Once again, a big gap in my blogging. What do you want – it happens when the academic year kicks in. As it kicks in, I need to divide my attention between scientific research and writing, on the one hand, and my teaching on the other hand.
I feel like taking a few steps back, namely back to the roots of my observation. I observe two essential types of phenomena, as a scientist: technological change, and, contiguously to that, the emergence of previously unexpected states of reality. Well, I guess we all observe the latter, we just sometimes don’t pay attention. I narrow it down a bit. When it comes to technological change, I am just bewildered with the amounts of cash that businesses have started holding, across the board, amidst an accelerating technological race. Twenty years ago, any teacher of economics would tell their students: ‘Guys, cash is the least productive asset of all. Keep just the sufficient cash to face the most immediate expenses. All the rest, invest it in something that makes sense’. Today, when I talk to my students, I tell them: ‘Guys, with the crazy speed of technological change we are observing, cash is king, like really. The greater reserves of cash you hold, the more flexible you stay in your strategy’.
Those abnormally big amounts of cash that businesses tend to hold, those last years, it has two dimensions in terms of research. On the one hand, it is economics and finance, and yet, on the other hand, it is management. For quite some time, digital transformation has been about the only thing worth writing about in management science, but that, namely the crazy accumulation of cash balances in corporate balance sheets, is definitely something worth writing about. Still, there is amazingly little published research on the general topic of cash flow and cash management in business, just as there is very little on financial liquidity in business. The latter topic is developed almost exclusively in the context of banks, mostly the central ones. Maybe it is all that craze about the abominable capitalism and the general claim that money is evil. I don’t know.
Anyway, it is interesting. Money, when handled at the microeconomic level, tells the hell of a story about our behaviour, our values, our mutual trust, and our emotions. Money held in corporate balance sheets tells the hell of a story about decision making. I explain. Please, consider the amount of money you carry around with you, like the contents of your wallet (credit cards included) plus whatever you have available instantly on your phone. Done? Visualised? Good. Now, ask yourself what percentage of all those immediately available monetary balances you use during your one average day. Done? Analysed? Good. In my case, it would be like 0,5%. Yes, 0,5%. I did that intellectual exercise with my students, many time. They usually hit no more than 10%, and they are gobsmacked. Their first reaction is WOKEish: ‘So I don’t really need all that money, right. Money is pointless, right?’. Not quite, my dear students. You need all that money; you just need it in a way which you don’t immediately notice.
There is a model in the theory of complex systems, called the ants’ colony (see for example: (Chaouch, Driss & Ghedira 2017; Asghari & Azadi 2017; Emdadi et al. 2019; Gupta & Srivastava 2020; Di Caprio et al. 2021). Yes, Di Caprio. Not the Di Caprio you intuitively think about, though. Ants communicate with pheromones. They drop pheromones somewhere they sort of know (how?) it is going to be a signal for other ants. Each ant drops sort of a standard parcel of pheromones. Nothing to write home about, really, and yet enough to attract the attention of another ant which could drop its individual pheromonal parcel in the same location. With any luck, other ants will discover those chemical traces and validate them with their individual dumps of pheromones, and this is how the colony of ants maps its territories, mostly to find and exploit sources of food. This is interesting to find out that in order for all that chemical dance to work, there needs to be a minimum number of ants on the job. In there are not enough ants per square meter of territory, they just don’t find each other’s chemical imprints and have no chance to grab hold of the resources available. Yes, they all die prematurely. Money in human societies could be the equivalent of a pheromone. We need to spread it in order to carry out complex systemic changes. Interestingly, each of us, humans, is essentially blind to those complex changes: we just cannot wrap our mind around quickly around the technical details of something apparently as simple as the manufacturing chain of a gardening rake (do you know where exactly and in what specific amounts all the ingredients of steel come from? I don’t).
All that talk about money made me think about my investments in the stock market. I feel like doing things the Warren Buffet’s way: going to the periodical financial reports of each company in my portfolio, and just passing in review what they do and what they are up to. By the way, talking about Warren Buffet’s way, I recommend my readers to go to the source: go to https://www.berkshirehathaway.com/ first, and then to https://www.berkshirehathaway.com/2020ar/2020ar.pdf as well as to https://www.berkshirehathaway.com/qtrly/3rdqtr21.pdf . For now, I focus on studying my own portfolio according to the so called “12 immutable tenets by Warren Buffet”, such as I allow myself to quote them:
>> Business Tenets: Is the business simple and understandable? Does the business have a consistent operating history? Does the business have favourable long-term prospects?
>> Management Tenets: Is management rational? Is management candid with its shareholders? Does management resist the institutional imperative?
>> Financial Tenets Focus on return on equity, not earnings per share. Calculate “owner earnings.” Look for companies with high profit margins. For every dollar retained, make sure the company has created at least one dollar of market value.
>> Market Tenets: What is the value of the business? Can the business be purchased at a significant discount to its value?
(Hagstrom, Robert G.. The Warren Buffett Way (p. 98). Wiley. Kindle Edition.)
Anyway, here is my current portfolio:
>> Tesla (https://ir.tesla.com/#tab-quarterly-disclosure),
>> Allegro.eu SA (https://about.allegro.eu/ir-home ),
>> Alten (https://www.alten.com/investors/ ),
>> Altimmune Inc (https://ir.altimmune.com/ ),
>> Apple Inc (https://investor.apple.com/investor-relations/default.aspx ),
>> CureVac NV (https://www.curevac.com/en/investor-relations/overview/ ),
>> Deepmatter Group PLC (https://www.deepmatter.io/investors/ ),
>> FedEx Corp (https://investors.fedex.com/home/default.aspx ),
>> First Solar Inc (https://investor.firstsolar.com/home/default.aspx )
>> Inpost SA (https://www.inpost.eu/investors )
>> Intellia Therapeutics Inc (https://ir.intelliatx.com/ )
>> Lucid Group Inc (https://ir.lucidmotors.com/ )
>> Mercator Medical SA (https://en.mercatormedical.eu/investors/ )
>> Nucor Corp (https://www.nucor.com/investors/ )
>> Oncolytics Biotech Inc (https://ir.oncolyticsbiotech.com/ )
>> Solaredge Technologies Inc (https://investors.solaredge.com/ )
>> Soligenix Inc (https://ir.soligenix.com/ )
>> Vitalhub Corp (https://www.vitalhub.com/investors )
>> Whirlpool Corp (https://investors.whirlpoolcorp.com/home/default.aspx )
>> Biogened (https://biogened.com/ )
>> Biomaxima (https://www.biomaxima.com/325-investor-relations.html )
>> CyfrPolsat (https://grupapolsatplus.pl/en/investor-relations )
>> Emtasia (https://elemental-asia.biz/en/ )
>> Gameops (http://www.gameops.pl/en/about-us/ )
>> HMInvest (https://grupainwest.pl/relacje )
>> Ifirma (https://www.ifirma.pl/dla-inwestorow )
>> Moderncom (http://moderncommercesa.com/wpmccom/en/dla-inwestorow/ )
>> PolimexMS (https://www.polimex-mostostal.pl/en/reports/raporty-okresowe )
>> Selvita (https://selvita.com/investors-media/ )
>> Swissmed (https://swissmed.com.pl/?menu_id=8 )
Studying that whole portfolio of mine through the lens of Warren Buffet’s tenets looks like a piece of work, really. Good. I like working. Besides, as I have been reading Warren Buffett’s annual reports at https://www.berkshirehathaway.com/ , I realized that I need a real strategy for investment. So far, I have developed a few efficient hacks, such as, for example, the habit of keeping my s**t together when other people panic or when they get euphoric. Still, hacks are not the same as strategy.
I feel like adding my own general principles to Warren Buffet’s tenets. Principle #1: whatever I think I do my essential strategy consists in running away from what I perceive as danger. Thus, what am I afraid of, in my investment? What subjective fears and objective risks factors shape my actions as investor? Once I understand that, I will know more about my own actions and decisions. Principle #2: the best strategy I can think of is a game with nature, where each move serves to learn something new about the rules of the game, and each move should be both decisive and leaving me with a margin of safety. What am I learning as I make my moves? What my typical moves actually are?
Let’s rock. Tesla (https://ir.tesla.com/#tab-quarterly-disclosure), comes first in line, as it is the biggest single asset in my portfolio. I start my digging with their quarterly financial report for Q3 2021 (https://www.sec.gov/Archives/edgar/data/1318605/000095017021002253/tsla-20210930.htm ), and I fish out their Consolidated Balance Sheets (in millions, except per share data, unaudited: https://www.sec.gov/Archives/edgar/data/1318605/000095017021002253/tsla-20210930.htm#consolidated_balance_sheets ).
Now, I assume that if I can understand why and how numbers change in the financial statements of a business, I can understand the business itself. The first change I can spot in that balance sheet is property, plant and equipment, net passing from $12 747 million to $17 298 million in 12 months. What exactly has happened? Here comes Note 7 – Property, Plant and Equipment, Net, in that quarterly report, and it starts with a specification of fixed assets comprised in that category. Good. What really increased in this category of assets is construction in progress, and here comes the descriptive explanation pertinent thereto: “Construction in progress is primarily comprised of construction of Gigafactory Berlin and Gigafactory Texas, expansion of Gigafactory Shanghai and equipment and tooling related to the manufacturing of our products. We are currently constructing Gigafactory Berlin under conditional permits in anticipation of being granted final permits. Completed assets are transferred to their respective asset classes, and depreciation begins when an asset is ready for its intended use. Interest on outstanding debt is capitalized during periods of significant capital asset construction and amortized over the useful lives of the related assets. During the three and nine months ended September 30, 2021, we capitalized $14 million and $52 million, respectively, of interest. During the three and nine months ended September 30, 2020, we capitalized $13 million and $33 million, respectively, of interest.
Depreciation expense during the three and nine months ended September 30, 2021 was $495 million and $1.38 billion, respectively. Depreciation expense during the three and nine months ended September 30, 2020 was $403 million and $1.13 billion, respectively. Gross property, plant and equipment under finance leases as of September 30, 2021 and December 31, 2020 was $2.60 billion and $2.28 billion, respectively, with accumulated depreciation of $1.11 billion and $816 million, respectively.
Panasonic has partnered with us on Gigafactory Nevada with investments in the production equipment that it uses to manufacture and supply us with battery cells. Under our arrangement with Panasonic, we plan to purchase the full output from their production equipment at negotiated prices. As the terms of the arrangement convey a finance lease under ASC 842, Leases, we account for their production equipment as leased assets when production commences. We account for each lease and any non-lease components associated with that lease as a single lease component for all asset classes, except production equipment classes embedded in supply agreements. This results in us recording the cost of their production equipment within Property, plant and equipment, net, on the consolidated balance sheets with a corresponding liability recorded to debt and finance leases. Depreciation on Panasonic production equipment is computed using the units-of-production method whereby capitalized costs are amortized over the total estimated productive life of the respective assets. As of September 30, 2021 and December 31, 2020, we had cumulatively capitalized costs of $1.89 billion and $1.77 billion, respectively, on the consolidated balance sheets in relation to the production equipment under our Panasonic arrangement.”
Good. I can try to wrap my mind around the contents of Note 7. Tesla is expanding its manufacturing base, including a Gigafactory in my beloved Europe. Expansion of the manufacturing capacity means significant, quantitative growth of the business. According to Warren Buffett’s philosophy: “The question of where to allocate earnings is linked to where that company is in its life cycle. As a company moves through its economic life cycle, its growth rates, sales, earnings, and cash flows change dramatically. In the development stage, a company loses money as it develops products and establishes markets. During the next stage, rapid growth, the company is profitable but growing so fast that it cannot support the growth; often it must not only retain all of its earnings but also borrow money or issue equity to finance growth” (Hagstrom, Robert G.. The Warren Buffett Way (p. 104). Wiley. Kindle Edition). Tesla looks like they are in the phase of rapid growth. They have finally nailed down how to generate profits (yes, they have!), and they are expanding capacity-wise. They are likely to retain earnings and to be in need of cash, and that attracts my attention to another passage in Note 7: “Interest on outstanding debt is capitalized during periods of significant capital asset construction and amortized over the useful lives of the related assets”. If I understand correctly, the financial strategy consists in not servicing (i.e. not paying the interest due on) outstanding debt when that borrowed money is really being used to finance the construction of productive assets, and starting to service that debt only after the corresponding asset starts working and paying its bills. That means, in turn, that lenders are being patient and confident with Tesla. They assume their unconditional claims on Tesla’s future cash flows (this is one of the possible ways to define outstanding debt) are secure.
Good. Now, I am having a look at Tesla’s Consolidated Statements of Operations (in millions, except per share data, unaudited: https://www.sec.gov/Archives/edgar/data/1318605/000095017021002253/tsla-20210930.htm#consolidated_statements_of_operations ). It is time to have a look at Warren Buffett’s Business Tenets as regards Tesla. Is the business simple and understandable? Yes, I think I can understand it. Does the business have a consistent operating history? No, operational results changed in 2020 and they keep changing. Tesla is passing from the stage of development (which took them a decade) to the stage of rapid growth. Does the business have favourable long-term prospects? Yes, they seem to have good prospects. The market of electric vehicles is booming (EV-Volumes; IEA).
Is Tesla’s management rational? Well, that’s another ball game. To develop in my next update.
 Chaouch, I., Driss, O. B., & Ghedira, K. (2017). A modified ant colony optimization algorithm for the distributed job shop scheduling problem. Procedia computer science, 112, 296-305. https://doi.org/10.1016/j.procs.2017.08.267
 Asghari, S., & Azadi, K. (2017). A reliable path between target users and clients in social networks using an inverted ant colony optimization algorithm. Karbala International Journal of Modern Science, 3(3), 143-152. http://dx.doi.org/10.1016/j.kijoms.2017.05.004
 Emdadi, A., Moughari, F. A., Meybodi, F. Y., & Eslahchi, C. (2019). A novel algorithm for parameter estimation of Hidden Markov Model inspired by Ant Colony Optimization. Heliyon, 5(3), e01299. https://doi.org/10.1016/j.heliyon.2019.e01299
 Gupta, A., & Srivastava, S. (2020). Comparative analysis of ant colony and particle swarm optimization algorithms for distance optimization. Procedia Computer Science, 173, 245-253. https://doi.org/10.1016/j.procs.2020.06.029
 Di Caprio, D., Ebrahimnejad, A., Alrezaamiri, H., & Santos-Arteaga, F. J. (2021). A novel ant colony algorithm for solving shortest path problems with fuzzy arc weights. Alexandria Engineering Journal. https://doi.org/10.1016/j.aej.2021.08.058