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Circle of Competence Issue #72

QUOTE OF THE WEEK

"Even so, the most striking characteristic of China’s presence on the Global 500 remains the overwhelming—and growing—dominance of state-owned firms. A calculation by Hong Kong’s South China Morning Post found that, if firms from Hong Kong and Taiwan are excluded, state-owned enterprises account for 80% of the revenue generated by Chinese companies on the 2019 list, up from 76% last year." - Alan Murray, Fortune

FOOD FOR THOUGHT

Howard Marks' new memo "On The Other Hand" (Howard Marks)

Two quotes from Howard Marks' latest memo jumped out at me, especially the second one (emphasis mine) which leads into some thoughts on Adam Neumann and WeWork.

"Low rates reduce the discount factor used in calculating the net present value of future cash flows. Thus, all else being equal, there’s a direct connection between declining interest rates and rising asset prices. (I consider this to have been the dominant feature of the world of finance over the last ten years.)"

"Low rates on savings and fixed-income investments drive investors to accept increased risk in order to pursue decent returns in a low-return world. This increased risk tolerance makes the financial markets more accommodating, increasing the availability of financing for ventures that otherwise might find capital in short supply."

Hence the public market appetite for high growth (yet high negative free cash flow) IPOs as of late...

WeWork's CEO, Adam Neumann (Intelligencer)

Adam Neumann is cashing out $700M prior to IPO (WSJ)