The BlackSummit Team

The Wooden Nickel is a collection of roughly a handful of recent topics that have caught our attention. Here, you’ll find current, open-ended thoughts. We wish to use this piece as a way to think out loud in public rather than make formal proclamations or projections.

1.    When Past is Prologue Just about everyone knows about the heroic and brave acts of June 6, 1944 when Allied forces stormed the beaches of Normandy, a watershed moment in the war and in human history. What I was unaware of, until recently, was the critical efforts the night before and their impact on the broader invasion. As part of a four-stage plan, Allied forces dressed up dummies as paratroopers, dropping them over Normandy. As they fell, Germans couldn’t tell they were fake given the distance away. So they rushed to engage. The maneuver pulled German troops away from their bases and spread out their fortifications, creating a vulnerability. Second, when real paratroopers dropped later German forces assumed they were also fake and lacked any urgency to engage. Understandably or not, they extrapolated the recent past and assumed the same thing would continue. They let their guard down and they paid the price due to their lack of discipline. 2.    Being Built on Excess There’s a parable told by a Hindu spiritual teacher that the market activity this year inspired a recollection of. “On a certain day, a bull and a pheasant were grazing on a field. The bull was grazing and the pheasant was picking ticks off the bull—a perfect partnership. Looking at the huge tree at the edge of the field, the pheasant said, “Alas, there was a time I could fly to the topmost branch of the tree. Now I do not have enough strength in my wing to even get to the first branch.” The bull said nonchalantly, “Just eat a little bit of my dung every day, and watch what happens. Within two weeks, you’ll get to the top.” The pheasant said, “Oh come on, that’s rubbish. What kind of nonsense is that?” The bull said, “Try it and see. The whole of humanity is onto it.” Very hesitantly, the pheasant started pecking. And lo, on the very first day, he reached the first branch. Within a fortnight, he had reached the topmost branch. He sat there, just beginning to enjoy the scenery. As it happened, an old farmer, rocking on his rocking chair, saw a fat old pheasant on top of the tree. He pulled out his shotgun and shot the bird off the tree. Moral of the story: crap may get you to the top, but it never lets you stay there!” 3.    Leaner Times Ahead Layoff announcements, particularly within technology and tech-adjacent industries, seem to be picking up steam and accelerating: Salesforce. Google. Uber and Lyft. Chime. Snap. Intel. Shopify. Meta. Stripe. Microsoft. Peloton. Amazon. Beyond Meat. Twilio. Apple. The list could be much longer. At best, resources are being reallocated but in most of these cases, there are massive cuts to internal spending and headcount. 10%. 15%. 20% in some cases. This is structural turnover and not all of them will be relevant or memorable years from now. Figure 1 shows the percentage of large-cap companies that lack profits Stimulus. Friendly capital markets. A pull-forward in demand. These all allow for bad practices, mismanagement, waste, and other inefficiencies to take root and hang over a company. Their junk and internal waste didn’t matter on the way up. Figure 1: Large-Cap Losers, Empirical Research That’s no longer the case and it’s a fork in the road that is dynamic, not a one-time pivot. A lot of companies are going to have to learn very quickly how to structure themselves profitably and for lack of a better term “grow up.” The next few years will unveil which of these companies were real businesses, which were a flash in the pan, and which ones were junk all along. And these are large-cap companies. They don’t include most of the SPACs or the crypto fads.  Even those that do get their act together may not see shareholders get rewarded. An investor could have bottom-ticked Microsoft coming out of the dot-com bubble. They would have seen sales and net income essentially double over the next six years. And their reward was a measly 4% return.  Just because something stops going down does not entitle it to appreciate in the future, let alone at the historic rates in its (bubbly) past. The future context is different and only the disciplined investor will recognize that.