The SportsFolio Journal - April 15, 2021
The SportsFolio Journal - April 15, 2021
“Coloring” a Shark
We are going to try something different this week. Kevin O’Leary, one of the “sharks” on the popular investment pitch show Shark Tank, provided commentary across a variety of financial topics earlier this week. Kevin is obviously a very smart, successful businessman, so we thought it would be interesting to do a play-by-play and provide color commentary. Below, we present his thoughts followed by ours.
1. "I'm waiting. So far there's been no correction, but I've lived through lots of volatility and I know, just when it seems to be safe, poo poo happens." - discussing the prospect of a market crash.
We agree. A market correction is not a matter of if, but when. A ratio that was popularized by the Nobel Laureate Bob Shiller has become dangerously high. By the way, if you haven’t read it yet, check out Bob Shiller’s Irrational Exuberance.
2. "GameStop's brand has way more value today than it had five months ago, before it became part of every headline around the world, day after day. Netflix saw the writing on the wall when they were mailing DVDs to everybody and said, 'We're going to digitize this,' and they had a brand. Maybe GameStop can do the same thing."
Anything is possible in theory, but we think GameStop becoming the next incarnation of Netflix is pretty remote. Netflix saw an opening and made the best of it. They have produced, and are still producing good content. One low monthly price to access a mass of solid content was a great proposition.
GameStop did not come into the public consciousness because they have done something similar. They have done so with an assist from the subreddit r/WallStreetBets and the stock subsequently skyrocketed. That the business model could change sounds like fitting a narrative into a story after the fact, as opposed to people realizing GameStop’s future cash flow expectations had changed materially.
3. "If I was short GameStop stock right now, I'd be worried. I think it's going to get a second kick at life. This whole social constituency supporting it - the pricing of the stock is kind of irrelevant at this point."
The very act of shorting assumes not only you are right in your value vs. price position, but also that the price will converge to value soon enough. Alas, as Damodaran often says, you are playing a dangerous game if you think you can reason with markets. We agree, shorting GameStop is not a good idea, but not because it is not overvalued. It is because there are rational bubbles and the stock may become even more overvalued before it converges to its true value.
4. "It's hilarious if you look at the volatility of Amazon over the last 20 years. You would have never owned it as it's so volatile, but in the long run it's created a trillion dollars' worth of value for shareholders. Same thing is going to happen to these stocks that are going to provide digitization." - underscoring the growth prospects of Zoom, Shopify, and other stocks that enable remote activities.
This is called selection bias. For every Amazon, there were hundreds of stocks that were too volatile, and investors did the right thing by staying away from them (or the wrong thing by buying them). Could there be one or two stocks that become category winners in digitization? Absolutely. Does that mean that every “digitization” stock is a winner? Absolutely not.
5. "It's not good news for the airlines because even though they're coming back, it's all basically vacation tickets. Everybody's going to Disneyland in a big tube. That's a very crappy business, they won't make any money. Over the next two years, probably a couple of them have to go bankrupt." - underscoring the challenges for airlines if business travel permanently falls by 15% or 20%.
It is indeed hard to see a scenario where business travel won’t fall. People were traveling quite a bit before the pandemic and a big part of that was because there was hesitation around how much can be accomplished remotely. People adjusted and learned how to get things done.
That stigma is gone forever. Over the long run, the economy will find its equilibrium (with respect to business travel) where travel will happen when it needs to happen. That equilibrium is below where it was two years ago and above where it is today.
Is that enough to bankrupt an airline or two? Maybe. Though that assumes the airlines won’t adjust and create new revenue sources. They are already experimenting, American Airlines, for example, started selling wine during the pandemic. Not having the benefit of monetizing the hesitation around remotely conducting business, the airlines will innovate more. Maybe that’s what needed to happen in the rare industry where the customer experience has actually gotten worse over time.
6. "Frankly I'm not a big fan of SPACs. I do have about 20 SPACs in my portfolio right now, but only from operators that I know. A SPAC is no different than private equity, and so I need to know the team that's backing the SPAC has done deals before, knows how to buy at the right multiple, and knows how to operate. I'm against the idea that some celebrity knows what they're doing in private equity, it's a joke. I avoid those like the plague, I think those are going to go to zero."
We agree there are too many SPACs chasing too few investment opportunities. That can’t be good. In any event, believing a team can find the right target is not investing, it’s speculation.
7. "I'm a big fan of Robinhood because even though it's got a lot of criticism, it helps 22 million people learn about stocks. I'm a big believer in learning the ways of the stock market."
We disagree wholeheartedly. We are also big believers in learning the ways of the stock market, but the desire to educate gives nobody a free license to gamify investing. That creates many problems in the long run. A kid’s life ended because of Robinhood, and that’s one too many. In any event, we know a better way to teach finance.
8. "When you get into these complex straddles and collars and all of this stuff with leverage, sometimes you wake up with a hangover after going out to a party, and you forget the position you have on and you just blow yourself up. You've got to be careful."
We are in full agreement.
9. "I'm beyond sanctions, I want to take them right out of the financial system in North America." - calling for the US to adopt a tougher stance towards China in order to level the playing field.
This sounds drastic. Can’t we just get along? We think we can.
10. "Elon Musk is a maverick who doesn't play by the rules, but he's actually a good example of how this relationship should work. If American companies want to go to China, they shouldn't have to give up control of their intellectual property to do that."
They absolutely shouldn’t, but that point could probably have been made without reference to Musk.
11. "If you believe that burning up huge amounts of coal is detrimental and I do, you should stop buying bitcoin from the Chinese. Over time, as institutions start to really get involved in crypto, you'll have the discounted blood coin from China and you'll have the premium virgin coin with provenance - no different than blood diamonds."
Here, the U.S. vs. China discussion and the crypto discussion blend together. That is not a good starting point for a merit-based debate. There is already one good reason to buy less crypto, which is: it is not a financial asset and therefore not an investment. We should start there. Of course, we agreed with Kevin when he called Bitcoin a giant nothing-burger.
12. "NFTs are a derivative of the digital economy. There's merit, but as a new asset class it's going to be immensely volatile. The idea that you have something that's copyrighted in perpetuity and can't be forged is really interesting and a good idea. At the end of the day they will find their place."
NFTs are interesting, we wrote about them before. Just digitizing something does not turn something that was not an asset class before into an asset class. Physical sports cards are collectibles that could be priced, not valued. Top Shot does not change that fundamental truth.
13. "You're pouring free money out of the sky from a helicopter into anywhere you can stuff it. But then you're raising taxes so you're taking it back right away, before it has a chance to have any effect whatsoever. You can't suck and blow at the same time, it doesn't make any sense." - criticizing the Biden administration's plan to follow up its stimulus efforts by raising corporate taxes.
That seems like an oversimplification. One should think about who accesses the stimulus and who pays the taxes. One should also think about the short-term needs of our country vs. the long-term needs.
14. "The idea that Yellen can run around the world asking for a standard minimum corporate tax is a joke that's never going to happen."
Minimum corporate tax is not a bad idea. But we agree that it is quite unlikely that there will be a consensus on that idea. That’s good news for tax consultants, but probably not so good news for the people on the street.
15. "I covet downside protection much more than outperformance. I don't care about beating the indexes at all. I don't need more money, I need to keep what I've got."
One of the most important things in personal finance is knowing what you want and acting accordingly. Investing is ok, so is speculation (as long as speculation happens in a socially beneficial context, like the stock market). What is not ideal is mixing the two. There is nothing wrong with focusing on protection which means your speculative portfolio should be really small.
16. "Buying the dip is more rock and roll, but what invariably happens is you go through a massive correction and you learn a very important lesson. The generation that is trading right now has never gone through a sustained correction. It's coming - I don't know when, I don't know what'll trigger it, but they will learn their lesson. If you have a lot of leverage on, it's a hell of a lesson because you end up in a negative net-worth position. But you do learn from it."
History tends to repeat. We have two choices. We can read it and learn from it, or we can blindly believe that “this time is different.” It really isn’t. If you want to continue to party, that’s fine, but don’t expect a bailout when the punchbowl is gone. We think that the assumption that U.S. equities can continue to generate 7 percent on average will be tested like never before. Japan is a perfect example of a cautionary tale.
17. "Take 10% of your paycheck, put it away, and do not touch it except in emergencies. When you take money and burn it on a vacation, or buy some useless piece of crap you're never going to use - which many people are guilty of including me - you've killed off your future. That money's not working for you anymore. Do you really need another pair of jeans, another pair of shoes? Just look at your closet of all the crap you don't wear, that's all money you wasted."
Agreed.
18. "If you walk around with an Apple Watch on, that thing is a piece of consumer-electronic junk. I own Apple stock, but I would never be seen dead with an Apple Watch. Not a chance in hell." - voicing his preference for wearing traditional watches and supporting conventional watchmakers.
To each his own. Economists learn quickly not to question people’s preferences, but rather the decisions they make given their preferences and their constraints.
We hope you enjoyed our take on Kevin’s views. We’ll repeat this process when we come across another interview just like this one.