Better Returns
Some of the most clarifying conversations I’ve had as CIO of Permanent Equity happen after someone who has spent time and money diligencing us says they’re not going to invest – and answers after I ask why. Rejection is a powerful surfacer of perceptions and realities about you and your counterparty.
For example, on one end of the spectrum there was a gentleman who said that while he appreciated our approach and thought we’d do well, it simply couldn’t compete (this was 2019) with the opportunity to borrow low interest USD to buy Chinese private equity. I couldn’t tell you exactly how that strategy has performed since then (good luck getting a mark!), but the Chinese stock market is down, the renminbi has weakened, and our relationship with China has worsened, so I would hazard a guess that the answer is “not well.” Of course, who could have foreseen a totalitarian regime focused on self-preservation not being a careful steward of foreign capital?
But that’s bets. Sometimes they don’t work out.
On a different end was a gentleman who simply said, “Look, I’m probably going to earn lower returns, but the capital I intended to allocate to you, I instead am going to allocate to my son’s start-up. It may not work, but I don’t need the money, and the upside of spending time with family building is not something any other asset can compete with.”
Class.
I wrote previously about an entrepreneur who is now a close friend who said he’d never invest with us because that would mean he was out of his own ideas. I respect that. And I’ve also written about buying a billboard because it supported a good cause and will always make me laugh.
Capital allocation is a funny thing. We’re all after returns, but there are lots of ways to measure them. It turns out what’s worth it is worth it.
What’s universally true, however, is that allocating capital is a privilege, so don’t abuse it. But also don’t be surprised when someone with worse returns than you thinks they have better returns than you. That’s why the qualifiers “relative” and “risk-adjusted” (and so many others) are a thing.
– Tim
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