Sunday Finds + 3 Thoughts From Last Week
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Welcome to Chit Chat Money’s Sunday Finds + 3 Thoughts From Last Week. In this newsletter you will find three topics I thought about last week, links to shows we’ve recently released, and links to some interesting articles, podcasts, and tweets. Check out the archive here.
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1. Incentives vs. skin in the game
A lot of the conventional wisdom (or at least, what I have read) says that it is good for an executive to have a large ownership or options stake in the stock you are buying because it “aligns” their goals with yours (making money).
There are usually two ways to get to this conclusion:
“This is a founder-led business. The CEO owns 20% of the stock and will make money if you make money. He has skin in the game and cares more than other CEOs. He wants to make money along with outside shareholders.”
“This [insert mercenary CEO] has a fat options package that vests if the share price doubles. He will want to get the stock price up and is heavily incentivized to do so. This is good for outside shareholders.”
I am coming around to caring more about bonus incentive criteria vs. ownership stakes.
Most of these executives are so rich that a little extra juice won’t materially change their lives. So what if they have skin in the game if they are already worth $100 million?
But everyone likes to hit goals others set out for them.
I love it when I see executive bonuses based on targets that will create shareholder value, regardless of the payout. Depending on the business this can be growth in free cash flow per share, growth in book value per share, or specific company KPIs.
I get discouraged when I see stock options and fat cash bonuses given out on weak revenue and adjusted EBITDA targets. Barf.
The holy grail is when you don’t have to care about executive incentives because you know the executive team cares about building the business and winning regardless of how much they get paid. Some examples that pop to mind are Nintendo, Airbnb, RH, and Spotify. There are plenty of others. They do their jobs (at least in my mind) because they want to make customers happy and put their mark in the history books. For me, that is the most “aligned” you can be with shareholders over the long term.
2. Can we retire the ZIRP absurdity takes?
Apple just closed at a $3 trillion market cap and trades at 30x+ earnings.
The AI boom (bubble? Not sure yet) is in full force and investor animal spirits are back.
Tesla is about to get back to a trillion-dollar market cap.
And yet, the Fed has interest rates at 5%. I was told for the last five years this was impossible by the ZIRP (zero interest rate policy) absurdity crowd. Turns out things can still get whacky regardless of whether short-term treasuries or yielding 0% or 5%.
We need to retire the takes that interest rates have an outsized effect on bubbles forming or moving markets. Look throughout our history…there is minimal evidence for this.
The thing is, in a bubble, nobody is looking to make a 5% annual return and sail off into the sunset. They want to make 100% in Nvidia call options tomorrow. It is called animal sports because everyone gets into a frenzy and acts irrationally. By definition, nobody cares about the “risk-free rate” during these time periods. Not that they really ever do.
Just ask yourself what sort of returns you expect from a stock you buy. It is not 5%. So why should treasuries at 5% have any outsized effect on short-term price movements in stocks? It never made any sense, yet so much brain power has been wasted talking about it.
3. More Amex anecdotal evidence.
4th of July, no earnings, this has been a slow news week.
But I did get some more anecdotal evidence on American Express. My bullish indicator is going off the charts, everyone under the age of 30 who is starting to earn money wants one of the platinum cards.
Every time I ask why they like Amex I get two responses:
“I love the points. So worth it for the benefits”
or
“The card is sick, dude.”
The Amex brand is strong among the younger generation. I think this will be a valuable insight I don’t want to forget. Maybe I just need to get a platinum card myself.
Check out our recent podcast covering American Express for our full thoughts on the business:
See you next week,
Brett
***Our fund, Arch Capital, may own securities discussed in this newsletter. Check our holdings page and read our full disclosure to learn more.***
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