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Some things and ideas: January 2021

Posted February 1, 2021
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Some random thoughts on articles that caught my attention in the last month. Note that I try to write notes on articles immediately after reading them, so there can be a little overlap in themes if an article grabs my attention early in the month and is similar to an article that I like later in the month.

My monthly overview

I'm going to start putting this piece in at the start of every month. I just want to highlight two things

  1. I do four things publicly: this blog, my podcast (SpotifyiTunes, or YouTube), my premium site, and my twitter account. You can see my vision for the podcast here, and my vision for the blog and premium site here. If you like the blog / free site, I'd encourage you to check out the pod, follow me on twitter, and maybe even subscribe to the premium site!
  2. I try to be as helpful as humanly possible to anyone whose research / writing I enjoy. In almost every post I do, you'll notice I link to other subscription services or investors who I like. I don't get referral fees or anything for that; these are almost always organic links and highlight that I do not because I was asked to but because one of my goals with the (very small) platform I have is to shine light on other people who are doing good work.
    • If you're launching a subscription service, or a new blog, or you're an investor who has done some really good research and wants to let the world know, please send me a line and let me know. If the quality is there, I would love to link to your blog post or subscription service or research (and if the quality isn't there, I'm happy to provide feedback!), and I'd love to have you on the podcast to talk about all of it. I can't promise anything, but most podcast guests / people I've linked to have been very happy about the reception / feedback they've gotten. My DMs are always open, so feel free to slide into them if I can be helpful!

What a fudging month January was

  • This month has been wild. Wild. How wild? I wrote this post about how insane this month was and did the whole thing without remembering that our capitol was stormed January 6th. That's right; things got so crazy that I forgot the freaking seat of democracy was overrun just three weeks ago.
  • In financial markets, I'm not sure we're ever going to see anything crazier than a bunch of redditors almost breaking the market by buying out of the money call options en mass on companies on the edge of bankruptcy.
  • I do think that this month and the massive short squeezes have revealed a ton of underlying structural issues in markets. In particular, our markets are particularly vulnerable to pumps on social media. Just this month, Elon Musk alone was involved in sending three different stocks / assets screaming higher on tweets (Bitcoin, Gamestop, and Signal). Carole Baskin sent a penny stock soaring 230% on a cameo plug.
    • This vulnerability is an absolute disaster for regulators. If you're a scammer, all you need to make a fortune is for a celebrity to tweet your company's stock. If you're an unscrupulous celebrity, you can make a fortune by tweeting about companies and trading around their stocks. Regulators can't let stocks continue to rise and fall by huge multiples simply on tweets and random plugs. Trust in financial markets will eventually break, and every day people lured into the bubbles will have huge sums stolen by scammers.
  • What's the answer? I have no idea. Someone smarter than me can figure that out. But our markets clearly aren't equipped for huge surges in volumes on tweets or from people who are willing to throw caution to the wind and buy / pump things for the LOLz.
    • Look, I'm not here to preach. I'm actually really excited about the market currently. If you're not shorting high short interest stonks, I continue to think the current market is a sophisticated investor's dream playground. Yeah, it's easy to be jealous of retail investors making 1000% a day by yolo'ing Gamestop calls, but the current environment is presenting extreme dislocations that I think will be really rewarding for investors willing to turn over a few rocks and connect a few dots to take advantage of them. And they'll be rewarded with much, much, much less risk than YOLO'ing.
    • Update: after I wrote this, I read Liberty's take on WSB. He said everything I wanted to say and more, and he did it more eloquently. I mention him again later in this post, but suffice to say I'm a big fan!

Rejudging investment portfolios in public companies

  • A lot of companies these days have tiny equity investments into start ups or emerging businesses. In the absence of other info, I generally value these at either book value or at zero. It really doesn't make a difference; we're often talking about $500m+ businesses that have three or four investments into startups that might, in total, be worth $5m.
  • One thing I'm increasingly wondering as I'm seeing a ton of companies realize huge value from these start up investments: when do you start giving management some credit for skill in investing in small start ups, or putting some upside value on the optionality?
  • Let me give about the starkest example/contrast I can think of: IAC and Worthington (WOR).
    • IAC has a huge history of starting up flywheel companies, building them up, and spinning them off. Expedia, Ticketmaster, Match, and a ton of others. So if IAC owns a company, I'm probably inclined to value them at more than investment cost. For example, IAC bought Care for $500m last year. The day that deal closed, I know a lot of people marked the investment as worth $500m when valuing IAC. That's what I did, but I think it was conservative. If IAC bought it for $500m, I would bet that the base case expected value of that investment was ~$1B.
    • Contrast that to Worthington: they made a small investment in Nikola because they had a prior relationship with Nikola's founder, and that investment turned into a generational fortune. Was it an awesome outcome? Sure! But I'm not sure how much repeatable skill there is there, and I'm not about to mark up any future small investments WOR makes.
  • Neither of these fit the exact example of what I'm trying to show, but I think they paint the broad idea right. If I'm looking at a company that has 10 small equity stakes, how much of a history do I need for them to have with successful investments in order to think there could be a lot of value or hidden potential there? The answer is clearly somewhere between one lucky strike (like with Worthington) and a decades long history (like IAC), but I don't know the right answer. Given how quickly successful investments can grow and scale in the internet age, getting this answer right could result in some very interesting and contrarian outcomes.
    • For example, say a stock trades for $100, and "everyone" agrees the business is worth $100. If they have 10 investments on their balance sheet that are worth $1 each, and you think the management team has enough skill and track record that one of those investments will likely "pop" (turn into a homerun), well then you could see a huge undervaluation in that stock passed on that likelihood (and no one else would see it!).

SPACs SPACs SPACs

  • It got lost a little in the Gamestop craziness of the past week, but there's still a huge bubble in SPACs. I just wanted to do some quick hits here.
  • Some math on how much Liberty / FWONA is making on the current Liberty SPAC. As long as the market remains this hot and sponsors can make this much money doing it, we're going to continue to see a wave of SPACs.
    • And, on the back end, as the wave of SPACs looks for deals, I think we're going to see some eye popping valuations on some growthier names. One of my favorite "themes" to play right now is companies that have high growth subsidiaries that would be a good fit for a SPAC; at some point, they will SPAC that sub (either because a SPAC bowls them over with a number or because an activist forces them to), and when they do the market is going to see how cheaply the rest of the business is trading!
  • Speaking of making a lot of money on SPACs, I thought the conflicts of interest in the recent IPOE / SoFi deal were really interesting. IPOE is currently trading >$20, or more than double trust value on the SoFi deal. If you're one of Chamath's other SPACs, and you know that you were originally under LOI for a deal that resulted in a double but Chamath gave it to a different SPAC, aren't you a little upset by this? If that other SPAC announces a deal that isn't well received, is there any legal risk for the board?
    • I also wonder how long till we see a SPAC go in for a topping bid on another SPACs deal. It probably won't happen (private deals, unlike public deals, often don't contain outs for superior proposals). But if you're a SPAC, and you see a competitor SPAC announce a deal to buy a company for $2B and the SPAC immediately trades for a $10B valuation.... what's to stop you from offering the company a $5B valuation and trying to capture that value spread?
  • Unrelated, but I really liked this tweet on consensus short IPOs that turned into huge home runs. I don't know of any real consensus shorts IPOs right now; post GME, I'm not sure how many people are eager to short low float hyper growth IPOs. But I will be keeping this idea in my mind going forward.
    • PLTR may have been the closest thing to a consensus short I know of post listing; it's gone from $10 to >$30 in a few months!
    • If and when the SPAC bubble ever pops, I do think something similar could emerge here. If every SPAC and former SPAC trades down 10/20/30% when the tide goes out, I bet there will be some real gems thrown out with the bath water.

Liberty on DCF's being needless

  • Liberty is one of my favorite newsletters, and it's free. Highly encourage signing up.
  • I particularly wanted to call out his "DCF (Theory vs. Practice) piece, because I'm so conflicted on it.
    • I generally don't build detail excel models for companies I invest in. My general rule of thumb is that I want to really understand the economics of the business, and then build a simple model that shows the company is cheap. The cheaper the company and the better business, the more aggressive I can be.
    • But I do think models can be useful. In particular, we're living in a scale world, and modeling unit economics can be really useful for looking at and understanding scale businesses.
  • Let me give a simple example: if you look at a SaaS company with 100 users, the economics are going to look absolutely awful. But if you look at the same company charging the same price but with 100,000,000 users, the financials will look incredible.
    • Building a model will help you understand the economics of the business and what level they need to grow to become profitable / viable. It'll also help you figure out what the market is currently pricing in.
    • So for that company, a nice model might help you figure out that the company needs to hit 50,000 users to be breakeven, and that they would be profitable at 100,000. A little more work will help you figure out the user level the market is pricing in (say, 75k) or the probability of different levels of success. You could then use all of those numbers to help inform an investing decision ("I think this business model is a killer, and I think they can easily hit 200k users. The market is only pricing in 75k users, so this company is a mammoth buy").

One Plug: Nongaap

  • Just a quick plug. If you've listened to me for a while, you know that Nongaap is my absolute favorite newsletter. I mean no insult to any other subscription service: there are about five that I consider must subscribe and I mention them all frequently in my posts / to people who ask for references.... but in terms of bang for the buck there is literally nothing and no one better than Nongaap.
  • He's raising the price on his newsletter tomorrow. Again, if you've listened /read me for a while, you know I consider his newsletter the best value out there, and the small price raise doesn't change that. But I wanted to call it out now so you can get in ahead of the price raise if that's of interest.

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