Here’s my missive on my recent trip to California. Because of its large size, I decided to break down in different posts.
I spent two days in Los Angeles to attend Charlie Munger’s Daily Journal meeting and various related investment events. Then I headed to the San Francisco-Silicon Valley area to have a better understanding of what’s going on in that special part of the world. Here are the posts:
I use Google every day. I use its search engine, gmail, Youtube, Chrome, cloud, photos and calendar. My phone runs Android. Google organized my life. It’s hard to imagine a world without Alphabet-Google. Today, Google is a global icon that regularly pushes the boundaries of innovation in a variety of fields.
I had the chance to visit their campus. Google’s campus is famous. Google is well known for doing things differently. Not only it is an awesome working place, it is famous for throwing tons of perks at its employees. Free gourmet cafeterias, massage rooms, nap pods, haircuts and onsite. Why would a company offer so much? Well they want to keep their employees happy and productive. They put in 12-14 hours day and they need them at their best. It’s good to have your employees on site. I worked for a company that hired a catering service for lunch because leaving work site brings too many distractions. Another reason for the generous perks is that the Silicon Valley area is competing for their services. Their talent are highly sought after, not just in the Valley for everywhere in the world. The lesson here is to attract smart-creative people and give them an environment where they can thrive at scale.
Google organized the world’s information. This is an organization that has improved our lives. The world is certainly a better with Google. Alphabet’s business model is to collect data on users and sell that data for targeted ads. Alphabet, already one of the largest companies on the planet, seems to be defying the laws of physics by continuing to grow like a startup. Despite being over $100 billion, revenue is still growing at a rate of over 20% per year. Here are some financials: Continue reading “Alphabet (Google)”→
Perhaps the strongest thread that runs through the Valley’s past and present is the drive to “play” with novel technology, which, when bolstered by an advanced engineering degree and channeled by astute management, has done much to create the industrial powerhouse we see in the Valley today.
— Timothy J. Sturgeon
I didn’t have official business in the San Francisco Bay area but I wanted to go see for myself what is going on in this part of the world. There’s something truly unique going on there. I had to go. Some of the companies that have a major influence on our life are all located in the area. Silicon Valley, the nickname for the region, is populated with the Google, Apple, Facebook, Amazon, Netflix and Intel of the world. Even traditional brick and mortar businesses like Walmart have a presence with a tech lab. I don’t think we realize how much these companies have penetrated our daily lives. We use their products all the time. We use our iPhone to go on Facebook or Youtube. Google Maps to get around. On a flight, Netflix and the iPad are great at averting a kid crisis. Our methods of communication, work, and the way we get our entertainment are all in the hands of a couple companies. And is it a coincidence that they are all located in the same area? How did that happened?
Silicon Valley is a unique place. It’s a place of dreamers. The belief is that if you can think it, you can code it. And if you can code it, you can make products that will improve our lives. Silicon Valley has the ability of attracting the smartest brains. The region has everything to gets things done. Money is not an issue with its legions of venture capital funds looking to fund the next big revolutionary idea. Some of the best schools in the world, Berkeley and Stanford, are located there. It attracts and retains some of the smartest people in the world. Silicon Valley has created this virtuous circle of attracting money and brains that build companies that improve our lives. Continue reading “San Francisco Bay Area – Silicon Valley”→
We all have seen the picture. The picture. The one that features Starman clad in a SpaceX astronaut suit. It is nothing short of epic. Musk’s SpaceX launched the Falcon Heavy rocket to much fanfare. The 27-engine behemoth is the most powerful rocket in use today. Because Musk though the launch wasn’t exiting enough, he put his own cherry red Tesla Roadster in the rocket to be released into space. There’s a live video feed of the Tesla floating through space.
If you work in marketing, I wouldn’t be surprised if your clients ask you to have a “stunt” marketing campaign with a $5,000 budget.
Its successful launch was a significant step forward for SpaceX and Musk’s eventual goal of sending people to live on Mars. President Kennedy was fixated on the moon. Musk is fixated on Mars.
I had the opportunity to visit the Tesla factory in Fremont but it didn’t work out. There are plenty of documentaries on the factory such as this one (Youtube).
I have written a post on Elon Musk after reading his biography. Musk and his accomplishments are an incredible story. We need more Elon Musk in this world. Musk has his share of critics. But he is also an easy target. I have no investment in Tesla and I don’t plan too. I would like a Tesla roadster but there’s no way I’m touching the shares. I can’t justify its valuation (TSLA). Tesla is currently trading at a $60 billion market cap and an enterprise value of $70 billion. And it makes no money. I know this is a bet on the future, but let’s say that once it is profitable, what will be its margins? 5-8%? I haven’t got into its financials. Tesla has a lot debt, losses, and burns a lot of cash. If you think its financials are bad, the critics are trashing the new Model 3 that just came out. The quality of the car has been compared to the 1990s Kia. In a normal rational world, none of this is good for the price of a stock.
So why, knowing what we know, is Tesla trading at astronomical levels? Tesla’s shareholders are like members of a religious cult. They don’t invest based on fundamentals (things like profits, cash flow, and assets), but instead the investment is based on faith. They believe that Tesla will revolutionize the world and they want a piece of the action (or wealthy). In my mind, they have no idea what’s about the hit them. But as long as the capital markets are there to support Musk’s vision he might succeed in accomplishing it.
I was in town on business and I only stayed two days. I need to come back to spend more time. I liked LA. I enjoyed my short stay. Here are some observations.
Ask locals what is the population of LA and you will get different answers. There’s the official count which is 4 million people, according to the Census Bureau. And then there are the off the book numbers that range from 12 to 17 million. The answer varies on who you ask and what you consider to be Los Angeles. If you include the greater LA area, the number jumps to 10-12 million. If you add illegal aliens, we could be taking about 17 million. Nobody really knows because how do you know how many illegals are there? It happens to be thaT Los Angeles is a sanctuary city. While there’s no clear definition of what a sanctuary city is, it understood that it limits local law enforcements cooperation with federal authorities. In other words, city employees are not assisting Immigration and Customs Enforcement (ICE) in enforcing federal immigration laws. Sanctuary cities are controversial and Trump has promised to crack down on them. It’s estimated that there are between 5 to 7 million illegal immigrants in LA. It’s near Mexico, the weather is nice, and it seems like everybody speaks Spanish, so why not immigrate there. LA is a majority-minority city. Latinos and Asians make a large percentage of the population. LA also has a huge homeless population problem. The official count underestimates L.A.’s homeless population according to a study. So who knows how many people are in the city of Angels.
What is Los Angeles?
If you tell somebody that you are going to New York, you are probably referring to Manhattan. Or else you would say I’m going to Brooklyn or Long Island. If you are going to LA, it’s not exactly clear where you are going. Los Angeles is a collection of neighborhoods. There’s Hollywood, Malibu, Beverly Hills, Inglewood, Anaheim, Compton, Santa Monica, Pasadena, Long Beach and many others. Logistically speaking, these neighborhoods don’t connect well. People in Pasadena don’t hang out in Inglewood and so forth.
There’s a downtown. Sort of. LA has been investing a lot in the last couple years to create regenerate downtown. The reason why LA is structured the way it is today is due to the way it was grown. LA’s growth exploded in the post-World War II suburbanization, thanks in part to defense spending. So its growth was sprawled out resulting in all these different neighborhoods. As the move to more suburban neighborhoods continued, the city’s population surged. Signs of decline in the central city, however, were becoming apparent. Downtown LA has declined in metropolitan importance for decades.
But in the last couple year gentrification began to take hold in downtown. I was only in LA for two days and I spent 90% of my time downtown. It was nice and clean but unfortunately it has a major homeless problem. I found that even though it was nice, it lacked “life”. I don’t have the exact words I’m looking for. They have this new art district. It’s beautiful. But it doesn’t feel organic. An art district has to look like it has grown on its own. You can’t put a painting up and call it the art district. Just like when there’s a Chinese restaurant that opens on your block, you can’t just call it Chinatown. A local told me that you only go downtown if you need to, which is like never.
When I visit a major city, I like to get a vibe of the sports scene. In LA, the Lakers are #1 by far. It’s a Lakers’ city. The Dodgers come in 2nd. After that it’s college sports and the Clippers. When I asked somebody about the LA Kings (NHL), he thought I was talking about the Sacramento Kings (NBA). Nothing on soccer and zero mention of two NFL teams they have. After twenty years without a team, they now have two. You probably heard about the indifference toward the Rams and the Chargers in LA. The moves looks like a failure at the moment, but let’s give it some time. They will have a new stadium in 2020. My guess for the failure is that LA is a neighborhood city, so they probably don’t have the sentiment that its “their” team.
I consider both current mayor Eric Garcetti and former mayor Antonio Villaraigosa great presidential candidates, in 2020 or later. They have done a good job with LA. Their diverse background could provide them with a broad appeal. Also California Lt. Gov. Gavin Newsom could be an interesting candidate. You can’t count out California Senator Kamela Harris which is increasingly positing herself for a White House run. It could be a crowded race.
I want to introduce a new section to the blog: The Investment Collection. It’s simply a collection of links and resources that I found interesting. I will try to update it when I have time. Why am I doing this? First, I wanted to gather some of the most important investment material under one roof. Second, somehow stuff gets lost on the Internet. The resources are not simply about investing. It is about becoming a better human being. Learning from the success and failure of others is the fastest way to get smarter and wiser without a lot of pain.
The best thing a human being can do is help another human being know more. – Charlie Munger, Berkshire Hathaway Annual Meeting, 2010
Here’s the full stack from the Barron’s Round Table. It’s a great read to start the year. The first part focus on the economy and the second part are the picks. This is a long read, so have a good weekend. Enjoy!
*None of what you are about to read is investment advice of any kind. You shouldn’t buy any cryptocurrency without deep personal research and consideration. Again, this is not investment recommendations.
Euphoria: is an affective state in which a person experiences pleasure or excitement and intense feelings of well-being and happiness.
Economic Bubble: When the prices of securities or other assets rise so sharply and at such a sustained rate that they exceed valuations justified by fundamentals, making a sudden collapse likely (at which point the bubble “bursts”).
My last Bitcoin/blockchain post (Bitcoin Mania) has received a lot of attention. I talked about the forces that are fueling Bitcoins to record level. For many Bitcoin seems the easy path to riches. This is a pure sign of a bubble. However a bubble doesn’t pop just because you spotted one. You need a catalyst that will trigger the crash. Before we get to that I want to mention a few examples of pure irrational behavior related to Bitcoins, just to get a sense of how absurd the market can be. You can replace the word Bitcoin with dotcom bubble, 2007 real estate bubble, or the 1634 Tulip bubble if you are old enough. The overvalued asset might be different but the composition of the bubble is the same.
At the moment, there’s only one way you can make money with Bitcoins; you need somebody to buy it at a higher price than you (Greater Fool Theory). I buy an overvalued asset with the anticipation of selling it to other speculators (the greater fools) at a much higher price. Basically you need somebody more stupid than you.
Pole dancing instructor Dee Heath is riding the surge with her fitness business in western Sydney. She has spent $5,800 on Bitcoin since July and has more than tripled her investment.
“Look, I love pole dancing but lately my passion has definitely been Bitcoin,” she told SBS News.
She is now dedicating her time informing would-be Bitcoin investors about navigating the world of cryptocurrencies […]
“The good thing is when it goes down, you can buy some more, and you know it’s going to go up at some point.”
The message is Bitcoins = Path to Riches. If an Australian pole dancer is making it rain, you can too! Nobody wants to be the poor pole dancer. Expect more pole dancers to get to fuel this bubble before less. In behavior finance this phenomenon is called herding. We mimic the behavior of our surrounding to feel better and to fit in. It makes us feel more secure because everybody else is doing it. In the movie The Big Short, Steve Carrels figures out there’s a bubble in the housing market after interviewing a stripper in Florida. It turns out all her strippers friends are on it too (Youtube NSFW):
In finance portfolio managers have very similar investments because they are compensated on their performance relative to peers. You don’t want to explain to your investors every three months why hot trendy stock ABC is not in your portfolio like everybody else.
While I’m on the topic of strippers, there’s now the world’s first Bitcoin strip club, The Legends Room in Las Vegas. According to the website The Legends Room is a world class Las Vegas gentlemen’s cabaret re-imagined using blockchain technology. The “club” has its own virtual currency and feature Bitcoin ATMs within the club. Instead of pulling out cash, you’re literally buying digital coins. You put money into the “ATM,” hold up your phone, and the machine sends bitcoins directly to your mobile device. Now there’s an army of adult entertainers getting a degree in cryptocurrency.
Here’s another example that brings back memories of the dotcom bubble when any old company could slap .com on the end of their name and see their stock levitate.
Failed biotech Bioptix Inc recently changed its name to Riot Blockchain Inc. (RIOT). Below is the stock chart since the change:
RIOT is not alone. Other companies have shown that a foray into the cryptocurrency space is often rewarded by investors, at least initially, as the astronomical increase in the value of virtual coins has lured everyone from big banks to startups. This trend will also get worse before it gets better.
There are strange stories too such as this one: Rare Pepe Blockchain Cards Have Produced More Value Than Most ICOs. I’m still trying to wrap by head around this. Rare Pepe is based on an internet meme called Pepe The Frog that has been around since 2005 and became popular during the 2016 election. Over the course of 2017, there have been a lot of blockchain projects, and the Initial Coin Offering (ICO) craze has been off the charts. Most ICOs are pump and dump scheme, but this Rare Pepe one is successful for now. Rarepepes are digital trading cards.
These are some of the few examples I came across since researching the crypto space.
Like I previously explained, my guess is that Bitcoins is most likely to go up before it pops. There will be more people like the Australian pole dancer getting involve before they are less. Easy money is addictive and contagious. This will get bigger before it gets smaller. Everybody is talking about Bitcoins but only a minority has managed to dip their toe in the action. It will eventually get main stream. The fear of missing out will drive people to get involved. Eventually the government will have to step in and that’s when the party is over. It will be particularly damaging when it burst because there were no assets underpinning its price.