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Hi everyone, I’m moving all posts to http://www.fraziscapitalpartners.com
I’ve transferred over the mailing list – so shoot me a message if you’d prefer to unsubscribe
The core problem in politics
Most fields have a specific core problem that needs to be repeatedly solved. In surfing it’s the bottom turn. In investing it’s valuation.
In politics it’s this: how do you speak to a nation of people who don’t care politics and certainly don’t care about you?
Every successful (democratic) politician has to solve this their own way, and a lot of strange behaviour can be explained by it.
Why did Tony Abbott, a roads scholar, define himself by the infantile phrase ‘Stop the Boats’? It’s perhaps clearer why Obama stood for ‘Hope’. We all know Trump is here to Make America Great.
These are far more than slogans, they penetrated the community psyche allowing tens or hundreds of millions of people to know who these people stand for. This then becomes authenticity and then support.
Gleeful articles grading and deriding the simplicity of the childlike language used by many politicians miss the point somewhat.
Wannabe politicains hoping to rise through party ranks should study this problem carefully. In almost every situation it’s best to build public profile, and should learn the elusive simple messaging that can pierce the zeitgeist.
A parallel problem is how to get your name out, which leads to the conclusion that all publicity counts. Unfortunately we are all too often witness to leadership challenges by absolute nobodies that haven’t managed to do anything of public note, yet aspire to public leadership. Profile must come first.
This was something Trump has understood for years.
Boris Johnson says it well.. Putin is also a master. Even my grandmother in Darwin has strong opinions on this Russian man on the other side of the world. In this case it’s his theatrics that penetrates, the tiger shooting, the hockey game winning and so on. (I just came across the tiger bear eating).
The wrong lessons
Over the past 12 months Trump has learned some terrible lessons. Hitler and fascist analogies are tedious (if not overdone) right now, but there is one part I find particularly compelling.
Hitler repeatedly moved aggressively against the views of all those around him, even his supporters. By the time the 1930s were finished he learned that the opinions of diplomats, politicians and generals stood for nothing against his own intellect.
These ‘experts’ got the core questions of the day wrong, or so they appeared. Hitler repeatedly outmanouvred the allies of the previous conflict in ways that seemed genius. Ofcourse, his strength was weakness, and the apparent weakness of the allies hid their true strength.
With the destruction of Germany’s old cities, mass rape of her women and lethal destruction of her armies, the experts were vindicated far too late. Remembering how proud Prussia was dismembered and absorbed into Russia, and only mentioned now in history lessons, the Brexiteers and Trumpsters should temper their gloating.
On election to the highest office, Trump has the ultimate proof of his own intelligence. Noone else has a handle on truth, save for those with him at the start, who he has now elevated above all others. Expect no respect from Trump for any advisor now.
More worryingly, his tactics were vindicated too. He lied repeatedly, got away with blatant racism (Obama’s birth certificate), sexism, and general piggishness in every way. There will be some rough times ahead.
His election is no proof of wisdom or intelligence, nor has any bearing on future orthogonal challenges. As investment advisors constantly declare: past performance does not suggest anything about the future.
The startup atmosphere is not what it was six months ago.
“I prefer building rather than fundraising,” Kalanick added in the interview with Betakit. “But if I don’t participate in the fundraising bonanza, I’ll get squeezed out by others buying market share.”
Earlier this year an expedition of climate scientists went to Antarctica to find evidence of global warming. Their boat was trapped in the ice.*
If you give it some thought, most of the climate predictions haven’t actually played out.
Not the details or minor aspects, but those at the very core. The icecaps are growing, weather is less extreme, polar bear populations are up and no coastal maps have been redrawn.
Are we just not going to talk about this?
Al Gore’s An Inconvenient Truth came out in 2006 and completely changed climate politics. It was an intensely political project.* He made the case for dramatic change and the redirection of trillions of dollars of investment.
I actually did do a science degree. In our second year we derived the classical heat capacity equations by applying statistical methods to a handful of threadbare assumptions about the quantum world.
The equations were developed hundreds of years ago by the first real scientists, using equipment invented by the misplaced energies of the alchemists before them. They are the undeniable, rock-solid scientific basis of climate science.
Climate politics has very little to do with this. The ever-reliable physical science behind planes and televisions cannot be compared with multi-decade weather forecasts and has even less to do with the effect of those weather forecasts.
At some point journalists and politicians have been allowed to associate the rigour of physical chemistry to the alchemy of long term prediction pseudoscience.
I could go into how experts in most fields are wrong when they make forecasts, but that would just be opinion. Plus it’s been said better before and frankly it would make me too angry. Instead I’m going to try something different.
An Inconvenient Truth came out about ten years ago. Al Gore beat this deserving woman and won a Nobel Peace prize, sparking a highly lucrative speaking career for him and his pals.
I thought now would be a good time to watch the film and compare the expert’s ten year predictions with what actually happened. I did this yesterday so you don’t have to. The first section is Al Gore being applauded in slow motion by enraptured audiences.**
Climate articles often start with ‘modelling predicts in X many years that Y horror will happen and doom us all’. Without wading into the swamp of poor logic and muddled thinking behind these models. But you don’t need a science degree to see whether predictions came true.
You are as qualified as the next punter to judge the following:
1. Al Gore : Polar bears are going to drown
In the film Mr Gore emotively narrates a cartoon of a polar bear sinking, and states polar bears have already started drowning. This is the latest data:
2. Al Gore: Weather will be more extreme
This really irked me because Mr Gore interspersed the destitution of Hurricane Katrina with political arguments that have nothing to do with it.
It’s possible to argue that statistically this data is compatible with a worsening.
But that is not what climate politicians have been saying. The clear forecast from Mr Gore was that we’re in for disastrous extreme weather in the near future and we need to incur dramatic costs to avoid it.
3. Al Gore: Icecaps are going to melt
This is my favourite because Mr Gore predicted on record on an almost annual that by 2015 the Arctic would be ice free in Summer. Not even close.
In the movie he showed New York, Bangladesh, Beijing and other population centres being swamped, implying catastrophic loss of life and property.
In 2009 he stated publicly that computer modelling predicted the Arctic would be ice free by 2014, and it was our last chance to avoid catastrophic climate change.
Umm.. the ice is still there.
The point is not that Al Gore is lying, but that that the models are very wrong. This has nothing to do with the science I spent years studying.***
In line with the Antarctic expedition mentioned previously, the a group of scientists on a 115 day expedition to the Arctic this year had to reroute their journey. Because the ice was too thick, according to the Canadian Coast Guard who actually live and work there.
Again even if record sea ice is not statistically significant, this is the exact opposite of what climate politicians predicted. The forecast was melting ice caps, unstable Antarctic ice shelfs and catastrophe. Al Gore went into much detail on this. Too often predictions of drought that end in flood are used as evidence of climate change or vice versa.
I could go on. He points to Mt Kilimanjaro and says it will be ice free in ten years. He points at the Himalayas and ten years ago implied the ice would shortly be gone.
Is anyone allowed to point out these very specific predictions have not played out? The global environmental movement was based on such predictions. Almost every Government just signed agreements on the basis of these forecasts!
How many years of data on how many different issues would it take to convince you that the consensus in climate politics is wrong?
To refocus back home, if you’re Australian you’ve probably heard the name Tim Flannery, though he’s not quite a celebrity. Until recently I had only thought positive things of the guy.
There’s something quasi-religious about the modern environmental movement. People who disagree are ‘heretics’. I had no idea it was this bad though. Tim is a climate science thought leader of Australia and was until recently paid $175,000 a year to advise the Government part time on climate science. He said the following:
‘For the first time, this global super-organism, this global intelligence will be able to send a signal, a strong and clear signal to the earth. And what that means in a sense is that we can, we will be a regulating intelligence for the planet, I’m sure, in the future … And lead to a stronger Gaia, if you will, a stronger earth system.This planet, this Gaia, will have acquired a brain and a nervous system. That will make it act as a living animal, as a living organism, at some sort of level.’
For those of my Facebook friends who have read this far you can now hate me more: I am stoked that Tony Abbott sacked this guy and feel like I owe him one.
Here are my ten year predictions that you can hold me to. In 2026 I wager that:
Finally, I have no doubt Al Gore will take all the credit despite getting everything wrong.
You probably haven’t heard of Valeant but you should, because it’s important. It’s a great example of how one person can really make a difference.
In this case an ex-McKinsey guy called Michael Pearson totally messed up the global pharmaceutical industry.
Mr Pearson became CEO of Valeant a few years ago. After careful analysis he figured that medical research was a waste of money. So he cancelled all programs and decided on a strategy of mergers and acquisitions instead.
As he must well have known, acquisitions almost invariably destroy economic value. They go ahead due to the incredible ’strategic’ advantages they have for the decision makers – the CEOs that run the company. Dealmaking is fantastic for executives but almost always horrible for shareholders and often enough for society at large.
As an example of how consistent this is, 90% of the deals made by major mining companies since 2007 have been written down to zero.*
Tens of thousands of mining executives, bankers and advisers have spent the past 8 years burning capital. If they did the opposite of what their thinking told them, they would have done better. Their entire approach was flawed, all their work was a waste of time, and they’ve demonstrated a total lack of understanding of their business.
Almost without exception.
If you were a mining executive or banker since 2007 you should have stayed in bed.
If only Michael Pearson made his mistakes in mining rather than Corporate Chemistry.
His strategy was to buy any pharmaceutical company he could get his hands on. He then immediately jacked the prices of the drugs as high as he could, while gutting research expenditure to as close to zero as possible. Thousands of highly skilled jobs were destroyed and fruitful avenues of inquiry abandoned because of his work.
To see why this is so appealing to the likes of Pearson, consider that if you cut $100 million of R&D costs it’s $100 million of earnings, which means you get it every year. This has a value of anywhere to $1 billion to $2 billion, or in the ridiculous valuation mathematics that still applies to Valeant, much, much more than that.
You can use this extra value in the debt or equity markets to buy another company, rinse, and repeat.**
When you gut a research lab all the institutional memory disappears. The equipment is sold at liquidation prices and the teams disbanded. It’s an entropy thing.. a house that took a year to build can burn to ash in under an hour. The same principle applies to labs full of bespectacled researchers, only we’re all depending on these labs to treat the diseases that will kill us.
There’s an argument that the presence of a player willing to pay top dollar for new drugs encourages that development and helps fund start-ups by giving them a clear exit route. I’m somewhat open to this view. Most drug development occurs in the US precisely because they’ve let a million business models flourish, creating a market large enough to literally pull these miracle treatments out of thin air.
I would take the US Facebook, Amazon, Google or Apple over any tech company Europe has produced over the same period, and Europe has more than twice as many people. Just because something emetic like Valeant turns up every now and then doesn’t mean that it should be killed because on the surface it seems to be up to no good.
In line with this thinking, Forbes argued that spending $16 billion on research or buying a research company for $16 billion is exactly the same.
Umm, no. They are completely different. Valeant is a truly repulsive beast that needs to be put down.
The cuts that justify the deals (‘synergies’) invariably involve the destruction of real networks, business links, knowledge and whatever that invisible stuff is that actually makes up a firm.
This kind of strategy needs an ever higher multiple on your shares and an endless supply of new prey.
The impact of this kind of strategy is far broader than it seems at first. Once one company starts this game all the others either follow suit or are bought themselves by that very company kicked things off.
The simple presence of a player like Valeant caused the entire US pharmaceutical sector to boot valuable researchers onto the streets, where they are unable to help you, me and our families beat the incurable cancers, heart conditions and other diseases that will kill us.
A notorious example of Valeant’s broader impact is that Martin Shkreli twat who cottoned on to Valeant’s idea that you could buy drugs, jack up their prices, then claim with a straight face that this was all a good thing. Fortunately he’s about to get his own punishment.
I’m also particularly irritated by Martin Shkreli as his interests (hedge funds and chemistry) overlap with mine, but that’s another story.***
Anyway Valeant gets worse. Aside from some of the most blatant tax structuring on the planet (it pays an effective tax rate of something like 3%) Valeant has been screwing pharmacies and insurance companies by manipulating them into buying their own overpriced and less effective drugs instead of cheap generics.
This looks illegal and mildly fraudulent, but probably not Enron-like.
From an investment perspective, however, the good news is that Michael Pearson will probably still lose the cheeky billion or so he paid himself recently.
The company’s market cap is $40 billion, with debt of $30 billion, for a total business value of $70 billion (excuse the rounding).
Valeant’s revenue is $10 billion – earnings are $0.6 billion and they’re now going to have to reduce the price gouging on their drugs. Due to the fall in share price and loss of confidence, the equity and debt capital markets will be closed to them. They will not achieve the growth required to justify a 7x sales multiple. M&A is now impossible.
Did I mention their research pipeline is empty?
I hate getting into anything late. Much better to build positions early and slowly in which case you invariably put in some capital at the top (or bottom when buying). This might be an exception.
My favourite part of this story is that Bill Ackman, one of my least favourite hedge fund managers, has around a third of his fund invested in this monster.
A couple of years ago Bill tried to get a company called Herbalife nailed for fraud and was proven conclusively wrong, after extensive and damaging investigations, after he spent a small fortune blown on private investigators and the like.
More recently he made a pile of coin by finding a way to legally insider trade.
He teamed up with Valeant and bought a huge stake in a company Valeant was about to bid for before the news became public. If a banker did this he would be jailed for years, but Ackman found a way and was the toast of the financial town.
In summary, if ever someone deserved to get burned in the markets, it’s this investor, on this stock, with this CEO. Both of these men are about to get Valeantly f*cked.
*To be clear, this isn’t 90% of mergers and acquisitions that made less than they hoped or destroyed ‘economic value’, it’s 90% of the total purchase price paid that subsequently vanished.
In these M&A roll-ups nothing of value is actually created. No matter where or over what time period you look at, M&A is a loss-making proposition.
**Ofcourse you need a high earnings multiple to make this work, and if there’s one carnivore doing this all the target companies tend to rise in price themselves.. which is all you need to know to realise this kind of strategy could never run forever.
There was an entire boom and bust in the 60s based on this kind of thing.
***At least I feel like less of a mercenary!
ps I think I went easy on these guys. According to the excellent work done by John Hempton of Bronte fame, Valeant sells vitamin A cream for $400 a tube. They sell another drug for $400 that’s available for ~$10. They sell a treatment for athlete’s foot with 20% success rate for $8,000 – a better one costs maybe $20. And it looks like they’ve done it by buying pharmacies, sending the drugs to people and getting insurance companies to pay the bill.
pss I trade this stock (advise you don’t) and change my mind all the time
I finally cracked 100% on the trading performance – a private goal for the past few years. Purple is me, blue line is Australian stocks, yellow and green are the US and the UK.
It’s been a bad period for a number of hedge fund heroes. Einhorn hasn’t made money in about a decade, despite his fresh-faced appearances boldly plugging such uniquely intelligent trades as long dated call options on Greek banks (lol). Ackman’s arrogance (‘I’ll donate all the profits on this trade to charity’) was justly and rightly punished. Paulson got everything wrong for maybe the fifth year in a row.
Since he paid himself a 3.5 billion dollar bonus one year he’s got almost everything wrong. Gold, oil, pharma, stock picks… You could have made a fortune just taking the opposite side of his bets. It’s incredible bad these guys really are at picking stocks. And these are the good ones.
As in most parts of life it’s better to be known as a brilliant investor than to actually be one.
Nobody has any business investing in hedge funds, though I’m about to set one up so I should probably stop saying that.
Anyway, pride goeth etc, though I like to think I’ve been sufficiently chastened by the market to last a lifetime. I’ve lost every cent to my name twice, and nearly everything a third time.
At least now in dollar terms I am very much ahead. It took four years to make back everything I lost in 2011 when all my option trades went sour a couple of weeks before finals.
Then I had a fraction of the capital and my trades were more than ten times the size they are now. The good news is I haven’t worried about the markets since and don’t even check them most days so it was probably worth it. Back then, most of the stocks I picked went fantastically but I lost money. These days I can’t catch a trick on the stock selection but the portfolio has been printing coin. Go figure.
Time to put more cash behind these trades.