Tag: Investing

A friend of mine posed the question yesterday – “how do I make money from this EV transition?”

My immediate thoughts were words like: popular, crowded, challenged business models, etc. Somewhat the equivalent of playing soccer and trying to score a penalty kick by arcing the ball around 3 rows of defenders, three goalies, and having the wind blowing strong in the right direction to score a goal.

On the way home I tried to challenge myself to think any ways that allows an investor to shoot the ball from a few feet out of bounds behind the goal where nobody is looking, and perhaps bounce it off the foot of some unassuming goalie only to see the ball bounce backwards into the goal. What I mean by this is, is there a way to play the trend that nobody is looking at today or, is there a way to play that most investors cannot play?

While a bulletproof answer to such a difficult question of making money in the EV transition is elusive, I had one thought along the lines of the shot behind goal…

Coal is an un-investable asset class. It is universally hated by investors and the public. Banks have entirely stopped lending to the sector, sending companies packing to Chapter 11 or forcing them to run debt-free. The terminal value of these businesses is valued at near zero.

Never-mind these businesses are printing cash today as a collision of geopolitics and oil and gas underinvestment has driven a resource shortage. Most management teams continue to focus on coal exclusively, as they don’t have a pathway to anything else. However a select few are trying to morph to survive the energy transition.

These companies are good at one thing, mining. In a global economy, mining is achieved at lowest cost in resource rich countries with a poor population. However, the geopolitical regime of today is not the same as the one of only a few months ago. And if one truly believes the EV transition will come faster and bigger than people imagine, new possibilities emerge.

One coal management team is specifically scouting renewable energy opportunities, to which in the past I had always thought, “this team has no advantage at anything in renewables versus the crowd of renewables specialists.” Enter the Q1-2022 earnings commentary in response to a question:

To that end, I think an opportunity that may be interesting is companies that are off limits for most investors (ESG negative companies), that are trading at undemanding valuations (the above company happens to be trading at something like 3-6x earnings with a 10%+ dividend yield), and making potential inroads to use their skills to produce raw materials that power the renewable economy.

While not the perfect shot on goal, an investment like this may give the downside protection of real cash earnings at a low multiple and upside optionality of the upcoming climate transition. And importantly, most investors either cannot or will not make an investment like this, handicapping the odds of not losing money / giving a shot at making substantial money more in the favor of the investor.

Making money in a crowded field is hard, but certainly some investors will make it happen, either within the crowd or just outside of it.

Disclosure: This is not investment advice, do your own work.

Generally speaking as I’ve noted in the past, when the next downturn happens there will be a slew of people who said they called it. In reality few accurately predict, let alone prepare for, the specific downturn that happens next.

As of now, fear seems high. Lots of uncertainty about war. People doubling down on commodities after they have had a huge run. Inflation shocking multiple generations from old to young. Deep social and political division. Etc. Few people are bullish:

But certain barometers of economic health are telling a different story. One recession indicator is going the other direction, the 10Year – 3Month US government yield spread (red line):

High yield spreads are low and steady:

And the consumer is in good shape:

The divergence from what people’s expectations are for the future (mayhem!) versus what certain core indicators have been registering in, may mean one thing, volatility. And generally speaking volatility along with apprehension is not a poor time for investors or companies to be taking advantage of select investment opportunities.

Bill Brewster is a private investor who runs a podcast, The Business Brew, of which I’ve found a number of episodes to be interesting (principally his first two, Mike Mitchell and Dan McMurtrie). I feel some level of kinship with Bill, as he is investing for his own account in support of his lifestyle. But more specifically, he isn’t a traditionally trained financial analyst, more a person who has stumbled through the knowledge curve via self-education and “own-goals” (mistakes). In that, I’m much the same.

However at this point, it seems that Bill is experiencing a period of self-doubt:

This is where I believe that my own thought process has diverged from Bill. And I think it’s because we have different goals. His, without asking him directly, appears to be to beat the market. Mine, is to generate consistent and growing investment income from a diversified pool of investments.

I’m not looking to regularly check the chart of my performance versus the S&P500. I regularly research existing and new investments across debt / real estate / public stocks, tally up investment income as it comes in, and evaluate earnings of our portfolio companies and watchlist companies quarterly. The output of this is a clear budget of what we can spend for the year without excessive stress of whether the market will go up, down, or sideways.

Perhaps more importantly, my focus on investment income is a strong eliminator of FOMO. I’m not going to chase investments others make, simply because most businesses today don’t pay out their earnings to shareholders. Furthermore, I’m honest with myself that as a solo analyst, the limits of my analytical ability are are very real. I just won’t have a differential view on the valuation and business model of Peloton, Twitter, etc – especially when there are absolute pros on the other side of the fence (see above podcast episodes). I’m shameless about letting others be the investing experts and act more as a capital allocator (like a pension fund manager) versus investment underwriter. In fact, most of my public stock investments are just that, effectively publicly traded private investment funds that are generally somewhat diversified.

To conclude, as I’m running out of steam, I hope that Bill finds an equilibrium between being able to engage his deep interest in finance, his talent for building his network and podcast, and the realities of the investment goal(s) he has set for himself. Life is too short not to have a lot of fun when you’ve got the gift of financial independence.

It’s fairly certain that economic / geopolitical forecasting is a fool’s errand. The world is a complex and adaptive system. History is useful but humans / nature also do incredible and unpredictable things.

However the allure of listening someone illustrate the future, often an extreme one, is tough to ignore. I don’t know if this statistic is correct, but this website says that 1 in 5 Americans have consulted a psychic at some point in their life. Despite the fact that they look at cardboard cards and make shit up.

To that end, I indulged the finance version of psychics. A couple billionaires on the All In Podcast recommended a video that Ray Dalio (another fellow billionaire, macro investor, founder of Bridgewater) put out about the rise and fall of empires and said “it is a must watch.” Well I watched it and the conclusion is the US is on the way out and China is going to be the new superpower. It looks back on the history of empires back to whatever, the Ting dynasty of 600 AD (or was it BC?). Basic on his set of indicators (e.g., quality of education, fiscal cycle, etc.) – he says it’s clear the US is on the way down. He also says there’s a 30% chance of civil war in the US in the next 10 years. Oooook bro. He also offers a flagship investment vehicle that curiously is the recommendation without explicitly saying it. Ok bro.

So I looked for people (finance psychics) counter to that viewpoint to understand where this guy could be way off – particularly since it seems like he spent a fortune on the animation in that video vs providing very convincing arguments. Two stood out.

Peter Zeihan has been perhaps the hottest forecaster in the past half year given his prior book predicted the Russian invasion of Ukraine. His approach is based on demographics, specifically how the age distribution of countries helps indicate what their future moves may be. Looking forward, his view is US demographics are extremely favorable versus other nations (e.g., Russia, China, etc.) and it has a long runway of relative advantage versus other countries. That’s nice.

Second, I actually read this guy’s audio book (see left) in a few days, which is a feat as I’ve been unable to sit through a full audio book for about a year, for what reason I can’t understand (attention span shortening for some reason).

His view is that the US, for many reasons, is a unique “empire” that reinvents itself over 50-80 year periods. Examples are the US flipping to massive social program expansion during the New Deal in the ’30s, and dramatic tax regime changes under Regan in the ’80s. He believes that we are at the tail end of the current period where the investor / knowledge expert / technocrat class rules the nation and power shifts to a united multi-race front of the US that is excluded from the current ruling class (primarily the industrial base). The result of this is the dismantlement of government complexities that breed distrust of government (e.g., making laws no ordinary citizen can understand, putting its hand in everything), dismemberment of elite university pipelines (e.g., Yale, Stanford, etc.) that favors the knowledge / technocrat base vs industrial base, and far higher taxes on the wealthy (e.g., aggressive income and investment income taxes) to re-level the wealth disparity. However, he does say with confidence that after this difficult and volatile re-alignment of the US in the 2020s, the US will go on to another period of productivity and calm in the 2030s onwards until the next regime change. That’s nice.

While I obviously have no idea how this will play out, I do think this small indulgence of mine is helpful to open my mind to what is possible. I do think certain things like education at a top institution coming with a price tag close to $100k / yr, requiring massive “extracurricular” preparation in high school, and test prep coaching is an incredibly unfair standard for all to even try to achieve. I do think that the continued wealth disparity between the base of industrial labor and professional labor is far too extreme and has to correct at some point in the not too distant future. But I truly have no idea how those implications can or should affect actions that I take today. And that’s okay.

The worst feeling during March of 2020 was owning companies that were on their back foot versus on the offensive. I believe that I’ve rotated the portfolio so that is not the case anymore. A few quotes from the largest portfolio holdings:

And so yes, we will be prepared for those cycles. We hold excess capital for those cycles. We will make a lot more money than the case if we get those cycles…

I didn’t know that Enron was going to go bankrupt and we’ll be able to buy pipelines and things of that nature. But having the ability to be there to take advantage of it is what that plan is all about.

We’ve got $1.5 billion of liquidity, and this is pro forma for the 3 transactions that we announced this quarter. And this doesn’t include the $5.5 billion of liquidity that exists within our operations.

…you have heard us to talk a lot about the inherent resiliency of the business model, and how it allows us to thrive in times of volatility, especially investing in a region like Latin America. 

Gaurav Kapadia of XN had an unremarkable yet important quote from his recent podcast appearance on ILTB:

That narrowing of focus really helps you build these deep, vertical expertises and stops you from being a dilettante. What always kills people in investing is they go off piste. They become like a dilettante in something because they’re reaching for something to do, so we’ve eliminated that temptation.

ILTB

So often, especially today, I find that smart investors think they are incredibly good at understanding, dissecting, and making recommendations on topics they have no real experience in. Examples today include the price of oil, the course of the Ukraine war, etc.

It’s a helpful reminder to me to stay in my lane. That lane is investments that produce investment income in the form of dividends.