Category: Uncategorized

Over the past decade, companies with high growth and even higher valuations have been the market darlings. So much so that many investors, even at the highest level of institutional investing, have eschewed valuation by arguing that company quality drives shareholder returns over the long run. It’s not wrong, but it requires an investor to be right over a very long term horizon (e.g., not just right over the next five years, but the next fifteen years).

While in the moment, it may seem that these insights have a lot of merit, as backward looking performance supported it. The pariah of this growth cycle is Cathie Wood and the ARKK ETF, which is down over 60% from its high. But that’s for mostly retail investors. Yesterday it was reported an investor who has been making the rounds on podcasts over the past year, and heavily praised for their growth investing strategy is liquidating:

Looking forward, I rarely find macro commentators interesting, as they typically make definitive prognostications that most often aren’t correct. But I listened to a podcast with one who surprisingly doesn’t make strong predictions, just offers a set of potential outcomes. To me that’s helpful just to understand what is possible.

In that he speaks of the uncertainty as it pertains to the global energy linkages, both the payment flows and physical linkages. Specifically he acknowledges that there are Lehman-ish elements to the current situation, in that we don’t really know what breaks, if anything, when energy (and other critical commodities) flows out of Russia are fully shut down. While the odds of something catacylsmic I believe are low, it’s good to understand that there’s non-zero risk of something we don’t understand within the commodities realm that starts to break things. After all, I tend pray at the altar that “we won’t know what causes the next big one a priori.”

It’s always good to take a break once in a while.

While I am not literally fishing today, instead of doing some finance related work I watched a part of the new Kanye documentary on Netflix. Kanye was one of my favorite rappers at one time, so it’s incredible to see the behind the scenes of that era.

It’s also sunny for the first time in a while, so a good time get out with the kids and get some real Vitamin D.

The unprecedented economic war already being waged globally is jaw-dropping. Virtually all large cap companies have stopped or abandoned service in Russia, from discretionary providers (Ikea) to core infrastructure (Visa, Mastercard, Amex). Companies like Boeing have stopped selling spare parts to Russia while abandoning titanium mining agreements that provide raw materials for said spare parts globally.

Globalization in some ways is a deflationary force. Jobs shift to lowest wage locales, supply chains shift to lowest cost locales, and at the end of the day, the consumer gets a far lower price. If countries, including western nations, must now consider that the locale in which they utilize to lower cost allows for true economic independence from adversaries, unquestionably costs must rise as lowest cost locales don’t always fit that description. China is a massive US trade partner, and while it seems relations are stable now, one may wonder how quickly western companies (and China) may react if it eventually sides with Russia economically as an ally. The ramifications both logistically and economically to replumb how companies operate are enormous.

While the prior discussion is broad strokes, the impact from exclusion of Russia from the world economy via sanctions is still clearly unknown. The global interconnectivity hasn’t been tested in such a way and thus the potential effects are largely unknown. Furthermore, and on a more positive note, humans are highly adaptive to new situations. Changes that, before the fact, seemed devastating or impossible often get solved via the ingenuity and creativity of humans in desperate times. The Covid vaccine is a prime example.

To conclude, as an investor, I think that fear in the market is high right now as I have discussed ad nauseum, the probabilities of outcomes have widened substantially. Some will invest substantial capital today and make good money. Some may do the same and impair capital. Keep calm and carry on.

It is really hard to focus on anything economically without including the war in Ukraine. Really hard. Why? Because the set of knock on effects are so wide ranging and large, both known and unknown, that many or most businesses may be impacted.

With commodities not just rising, but skyrocketing – a recessionary force is virtually guaranteed now. M&A typically is deeply cyclical, being highly active in the most frothy of times and dead during periods of deep negativity and uncertainty. The small / medium cap IPO or SPAC market has been virtually shut for almost three months now. Large scale M&A is almost certainly slowing down.

I’ve been keeping watch on a number of banking businesses, because they have great founder managers, pay out a large share of their earnings as dividends, and trade at lower multiples due to cyclicality and human capital flight risk (e.g., your assets can walk out the door, literally).

Their stock prices have fallen dramatically. They will likely go from peak earnings in 2021 to more trough-like earnings in 2022/2023. Some have countercyclical units such as large restricting teams.

In any case, I’m taking a cautious stance to purchasing these securities as I think the odds of a recession are growing by the day. But if a recession becomes fully priced in by the market, these stocks may overshoot dramatically on the downside and present good buying opportunities.

As this war continues to intensify, the probability of economic side effects that we don’t know about in this moment rise in tandem. It’s clear that Putin is on the edge of rational at best, and wildly irrational at worst.

While its impossible for a small investor like me to deeply understand an incredible complex situation let alone the knock on effects economically, the best one can do is own “antifragile” companies.

These are businesses that have management teams that thrive in difficult times, run overcapitalized balance sheets, and exhibit strong patience. But the worst of times can hurt even the most prepared companies. Thus having cash on hand as a buffer to a deteriorating future expectations and prices is key to keeping calm.

While I hope there is no major downturn, the probability of one is likely far greater than it was only a few weeks ago.

Ho Nam of Altos Ventures described his philosophy on growth yesterday. I wish more companies took this approach, especially in earlier stage companies. Growth for the sake of growth rarely works. Growth as an output to the problem solving actions of a company works.

When you tell the public that you are going to grow at a certain rate and don’t know how you’re going to get there with strong certainty – things get bad quicky: