Listen in podcast app and follow below for the podcast topic arc.
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Recommendations and Links
In todays market update, i want to focus on Cost of Capital’s Evolution and Today’s Market Dynamics.
Understanding the Cost of Capital
1. Why It Matters:
Cash Flow Management: Companies must wisely reinvest their earnings to surpass their cost of capital. Failure to do so can lead to poor market valuations.
Market Perception: Investors value companies based on their ability to reinvest cash flows in lucrative projects.
2. Historical Perspective:
1980s-90s: The rise of junk bonds and the focus on financial leverage. This era saw a heightened consciousness of cost of capital, partly due to the disruptive influence of corporate raiders and academic literature advocating for more debt.
Dot Com Era: Intellectual capital began to overshadow traditional capital allocation methods. Tech giants like Microsoft and Cisco led the charge, redefining market leadership.
3. The 2000-2020 Shift:
A Debt-Friendly Environment: Low interest rates led to increased corporate debt, altering the landscape of corporate finance.
Bear Markets and Equity Cost: The volatile market conditions made assessing cost of equity challenging.
Tech's Rise: The tech rally in the 2010s highlighted the diminishing importance of financial capital compared to intellectual capital.
4. The Present Scenario:
Rising Costs: Debt and equity capital costs have returned to early 2000s levels.
Tech Dominance: Big Tech firms are now major players in the S&P 500, signifying a shift in market dynamics.
The Debt Dilemma: High corporate debt levels amidst rising interest rates raise concerns about potential economic impacts.
Intellectual Capital Over Financial Metrics: The past 35 years have witnessed a transition from traditional capital metrics to a focus on intellectual capital, particularly in the tech sector. This shift has significantly influenced management strategies and market valuations.
Generative AI's Potential Impact: The rise of generative AI could either widen the gap between tech valuations and other sectors or bridge it. Its full impact on market dynamics remains to be seen.
Conclusion: The journey of cost of capital from a mere financial metric to a broader concept encompassing intellectual capital highlights the evolving nature of business and investment strategies. As we navigate this landscape, understanding these shifts becomes crucial for making informed investment decisions.
Twitter Links from the Podcast:
Podcast & YouTube Recommendations🎙
Bob Macro Update is terrific:
How to think about Multibaggers - Ian Cassel
My favorite podcast from this week
Best Links of The Week🔮
Expectations Debt - Morgan Housel
Corry Wang on Ozempic - A fascinating thread on the wide-ranging implications of a real anti-addiction drug. An under-appreciated number of consumer categories depend on a tiny cohort of super consumers (including gambling, alcohol, candy and soda). What happens when addiction is curable?
Banking on Status by Julian Lehr - How luxury takes on the next frontier: Software. (or, why increasingly dull apps and services all look like lifestyle brands)
The Six Moats of Data Businesses by Travis May - Travis outlines the features that aren’t moats, and what effective moats actually look like in data businesses.
Jared Kushner: Israel, Palestine, Hamas, Gaza, Iran, and the Middle East on Lex Fridman Podcast - A real-time reaction to the Oct 7 terrible terrorism and a deep-dive into the history of the Abraham Accords.
Bonus (Heartwarming): Stay in the Game by Drew Dickson - A beautiful, honest story about one of the hardest things in the world to be open about: a troubled child. Plus, an amazing twist ending. Bonus (Listen): Ben Horowitz, co-founder of a16z: Venture Capital on World of DaaS pod - A wide-ranging conversation with one of the greats of modern venture capital. Ben and I discuss culture, the war-time CEO playbook, and whether AI will eat the world like software.
Must Read of the Day: "Amazon is turning to Prime members to bolster its healthcare business, an industry where the company has sought to expand for years. The tech giant on Wednesday revealed plans to offer its millions of Amazon Prime subscribers a low-cost annual membership to One Medical, the primary-care business Amazon purchased for $3.9 billion earlier this year. Amazon says Prime subscribers can now become One Medical members for $9 a month, or $99 a year. The typical cost to become a One Medical member is $199 annually... The move is the company’s latest to grow in the healthcare industry, including in primary care, pharmacy and even medical-drone deliveries after unsuccessful attempts in recent years to crack the market." Source: WSJ
"Regulators on both sides of the Atlantic have cleared Eli Lilly’s injectable diabetes medication for use as a weight loss treatment, creating the first direct rival to Wegovy, Novo Nordisk’s obesity drug." Source: FT
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