Thursday, August 7, 2014

Trust Can Be A Dirty Word

I've said it before, I'll say it again: when it comes to business, you don't trust anyone until you know their true motivations, no matter how nice and genuine they seem.

Had a guy from an investment trust reach out to me and asked for my company snapshot and executive summary. Guy seemed like a good ol' boy, grey hair on his LinkedIn profile, southern twang on the phone, missionary work in Africa prior to working with the fund, pictures working with tribesman in relief efforts on Facebook, the whole nine yards. A real heart-string puller on paper...

Long story short, we set up a call today and he explains that the fund has about $100M under management and invests in all stages of funding,  but they don't take an equity position, they do a profit sharing percentage. Fine. I'm open to unorthodox deals insofar as it makes sense for both parties and doesn't kill cashflow. So I ask him how he gets paid and he tells me he takes a retainer up front to present to the trust because it's a conflict of interest basing his compensation on the funding amount and that the client [me] chooses what he gets as a consulting fee...

Uhh okay. In that case, I'll bid $1, Bob.

Resisting the urge to offer to pay this guy in milk duds, I explain I wouldn't have a problem paying him a small retainer as an act of good faith, to be paid in tranches upon reaching certain milestones within the presentation process...provided that the majority of his compensation is payable upon the event of the company getting funded from the trust. Pretty fair deal so that all interests are aligned, I'd think...

Since he is serving as the fund's sole representative, I ask him if he has his Series 7 to broker the deal. He asks "What's that?"

Red Flag #1

So I have to explain to a supposed fund representative of what a Series 7 license is. He says to me "Well John! You seem to know a lot about this!"

[Face palm...] At this point, this is like a doctor saying, "Hey you really know your stuff! Can you show me what this doo-hickey does?? [points to stethoscope around neck] All I know is when I yell into it, it hurts my ears..."

So I get off the phone and prior to sending the full business prospectus, I ask the guy for a portfolio of companies that the trust has invested in via email. He writes me back the following:

I cannot do that due to required adherence to confidentiality agreements.  The Trust does not allow even the clients to reveal their source of funding - its a deal breaker. 

There is no communication between "prospective" clients and the Trust; it is the basis of my involvement.   Before releasing the funding a strict NDA is requiring there be no disclosure of information regarding the Trust, its clients or partnership arrangements except by order of a court

Ahhh ok, all I read from that was "no, we have no portfolio companies for reference, you're just going to have to trust a perfect stranger." Red Flag #2...that $1 retainer is sounding better and better.

Pressing forward, I write back:

Chris [name changed for confidentiality],

I understand your concern, but I'm sure you can also understand my concern in regards to first determining the legitimacy of your trust in the form of either a portfolio of current holdings or referenceable business contacts. Before I release any further information on our company's internal workings, especially confidential financial documents, I need to determine the validity of your trust from a third-party source, preferably more than one. 

To start, can you provide me with the chosen name of your unit investment trust (UIT) that is registered with the SEC? Upon request, when I release financial information to you, I would have no problem engaging the services of a third-party auditor of your choice to determine our financial statements are accurate according to GAAP.

I receive no answer back, most likely because he didn't know what UIT, SEC, or GAAP even stand for. Who owns this trust exactly??? Willy Wonka?? Does my investment round come with a golden ticket? Do the shnozz-berries taste like shnozz-berries? Only shnozz-berry I'm seeing here is you, dude-man...

Goes to show you, no matter how genuine and trustworthy someone seems at first, even if they've got photos of themselves feeding starving Africans, doing missionary work, owning a chocolate factory, could very well all just be a front to throw you off the scent of bullshit that's wafting from their mouths when they open it.

Saturday, May 10, 2014

The Funnest Sport You'll Ever Play: Bubble Soccer | Bubble Football

These videos being passed around the internet of this hilarious sport has to be the most entertaining thing I've watched in years. Full-contact soccer!

I actually had an opportunity to play recently and its even more entertaining to play than it is to watch. Half the time I couldn't even stand up I was laughing so hard. Could definitely play this with my friends on a regular basis.

I found the website from the National Association of Bubble Soccer that you can find a league in your area and register to play. They connected me to a league in South Florida immediately and my first game is next week. I've already invited a ton of other people in Fort Lauderdale and Miami to play and they're all psyched up about it.

I recently just went on the website again yesterday and it looks like there are leagues starting up in New York City as well, would be pretty cool to play some bubble soccer right in Manhattan, maybe even Central Park.

Anyways, cool sport and looking forward to it. Good to know if I ended up moving to NYC ever, there's some bubble football action going on up there too!

If you want to register to play on my team, or just find a league in your city, you can register to play here.

Monday, April 14, 2014

What Movie Production Can Teach You About Success

Somewhat obsessed with this website "The Numbers," its a huge database of film budgets, box office results, and star bankability analyses to assist production companies cast for movies. The most interesting thing so much value do the most bankable stars bring to a major motion picture? Not as much as you'd think. Steven Spielberg for example, who is undeniably the most bankable person in Hollywood, on average only brings about $26M in value to a major motion picture. "But John that can't be right, his movies have bring in billions," so what gives?

What the data shows is that no matter how big a celebrity's bankability is, its nowhere near the bankability of when they team up with the right people. Not just any people, the RIGHT people. Scorsese and DiCaprio, Spielberg and Tom Hanks...these divine combinations along with the other smaller relationships within a production are what yield results whose sum is greater than its parts.

Which goes to show you, even if you are a celebrity, you are NOT directly responsible for your own success, no matter how big you are. Success is what happens when talented people team up with other talented people who thus enhance each other's talents.

Its about relationships, but not just any relationships, the RIGHT relationships. One of those universal truths I'd say you could probably apply to more than just movies.

Thursday, February 13, 2014

The Tree of Wisdom

Drinking my pre-workout drink and staring at a tree outside my balcony window and started thinking, "ya know, a tree is a living thing, but it doesn't move, it doesn't talk, it doesn't even have eyes to enjoy its surroundings. Imagine if you were a tree, what would even be the point of life?" So I thought what a typical tree does in its lifetime...well, it grows and endures harsh weather until it matures, then it provides a home for bugs & birds, it produces oxygen for us to breathe, provides shade & aesthetic beauty, produces fruit, and eventually someday will get chopped down to produce wood. And I looked at all those reasons for a tree's existence, and I noticed two words: produce & provide. And I had a little "Aha" moment...

Nature's meaning for any individual existence is to mature and endure long enough to produce and provide for other individuals. That's also what makes a successful business if you think about it; the best and most successful businesses produce and provide for millions of people, so the fundamental natural law of business mirrors that of nature itself. Interesting...

So there's really only two questions you need to ask yourself: 1) what am I producing and providing that is needed, and 2) what do I want to produce and provide that is needed?

When the answer to those two questions are the same, the rewards are massive success and natural fulfillment.

Tuesday, January 14, 2014

John Anthony's Wager

Do you believe in destiny? I see a lot of philosophical stuff on my Facebook newsfeed and it seems people fall into one of two camps: the "your destiny is already written" camp and the "there is no destiny, you need to work hard to achieve your dreams" camp. Neither one is provably wrong as you could site countless examples of people who have become successful by going with the flow and who have clawed and scratched their way to success. So I've come up with an outlook that I'll just call John Anthony's Wager.

In case you've never heard of Pascal's Wager, basically in a nutshell it says that given the choice between believing in God or not, logic would dictate you should because your downside is the least compared to the alternative choices. If you are right, you would live a fortuitous life and be greeted with open arms at the Pearly Gates. If you were wrong, well you may have missed out on doing some less than fortuitous deeds, but you would still live a great and fruitful life.

Similarly, my wager is this. Given the choice between believing in a written destiny or not, you would be best suited to work hard everyday in the anticipation that there isn't. The reason is because if you are right, you will have worked hard your entire life to achieve your dreams and will have a better shot at achieving them. If you are wrong and there IS such thing as destiny, then any attempt contrary to your destiny will be rightfully thwarted and you'll end up fulfilling your destiny anyways once you do find yourself on the right path. Not only that, you will have developed great habits and character along the way. Its a "heads you win, tails you don't lose" scenario.

Wednesday, October 9, 2013

Attacking The Drug Problem Globally

I saw on LinkedIn that Richard Branson spent all of last week in Geneva debating drug policy at the Global Commission on Drug Policy. He welcomed suggestions on a slogan in the comments, but it got me thinking about how to tackle the drug problem as a whole. Do we legalize drugs and regulate them? Do we impose stiffer penalties? What results would they manifest? My approach is a little different. I say, tackle the problem at its source: the economics of the industry.

Unfortunately, stiffer prison terms for dealers by itself will only be marginally effective because the payoff remains relatively the same. Legalizing drugs won't do much because a legal market with regulation cannot thrive when a healthier black market exists for the same commodity. Anybody who's ever read "Freakonomics" by Steven Levitt will recall the lengthy chapter on the bursting of the "crack" bubble in the early 1990's. So this got me thinking: perhaps the way to control the drug problem is to create an artificially induced market crash.

The approach would be a 4-prong approach, but in order to implement it, we need to look at the supply chain of drugs, their players, and their incentives:

According to Levitt, the 'crack' bubble burst in the early 1990's happened because when 'crack' hit the market, the market price of cocaine dropped as 'crack' was a cheaper alternative to cocaine. This lead to drug-dealers starting to undercut each other, which eventually caused the crash because the risks associated with dealing were not worth the low payoff (getting killed, shot, arrested, etc. vs. the earnings of the average crack dealer of $7/hour*). So the first step would be to get the drug dealers to start undercutting each other in price to unload their inventory. 

To do this though, a few more things are required. Getting dealers to price cut each other and the second step of the approach, requires making the wholesale price of drugs cheaper. Temporarily higher margins to the dealers will make the industry attractive to price-cutters. In any commodity-based industry where no one supplier has a competitive advantage, the return on investment becomes compressed downwards towards the cost of capital because the only thing participants can compete on is price. So where a 70% margin is attractive to one participant, other participants are perfectly willing to settle for a 60% margin, 50% margin, etc. etc.

So to make the wholesale price cheaper, we need to increase the inventory of the manufacturers, which leads to our third step, have local governments subsidize sourcers that reach a certain production quota (lots utilized and total yield) and penalize sourcers who do not reach this benchmark with a "Agricultural Inefficiency Tax." This will incentivize all sourcers to both keep their total yield high and require minimum order quantities from manufacturers to hit the subsidy benchmark. Manufacturers now being forced to take on excess inventory, will both require mininum distribution quotas from their dealers. Dealers will then become loaded with excess inventory and thus incentivizes them to lower their prices just to move their stuff in larger sized deals.

But we're not done there, the fourth and final step is to make prison sentences even higher for drug dealers. What this does is increase the risk profile to drug dealers. Because of this higher risk, the dealers will demand for higher reward in the form of pricing pressure on the manufacturers to expand their profit margins. So what ends up happening is the entire supply chain becomes pressurized from both ends, and the incentive to each player gets flips on its head:

In these conditions, the market becomes unstable and cannot self-sustain, which inevitably will cause conflict between all participants and cause the market to eventually crash.

At least, that's my theory...implementing it is another story.

*See the financial statement of the average crack dealer provided by Steven Levitt in "Freakonomics."

Thursday, September 19, 2013

Zuoan Fashion Ltd (ZA): A No-Brainer For Big Returns

Just took a long position in Zuoan Fashion, Ltd. (NYSE: ZA), opportunities like this come few and far between. Not far from its IPO back 2011, Zuoan Fashion is a design-driven fashion menswear company in China that has taken a beating for no apparent reason.

The No-Brainer Aspect

The reason to me this is a no-brainer investment is because while the company is currently priced at $2.17/share, a quick look at their balance sheet in 2012 shows they have $5.96/share in net cash alone (cash minus debt). Furthermore, if we take all the current assets and pay off all outstanding debt, we're left with $11.79/share. What this means is that if the company liquidated everything tomorrow, that's how much shareholders would receive per share, which makes this a textbook Buffet/Graham/Klarman value play with a 82% margin of safety. Wow...

And the story gets better. The company has no long-term debt and no short interest whatsoever. Below is my analysis of the fundamentals versus the stock price over a 5-year period:

Zuoan Fashion Quality of Earnings Vs. Stock Price (2008-2013)
(click to enlarge)

So what we have is a company who's fundamentals are clearly growing stronger over time while the stock price is diverging to reflect the opposite. No financial shenanigans here either, their financial reports were signed off by Crowe Horwathe, one of the top 10 auditing firms in the United States. Zuoan is essentially like a straight-A student in a bad high school, the top institutions are overlooking her just because she's small and didn't go to Harvard Academy. Their loss...

Not only has their fundamentals improved, but their ability to self fund with cash is getting stronger too (defensive), which means they can weather any storm that may lie ahead because their industry is so competitive.

Industry Recognition

So what about the company? Well, the fashion industry is highly fragmented. While the company has no defensible competitive advantage against competition and its success is dependent upon its ability to recognize and create appealing fashion styles in the years to come, the company has received the #1 spot of fashion designers in China by Apparel Magazine two years in a row now, beating out major competitors such as True Religion, Ralph Lauren, Nike, Urban Outfitters, & lululemon, two times over. From the July 2013 issue of Apparel:

(click to enlarge)

And as apparel magazine mentions, they sponsor and are regularly featured on the Chinese equivalent of Project Runway, "Hello Gorgeous." What better marketing avenue could a fashion company ask for? As China's middle class grows, Zuoan's affordable fashion line stands to benefit which makes this not only a value opportunity, but a growth one as well.


Baseline valuation is $9.08/share (assuming a 50% write-off of Accounts Receivable in a liquidation event), but if the trend continues I may hold on until $12-14, making this one a potential 6 or 7-bagger. Estimated time to value realization, 2 years, maybe even sooner.