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Musk, Twitter and a Crypto Crash

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Happy Friday! Here’s what’s on my mind.

Will Musk crash? Or crash through?

The Twitter thing?

It’s fascinating.

Elon Musk is a polarising figure. I’m in awe of his intellect and his achievements. I’m less enamoured with some of his other personal qualities.

And I’m certainly not a fanboy of his, or his companies.

As a prolific Twitter user, I’m also a little worried about the damage he might do to the network, if his ‘crash or crash through’ strategy fails.

But still, the saga is fascinating.

Aside from his obvious brainpower, Musk’s biggest advantage, and potentially his biggest Achilles Heel, is how little he cares for the view of others.

Few other CEOs would be as blunt. Or, frankly, as heartless, as Musk appears to be.

Few others would ask employees to confirm they want to be worked like dogs, or have the company assume they’re resigning. (I’m paraphrasing. A little.)

Few would fire people on, well, Twitter.

But Musk, not caring for the opinions of the rest of us, seems to be of the view that he can attract and retain a critical mass of true believers, who will do things his way.

And he might well be right.

Whether it’s fair, reasonable, appropriate or decent are questions we can debate – but he seems not to care.

It’s his company, and he’s going to run it his way.

What’s interesting about Twitter is that the users are also the product. Unlike a car company or a rocket company, Twitter’s success or failure will depend on the extent to which people will hang around and, increasingly, pay for the privilege.

If users think there’s no better alternative, they’ll probably stay.

But if Musk’s bravado leads too many people to switch to an alternative, he may well wish he’d done things differently.

The stage is set.

History repeats itself, repeating itself

And this week’s other scandal? The FTX collapse?

Frankly, I haven’t paid as much attention as others. Soap operas are still soap operas, even if they’re financial companies. And they’re usually little more than a distraction.

I feel sorry for those who’ve been caught up in the whole thing… but I’m not surprised.

Collective delusion is powerful.

Smart, wealthy people – including managed funds – have been caught up in the collapse.

Pension funds, who should know better than to chase the latest fad, lost small fortunes.

If it sounds familiar, it should.

The power of crowds has been with us as long as investing itself.

You’ve probably heard of the ‘tulip bubble’ and the South Sea bubble. No less than Sir Isaac Newton lost most of his wealth in the latter.

And I’m sure you’ve heard of the dot.com bubble (and crash).

And a little thing called the GFC, when uber-smart people at investment banks all over the world abandoned critical thought and went all-in on collateralised debt obligations (CDOs).

Yes, a lot of normal people got swept up in the crypto craze. But so did the professionals.

Why?

Because ‘everyone else is doing it’ and, worse ‘other people are getting rich’.

At least, they were… temporarily.

It’s ever been thus. And yet people keep falling for it.

Don’t.

Oh, and I’m not saying you should stay away from a financial product just because a celebrity is endorsing it… but I’m not saying you shouldn’t…

Breaking the (block)chain

Oh, and speaking of getting carried away, I’m no database expert, but it’s hard to escape the feeling that the ASX’s now-cancelled blockchain project was not entirely unrelated.

For more than half a decade, they’ve ploughed $250 million into a project to replace the CHESS system (which records who owns what ASX shares).

And someone thought the answer needed to be the blockchain technology of the sort that underpins Bitcoin (among other things).

Why?

Well, that’s not entirely clear.

To the average onlooker, a central database, overseen, controlled and regulated by the appropriate entity would seem to be the ideal structure for a share registry.

Certainly, taking the whole thing to a technology in its relative infancy – even if that technology is intellectually super-cool – did seem kinda… ambitious.

I said so at the time, and I’m glad to see they’ve cancelled the project.

I’m sorry for ASX shareholders that the company has torched that much value in the process. And ASIC and the RBA aren’t thrilled that the ASX is going back to the drawing board.

But at least someone had the guts to say the Emperor had no clothes.

It’s a start.

Quick takes

Overblown: I’m an optimist. But the excitement with which the market reacted to slightly lower US inflation last week was just silly. Now, I do think share prices were (and are) attractive prior to that announcement, and the market was too pessimistic. But the response was one of unbridled relief and was disproportionate to the news itself. And the UK’s inflation rate of 11.1%, released this week, underscores the challenge. Stay optimistic, but remember the road ahead could still be bumpy.

Underappreciated: Let’s go back to the well on this one. Markets are usually pretty efficient, most of the time. But when there’s excess pessimism (or optimism), they tend to lose perspective. Some companies’ share prices are beaten down because the immediate future might be tough. But precious little attention is being paid to the ‘… and then…’ bit. Quite a few quality businesses with attractive long term futures are being sold at attractive prices right now, in my opinion, because investors can’t see through the short term gloom.

Fascinating: Speaking of opportunities, have you noticed the huge spike in private equity interest in smaller ASX companies? While investors (and traders) are worrying about whether share prices could fall further, these PE mobs are looking at the cash flow generation potential of those companies and figuring it’s worth paying up to buy the whole thing. Which… is an interesting disconnect, no? We’ll see who ends up being right, but PE buyers are no mugs.

Where I’ve been looking: This week, it’s a case of where I’ve been avoiding, rather than looking. Extrapolation is tempting, but it ignores the reality of a changing market. There are some businesses priced for a long term continuation of two different trends: the flight away from growth companies, towards ‘defensive’ companies, and the assumption that the world’s current struggles will continue. I think both trends are potentially hazardous to your wealth.

Quote: “I can calculate the movement of stars, but not the madness of men” – Sir Isaac Newton.

Fool on!



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