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.

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.