Capital Allocation

Heard from LPs this week: The past 9 months have felt like groundhog's day - a very small set of deals dominating all LP convos. The fever pitch to access rounds of OpenAI and Anthropic by LPs (and even GPs calling us) at times - has reached levels I've never seen...

This man achieved 921% returns while the market made 117%. He retired at 45 after making investors $2 billion. Yet you've probably never heard of him because he refused every interview and turned away new money. Here's Nick Sleep's secret to finding 100-baggers.

Final Search Fund Advice Megathread In my search fund survey I asked searchers what they wish they knew prior to searching. Here are 26 answers from the survey. For the full compilation and more, visit my search fund page here: https://t.co/cxDZOYnBsY 1. Everything! How to use CRM, convince owners/brokers, screen/structure deals, write legal documents, operate companies, etc. Search is a learning experience. I'm having a blast because I don't know everything. 2. Not to waste too much time finding the perfect tech tools while also being cheap. Pick some and go with it. 3. Legal templates, how to source advisors that are trustworthy and cost-efficient. 4. How hard sourcing would be. Difference between broker released financials and financials after diligence. 5. How slow it can be at times. 6. You will review a lot of deals before finding any "great" ones. Don't be afraid to pull the trigger. 7. Most brokers have proven to not add much value. 8. Not a specific piece of information, but I wish I would have interned for a searcher and/or search fund acquired business. It's hard to know if you'll like the search process, types of businesses, management challenges, etc. until you're in it. 9. Think I was well informed but has been even harder than expected. 10. It is hard, but so worth it. 11. I kind of knew what I was getting into from talking to lots of people beforehand, but you don't really internalize how hard it can be at times until you're actually in it. 12a. It is ok to look at smaller businesses. Traditional search investors have little to no overlap with self funded investors because the terms and types of deals looked at are way different... 12b. ...Do not spend much time chatting with traditional investors as a self funded, other than if you just want to do general networking or learn about industry trends. 13. I dug into the model for several years before actually embarking on my search, so I was fairly well-prepared. 14. Just start. 15. There will be many slow days! That's okay… There will be many deals you get your heart set on. That's also okay. 16a. I floundered for the better part of a year in my search because I wasn't clear on my objectives and the why behind the search. I think it's so important to take the time and hammer out why you're doing this and what exactly you're looking for in a business. 16b. This saves a ton of time and energy because now you know what to say "no" to. I spent a lot of time going down rabbit trails on businesses because they looked interesting, when I should have passed on them immediately. 17. The highs & lows are more intense than I would have thought, even though I expected them. 18. How long it would take and not to be afraid to wait for the right opportunity. 19. Covid. 20. Self-funded acquisition capital structures with investor partners. What does that look like? 21. Top industries for growth. 22. Start earlier, why wait? 23. You aren't going to be great at it week 1. It is a learning process! 24. So far nothing unexpected. 25. More investors and family offices. I've met many over the years, and should've stayed in touch. 26. How time flies by during search, even though at times it feels eternal.

Book notes from Thomas Piketty's "Capital in the 21st Century" — Curious to hear critiques & responses to the book. Normal economic growth has been between 1-1.5% annually. When it's higher than that it's for 3 reasons: 1- high population growth 2- temporary bubbles 3- "catch up growth" (e.g. Germany & Japan after WWII) Piketty's main focus is the growing inequality between capital & labor. A rentier is a person who lives off the interest on savings instead of working (e.g trust-fund kids, landlords) Inequality grows when r > g – the rate of return from capital is greater than the growth rate. Laborers largely live pay-check to pay-check. So their income grows at the level of GDP per capita. Rentiers live of interest of their principal, so their income largely grows on rate of return on capital (one check on this is pop growth) When the rate of return on capital exceeds the growth rate of the economy (as it did through much of history until the 19th century and as is likely to be the case again in the 21st century), then it logically follows that inherited wealth grows faster than output and income. In normal times, the rate of return on capital averages about 4% – 5% per year, and the GDP per capita growth rate averages about 1% to 1.5% per year. So in normal times, rentiers’ yearly incomes should be growing more than laborers’, which would increase inequality During wars & crises however, rentiers are worse off than laborers relatively. Hyper inflation, asset destruction, gov't interference, wealth taxes, are all likely to hit rentiers the hardest. 1914-1945 was an example of this. Piketty references Jane Austen novels which show how much time money matters take up. Even with someone who has 5x average income, it was necessary to spend most of one’s time attending to the needs of daily life. Grateful for economic growth that has changed that for many. Contrary to the popular consensus today, the American Dream was very real for most of America’s history. This was due to the fact that America (as a new country) had less time to accumulate a rentier class, which takes a couple generations for the fortunes to really multiply. Rentier class used to be top 1%. Now it's top 0.1%. Why? - Have a bunch of super laborers who make money both on labor & on their principal (e.g CEOs). Fewer rich bums these days. :) - Capital is disproportionately tied up in institutions (endowments, sovereign wealth funds) There's growing income in equality among labor. The share of top 10% (top 1% in particular) has been growing for decades. CEO salary has been rising steadily. Why? - Maybe it's just the market - Maybe it's low taxes relative to 1980s - Maybe it's corporate governance The Rich get richer faster than others. People like Bill Gates grow their fortune at 8-10% a year, double Piketty's 4-5% return on capital. The richest endowments grow at 10% yearly as well. Medium rich endowments grow at 7-8%. Avg person saving for retirement is 4-5%. All of this suggests increasing global inequality. Which is why Piketty suggests a global tax on wealth. Maybe fixing housing would help here, as that transfers wealth from laborers to rentiers. Or fixing colleges, which also puts laborers in debt. Or increasing birth rates. Personally, I am more excited about fixing wealth inequality by enabling people to have equity in companies (perhaps by a token-like mechanism), such that people are directly and legibly aligned with economic growth. Share the pie as you expand it. This was a great book review that inspired these notes as well: https://slatestarcodex.com/2018/06/24/book-review-capital-in-the-twenty-first-century/

ROIC is one of the most important concepts in Investing. Excellent article with a deep dive on that topic with couple of examples, and also some terrific links at the end.