The formation of a thesis

It’s interesting to follow trains of thought among the medical authorities around this time. The progress that is made in tiny analytic steps, the statistical and probabilistic assessments, the hesitant conclusions subject to further testing and interpretation, all this in many ways resembles the formation of an investment thesis.

And the endpoint is more or less the same: a recommended course of action towards a desired outcome, predicated on the isolation and mitigation of risks that are identified along the way, balanced against tradeoffs and potential benefits that hopefully result.

Particularly as the subject matter is one of multivariate complex systems – organs that may react and interact in varying ways, groups of bodies that may do the same, externalities that skew outcomes, individual and group psychology, always a wildcard – the resemblance to economies and markets could not be more pronounced.

CBS News

As large economic managers and their counterparts in medicine consider their next steps and large directions, which in the current case also interrelate, we smaller ones may seek to do the same. That is to say, we’re all investors, even if not in financial assets, with positions that require monitoring and reconsideration at all times. Especially in turbulence.

Business strategy and execution, career planning and education, expenditures and downside protection, such things make up our non-financial portfolios (but so much boils down to finance at least indirectly, truth be told) which aren’t always liquid. A thesis helps.

A thesis helps to set a course, to watch for variances or fine-tune, as will likely be required. In many cases, the thesis will be one to modify outright as circumstances outright change. Under the guise of a business plan, a job, a degree, a stock purchase, and etc., there is consciously or unconsciously a thesis in any case; thinking this through formally, if you will, is probably not a waste of time and energy these days, as the givens and assumptions are said to be changing.

Real estate is also marketing

There was once an investment bank, back in the day, that spent lavishly on its meeting rooms where clients came to visit and were entertained, while letting all the remnant spaces of its office area crumble. Other investment banks took a different approach, but the meeting rooms, no matter the firm’s budgetary decisions or constraints, were sacrosanct. Understandably.

When the industry gave rise to many smaller firms of lesser fame and balance sheets, the practice persisted, even to the point of leasing a shared location that seemed expansive to the untrained eye, although behind the shared facade there was a cubicle and a closet. When the excitement shifted away from Wall Street and to innovative tech, the idea evolved but the principle was constant: Incubators, WeWork locations, and the such, were, among other things, the outward expression of the tenant’s profile and desires, as previously palatial gathering grounds turned playful, glass-walled and gadget-conscious.

For all the issues of efficiency and team culture now under consideration in the centralized vs. decentralized commercial real estate discussion, as the distributed work-from-home routine becomes a universally accepted standard, the referenced aspect of outward presentation remains a theoretic challenge.

Beyond the meeting rooms and glass and all of that, the physical location is a symbol and advertisement. Companies spent fortunes for their logos to be on display at the building entrance, cities that became a magnet for buildings and logo’d entrances had emerged and differentiated on the basis of the tallness of these structures and the logos that moved in.

Banks had opened and maintained branches around town, even as mobile applications reduced the need for that, in large part as a testament to status and to entrench a presence to the customer’s perception, while the logo in the window was a billboard ad for everyone to see.

If physical space, in this way of looking at it, is a marketing expenditure as much as (or arguably now more than) a real estate expense, and if the current trend to reconfigure real estate persists, what will replace the marketing? And, beyond the firm’s offered product – which may or may not sell itself, which may or may not require a physical presence, which may or may not be digitized – how will the deepest pockets outwardly differentiate? How will the smaller pockets pretend to be less small? A bookshelf and some flowers in the video background can be had by anyone.

NY Times – Manhattan Faces a Reckoning

The exponential circularity

The circular effect is roughly as follows: If value is essentially a forecast, then the economy is the aggregation of all forecasts, and the markets – where assorted values are determined in anticipation – are a clearing exercise shaped by a view of how these forecasts are prone to change. The markets set a forecast to the forecast, which can reflexively influence the source.

The investment decision – a strategic course of action by a business, group, or individual – takes its cue from the economy and markets, which take theirs from the investment that’s decided.

Over the course of time, the crisscross of influences and effects settles into a semblance of order, where all involved may start to get accustomed to a general direction until the order of the thing gets shaken and a period of volatility again takes root. The severity of this depends on the depth and reach of the shaking, and thus, too, the time to order on the other side, and its nature.

The present time and its triggering event are of a depth and reach that is (arguably) unprecedented, which makes the described flow particularly tricky, with little to look back to as a guide or by analogy to find the equilibrium.

At the basic fundamental level this presents a problem…

Howard Marks – Uncertainty

… ideally resolved with patience and close observation…

Paul Tudor Jones – May 2020 Market Outlook

… to the extent permissible by liquidity and funding…

WSJ – Banks Are Only as Sound as Their Models

… which circularly reflects back on value and is determined by it.

The warning and the warned

The going-concern opinion is in a normal time – when the economy is in a steady state of progress – a more or less subjective thing. A company’s auditors determine that its financial runway for the coming 12-month period is at risk of falling short. The determination is based on projections, which are based on expectations and estimates.

At least in theory, but maybe also in practice, a going-concern opinion from the auditors can be disruptive to the company’s operation and liquidity, almost as though self-fulfilling, as a warning signal like a brand in interactions with the marketplace. It’s something to be avoided, if possible.

In a normal time – but all times have their little quirks, depending on whom you talk to – it’s possible at least to judge a financial forecast on the basis of conservatism or aggressiveness, assuming that markets and the economic atmosphere are in a reasonably defined state. The risk of falling short in such a state – and doing so within the arbitrary one-year timeframe – although the magnitude of such a risk can be and is debated, the argument will nonetheless take place within some semblance of parameters, some form of reasonable standard.


In an abnormal time, such as, for instance, when an economy itself is the subject of going-concern discussion, the relative status of one micro element within this macro flux can be of even greater (arguably, absolute) subjectivity. If everyone is in the same boat, what does a warning even mean? I think the warned already kind of know, and more than likely are themselves feeling the onslaught. The red flag is almost presupposed and may just be a matter of degree. Like, “your concern is going more or less than mine,” or, “as you go I go and let’s make the most of it together.”

The relativity is perhaps what matters most, and the orders of magnitude.

The relative connectedness and equivalence, perhaps, is also what proves to be the saving grace… as we evolve from an environment of cutthroat competition to one of self-interested cooperation. This will anyway be something to watch.

Fortune Term Sheet

Freemium volatility

If a product were judged purely on the basis of what paying customers pay for, or don’t, then just as free sell-side financial research is a commissioned trade solicitation, published media content is an ad. If the publication is subscription based, then the ad is for itself. Otherwise, for some third party. In either case, the transaction is what matters. It pays for the content production, which is to say, the ad placement, ideally at a profit.

The difference between assorted models is mainly a matter of disclosure. Many take sell-side research with a grain of salt because they know the underlying model. In media, the cynicism translates thus: If you’re not paying for it, you are the product. In other words, you are what is sold to those who pay. Either way, there is disclosure, though sometimes it’s implied. It’s always about the customer who pays, in big print or the fine print.

In the economics of digital supply and demand, where the supply of product is the content that is published and its demand is either free (i.e., promotional) or paid (i.e., subscription-based) attention, the demand-side (i.e., buy-side) is these days under the microscope for clues. Whether it’s the advertiser cutting back on spend, or the subscriber re-channeling income disposition, the dynamic has begun to signal a rebalancing.

Source: The Information [from free email Tech Briefing, incidentally, in support of subscription product]
Same source

In this universal freemium model, which is in essence what we’re talking about one way or the other, in which perceived value is the driver of both supply and demand, the currently prolonged period of general positioning and repositioning, investment and divestment, customer growth and churn, preference and subordination, focus and inattention, will likely shape new patterns of behavior (for both suppliers and demanders) as the meaning and relative scale of value are rejudged.

If the digital economy should see a lift, as is generally now contemplated, this will coincide with the aforementioned scrambling of patterns. We’re at the early stages of all this. The expectation is for greater possibilities.

Funding, execution and optionality

Timing, luck and survival was the subject of yesterday’s post by Fred Wilson, in which the three notions are shown to interrelate. The significance of the idea can’t be overstated, and it may be of particular importance in an environment of escalating turbulence and pace. Fred’s post was from the perspective of venture capital and the entrepreneurial existence, where funding, execution and optionality are also interrelated.


It’s possible to make a case, I think, in an environment of escalating turbulence and pace – especially when these accelerating qualities extend out into all areas of the economy – that all capital is venture capital, all enterprise has aspects of a startup, and we are all entrepreneurs regardless of our interests and status. Fred’s post, in this context, can be read more generally and applied to most, maybe all fields, endeavors, and directions.

In so doing, the concept of survival is the one out of the three that is most interesting, because timing and luck, which are associated, are largely out of our control and at best managed through portfolio diversification. Survival, on the other hand, though no sure thing, can be proactively pursued. The even better news is that the trying comes prefab in our natural instinct.

The thing that makes it less than obvious, in light of circumstance and volatility, is the relative measure of what survival means, how long it lasts, and in what way. A few examples from the latest headlines follow.

In the end, execution is what matters most, which is enabled by adequate funding. And all value is option value.

From technicals to fundamentals

The market‘s large surface, made up of many categories, voices and opinions, is a generalization that is useful only in a large directional sense. It feels like the market is starting to shift its focus from liquidity to the underlying business asset that gets funded.

In this sense, if the early stages of the crisis saw investors rush to cash and the management of volatility, perhaps we are now entering a phase of reassessment and repositioning with respect to the investment itself.

If the former is at least symbolically predicated on market technicals and the management of capital sources, the latter is in the same way directed at business fundamentals and capital uses.

In a different way of looking at it, if the economy is represented by the asset side of the balance sheet, and the market represents the liability side, we’ve migrated from a reactive stage where liability holders look within to get their house in order…


to a proactive stage where capital structure and positioning are refashioned based on (economic) asset value.


Just as assets and liabilities relate, so also business economics and market flows. Where a cause begins and an effect ends in the circular reflexive dynamic is probably more interpretive than it is precise, but on the assumption that markets are analytically efficient for the short term and reflect generally comprehensive patterns, the sifting through the rubble has begun…


… which, regardless of individual business outcome, is a positive economic indicator.

Even if asset values are estimated to shrink on scrutiny and investors seek to climb up to more senior levels of the liability cascade, the movements show that, possibly, the capital lockdown is ending.

Fact accretion, opinion amortization

There is the old saying about profit and cash: the former, it goes, is an opinion and the latter is fact. This is a comment on accounting rules that govern various line-items up to the profit calculation, rules that in principle seek to connect economic qualities and magnitude with timing of their recognition, to most correctly represent the financial profile of an operation.

At least that’s the objective, though “represent” is maybe putting it too strongly. To “estimate” is probably more correct, and in any case the exercise is arguable and subjective. Under the best circumstances, it’s predicated on a stable set of principles that justify the theory in ensuing conversation. The fact underneath it all is still cash, which pays for the sandwiches.

Now, in a period of unprecedented economic volatility, in which investors and operators are looking deeply into the unknown with little confidence in what they think they see, the difference between opinion and fact becomes much more pronounced.

On one hand, the opinion is prone to be more fickle and devalued…


… while on the other hand the fact becomes more highly prized…


… even for those who have plenty of it.


There is a market signal in these patterns. From the funding source perspective, it suggests a movement up the capital structure to more stable levels of collateral; while funding uses are directed at conservation and survival, more so than vision, which is blurry all around.


Cost of carry

The chronological price pattern of futures contracts here isn’t conceptually dissimilar to the valuation of a business asset. It isn’t uncommon for near-dated cash flows to be negative, in the early stages of a business, when carry costs outpace revenue… up to a point, some time in the projected future, at which the business starts to turn a profit as it comes into its own.

WSJ – Oil Prices Skid, With May Contract in Negative Territory

In one way of looking at it, business valuation is a price view on a series of futures contracts, discounted for variances in expected results over time. The cash flow forecast tends to rise but the discount factor keeps the uncertainty of distance in check. Or so goes the theory.

In practice, venture capital (in the conventional sense) enters the picture when the business has its greatest cost of carry, when revenue growth is unknown, or possibly nil. As the business matures, and if all goes according to “plan” – which is rarely the case, even when the business is successful – subsequent funding rounds see lower negative cash flows, up to the crossover point where the business is self-sufficient and profitable. At that point, in practice or at least in theory, the business is sold for a multiple of its profit.

Oftentimes this happens before the business is profitable, just as sometimes profitable businesses aren’t sold. It all depends on circumstance and environment and a price that clears the market, so to speak. The same is true for funding rounds that precede the “exit”.

The behavioral constant, however, is the implied evaluation of underlying futures contracts in all these cases, and the balancing of carry costs with profits to arrive at a positive present value in the aggregate. So, when the expected carry costs don’t support such a result; or when, as may be currently the case, there isn’t a strong view on what these carry costs will be and for how long, this is what happens…


If, theoretically, business insiders are in tune with their realities much more than investors, traders, and the outside market, there is a signal here in the composite. It says: we don’t know what’s on the other side of now, and now the carry costs are high.

Related reading: Market notes from up above (when the economy is a restart).

It’s time to recapitalize

The distinction, perhaps, is between infrastructure, hardware, and large-scale systems, on one hand, and software applications, data networks, and mobile commerce, on the other. It might also be one of centralized platform solutions vs. distributed connectivity. And true technical innovation vs. business model refashioning.

Maybe the recent call to action touches on all these things, individually or in combination.


One feels the fundamental truth of the position, but also that there’s been enormous building underway for decades, in many ways unprecedented in magnitude and velocity.

WSJ column

When push comes to shove, the difference may be one of weight: on one hand, the heavy and capital intense projects that require massive funding and yield a long-term payback; while on the other hand, the lower cost and entry-barrier undertakings with the potential for rapid scale.

If there’s something to this interpretation, then the referenced building treatise is also a call to financial markets. Funding amounts, investment expectations, financing terms, liquidity support and potential backstops (including from the public sector), are all ingrained in industrial directions.

It’s hard to know which leads and which one follows, a circular cause-and-effect reality is probably most correct. But if it’s time to build, as stated, it’s probably also time to recapitalize.