Euphoria

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 TheDeal.com 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

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.

China

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. 

Vaccine

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.

Inflation

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. 

NHL

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


Cheers,

Brian

Financial Sources

After a small break from blogging, I’m back for 2021. I’ve plenty of material to write about. It’s more a question of getting to it.

The pandemic is a mixed blessing. The good: I’m at home with my wife and two young kids (two and six years old). It’s great to spend time together. I’m there for all the little moments. Life goes by fast. The bad: I’m home with my wife and kids. It’s hard to get anything done. Small children are the equivalent of having a F1 tornado in your house. But when you have to get something done you do it.

I recently had a conversation with a friend which form the basis for this post. He’s getting into investing and wants to know where I get my financial news. It’s a good question. Great investment ideas are hard to come by. You would have think that with the Internet it would have been easy to stay informed. But just like current event, it’s a mess. The links below are a mix of free and pay resources (pay-wall or metered). Each source has its pros and cons. There are diverse platforms and website with their own nice and approach. Also the order below is totally random.

  1. Seeking Alpha
    • It’s one of the better platform. I’m an occasional contributor. There are news and financial analysis. It’s strength is covering under-followed companies. Part of the website is free and some you have to pay for. The format often change.
    • Be careful: I suggest you find and follow good authors. There are great authors that does great research. Their track record speaks for itself. Like anything else there’s a lot of junk out there and Seeking Alpha is not immune. Not every idea is a barnburner. You need to filter and do you own research.
  2. Barron’s ,WSJ, Bloomberg news, Financial Times: Good financial news and investment analysis. You have to pay and they often have promotion.
  3. The Economist: One of the better publication left. Not pure financial news but it offer deep analysis of the weekly news and world issues.
  4. Value Investor Club (VIC): This one has been around for a while. It was co-founded by Joel Greenblatt. You explore the idea section with a delay. It’s a “club”. You have to propose a good idea to be included. But like I said, you have access to the idea section and analysis.
  5. SumZero: It’s a professional community of investors. Facebook meets Seeking Alpha meets LinkedIn. The members are vetted to make sure they are professional.
  6. Koyfin: Good financial platform. I like it and I only been using it for the past year. There’s constant updates. It’s positing itself as a Bloomberg killer. I’m using it for free right now. Let’s see.
  7. Morningstar: I have the full version with my broker. They have good data and ten-year numbers. They have good articles too.
  8. Twitter: Twitter can be a savage place. It’s wild. But you choose who to follow and a well curated list of people to follow can be a great source of ideas and discussion. I don’t want to give names because there’s no end. You need to pick a genre and explore. Lets say you are into real estate investing, well you can find a decent list of people that have high level discussions. A whole post could be dedicated to this and I’m sure a quick Google search will bring fruitful results.
  9. Yahoo Finance: After all these years, it’s still a go to for quick stock prices and portfolio. But the news section is brutal. Their stats and numbers are ok but very often you have to calculate them yourself because they are often off.

Others

  • Reddit, Podcasts, Blogs, Substacks, Newsletters, WhatsApp/Slack/Discord groups

Blog posts could be written about the suggestions right above. Again, just like Twitter above, you need to find a topic or sub-genre and start exploring. Some are free. Some you have to pay. Just like anything else, if you put the time and work into it, you can build a pretty good system for news, information, and great investing ideas.

Happy 2021

Charlie Munger Caltech 2020 Notes

Yesterday, December 14th 2020, Charlie Munger did a Zoom call with Caltech. I think the last time he formally spoke publicly might have been at the Daily Journal AGM back in February since he didn’t Berkshire’s AGM.

Caltech decided to celebrate 2020 Distinguished Alumnus Charles T. Munger. Munger attended Caltech in 1944 where he studied meteorology. In a year that mixed dramatic social and worklife changes with record-breaking trends in the S&P and the Dow, has there ever been a better time to hear Munger’s perspective? Caltech had a conversation for about an hour.

I didn’t post the video yet. Caltech was supposed to publish it on its Youtube channel but it’s not there at the moment. You can find copies on Youtube but the quality is subpar. If the official Caltech copy ever surface, I will add it.

The notes below are a combination of mine, Tren Griffin, and Nick Henderson. Thank you.


  • Munger sees virus impact dwindling in about a year as the vaccines are widely distributed. “They’ll spread these vaccines over the world so fast, it’ll make your head spin.” Munger actually spoke just hours after some of the first vaccine shots were delivered in the U.S. 
  • Retailers: are under heightened pressure during the pandemic, were already in a tough situation because of the growth of e-commerce. “Certainly it’s been a very difficult place to make money because of what the internet has done,”
  • Future market returns: Munger expects equity-market returns to be lower in the next 10 years compared with the previous decade. “The frenzy is so great and the systems of management, the reward systems, are so foolish,”
  • QE and fiscal deficits: Munger urged caution with the levels of quantitative easing and large government deficits seen in recent years. “We’re in very uncharted waters,”
  • Warning: “Nobody has gotten by with the kind of money printing we’re doing now for a very extended period without some trouble and I think we’re very near the edge of playing with fire.”
  • “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid instead of trying to be very intelligent.”
  • Key ingredients for successful investing: “You have to know a lot, but partly it’s temperament, partly it’s deferred gratification, you gotta be willing to wait. Good investing requires a weird combination of patience and aggression and not many people have it. It also requires a big amount of self-awareness about how much you know and what you don’t know. You have to know the edge of your own competency, and a lot of brilliant people think they’re way smarter than they are. And of course that’s dangerous and causes trouble”
  • Charlie has said many times that investing is harder now. He said that again today. When he started out there was lots more stupidity. If investing was as easy as following a formula there would be lots more billionaires who made their fortune investing than there are today.
  • Never stop learning.
  • Try and benefit from a tail wind. People from Harvard and Stanford don’t go to work at Costco, they should think about it, it’s a rising tide (or at least it was) and your competition is not going to be that strong (inside of Costco).
  • On business getting “clobbered” over time: “Over the long term, the companies of America behave more like biology than they do anything else. In biology, all of the individuals die, so do all of the species. It’s just a question of time”
  • Technology: “Technology is a killer as well as an opportunity.”
  • VC tech firm: “The most remarkable investment firm in America is probably Sequoia. That venture-capital firm absolutely fanatically stays right on the cutting edge of modern technology. They have made more money than anybody and they have the best investment record of anybody. It’s perfectly amazing what they have done”
  • Apple: “Think about what Apple is worth compared to John D Rockefeller’s empire. It’s been the most dramatic thing that’s almost ever happened in the entire world history of finance”
  • China: “Who would have guessed that a bunch of communist Chinese run by one party would have the best economic record the world has ever seen.”

How to Build a Startup

This is the approach I would try if I was starting an AI software startup from scratch. It’s more of a strategy than a business plan. It doesn’t have to be complicated (easier said than done). Here’s the template. This is the approach I would try if I was starting an AI software startup from scratch. It’s more of a strategy than a business plan. It doesn’t have to be complicated.

It’s easier said than done but it’s easier to play McKinsey and making real decisions. Here’s the template.


Phase 1 – Have a workable product

Have something to show. A prototype. Everybody has good ideas and good intentions (e.g. peace on earth). Executing is the important part. You need to deliver something to demonstrate that the product could  be applied successfully to solve a complex problem (or save money, or to deliver substantial economic value in a short period of time).

“AI-X: Our application address a wide range of predictive analytics use cases. The app is designed to integrate and process highly dynamic data sets from networks (e.g. sensors, satellites, enterprises), and enable advanced machine learning capabilities.”

How do you get started? Do a trial. It’s like those sample stands at Costco or when you take a car out for a test drive. Trial projects typically consist of several phases including project kickoff, design, data integration, configuration, validation and final demonstration.

Not sure where to start? Study your potential client/customer. You have a deep understanding of your users’ needs. Successful startups understand some group of users and can make what they want. Make something people want. It genuinely need to delight its customers. Otherwise it will never get off the ground. In a market economy, it’s hard to make something people want that they don’t already have. That’s the great thing about market economies. If other people both knew about this need and were able to satisfy it, they already would be, and there would be no room for your startup. So you need to address either a new need (possible uncertain need), or a new way to satisfy one. Can’t find a need? Look for problems and solve them.

Don’t try to do too much. You lose focus and important resources. This sells well and attracts attention. Do one thing and do it very well. People are attracted to success and VCs will start replying to emails.

Stripes, Shopify, Square all started with a single product addressing a problem, then expanded to solve other business needs.

Phase 2 – Customer concentration

Get a few high profile clients. You want to focus on “lighthouse” customers. They are a trophy you can display. If bank X likes us, then that’s a seal of approval. Try to get clients from a few different industries (banking, energy, industrial, military, government etc..). Get them as partners if possible. If you are trying to save the planet, it will look good for them in their glossy ESG report. It also gives your product credibility. Having a solid partner sends a signal to the market “hey, this is important, pay attention.”

Phase 3 – Scaling the business

After having a few juggernauts clients and establishing your credibility, start going after middle-sized companies. The business is not a startup anymore. It’s on the path to be structurally profitable and cash flow positive. If you are doing financing round, by this time you should be a hot ticket.

Virtuous Circle – How to Make Flying Cars

Ever heard of the virtuous circle in equity financing? A new startup, let’s call it the Wright Motors Company, has big big dreams. They want to make personal electric flying vehicles (EFVs). Wright Motors believes that in the future EFVs will replace ground vehicles, an old technology. To accomplish these dreams Wright Motors needs a  lot of capital. It will need billions of dollars. 

To raise money Wright Motors decides to sell shares. EFVs chances of success are low and it’s a very risky investment. Wright Motors makes big promises and gets investors super excited. Wright Motors claims that EFVs will unclog our roads, free up crucial real estate taken by parking lots, revitalize the economy, create smart green jobs and provide us more with the commodity we need the most; time. No more dirty polluting clogged gridlocks! If you want a piece of the future, the opportunity is now. Once EFVs gets the attention of the mainstream media, the stocks will be expensive and it will be too late. In five to ten years, you want to look in the mirror and say “look at the wise decision I made. My capital has contributed to a better world and my family is better off.” You want a piece of the American dream don’t you? You don’t want to be left out. You will be the coolest person at barbecues. Electric flying cars beat talking about Treasuries.

Investors are excited and Wright Motors raises a lot of money through selling shares. Now the hard work begins. Wright Motors needs a product, engineers, scientists, smart workers, parts and equipment, and a massive factory. Once it has accomplished these things, it will need a sales team, marketing, accountants, lawyers, customer service, and a service team. And more money.

After all success is never a straight line. But there’s a lot of enthusiasm surrounding the company. The media is hooked on the story and Wall Street is always looking for the next flavor of the month. Wright Motors taps Wall Street and manages to raise billions. Banks pocket millions in fees. And rather than punish the company for diluting its shareholders, the market sends the stock higher. It’s a great story after all.

Finally, Wright Motors announces that they have a working EFV prototype. The stock surge on the announcement and Wright Motor issues more stocks. The money raised goes toward building the factory and production should start soon. The stock is up on the good news and more shares are issued. 

For a company with no revenues for the foreseeable future the stock looks expensive. But valuation is based on the future cash flow, or future projections in the case of Wright Motors. So Wright Motors makes the story more compelling. The better the story the more excited the investors, the higher the stock price. You are investing in a piece of the future after all. 

Wright Motors burns all its cash and needs more money. They follow the script which is the higher the stock price the more money I can raise. Wright Motors announces they will enter the China market. China! That’s a billion plus customers! Now the stock is in complete frenzy and Wall Street goes to work.

A silicon valley technology giant is interested in acquiring Wright Motors and makes an offer. Wright Motors rejects the offer on the basis that the price is too low and opportunistic. After all it doesn’t take into consideration the potential ride-hail service and a future robotaxi launch. The stock surge some more and more shares are issued to make the vision happen.

The latest offering boosted Wright Motors’ market capitalization to over $250 billion, ahead of traditional plane manufacturer Boeing. Wright Motors is now among the world’s most valuable manufacturers in the world. The ascent of Wright Motors’ stock helps shore up the balance sheet and fund endless aspirations. Everybody wants a piece of the action. Wright Motors is now teasing another new factory and governments from all over the world are competing for the prize. Some are offering to foot the bill in addition to massive tax breaks. Here comes the kicker: This new factory will manufacture a flying truck! It will revolutionize the way we work hard!

Wright Motors follows the script and lets the virtuous circle roll! As long as investors are believing in the vision, the capital market will be generous. Excitement drives the stock price up, a higher stock price raises more money, which drives production, which drives a higher stock price, which raises more money. 

Rinse, repeat.

Capital Allocation – How to think about excess cash?

This is a snap shot taken from Quality Shareholders by Lawrence Cunningham. The book elaborates on the actions management can take to attract high quality shareholders. These are the shareholders you want. They load up and stick around.

There is a section in the book on capital allocation. Capital allocation is most important decision management has to make. A lot has been written on the subject. Maybe I will write a post on the subject soon.

I like the figure above. I’m visual in nature. The framework highlights the capital allocation decision making process.

A business generates excess cash. What action you take with excess cash will often determine the future returns of the business.

  1. Do you re-invest in the business?
  2. Do you pay down debt?
  3. Do you repurchase shares?
  4. Do you distribute a dividend?
  5. Do you make an acquisition?

Making the right decisions is not always straightforward. But having a structure framework in place can guide management towards better decision making. And better decision making can led to superior returns.

The Big Shift: The Future of Renewable Energy

Covid-19 is the current global crisis taking center stage and we will prevail. However there is another global crisis that has been decades in the making and that is climate change. Climate change is one of the world’s biggest, if not the biggest problem that we are facing. And it’s coming real soon to a theater near you. Climate change is hard to quantify and with so many variables it’s quasi impossible to predict any events. However we don’t need another study to remind us the “once in a century fire” is now the “once a multiple times a year fire”. The “fire season” is now a permanent part of the calendar. Climate change impacts everything. From the food we have on our plate every day, the air we breathe, our quality of life, and our national security. It’s a generational challenge with no quick fix.

On a more positive note we are closer to responding effectively to it. This post is about the notion that the oil era is winding down and that renewable energy would soak up the bulk of the entire energy industry’s investment dollars. The trend to move away from fossil fuels is real. And it’s renewable energy that’s taking shares of the pie. The global shift to renewable energy is a big step in the fight against climate change. Renewables are a form of “disruption” and I apologized for using a word that has been so overused.

Producing clean energy is not a novel topic. Thanks to innovation we are at a turning point. The technology has improved and cost has fallen. Innovation solves problems. Economics is central. Great innovations see their cost decline over time, creating real demand. The cost to produce renewable energy has fallen dramatically in recent years, to the point where it has become attractive next to fossil-fuel generating assets, particularly coal and oil. According to Lazard, the costs of solar panels and batteries have dropped by more than 89% in the past decade. Solar is substantially cheaper than it was even five years ago. The wind and solar power in Arizona that Fortis generates now costs less than 3 U.S. cents per kilowatt hour.

Continue reading “The Big Shift: The Future of Renewable Energy”