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Circle of Competence Issue #84


"The best call option to have is cash." - Josh Wolfe


First things first, I had a subscriber reach out about taking Columbia's online value investing class. Has anyone taken this class that would be willing to share their candid opinion and whether you'd recommend taking it? All responses will be kept anonymous.

Now, on to the top material from this week.


What will a recession do to venture capital? Josh Wolfe and Raoul Pal discusses increased valuations in venture capital and the wider capital markets (Real Vision)

Josh Wolfe and Raoul Pal make great points that, taken together, paint a precarious position for the global economy over the next few years:

- US yield curve is inverted

- Many big pensions, retirement funds, and institutional capital are all pushed out on the yield curve as well as out on the risk curve to get returns

- $15+ trillion in negative yielding debt (see the 'Integrating Investor' posts below for more on this)

- The last time corporate buybacks eclipsed corporate capital expenditures was 2008

- Valuations in venture capital and growth equity markets are much different than public market expectations because one marginal buyer can set the entire market by buying small slivers of equity (SoftBank, the second most in-debted company in the world) where artificial prices are set early on.

- Early backers are banking on later rounds to vindicate their early pricing with 'up-rounds' to generate paper returns.

- Many of the institutional investors in long-dated low or negative yielding fixed income are also LPs in venture and growth equity. What happens if they are forced sellers due to the inability to hold downgraded debt?

- Q: Thus, what happens if liquidity for venture and growth equity dries up?

- A: Josh Wolfe believes that if the cycle begins to turn, there could be a liquidity crisis in the private markets which could spill over to the broader economy

I wanted to share this episode because I am generally in agreement with both speakers on the knock-on effects of a liquidity crunch and how it could manifest in the private markets. It is worth noting that this type of discussion is what makes investing so interesting - no one actually knows what will happen over the next 5-10-15 years. It is like sailing a ship in a storm with no way to shine light on the way forward - you understand what is going on around you, but you can't quite see what will happen ahead. The best course of action therefore is to decide, with limited information, how to equip your ship to weather various conditions. Wolfe made one statement that I want to share as my general portfolio advice ahead:

"The best call option to have is cash."

Do your own research, make your own decisions, but I couldn't agree more with this stance. True wealth-creating opportunities are scarce now, but this won't always be the case. The key will be to be patient and recognize when opportunities arise as the economy (eventually) cycles.



How to invest in a low growth world part 2 (Absolute Return Partners)

Negative rates are destructive but profitable (Integrating Investor)

Behind the motives creating negative yields (Integrating Investor)

How long can the debt-burdened consumer sustain the US economy? (13D research)

Ray Dalio on the David Rubenstein show (Bloomberg TV)


Trends revolutionizing games (a16z)

Biology is eating the world (a16z)

Buildings are good for people, but not the environment: what we can do to change this (Bill Gates)

Patrick O'Shaughnessy and Chad Cascarilla on the future of blockchain innovation in the financial services industry (Invest like the Best)

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