by Nicholas Mitsakos | Book Chapter, Investment Principles, Writing and Podcasts
Look at the facts not the opinion about the facts. Anyone holding themselves out as an expert has, a very deep but narrow knowledge base that is rarely universally applicable. Fundamentally, listening to opinions rarely give useful insight. Often, it assumes looking backward but does not apply to the current situation. Global commerce, trade (and trade wars) tariffs, flexible manufacturing, and global markets, along with technological innovation and automation create significant pressures against inflation, regardless of employment levels. These are the set of facts to be considered, not an assumed economic model where few people understand the actual inputs from 50 years ago.Another example looks at revenue projections based on historical business models. But what happens when those business models are changing? We discussed the example of the metamorphosis from Blockbuster to Netflix where a fundamental change in the business model made revenue projections from the historical model meaningless. Then, Netflix had to change their business model again to one of the original production and international expansion – once again obviating existing models for revenue. Facts are what happened. Specific and verifiable. Knowledge is the appropriate combination of facts. Knowledge comes from understanding the facts that matter. Wisdom is the insight that leads to prediction. At its core, any investment strategy predicts the future. To predict the future effectively one needs the wisdom to grasp what will happen. Of course, this cannot be known, and there are many random events that can affect the future (see Anti-fragile and Fooled by Randomness by Naseem Taleb), and uncertainty should always be factored into any investment decisions or predictions.
by Nicholas Mitsakos | Book Chapter, Investment Principles, Writing and Podcasts
“Assume no knowledge” (Socrates)
No successful company can create or sustain its competitive strength without constantly examining its First Principles. It means defining a problem effectively, understanding the actions needed, and then implementing those plans. This requires a unique combination of perspective, talent, drive, and organizational flexibility. It is rare, but when discovered, it is where the most valuable investments are found. Defining a problem in its most basic form is essential for the most effective solutions. Most thinking stays at a superficial level because not enough thought is given to the problem one is trying to solve. There are many examples of this but mostly it comes from an attitude that says “it can’t be done that way” until, of course, someone does it.
This is the true source of any disruption. It is not simply doing things differently but looking at how the same thing can be done in a more basic and fundamental way. Assumptions about how things work (“assuming knowledge”) impedes innovation. “We’ve always done it that way” is usually the death knell of creative thinking. Many examples exist but some fundamental and obvious examples range from several well-known developments and innovations that were generated more from asking simple, basic questions instead of coming from some ill-defined inspiration.
Obvious answers only come from asking the right questions.
by Nicholas Mitsakos | Investment Principles, Writing and Podcasts
Luck and timing play an outsized role in determining any outcome – and these are extraneous circumstances one cannot influence. As in sports, sometimes the ball bounces your way and sometimes it doesn’t. What matters is doing the best you can. While this sounds like a cliché if one genuinely knows they have done their best, gave it everything, and left it all on the field, that self-satisfaction alone is the worthiest goal, not some sense of “winning.” Importantly, winning should never be the goal because you can never do your best if you compromise who you are – your values and character – while achieving your goals. Whatever the outcome, it’s just the outcome. But the values and standards that make you who you are inviolate and supersede any near-term goal.
by Nicholas Mitsakos | Currency, Economy, Investment Principles, Investments, Public Policy, Trade, Writing and Podcasts
We are rapidly approaching a zero-interest rate world. Interest rates are being driven to zero (or below zero in many cases) as a first-line tool for central banks to generate economic activity in the face of the dramatic negative impact of the pandemic, as well as existing and lingering economic fallout. This toolbox will be empty soon, and the only remaining weapon will be fiscal policy. Among other things, fiscal policy and domestic financial markets will have an overwhelming influence on global currencies. Capital flows will dramatically impact currency volatility as capital moves to more attractive countries with more liquid and robust asset markets.
by Nicholas Mitsakos | Economy, Investment Principles, Public Policy, Writing and Podcasts
Defining and the problem precisely is the only way to solve anything, and, undoubtedly, the single greatest challenge to achieving anything. Otherwise, it is a waste of time and resources (which describes most public policy). All too often decision-makers waste time, resources, and make matters worse because they simply do not understand the actual problem they’re trying to solve. Very few problems are well-defined, and few people take the time and effort to understand what it is they are trying to solve. Motivation, energy, and focus on an outcome are inefficient, misguided, and dysfunctional. Good intentions do not effectively define any problem, and typically lead to very bad outcomes. Wanting to solve a big problem is fine, but not defining it accurately is inefficient at best, and most likely disastrous. It will never lead to a solution.
by Nicholas Mitsakos | Investment Principles, Investments, Writing and Podcasts
The government is providing a backstop for all government-backed securities. The Fed is also going to be extremely active in the markets, buying not only fixed-income securities but also stock index funds. They are working very hard to keep the market aloft and preventing it from cratering (they still may not be successful). This is an election year and this administration will do everything it can to make sure things look as good as possible through November.
I understand there is riskiness, but I expect economic activity and fed support to continue to increase. Even if we have an increase in coronavirus cases, people will remain optimistic – justifiably or not.
There will be extreme volatility. Economic activity will waiver, increase suddenly, pull back, and the pattern will continue for some time to come.
Market volatility is our friend because we have a stable source of cash flow that protects our capital base. On top of that, the speculative strategy will profit from volatility while the equity investment strategy will play for the long term – it is a multi-year long-term perspective.
Although there are a handful of investments where confidence in the five-year curve is justified, and now is a great time to make these long-term investments, it is still very unpredictable.
The short- and long-term state of the economy, how this massive amount of debt gets repaid, how we reopen businesses, etc. is unknown, volatile, and any attempt to predict seems fruitless. But, understanding how to adjust for risk, accept, and ultimately take advantage of volatility, will be powerful. Along with a long-term perspective, this will be the most effective investment strategy. The Fed is printing more money. We’re going to see a lot of capital injected into the global economy. But the presence of money is not the important factor. It’s the velocity of money – how people are spending it and is that money chasing after other goods. That will drive inflation. We didn’t see it in the past even though we had a massive capital injection. Deflation and recession are much bigger concerns. Inflation is not on the horizon. The Fed’s enhanced bond-buying, which includes high-yield bonds and other fixed-income securities is unprecedented and has boosted the value of debt portfolios. However, these portfolios (mostly just above or just below investment grade) still yield attractive disproportionate risk-adjusted returns.
by Nicholas Mitsakos | Economy, Investment Principles, Public Policy, Writing and Podcasts
The US economy is facing a transitory, but critical, credit emergency beyond the Fed’s normal scope. A new federal credit facility is needed to ensure that sound businesses and households have ready access to cash to get through this crisis. Global business needs a giant bridge loan to get through a tough few months, and governments may need to intervene to make it happen – led by the Fed. The credit markets need substantial additional liquidity, taxes need to be cut to get cash to companies, and banks need to lend and show patience
by Nicholas Mitsakos | Book Chapter, Investment Principles, Writing and Podcasts
It is the reasonable person who stops and sees, connecting the dots and not trying to manipulate reality to fit your vision. The unreasonable try to force change where it is unwelcomed, or, more often, stick to a belief increasingly at odds with the world’s reality. The reasonable person looks at the world and tries to connect the dots others don’t see – but the dots are there. They may seem unrelated to most but seeing what most miss is innovation’s foundation. It is connecting those dots and seeing how things can connect – not forcing something that isn’t there or ignoring what is and how it has changed. It is only afterward that a new idea seems reasonable. To begin with, it usually seems unreasonable. Don’t be fooled and believe you must force change.
by Nicholas Mitsakos | Economy, Investment Principles, Writing and Podcasts
Thinking the government now can take over something the private markets provide efficiently and effectively as government is the appropriate entity to provide those services from now on only leads to inefficiency, misuse of capital, the demand for more tax revenue to support the inefficiency, and the downward spiral which ultimately creates more inefficiency that private industry will look to rectify.
by Nicholas Mitsakos | Economy, Investment Principles, Investments, Writing and Podcasts
High growth companies competing for large total addressable markets may not be creating long-term value. Cheap capital has created a vicious circle of unproductive investment. Markets will correct this overvaluation and misappropriation with a rather unpleasant bang.
by Nicholas Mitsakos | Economy, Investment Principles, Public Policy, Writing and Podcasts
While the current trade war commands our immediate attention and thoughts about its impact on the global economy, there are deeper and perhaps more troubling issues regarding globalization and its future.
