gains that came with lower rates, not the coupon. It’s a weird world — Buying bonds for capital gains, not the coupon (and investors buy stocks for the coupon).

There’s a camp that says when rates go up you should be invested in equities. But not for all stocks. With the recent rise in yield, we have seen high flying tech stocks take a beating.

Higher interest rates have hurt high growth stocks like Tesla more than others. For starters, higher interest rates make it more expensive to finance growth. Second, high growth companies generate most of their cash flow far in the future. Higher rates make the promise of future cash a little less attractive, relatively speaking, than higher yield from bonds in the present day.

Net Present Value formula. Take a cash flow and divide it by the discount rate.

If you have ever looked at a discounted cash flow model (DCF), a tool used to price assets based on projected cash flow and its risk, you know how sensitive it is to a discount rate. The value of an asset is the sum of all its future cash flow discounted to the present. That’s the formula in the graph above. Take a cash flow, let’s say $100,000, apply a 5% rate, you get  $95,238$ (1/1.05). Now apply a 10% rate (100,000/1.10), the value of your cash flow falls to $90,909. Also, to compound the effect, the further a cash is projected, the more sensitive it is to a change in rate. That’s why a 30-year old bond is more affected by a rise in rate than a 5-year bond. The projected income in the late years is whacked which affects the value of your bond.

If you are a start-up, your valuation is probably based on future cash flow estimates, and in a DCF model the terminal value carries most of the value. A slight rise in the discount rate and you can see the value drop like a rock. This explains why the Dow held up better than the Nasdaq during the recent rise in rates.

Now that I’ve told you what I wouldn’t own in a higher rate environment (bonds and unprofitable high flyers), I would focus on high-quality companies with growing income that are trading at a reasonable price. Because their business model is already proven, profits are reliable and not based on future projections that are subject to get beat up if rates are rising. Balance sheet quality is also important. A highly indebted company will see its cash flow pinched by higher rates. A company with a healthy balance sheet will retain more profit for shareholders and will be able to finance at a better rate if needed. 

In a rising rate environment, equities might get beat up in the short-term, but in the long term a rise in rate might signal a stronger economy that might support higher earnings and a higher stock price.Also equities have generally outpaced inflation over the long haul. 

Higher rates might bring a correction in the growth stocks everybody is talking about. The cool hot stocks will get cold. I would keep a list of these high quality growth companies that are at insane prices and wait for them to correct. A rising rate environment presents an opportunity to buy them at a cheaper price.

NFT – Fad, Fraud or Innovation?

The First 5000 Days by Beeple sold for a record-breaking $69.3 million at a Christie’s online auction.

Regular readers know that I’ve been keeping an eye on cryptocurrencies and the blockchain. It’s a fascinating space even thought I don’t have any investments in cryptos at the moment (I did but my exchange got blown up in a massive fraud). I’m sure you have heard about non-fungible tokens (NFT) by now, the current flavor of the month in business news. I read about NFTs in the past (cryptokitties) and it seemed to be nothing more of than a nerd sub-culture of a sub-culture. I was quite skeptical and it didn’t seem important enough to invest the time.

Then the Beeple sale happened.

Last week a purely digital work of art, The First 5000 Days, by Beeple sold for a record-breaking $69.3 million (42329.453 Ether) at a Christie’s online auction. The bidding opened at $100. According to Christie’s, during the last few minutes of bidding, a total of 33 active bidders from 11 countries competed for the piece, with 22 million visitors tuning into the auction. This is the third-most valuable piece ever sold by a living artist.

Once you start reading about blockchain and cryptos, it doesn’t take long to fall really deep into the rabbit hole. I get it, there’s a lot to digest. It’s an intersection between philosophy, finance and technology. Not the easiest subjects to grasp. Just the lingo makes your head spin. Blockchain, cryptos, NFTs, DeFi (decentralized finance), record breaking digital art sale by an artist named Beeple that was bought by a NFT fund named Metapurse run by a guy named Metakovan. This is all real or I think it is. For the past year I’ve wake up wondering if I’m in the real world or if I’m in some kind of bad Matrix prank just waiting to snap out of it.

Right now, I can’t tell the difference between what is a fraud, a fad, or a innovation that’s here to stay. Are we in the first inning or second of NFTs? Will this become the standard in 10-15 years? Is this the tip of a $1 trillion plus industry? Or is this another ridiculous speculative mania that will spectacularly crash?

Continue reading “NFT – Fad, Fraud or Innovation?”

Distressed Investing

“How did you go bankrupt?”

Two ways. Gradually, then suddenly.”

― Ernest Hemingway, The Sun Also Rises

Distressed securities is a niche space. It’s a big contrarian playground. It’s an area filled with mispriced assets. When companies become distressed, they go through restructurings. If you like reading long complicated legal documents then there’s an investing space just for you. Besides lawyers, investors willing to do the work can profit from bankrupt companies. Investing in distressed securities is the practice of trying to find inefficiently priced securities in companies that are restructuring and going through significant change. Because it’s a complicated, risky, and messy space, lots of investors shy away. The inefficiency and lack of investors creates opportunities for the investor willing to get their hands dirty.

First a little background on bankruptcy. Up until the mid-19th century defaulters were treated harshly. Defaulters were thrown into debtor’s prison called the Schuldturm—the prison tower that was the destination, in the past, for those who couldn’t pay their debts. The word “bankrupt” derives from banco rotto, the practice in medieval Italy of smashing the benches that merchants sold their goods from if they did not pay their debts. Unless you deal with the mafia, which has inherited some of the old Italian ways if you don’t honor your debt, today’s bankruptcy proceedings are less violent. 

Continue reading “Distressed Investing”


We live in strange times. I don’t know if this is just me, but right now with everything that’s going, and all the changes, I can’t differentiate what is a fad or a revolution.

King of Capital

I just finished reading King of Capital: The Remarkable Rise, Fall, and Rise Again of Steve Schwarzman and Blackstone by David Carey and John E. Morris. I bought the book with What It Takes: Lessons in the Pursuit of Excellence by Stephen A. Schwarzman. I figured I would get a full picture but aside from covering the history of Blackstone they are different books. I started reading What It Takes first, which is newer, then in parallel I jumped to King of Capital just to see if the story matches and I ended up finishing it first. I will eventually finish What It Takes.

King of Capital mostly focuses on private equity firm Blackstone but it touches all the big main PE players. From KKR, Apollo, TPG and others. Their stories are interconnected. The book is part history on private equity since it covers a timeline that precedes the foundation of Blackstone. But the book is mostly an encyclopedia on deals. It covers deals, deals, and more deals. If you are detail oriented, you won’t be disappointed. It provides deal value, closing dates, equity invested, profits and rate of returns, and the strategic plan behind individual investments, and accounts how they played out over time. Both authors are former writers with and they have their homework.

King of Capital was published in 2012, which started to touch on the post-financial crash recovery. I feel another chapter, or even a follow up book, could be added to cover the massive growth of PE as an asset class since publication. The industry has exploded. When the book was published, Blackstone had about $166 billion in asset under management. Today it has $618 billion and growing. That’s a 272% growth in AUM in 9 years. The funds they managed are also getting bigger. They can get $20b in commitment for a new fund by just picking up the phone. That’s a lot of money to put to work. I have to point out that the last sentence of the book is “A history of private equity in 2020 thus will have many new story threads and a new cast of characters.”

Notably absent from the book is Brookfield Asset Management (BAM). I bring BAM up because I’m a big fan of the firm and it’s a major PE player. It had $150b in AUM when the book was published. But I can understand why the book skipped over them. Although BAM has a massive presence in the US, it’s Canadian and has a low profile. The book covers the stories of KKR and other traditional PE firms. Their story is linear. The BAM story is a whole book on its own. It didn’t start as a PE firm. It was a massive conglomerate of assets that transformed itself into an asset management firm over the years under Bruce Flatt. I’m sure a follow up chapter would cover BAM because today it has over $600 billion in AUM.

I could write a whole post on the topic of PE. PE needs a PR firm. It has a bad rep. “Cost cutter, slash and burn, saddling companies with debt and dumping them, vulture capitalist etc…” I think the media is partly responsible for that characterization. Has PE firms done some unpopular things? Of course. Is it all bad. No. The true is that it has done more good than bad. But of course only hear about the bad deals. Despite the persistence of the bogeyman, strip-it-and-flip-it image, it isn’t borne out by the facts. Studies have been done on how private equity and as an industry does not harm the economy. Most of the standard knocks (e.g. job killer) have been debunked. A good portion of their profits derive from buying and selling and leveraging up to accentuate their gains. But that’s no sin. Also the notion that PE firms leave companies in tatters doesn’t stand to reason. How could a form of investment that relies on selling companies for a profit survive if it systematically damaged the companies it owned? Why would sophisticated buyers acquire companies from private equity if they were known to strip them bare? It makes no sense. 

I was an intern early in my career at a PE fund a while back. PE’s main job is to provide capital. That capital fuels the growth of businesses and communities. That money at work is institution money such as pension plans, in other words retirees’ assets.

Conclusion: Read the book if you are interested in a detailed history of PE and the rise of Blackstone.


Myanmar Kyat got crumpled around the time of the coup

Myanmar Kyat

Strange story. Sunday evening around dinner time I found a crumpled 100 Myanmar Kyat on the kitchen floor. The bill has been on the fridge for years with magnets, pictures and what not. The bill is currency left over from my travels in Myanmar back in 2012. The bill had just been another simple fixture on the fridge until I found it on the floor. That’s weird since the kids haven’t really paid attention to the bill all these years (animal magnets are more fun). I picked it up, uncrumpled it, and put it back on the fridge. Saving it for my next trip. Then it gets weirder. Next morning I wake up to the news that the military has staged a coup in Myanmar and has taken over the country (claiming election fraud, I thought that only happened in rich countries). It also occurred to me that because of the time difference (11.5hr), the Myanmar bill was crumpled around the same time as the coup (5am their time). I should probably not read too much into it but the coincidence is striking. But I can’t stop wondering how did Lexa, my almost three year old knew?

Myanmar: Democracy is fragile. I had the opportunity to visit in 2012 just 4 months after they announced they were making changes. I loved it. Beautiful country with no tourists at the time. I imagined that’s what Thailand looked like before it became a mass tourist destination. At the time Myanmar/Burma always played the international community. When they needed something, they would pretend to open the country, get what they needed, only to shut it from the world. It had a North Korea lite approach to the world with some strangeness in their actions (moving the capital in the mountains, changing the time zone to confuse the West in case they wanted to invade). But in 2012 it felt different. This time the reforms were real. I saw a great future for the country. Now I’m not sure how this will play out. Military coup is a thing in that part of the world. Just look at next door Thailand. Even if they return to democracy and open up the country again, it will be hard to trust. I reached to a friend over there but now they are shutting down Facebook for the “sake of stability” (another rich world trick). #Myanmar#Burma#democracy

Random Thoughts – After the Crisis, Opportunity

After the Crisis, Opportunity

The pandemic has created the opportunity for an economic and social reset. The question is whether politicians will grasp it. Are we too focused on repairing yesterday’s world rather than building tomorrow? The biggest danger is being short on effective action. The risk is not on the left or the right —  it’s inaction.

The Pandemic

Covid-19 has changed the trajectory of three big forces that are shaping the modern world. Globalization took a hit. The digital revolution has been radically accelerated. And the geopolitical rivalry between America and China has intensified.

The pandemic has compressed years’ worth of transformation into months, bringing with it a dramatic shake-up in how people live, what they buy and where they work. Fortunately the Internet we have is just good enough to make it happen. It’s not perfect, it’s not great, but just good enough to make it work. I don’t think we could have handled it as well five or ten years ago. With everyone on Zoom and Netflix at the same time, the whole world would have broken.


The Sino-American rivalry will continue. I don’t think Biden is in a rush to removed the tariffs imposed by the previous administration. The United-States and the world is suspicious of China. Despite for all its “vaccine diplomacy”, China inspire fear and suspicion. That means once again America will have disproportionate ability to shape the post-pandemic world. The world is splitting in two parts. One American led, the other Chinese dominated. The digital world and supply chain is designed by these two countries.
How should the US approach China? First, through diplomacy. The US need to strike a bargain with Europe (+Canada and Oceania) and form a new global alliance, binding Asian democracies into the Western coalition to counter China. Second, the U.S. and China need to send their top three diplomats on an island and workout a deal.

What’s next?

All these predictions about what the world would like post-Covid, as usual, is all nonsense. It’s just filler material. Nobody really knows. Some say we will return, eventually, to what we were before. Others say no way, we are not going back into offices and stores. But the truth will be somewhere in between. 


The good news: We will have many more vaccines in the next six months to complement the successful candidate from Pfizer-BioNTech. That is the testament to the power of scientific collaboration. Vaccines used to take 10-20 years to create, but today there are more than 320 projects, including dozens in advanced clinical trials. As teams attack the virus from different angles the work yield considerable advances in vaccine research.

The bad news: The distribution is an absolute mess. We can’t get it to people. For a world that desperately needs to be vaccinated, looking into this is a frustration trigger. 

I don’t pretend to know all the answers but I can point in the right direction: Israel. From the start they administered over 150,000 shots a day, multiple more than any other countries on earth. Let’s take what they do right and apply it.

A big difference is in their approach and attitude. Israel is in a constant war state. Their government in collaboration with the military are drilled in getting things done. Because they are surrounded by people that wants them dead for the last 70 years, they have a constant war mentality mindset. We should adapt a similar approach. Getting things done. Let’s make vaccination a giant national effort project. Let’s pool our resources in getting this done. Vaccinate day and night, weekends, including Valentine’s day, like thousand of lives depend on that effort. Our economy will come back and so are jobs. It can’t be worse than how it’s done now.
Covid-19 will not disappear but it will start to fade in the background. I’m optimistic that we will get through. Most likely a muddle through. That means getting through many obstacles but we will get there. 

Stock Market

The biggest question I get is: Are we in a bubble? Well actually no ask me anymore, they just tell me we are one. There are a lot of evidences that is pointing to bubble activity (SPACs, GME, Bitcoin, Robinhoodies, Tesla, real estate etc…) So sure they are certain sectors that are absolutely mad crazy. If a 20-30-40% correction happened tomorrow I wouldn’t be surprised. Anything could trigger that. Nobody is saying it’s a good idea to buy GameStop at $150 a share.
But overall, you could argue that we are not in a bubble. Sure stocks and assets are not cheap but some stuff looks reasonable. Look at it this way. Interest rates are almost at zero. Real interest rates are negative. Central banks have indicated they are not going anywhere anytime soon. There is no where else to put your money. And on the top of that, you have the world governments going full gun blazing on the money printing press. There is so much money in the system and more is coming. It’s pointing one way: up.


Will inflation start to kick in?

We have been lucky not to have a lot of inflation in the last thirty years (~2% official numbers). With all the money printing you would expect higher inflation and eventually higher interest rates. Anyway that’s the conventional textbook thinking. But we have been printing money for a long time without having signification inflation. Commodity prices are on the rise as the table above demonstrate. 
It seems that inflation via excess money creation is coming our way. It doesn’t mean it will, but there are credible reasons to believe it will. Will it go up long term? Or is this just a short-term bump?

The best paper and book I’ve read on inflation and prices is not from an economist, but from two historians, Paul Schmelzing and David Hackett Fisher. Paul Schmelzing looked at eight centuries of interest rate in his paper: Eight centuries of global real interest rates, R-G, and the ‘suprasecular’ decline, 1311–2018 and David Hackett Fisher with his book The Great Wave: Price Revolutions and the Rhythm of History Their work puts the present day in a historical perspective encompassing many centuries.
We normally look at the demand side, but there is a supply side too. Events, like war, famine, and epidemics destroy capital and led to inflation. Human capital is the most important. Now we have a pandemic but we also have mass money flooding the system. We are currently writing the book on how this will work out. Maybe understanding the past can teach us to avoid disaster. 

Bitcoin and Cryptocurrencies

Bitcoin is becoming more accepted. Bitcoin is not the most technology sound currency, but it’s the one most people believe in. A lot of professional investors have changed their tunes on Bitcoin and cryptos in the last couple of years. It’s becoming more widely accepted. I took a crypto deep dive during the 2017 bubble. I get it. It’s not simple but there’s something there but we are not there yet. The technology/infrastructure/legal framework to support crypto currencies as mainstream currencies is not there yet. I think in the future there will be higher crypto currency penetration in the economy. I guess we are all waiting for that “killer” app to force adaption. Nobody knows where it will come from or which currency will win (doesn’t have to be just one). My prediction: Cryptocurrency adoption through mass teenagers on some kind of wallet app with a closed system (where the app keeps the money instead of sending it to the bank) where they can cryptocurrency among themselves outside the banking system.. The catalyst could be a game like Fortnite where all the kids hangout and want to trade stuff.

My Crypto Fail Story

I got into crypto trading during the 2017 bubble. I was fascinated by the space and to really learn about cryptos you really need to get your hands dirty. So I opened an account (complicated back then) and invested speculated a little bit of money just to see what would happen. 

I opened an account with Coinbase at first. It was the most accessible in Canada but it had drawbacks. Fees were expensive and you didn’t have access to most cryptos. There was Bitcoin and another one back then. I’m sure it’s different now. I made a little bit of money with Bitcoin and then transferred to an exchange called QuadrigaCX. It was highly recommended in Canada. Fees were lower, better relations with bank, and access to many different type of cryptos. I sold Bitcoin and bought some Ethereum and triple my money in a month. And that’s the last good part of that story because it all south from here.

I eventually got bored and moved on to other stuff. Then the bubble burst and I lost 75% of my value. Mistake #1: when you are up in gambling take you gains. Mistake #2: because my Ethereum were basically worthless at the time I didn’t care much and left them on the exchange instead of having it on a drive. The exchange, QuadrigaCX, bankrupted and the founder allegedly die in India. He used the company/money/crypto as a personal expense vehicle and was living it up. His wife says that everything was on his laptop and she doesn’t have the password. And without a key you don’t have access to the cryptos. The whole story is very controversial and is still under investigation.

The kick a guy when he’s down part: Ethereum is about 10x when where I bough it and I can’t have them. Coinbase is still around and filing for an IPO soon.
Anyway if somebody sees the QuadrigaCX founder please let me know, I would like a chat.

Super Bowl LV

Is this going to be the greatest Super Bowl ever? The expectations are going to be high. As Super Bowl matchups go, it doesn’t get much better than Tom Brady vs. Patrick Mahomes. The GOAT vs the Kid. One is 43 and the other is 25 years old. That’s a 18 year gap. That’s like 6 average NFL career. It’s also weird that the Patriots are not there. 
I’m going with the Chiefs. The line is 3 points and Chiefs are favorite. The over/under is 56.5.

Tom Brady

This is Tom Brady’s 10th Super Bowl appearance and this time on a different team at 43 years old. Just writing that was weird. The guy still competes at the highest level. It seems like he’s getting better. How is the even possible? I mean aren’t you tired of getting sacked by monsters? He should be broken. 


Hockey is back and Canada has its own division, the North. Montreal Canadiens will grab the top spot.