Circle of Competence Issue #120

QUOTE OF THE WEEK

"The merging of the Fed and the Treasury which is effecitively what has happened during covid sets a precedent we've never seen since the Fed got their independence and its obviously creating a raging mania in financial assets and it hasn't transferred over to Main Street... I want all you guys cheering him on to remember the Maestro in 2005 and remember how that worked out." - Stan Druckenmiller, CNBC interview

FOOD FOR THOUGHT

Bessemer Ventures Deal Memos

Every now and again, I come across material worthy of inclusion in the Business Vault.

This is compendium of Bessemer Ventures deal memos is certainly worthy. They share their early investment theses of a selected batch of highly successful companies including LinkedIn, Twilio, Pinterest, Shopify, and more. Highly recommend reading through these as well as taking a look at the Business Vault for other resources that may pique your curiosity. This project will forever be in beta mode as it grows and I find additional resources on the investors, entrepreneurs, and companies that are worthy of study.

Stan Druckenmiller on the current market mania

I stumbled on this interview with Stan Druckenmiller from Wednesday the 9th with CNBC and he unequivocally compares the present period in the market to the 'party' of 2005. This is sobering to think about, with all of the stimulus that has been printed and deployed into the markets through various channels. Druckenmiller is one of the more experienced market players I watch and as I think about his comment comparing this period to 2005 (a full three years before the real estate debt and derivative bubble truly burst), I can't help but remember Prem Watsa's purchase of credit default swap securities beginning in 2003, a full 5 years (!) before the housing bubble burst. Watsa bled a small amount of his portfolio for 5 years before collecting a $1.5B gain in 2008 when his bets against the debt markets paid off. Talk about incredible patience and resolve!

Here's a neat quote from his 2003 annual letter on the riskiness of asset-backed loans:

"We have been concerned for some time about the risks in asset-backed bonds, particularly bonds that are backed by home equity loans, automobile loans or credit card debt (we own no asset-backed bonds). It seems to us that securitization (or the creation of these asset-backed bonds) eliminates the incentive for the originator of the loan to be credit sensitive. Take the case of an automobile dealer. Prior to securitization, the dealer would be very concerned about who was given credit to buy an automobile. With securitization, the dealer (almost) does not care as these loans can be laid off through securitization. Thus, the loss experienced on these loans after securitization will no longer be comparable to that experienced prior to securitization (called a ‘‘moral’’ hazard). And here’s the rub! These asset-backed bonds are rated based on their historical loss experience record which will likely be very different in the future – particularly if we experience difficult economic times. Also, in the main, these asset backed bonds are a creation of the 1990s, a period when the U.S. experienced one of the longest economic expansions in its history, followed by one of the shortest recessions."

One has to wonder - how long can the markets continue to discount the current negative impact of the coronavirus on mainstreet?

LINKS

Investing

Nikola: How to Parlay An Ocean of Lies Into a Partnership With the Largest Auto OEM in America (Hindenburg Research)

Beware the globetrotting private equity firm (Institutional Investor)

Warren Buffett is buying Japan - why you should consider it too (Forbes)

Investing in businesses with great fundamentals with John Huber (The Investors Podcast)

How They Did It: Halma, Plc, a UK 100-bagger (Chris Mayer)

Upside-Down Markets: Profits, Inflation and Equity Valuation in Fiscal Policy Regimes (O'Shaughnessy Asset Management)

The stock market is in an 'absolute raging mania': Stanley Druckenmiller interview (CNBC)

Real Estate

Nick Huber - sweaty business and self storage (The Fort Podcast)

Technology

Bessemer Venture Partners' Memos on deals (BVP)

Infobip is Europe’s latest unicorn — next step, an IPO (sifted.eu)

New architectures, much faster chips (Semiconductor engineering)

Michael Seibel - lessons from thousands of startups at y combinator (Invest like the Best)

Solar and wind reach 67% of new power capacity added globally in 2019, while fossil fuels slide to 25% (Bloomberg)

The long-term stock exchange opens (Protocol)

Palantir Technologies' S-1 (SEC Filing)

Social Capital is looking to acquire Opendoor through one of its SPACs (TechCrunch)

Introduction to Ethereum, the internet's government (Karl.tech)

Politics and Misc.

The secrets of elite college admissions (Wall Street Journal)

Darwinism, Immortality & the Fourth Frontier: The Next Step in Human Evolution, with Dr. Bret Weinstein (Dan Crenshaw's We Hold These Truths)