Category Archives: investing

Psmith was right

Here’s a good piece from the WSJ, distilling lessons for investors from 2008.   The best lesson is #7:

7. Psmith was right, too. Who? This fictional character, created by the great English comic novelist P.G. Wodehouse, frequently warned against the perils of confusing “the unusual with the impossible.” Certainly the events of the last year were unusual. Alas, too many thought they were impossible.

Here, in one line, is the key message from “The Black Swan.”

UBS Deathwatch

Enrico is having a small dispute with UBS. Their conduct makes Enrico think they are on their deathbed. The normal glaze of civility and decency that overlays business interactions involving large sums of money has been stripped away. UBS employees are simultaneously protesting their indifference to disputes over small amounts, blithely labeling them trivial, yet simultaneously scrabbling in the dirt for the small amounts like a crack whore looking for a missing rock.

Is Madoff going to kill them? Could be the last blow to a rotten ship.

The greatest Ponzi scheme of all time

My oldest son, Bert, is learning to drive. Every day, he drives to school and drives home, with old Enrico riding shotgun.

One thing I have continued to repeat to Bert to the point I am sure of nausea on his part is this: Assume everyone on the road is in a conspiracy to collide with you, but to make it look like an accident. Suspect everyone of waiting for an opportunity to run into you, or to make you run into them.

I have been spending a lot of time investing in small start-ups recently. I begin each due diligence with an assumption similar to the one I urge on Bert: I assume that the CEO is a liar, a thief, a fraudster, until proven otherwise. I take on the persona of an insane PI with an irrational grudge against the CEO: can I PROVE he’s a liar? Can I demonstrate that he’s a thief?

This is why I don’t get the people who were taken in by Bernie Madoff. He claimed to run the old split strike conversion option strategy, where you buy a given stock, and, for example, sell an out of the money call and buy an out of the money put. But simple math based on the huge quantities of money he was managing would have instantly revealed that this simply could not be true: the volume of options actually traded, at least publicly, were a tiny fraction of the volume that Madoff alone would have generated. Who could have been the counterparties on all these options trades? This would have been the very first question I would have asked.

Even without an answer from Bernie, one could have easily come up with the answer oneself: there could not possibly be any counterparties. You can’t slosh around that quantity of options without it showing up somewhere. Someone would be staffing gigantic teams of quants to crunch the numbers on the options trading, and these people have wives, husbands, boyfriends, girlfriends, homes, cars, condos in Manhattan, sewage, and bank accounts. This would be like me claiming to have 55 million barrels of oil stored in a big tank under my modest abode here in the Memorial Villages. Really, Enrico? What did you do with all the dirt you excavated?

Of course, it was a gigantic lie. There were no options. It was just a huge, long-running, incredibly successful pyramid scheme.

This kind of makes me cheerful. Here is yet another group of people voluntary setting their piles of cash on fire. We need all the asset destruction we can stand to stave off the hellish inflation we’re otherwise due for.

Blood in the streets

Enrico was looking at some commercial real estate recently, in a part of Houston with which he is not too familiar. He networked and got connected with a broker who knows that part of town.

I told him about the parcels, and about the investment premise. “I would run,” he said. He meant he didn’t think it would prove to be a successful investment. “Why?” I asked. He said “nobody’s buying right now.”

I thanked him for his time and got off the phone as quickly as possible.

This is a true story.

Good riddance to Spitzer

Enrico and Gladys, etc., are in the old country. A few days ago, we toured London Bridge, and got to go up on the old elevated pedestrian pathways, which used to allow foot traffic on the bridge even when the drawbridge was up. You get a terrific view from there of the City of London, and the dome of St. Paul’s.

You simply cannot miss the fact that the City is liberally festooned with construction cranes. I did not count them, but i cannot believe there are fewer than 20 cranes.

Let’s face it, London has already supplanted New York as the financial capital of the world. There are many forces behind this: the increased rationalization of financial operations in Europe, the rapid industrialization in Asia and its capital needs, the collapse of the dollar, and, not least, the extremely hostile regulatory environment in the United States, headlined by Sarbanes-Oxley and Elliot Spitzer.

There has been an unsustainable, disastrous move to criminalize what was formerly simply bad business practice. Thank god Spitzer has been consigned to the memoir desk of history.

Sarbanes-Oxley needs to be trashed. No one in his right mind would float a company in New York right now. The banking sector so completely revolves around this simple generating event that Sarbanes-Oxley is essentially an open artery in lower Manhattan, gushing blood into the Atlantic.

Winning Through Intimidation

I have to give a shout-out for Winning Through Intimidation, a 70s gem.  I have started re-reading it, after a recent business transaction made me think of the lessons I absorbed from it when I read it at the tender age of 16.

I am adding it to my list of mandatory reading for my sons. Maybe for my daughters, too? Hmm, not sure the world-view of the book is fathomable for the misleadingly named gentle sex. A lot of women I know would have gutted the turtle and served him for dinner in his own shell while he was still perfecting his business card.

Glengarry Glen Blake

Enrico’s avocation is scribbling and punditry, but, as with prostitution, the ability to derive income from my avocation is greatly hampered by all the amateurs giving it away for free. So, my vocation is the pursuit of filthy lucre, the efficient use of capital to extract highly excessive profits by buying future cash flows at very very low prices.  I once knew a guy named Jeff Luker, no kidding! We referred to him as Jeff “Filthy” Luker.

My incessant hand-wringing over the more banal financial instruments has probably been the source of some annoyance and impatience for all my readers, and everyone will probably know by now that I have been looking increasingly far afield for some path to at least mitigate the total ruination of my vexatiously won meager hoard of capital. Thus, I often these days find myself listening to entrepreneurs, pitch men, brokers, bankers and other would-be stewards of capital describe how wonderful life will be if I entrust them with the mission of delivering those ever elusive future cash flows.I attended recently an event regarding a late stage enterprise. Let’s just say that the enterprise is involved in the biofuels industry. The premoney valuation of this company was at least double the maximum I would normally even consider as a private equity investment, but I was swayed to listen by the shocking, stunning allegations about the potential size of the future cash flows.

This deal looked quite odd from the very beginning. The company had already consumed vast tracts of capital which had been ponied up by the usual suspects in silicon valley.Amongst these usual suspects is a gentleman whose name I will not mention in order to spare him embarrassment, but he made his fortune with companies involved with the applications of silicon chips, and he has now become quite passionately involved with clean tech, like so many of his SV brethren. You can watch a video tape of this gentleman declaring from the podium of an exclusive conference that the production and consumption of petroleum products is a net energy loser, that more energy is consumed in the drilling, transportation, refining and eventual burning of a barrel of oil than the energy that is produced by the eventual burning of the barrel of oil. Of course, this is complete nonsense.  The average energy balance for a barrel of oil, well to burner, is about 10 to 1.  Yet, in this video tape, people in the audience nod wisely when he makes this outrageous assertion, and no one bursts out laughing, and no one leaps up or even clears his throat.

I personally witnessed ANOTHER distinguished gentleman make this very same ridiculous claim from the podium of ANOTHER distinguished conference.  I did burst out laughing, and I raised my hand and waved it frantically, trying to get Martin’s attention, but he ignored me.  I later emailed him to tell him how totally full of crap he was, but oddly, I never received a reply.

At any rate, back to this company, which I will call BugFuel (which is NOT its real name, but would be an excellent name for this kind of company), this company, after consuming these huge swatches of capital, was now going around with a sort of would-be investment bank, looking to raise money from the likes of Enrico.

Now, I don’t mean to offend anyone, and I have a healthy self image, but the industry short hand for this sequence of capital raising would be something along the lines of “Let’s hit the dumb money.”  It is so odd, so unusual, to do things in this way that there is almost always a very interesting story lurking in the background.

I looked into BugFuel’s claims in some detail.  I looked into other companies working in this area.  I did all the usual things I do, based on my experience that the correct assumption, when looking at a new company run by people one does not know, is that the principals are all thieves and conmen, unless one can definitively prove otherwise.

I finally concluded that the company had excellent science, very good executive leadership, and a somewhat novel business model that had the potential to mitigate the gigantic, almost insurmountable barrier to biofuel companies which arises from the mind-boggling scale of the energy industry and the concomitant mind-boggling capital demands.

However, the valuation proposed by the company and by the wannabe investment banker just made me laugh.  It really made me giggle.  It bore absolutely no relation to any conceivable reality.  It was truly the greater fool theory made flesh.  It was so much so the greater fool theory that the wannabe IB dude kept babbling about Google in his pitch.  I finally asked this dude, whom I will call Glengarry Glen Blake, what on earth Google had to do with BugFuel.  He stammered and stuttered around for a minute, after I finally made him realize that he would have to stop talking in order to hear what I was saying, and explained, in his own quaint argot, that he was making an analogy between the potential “addressable space” of Google and BugFuel.  He meant, simply, to assert that BugFuel would be able to sell to a very large market, and that, upon a float, BugFuel would rocket up insanely in a googlish manner.

So, I decided that I would not get involved with this “opportunity.”  I phoned Glengarry Glen Blake to tell him thanks, but no thanks.  He answered the phone, put me on speaker, and I told him I was going to pass.  He then said something like “Who is this? What happened to Enrico Hale?  Can I please talk to Enrico??”  I laughed, who wouldn’t, but then, and I swear to god I am not making this up, he began SCREAMING at me.  He kind of calmed down enough to ask me why I didn’t want to play, and I told him the valuation was insane.  That really set him off.  He said, are you scared?  Are you afraid?  He said, you pretended you were interested.  He said, you’re lying, that’s not the reason.  Tell me the reason!

I don’t like being called a liar.  I don’t tolerate it.  I said “Fuck you.”  He said “What did you say?”  I said, much louder this time, “FUCK YOU.”  Some other dude who was in the room with Glengarry Glen Blake tried to interject something about the “addressable space.”  I said “Fuck both of you, and don’t ever, ever call me again.”  I hung up.

So, that was pretty mind boggling.  Glengarry Glen Blake sent me an abusive email a few minutes later.

I have to conclude that Glengarry Glen Blake’s former occupation was timeshare condo salesman.  The guy went all boiler room on my ass.

I wrote to BugFuel, telling them what had transpired with Glengarry Glen Blake.  BugFuel’s execs are responsible guys with great resumes.  If I were them, I would be absolutely mortified by the way Glengarry Glen Blake carried on.

Bear in mind, too, that little Enrico was absolutely going to invest no more than the bare minimum of the deal, if he invested at all.  He is a tiny little guppy in the context of this deal.  Enrico would like to know what on earth is going on that Glengarry Glen Blake could even get motivated to behave in this manner in this situation with little Enrico.  It is a useful skill in the worlds of high and low finance to be able to blow one’s top on cue, just as an actress must be able to weep copiously and credibly on command, but for most people who aren’t psychopaths, there is some threshold level of required motivation before one can trigger the adrenalin glands.