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I’ll be distilling the most impactful information I picked up over the last week so you don’t have to.

Today’s Business Academy takes 2 minutes and 59 seconds to read.

🔑 Asset prices and business buying

I try to stay away from predicting the future…

But let’s talk about interest rates, economics, and how that affects asset prices.

—

Macroeconomics was a frustrating class in business school.

Why?

Because Economists are too confident about their predictions of the future.

They have formulas to explain the behavior of the economy, but those formulas historically have not worked.

The reason for this is Economics is essentially the study of humans, and humans are irrational beings.

We’re unpredictable.

I wish Economics professors would say “this is our best understanding of the topic but it’s not perfect”.

Overconfidence in their formulas leads to bad advice to our government officials which leads to bad policy which hurts our economy.

There is however one rule that is immutable in economics. Interest Rates.

The Fed Interest rate is like gravity.

Interest rates go up → asset prices are deflated

Interest rates go down → asset prices are inflated

The Cost of Assets

Take a look at this graph (tweet link here).

This is the price you can pay for a house at different interest rates if your monthly payment is steady at $1,850.

—> At 2.6% interest you can buy a $462,000 house.

—> At 7% interest you can buy a $280,900 house.

That’s a 39% drop in price to simply pay the same monthly mortgage.

Buyers are in a tough spot now.

Business and home sellers are looking at 2022 and are expecting those prices.

As a seller (understandably) you are often the last person to believe the reality of the new world we live in.

So if your business was worth $50 million in 2022 it is worth $30-35 million today for private equity buyers.

And it’s not because business buyers are evil and want the perfect price. They are subject to the whims of lenders.

And the bank simply won’t give you the money to buy a business at last year’s price…

So what happens now?

It’s a war of attrition…

Buyers cannot buy at old prices with debt.

So sellers will come around slowly to this new reality.

The tide will turn.

It starts with deals that need to be creatively structured so sellers can feel like they’re getting just a small discount from last year.

If interest rates stay steady for 12+ months, sellers will capitulate and we will see PE buying at a 20-30% discount to last year’s peak.

Have a great week,

Sieva

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The 🔑 key to success is information.

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Today’s Business Academy takes 6 minutes and 58 seconds to read.

🔑#1- What I learned from Charlie and Warren.

I finally did it.

After a decade of desire…I made the pilgrimage to the Berkshire Hathaway Shareholder Event.

Here are some of my learnings from the event…

(my favorite learnings at the top)

Celebrate Capitalism…and be playful

Warren and Charlie host the only shareholder event that feels like a music festival. A celebration of capitalism. They run ads for their key companies at the beginning of the event, they have a tradeshow where you can buy products from the companies they own. And most importantly, they don’t take themselves too seriously. It’s hokey and playful.

Be Kind.

Warren has a favorite quote from one of his CEOs:

“you can always tell someone to go to hell tomorrow”.

Charlie and Warren both recommend you be kind to the people around you.

“I’ve never met anyone kind that died without friends. I’ve known plenty of people with a lot of money that died without friends”

The most important thing is longevity…

When I asked attendees after the event what their favorite part of the meeting was, every single person started with:

“I can’t believe how sharp they are at 92 and 99 years old!”

Nobody celebrated their hundreds of billions of wealth, or heroic feats.

It turns out everyone wants to know how to live long, and stay sharp throughout your life. So protect your body and your mind. If you can avoid it, don’t retire!

Their instructions on how to live a good life

• Spend less than you earn 

• Invest your money 

• Don’t surround yourself with toxic people 

• Know how people who manipulate other people, and resist the urge to do it yourself

• Write your Obituary and try to live your life accordingly  

Is the US at risk of losing its place as the reserve currency?

“I see no other option for any other currency to be the reserve currency” - WB

“We can do a lot of dumb things and get away with it, we can’t do an unlimited number of dumb things.” - WB

It’s the government’s job to operate in a fiscally responsible way. If we don’t do that for a long period of time, it will decrease other countries belief in our country’s economy which could lead to long term pain.

Ignore Finance Professors

A professor and podcaster stated that if a stock makes up more than 35% of a holding company, it can be considered dangerous.

Charlie Munger’s responded

“I think he’s out of his mind”

Two lessons

1. When you find a company that is better than the rest, don’t sell it because of some arbitrary targets. Hold on tight.

2. Be careful. There are so many finance professors and educators out there that are just wrong. Remember, if they had the perfect plan, they would be very rich themselves.

On Investing in America

“US is a better place to live than when I was born by many magnitudes”

“You can romanticize about the past but forget it!”

“My dad was a congressman in 1940, and the government was a mess back then.”

“If I had the choice. I would choose to be born in the United States and I would choose to be born TODAY.” - Warren Buffett

Stop romanticizing the past, we list in the best moment in history. These guys that have been around 100 years and have seen every moment have told us so.

On Estate Planning

What should heirs do after your parents die and give you an asset?

“Just hold the goddam stock” - Charlie Munger

You need to prepare your kids for what they’re inheriting. Talk to them. Share your values.

“I don’t sign my will until my kids have seen it, and offered suggestions”

“Live your values, and talk about them with your kids” - Warren Buffett 

We hosted an Enduring Ventures meet-up in Omaha :)

🔑#2- Our Shareholder Event.

Two weeks ago we hosted our shareholder event in Miami.

The room was full of builders, people who owned small businesses and holding company owners.

A few takeaways on hosting an event.

Plan an event you would like to attend. Don’t host an event to impress your attendees. We host the event we would want to attend. It attracts the type of people we want to surround ourselves with.

We’re both pretty down to earth. So we avoid fancy stuffy hotels and expensive restaurants. We hosted the event at a simple boutique hotel with a good vibe. They didn’t have conference space so we huddled in their “living room”, sat on the floor etc…

We care about activities. We want people to bond outside of just food and content sessions. So we bring people to lead yoga, workout classes, breath work, art classes and we even played beach Ultimate Frisbee. These are all optional, but people who participated enjoyed it. Every year Xavier hosts a Business Trivia to kick-off the event. This is not optional and is a nice way to get some competition and comradery going.

Food. This one is really important to me. It hurts my heart to attend an event with bland conference good. Our event planner knows this and flies out to test all the food ahead of time so every meal is special.

Hire an event planner. The first year we hosted an event, one of our employees spent part of the year preparing for the event. It turned out well, but it was too much work and stress for me. I’ve since learned it pays to hire a professional. Blair and her company NoName Road specialize in hosting corporate events 40-150 people. She does it all. She even prepares flower arrangements for the entire event space.

A few learnings from our speakers

Jay Vas gave a talk on holding companies. His key insight was that great investors don’t focus on demand. They focus on supply. If they can compete in an industry with constrained supply they prefer that. Especially if they can buy up some of the other competitors.

That comment hit me like a ton of bricks.

My whole life I’ve been focused on demand!

I was told if I was starting a company I needed to pick an industry with a lot of demand. But with a lot of demand, and also a lot of supply you have no pricing power. Your competition will eat your margin away.

Jacob McDonough - wrote a book called “Capital Allocation” about the early years of Berkshire Hathaway.

His insight was: “Berkshire was built on the backs of three failed businesses, Berkshire textile mills, Blue Chip Stamps, Diversified Retailing”

There is some beauty in knowing that even the greatest investors we know today made major mistakes along the way.

My takeaway from this as a Holding Company owner is you can make mistakes along the way, as long as it doesn’t bring down your company.

So you should optimize your decisions around two things 1) getting your money back on an investment and 2) surviving a long time.

But don’t overoptimize growing fast, especially if it puts risk on the future of your company.

For example: taking debt can help you grow faster, but is risky and can bring your company down to zero.

Sahil Bloom is a friend of ours and has built one of the largest non-celebrity social followings on the internet. 1.5+ Million people follow him across different platforms.

He spoke about the power of building an audience and how it can be applied to business.

What stood out to me is you don’t need to build your audience for a specific purpose.

Because once you have a large audience, you’ll have endless opportunities to create value and wealth for yourself from that audience.

Before I started my journey on Twitter I thought it was best to have a specific goal in mind, or a product you wanted to sell.

That’s not true at all.

I’ve seen many people now build an audience and only then figure out what businesses make sense for them.

My most extreme and favorite example is the Kardashians. Kim Kardashian built a massive audience and following first. Today she owns a variety of businesses including Skims, a mobile game, makeup and now she’s a co-founder of a private equity fund.

Have a great week,

Sieva

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I’m trying something new this week.

I spent hour researching an interesting Holding Company. I read dozens of articles on them, and summarized my learnings below.

Let me know if you enjoyed this, or if you’d rather I stick to my other format.

Today’s Business Academy takes 4 minutes and 35 seconds to read.

I’ve become fascinated with Holding Companies…

As I learn about interesting holding companies, I’d like to share those with you.

Today’s pick is a company you’ve heard of, but I bet you don’t know their story.

Loews Hotels was founded by Laurence (Larry) Tisch in 1946.

Larry first convinced his parents to spend $125,000 on a resort hotel in Lakewood New Jersey.

Shortly afterwards he opened a luxury hotel in Brooklyn called the Loews Kings Theather Hotel. The hotel had an Olympic-sized swimming pool, a rooftop garden, and a theater that could seat over 3,000 people. 

Larry spent the next decade building a hospitality portfolio…then something incredible happened.

The Supreme Court came down with an antitrust ruling (United States V. Paramount Pictures Inc)

Major movie studios were required to dispose of the movie theater chains they owned.

The Tisch brothers buy Loew’s Theathers from MGM 1959, which had 102 locations.

That same year they take the business public and list it on the NYSE.

The theaters they bought over were old, and out of style…

They had a choice:

Spend a lot of money remodeling their theaters, or sell the premium locations.

They decide to sell, and begin their diversification journey.

• in 1968 they buy Lorillard Tobacco Company

• in 1974 they buy CNA Financial

• in 1979 they buy Bulova Watch Company

Fast forward to today, Loews Corporation had revenues in 2020 of $12.6 billion and EBITDA of $3.4 billion 🫣

But it hasn’t always been roses and butterflies.

I love to hear about struggles and mistakes these behemoths made along the way…

Loews Biggest Losers…

In 2007 Loews Corporation buys HighMount Exploration LLC for $4Bn.

It's a natural gas exploration and production company.

The following year gas prices collapse by 70%…

The CEO James Tisch decides that gas prices are not coming back, so he goes to sell it.

Here are a few media snippets about the deal…

Them looking to sell it…

The CEO of Loews moving on from the mistake:

James Tisch prediction proved to be correct.

Gas prices never recovered from their 2008 highs…

He did the right thing.

Cut their loses and moved on…

Which made me think of favorite Warren Buffett line:

Summary of Loews Corporation performance over the years…

Loews Corporation went public in 1971.

If you bought $10,000 of stock in Loews at the IPO and all dividends were reinvested, the value of your investment today would be worth approximately $2,395,000 😮

Now lets learn about the Tisch family’s greatest feat...

After founding Loews Hotels, Larry Tisch diversified into insurance.

In 1974, he bought a struggling insurance company named CNA Financial Corporation.

The day after he buys the business, he tours the office.

He walk up a private spiral staircase to the chairmans office.

There he finds a marble room ajoined to a private dinning room.

That room was never used again in a symbol of new found austerity for the company.

Larry and his brother turn the business around. It becomes profitable, and eventually grows to become one the the largest insurance companies in the US.

Here’s a description of Larry

Another quote about Larry’s style

Here’s the next level of the CNA Financial story:

• In 1974 the business did $4Bn of revenue while losing $135 Million per quarter

• End of 1974, the Tisch brothers buy the business for $100 million

The Tisches' hire Edward J. Noha, then the No. 3 man at Allstate Insurance (their smartest move yet).

Noha refocuses the business on its core strengths:

• property casualty insurance and,

• life insurance.

Lester Pollack, a Tisch associate, then leads the spin out of CNA's non-insurance business:

55 nursing homes, a cable TV company, 40% of a dental supply group, and Larwin group, a homebuilder that had lost $125M the previous year.

Today CNA makes up for more than 50% of Loew’s yearly profits 💰Put this one in the “Win” category.

One last hiccup in their journey I’d like to share with you…

In the 1990s, the company was embroiled in a high-profile legal battle with the US government. The allegations were that Loews' tobacco subsidiary, Lorillard, had mislead the public about the dangers of smoking.

The government ultimately won the case, and Lorillard was ordered to pay billions of dollars in damages. However, Loews managed to emerge unscathed from the incident, as the company had previously spun off Lorillard into a separate entity.

…there’s a lesson in there somewhere.

Have a great week,

Sieva

ps: what did you think of this week’s story, 👍 or 👎?

The 🔑 key to success is information.

I’ll be distilling the most impactful information I picked up over the last week so you don’t have to.

Today’s Business Academy takes 7 minutes and 51 seconds to read.

Summary of today’s issue

🔑 #1 - How to fight 300 war ships, and win.

🔑 #2 - Business mistakes I made early on…

🔑#1 - One man VS 300 war ships

I’m a sucker for a tale like this…

Here is the story…

Korean admiral Yi Sun-Sin is sitting in jail for disobeying orders. A messenger for the king arrives to Yi’s cell to ask for help.

The Japanese are attacking their homeland with 300 ships. Korea only has 13 ships…

Yi’s mind springs to action.

He needs to drive the Japanese into a situation that gives his Korean army an advantage.

He knows a place that has a narrow channel so the Japanese can’t surround him. Importantly the tides change every 3 hours in this channel - something not many people know.

Yi’s army abandons him.

He’s alone in this bay as the Japanese ships approach.

Yi charges the ships…as he does the tides begin to move. The Japanese ships have nowhere to escape. They collide with each other.

Yi’s army see the Japanese are cornered so they attack. The Japanese flee for their lives.

You must be thinking… “Sieva…why are you telling me this silly folk story?”

Because I want you to remember…never underestimate your ability to create a HUGE impact.

Too many times I’ve heard people around me say: “our team is too small”, “we don’t have enough resources”, “this will never work”. I call these surrender phrases.

I don’t get upset easily, but saying one of those 3 surrender phrases to me ignites a fire of a thousand suns. Don’t try it.

The story of Yi Sun-sin made me think of another hero journey…

In 1891, Samuel Zemurray arrives in the United States as 13-year old poor Russian immigrant.

He will soon start a banana import company that grows to be one of the biggest companies in the world.

(this is Sam Zemurray)

Sam builds his business importing millions of bananas from Honduras.

Then in 1905, Honduras defaults on its $100M debt to the British government.

The US doesn’t want British war ships in Honduras, so the US Secretary of State asks JP Morgan to buy the debt.

In exchange he can collect import fees on all Honduran imports.

Well, Zemurray didn’t like this. He didn’t like it at all.

Why?

Because he had a special deal with Honduran government about his import fees. He paid less than everyone else.

So what does he do?

He starts a lobbying and marketing campaign against the plan.

The secretary of state calls him into his office and tells him to back off.

What does he do next?

He buys a 160-foot ex-Navy warship. Hires a group of mercenaries. And stages a coup to overthrow the Honduran government.

It works.

For placing the new Honrudan president he gets all his concessions and 20,000 acres of free Honduran land.

The best part about this?

Sam was 29 years old when he pulled off this coup. He had only been in the country for 15 years!

He outmaneuvered one of the greatest super powers at the time.

When your team tells you “we don’t have enough resources” to achieve your goal. Please share this story with them.

You can read the full book here. It’s excellent.

🔑#2 - Business Mistakes I made early on

This post inspired me to reflect on my own list of mistakes & learnings.

Unwind Contracts Are A Must

Have you heard of a Prenup?

If you’re getting into a partnership, you must have an unwind contract.

The contract should answer

• how do you make decisions if you disagree?

• what happens if one partner wants to leave in a few years? Do they have to sell stock back?

• how will you value the company? You can select a 3rd party valuation firm, or you can select a valuation methodology ahead of time (ex: the valuation will be 3x EBIT for the last 12-months)

When I started my first business I was 50/50 partners with my co-founder.

We built a nice business but we disagreed on a lot of things and we didn’t have a strategy to resolve those disagreements. We also never considered what happens if one partner leaves. It caused me a lot of stress and headaches.

In hindsight here what I would do:

1) introduce an independent board member (or have a mechanism that mandates one after 2 years in business).

2) have a share repurchase plan. If a founder leaves, I don’t want them walking away with 40% of the business and riding the coattails of the business. Instead I’d have a mechanism that buys 90% of their shares at Fair Market Value (FMV) over the next 5 years (yearly)

3) include a mechanism to value shares in the future. The best would be FMV is 3-5x EBIT. So perhaps you can use something like this: 3x trailing 12 months earnings under $1M/yr EBIT. 4x at $1-2M/yr EBIT. and 5x at $2M+. Alternatively you can agree hire a 3rd party firm.

4) chose a mediation/arbitration process and person. Include in your document a provision that mandates arbitration, and select a process for how that arbitrator is chosen. You don’t want to leave disputes in the hands of lawyers or a judge. It ends up costing everyone more money and nothing gets resolved (sorry the legal system doesn’t work here the way you think it does).

An arbitrator can take all the information on hand and make a definitive judgement on the outcome if you give them that power in the contract

5) long vesting. The normal 4 years vesting schedule is a trap for founders. It takes 10+ years to build a great company. I would align my vesting schedule with that timeline. Otherwise you may have a founder leave after two years with 25% of the stock! That is highly demotivating to those that stick around.

6) buy preferred shares. Founders will own all of the common stock at founding. But founders should each buy 5-10% preferred shares at founding as well. You can use a SAFE note to buy $5k of shares at $50k valuation. In case things go sideways and the investors own most of the company, it can protect your personal wealth to own the same class of stock as your investors.

Founder Market Fit > Product Market Fit

The first business I started as a sophomore in college was a Learning Management Software for universities.

There’s a big market out there for this product.

But it was a hard sell.

We didn’t have the skills to sell this type of product at the price that was needed.

And we didn’t have the capital to build an enterprise software product that a school could use.

When doing your first company, I’d pick something that is “achievable” for your skill level and the people you have on your team.

If you’re early in your career you need a “win” to give you the confidence and experience to work on bigger harder problems later on as an entrepreneur. So I suggest you start with an easy business that will definitely work.

What’s an easy business? Something the world already needs: plumbing service, HVAC service, painting, landscaping…etc

Business Model > Market Size

Pay attention to things like:

• Unit Economics

• Cash flow cycle

• Sales cycle

If it cost you a lot to build a product with a low margin, you’re not going to make it.

If you have to pay to build the product, and you only get paid 60-120 days later, you have a poor cash conversion cycle which makes your business need more cash (construction is an example of this, eCommerce is another example).

Some products take 1 minute to sell, other products take 12 months to sell. When you’re doing the latter, you have to pay your team’s salary and are taking a lot of risk on them…what if they close nothing in a year and are actually not good at their job? You spent a lot on their salary and got no results. (medical device or government sales are examples of this)

Avoid businesses like this if you’re a first time founder.

Flexibility > Fundraising

Don’t raise money unless you’re very confident you absolutely need it to grow your company 3x from here.

When I ran my first company, I thought raising money would solve my business model problems. We didn’t need it. But it felt cool. We got featured in Techcrunch and all my friends congratulated me.

I've now raised over $50 Million in my career, and each time I raise money people congratulate me.

Why?

Funding is an obligation, it's not a reason for celebration.

Nobody congratulates you on getting a loan on your car.

In the same spirit, we shouldn’t congratulate people for raising money from investors.

My biggest mistake in raising money was I thought we could get big enough that it would solve our unit economic problems (we were not making enough margin on most of our sales).

That was not true. Don’t make the same mistake I did.

Look for businesses that have good economics. Avoid funding.

Growing slowly ensures you build a better, more resilient business.

I’m embarrassed about the decisions I made as a young entrepreneur. Please don’t give me a hard time about it…because I already do.

Have a great week,

Sieva

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