I try to change the world
Specifically, I invest in start-ups. I have my hits and misses and I can't yet say if I'm successful at it or not. What I can say is that it is difficult to get a company from zero to one. A start-up needs to replace something else, it needs to get "wallet share", a part of whatever budget clients have. In times of higher costs for electricity, transportation, mortgages and food that's getting increasingly difficult. And yet I insist on spending my cash on start-ups - simply because I'm driven to change the world for the better.
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CHAT GPT summary
The author invests in start-ups in an effort to change the world for the better, despite acknowledging that it is difficult to get a company from zero to one.
They invest in established companies in the expectation that tomorrow will be mostly like yesterday. They invest in a way that seeks quarterly momentum in sales, profits and valuation multiples. They expect growth rates, profit margins, valuation multiples, market shares, index component churn rates, etc. to oscillate slowly around their historical averages.
They also speculate, hoping for a greater return on investment.
They believe that there will be a recession and that the stock market will take a significant drop.
However, the author is not trying to make readers sell their shares but to educate them that wealth and stock wealth are two different things, and to distinguish between investing and speculating.
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Some of may failed investments include electrical marine-grade engines, insect protein, patient motion detection, mortgage robot adviser, renewable energy storage. Som of my better ones include credit score monitoring, systematic/automated start-up valuation, crypto index creation, Swedish PE investment company, and crowd monitoring for explosives and narcotics. And then there are the in-betweens like my Colombian gold venture, Human Resources SaaS, and online shopping automation.
My professional investments are of a completely different character. Firstly, it's market neutral, meaning I have just as many long positions as short positions. Secondly, I only deal with the world's largest and most established companies. I am long stuff like Swedish banks, US oil majors, and fertilizer companies. And I'm short expensive discretionary consumption (Tesla, Lululemon, Apple, Netflix, Amazon, DoorDash) and tech, cloud and software companies with low pricing power or extremely high valuations (Workday, Cloudflare, Snowflake, ServiceNow, Adobe, Autodesk, DocuSign, Nvidia, Shopify). Thirdly, rather than buying world altering technologies, I buy and sell what is already there. I look for quarterly momentum in sales, profits and valuation multiples. I try to imagine what others are seeing now (how they aseess the situation) and what they will perceive in the next 3-6 months. i.e.,
The message here is that I have one way to reliably make money for me and my clients, and another way to spend my money. I "invest" in established companies, in the status quo, in the expectation that tomorrow will be mostly like yesterday. I simply don't expect anything new under the sun. On the contrary, I invest on the expectation that growth rates, profit margins, valuation multiples, market shares, index component churn rates etc. oscillate slowly around their historical averages.
Then I turn around and spend my money on hopefully transformational companies that will make the world better. And if that happens, I get even more capital to spend.
What's weird is that I get to buy banks and oil majors at 8 times earnings when their profits are increasing due to higher interest rates and lower investments in oil production. At the the same time I get to sell loss-making also-rans in the software space at 10-20 times sales (implicitly 100-200 times normalized earnings. It's a free lunch if I ever saw one. Just like back in 2001 or 2007. According to a lot of indicators, actually more or less all but employment (which by the way is always lagging so we can disregard it), we're on the brink of a serious recession.
What typically happens from here, after the stock market correction and the bounce (both of which have happened exactly as in 2001 including within the same 15-month time frame), is that a recession makes both fundamentals (profits) and valuations (P/E multiples) fall significantly, thus taking stock markets drastically lower (30-50% lower from here).
Central banks will predictably counter with lower rates and re-starting QE programs, just as in 2001-2002 and 2008. And just as in those instances, equities are likely to fall off a cliff - as they almost invariably do in recessions when starting from high valuations. And high they are. Price/Sales for S&P500 is 2.4, which is higher than even at the very peak in March 2000. When the markets subsequently tumbled, most people said that the valuations of course had been unsustainable: "the norm is 1x sales, so 2.3 was just crazy". Well, we're at 2.4 now. Crazy talk?
So, we have patterns pointing downward. Patterns of economic activity (PMIs, eurodollar rates etc), patterns of CB behavior. In addition, valuations tell us stocks are at least twice as expensive as the historical average. Yup, a 50% fall wouldn't even make stocks fairly valued, let alone cheap.
A crash still doesn't have to happen. The reason stocks could get so expensive to begin with was that high valuations can always become even more ridiculously high. However, sooner or later stock prices always realign with the actual wealth creation (sales and profits). If a company makes 100 in profits, you're no richer if the stock price is 2000 than if it's at 1000. Only if you manage to sell the stock. But taken as a whole the stock market can't be sold to somebody else. All shares have to be held by someone. The wealth is the underlying profits, not the stock price. The ultimate (last) shareholder will only get the profits.
Why do I ramble on about this?
I'm not trying to make you sell your shares. I'm not saying a crash is imminent. I'm only educating you in the fact that wealth and stock wealth are two different things.
I'm also communicating the difference between making money and spending money, between investing and speculating. Investing entails profiting from entrenched structures, betting on the status quo, on the expected to continue. Speculating involves hoping for a change, for an unexpected breakthrough, a breakthrough you actually shouldn't rationally expect.
But what do I expect?
I think 2023 is the year. The year the recession is recognized, the year the Fed is forced to pivot. The year the very pivot signals doom. The year that demonstrates that everything as it always is: high valuations normalize (fall), super profits normalize (fall), monopolies are broken up (by regulators or competitors). It's the year of a typical once in a decade re-set. Sure, it might take until 2024 too, albeit slightly unusual and out of pattern. The point is, how will you act? With bravado or with caution? And why? And what is your plan B? You must have a contingency plan, a script for what to do when your bravado or caution are proved misplaced.
Resiliency is key, i.e., to always be sure to get to play the next round. Sooner or later the obvious pitch comes your way. You don't have to maximize every bet. Actually, quite the contrary, say no (underinvest) 95% of the time and make sure you have dry powder for those once in a decade moments.
"The steady players
make it through
the bear markets"
In very brief terms investing is about making calculated bets based on available statistics. The task is to buy current profits at a low enough multiple to account for the risk of unexpected losses. You have to have a margin of safety for the unexpected if you want to expect good results. Or you can speculate in windfall gains, in luck, in unexpected breakthroughs. You can also do both, first invest to earn capital that you can spend on changing the world.
Kind regards,
/Sprezza
P.S. This is just one(more) P.P.S. Two recent interviews in English: Kook Jester and Curious Worldview P.P.P.S. The English version of The Investing Course (www.finanskursen.se in Swedish) should be done by April or May, so keep a lookout if you're interested in investing and finance. The first year will be about half price for a skeleton course but will give access to the expanded full-price material in the future
KARL-MIKAEL SYDING
Hedge Fund Manager https://antiloophedge.com/
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former Mg Dir, Senior partner and PM at Futuris (Brummer)
The HFR European Hedge Fund Of The Decade (2000-2009)
____________________________________________________ Host of the "Antiloop", "Future Skills", "25 minuter" and "Outsiders" podcasts Video interview, July 2020
____________________________________________________ www.mikaelsyding.com https://mailchi.mp/mikaelsyding/investeringsprinciper sprezzaturian@mikaelsyding.com
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The fund Futuris received numerous awards, including several HFR Best Directional hedge fund over ten years, and not least European Long Short Equity HF of the year 2008 and HFR's award to The European Hedge Fund Of The Decade 2000-2009 (all categories)
