Back to school, back to work!
I’m diving into research on funds investing in Economic Opportunity Zones on behalf of a family for whom I serve as CIO. I first heard about EOZs in my conversation with Manny Friedman. The newly created bi-partisan section of last year’s tax legislation is a no-brainer for taxable investors to take a look. Have a listen to Meb Faber’s podcast with Steve Glickman (below) for a full introduction, and drop me a note if you know any great GPs addressing the opportunity set. Happy to compare notes and share what I find over the next few months
For those with children easing into school and suffering Fortnite withdrawal, watch this Holderness family video.
In honor of the season, I’ve sorted this month’s selection by course subject.
1. Risk in credit markets
Moody’s Investor Services released a piece for subscribers entitled “Leveraged finance – U.S. Convergence of bonds and loans sets stage for worse recoveries in the next downturn.” The piece is summarized for the rest of us by Bloomberg.
I heard ironic alarm bells going off when reading the article. A decade ago Moody’s whiffed on seeing problems in subprime mortgage pools, rating many tranches of securitzed products AAA that eventually were worth pennies on the dollar. Despite Moody’s failure and the manifestation of its misaligned incentives, the oligopolistic nature of its business and dependency of bond buyers on its ratings allowed it to weather the storm.
Moody’s, of all people, may be on the leading edge this time. The article reminded me of a research paper I wrote for Peter Bernstein a year before the Global Financial Crisis describing a strikingly similar set of conditions to those present today.
2. Anti-capitalism meme
I’ve struggled to see the logic in the populist missives against buybacks and private equity. However, in applying the lessons of behavioral finance and confirmation bias, I’ve tried to remain open to counter factual arguments.
Bryce Covert wrote an article on the Toys ‘R’ Us bankruptcy in The Atlantic, offering a thoughtful case study on how the asymmetric incentives of private equity firms led to the failure of an over-leveraged business despite delivering similar operating performance to before the LBO . It made me think twice about that reality and its implications.
Cliff Asness wrote an editorial for the WSJ on the topic supporting stock buybacks (so much for seeking out contradictory evidence). At the end, he concedes that overleveraged private equity is one of the imperfections in the system.
3. Elon Musk
Elon’s infamous tweet carried the business headlines this month (along with the next stage of trade wars of course). I dove into Ashlee Vance’s Elon Musk biography and learned a lot about the hard-driving visionary.
Morgan Housel wrote another fabulous blog, Natural Maniacs, describing the good and bad of entrepreneurs like Musk and how both sides necessarily go together.
I’m in Josh Wolfe’s camp (see podcast below). Tesla the stock has serious issues and Musk the CEO does as well, but without the company and him, we’d be a long way away from the rapid deployment of electric vehicles. Musk is incredibly positive for innovation and our country. If you’re the SEC investigating, what do you do?
1. Kristian Fok, CIO of Australia’s CBUS Superannuation Fund, discusses a different model that Aussies have pursued emphasizing internal direct investment. He talks about the opportunities and challenges of making it work.
2. Josh Wolfe, co-founder of venture capital firm Lux Capital, walks through his history of building a venture firm from scratch and shares a wide range of wisdom about people, incentives, markets, and competitive advantage.
3. Ben Reiter, author of recently released, and soon-to-be-best-seller Astroball: The New Way to Win it All walked through the Houston Astros process of going from worst to first in 3 years. It was astounding hearing how similar the game of baseball has paralleled the evolution of investing over the last 15 years.
4. Roz Hewsanian, CIO at Helmsley Trust, offered a refreshingly open perspective on managing people, process, and detailed examples of difficult manager decisions.
Best of the Rest
I fully participated in the driving season this month and came across some doozies.
1. Origins with James Andrew Miller on Nick Saban. This short series discusses “The Process” and is full of management wisdom. Bonus track 1 (Episode 4) is an interview with Saban and cuts right to the core of the message. I particularly liked Saban’s two-part definition of self-discipline. 1) There’s something I know I’m supposed to do, but I really don’t want to do it. Can I make myself do it anyway. 2) There’s something I know I’m not supposed to do, but I really want to do it. Can I keep myself from doing it.
3. Steve Glickman on The Meb Faber Show. Steve is the co-founder (with Sean Parker of Napster and Facebook fame) and CEO of Economic Innovation Group, and has been deeply involved in the creation of Economic Opportunty Zones, likely to catalyze a game-changing allocation of capital into underprivileged areas of the US.
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Have a good one!