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A failure of imagination

A couple of times in my illustrious (?) career I rejected what now would have been brilliant buys. They were real estate. At the time they were “too hard.” Today I’d buy them in a nanosecond. I have “matured.” I have learned how to recognize the essences of a good deal. (I hope.)

Two beautiful buys that came long in forty years. Today nothing grabs me as so obvious and so compelling.

In six or months or so — mid 2023 — there’ll be some great properties — ones that today are on a variable mortgage rate, and the bank doesn’t want the keys — because they know less than the previous failing owner and bank regulators don’t want ailing properties on bank balance sheets.

I wish there were compelling deals on the stockmarket. I’ve written, “Stay away from equities.” But readers who know more have said bunkum. Look at Merck, United Therapeutics and Gilead. I

f only I had known earlier.

Housing stocks have been weak. And with mortgage rates up more than double, they look like great shorts. Better six months ago.

My best short has been Meta. Here’s a good explanation from October 22 Economist:

It is almost a year since Mark Zuckerberg announced that his company would change its name from Facebook to Meta, to reflect its commitment to the metaverse and, no doubt, to escape the firm’s toxic public image. Many were unsure what the word meant, but with the company’s value at a near-all-time high of $1.1trn, and its core social-network advertising business humming away on the back of a pandemic boom, investors were willing to indulge the experiment.

A year on, things look different. The metaverse on which so much has been staked remains unproven and unpopular. Meanwhile there are signs that both users and advertisers are drifting away from the social networks that pay Meta’s bills. Since its rebranding the company’s share price has dropped by 60%, destroying more than half a trillion dollars of market value (see chart 1). Forecasts for profits in 2023 have fallen by about 50%, according to data from Bloomberg. Meta’s next earnings results, due on October 26th, represent an “existential quarter”, says Mark Shmulik of Bernstein, a broker.

It gets better. Remember FANG? Here’s today’s Economist on “Big tech, big trouble”

In 1997, in his first letter to shareholders, Jeff Bezos, Amazon’s founder, wrote that it was still “Day 1” for his firm. Day 2, he later explained, would mean stasis, followed by irrelevance. His rousing call to avoid complacency seems apt today. Silicon Valley’s five big tech giants, Alphabet, Amazon, Apple, Meta and Microsoft, have long been the bedrock of America’s stockmarket and economy, miraculously combining reliable growth and profitability. But after a torrid third quarter their market capitalisations have now collectively dropped by 37% so far this year. About $3.7trn of value has evaporated.

The law of large numbers made it inevitable that the tech giants would mature. Sales growth in the last quarter slowed to 9%—barely above inflation. As they have grown bigger, they have become tied to the economic cycle; a fact which the digital surge during the pandemic only temporarily masked. Penetration rates for smartphones, digital advertising and streaming are plateauing. With slowing core businesses, the giants are venturing onto each other’s turf, increasing competition.

Meanwhile, they are threatened by “conglomeritis”. The symptoms of this disease are bloating and egomania. Consider the recent orgy of spending on hiring, experimental ventures, vanity projects and building data centres. In March the five firms’ combined annual expenses reached $1trn for the first time, and the value of the physical plant of these supposedly asset-light businesses has reached $600bn, over triple the level of five years ago. Swollen costs and balance-sheets mean returns on capital have fallen from over 60% five years ago to 26%. Three of the five do not deign to pay dividends.

It is hardly unprecedented for successful companies to lose their focus, or to fail to control costs. In the 1980s rjr Nabisco’s executives splurged on jets and golf before being ousted by private equity’s barbarians. General Electric sprawled and had to be partially bailed out during the financial crisis of 2008-09. The best safeguards against such indiscipline are active boards and investors. When successful managers start to believe that they always know best, it is the board’s job to rein them in.

But here, the tech firms’ governance rules add a twist. Often they entrust disproportionate power to bosses and founders, some of whom enjoy special voting rights that give them near-absolute control. Such bosses often cultivate an image as visionaries, whose daring bets horrify myopic outsiders but end up lucratively transforming the world.

At the worst end of the spectrum is Meta, the owner of Facebook, run increasingly erratically by Mark Zuckerberg. Its value has dropped by 74% this year. Its core business is wobbly, attracting too much toxicity, too few young people and too little advertising. It has become clear that Mr Zuckerberg is betting the firm on the metaverse, an attempt to diversify away from social media, on which he plans to lavish 20 times what Apple spent to build the first iPhone. Because dual share classes give him 54% of voting rights, Mr Zuckerberg has been able to ignore the pleas of outside investors. Alphabet, the owner of Google, has performed better but is flabby. Its founders retain 51% of its voting rights, allowing them to overrule the wishes of other owners.

In the middle is Amazon, which has over-invested in e-commerce and expanded too far, crushing its cashflow and returns. Mr Bezos, who remains executive chairman, owns less than 15% of the firm’s voting rights, so he has to be at least somewhat responsive to investors. Apple and Microsoft are at the benign end of the spectrum. Both firms are older, no longer have founders with controlling stakes and operate on the principle of one share, one vote. Both listen to outsiders. In 2013 Tim Cook, Apple’s boss, sat down for dinner with Carl Icahn, a fiery investor, and took on board his request to return money to shareholders through buybacks. In 2014 Microsoft invited an activist investor, Mason Morfit, onto its board. The two firms have performed the best of the big five this year.

When you have disrupted industries and created hundreds of billions of dollars of wealth it is hard to accept financial constraints and outside scrutiny. Nonetheless, many in big tech’s elite need to show more humility and better performance. Otherwise Day 3 might bring an escalating confrontation between them and investors over who controls the most successful firms of the past two decades.

Skip FANG. Try energy

Want to try something crazy? Look at energy stocks. I own some XLE, an energy ETF.  If I had bought it a year ago, I would have done better. But meantime, I’m waiting for another dip to buy some more.

Nothing is as compelling as those two properties I didn’t buy. Idiot.

Tears for Elon and Twitter

Elon’s like the dog that chased the car, caught it and now has to learn to drive it.

Elon now has a billion a year interest bill on the $13 billion he borrowed to buy Twitter for $44 billion. It’ll be a hard pull. Twitter has lost money for eight of the past ten years. It’s now losing $4 million a day. To save money, Elon is firing (or trying to fire) half of Twitter’s 7,500 employees.

Elon has changed his handle from Chief Twit to “Twitter Complaint Hotline Operator”.

Elon is one of the smartest guys alive. I’m in awe of his imagination and his accomplishments — from Tesla to SpaceX, from the Boring Company to Neuralink and OpenAI and to Starlink.

If I lived remotely and wanted high-speed Internet, I’d order Starlink instantly — one-time hardware of $599 and $110 a month for service.

This is him for Halloween:

Latest rumor:  SpaceX (i.e. Elon, etc.) should buy Boeing.

Try this: Boeing’s market cap is less than half Elon’s net worth.

Stranger things have happened.

Great articles to read this weekend

For nearly 80 years the world has enjoyed paralleled peace and prosperity, Technology, off-shoring, intelligent politics and American strength has brought hundreds of millions out of poverty.

No longer. Increasingly, the world is now ruled by autocratic nut cases, with China and Russia leading the charge into the insane asylum. Not convinced? Read these four pieces:

+ Thank You, Xi Jinping

From New York Times. Click here.

+ The Sources of Russian Misconduct
A Diplomat Defects From the Kremlin
By Boris Bondarev

From Foreign Affairs. Click here.

+ Russia’s Dangerous Decline
The Kremlin Won’t Go Down Without a Fight

From Foreign Affairs. Click here.

+ How Saudi Arabia Sees the World
MBS’s Vision of a New Nonaligned Movement

From Foreign Affairs. Click here.

For tomorrow

I love my new hearing aids.  I have  tasteless cartoons. No space today.

 — Harry Newton