We previously presented the first part with Ryan Morris of Meson Capital. In this article we will share the second series of our Q&A with this thoughtful investor who is more than willing to get his hands dirty to generate returns for his investors.
If there are other managers who would like to take part in our interview series, please drop us a note through Seeking Alpha.
As for today we hope you enjoy this interview with young Mr. Morris.
Superinvestor Bulletin - How important is insider buying and insider ownership to you?
Ryan Morris Meson Capital - It's a component for sure, I want to see that people are well aligned, but past track record and the overall incentive structure of management is more important.
Having the net worth to buy a large amount of stock is nice to see, but maybe the CEO who is younger and hungry and can't afford to buy much stock but has a heavily incentive driven compensation scheme is a better set up.
Superinvestor Bulletin - How much thought do you give to macro level issues?
Ryan Morris Meson Capital - Quite a bit actually but not the typical variables referred to as macro. I spend no time on trying to forecast interest rates, GDP, currency, or equity risk premium type variables. I do spend a lot of time trying to understand macro trends in business especially around supply/demand dynamics and the cost of key inputs, especially technology.
One of my heroes since I was a kid has been Ray Kurzweil, who has articulated brilliantly the concept of Moore's Law translating into a much broader array of information technologies.
In general people are not wired to intuit exponential functions as nothing in our evolution would have appeared this way, our day to day lives are basically linear. If you have a cost of a certain technology declining at an exponential rate, such as digital sensors or solar panels or batteries, then the impact on the current state of the market will be invisible at first but then appear abrupt once you hit the 'knee in the curve'. Kodak is a good example how an apparently small threat from digital cameras ended up eating the company - it had a low P/E and looked cheap all the way to zero.
I want to make sure that these exponential macro trends are tailwinds for me rather than headwinds.
For example - coal may look cheap, but it is never coming back. Natural gas was the body blow and solar will be the knockout punch. The cost of solar power will be lower than coal relatively soon and you would be betting against about a million self-reinforcing processes around the world to bet otherwise.
Superinvestor Bulletin - If you could only pick one investment to put 100% of your net worth into what would it be and why?
Ryan Morris Meson Capital - If I was forced to exit the business of investing and had to pick one public stock, I'd pick Amazon (NASDAQ:AMZN) with Google (NASDAQ:GOOG)(NASDAQ:GOOGL) being a close second.
I have never owned stock in Amazon because of the valuation but it is hard for me to imaging them not being the largest company in the world in very short order. They were first to scale in two gigantic markets and are 10X larger than their nearest competitor in both online retail and cloud hosting. It's hard to imagine anyone putting a serious dent in them at this point and the technological tailwinds are very strongly in their favor.
Superinvestor Bulletin - What do you think will be the best sector to invest in for the next 25 years? Why?
Ryan Morris Meson Capital - I really think about things as more individual companies not sectors, so this is a tough thing to answer.
Software and internet will continue to become a larger part of the world but that is also priced in. Biotech will revolutionize the human race over the next 25 years but then will be obsolete shortly thereafter so it's sort of threading a needle on that timescale. I honestly can't answer this very well.
Superinvestor Bulletin - What do you think would be the worst sector to invest in over the next 25 years? Why?
Ryan Morris Meson Capital - I feel more comfortable giving thoughts on this one! Traditional energy (coal, oil) probably will be the worst. Those are going to mostly go away. Oil will still be used for materials / plastics but in a declining way for energy as renewables get exponentially cheaper.
Retail is tough to see how that area doesn't have a complete shakeout with what Amazon is doing to the world.
I think financials may be next in line as worst. Blockchain and continued low interest rates will massively erode the profitability of most financial businesses and banks I believe.
As you can tell I see a lot of technological headwinds for the established state of the world. This will be very good for civilization and consumers but existing profitable businesses will have to adapt substantially to avoid being battered and many of them are not organizations designed for this feature.
Superinvestor Bulletin - Are you worried about the eventual consequences of a decade of unprecedented easy money policy?
Ryan Morris Meson Capital - I would worry somewhat if I was an old retiree that planned on living another 40 years without working but since that is never a state I plan to occupy then 'no'. I actually have a perspective on this 'easy money' policy that I have not heard articulated by anyone else yet. Please indulge me…
Firstly - I think they are doing the right thing by keeping interest rates low. As much as it pains my short book - if rates were higher, then we would be in the next Great Depression right now with deflationary forces accelerating even more than they are.
Secondly - there is only so much the central banks are responsible for regarding low interest rates. They can only really manipulate short term rates but the long term rates (10 and 30 year) are much more determined by market forces, central banks are a drop in the bucket for the supply/demand dynamics for these markets.
To sound out there for a moment: I believe that rates will most likely stay low and even get more negative over the next century. How is that possible? There is no natural or economic law that says interest rates need to be positive (in nature: they are VERY negative - think how quickly unrefrigerated food spoils, for instance).
So what is causing persistently low and declining interest rates? Here's my theory and what you can do about it as an investor.
Interest rates are a function of the fundamental forces of supply & demand of capital.
On the supply side of the ledger you have demographic trends that the world has never seen before - people living longer and retiring with savings to last them 40 years rather than 5-10 as recently as just half a century ago. This is a big 'savings glut'.
Supply of capital going up = interest rates lower.
Before I go into the demand side - here's a concept: the world is made of raw materials + information (i.e. patterns). An ounce of gold is worth $1,000 because it is made of a rare raw material and the atoms are scattered randomly, information component is $0. An ounce of 16gb DRAM chips is worth $1,000 today because of the $999.99 of information about how the atoms are organized and $0.01 of silicon raw material.
On the demand side: technology is also going through a transition that the world has never seen before. The first service business went public only about 60 years ago, before that every single company needed a large amount of tangible financial capital to build a factory, buy inventory, etc.
Now an increasing number of businesses are service oriented and in general do not need much, if any tangible financial capital. Google, Amazon, etc are very tangible capital light businesses. They rely on human capital / information as their value, not raw materials. Unless you are being aggressive with your accounting, the 'information component' doesn't show up on the balance sheet - you spend the money on salaries and then it's gone, expensed in each period, intangible.
With AI, automation, cloud computing, etc. the world is moving at an accelerating pace towards an intangible, information based world. Just look at the trends of millennials buying cars and houses. Nobody cares! They just want to take an Uber from their apartment and play Pokemon go, buying virtual Pokeman balls! Marc Andreessen wrote a famous article in 2011 along these lines "Why Software is Eating the World." This is not a state of the world that existed when Adam Smith wrote the Wealth of Nations.
Demand for capital down = interest rates lower.
Can you tell me a market force that is causing supply of capital to go down or demand to go up? I have a hard time thinking of anything meaningful. The fact that interest rates averaged 5% over the last 250 years I think is in some ways an accident of history. It's a function of the industrial revolution that allowed tangible capital to be accumulated and stockpiled and the population to grow exponentially. Now we are in the early innings of a second industrial revolution where the marginal cost of supply for most things approaches zero and the math changes. Value accrues to those who are dynamic and always making the next score rather than who has the ball in their hand right now to use a basketball analogy - the shot clock of capitalism is speeding up.
So in short: get used to it, it's never going to be like it used to be and that's a good thing for those of us who are PHD's (Poor Hungry and Driven to quote Mario Gabelli). If all you bring to the party is financial capital, then the supply/demand dynamics are not in your favor; but if you're an entrepreneur who can create information and ideas to create value, you've never been in a better position. Competition is fiercer too which is great for consumers and the declining cost of goods and services only help. That's why I'm focused on modernizing & adapting older low risk public companies with strong strategic positions and high barriers to entry. I hope to get VC like upside without the risk of not knowing if the business has a reason to exist or not.
About The Superinvestor Bulletin
As mentioned, we are looking for more investing stars of the future to interview. If you are one and are interested in being interviewed please contact us through Seeking Alpha.
In the meantime, if you are an investor looking for an investment idea we have one that another young hedge fund manager turned us on to. It is a micro-cap company with two-thirds of its market cap covered by working capital, is trading at three times cash flow and is buying back shares. You can join our subscribers and get access to our full report on this company through the link here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.