Circle of Competence Issue #27

Quote of the week: "Nothing in life is more liberating than to fight for a cause larger than yourself, something that encompasses you but is not defined by your existence alone." - John McCain (1936-2018)

FOOD FOR THOUGHT

Buffett Watch

As cliché as it seems, Buffett has always and will always be my favorite investor for his prolific investment career and the tremendous wisdom that can be learned by just observing his behavior. So naturally I thought it was very interesting when he gave the OK to Todd Combs, one of his right hand managers, to invest ~$300M into a private Indian payments and mobile commerce company, Paytm. A couple of points:

- this is their first direct investment in India, whose economy is exploding . Look for more investments by the conglomerate in the years to come.

- Todd Combs joined the board of the private company, which was certainly a term of investment. Buffett is almost on no boards any more because his time is better spent investigating new investments, so this is interesting that Combs would immediately join the board.

- Most importantly, Paytm is currently losing money but Buffett & company could be learning a new mental model on how money-losing tech companies can grow quickly (losing money along the way) to scale into BIG profits.

Continuing activism discussion

Last week, I wrote a column exploring whether activism is good for companies and the capitalist economy, or just good for agitating for a sale of a company and making a quick buck for investors. Matt Levine also wrote a nuanced piece on activism where his key point was that sometimes activists are right and sometimes they aren't.

This week I came across a couple pieces where it seems activists are almost unequivocally justified to engage with the target company, but for different reasons.

First, I shared two yetanothervalueblog.com (Andrew Walker) pieces earlier this summer on how Michael Dell is 'stealing' Dell Technologies' tracking stock $DVMT (see pieces here and here). The long short of it: the tracking stock was worth one share of VMWare but was being bought out at roughly a 40% discount ($109) to the price of VMWare ($165) at the time the deal was announced. Seemed to me that shareholders were getting shafted by Dell. Well, earlier this week, it was announced Paul Singer's Elliott Management is against the Dell buyout (NY Post). Despite the negative press given Elliott Management last week in the New Yorker's piece detailing their tactics, I tend to agree with them in this situation: DVMT shareholders are getting underpaid.

Secondly, I stumbled across these churches that buy shares in gun companies as activists and agitate for social justice (Institutional Investor) and corporate responsibility. It is quite common to see organizations invest socially responsibly (no gun stocks, casinos, or tobacco), however I had never heard of the religious organizations flexing their social muscles by investing directly as shareholders of such companies and pushing for change. Whoever said activism was all about the bottom line?

Conclusion: not all activist campaigns are effecting necessary and good change, and some are downright damaging to target companies. However, there are indeed some instances in which the incentives of a company or management are set up such that they trample on the rights of shareholders (DVMT) or aren't pulling their weight in pursuing positive social change (Sturm & Ruger) and activists are therefore justified in engaging with them.

DEPARTMENT OF GENERAL FINANCE

- Volatility is the friend of the long term investor - interview with Mohnish Pabrai (Economic Times)

- Harley Davidson needs a new generation of riders (Bloomberg)

- The LaCroix effect: public/private interest in sparkling water booms (Pitchbook)

- Chicago's new idea to fix its pension obligations: borrow $10B (WSJ)

- Argentina's currency plunges after interest rates hit 60% (Business Insider)

- Watch out for exploding corporate debt! (CFA Institute)

- Apollo buys goes off-shore for insurance operation (Pitchbook)

- How the Chinese business elite think of America (Bronte Capital)

- Where does the money go if sports betting is legal? (The Ringer)

- NBA signs deal with MGM for sports betting (ESPN)

DEPARTMENT OF TECHNOLOGY