Dave Canal's blog

It was a dreary fall day as I climbed the stone steps to Marblehead’s cemetery, known as “The Old Burial Ground.”  The weather was appropriate.   The cemetery, dated 1638, is situated on a hill overlooking the ocean.  I was curious what historic names might appear on the tombstones.  After all, I live a block from General John Glover’s house.  He is the man in the famous painting ferrying George Washington across the Delaware.  And then of course there is Salem, famed for the witch trials, in an adjacent town.  Two “witches” are buried in the cemetery.

In theory, a magician and an illusionist are the same.  But an illusionist performs on a much larger scale.  He’s the one who uses sleight of hand to distort the senses.  Especially the brain.  In effect, he makes perception overtake reality.   Such a technique is used today in bringing a “new” company public.

The word, unimaginable, has a fearful connotation.   It describes something we cannot comprehend because we have not experienced it before.  This is the reality of a subzero interest rate environment.  There is now 17 trillion dollars in sovereign debt paying a negative interest rate.  Why would anyone want to purchase a bond guaranteeing them a loss?  There is no reason, other than a fear of everything else that pays a positive interest rate. 

“History Doesn’t Repeat Itself, But It Often Rhymes” –Mark Twain

The current unicorn IPO market is reminiscent of the psychology used in the Trojan War.  Today the hidden “soldiers” are venture capitalists, investment bankers and corporate employees.  According to mythology, the “gift” to the Trojans was an 80’ wooden horse that seemingly marked the end of a ten year war.  We are now ten years into a bull market.  A market that has not been believed, nor participated in, by individual investors.  However, they are now being offered “gifts” of unicorn IPOs.  These companies are immense in size and … unprofitable.   

With deference to Stephen King and his horror novel “Misery,” it seemed the only appropriate name for my scrapbook.  The “book” started 10 years ago when a famous hedge fund manager massively underperformed the S&P 500.  Then it happened again with a well-known mutual fund manager.  I sensed there was more to come.  Over two, three, five years, the list grew rapidly.  As time went by, active underperformance became a “gift” to passive investment firms.  One that kept on giving.

When I was quite young, my father and I would go into Boston on Saturday afternoons to see my grandmother.  She lived in a brownstone in the south-end across from the Greek Cathedral.  As we settled in, she would give me a dollar and ask me to “go down to ‘Sam’s” and get a pound of hamburger for dinner.  Sam was the butcher at the end of the street.  Every time I walked in the store an overhead bell on the door would ring and I would become instantly mesmerized by all the sawdust on the floor and the smell of meat.

Most of us think of the stock market as a monolithic entity.  I don’t.  I believe it has an internal structure of three categories each based on the size and history of the companies.   Or sometimes, it’s just the nature of the business.   Each segment has its own investment advocates.  

For all the presumed sophistication of Wall Street investment banking firms, I have yet to see a mention of a simple financial law.  The law states the faster a company grows, the harder it is to maintain the same percentage of growth.  We now have dozens of “unicorn” companies (billion dollar valuations) ready to go public.   Many are 10 billion or more in size. Some have been in existence for 10 years or more and most (80%) have not made money.   They’re following the Amazon model.    “Build it and they will come.” Gaining market share is not the same as gaining profitability.

You might think I’m referring to Bill Gates, but the story goes back much further in time.  The father of 20^th century technology, undoubtedly, was General Georges Doriot.   He was born in France in 1899.   Twenty-one years later, he came to the United States as a young immigrant to attend the Harvard Business School.   Four years later, he was the Assistant Dean of the school.  Yes, he was that bright.