Herro, Perro! w.33
Hello! Fun week, huh? I have a headache, do you think it's early symptoms of Covid-19? You're right, that's not a joking matter. Anyway, I'm happy to report I'm in downtown Seattle and just came back from Whole Foods. Guess what?!?! It's a normal level of busy (particularly given that Amazon employees can all work from home), and there is plenty of toilet paper. Can you believe that?
Sarcasm, aside. Promise.
Last week I shared the Crisis Investing article by Dan Rasmussen at Verdad Capital. And I got a couple responses from GPs who manage/managed funds over several hundred million AUM strongly supporting his work. Building on that, I highly recommend his interview here on 'what you should buy in a recession,' and the video at the bottom on 'why is private equity has hidden dangers.' Why is PE potentially dangerous, you wonder? His argument goes like this:
PE wants leverage and control of the company to change the capital structure by adding debt. If you buy stuff cheap, it leveraged, and get multiple expansion you doing really well. If you buy things expensive with debt and the multiple goes down, you get hurt really really badly
PE used to purchase assets at 40% discount to the S&P. They used to buy family business in the '80s and 90s used buy things at 4 to 5x cash flow. Now they pay, sometimes, over 12 times on adjusted EBITDA
Survey of CIO - 94% think that PE will beat public returns. Dan believes it will underperform relative to public markets. Contrarian view.
What are CIOs missing? According to Dan, the risk because they don't understand the credit quality of their investments. Huge variation between Moody's assessment of A-rated credit and institutional investors' view.
The lack of volatility lulls you into it. If the lending stops, you don't do deals.
At least half of PE debt is CCC, according to Dan, because the net debt to Adjusted EBITDA is 6x and more like 8x without adjustments, according to pitch book.
At the end of the interview Dan start's talking about financial panic and says: Three ingredients to a financial panics:
Consensus - CHECK: 94% CIOs agree
Leverage - CHECK: all-time high, well-above what the fed said was dangerous.
Increasing illiquidity - CHECK: longer and long hold periods
And then the interviewers suddenly cut off the interview. And it's like, why?!?! It was just getting good!
+ What's the counter view, according to a PE friend:
PE can mark to, basically, whatever they can convince their willing accountants
Lots of lending with no covenants so as long as the business can make the interest, the PE guys can hold on
Banks never, never want to write off a loan if they can help it
In the last downturn, PE could wait out the volatility and sell its assets to get a good return.
WHO KNOWS!?! We live in interesting times.
+Shopping on Amazon sucks now - I've been feeling this for a while. And, it's strange because Amazon's number 1 shtick is Customer Obsession: 'Leaders start with the customer and work backwards. They work vigorously to earn and keep customer trust. Although leaders pay attention to competitors, they obsess over customers.' But like any giant monopoly, when they get you, they get you, right?! You lose your guard. The monopoly gets greedy. Yuck.
Every single Amazon purchase now is an ordeal, that makes me feel like I am buying tickets on Expedia in 1999. Every tab on for a product on Amazon has to be paired with various other review sites like Wirecutter and Reddit. There are extensions, ranging from Honey for coupons to Fakespot, to…spot fakes. How insane is that?
Like most people who buy things on Amazon, I've long internalized and normalized this pain. The fact that a shopping website is so bad at spotting fakes on its platform, or that its marquee feature, reviews, are so gamed, barely even registers anymore. We think this is normal, but it is not. Amazon is famous for its razor-thin margins, but the work, a company, does to provide value.
The awfulness of the experience doesn't stop there. Yes, Amazon does have good return policies. But like everything on Amazon, that now is also gamed and manipulated.
+Last week, I passed on a recommendation by my friend, She Said. My friend wrote back and said he recommends Know My Name by Chanel Miller even more!:
About the courageous and no longer anonymous woman who the wrote the viral victim impact statement eviscerating Stanford swimming star Brock Turner her account of the ordeal is all the more searing for the fact that she doesn't even remember the actual rape - instead, its how she's treated by the criminal justice system and society, even as one of the few women who received competent legal assistance and has a bullet proof case (since two men witnessed her being raped and broke it up by assaulting her rapist), as well as what such trauma does that is the ultimate, devastating story. I couldn't put it down, I couldn't stop crying, and the prose had a rare lyricism and heart.
I read the buzzfeed article and in my new regime of #selfcare I simply can't put myself through a devastating story that made you cry but I'm passing it on! Retweet!
+This week, we have Ronan Farrow, who fresh off his victory lap of Harvey Weinstein (who is, finally, at Rikers) started a march out movement at his publisher, Hachette, for agreeing to publish and distribute Woody Allen's (Ronan's father) memoir 'A Propos of Nothing. Anyway, Ronan is powerful. Powerful enough that Hachette changed its mind as of four hours ago and decided to pull the book and return the rights to Allen. Ronan wrote Catch and Kill which I also haven't read but might, someday. It's about power and accountability and on the Know My Name, She Said theme.
+RIP Elizabeth Warren's presidential campaign. An angel investor on twitter wrote:
"Capitalism dodged a bullet: Elizabeth Warren was articulate, intelligent, charismatic & extremely hard working
She would have had a much better chance of dismantling the extreme capitalism we practice today, raising taxes massively & redistributing wealth at scale.
She was the real deal."
And, yeah, I think so too. I was tempted to copy the 4 pages on the "Prairie Populist" from George Packer's great book The Unwinding but thought you might revolt. So instead, I leave you with Warren's end of campaign remarks here, and a few below.
So if you leave with only one thing, it must be this: Choose to fight only righteous fights, because then when things get tough — and they will — you will know that there is only one option ahead of you: Nevertheless, you must persist.
And we did all of this without selling access for money. Together, more than 1,250,000 people gave more than $112 million dollars to support this campaign. And we did it without selling one minute of my time to the highest bidder. People said that would be impossible — but you did that.
+Loved this Collaboration Fund on 100 little ideas. They include:
Sturgeon's Law: "90% of everything is crap." The obvious inverse of the Pareto Principle, but hard to accept in practice.
Skill Compensation: People who are exceptionally good at one thing tend to be exceptionally poor at another.
Hedonic Treadmill: Expectations rise with results, so nothing feels as good as you'd imagine for as long as you'd expect.
Inversion: Avoiding problems can be more important than scoring wins.
Aumann's Agreement Theorem: If you understand your opponent's beliefs you cannot agree to disagree. If you agree to disagree it's because one side doesn't understand the other side's view.
Fact-Check Scarcity Principle: This article is called 100 Little Ideas but there are fewer than 100 ideas. 99% of readers won't notice because they're not checking, and most of those who notice won't say anything. Don't believe everything you read.
+The problem with optionality. Enjoyed this podcast with Mihir Desai, a HBS/HLS professor who explains some of life's tradeoffs using financial terms. This was recommended to me by HP member and the writer of a highly recommended weekly blog dedicated to Asian investments of Off-Piste Investing. Desai explains more in this article.
Options have a "Heads I win, tails I don't lose" character—what those in finance lovingly describe as a "nonlinear payoff structure." When you hold an option and the world moves with you, you enjoy the benefits; when the world moves against you, you are shielded from the bad outcome since you are not obligated to do anything. Optionality is the state of enjoying possibilities without being on the hook to do anything.
In fairness, these optionality-obsessed professionals often wind up happier than the other type I've become accustomed to seeing in my office: the lottery ticket buyers. These individuals are just one payday away from securing the resources they need to begin their work toward their true ambition, be it political, civic, or familial. They believe that one Silicon Valley startup or one stint at a hedge fund will allow them to begin their true journey.
My gripe with these articles that apply abstract concepts to about personal matters like how you run your life, the decisions that you make., is the author rarely shares deeply about their decisions. Who are they? The devil is in the detail. And it's all about the personal. That's one reason I decided in this newsletter that the most honest, most insightful, most meaningful things I could write about for you, my friends, and also for myself is the personal. You bring your full person to the table.
March 2020 is likely to be a real one for the books. Seems in keeping that on the cover of RollingStone is a very pregnant Grimes describing herself and her life carrying Elon Musk's baby. Grimes doesn't need black rock desert. Every day is Burning Man for her. What is it like for Grimes to live with Elon Musk? And when I read this description, it all made sense: "She looks somewhat out of place here, like the problem kid of a wealthy family, with her tattoos snaking out from the sleeves of the paisley turtleneck she's wearing under the Marvel shirt."
And I liked this part at the end:
"I like to aim very high," she says, her hand resting on her stomach again. "Because even in failure, I think I'll get higher than if I didn't aim very high. I'm not afraid of failure."She smiles. "And I'm not afraid of embarrassing myself."
I guess that's it. And I am kinda jealous of her not being afraid.