Saturday, September 21, 2013

Nonfat Caffè Mocha - Hold the Whip

So I’m sitting at a Starbucks in SOMA, San Francisco.

Just less than a mile to my south is AT&T Park, where the Giants play baseball. They’re not enjoying a particularly good season, unlike the last one, when they had won the World Series against some other American team.

Across the street is the Moscone Convention Center, where there’s a high profile exhibition or conference every week.  Today, there are construction crews scurrying about, setting up, building the exhibition stages for the Oracle OpenWorld 2013 (#OOW13) conference and exhibition.

I haven’t Googled #OOW13 yet, so I don’t know what it’s about, but I will.  And I’m long $ORCL, so happy to see them take over the convention center, north and south of Howard St., along with closing off the actual street itself.  They are building a Gadhafi-sized marquee to host and entertain visitors and dignitaries on Howard St, closing it off to traffic. 

Just a few blocks to my right are Market St., and the financial district of San Francisco.  Market is the main downtown thoroughfare that features BART subway stops every few street blocks, along with – seemingly – the entire homeless population of the United States.

So much money… interspersed by so much poverty!

A San Francisco Giants player – at the bottom of the sucking pile of underperforming men in tights who play a game with little, hard balls – earns about $500,000.  A top guy, around $20 million.

Across the street, the Moscone Center includes more than 2 million square feet of building area, with about 700,000 square feet of exhibit space, 106 meeting rooms and nearly 123,000 square feet of pre-function lobbies, whatever the latter means. The center was developed and is owned by the City and County of San Francisco.  A proverbial goldmine!

Last time I looked, Oracle was valued at about $160 billion.  As I type this, the Oracle-sponsored America’s Cup Grand Prix boat, valued at around $10 million, is about to lose the final to New Zealand. 

My investment in Oracle is in the money, so I’m happy to celebrate our shared successes!  Theirs allows them to take over the entire Moscone Convention Center and adjoining real estate… mine buys two tall Americano coffees at Starbucks, paid for in hard cash.

This morning on Twitter, one of my favorite posters said we should sell all our equity holdings and move our investments into cash instead.  He said he converted the equities in the hedge fund he manages for clients into 45% cash last week.  The primary reasons he offered were that the Fed keeps printing money, can’t decide when or whether to taper their monthly bond buying or not, and the upcoming Congressional fight about the debt ceiling.

Remember the debt ceiling?  That’s the same ceiling our fearless leader, Obama, accused George W. Bush of mismanaging when he wanted it increased.  In fact, just for good measure, Obama added that Bush was mucking up our children’s future by "funding his out of control spending with a Chinese government credit card!"

As I write this I’m blessed to be okay, financially speaking.  This, as a result of a combination of ongoing frugality, careful/conservative saving & investing, hard work and most of all... because we carry no debt.  I’m even more blessed to be siting next to my delightful wife and best friend, enjoying another day of some 30 years of togetherness (and an Americano).  

Our investment portfolio is about 20% cash, with the rest in some fixed property, and most of it in blue chip, dividend-paying equity investments.

Our equities have trailing stops plugged in, preventing us from losing more than 3% of the market value.  All of these investments are >3% in the money, meaning that we’ve mitigated the possibility of market losses, because all we can lose is max 3% of other people’s money (aka market investment gains).

I don’t know what the right mix is in terms of liquid/illiquid/equity/fixed/term investments right now.  The market is too volatile to be absolutely certain.

What I do know with absolute certainty is that I cannot allow myself to be exposed to the risk of having bad political managers affect my personal investments.  In much the same manner that you cannot rely on them to help secure your future, you cannot possibly trust them with the present. 

Hedge to protect your investments accordingly, as if your financial wellbeing and future depends entirely on your own actions… because it does!  If you don't know how, feel free to ask.

Oh yeah, before I forget, my Americano only has 10 calories, whereas the Nonfat Caffè Mocha without the whip has 150 calories.  That’s primarily why we chose the Americano.  In addition to saving $1 per drink!


Sunday, September 15, 2013

When Innovation Stops

I don’t have a wealth of experience in M&A, having been directly involved in only 14 deals over the course of my professional career. 

Grad school studies arguably complement my limited hands-on experience.  My focus was on M&A as a corporate strategy.  And I wrote a master’s thesis on the question of value creation for shareholders, resulting from a pursuit of M&A as a formal corporate strategy. 

Overall, in this regard then, I offer limited standing.  But I would prefer to bow to the superior experience of serial M&A practitioners, many of whom have successfully executed hundreds of M&A deals and oftentimes, even more.   

Cisco ($CSCO) is a great example of a serial acquirer.

There are many reasons why corporations acquire or merge with other companies. 

These may include e.g. removal a competitive threat; an attractively priced ‘buy’ because of market/economic conditions; the acquirer’s ego; to gain operational efficiencies (e.g. vertical integration); to infuse innovation; etc.

It is this last point – innovation – that has perked my attention.  Technology companies love to proclaim constant and ongoing innovation, new releases, etc.

Meanwhile, ‘behind the curtain’, innovation is often limited to rather simple product enhancements, new feature functionality to address internal operational processes and/or deficiencies... a facelift here, a new skin there, etc.

Our generation has probably witnessed more innovation that any that had gone before.  Just think of smartphones, tablets and MP3 players over the past decade.  Apple ($AAPL) may come to mind.  Or how about start-ups like Zipcar (now owned by AVIS Budget, $CAR), Uber and Lyft… without risking to forget more mature innovators, like Twitter or even Facebook ($FB).

Innovation stops when a company starts to manage fundamentals.  Very often, if publicly traded, this entails managing the investment community, shareholders and ‘related persons’ at the expense of ongoing innovation and the quest for continued, organic growth.

In corporate strategy language, managing fundamentals literally means managing the corporation’s valuation and earnings.  We expect this type of focus from more mature companies, executed by CEOs more inclined to milk the proverbial cash cow, than grow new business aggressively. 

There is room for managing fundamentals, but know that a dedicated focus on metrics like EBITDA and the stock price (valuation) will always distract attention from the other assets… more important assets like the people, as in the resources who deliver the creativity, new ideas… and innovation!

A chasm exists between start-ups attempting to innovate and add clients with a total disregard for business fundamentals… and a more mature company focused on managing it’s fundamentals, perhaps at the risk of lacking or losing sight of innovation.

Ironically, when innovation stops, client attrition accelerates!  In fact… the latter is the surest indicator and measure of paused/stopped technological innovation.

The next time you set out to make an acquisition, make sure you don’t discard the hunger, creativity and innovation that may have been embedded in the purchase price.

A successful acquisition that includes a true, new innovative technology may be your only method and sole chance to claim status as an innovator!

For more on this complex subject I offer a related, published research paper that you can buy by clicking here (Kindle Version for only $0.99).

Disclosure: long $CSCO