The barren cow paradigm

Whenever a highly lucrative business is offered for sale to the general public, you can be pretty sure there’s a gargantuan catch and the whole thing is likely to crap out, or at least become a whole lot less lucrative in the near future.

More often than not, it’s a game of pass-the-ticking-bomb with clueless peasants.

I advise the highest caution when, say:

  • Vietnam puts up part of its stake in a dairy giant up for sale because they apparently need the money for something else. What’s not to like about joint ownership of business with communist dictatorships? It’s not like you’re risking arbitary expropriation by entrusting your capital to people viciously opposed to the very concept of private ownershi….shit.
  • A telecom giant famous for mismanagement and being owned by super shady organized criminals even by the standards of telecom giants moving to be offered on the stock exchange just as traditional telecoms are getting annihilated by internet startups.
  • As London office space is likely to face diminished demand due to 1) Brexit and 2) the general tendency of 21st century people to work from anywhere else than a soul-crushing office block, suddenly stakes in commercial real estate are “being democratised” and “taken mainstream” by a bold new venture of notorious old incumbents.

Starting to pick up on the pattern?

If the expectation was that the thing will continue to be good, they wouldn’t be selling.

Lucrative assets are kept private and guarded jealously. When they start to dry out, you “take them mainstream” and sell to mom and pop investors – who are then on the hook to lose their retirement savings in exchange for something like 2% above inflation.

It’s a scam, of course.

You sell the golden goose to naive idiots for that last gigantic bag of money when it starts to crap out less gold than it costs to take care of it, and hope to be over the hills before they notice.

Any old company or established institution that suddenly lists on the stock exchange can be reliably assumed to be fucked and looking for dupes.

It’s like used cars that you try to take maximum advantage of and then sell exactly 15 miles before they conk out. Or a cow that shows signs of imminently planning to stop producing milk, so you quickly sell it.

Why is SpaceX private and Snapchat scrambles to IPO?

Because SpaceX is one of the most important ventures in the history of humanity, and will remain central to our nascent space infrastructure, with the potential to be the real-life Weyland-Yutani corporation of the space age. It also has the potential to be not just the most important, but also the most profitable thing anyone has ever done.

So you keep that private – for the control as much as for the future revenue.

In contrast, Snapchat is a pointless social media startup whose sole value is showing advertisements to sexting teenagers. Its IPO is harking back to the dotcom bubble with astronomical valuations for fundamentally worthless projects, and it‘s likely to follow Twitter on an „Oh god we need to dump this on somebody before it implodes“ course.

Nobody sells a goose that lays golden eggs. But when the goose is getting a bit old and the eggs farther inbetween, and really rather less golden, but it still looks plausibly lucrative to a careless, credulous or inexperienced observer, that’s when you dump the thing on mom and pop investors to enjoy the 3% p.a. returns.

In the words of a poet: “Do not tread upon ice with the lords, for often a lord slips and it’s the peasant’s leg that gets broken“

So where are the lucrative investments for normal people?

Not many other options, not until the financial industry becomes a bit less cartelish and rent-extractive. Don’t worry, it’s coming.

Investing in is a fairly straightforward deal: you buy me a drink and I write more of these eminently shareable things. 

  • Mark Friedrich

    What type of checklist or investment thesis do you typically use? For example, what part of the fundamentals of Swiss Re AG, make it an appealing investment?

    • Zbyněk Dráb

      To the horror of my investment advisor, I use a collection of big-picture heuristics rather than an analysis of P/E ratios and EPS and the shoe size of the CFO, which can be massaged and hide *qualitative* problems with the company, to miss the wood for the trees as the expression goes.

      The thesis/checklist: Is this company doing something viable, something that has an important role in the future, such as it can be reasonably predicted? Is the company a high-chance player in its industry, or a slowly failing has-been (IBM, Yahoo)? Is it well run, who are the main people at it?

      When a candidate investment passes these heuristics, only then do I look at the numbers to see if it’s good value to buy right now.


      NVidia, which is making the GPUs that power the world’s rapidly developing artificial intelligence systems (“The best investment in a gold rush is in shovels”). Up 86% (!) in the last 6 months, probably still a way to grow.

      Tesla, because Elon. Stuck orbiting around 200 USD / share, because market curious whether he’s gonna pull it off. I think if anybody is, it’s him. I’d bet my last pair of shoes on Elon Musk.

      Swiss Re was actually one of my few “numbers-based” investments – I chose it for the huge 10% dividend (5% is their standard, which is already pretty sweet, and they paid out double the last few years). The “big picture” there is – Switzerland, stable jurisdiction, boring industry unlikely to face major disruption, well run company, long history -> can probably hold the stock forever with minimum attention and reinvest the dividends in other stuff.

      I probably wouldn’t start a hedge fund on my methods,

  • Felipe Botelho

    Always excellent. However you forgot to consider one thing in this rehearsal, which changes everything. Some times current owners can only see the value from one perspective. Say, if the golden goose is not laying golden eggs, than it’s worthless. However a investor can decide to put his money on it not for the golden eggs, but for the goose. Or any other thing. And then it becomes highly lucrative again. Starbucks history, by the way.

    • Zbyněk Dráb

      Well, the main thesis is that it’s suspicious when things like state-owned enterprises and big old established companies suddenly become available for sale. Or when startups rush to IPO.

      Nobody is saying that there are no good investments, or that an identical asset doesn’t have different values and uses for different owners. On top of that, there are situations when it makes sense to sell a good asset because an even better opportunity turned up. But that’s not the case with Aramco, or Telefonica, or any other wounded elephant.

      • Felipe Botelho

        I would agree with that. Dealing with a government is always a grey area in any scenario anyway, whichever the government.

  • Emilio Garza

    Very interesting topic, by the way, what do you mean with mom and pop investors? Thanks!

    • Zbyněk Dráb

      Small retail investors using their own money, usually long-term, and generally not having a very high risk appetite (because it’s their retirement savings or their kids’ college fund or just life savings in general, and they have nothing else).

      Contrasted to institutional investors.

      • Emilio Garza

        Thanks for the reply! Btw, sent you an email.