'Buy the Umbrella' - Issue #44
Hi there!
Here is your latest dose of ‘Buy the Umbrella’, a short list of interesting things we’ve been reading and thinking about during the week.
If you missed our prior issue, you can find it here.
Quotes
“In the real world, things fluctuate between pretty good and not so hot. In the market, they fluctuate between flawless and hopeless. We’re not at hopeless. Hopeless is October 2009 or March 2020. But at least we’re not flawless anymore.”
— Howard Marks (Co-founder and co-chairman of Oaktree Capital Management)
"Someone with half your IQ is making 10x as you because they aren't smart enough to doubt themselves."
— Ed Latimore (Writer and former heavyweight boxer)
Tweet
As ever, Nassim Taleb did not mince his words in his tweet.
Taleb highlights that venture capital funding is down ~55% year-on-year as of the third quarter, while deal count is down 20%. He believes investors have still not accepted this new regime of higher interest rates and its consequences, including its impact on companies that are unable to generate positive free cash flow.
In 2021, start-ups with a valuation of $1 billion+ (known as 'unicorns') were being created at a rate of more than two per business day, according to CB Insights. More start-ups hit unicorn status in 2021 than in the previous five years combined.
Charts
Analyst projections for the S&P500 in 2023
Every December, analysts from most the major wall street firms publish their macroeconomic and market forecasts for the coming year or two. Interestingly, for the first time in 22-years, analysts are forecasting a down year (2024) for their S&P500 annual change projections.
Now before you run off and spend hours reading what they have to say, note this: these projections have little to no predictive power.
Case in point: while analysts had projected positive returns for the S&P500 over the last 22 years, the index experienced seven negative years, including the bear market of 2000-02, down 10.2%, 13.0% and 23.4% respectively, and the 2008 drawdown of 38.5%.
With the benefit of hindsight, if you'd like to read what analysts had predicted for 2022, here is Bloomberg's 2022 summary of analyst projections.
If you are [somehow] still curious to read what analysts are predicting for 2023, see Yahoo Finance's summary here.
So what does matter? I highly recommend reading Howard Marks' memo appropriately titled "What really matters?".
Articles
UK government is considering whether to relax the ring-fencing of banks to free "trapped capital"
Ring-fencing, which requires banking groups to separate their retail banking operations from their investment banking activities, was brought into place following the global financial crisis in 2008. Fundamentally, it was designed to protect UK customer deposits. Bloomberg reports that the government is now planning to relax these rules to make the country a "better place to be a bank".
The hope is that deregulating the City of London would result in a "big bang" out of Brexit [we should perhaps be careful what we wish for?].
Saudi central bank accelerates efforts to boost liquidity
The bank intervened via open market operations, enabling it to provide short-term liquidity in exchange for securities from lenders. This helped stabilise the interest rate banks charge one another for loans however, it remains near a record high.
The funding shortfall is reportedly due to the rapid rise in lending in the country as part of the ongoing construction boom, which has not been matched by deposit growth. Saudi Arabia's construction pipeline is estimated to be $1 trillion over the next eight years, aimed at diversifying the economy beyond oil.
Meanwhile, the government is expected to run its first budget surplus in about a decade after seeing revenues jump on the back of higher oil prices.
Private equity: the new conglomerates?
Marc Rubinstein writes a thought-provoking piece, asking whether private equity firms, which generated strong returns initially by purchasing unloved assets from conglomerates, have now become so large that the firms and the portfolios they manage now resemble conglomerates themselves.
Clearly, there are differences: portfolio companies remain independent and are acquired through termed fund structures with the goal of selling them at a profit and returning capital to the fund's investors.
Despite this, Rubinstein argues that they are run by "the same firms, the same partners, and housed in the same portfolios.".
Using his example of Blackstone: in mid-2021, the firm controlled 250 companies across a range of industries, in which they employ more than half a million people.
Blackstone runs an internal "portfolio operations" team to provide functional support across its portfolio companies, helping company management with a wide range of areas such as brand strategy, data science, technology, M&A, procurement and recruitment. This team comprised of over 70 people in 2018 and has grown since, delivering $600 million of savings in the last full year. These can be compared to the "synergies" promised by conglomerates of old.
Adding to the similarities is the fact that many private equity firms now invest ever-larger sum of their own capital into deals.
Image of the month
Until next time...
Thank you for reading this week’s issue. If you found it interesting, consider sharing it with someone who would enjoy it.
Do you have any questions or thoughts? Please feel free to reach out.
Have a wonderful week.
Why ‘Buy the Umbrella’?
Individuals, many of whom also run businesses and governments, tend to not think of the downside when the present is stable, and the future is looking positive (usually when we feel most in control).
Just because it is currently sunny, does not mean it will never rain. If we are not prepared, once it does begin to rain, we will end up running around looking for an umbrella in the middle of a storm when they are typically in short supply. We therefore need to ‘buy the umbrella’ before it rains.
Simultaneously, we cannot allow our awareness of risk to make us fearful, pessimistic, or paranoid, as this too works against us over the long-term.
Having the right mindset in advance is critical. The challenge is getting the right balance between being optimistic about the future and being able to not only withstand future crises, but in fact grow stronger due to the opportunities they tend to present.
It is not enough just to be conservative. One needs to be willing to put cash to work when others feel least comfortable doing it. To do that with confidence, we need to have a foundational understanding of history, business, markets and human psychology.
Our mission at BTU is to learn as much about the world as possible, and in doing so, to try to find investment opportunities with favourable risk/reward characteristics. These should, over the long term, help build sustainable wealth.