Chamath Palihapitiya

Chamath Palihapitiya on How to Invest Through This Crisis | The Pomp Podcast

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Key Takeaways

  • Patience and astute observation of the present are essential to being a good investor
    • During crisis: Sit down and learn. Avoid action at all costs
  • Chamath Palihapitiya believes this is an opportune moment for investing; you can 10x an investment, but being clear minded is essential
  • Follow the trail of bread crumbs; Corporations are trimming their expenses to the absolute necessary, who are their suppliers?
    • You will quickly realize it’s an interconnected web of businesses and the implications reach every single business
  • Ask yourself: Which companies have been disproportionally punished despite providing basic needs that should remain relatively in demand over time?
  • Industries like healthcare, climate change, and education will change the fastest
  • On Bitcoin: “I have always thought of Bitcoin as a very binary investment, whether it goes from 80 to 8K to 20K to 3K is irrelevant, this is either zero or its millions” – Chamath Palihapitiya
  • The way out of crisis: “We are going to need a massive stimulus package that incentivizes building things, creating things, repatriating supply chain back to the US, and in that I think there is a way out of this” – Chamath Palihapitiya

Intro

Reflections during Quarantine

  • Coronavirus makes us realize how equal and powerless we are, it’s humbling
    • Not to say we’re irrelevant – Be there for your family and friends, be functional
  • Chamath believes this is an opportune moment for investing; you can 10x an investment, but being clear-minded is essential
  • The most successful people realize they are participants, not all-knowing people – Be humble
  • How do billionaires quarantine? Like everybody else: Chamath spends time with family, works out, and does house chores

What makes a Good Investor?

  • Patience and astute observation of the present
    • “I think that if you are going to allocate capital well over decades, what you really are is a good observer of the current moment in time” – Chamath Palihapitiya
  • During crisis: Sit down and learn. Avoid action at all costs
    • As Chamath puts it: “You are not supposed to be day trading in moments like this, you are supposed to be learning”

How is Chamath Positioning his Portfolio?

  • Defensively – building up a big cash base that he can aggressively put to work
  • Chamath had four positions coming into 2020: Virgin Galactic, Tesla, Amazon, and Slack

Follow the Trail of Bread Crumbs

  • Corporations are trimming their expenses to the absolute necessary. Follow the trail of crumbs – ask who are their suppliers?
    • You will quickly realize it’s an interconnected web of businesses and the implications reach every single business
    • All these sectors have stopped buying:
      • Oil and gas
      • Airline, transportation and logistics
      • Hospitality segment
      • Banking
  • To grow out of the crisis, companies will implement Zero-based budgeting – put simply:
    • Start with a clean sheet paper, my company is worth nothing – zero revenue
    • Let me build it back up bottoms up line by line – What are the bare necessities?
    • This process will take 6-9 months to unfold

Case study: The Movie Industry

  • The US domestic box office saw a decrease a revenue by 99.9% from this time last year (from $210M to just $5,100) – Let’s follow the trail of bread crumbs
    • Movie studios may have gotten prices wrong because they never had time to do price elasticity analysis (For instance, charging $20 on iTunes when they could be charging $100)
    • Movie studios may find it hard to give back theaters their window of exclusivity
      • Additionally, they do not have the same pricing power they would have had with online distributors in normal conditions
    • Result: The cost of the making movies will change
      • The ripple effect impacts paying unionized employees, CGI budgeting, catering budgets, etc.

Think of Things that aren’t going to Change

  • Ask yourself: Which companies have been disproportionally punished despite providing basic needs that should remain relatively in demand over time?
    • For instance, people will still go out, travel, buy things offline, consume energy, eat, buy clothes, and access the internet
  • Example: Despite all their dysfunctionalities, Telecommunications continue to be important
    • They have complicated infrastructure, but they are dysfunctional at handling massive throughput. Additionally, interacting with them requires visiting a physical store
    • In the US: We need more resilient internet, better service, more US-made parts
    • Overlay these dynamics to emerging markets and you get a bunch of bankruptcies
  • This work is boring, time consuming and tactical, “be a humble worker and grind it out”

Then Look for Things that NEED to Change

  • Industries like healthcare, climate change, and education will change the fastest
  • Commercial real-estate is fundamentally impaired – i.e., You can create just as much business value working from home (but sectors like big box retailers still require physical space)
  • “I think the IPO process is totally broken, and so I think SPACs make a ton of sense” – Why?
    • Going public is done through a merger, which is a much faster and simpler process

Big Enterprises vs SMBs

  • In 2015, Chamath started becoming bearish on Enterprise software, as it  shifted more towards SMBs (Small to Medium Business) – The reason was faster money cycles:
    • Put smaller amounts of dollars to work
    • Quicker process, selling online to other SMBs
    • Show revenue traction, which can be used to raise more funding rounds
    • Hire more employees with good equity options
  • But tables turn in crisis, customer base suddenly stopped paying. Many SMBs lack a cash cushion and will go out of business
    • In addition, many SMBs are mono products, they will lose out to big corporates providing a stack of solutions
  • Your takeaway: There will be carnage among SMBs, the usual 3 year mortality rate on SMBs is 50-60%, assume 100% in the coming 2-3 years
    • The exception is for unique products, like Zoom or Slack

The Path Out of the Crisis

  • “In the search for efficiency, we have abandoned resiliency, and we have to pivot our economy to resilience” – Chamath Palihapitiya; More below,
    • Refactor the economy by putting money where it creates incentives for prices to go up and essentially mandate things to be more domestically created/ produced
    • It gets us closer to full employment, allows more competition in job markets, increases wages, charges more for their products and we break the deflationary cycle
    • “We are going to need a massive stimulus package that incentivizes building things, creating things, repatriating supply chain back to the US, and in that, I think there is a way out of this” – Chamath Palihapitiya
  • The alternative is debasement: the government keeps printing money and buying all the assets
  • Chamath expects massive bailouts for pensions, with more political support than for corporate bailouts

Capitalism and Bailouts

  • In the absence of debt, US has negative GDP, i.e., Without debt, economy isn’t growing
    • Additionally, most of the debt went towards propping up stock prices rather than R&D
  • Capitalism is a game that lets you use ingenuity and money as “fulcrum instruments for change”
    • Imagine airlines investing in R&D for super-sonic flights and later demanding bailouts, that will be better deserved than buying-back shares
    • Corporations not advancing humanity should be disqualified from being able to run to the government

What would Chamath do if he were President?

  • Stand up every voting site for testing 
  • Deploy rapid coronavirus mass-testing (results in 10 minutes).
  •  You get one of three wrist bands:
    • Red: Positive – Go home and isolate
    • Green: Cured – Go to work
    • Blue: Negative – Go to work
  • Introduce a massive infrastructure bill that gets the supply chain back into the US
    • Part is incentives and part is government spending
    • Mandate certain % of things to be made domestically in various categories (Silicon chips, clean energy, physical infrastructure, etc.)
  • Chamath notes how health has become politicized – a Republican vs Democrat issue!
    • “At many points in this disease, logic and open-mindedness and iteration ran into bureaucracy, and bureaucracy won”

Bitcoin as Shmuck Insurance

  • Bitcoin is still a speculative instrument, it’s still too volatile to replace fiat (government) currencies, still stuck in the ghetto of day traders and speculators
  • With that said, Bitcoin creates a quasi-gold standard, but instead of gold being owned by central banks, bitcoin is owned by everyone and its value is determined by and between its participants
    • “I have always thought of Bitcoin as a very binary investment, whether it goes from 80 to 8K to 20K to 3K is irrelevant, this is either zero or it’s millions” – Chamath Palihapitiya
  • Chamath expects the crisis to push the Euro-zone to its breaking point, and to cause failures and currency devaluations in emerging markets
    • “It will push bitcoin’s price up on the margins, in these countries, but it’s not enough to create a tipping point”

Additional Notes

  • On Social Capital “My dream is for this to be public, and my objective over the long term is to give individual shareholders the ability to be beside me and be at risk with me. I can’t guarantee that I will make great decisions all the time, but what I will tell you is I am journey to become the best that I can be”
  • It will be an incredible boost to morale to get professional sports going, NFL, basketball, baseball
  • Early flights to space? Chamath is 604th in line
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Notes By Mostafa Khaled

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