$INV: Thread on aspects of good investing | Dec 2019


1. Fundamental analysis that doesn’t respect the reflexive nature of reality is kind of dumb.

Reality is only kind of “real” and can be altered, for example, with the strength of belief. 

2. Warren Buffett is a master propagandist and you shouldn’t take his folksy mannerisms earnestly.

He’s trying to trick you into coming to Omaha so he can impoverish you at his annual carnival. $BRK 

3. The “present value” of real estate operating lease liabilities is not equivalent to debt in the United States, no matter how many times people say otherwise. 

4. When a biz has a layered claim on another, such as $MCD and its franchisees or $MAR and its hoteliers, it’s critical to think about the economics of the sharecropper business.

If the sharecropper doesn’t have good economics, eventually the parasitic parent won’t either. 

5. Changes in a business’s growth trajectory often swamp the merits of valuation, to both the upside and the downside.

Favorable inflections can sometimes make you a killing. $TGT 

6. Consolidated financials are BS when looking at a company’s leverage.

Companies are legally distinct entities and this can result in situations where debt is held at a subsidiary that has no claim on a parent co’s other assets.

Important to see which companies guarantee what. 

7. Henry Singleton built and dissembled Teledyne so profitably by using the dark arts.

Soros gets credit for reflexivity but Singleton understood it intuitively AND knew how to manage narrative to bend it to his own will.

Look at how trouble at Argonaut influenced his buybacks. 

8. Jeff Bezos is the John Malone of operating expenses. 

9. Good and underappreciated sources of information are PACER and state regulatory filings.

Discovered $CAOX corporate existence was supposed to be terminated decades ago and the company never got around to updating its Articles of Incorporation. 

10. Humans are on the brink of achieving functional immortality and time is about to become much less valuable.

Interest rates are already reflecting this. 

11. Using history beyond the past twenty years as your understanding of the limits of what sort of corporate growth rates are possible is like using a dowsing rod to start your own water utility.

The world really is different now and what didn’t used to be possible now is. 

12. The $TSLA and $TSLAQ communities are both rational responses to a situation that is almost nothing but high stakes reflexivity.

The two forces are in a game of tug-o-war to shape Tesla’s intrinsic value by influencing its stock price. Lots to learn from watching their duel. 

13. Value investing and growth/momentum investing both work and it’s important to respect and try to integrate the best ideas from each investing style into your own.

Don’t be a cultist to one style. You’re only harming yourself and your family by drinking the Kool-Aid. 

14. Financial statements are usually the outputs of a company’s value drivers, not the value drivers themselves.

Learning adjacent skill sets, such as direct response marketing, can open up opportunities to you that others can’t yet see.

I recommend Tested Advertising Methods. 

15. Knowledge is abundant and by itself is only rarely a competitive advantage.

But you can create an edge by synthesizing knowledge to create an understanding that is unique to you. Taking a break now that I’ve worked through my backlog. Will do more later if more likes come, though. 

16. The strength of the crypto and pot stock bubbles were influenced in part by how aggressively they were hyped by investment newsletters.

The size of the industry would surprise most people. The largest co. has a subscriber base in the seven figures. 

17. Company narrative metagame management is one of the primary roles of a good CEO and most do a poor job of it.

Managing your narrative is a big aspect of capital allocation and can create or destroy fortunes for your shareholders. 

18. This is why Elon Musk may be one of the greatest CEOs of all time, ESPECIALLY if you think Tesla is worthless.

Narrative management + capital allocation alters intrinsic value. 

19. Some of the most basic setups are basically just capital structure arbitrage.

Have doubled my money on $MAR from the company replacing higher cost equity with lower cost debt.

Doesn’t always work out but when it does it’s like putting biz performance on steroids. 

20. Dispassionate analysis will always have its place but emotion can add a ton of value to an investor’s skill set.

Putting yourself in the customer’s shoes can help you share empathy with them, which can tell you a lot about WHY they use the products and services they do. 

21. Distressed situations are fascinating because they’re just as much about game theory as they are about legal protections and rights.

The Vulture Investors by Hilary Rosenberg is a fun book on the subject, for those of us (mostly) locked out of this game. 

22. Markel’s culture is overrated. The company’s predecessor was literally formed to take advantage of regulatory capture its founder created.

Here’s $MKL co-CEO Richie Whitt talking about the scheme.

“It was pretty brilliant.”

I’ll say.

23. Alternatively, $MKL culture is underrated because the company has a history of being kinda clever and sneaky.

Choose your own adventure.

I own $MO. I’m not beyond making money from regulatory capture. 😂 

24. Economic moats are cool but aren’t the only thing.

Commoditized businesses can be great investments despite low AVERAGE returns if the range of possible outcomes is wide enough. 

25. For example, industries with relatively low short term price elasticity of supply occasionally experience jackpot economics when the service they’re supplying is mission critical.

See: shipping. 

26. In highly reflexive businesses, short sellers are kind of like economic terrorists by reducing the range of possible intrinsic value outcomes. 

27. The pink sheets are one of the last Wild West markets in, well, the West.

The SEC’s new proposed rule may make trading many of the stocks there much more difficult in the next few months.

Looking forward to major dislocations, if so. Do the homework now to be ready. 

28. Businesses that don’t have economic moats yet but are developing them can be better investments than businesses that already do. 

29. Social hierarchies come natural to humans, so entities that sell perceived access to higher tiers of those hierarchies will always be in demand.

Social signaling never dies and neither will lux goods and services. 

30. The economy is creating more wealthy people and more poor people. The middle gets eaten by the economic meat grinder.

The same is true for businesses. Midline is usually the worst place to be. High end and low end are key to the American Carnage portfolio. 

31. You can run your own John Malone home game.

Dividend stocks are for tax deferred accounts and geezers who want an extra $20 per month in income to supplement their SSI.

Compounders are for taxable, just gotta hold them til you die so your heirs get a cost basis step-up. 

32. LTV/CAC analysis can really screw you up if you don’t consider cohorts and scale of spend.

Often, your earliest adopters are your biggest fans.

If you don’t have an internal growth engine, there’s a good chance you’ll run into diseconomies of scale in customer acquisition. 

33. Real estate leases serve as a hedge against Wholesale Transfer Pricing.

Advertising may be the new rent, but the rent is month-to-month so if you don’t expect to get squeezed it’s your own fault. 

34. Insurance tends to be an awful business, but a fun way to check the trend in reserving adequacy is converting calendar year loss development triangles into accident year ones.

Insurance has goofy accounting so sometimes you can gain insight from the granularity. 

35. Insurance float is one of the worst kinds of float because what you can do with it is heavily regulated.

If someone is starting an insurer for float, run away. There’s a good chance they’re either living decades in the past, planning a scheme, or lacking in creativity. 

36. Anti-prestige businesses are often not appreciated on the market.

There’s often value in companies that cater to non-coastal regions and rural communities. 

37. Having a list of businesses that should do well in alternate economic environments can be useful to help you move quickly if things change.

$FMBL will make a killing if interest rates rise, for example, because of its huge base of non-interest bearing deposits. 

38. Get on the mailing lists of the major investment newsletter publishers.

Sometimes they’ll pitch a small cap stock for months at a time in their advertising, if the return on ad spend is high enough.

Between a small float and a million Boomers, interesting things can happen. 

39. Alternatively, just check out Stock Gumshoe and avoid the spam.

There’s a guy there who analyzes the advertisements and outs the stocks they’re pitching.

Sometimes the momentum from a repeated pitch alone is enough to be worth a small wager.

stockgumshoe.com 

40. Who knows how long it will last with the new proposed SEC rule, but there is an opportunity to create catalysts with Pink Sheet stocks that don’t post their financials publicly.

Using shareholder rights laws to get and share them, you can sometimes help market efficiency. 

41. Structural subordination sounds like a BDSM theme but unfortunately it’s just a credit term mostly relevant in distress scenarios.

Well, I guess it’s not that different. 

42. Jeff Bezos is a better capital allocator than Warren Buffett. $AMZN $BRK 

43. Stock ownership doesn’t necessarily represent partial business ownership in any realistic sense.

He who has the gold makes the rules. 

44. Not every company is even trying to become more competitive over time.

Many exist only to provide sinecures to their agent operators.

There’s money to be made in companies that bother to care. 

45. Massive presentations about a new position are massive not because that much information is relevant, but because it looks more convincing and shows people you “did your homework”

Using research as marketing. Very smart. 

46. The best players in bad industries are worth investigating.

If economics are so poor most companies can’t make money, you MAY not have to deal with new players boosting industry capacity.

Top dog’s scale can let it wring out profits surrounded by a moat of broken glass. 

47. Real estate has some unique advantages in terms of leverage and taxes, but also has unique problems.

If you don’t manage it yourself, you’re subject to an agency problem with expense pass throughs.

If you do manage it yourself, you’ve bought a part time job. 

48. The Greater Fool Theory is something to be cherished, not maligned.

Playing it opens up a whole new world of opportunities where psychology is a competitive advantage.

But if you never try, you’ll never get better. 

49. $GOOG and $FB have faced a lot of criticism about their ads not working.

Not a new problem. Most ads either don’t work or are hard to measure and advertising agencies have been feasting on that opacity for decades.

Only when their lunch was eaten did they start crying foul. 

50. There is a misunderstanding that advertising returns could not be measured before big tech came along and provided a treasure trove of data.

This is false.

Keyed ads have been a thing in direct response advertising since before Silicon Valley was even an idea. Halfway there. Even fifty is hard without relying on basic bitch truisms!

Time for a lunch break!

Thanks to everyone who has enjoyed and shared my thread so far. 😄 

51. Some of the best investment opportunities are found just by stumbling into them in your personal life and appreciating how cool the company is.

Peter Lynch was pretty much right about this and this is also a big reason why emotion and empathy can be advantageous. 

52. Someone asked for elaboration on tweet #3.

You can count the present value of real estate operating leases as debt if you want, I suppose, but you should think about the lease rejection damages cap.

Following up, it’s hard to perfectly transmit knowledge and sometimes the understanding of a subject becomes goofy because the knowledge has become a Xerox of a Xerox of a Xerox of itself.

Knowledge is viral and without close inspection, can rot and become anti-knowledge.

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