Circle Of Competence Issue #21

July 22, 2018

What are you reading this week? Drop me a line or tweet @competence_co. Also, this week, I'm encouraging my subscribers to forward Circle of Competence to one person who you'd think might enjoy getting curated links weekly. Thanks and have a great week!

 

HIGHLIGHTED INVESTOR

 

This week I had the distinct pleasure to speak with a seasoned commercial real estate broker and investor, Jim Scofield from Raleigh, NC. He was gracious enough to allow me to share a few nuggets I took from our conversation and share them below. Enjoy!

 

1. As an investor or businessman in general, DWYSYWD - do what you say you will do! Following through with promises is such an important part of building a positive reputation that will precede you in more areas than business. 

 

2. Time kills all deals. Investing requires great patience, but when an opportunity presents itself, move swiftly. Time kills all deals.

 

3. Take the 'value investing' approach when investing in real estate, which means investing consistently through all the cycles, up and down.  You can never time the market peaks and valleys exactly, but if you invest consistently through the cycles, you’ll get some good deals in slower markets, and you’ll pay more in hotter markets.  But over the long haul, which investing is all about, you’ll achieve a profitable “weighted value” for your portfolio. Consider and evaluate all the opportunities available to you, and invest in the one that will yield the highest risk-adjusted return. Continue to deploy capital conservatively in all markets (with reason). Over time you will build up a portfolio of properties at different rates of return, but it will average out to a satisfactory rate of return as long as you do not over leverage.

 

4. Real estate is all about relationships so get in touch and stay connected with those who hold the keys (brokers, owners, etc.)

 

5. Leverage is a key aspect of real estate returns but use it with prudence so that when markets cycle and times get tough, you can hold onto possession of the asset.

 

6. Do your due diligence on the people you are doing business with. As my father-in-law would say, any deal or contract is only as good as the person behind it. 

 

7. Persistence is key. Don't take no for an answer and keep knocking on doors. Follow up, follow up, follow-up.  Today’s “no” will eventually turn into a “yes” at a future point of time due to changing circumstances. The deals will follow. 

 

 

DEPARTMENT OF GENERAL FINANCE

 

Working Capital: Bodies, Blood, & Buckets

Short essay by the Adventur.es firm (led by Brent Beshore) on working capital in private company negotiations. I had never thought about working capital as anything other than a balance sheet metric for public companies, but as you will see, in this article he points out discrepancies that can happen in negotiations where buyers and sellers think parts of the working capital will belong to them after closing the transaction. Interesting read!

 

LinkedIn Discussion On Structuring Self Storage Deals

Wonderful discussion on Kris Bennett’s LinkedIn on what he is seeing in the Self Storage Markets today as he underwrites deals and is trying out various deal structure scenarios. Absolutely loved the comments - the power of a network can’t be understated!

 

Live Stream With Paul Moore On Investing In Self Storage Deals

Fantastic live stream by Paul Moore from Wellings Capital on niche investing in Self Storage. He is an experienced multifamily syndicator and is currently syndicating large self storage facility deals. If you listen closely, you will hear several wonderful little nuggets on what to look for when examining self storage deals including:
 

- looking for less than 7 square feet per person of storage space in a 3 mile radius as a proxy for market saturation.

 

- statistics on how people find storage facilities around them (convenience, road frontage).

 

- Mom and pop operators are aging and could be great sources for deals that are priced attractively.

 

Dell's Buyout Doesn't Math Doesn't Quite Compute

Another interesting piece on the Dell-DVMT buyout that is happening at a massive discount to VMware’s current market value. Valuing core Dell at $1B seems to be quite conservative, even if Dell himself thinks it to be worth $17.5B. The value is certainly between the two numbers and is probably higher than a mere $1B in my humble opinion. See more in depth analyses in last week's edition for more information and do your research, but this situation looks ripe for some good old fashion shareholder activism to push for a higher deal price. Dell is simply stealing DVMT from minority shareholders at $109/share. (Disclosure: long DVMT). 

 

OTCAdventures On Doric Nimrod Air One (DNA:LN)

Alluvial Capital found a way to buy a closed ended fund that finances and leases out... Airbus 380’s? Interesting thesis on an investment opportunity listed on the London Exchange. The comments are especially enlightening because there are several knowledgeable readers who point out a potential drawback in the investment thesis (the resale value of the lone Airbus 380 might be overstated). 

 

Ben Graham's 1920 Hedging Strategy

Very interesting article by Novel Investor on the convertible bond and preferred stock arbitrage  strategy employed by Ben Graham in the 20’s that worked quite well. It was interesting to note however, that as profits got easier with the exponential market increase, he stopped hedging positions fully to let profits run... and it was almost his undoing. He learned (and later shared) many valuable lessons in the crash of 1929 on the topics of leverage, greed, and sticking to strategies through full market cycles. 

 

Cyclically Non-Adjusted Earnings

This article is a magnificent little piece of wisdom. It encompasses one huge human behavioral bias - the recency bias and extrapolating recent results far into the future. It is wise to “normalize” earnings to arrive at a conservative valuation of a business in order to avoid valuing a business at peak earnings and thus paying more for a stock (or piece of real estate or any asset) than its truly justified intrinsic value over the long run. 

 

Map Of Economic Opportunity Zones

Bloomberg has written some interesting articles on tax advantaged zones known as Economic Opportunity Zones that were slipped into the latest Trump tax bill. They are zones that can offer capital gains incentives and other forms of tax shelters for investors, should they put money to work in the form of long-term capital investments (real estate, businesses, etc.). This is a map of those zones for those who are interested.

 

A Short History Of US Trade Wars

Despite short trade wars happening every few decades, international trade relative to a couple centuries ago has continued to become cheaper and cheaper. This is good for international economic cooperation as well as providing consumers with cheaper goods on both sides of the table. It may be that Trump’s tariffs are the start of a trade debate that threatens to spark a larger international conflict, or it may just be another blip in the graph. Time will tell. 

 

 

DEPARTMENT OF TECHNOLOGY AND STARTUPS

 

Best Buy Should Be Dead, But It's Thriving In The Age Of Amazon

Many thought Big Box retailers would die a swift death at the hands of Amazon, but this didn’t exactly play out the way most expected. This piece illustrates some ways that Best Buy clawed its way back from the brink of destruction as a traditional brick and mortar retailer. Great read! 

 

Elon Musk Vs. Short Sellers

Deep piece on the Tesla Shorts and how they are potentially attempting to “bankrupt Tesla” by cutting off cheap financing in the capital markets. I enjoyed this piece, although budget some time - it’s lengthy! 

 

Netflix And The Rise Of Global Media

This is an absolute masterpiece on the competitive position and moat of Netflix’s business. Courtesy of Ensemble Capital, this long profile of the NFLX business is thorough and deep and illustrates how the company navigated from “Blockbuster killer” in DVD’s to internet streaming behemoth. Although you will need to budget a good chunk of time for this one, I promise it does not disappoint. This piece is timely given Netflix's earnings (miss) this past week! 

 

Inside JD.com, The Giant Chinese Firm That Could Eat Amazon Alive

Very interesting mini profile of JD.com and how it grew from a small brick and mortar store to the Chinese Amazon-like behemoth it is today. 

 

Pokemon Go Hits $1.8 Billion In Its Two Year Anniversary

We’ve been reading about Fortnite and the explosion in its revenue numbers, but back in previous weeks, I wrote that we hadn’t heard much about Pokémon Go and other mobile games just a couple years after their launch. Seems like their growth is certainly slowing, but they still raked in $1.8 billion! The video game industry in my opinion is similar to the media/streaming  content industry - dependent on churning out more “hits”  but where the hits are big, they are exponentially big. 

 

New York To London In 3.5 Hours? Supersonic Travel May Be Back

Supersonic travel is making a comeback, but will consumers pay up?

 

“This is the future we were promised.” Love that quote. 

 

 

DEPARTMENT OF PODCASTS

 

Value Is Dead, Long Live Value (Invest Like The Best #95)

One of the best podcasts I’ve heard in a while, this episode dives into the disruption happening in e-commerce/retail and internet streaming/traditional cable media industries. Whoever the anonymous guest (a modest proposal) is, he is smart money. You can’t go wrong with this episode of Invest Like the Best. 

 

The Investors Podcast #199 - Learning From Jeff Bezos

Wonderful episode discussing various interviews with Jeff Bezos, the founder and CEO of Amazon. This is full of fantastic glimpses into the managerial genius of Jeff Bezos. 

 

BiggerPockets #288: 75 Units In Their Early 30's (Jason & Carrie Harris)

This is a wonderful episode with a married couple on how they saved, invested, and just didn't let anyone tell them 'no' when they were financing their first deals. Now, they own 75 units worth over $11M in their early 30's with the goal of acquiring 500 in the next few years. What a journey in less than ten years! I highly recommend this for those looking to get into the real estate investing industry because Jason & Carrie drop some great knowledge on how to navigate lenders, various types of loans, and how to work the system to your favor using house hacking. 

 

Anthony Scaramucci - It's Called A Mooch (Capital Allocators #60)

I have to say, I had preconceived notions about Anthony Scaramucci from filtered media reports after he got fired from Trump’s administration. However, after listening to this podcast episode, I have a lot of respect for his mental toughness given everything he went through. While I’m not exactly a fan of fund of funds for the simple reason that they stack fees on fees (see Warren Buffett’s bet against fund of funds), I think Scaramucci has had an interesting career in identifying talented hedge fund managers and seeding their businesses and steering it through the Great Recession. 
 

A great quote from the interview (originally from Ronald Reagan) on delegation in life and business:


“It’s amazing how far a man can go if he doesn’t care who gets the credit.” 
 

 

DEPARTMENT OF LETTERS

 

Curreen Capital Q2 Letter

Short read from Cureen Capital on the benefits and drawbacks of an illiquid portfolio. Interesting things to think about when constructing a portfolio.
 

Hayden Capital Presentation On iQiyi At ValueX Vail

Very interesting research and presentation on iQiyi, a massive Chinese video streaming platform service (like YouTube and Netflix). Given by Fred Liu of Hayden Capital, it gives a solid profile of the company, where it has come from, its current financial position, and where Liu thinks it is headed. I really enjoyed learning about the company but have to wonder if this a story similar to Netflix. Like NFLX, it is spending billions on acquiring content and producing content and is cash flow negative because it is acquiring customers at whatever cost.  Liu believes the company will be profitable by 2021, but I don’t know that I could pull the trigger on a massive company valued at over 7x sales that isn’t even profitable at the gross profit level. While the upside could be HUGE, I am 1) not very interested in making big bets on unprofitable companies with ‘potential’ venture type returns that 2) don’t have much of a margin of safety in its valuation. This might mean that I miss the boat on NFLX and iQiyi, but it also means I have a 0% chance of permanent capital loss from investing in either name.
 

What are you reading this week? Drop me a line or tweet @competence_co. Also, this week, I'm encouraging my subscribers to forward Circle of Competence to one person who you'd think might enjoy getting curated links weekly. Thanks and have a great week!

 

 

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