September 08, 2019

That sweet vigorish

I received an old-fashioned letter from Dr. Kapital this week, in which he made an interesting observation.

"The Other Front [he wrote], I can always tell you when a company's glory days are over.  It is the simplest thing in the world: they get interested into finance.  IBM, GM, GE - titans of industry that tried financial alchemy to extend their lives.  It always works - for a time - but there is a reason industrial businesses have historically sold for 16 times earnings, and financial businesses for 10.  In the end, finance is, as Bulgakov styled it, a 'black magic show, with money falling from the ceiling,' enabled by a credulous crowd.  But the show does end - every ten years or so - and we learn again that those slips of paper are not quite what they were imagined to be.

"I will never forget that fateful call with General Electric in 2008 when they told us that they were having a little problem with the commercial paper market, which financed much of their business on very attractive terms, but only for very short periods of time.  They avoided disaster with the expensive assistance of Mr. Buffett, and recently took the pledge to abstain completely.  This comes a bit too late, I suspect, but there is always hope for those who repent.

"So I was interested to see that these modern technology companies are now taking an interest in the dazzling world of finance.  Facebook and Apple are toying with cryptocurrency, as if actual currency were not cryptic enough.  Uber, its Golden Age already behind it, is entering the payday loan business.  And they say now Amazon dreams of becoming a bank, as Wal-Mart did before it.

"Trust me, there are better dreams.  To paraphrase the Oracle of Omaha, when a great industrial firm enters the dark forest of finance, it is latter that is likely to preserve its reputation.  Far better to return capital through judicious dividends and well-timed share repurchases, than to waste it on such frivolities.  The aged company should follow the wisdom of the Buddhist sage, and accept its fate with grace:

Barefoot and naked of breast,
I mingle with the people
Of the world.
My clothes are ragged
And dust laden,
And I am ever blissful.
I use no magic to extend my life...

"But, of course, no one ever got a bonus for that."


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