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“To a value investor, investments come in three varieties: undervalued at one price, fairly valued at another price, and overvalued at still some higher price. The goal is to buy the first, avoid the second, and sell the third.”


– Seth Klarman


REQUEST FROM SANTANGEL'S REVIEW

This September marks the 16th anniversary of Value Links. Over that time, we've quietly grown from a small handful of friends and family to now thousands of subscribers. Our Value Links community has allowed us to meet many talented people, and we're always eager to create new opportunities to connect with you and to make connections among the group. While we've never before asked you to help us grow, if you find value in receiving Value Links, please consider forwarding this edition to a colleague or friend who might share your interest. If you're new to this email, we invite you to join our mailing list via this link.

JOSH WAITZKIN (FROM THE FIRST EDITION OF VALUE LINKS IN 2008): "I think that challenging my constructs, my dogma, is at the core of what I [do]. If you study Buddhist non-duality, you know there's this question of the non-duality of duality and non-duality... the emptiness of emptiness. And you reach this kind of place where you're in this regress of identifying a thought construct as a thought construct. Then the identification of it as a contruct is a construct of its own, and you're challenging that construct once again. And for me, what I've found is that everything that I've learned, I've eventually unlearned... My experience of, for example the martial arts now - most of my breakthroughs are more unlearning than learning. They're breaking, they're weeding away the barriers between my natural intelligence and my conscious mind. And when you think about perceived distinction between static and dynamic quality, I think a lot of that relates to being relentless in the challenging of your own personal dogma and in your little micro thought constructs." Talks at Google (YouTube) - April 23, 2008

LISA SU: "One of the things that does strike me about the contrast is, and one of Nvidia’s really brilliant moves was the acquisition of Mellanox and their portfolio in networking, and to the extent it matters to tie all these chips together, particularly for training. In your Computex keynote, you talked about the new Ultra Accelerator Link and Ultra Ethernet Link standards, and this idea of bringing lots of companies together, kind of calling back to the Open Compute Project back in the day as far as data centers. Makes perfect sense, particularly given Nvidia’s proprietary solutions have the same high margins, we all know and love, as the rest of their products. But I guess this is my question about your long-term run — do you think it’s fair to say that, from a theoretical Clayton Christensen perspective, because we’re early in AI, maybe it’s not a surprise, the more proprietary integrated solution is the belle of the ball in many respects? There’s a bit where, yes, being open and modular all makes sense, but maybe that’s not going to be good enough for a while. I think as you get out three, four or five years, I think you’re going to see more tailoring for different workloads, and what happens is, the algorithms are going to get to the place where, “Hey, it’s a bit more stable, it’s a little bit more clear”, and at the types of volumes that we’re talking about, there is significant benefit you can get not just from a cost standpoint, but from a power standpoint. People talk about chip efficiency, system efficiency now being as important if not more important than performance, and for all of those reasons, I think you’re going to see multiple solutions. Tailor is the right word — you are able to tailor the solutions for different workloads, and my belief is that there’s no one company who’s going to come up with every possible solution for every possible workload. So, I think we’re going to get there in different ways." Stratechery – June 6, 2024

LARRY ELLISON: "By 2029, I can guarantee you AI is not going to be the problem, because the simple phrase, the race goes on. This is like Formula One. What do I mean by that? It's really not one winner, I mean you have three people on the podium, but it's really kind of one winner. Someone is going to be better at this than anybody else. And multiple people are trying. And there is a race... Elon Musk, Jensen Huang, and I went to dinner. And I would describe the dinner as me and Elon begging Jensen for GPUs. "Please take our money. Please take our money. No, no, take more of it. You're not taking enough. We need you to take more of our money, please." The demand for GPUs, the desire to be first, the desire to build the most capable neural network in the world, getting there first is a big deal." Oracle - September 12, 2024

JAMIE DIMON: "JPMorgan Chase CEO Jamie Dimon said Tuesday he wouldn’t rule out stagflation, even with greater confidence recently that inflation is coming off its highs. “I would say the worst outcome is stagflation — recession, higher inflation,” Dimon said at a fall conference from the Council of Institutional Investors in Brooklyn, New York. “And by the way, I wouldn’t take it off the table.” … But Dimon worries that a raft of inflationary forces on the horizon, such as higher deficits and increased infrastructure spending, will continue to add pressure to an economy still reeling from the impact of higher interest rates. “They’re all inflationary, basically in the short run, the next couple of years,” Dimon said. “So, it’s hard to look at [it] and say, ‘Well, no, we’re out of the woods.’ I don’t think so.” The bank leader has previously warned of an economic slowdown. In August, he said the odds of a “soft landing” were around 35% to 40%, implying a recession is the more likely outcome." CNBC - September 10, 2024

DAN GILBERT: "There's 30,000 places you can get a mortgage in the United States, and mortgages are very local and it's a very fragmented business. And it's fragmented and local for a reason, because it's hard to do so there's a lot of companies that muscle out maybe five, ten loans a month. But to build an operation where you can you have a platform that's going to be able to be in 50 states, 3,000 counties - I mean, that's a major undertaking - we decided to take it. And then we had the culture... our culture drives everything to this day. Before, culture was like a trendy word. We really jumped into culture as being the big thing that drives everything we do and our people know it from day one." Detroit Economic Club (YouTube) - September 13, 2024

BUSINESS INSIGHTS

THE WORLD NEEDS MORE BATTERIES — BUT NOT THIS MANY: "By the end of 2025, the global battery industry will be able to produce more than five times as many cells as the world will need that year, BNEF forecasts in its latest Electric Vehicle Outlook. Oversupply is most acute in China, where manufacturing capacity will exceed annual battery demand by at least 400% for the rest of the decade. Some planned factories around the world may be delayed or canceled due to the industry’s overcapacity, according to Yayoi Sekine, head of energy storage research at BNEF. At the same time, the chemistries used to make batteries are changing. The report found that lithium iron phosphate batteries are gaining popularity for powering electric cars, particularly among Chinese automakers. Their component materials are cheaper than the standard lithium-ion cells that use nickel, manganese and cobalt, and the shift could substantially lower future demand for those metals. BNEF cut its forecast for the amount of nickel used in batteries next year by 25%." Bloomberg Green – June 12, 2024

THE RISE AND FALL OF THE AMERICAN ELECTRICAL GRID: "The American electrical grid can no longer be relied upon to supply the public with the power it needs to get through the day. In the hope of forcing an energy transition, many states have committed themselves to massive renewables buildouts. The spot mar­kets have been conducive to this effort (80 percent of the renewables in America sit in RTO areas) because they were designed to onboard smaller generators. But the impact of heavily subsidized renewables coupled with cheap natural gas forced traditional, reliable plants out of the market and made the entire system more reliant on a single fuel source—natural gas—for reliability. Capacity prices cleared at a mere $5 per megawatt per day during MISO’s 2021 Planning Resource Auction. A year later, however, the price soared to $236 per megawatt per day. Large fluctuations like this make it nearly impossible for anyone to make long-term decisions about keeping their power plants running. New York’s Independent System Operator (NVISO) faces a similar problem. The state has aggressively pursued the green vision for de­carbonization: close profitable nuclear plants, phase out fossil fuels, and build out renewables. But on July 1 of this year, NVISO announced that the system was “already close to minimum reliability requirements” and warned of potential systemic risks: “While the state’s bulk electric system meets current reliability requirements, risks to reliability and system resilience remain.” The grid is now more fragile, more expensive, and more opaque. It is not clear how the grid can be fixed. The political force that could meet the challenge of fixing the American grid would have to be both powerful enough and competent enough to achieve its aims." American Affairs – Fall 2022

GOOGLE DEEPMIND SHIFTS FROM RESEARCH LAB TO AI PRODUCT FACTORY "Facing immense pressure to keep pace with OpenAI and other competitors, the company said in April 2023 that it would combine its two elite AI teams, Google Brain and DeepMind, into what has been described as an AI “super-unit” called Google DeepMind. The unit would have to achieve two separate goals, improving Google’s track record on commercial AI products while maintaining the company’s historic strength in more foundational research. The two labs had long operated separately. When Google restructured as the Alphabet conglomerate in 2015, it ended up establishing DeepMind as a separate but wholly owned subsidiary. In retrospect, the setup was bound to stoke resentment. DeepMind researchers had full visibility into Brain’s projects and code, and they could freely badge into Google’s offices in Mountain View. The openness didn’t go both ways, though: One former Brain researcher recalls working from a coffee shop on a trip to London after not being able to get into DeepMind’s office. Some Brain researchers concluded their own lab needed a clear power center, according to several people familiar with its operations. A major requirement for any AI work is access to computing power, and each Brain researcher received an allocation, a process that one person likened to the distribution of tickets for games at a carnival. A model the scale of GPT-3 or Gemini, though, would require far more power than any single researcher had access to, so building one would require a group of people to pool their credits. This was a tough proposition among competitive and often egotistical scholars. Google Brain’s attempts to come up with another system for doling out access got mired in bureaucracy, according to two people familiar with the company." Bloomberg Businessweek – June 17, 2024

THE RISE AND FALL OF A $600 MILLION STRIP-MALL TYCOON: "In almost two decades running Arciterra, Larmore accumulated a portfolio of properties valued last year at close to $600 million. Arciterra cut deals to buy strip malls and other retail properties in need of a turnaround, spruced up the places and then refinanced them, pulling out millions of dollars in cash. Now, though, higher interest rates are upending deals built on cheap debt, deflating values for office buildings, apartments and retail properties, and leading banks to brace for an onslaught of foreclosures. The tide is going out on commercial real estate, revealing errors of ambition, greed and incompetence. Under the terms of one $7 million loan, on a strip mall in Naperville, Illinois, the company would owe $43,000 a month for three years, then a final (balloon) payment of $6.3 million. Even landlords who borrowed conservatively, segregated investor capital and built reserves before paying themselves were struggling to manage such situations. Arciterra took a looser approach. Three Arciterra tenants told Businessweek that Larmore encouraged them to sign leases with artificially high rents they weren’t expected to pay, a tactic that would let the firm show inflated revenue on its mortgage applications but leave it all the more dependent on regular refinancing. Normally, a manager such as Arciterra wouldn’t use rents paid to a shopping center owned by one of its funds to make a mortgage payment on a strip mall owned by a different fund. The funds are owned by two distinct groups of investors, so those monies are kept separate. At Arciterra, money flowed freely between entities." Bloomberg Businessweek – June 12, 2024

SANTANGEL'S EVENTS
“What an excellent conference! Any time you show up 
and immediately spot five people who you think are 
among the best investors in the world, you know you are in the right place."




Santangel's Roundtable



October 29, 2024 (New York City)



May 7, 2025 (New York City)



Spring 2025 (Boston)




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