I first came across the name Jason Zweig when reading the commentary in the revised edition of the Intelligent Investor by Benjamin Graham. I read this book over a long period a few pages at a time while in high school but I remember really enjoying his commentary that helped break down and “modernize” some of what Graham was saying.
I forgot about him for many years, to be honest, until I subscribed to the Wall Street Journal and came across his Intelligent Investor columns. I have been an eager reader ever since! It’s also been really nice to be able to get on the email list so that now his commentary and links to top reads for the week hit my mailbox every Tuesday or Wednesday.
Last week he asked the question “What’s the most ridiculous investing idea you’ve come across lately — or ever?” and I knew exactly where I wanted to go with this one so I went ahead and responded.
In this week’s column/post I was excited to see my answer show up!
Venture-capital firms, private-equity firms and many small start-ups appear to be in business for a quick payday of M&A, getting swallowed by a FANG, or overleveraging themselves for near-term dividends — as opposed to solving problems for consumers…. At the end of this period I think a lot of “owners” (small investors, pensions, endowments, etc.) are going to realize significant value has been destroyed through this short-term decision-making. Charlie Groover, Houston, Texas
(Yes, I just quoted myself in my own blog/journal…) Here is the full post. There are some other really good answers like NFTs and triple-levers ETFs as well.
April 20, 2021 Intelligent Investor Newsletter
My comments were cut down a bit as I probably ran too long in my response (and I’ll give it a shot here too!). The general point is that I get the sense that less people are out to build businesses around wowing their customers in some way. Or businesses that are financial fortresses. Or intergenerational businesses with the goal of owning and operating them for 100 years!
Sure these exist still. Berkshire Hathaway and Costco are the top two that come to mind for me. But that’s not the focus of most businesses managers and CEOs today. The goal for many is to strip value, take dividends, add debt if not already high enough (PE Model) or to create half baked businesses, fudge numbers (eyeballs, users, clicks) with a goal of flipping to a larger player like a FANG. Rinse and repeat.
And at the end of the day it’s worked in recent years. I can’t help but think it’s been pushed to extremes at this point and won’t work much further in the future. FANGs and other large tech companies are now a huge percentage of the S&P500. PE companies, or the boards of their acquisition targets, are starting to see court cases turn against them when a company defaults due to reckless levels of debt are added. And since 2008 these FANGs and PE fund (“alternative investments”) have become a larger and larger part of capital under management in endowments and pension funds.
What does this mean? Not necessary that the market crashes, USD loses its mantle, and society falls apart. But it may mean that we see a long period of sub-par returns in most investment classes. The juice has been squeezed and we’ve pulled forward from future potential through debt in both the corporate and government spheres. No telling how this plays out but deleveraging has to happen in some form, slow or fast, though repayment or devaluation.
My thoughts about the root causes and possible solutions to some of this. I attribute the issues to two things both of which are part of human nature. One is a natural preference for the here and now over delayed gratification (especially if the repayment is stretched far enough out that goes beyond one’s lifetime) and two, the principle-agent problem. If, as owners of capital, we outsource decision making to a CEO or fund manager then they are naturally going to do what nets themselves the greatest value. This can be value destructive “exits” (M&A), adding debt to juice the beta of the remaining equity (as D/E goes higher the E should see more movement when the business does well or poorly). As our funds get larger and larger it all becomes more unwieldy to enforce rigorous decision making on this small group of agents.
My solutions are not perfect but here they are though:
- Control my capital to the extent possible. Make stock or fund selection directly so long as I am willing to put the time in to understand business characteristics such as cashflows, balance sheet, and management quality/governance.
- Look for businesses with high executive ownership that aligns interests
- Understand what I am buying when I buy an ETF. What’s in and what’s out. Percentages of largest holdings and in what regions of the world. What are the management costs. Finally try to understand on what basis/mechanism they will by making future additions/removals from the fund.
- Get engaged. Vote my shares in annual proxies. Email Investor Relations teams when I am not happy with a decision. Do what I can to get my perspective on issues in to these principles in the company. (One example of this is that I almost always vote against the CEO being chairman of the board because I believe those roles should be segregated and that the board shouldn’t be lead by management. As an owner I want the board to work for me and direct management, not the other way around).