I have decided to modify the Podcast/Media curation series of posts to focus on resources and media that I want to catalogue here to assemble for our future reference. I am creating a separate post category for these “Reading, Watching, Listening, and Learning” posts. Over time, I will pull in my prior posts on podcasts, presentations, articles, and books to help us quickly find the post/links. This time, I’m going to share a couple of videos and related thoughts, concerning Elon Musk and Bruce Flatt.
Elon Musk Burns It Down
Musk’s recent antics have been much discussed in the media. His appearance on Joe Rogan’s podcast was about a month ago now, so I am not very timely. I wanted to index the video, however, for future reference and briefly discuss it in case you missed it. Here is the appearance:
The episode is 2 hours and 37 minutes long. In case you don’t have the time or inclination to watch the whole thing, I will share a few observations.
First, Musk is obviously smart and motivated. To me, he also came across as likable and even humble at some points. As a total non-expert, he also seemed to exhibit a lot of mannerisms that are often associated with individuals who are classified as being on the Autism spectrum.
I don’t practice law in this area, but it seems like a moderately skilled defense attorney could easily use this and other appearances to effectively raise that issue in the event that criminal charges were leveled against him for his public statements/tweets.
Second, I noted that he mentioned several times how difficult he finds living with such an active mind. He noted difficulty shutting it off. I hope he has a good support network to help him to try and maintain good mental health. Based at least on the appearances from the outside, I am not sure his current romantic relationship is the best fit for him.
Next, I wanted to note the big headline occurrence from this interview. Musk did take a tentative puff from a “blunt” after Rogan basically peer pressured him into it. He definitely did not inhale. Ironically, if anything, this failed attempt to smoke marijuana pretty much convinced that he is a sober guy who definitely does not use recreational marijuana (as has been alleged at some points in the past…including concerning his “Funding Secured” tweet by a rapper associate of his girlfriend). Musk observed that marijuana use is bad for productivity. He demonstrated a complete lack of familiarity with the process for consuming marijuana by his attempt to smoke the blunt (not to imply that I would know anything about the proper procedures for such activities other than those gleaned from popular culture).
Finally, he noted several times how hard it is to maintain solvency at a car company and avoid bankruptcy. He observed that Tesla and Ford are the only U.S. car companies that have not previously filed for bankruptcy protection. At several points in this interview and others he has noted a number of non-economic motivations for Tesla. When he talked about profitability it is really just to obtain a break even level in order to accomplish the “mission.”
This is in accordance with my own views on the industry. There are simply too many irrational competitors who are going to compete despite the economics, for reasons other than acceptable returns on invested capital. Anecdotally, I look at Mitsubishi, Suzuki, even Mazda as pretty much totally unable to compete in the North American automobile market, yet they persist (likely for non-economic reasons). This is before the Chinese even really try to muscle into the market in order to create an industrial base, employ their population, and a host of other reasons that are injurious to private capital.
I was long General Motors at one point over the last few years. I finally decided that autos are definitely in my “too hard” pile for these and other reasons (including big exposure to organized labor and U.S. governmental/non-economic interests…”good jobs”).
Thus, Tesla is definitely in my “too hard” pile for investing. I don’t see how you can rationally claim to be invested (especially with the capital of others) in the biggest cash burner in a massively capital destroying industry which is potentially on the verge of a total sea change. I would not, however, short Tesla.
To me, this is essentially a quasi-non-profit, charitable enterprise. The stated goal is on forcing a change in the industry and creating an infrastructure, demonstrating proof of concept (i.e., “innovating”, rather than earning high/acceptable returns on equity capital. That could certainly last much longer than expected and/or defy the usual rational expectations for a purely for-profit enterprise.
As for my expectations of how the next couple of years will play out, I think Tesla is most likely to print a profitable quarter or two over the next several quarters (perhaps likely pushing the accounting rules). The rational move then would seem to be to raise a lot of equity capital. I think accomplishing this by issuing rights to existing shareholders would be viewed as fair. Based on the current market environment, (assuming no massive crash/tightening in financial conditions as a result of changed investor psyche) I think there would be “a lot” of capital available.
I might even consider participating (I would have to buy rights on the secondary market as I have no position). I most certainly, would not, however classify it as a pure investment. I would have to treat it at a charitable (or at least quasi-charitable) expenditure. I do not see how I could view it otherwise.
It’s a massively cash-burning enterprise, in an industry with huge capital requirements for even the most ROIC focused enterprise, where a large portion of the competitors operate based on motivations that are not (economically) rational, and where management’s stated goals are not related to generating acceptable returns on invested capital.
In conclusion, if you are so inclined, I recommend continuing to build the Tesla Tithe for the time when it is required. I could think of many, many, inferior uses for our charitable dollars and have adopted the consensus expectation (by the sober financial analysts) that additional equity capital will soon be needed (despite Musk’s protestations).
Bruce Flatt – Brookfield Asset Management
The second video I wanted to post is this presentation by Bruce Flatt, which was given as part of the Talks at Google series:
This talk was also recorded about a month ago. I don’t have a ton to say about this presentation, other than I recommend it to you. I wanted to pull it in here for future reference.
I did decide not to participate in the GGP merger or invest in the successor REIT. I think the investment/acquisition is likely to be very timely when we look back in a few years. I am not a fan, however, of the compensation arrangement and just the externally managed structure of the GGP successor REIT (or that structure in general). Prior discussion: Retail REITs: Brookfield’s Acquisition of General Growth Properties, I Pick Things Up and Put Them Down: August 2018 (Savings and Investing Diary)
Externally managed REITs (and similar vehicles) present conflicted incentives and no matter how skilled or ethical a manager is, that is not the game we play around here. Best to leave that to the sucker, yield-hog investors. If I did want to invest with Flatt or Brookfield, I would do so via BAM (assuming you are limited to public vehicles, like me). It seems like the alignment with management is better via BAM (which shares in the fee revenue from some of the other captive vehicles).
As Charlie Munger (and many others) have taught us, incentives matter a lot. In Tesla, the wider auto industry, the Brookfield Asset Management complex, and life in general, we ignore that at our own peril.