The rule - what you don't do is more important than what you do. In natural systems, you need redundancy to make the system work better. People think that redundancies are inefficient. I think they're the most efficient thing in the world, if you do them right.
Redundancy is bad if you buy the same morning newspaper twice or if you have two subscriptions to the same website. But redundancy is fine if you have a stock of cash in the bank or if you're a company that needs oil and you have extra oil.
Let's assume that you have cash in the bank and there's a big crisis. You have dry powder. It will make you antifragile to have the extra dry powder if nobody else has money. You can buy anything you want. Cash is the opposite of leverage.
In fact, the number one indicator of fragility is leverage. It can be operational or financial. Leverage corresponds to people's overconfidence about the future.
Most people who have leverage will be completely squeezed in a crisis, and you will have cash.
Thursday, September 26, 2013
Thursday, September 12, 2013
Analogies - Explaining the world around us
I need to be more clever in the way I communicate and explain things. Analogies, stories and metaphors are the way to go.
Need to get thinking cap on.
The semblance of normalcy: life is moving along, all is well with the world.
Need to get thinking cap on.
The semblance of normalcy: life is moving along, all is well with the world.
Monday, September 9, 2013
How and Where to Work Smarter
I can't possibly keep up with the torrent of information necessary to know everything that is going on.
The only way to manage this state of affairs is to have a system that captures the necessary information (that which you absolutely need to know), processes that information properly (runs it through a filter/paradigm/framework that weighs and assesses it correctly), and results in insights/decisions that are superior to the above average wisdom of the market.
Not an easy feat.
There will be times, when there is no way to keep up, and other times when the market due to its very nature (overreaction, illiquidity, herd effect, greed, fear, hubris, complacency, comfort) presents opportunity for advantage. Discerning those times is the hard part. Having signals and systems in place to identify those potentialities is critical to being aware of where opportunity may lay.
The only way to manage this state of affairs is to have a system that captures the necessary information (that which you absolutely need to know), processes that information properly (runs it through a filter/paradigm/framework that weighs and assesses it correctly), and results in insights/decisions that are superior to the above average wisdom of the market.
Not an easy feat.
There will be times, when there is no way to keep up, and other times when the market due to its very nature (overreaction, illiquidity, herd effect, greed, fear, hubris, complacency, comfort) presents opportunity for advantage. Discerning those times is the hard part. Having signals and systems in place to identify those potentialities is critical to being aware of where opportunity may lay.
Hat tip Split Enz "History Never Repeats"
History doesn't repeat, but it has a kind of familiarity. And as the Byrds (or should I say Solomon) would say "there is a season...turn, turn, turn."
I was reading James North short, concise "A History of the Church" and noticed the pre-conditions* for the French Revolution were eerily similar to the conditions of today. As then, so today, it is very hard to know what the spark will be, but when it explodes the social order changes fast. If you need any convincing that that can happen today, look at how quickly the Arab Spring upended the status quo is a number of countries with lingering effect elsewhere.
To quote, "The immediate cause of the beginning of the French Revolution was the bankruptcy of the state. Financial mismanagement had been an unresolved problem in France for some time...the people had plenty of complaints against the government, chief of which was that the nobility and the clergy were escaping most of the taxes. While the assembly began to restructure the tax and social structure of the country, the mob stormed the Bastille on July 14. By August 4 the entire feudal structure of France, with special privileges enjoyed by aristocracy and clergy, was demolished."
*Pre-conditions were a corrupt, bankrupt state and uber-wealthy living off an inequitable tax burden placed upon the middle class.
I was reading James North short, concise "A History of the Church" and noticed the pre-conditions* for the French Revolution were eerily similar to the conditions of today. As then, so today, it is very hard to know what the spark will be, but when it explodes the social order changes fast. If you need any convincing that that can happen today, look at how quickly the Arab Spring upended the status quo is a number of countries with lingering effect elsewhere.
To quote, "The immediate cause of the beginning of the French Revolution was the bankruptcy of the state. Financial mismanagement had been an unresolved problem in France for some time...the people had plenty of complaints against the government, chief of which was that the nobility and the clergy were escaping most of the taxes. While the assembly began to restructure the tax and social structure of the country, the mob stormed the Bastille on July 14. By August 4 the entire feudal structure of France, with special privileges enjoyed by aristocracy and clergy, was demolished."
*Pre-conditions were a corrupt, bankrupt state and uber-wealthy living off an inequitable tax burden placed upon the middle class.
Sunday, September 1, 2013
Spinning Your Wheels
You can't possibly keep up with everything that is going on in the economy or even one company. There is too much information to parse.
You get on the information treadmill.
That is why you have to think smarter and act smarter. Heuristics are the way you maintain and at times can get ahead.
The information treadmill is never ending and never conquered. It is ever present and ever future. It waits for no one and offers only fool's gold if you think that by keeping up with the "news" you are able to make better decisions.
It is true that better information is better. But discerning the better information from noise is the hard part.
Keep things simple. Have a philosophy, a set of guidelines that put the odds in your favor. Be disciplined, courageous and patient.
That will allow you to keep a proper perspective and not get caught up in the noise.
Easier said than done.
You get on the information treadmill.
That is why you have to think smarter and act smarter. Heuristics are the way you maintain and at times can get ahead.
The information treadmill is never ending and never conquered. It is ever present and ever future. It waits for no one and offers only fool's gold if you think that by keeping up with the "news" you are able to make better decisions.
It is true that better information is better. But discerning the better information from noise is the hard part.
Keep things simple. Have a philosophy, a set of guidelines that put the odds in your favor. Be disciplined, courageous and patient.
That will allow you to keep a proper perspective and not get caught up in the noise.
Easier said than done.
Thursday, August 1, 2013
The Cloud Bubble
There is nothing more irksome than the smugness of some momentum guy who dismisses valuation as irrelevant.
The current hot air craze is with "cloud" companies:
Amazon
LinkedIn
Netsuite
Workday
Salesforce.com
Concur Technologies
Commvault Systems
All these companies have solid topline growth, but there are minimal cashflows relative to their market value. The market is incorporating an awful lot of future unknown growth into present valuations.
For example, Workday (WDAY): $12b cap, $11b EV, 38x P/Sales, 750x TTM cash flow, 15% short interest, TTM sales are $308m, topline growth rate is 61%. The firm hasn't gone FCF positive yet, but is at the inflection point. What size do revenues need to be to justify a $12b market cap in the competitive tech industry? I would say a reasonable multiple is 4x-5x sales. 5x sales assumes revenues of $2.4b - that equates to a 50% CAGR rate over the next 5 years. Is that possible? Yes. Is it likely? Probably not (unless they are the next incarnation of Microsoft or Dell...but their addressable markets are much smaller and their competition much greater). Assuming 30% operating margins, then $2.4b in revenues produces $720m in EBITDA. That translates to the current stock price trading at 15.27x 5 yr EV/EBITDA. That is not todays EV/EBITDA multiple. That is 5 years from now, which assumes an awful lot has gone right. And if there is one thing we know from the tech world, 5 years is an eternity to techdom.
The most likely scenario is that these names will continue to trade at high multiples reflecting their leadership positions in high growth areas, but at some point in the future a transition or transposing of sentiment will take place and the tyranny of multiple compression will weigh down future appreciation. They may continue to grow like weeds and they may become obscenely profitable, but they will be paid less and less for those returns. In the case of dotcom leaders (CSCO, EBAY, INTC, MSFT, ORCL, EMC) they grew their earnings substantially but shareholder returns were highly muted by multiple compression.
The current hot air craze is with "cloud" companies:
Amazon
Netsuite
Workday
Salesforce.com
Concur Technologies
Commvault Systems
All these companies have solid topline growth, but there are minimal cashflows relative to their market value. The market is incorporating an awful lot of future unknown growth into present valuations.
For example, Workday (WDAY): $12b cap, $11b EV, 38x P/Sales, 750x TTM cash flow, 15% short interest, TTM sales are $308m, topline growth rate is 61%. The firm hasn't gone FCF positive yet, but is at the inflection point. What size do revenues need to be to justify a $12b market cap in the competitive tech industry? I would say a reasonable multiple is 4x-5x sales. 5x sales assumes revenues of $2.4b - that equates to a 50% CAGR rate over the next 5 years. Is that possible? Yes. Is it likely? Probably not (unless they are the next incarnation of Microsoft or Dell...but their addressable markets are much smaller and their competition much greater). Assuming 30% operating margins, then $2.4b in revenues produces $720m in EBITDA. That translates to the current stock price trading at 15.27x 5 yr EV/EBITDA. That is not todays EV/EBITDA multiple. That is 5 years from now, which assumes an awful lot has gone right. And if there is one thing we know from the tech world, 5 years is an eternity to techdom.
The most likely scenario is that these names will continue to trade at high multiples reflecting their leadership positions in high growth areas, but at some point in the future a transition or transposing of sentiment will take place and the tyranny of multiple compression will weigh down future appreciation. They may continue to grow like weeds and they may become obscenely profitable, but they will be paid less and less for those returns. In the case of dotcom leaders (CSCO, EBAY, INTC, MSFT, ORCL, EMC) they grew their earnings substantially but shareholder returns were highly muted by multiple compression.
Friday, July 12, 2013
What is your edge?
I don't really have an edge.
I'm not smart enough to have an edge over real deep value guys at a company level or the major traders at a macro level.
But if I take stock at what I am good at and what my natural instincts are then I think my edge is in distressed assets, ie. Argentinian land, coalminers, for-profit education. I haven't really played in that space for a while. Been a little gun-shy, but that is where the monster gains are had and that is where I have been most successful in the past. I think I have a broad enough perspective and sufficient wisdom to know when perfectly good assets have been thrown out with the bath water, and I have the natural contrarian instinct to step into a trade no one else wants.
Even though I am not smart enough, I can't help thinking that smarts does not always mean having an edge.
I'm not smart enough to have an edge over real deep value guys at a company level or the major traders at a macro level.
But if I take stock at what I am good at and what my natural instincts are then I think my edge is in distressed assets, ie. Argentinian land, coalminers, for-profit education. I haven't really played in that space for a while. Been a little gun-shy, but that is where the monster gains are had and that is where I have been most successful in the past. I think I have a broad enough perspective and sufficient wisdom to know when perfectly good assets have been thrown out with the bath water, and I have the natural contrarian instinct to step into a trade no one else wants.
Even though I am not smart enough, I can't help thinking that smarts does not always mean having an edge.
Subscribe to:
Posts (Atom)