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STATE OF THE FIRM

07-31-2019

Nothing below is considered investment advice.

 
Going into my birthday month, I’m both enthusiastic and excited. Not because I am getting extravagant gifts or taking off on a grand vacation (I’ve never been one to celebrate birthdays), but rather because there are so many great opportunities in markets for great businesses.
 
First off, in a flurry of activity, I have acquired the rights to a rare and elegant decorative/functional wood dating back 6,000 years. The website is here. Christmas is on the horizon, what spouse doesn’t want a new dining table or signature reading chair to ring in the new year? 
 
I am also raising money for private investments, to capture alpha from money that doesn’t need to be liquid. Thus, if there are funds with a time horizon over 15 years, economies generally return more to the illiquid investor. Inquire for more details.
 
Lastly on my personal radar, CFA level 3 results come out August 20th. 
 
This is earnings season, and as has been the custom for the past dozen or so quarters, firms are outperforming. I attribute the outperformance both to monetary policy and technological development, where the latter is reinforced by the former. 
 
The amount of M&A using cheap debt would cause a student of the 1980’s fits of anxeity, especially considering the Dell reverse merger, the IBM takeover of Redhat and AT&T’s risky bets. One firm changing the landscape is Softbank, backed by Apple, Microsoft, and many sovereign funds. Reviewing the 2012 takeover of Sprint, everyone (including myself) thought Softbank was ‘vision’-less. Right now, Sprint has a tangible book of about 1 billion with losses for the last several years. Sprint’s current market value: $29 Billion. I’m not privy to the discussions with T-Mobile, but the synergies must be akin to Adam and Eve to realize that valuation. Has the buyout market reverted to the conglomerate premiums of 1960’s? If so, there will be a moment of reckoning soon enough.
 
I’m hearing many managers discussing favorably the prospects of the emerging markets. I don’t buy the argument mostly. Anyone can agree that non-US dollar denominated assets are inherently riskier, and of course when it comes to both policy and fundamental economics, foreign investors will mostly underperform. 
 
One name I have heard a lot has been Alibaba. The Total Addressable Market paradigm is outweighing fundamentals, exactly as in the tech-bubble in 2001. But there are earnings! 13 Billion USD equivalent on about $50 Billion tangible Book Value. Alibaba’s current market value: $450 Billion. Certainly not a startup any longer, and that move into the trillions isn’t as easy as Microsoft, Amazon, and Apple made it look. One of Baba’s ailments is what I call “unregulation”.
 
Activism (influence by private investing firms) is virtually impossible now that the People’s Republic is strengthening its grip on domeciled firms. But the spectre of unregulation is truly incredible. The question basic to my process is: Where is the outsize valuation from and what would cause it to leave? I can’t imagine the People’s Republic, which owns about 50% of Alibaba would control the firm for the benefit of us American shareholders. This is why China will generally never make sense for me as a business owner in public markets.
 
Look also at Advanced Micro Devices (AMD). I have been baffled by this one for years. Heavily leveraged: AMD covers interest expense 1.6 times. Imagine having a mortgage payment of $30,000 per year and only earning $48,000. There isn’t anything left over to build great wealth for owners. With one billion of tangible book and an absurd valuation of $32 Billion, who really owns it? Ever since Lisa Su took the reigns in 2014, the value has jumped all the way from 3.5 Billion. What really happened there? AMD still has virtually no significant market share in any business segment. Without knowing who is behind this company with a checkered past, I’m staying far away. 
 
My goal will be to add as much upside to clients with as little downside as possible. To acquire businesses and employees that add… to the bottom line. This will always be a major focus, and even moreso in the coming year as the business structure is altered to provide an ability to scale. Because of this endeavor, my new vision is raising the net revenue per hour for the firm virtually by any means necessary. 
 
A couple of sectors surprise me right now from a fundamental standpoint: life insurance and natural gas. Firms like Range Resources and SRC Energy have good fundamentals, though my review is too brief thus far. 
 
Naturally, Cash Flow currently rules the day, as it should in a frothy market; Book Value shows solvency, especially for creating/redeeming leverage where we approach the M&A heyday of the 60’s excess.
 
One last point: Diversification is ignorance insurance. To say active management doesn’t work, I know now, is foolhardy. There are certainly areas that I am ignorant (like cooking), and in those areas I will avoid risk for fear of failure. Andrew Carnegie said it best, and I will leave you with his quote:
 
The concerns which fail are those which have scattered their capital, which means that they have scattered their brains also. They have investments in this, or that, or the other, here, there and everywhere. “Don’t put all your eggs in one basket” is all wrong. I tell you “put all your eggs in one basket, and then watch that basket.” Look round you and take notice; men who do that do not often fail. It is easy to watch and carry the one basket. It is trying to carry too many baskets that breaks most eggs in this country. He who carries three baskets must put one on his head, which is apt to tumble and trip him up. One fault of the American business man is lack of concentration.

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