Thank you for all the support, comments, etc- I truly appreciate it.

But I want to take a step back for now.

Feel free to contact me on a 1-1 basis via mylesmarino1@gmail.com

- Myles

Teams: Masters of Business Administration Students (MBAs) vs Kindergartners

Challenge: Build the highest tower with the given materials

Winner: Kindergartners (if they did not eat everything first!)

Why did MBAs lose to 6-year-olds? Dharmesh Shah, HubSpot's Co-Founder explained his success as:

"A combination of dreaming really big and iterating really small and having tight feedback loops" - Dharmesh, My First Million Podcast

He gave an example of this approach: The Marshmallow Challenge

Teams get a marshmallow, spaghetti, tape, string, and 18 minutes. Highest tower wins. Simple.

Why do MBA graduates perform poorly? What did they do in 18 minutes?

1. Introductions

2. Study the problem

3. Assign everyone tasks

4. Plan a structure design

5. Build their structure carefully

6. Start to run out of time and rush

7. Place marshmallow as the build falls

Compare this to Team Kindergarten:

1. Start building

2. Pick up any fallen pieces

3. Figure out what did not work

4. Consider eating the marshmallow

5. Repeat steps 1-4 until the timer rings

One team plans. The other team does.

Team Kindergarten had a tight feedback loop. They would start building. Then fail. Then build again. Do. Fail. Learn. Repeat.

10 minutes into the challenge- Team MBA have built zero towers. How many times do you think Team Kindergarten failed before Team MBA finished introductions?

Stop planning. Stop thinking. Start doing.

There is value in thinking ahead. But what if your plan stinks? Do not wait until the 17th minute to figure this out! Do. Fail. Learn. Repeat.

I have fallen into the trap. Constantly thinking. Constantly planning. But never doing.

For example, I have re-read Buffett’s letters multiple times. But did I get more value from reading the letters for the 6th time or from reading about a random industry?

There is value in listening to others. But that learning means nothing if I spend zero time applying it to businesses. Do not fall for the same trap that I did!

"The person that turns over the most rocks wins the game" - Peter Lynch

Anyways, back to rock flipping.

Why do the price fluctuate so widely when values can’t possibly? I will tell you the answer I have come up with: The answer is I don’t know and I don’t care. We could waste a lot of time about psychology but it always happens and it continues to happen - Joel Greenblatt

Split $1 into 4 quarters. Cut a sandwich in half. Slice a pizza into 8 pieces.

The underlying physiology does not change. Your wealth did not change. Your sandwich has the same calories. Your pizza has the same amount of cheese. Nobody has gained, and nobody has lost. Split, cut, and slice all you want. You still end up with the same result.

Forward stock splits are similar. Companies take their existing shares, and split them. Sometimes in half. Sometimes into 20s.

Today you own 100 shares at $10.
The company splits.
Now you own 200 shares at $5.

Either way- the underlying value of the business should not change.
The sandwich has the same calorie count. The pizza is as cheesy as ever. Your brokerage account still says $1,000. Just because you increased the amount of pieces does not mean that the whole has changed.

Right?

Academics would say otherwise. After decades of research, academics have concluded:

1. Stocks that split outperform by ~2% in the short term

2. Nobody can agree why

Satisfying, right?

As my Aunt alluded to in her request- several of the largest companies have recently announced stock splits. Amazon. Google. Tesla. Why?

C-suite executives often suggest that the reason for splitting is to lower their stock prices. This allows smaller investors to buy more shares. The argument is that these investors cannot participate in owning Berkshire Hathaway ($400,000+), NVR ($4,000+), or Autozone ($2,000+).

This tells us why managers split their stock. It does not explain the relative outperformance.

Instead of re-hashing a dozen academic papers (I fell asleep writing that)- a 2007 paper summarizes some of the theories. If you're into that academic-type stuff...

All we know is that on average, splits outperform. We don’t know why. All going theories have mixed results and have either been refuted or outright disproven.

I will tell you the answer I have come up with: The answer is I don’t know and I don’t care. We could waste a lot of time about psychology but it always happens and it continues to happen

Joel Greenblatt makes it clear that sometimes you don’t need to know the underlying reason. Sometimes knowing that something happens without understanding why is necessary to make money. Fair enough, Joel.

On the other hand, if post-split companies start to underperform on average over the next 20 years- understanding the underlying reason suddenly becomes important.

We blindly trust and use without knowing much about the underlying all the time. Food. Your computer. Substack posts.

Is it easy to blindly trust? Yes. Is it smart? Maybe. Should you do this with stock splits? I'm not. Give me the underlying causes and then we will talk. Until then, see you all next time.

1. Most “technology” companies compensate employees with stock

2. These companies had abnormal sales in 2020 and 2021 (Thanks, COVID)

3. Most high-flying technology stocks are down ~40% since January 1, 20221

If you add up these factors together- what do you get? It seems like DocuSign is figuring that out right now. In a recent earnings call, the CEO was asked why so many sales reps are leaving. His response:

They kind of knew only one DocuSign, which was, quite frankly, achieving the sales success was a heck of a lot easier than it had been previously...From a compensation standpoint, they [sales reps] said, ‘I think I’d be better off trying some place new’

So the reason so many sales reps are leaving is:

1. A tougher sales environment

2. Seeing last year’s compensation cut by 30% rather quickly2

This is something I have been watching for a lot of companies lately. This talent drop will especially hurt companies that rely on attracting the most creative people in the world. If this is happening to DocuSign, which doesn’t rely on creativity, imagine what is happening to Netflix’s writers!

Year to date- the stock is down nearly 70%! 50% of Netflix’s compensation last year was in stock- so employees just lost 35% of their 2021 paycheck!

Of course, Netflix will “remedy” this by having to issue more stock as compensation to keep up with their falling stock price. IE if you give out $100 in compensation and have a $100 stock, then you give away one share. If the stock is now worth $50, now you need to give away two shares to match last year's compensation. Ouch!

Be careful if some of your companies are falling into this viscous cycle of employees leaving and falling stock prices. This may get uglier!

You run a business for the shareholders and for increasing shareholder value. If that means that the company gets sold and somebody walks in one day and says “this is something I want”- then great. But, you make the right decisions for shareholders to increase their value. Do not run a business to sell it. If you run a business to sell it- it will fail

Said Andrew Austin, energy entrepreneur in a recent In the Company of Mavericks interview. This mentality of building a business to increase its value and not to simply sell has been a consistent message of his for well over a decade now, and it is something I wish more took to heart.

Sometimes it is clear when a company puts the “for sale” sign up. Maybe they created a “strategic alternatives” committee. Maybe they hired “outside consultants”. Or maybe the CEO plainly says that they are looking for a strategic buyer in a conference call. Either way, I come across way too many companies that have one thing on their mind- an exit.

All of the above examples are from operators who typically have to be underhand about their desire to sell the company- lest they undermine hardworking employees. Investors, on the other hand, are more than free to talk about selling. Investors at all levels often seem obsessed with selling at the first opportunity! Who cares if the company is firing on all cylinders? Who cares if the company is creating more value for customers than anybody else? These questions are overshadowed by the big one: when can I sell?

I have talked to some investors who make it a point to position the company to sell from Day 1. The most blatant I have heard was one investor explaining that every board meeting- the first question they ask is “how are we going to sell this business”. This may seem like a shrewd question, but is that really the way a business should be run? Yes- this investor has limited partners that want a high return- but is making yourself “attractive” to a strategic buyer from Day 1 the best way to improve returns? From my perspective, time is better spent improving the product and finding new customers.

It is one thing to sell your company after building it for years and years- and finally a trustworthy buyer comes along and offers an attractive price. Sometimes selling the company is the right choice- but nobody can control if Google offers to buy you out. Instead of focusing on selling at the first opportunity, investors should be focusing on letting these operators build! If you ever catch me pushing a company for a sale- remind me to focus on what matters.

There is no risk, there is no uncertainty, no luck. Compare that to other games- such as basketball or investing. There is no “correct” move. Should you shoot this shot? What if you can get a better one off in a couple seconds? Should you short this company? What if they are about to announce an upcoming buyout? What information are you missing? What are other people doing and how will that affect your performance? You don’t know all the information- nobody does! Basketball and investing are dynamic games- very different from a static chess board (although Bobby Fischer has tried dynamic chess)!

No matter how good computers are- they will never be perfect at finding great investment opportunities, as they cannot have all the information in the world. Even the legendary computer scientists over at Jim Simon’s Renaissance Capital admit their algorithms are only right 51% of the time. Now that is a game that interests me! Chess on the other hand? Not a fan.

Or maybe I just suck at chess…yeah…that is probably it.

Daniel Kahneman wrote about the many cognitive biases where our mind becomes lazy and tries to take shortcuts- often to our detriment. There are plenty of biases which we surfer from, but the one I care about today are framing effects.

Framing effects are when the choice of a couple options are influenced more by how information is presented instead of the information itself. For example, would you rather get on a plane and hear that there were 176 flight casualties in 2021, or that 99.9999998% of people who flew in 2021 were safe? Clearly, one has a different framing perspective than another.

A lot of governments and news organizations play with the framing issue. My favorite example is how a Spanish broadcast framed Eden Hazard laughing with his previous team after his current team lost. You don’t even need to speak Spanish to feel this guy’s emotions. Compare that to BT Sports and you will see a world of difference!

Although that is a silly example, think about how one might frame a recent political victory:

Former Chief Secretary John Lee was elected with 99% of the votes cast

That is how Regina Ip Lau Suk Yee, a member of the Hong Kong Legislative Council Member framed a recent political victory. Another way of looking at this is that 99% of voters preferred John Lee to nobody. Was this really the people’s choice or an uncontested election?

Don’t get tripped up with how information is presented! This type of framing is dishonest and dangerous. There is often a reason one statistic is used over another. Keep a watchful eye!

When a friend mentioned this movie- I assumed that Bigfoot was a metaphor. I assumed that the movie would be about a man who peaked at a young age and was deluded into chasing the illusion that he could regain that feeling in his old age. I assumed wrong.

I talked about this decision [to not short the subprime mortgages]. He [Charlie Munger] said that if you made a lot of money by doing CDS, you may still be looking for the next one today. The opportunity of a big short. The nature of human beings is like this. - Li Lu

Who were some investors who peaked early- and later destroyed their businesses? My mind wandered to those who shorted subprime mortgages 14 years ago.

John Paulson founded his firm in 1994. By 2007, he became a celebrity by earning $15 billion for his investors by shorting the subprime mortgage market. His assets under management peaked at $38 billion shortly after. After predicting 5 more global financial crises from 2009-2018, Paulson’s investors lost ½ of their money!

David Einhorn had great returns from 1996-2006, 10x his investors money! He recommended shorting companies that were manipulating numbers to fool regulators- such as Lehman Brothers. Over the next 13 years, David continued to short these companies- and his investors enjoyed a 2.6% annual return, while the S&P 500 returned 15% per year. There has not been a year where his firm outperformed the S&P 500 since 2009. Assets under management are now $1.7 billion, down from a peak of $12 billion.

Meredith Whitney became a celebrity overnight, after recommending to short various banks in 2007. Her best prediction was shorting Citigroup. Within days of her recommendation, Citigroups’ CEO resigned, and the company ran out of capital. What happened? Well, she continued to predict macro events, such as a meltdown in the municipal bond market that never happened. In 2015, she started a hedge fund and quickly closed after negative returns. She recently left Wall Street to focus on financial technology startups.

Steve Eisman bet against the subprime mortgage market, and quickly doubled his client’s money to $1.5 billion. In 2012, he started his own fund, but closed it in 2014 due to under-performance. He stated that individual stock picking was dead- and focuses on macro-events, like the 2008 bubble. Now he continues to manage money under a large investment manager as a portfolio manager. 

Michael Burry, as usual, is the outlier here. He has seemed to fare just fine after the Global Financial Crisis. He made a ton of money for his investors (>4x!), and then closed his fund- defying industry convention. He stopped chasing the next “Big Short”, and continues to focus on individual companies. Sure, he lost his business, but his track record continues to impress!

If you do not let go of your past successes, then you will never be able to embrace the exciting future. Focus on what you can do today- not what you did a decade ago.

“Some old ones just…hang around” -The Man Who Killed Hitler, and then the Bigfoot

Recently, I wrote about Embecta (EMBC), a recent spinoff from the giant Becton Dickinson. Emebcta spun out at a price of $49, and quickly traded down to a low of $27. This is a predictable company that has 15% market share of insulin injection devices. There are supply chain and inflation pressures for the business, and the financials have a lot of noise in them. The business earns 70% return on capital with a normalized operating income of $360M/year. At an 8% earnings yield, the business is worth around $50/share. This is not the greatest opportunity on earth, but it is an interesting spinoff. Enjoy!

Embecta Post

From 1963 to 1978, Joe Girard set and broke the record for most cars sold 15 times- and sold a grand total of more than 13,000 cars! This was accomplished by making individual connections with customers- and not by selling fleets of cars. Joe has many accolades from Guinness World Records to Salesmen awards to being invited to speak at General Motors, Krogers, and more. How did he do it?

I started reading his first book: How to Sell Anything to Anybody to find out! I will start off by saying that this was not a Bad Conference Read, but a sit-down-and-take-notes read. Normally, I am skeptical of guru-types writing books, but this one was fantastic!

Joe's secret to selling over 13,000 cars was simple: he had to find repeat and referral business. At least, that was the outcome. His true secret was: get people to like and trust you. In this post, I will not go over how Joe got so many people to like + trust him. Instead I will go over Joe’s why it was important to get so many people to like and trust him. 

It all started when Joe asked an undertaker and caterer how many guests they expect for a funeral and wedding: 

It’s a matter of experience. You look in the book where people sign their names, and you count, and after a while you see that the average number of people who come is 250…About 250 from the bride’s side and 250 from the groom’s

Girard’s rule is such: every person knows 250 people important enough to invite to the wedding or funeral. This number can be disputed, as theories like Dunbar’s Number argue that we can only have 150 stable relationships at once. Either way- we can estimate that we each know ~200 people.

The second part of Girard’s theory is that people love to talk. About themselves, their experiences, and what they have been up to recently. I do not think that this needs much explaining- everybody has the same favorite topic: themselves.

So if we accept that 

1) everybody knows 200 people and 

2) people like to talk about their experiences

then we can conclude that every time Joe speaks with somebody, he is reaching 200 people! No interaction stops at one person. Now imagine if you talked to 9-10 customers per week- you would reach over 100,000 potential customers every year!

Knowing this, Joe made sure that every person he talked to would have an immensely positive experience with him- predisposing 200 people to liking + trusting him! If you take this in reverse, Joe knew that if he upset one customer, he would upset another 200 customers- losing tons of business in a few minutes!

So remember- for every person you talk to, 200 are listening. Did you make 200 friends or 200 enemies with your last conversation? The walls may not have ears- but everybody and their moms do! And yes, I am about to quote my great-grandmother in my own newsletter. 

Kindness costs you nothing. Except maybe a smile - Rose Marino

What is briefly true today- and what is true forever? Most things that we know to be true become falsehoods (or vice versa!). Finding transitioning truths can provide lucrative opportunities, if done correctly. Although this post is finance-centric, this framework can be used outside of finance as well!

Here is a generally accepted truth: Apple is a great business. Below are some useful (pre-pandemic) metrics to back this up:

• Return on capital of 40% (most public companies do 10%)

• Growing 15%/year with plenty room to expand (most public companies do 10%)

• Gross margins of 40% (most public companies do 30%)

Now ask yourself- is the  truth that Apple is a great business brief or permanent? I have talked to people who say that Apple’s competitive advantages are impenetrable! Apple is the best business in the world! Apple will be around forever!

Well- forever's a mighty long time- and few things can evaporate quicker than a business model. Those metrics I just showed? They describe Bed Bath & Beyond. Yes, these numbers are indeed from Bed Bath & Beyond- albeit from 2011-2015. Interestingly, these numbers are similar to Apple’s metrics pre-pandemic!

If we take the same data and spread it out over a few more years, here is what happens to this Apple-like performer (the red toast-looking circle is what I showed you above):

• 3 year return on capital of ~3% 

• Growing -9%/year and “downsizing” operations

• 3 year gross margins of 34% (still holding up!)

    So what was once briefly true- that Bed Bath & Beyond was a great business by any metric, became a falsehood. Maybe they will one day recover to their former “glory”, but nobody is  arguing that Bed Bath & Beyond is a great business. 

    Investors need to ask: when will Apple start declining? Even if Apple continues to dominate 100 years from now, there will surely be a time when Apple starts to deteriorate. Not knowing these signs will get any investor in trouble!

Other Brief Truths

• Service businesses are the best businesses

• Software is the best business model in the world

• Paying 20x revenue for companies is a good idea

    I am sure you are questioning how this helps you. Well- the answer is that finding transitioning truths can be powerful. Tracking inflecting truths and falsehoods can make you a lot of money, if done right (which is the hard part!). 

Share A Truth

12 failures. 3 wins. This does not scream “successful” by any measure. But these failures led to a celebrated President. How did he endure so many failures?

In the insightful A Lifetime of Observations, Wooden mentioned how one of his heroes constantly failed. He explained that Lincoln, Wooden’s hero, persisted despite constantly failing in his professional and personal life.

From failures of the heart to losing political positions, Lincoln carried on. This persistence eventually led to the reunification of the United States- which made Lincoln one of the most celebrated Presidents. When one of the greatest coaches ever tells you to focus on the now and shrug off failure- maybe we should listen!

So how did Lincoln persist despite failing 80% of the time? Since my Ouija board is in the mail- I cannot ask Lincoln himself. But I can guess!

Lincoln persisted because he loved his work & knew he could make a difference.

If you love what you are doing and can make a difference- why stop? Or as John Wooden would put it:

Success is never final, failure is never fatal, and it's courage that counts.

Recently, I was asked about DWAC- the company merging with Trump’s “media” company. I knew about this transaction, but stayed away because the company was being valued at $15B and had revenue of $0. But, I was asked to look at this weird deal- so why not!

The general idea: 

• Stock = $95

• Warrant to buy stock at $11.50 = $26

• Warrants should be $83.50 ($95-$11.50)

• Or stock should be $37.50 ($26+$11.50)

You should be able to short the stock and buy the warrants, which would provide a 150%+ return as the stock and warrants hit parity (hint: it’s never that easy). Not too shabby. I wrote the idea out, and created a spreadsheet that would show different payoffs depending on:

• Confidence of the merger closing

• Timing of merger close

• Cost to short the stock (to short, you borrow shares and pay interest)

After an hour or two, I looked at my overly-complicated spreadsheet and felt confident I had the answer. As I went to my friend to show the results- I noticed something wrong. One of the return figures seemed off. This threw the entire output off the rails. However, my overly-complicated spreadsheet was so convoluted- I could not find the mistake!

Like a caveman, I shamefully went to my notebook to write out the trade by hand. Stock price- check. Warrant price- check. Time to close the merger- check. Cost to short the stock- also check.

After about 5 minutes- I had my answer.. There was no need to have a complicated spreadsheet- all I needed was a pen, napkin, and some sense.

Complicating things is not necessary. Maybe overly-complicated spreadsheets made me feel smarter, but so what? The pen is mightier than Excel! I got so caught up in acting smart with overly-complicated spreadsheets- I completely forgot that it didn't matter if I was smart or not- all that matters is if I can solve the problem!

Drop excel and pick up the pen!

If you know about a weird deal- send it to mylesmarino1@gmail.com!

DWAC Write-Up

Every year the finance world pauses as we read the Berkshire Chairman Letter written by the greatest investor of all time: Warren Buffett. As always, the annual letter had fantastic insights and quotes. Some of my favorites are below (emphasis mine):

Charlie [Munger] and I are not stock-pickers; we are business-pickers

Berkshire’s total float has grown from $19 million when we entered the insurance business to $147 billion…So far, this float has cost us less than nothing

Absent our American home, however, Berkshire would never have come close to becoming what it is today. When you see the flag, say thanks.

My favorite snippet from this year was the following (emphasis mine): 

Teaching, like writing, has helped me develop and clarify my own thoughts. Charlie calls this phenomenon the orangutan effect: If you sit down with an orangutan and carefully explain to it one of your cherished ideas, you may leave behind a puzzled primate, but will yourself exit thinking more clearly. 

The orangutan effect is the reason why I publicly post investment ideas and this newsletter. The problem with orangutans is that they rarely write back- however I have been lucky enough to be contacted by some of you concerning my writings. Thank you!

Charlie Munger is 100% right in how explaining an idea to another helps to clarify thoughts. Recently, I saw a pitch of eBay as an investment opportunity. Although my thoughts were jumbled at the time, I could tell that I instinctively disagreed with the idea. There were a few clear holes in the idea- but I was not thinking clearly enough at the time to make a convincing argument. 

So, Friday I sat down to write a 1-page report on eBay in order to clarify my thoughts. After 6 pages of writing- I realized that although the argument made sense to me, it would never make sense to another person. So, I continued to delete unnecessary words, repetitive paragraphs, and irrelevant ideas in order to make the write-up coherent. 

The final product is a streamlined product. Although far from perfect, my thoughts on eBay are clear. Hopefully you agree and don’t look like a puzzled primate as you read it!

If you have not already tried it- I suggest writing out some thoughts and trying to explain your thinking to another person in simple terms. It really helps to find holes in your thought process- and it helps you find the “core” of your idea! My only caveat would be- don’t pitch a stock to an orangutan. You will get a weird look from the other patrons at the zoo. Talking to an actual person and receiving feedback is the way to go!

eBay Write-Up

If you want the cliff notes:

• The founder (Spikes) now knows Movie Pass’ strengths and weaknesses

• This could be an opportunity to revive the industry

• Going all-in on Web3

• Black Turtleneck!

The Good

• Movie Pass as a Discovery Tool: Spikes mentioned a simple + different value proposition for Movie Pass: it is used primarily as a discovery tool for indie movies

• Leverage the cult: Movie Pass’ cult following gives a leg-up when it comes to the rebrand- and Spikes is fully leaning into that advantage

• Shouting out diverse founders: Spikes pointed out that in the Venture Capital industry, only 2.6% of VC funding has gone to women/minority founders- something that needs to change ASAP

• Returning engineers: Bringing back the founding engineering team is a testament to Spikes’ leadership and salesmanship ability

• Tiered plans: Something I thought Movie Pass was sorely missing in its first iteration is on the horizon :)

I think it is clear that the founding team knows that worked and what did not work in Movie Pass 1.0. From giving up control to understanding the true value proposition- there were plenty of lessons learned since 1.0 shutdown. Good on them!

The Bad

• Movies != Sports Event: Spikes equated the theater to a live sporting event. I agree that seeing blockbusters (Dune, Endgame) can be a good “live” experience. However, for indie movies, the difference between watching at home or in the theater is negligable

• It’s not me- it’s you: It looks like a lot of the marketing, technology, and pricing will still be on the theteres to implement. Independent theteres will struggle with the “Web3” future that Movie Pass wants to exploit

Overselling the industry prospects and giving theteres more issues to deal with is a tough sell for me. This could get ugly!

Speaking of which…

The Ugly

• Web3 Future: Movie Pass is staking its future on Web3. Maybe Web3 will be a success, but to stake your whole business on this does not seem wise

• Co-op Model: Apparently, there will opportunities for customers to invest in Movie Pass and receive benefits. Selling Movie Pass as an “investment opportunity” to raise money from your customers seems…yucky (note: business models that have done this well such as credit unions require little initial capital to grow!)

• Black Turtleneck!: Why do founders still do this??

Betting your business on Web3 and pitching yourself as a Steve-Jobs like figure (innovative technology, being ousted, Black Turtleneck!) is just plain ugly to me. What happens if Web3 fails? What happens if a co-op is not the right structure? What happens if Spikes stains the Black Tutleneck? Yuck!

The Weird

• Product Placement: Maybe I hang out with the wrong people- but I have never heard them express interest in the product placement from a movie. Yet Spikes apparently has a notebook to write down what suit James Bond is wearing? That’s just weird, man

• Preshow: This feature will allow direct marketing- using facial detection to make sure you are watching the ad. Look away and the ad pauses! Although this is a big plus for advertisers- it just seems weird to me

  ---

  Overall, this presentation was about what I expected. Take the lessons from Movie Pass’ blowup, throw in some Web3, and boom. What more can you ask for? Spikes even threw in a Black Turtleneck. Movie Pass is slated for beta use this summer- let’s see how this one plays out! Best of luck to Spikes and his team!

Previously, I wrote about thinking simple + different. Recently, I have been thinking about how I can apply this mentality to Kistos.

According to the most recent press-release:

Kistos is a trading company that has been established with the objective of creating value for its investors through the acquisition and management of companies or businesses in the energy sector.

Ew. Talk about corporate-speak. Management mind as well just spoken in Scottish. Maybe I would have laughed at least!

Here- let me translate:

Kistos buys and sometimes operates energy companies while thinking about the effects to the environment

This is the conventional way of describing Kistos. However, I do not think that this definition tells you much. How does Kistos buy companies? What does it mean to “sometimes” operate? How to they measure their effect on the environment? What type of energy assets are they limited to?

To be fair, I just came up with that description- so don’t blame management!

Although the above definitions describe Kistos, I think the following would be more accurate in capturing the essence of the company:

Kistos creates exit packages for energy companies. Kistos then focuses on maximizing acquired and maximizing their long-term cash flow- like a utility. At the same time, the company focuses on reducing their carbon emissions to a negligible amount.

To illustrate, the same team at Kistos used a similar strategy at RockRose, where they acquired Marathon Oil UK in 2019:

• Marathon Oil wanted to divest UK assets to focus on US assets

• UK assets had $110M in underfunded pensions (aka nobody wanted this)

• Andrew Austin & team bought the company for $140M

• Received $335M cash, 35M barrels of oil

• The pension was later sold for a profit

Marathon wanted to exit the area and RockRose put together a package for them so all sides could walk away happy. Employees got their pensions, Marathon exited the area, and RockRose shareholders were rewarded. After the transaction was completed, RockRose increased the oil reserves by 5M barrels of oil- an example of maximizing the assets like a utility company. Talk about a win-win-win!

So that is it: Kistos creates exit packages and maximizes their assets. Pretty simple to understand! Or- at least simpler than the corporate speak description.

Soon, I will post more about the Meta Game that VCs and Public Market investors play!

But this week, I will talk about the challenges of deal flow, where venture capitalists can only get deal flow through their brand, luck, or tolerance for bad deals. These dynamics are very different from public market investors who are swamped with potential opportunities. Enjoy!

Deal flow for Venture Capitalists

To get deal flow as a venture capitalist, you need to have a brand, be lucky, or accept below-average deals. Usually, all 3 are at work, but most VCs will get their deal flow predominately from one of those factors.

Nobody comes to me to invest in their start-up, because I have no brand! If you want to be successful as a VC, you need a top-tier reputation, either as an industry specialist (Lux Capital) or add tons of value (a16z). Entrepreneurs have one job as it pertains to their business: don’t die. Most entrepreneurs know enough to look for VCs that will reduce their odds of death. This means that the best VCs are able to decrease the chances of the business failing via their investment. Truth be told, these types of VCs are rare!

The other avenue for deal flow is to get lucky. As in, you somehow found the investment and entrepreneur by pure luck- you raised them, they overheard you talking at a restaurant, etc. This can lead to owning .5% of Microsoft, but it can also lead to many failed investments. Luck is often not repeatable, nor does it guarantee good deal flow. As my brother would say, you have to know a guy.

If you do not have a top-tier reputation or luck, then you will only get deals that the best VCs have passed on. As in, you are the entrepreneurs last resort. They only came to because much better investors already said “no”. This may give the VC an advantage when structuring the deal, but if the company fails, you will most likely lose money despite any creative deal making. Good luck building a great track record with this type of deal flow!

Even if you have a reputation, luck, and are willing to buy into rounds other investors pass on- there is no guarantee the company will want you as an investor! The company has full autonomy to reject your investment.

Deal flow for public market investors

Public market investors, on the other hand, have too much deal flow. If you are managing less than $1B, then you can probably invest in ~10,000 different companies. Almost none of which can deny you an investment. This leads to boiling the ocean.

Nobody can look at 10,000 companies deeply, and public market investors need to make sure they do not overwhelm themselves. This can be done with filters, which let an investor know if they should continue digging (IE only invest in US-technology companies). VCs have a similar filter, but it is often used to say “no” to companies that are already in their “deal funnel”.

Unless start-ups are stumbling over themselves for a 20-minute meeting with you, venture capitalists will almost always have a worse deal flow than public market investors. I know which game I would rather play!

Here are his first few years against the S&P 500:

Note that Joel’s performance was net his 30% fees!

There is a lot any investor can learn from Joel. From investing to philanthropy- his career has been filled with success. If you read through his works, there are plenty of insights- but my favorite is this:

There are lots of smarter people who can do better spread sheets than I can; there are lots of smarter analysts than me. I think the difference to how we have been able to do it is that we think simply and a little bit differently.

That’s his key to investing. Simple + Different.

As an example of thinking simply and differently:

In 1992, Marriott Corporation was being split into Host Marriott and Marriott International. International was a fantastic hospitality management business with great growth opportunities, high returns on capital, and a beautiful balance sheet.

Host Marriott had physical hotel properties and billions of debt. It was the smaller business to International (1/10th the size!) and was highly levered. For reference- they had $25/share in debt and $5/share in equity- that’s 5x leverage. Yikes!

Who would want this crappy over-levered hotel business over a beautiful income-producing management business?

Joel Greenblatt wants this crappy over-levered hotel business.

His thinking was as follows:

1. Host Marriott’s debt could easily be managed

2. Trump’s miracle CFO would be CFO of Host Marriott (Trump would have gone broke several times if not for this CFO)

3. A 15% move in the asset value would double the stock due to the leverage

4. Insiders owned 20% of Host Marriott’s stock

Simple and different. At the time, most institutions would dump this stock- believing it to be an annoying dumpster fire that would be difficult to explain in their quarterly portfolio review.

So, what happened? Within 4 months of the spinoff, Host Marriott tripled in price. Not bad.

Stepping away from the crowd and tilting your head slightly in a different direction than everybody else can be a huge advantage. Joel used this mindset to compound his money for decades. Many other great investors have simple theses- be simple, be different!

I was watching an interview with Andrew Austin, and he described his highly regulated business as this:

1. Own assets

2. Produce cash flow

3. Stretch assets out

4. Find more opportunities

5. Repeat

This just sounds like a utility business!

However, the business he was talking about was RockRose! If you Google RockRose, or look them up on any database- you will see that they are an oil and gas producer- not a utility.

You may also see this:

Is Andrew wrong? I do not think so. I think that he has a simple yet differentiated view into his business, which provides him with the ability to produce insights such as this!

I have not spent nearly as much time learning about Andrew Austin’s companies as the man himself, but this past week I may have had an insight of my own. Look out in a few weeks when I produce an updated write-up on Kistos, plc! Although this insight does not change my general thesis- it does change how I think about the business and its potential addressable market.

Some of you may be aware of mylesmarino.com/books. The idea behind this page is that most books can be simplified into a few big ideas.

Two large exceptions:

1. Entertaining Books should not be relegated to a single page. Don Quixote would be very boring if it were summarized on a single page.

2. Some non-fiction: Ben Franklin’s autobiography cannot and should not be put onto one page. That would be a grave injustice!

However, there are some books that can absolutely be put onto one page. Mostly because there is only one or two ideas, and the rest of the book is just fluff. Here is one example of such a book:

The Innovator’s Hypothesis

What’s the Big Idea?

The Innovator’s Hypothesis: How Cheap Experiments Are Worth More Than Good Ideas has some fantastic marketing ideas. The overarching idea is that you do not need to plan for years just to make a simple, yet profound, change to your business. Instead, it is more effective to throw as many cheap experiments on the wall as you can to see what sticks. When you find something that works- run with it!

The author proposes an actionable framework for companies to adopt- the 5X5 Framework. You give 5 people 5 days to make 5 experiments with a $5K budget that can be tested and rejected/validated in 5 weeks.

I love this idea

If a company completes the framework once a month, they will have spent $60,000 in a year. What will they have gained? 60 different actionable ideas to grow the business while unleashing their team’s creative abilities! That is 60 “shots on goal”. With so many ideas being thrown around, finding 3 to invest further in is not difficult (Sergio Ramos is more likely to get a red card)!

Using the framework can spur innovation, increase morale, and have significant financial awards. And the best part is- the experiments are cheap!

However, I have a problem with this book. It is 254 pages. That is 253 more than necessary. The idea is introduced a few pages in, and the rest of the book is pure fluff. Here is an outline of the rest of the book:

• Why innovation ideas suck

• Repeat framework

• Warren Buffett uses this framework!!

• Jeff Bezos uses this framework!!

• Other great people use this idea

• Case study

• Repeat framework

• Case study x3

• Repeat framework

• Manufacturing innovation

• A guide to using the framework

• Hypotheses are hard

• Q&A

• This framework will impact the future

• Justify the framework with math

The first 2 chapters of the book are fine. They introduce the author, the problem of innovation, and the framework. But the rest of the book is just a pure slog. When reading, it felt like I was wading through mud and had sand in my mouth.

Aiming High, Masa Son Biography

What’s the Big Idea?

The other book I read recently was Aiming High: Masayoshi Son, SoftBank, and Disrupting Silicon Valley.

Now this book is totally different from the Innovator’s Hypothesis. Instead of putting the meat of the book in the first few pages and wasting my time with the next 250 pages, this book is 95% pure, uncut meat.

If you rip out 3 random pages in this book, then the next reader will likely miss out on 1 or 2 fantastic ideas that this book presents. There are a few recurring big ideas, but the biggest is probably in the title: aim high.

For example: Masa wanted to earn some money quickly, but did not have enough time to stop and think about a business. So he spent 5 minutes a day thinking creatively to try and build something (which ultimately netted him $1M after a few months/hours). Talk about ambition!

Overview of Book

• Childhood

• Early entrepreneurial adventures in America

• Japan entrepreneurial ventures & building SoftBank

• Today

That is the best I can do for an outline. This book is pretty tight, with few words wasted. I recommend this book, as Masa is a truly interesting character who is constantly in the news for blowing up and rebuilding!

For the uninitiated: Masa Son is a serial entrepreneur out of Japan. He is the CEO of SoftBank, a holding company that invests in technology companies. Masa was the first to invest in the internet at scale, a true visionary. He is mired in controversy (WeWork, Vision Fund, and more). This book does not give a good overview of his investments, but does show how SoftBank was built from a tiny office in Japan to a worldwide conglomerate holding some of tomorrow’s most important companies.

Conclusion

The thing is- The Innovator’s Hypothesis has some useful information in it. So does Aiming High. However, one needs 250 pages while the other wants 250 pages. Why?

My theory is that The Innovator’s Hypothesis is meant for traveling businesspeople. IE, if you have a marketing conference that lasts 2 days, then this book can be read on the flight, at the hotel, and then on the flight back. This is a very specific demographic (“weekend conference readers”), where readers are supposed to read, digest, and contact the writer for a speaking event all within 48 hours.

Aiming High, on the other hand, does not have the same demographic. It is just a biography, not meant to lead to speaking roles, actionable advice, or anything else of that nature.

The Innovator’s Hypothesis has a totally understandable structure. This is a business, after all. However- it is still annoying to me. I have found that if I ever accidently get ahold of a “weekend conference” book like the Innovator’s Hypothesis- I read up until I get to the framework. That usually takes ~20 minutes, all in all. Then I move on and complain in my Substack.

Elon Musk’s Value to Humanity

Hate him or love him, you have to admit that Elon Musk has created significant value for others. His first startup was Zip2 (1995), where the company digitally mapped cities (novel at the time). His most recent ventures in Tesla and SpaceX have pushed the boundaries on electric cars and space exploration.

He has been involved in informational services, digital financial services, and space exploration. But which of these will be the most impactful? As I mentioned in a past post, $10,000,000,000 Yorkie Bars, it may be SpaceX. If humans are able to become multi-explanatory, then SpaceX will be Elon Musks’ largest contribution to humanity.

But what if we don’t become multi-planetary? What if Blue Origin is able to get us to Mars or some other planet first? What will have been Elon Musks’ largest value-creator?

In my mind, it will be getting millions of people inspired to dream bigger with science.

Since the 1990s, there has been a renaissance in computer engineering. However, what was the last moonshot in other areas of engineering- such as mechanical, design, or other? Musk has been directly involved in two breakthroughs (making electric cars cool and space travel) that could be considered moonshots (changing the carbon intensity of transportation and changing space travel).

Even if SpaceX does get us to Mars, Elon Musk inspiring millions may cascade into others becoming bigger and better than Musk. Imagine if in a generation or two, somebody who Musk directly inspired is able to create something as out of reach today as Mars was 100 years ago? Say- instantaneous teleportation? Even some of that could be credited to Musk if he was a direct inspiration. But that discussion is for another day.

There are plenty of things I do not like about Elon Musk- mainly his fraudulent activities. But, I cannot deny what may be his greatest contribution- encouraging humanity to dream bigger and better.

The Power of Silence

Have you ever asked a question, received 20+ seconds of silence, and been completely OK with it? Well, in a recent interview with Elon Musk, there were two instances (27:42 and 1:00:38) where Lex Friedmen would ask Elon a question and would be met with a silent response, where Elon was thinking.

During these pauses, Lex did did not interrupt, seem upset, or even awkward. Later, Lex explained:

Silence is one of the most intimate things that two people can share with each other, because it’s having a trust that you’re on the same page

When was the last time one of us even took 20 seconds of silence to think about something for ourselves? What about in a conversation? When I ask a question- I almost always expect an instant answer- no matter how complex I expect the answer to be. The same can be seen when I am asked a question- I just answer without taking the requisite time to think in uninterrupted silence. This is a conversational norm that should change!

Yorkey Update

With the updated buyout price,

In the $10,000,000,000 Yorkie Bars post, I write about Yorkie Optical International (HK: 2788), saying that they were mispriced at $0.85/share, due to their pending buyout and underbooked real estate assets.

The independent valuation report came out on December 15th, pegging the net asset value to be $0.94/share- a price I vehemently disagree with. However, the acquisition price was marched up to $0.999/share- a price I still think is low.

However, it is unlikely the price will be increased again. As I write this, shares are traking at $0.97/share. Although I don’t consider this a massive success- it could have been much worse for shareholders!

Now it only takes 63 Yorkey shares to buy a Yorkie Bar!!

Yorkey Writeup