Reminiscences of a risk operator: 8_5.3.21 // 12:29pm Singapore // 1.8K word=6mins
Hail, Hail, The gang’s all here…
And it’s good-bye to all the rest!
(YELL)
][INTRO: Dear high schoolers, it is April 24 ‘21 and this is penned while at our 2nd COVID vax shot. The room is huge and reminds us of standing in line at immigration in LAX, BLR, or LHR. There are generations galore with a ~6 yr old girl and parents next to me, alterna-dude with a beanie in front, and a high-schooler with broken arm behind me (remember, he does not have the option of taking AP Finance).
It’s refreshing to now write about contemporary markets without referencing old journal entries, audio, video, and stories. Firmly planted in spring 2021, today we delve into the American+ Dream told through the Balance Sheet, the second most ignored of the 3 financial statements, but the foundational bedrock of all companies.
2 of 21 stations have male heroes, or said the better way: the vast majority of heroes this morning are women, I’d say >50 yrs of age, 95% of 1 “color”. The Doctor (32 yrs of MD, 6 of nursing before she put herself through school, so 38 total) volunteering to help me chuckles when I point out the sexist imbalance!
What do huge COVID vax centers in fire stations, empty warehouses, failed retail shops, hospitals, community centers and arenas have to do with the foundational aspect of Corporate Finance?
>>> It’s HUMAN EQUITY.
Not the elementary, pretend, legacy-establishment US northern-EastCoast and SF/LA coast definitions. Nor what shows up in the papers and channels that are crumbling by the month.
A] Equity: spiritual, physical, economic, familial, careerist, non-profitist, educational.
B] Human: the music, laughs, barefoot runs, hugs, yells, cries, surprises, fights, and graduations - big hair, skinny legs, fast-twitch, slow-twitch, introverted, loud, terrible 2s, young-at-heart-90 year old’s drinking cokes and yucking it up for hours on Yahoo…
That’s what we are fighting for - everywhere. Brazil is suffering and we feel for her, even more so our dear friends in India; I was on w/Bangalore this week and it is truly terrifying because the scale is out of this world (there are ### of cities with 1Million+ inhabitants = read down for answer). But these 2 emerging beauties have always had endless human INequity. DISequity. NONequity.
Again, the visible virus ripping right now is finally for the 1st time (since perhaps 9/11, or 7/7 London?) fully exposing the Developed worlds to what emerging markets live with decade after decade.
My 15min post-vax observation is almost done, so I’ll stop here with an observation: behind double masks (last time Don Q is doing that, unless the Variants storm these shores) you can’t tell anyone’s position on Biden’s (surprise, surprise!) massive proposed cap gains tax, or who here sold crypto last weekend when it got rocked, or who is maxing out IRA/401K plans into large-cap-tech, or has risk adjusted their real retirement expectations (implied house equity available post downsizing) or...
On and on. So yes there are many nerdy topics we will cover in AP Finance to 2026. But those are out of mind for most here, sitting on $9 chairs. It’s human equity.
Our own, our families, our parents, our neighborhoods, our schools and companies, our state, our (american, nigerian, swiss, thai, aussie) DREAMS.
][Medical INTERRUPTION: I never finished because a girl three chairs away fainted, ~10 mins into her observation period. Yes people rushed to help, but all-in-all I thought again about Bonds VIX aquarium because when you give thousands of shots, you are bound to get a few reactions; I hope she’s doing well and with so many caring heroes around she was in great hands. *We will revisit this for the diversification letters.
][MAIN: Balance Sheet (“B/S”, no not “BS”) definitions - pick your own adventure - a] Erratic Nars, b] CFA:
a] Erratic Narratives: a Balance Sheet is the bedrock triangle of 1-ownership 2-investment 3-obligation.
*I don’t preface my definition with “corporate” or “company” B/S because our definition is more broad - cities have them, so do countries, and companies, and non-profits, and for sure individuals.
Most_do not fully comprehend their own B/S - wonderful case is San Francisco/CA, or “SF” if you want to be cool. They decided ~6 years ago to start castigating their assets while piling on their obligations. And most damming, they tried to mess with the equity (including abolishing merit entrance in schools where so many smart young hungry hard working Asian kids learned their way into Stanford, CalTech, UCLA, etc)
So to be extra clear for the 2026 readers, a conglomerate of “stakeholders” (their leaked videos replaced SNL) managed to fundamentally transform the next 2-3 decade trajectory of the community’s B/S (assets/investment, liabilities/obligation, equity/ownership) by alienating -you can’t make this up- THE greatest inventor of the modern age across electric, solar, and space (with a minor in electronic payments due to PayPal), who was the last one to build autos in CA but now immigrated to Austin near his buddy Rogan.
Which song will result in greater VALUE-CREATION for the California B/S?
“Lorena, lorena, hay caramba Lorena” OR “Hook-em-horns” Texas: “senor Musk, venga, venga, venga”:
Within a few months Elon put up houses for sale, moved, and by the time of the virtual WSJ CEO summit confirmed publicly for first time his move to La Texas.
2) CFA: The balance sheet (also referred to as the statement of financial position) discloses what an entity owns (assets) and what it owes (liabilities) at a specific point in time. Equity is the owners’ residual interest in the assets of a company, net of its liabilities. The amount of equity is increased by income earned during the year, or by the issuance of new equity. The amount of equity is decreased by losses, by dividend payments, or by share repurchases.
Source: https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/understanding-balance-sheets
Note CFA construct relies on a “residual” concept - I love thinking about residuals because they force hard conversations, but don’t like that it feels back-foot leaning. For the CFA materials, lets delve into the Adyen B/S for 2020, page 105; it’s a now public, wonderful European ex-unicorn that lives right around the corner from La Mancha.
Adyen IR: https://www.adyen.com/investor-relations/annual-report-2020#management
Adyen 2020 Balance Sheet [click to enlarge]:
We will refrain from going deep, except to note that the Americans show it reversed from Euros - don’t worry, it all balances and it keeps things interesting. We suggest you find a stock that you own in your 401K, brokerage account, or your employer and just stare at it for 30mins. What stands out, which are the biggest changes year over year from prior B/S? Don’t the derivatives stand out above for Adyen? Once you stare at it for 30mins, in the column write / guess what you think it will look like next year, don’t worry about precision, no one gets it right. Then put it away, and next year take it out when the new 20F or 10K get published - cool little trick “write it down.”
c] BURRITOS: At the burrito stand level it’s the same exact machinations:
Liabilities & equity: my bank account puts $20k into the business to get it going.
As owner/shareholder I now have in founders equity (the gold kind, not the SPAC kind).
Assets: out of $20k I leave $3k in cash, and with the rest buy assets (fixed or non fixed) like 1-the cart 2-cooking equipment 3-supplies 4-food inventory (el queso, los frijoles, las tortillas)
If one day a nice Chase or Citi banker walks up to us on 42nd & Park to say: these are the best burritos in towns, you should open up breakfast instead of just lunch/dinner and my bank will LEND you $5K to get breakfast going then: +$5k comes into the asset side (food inventory: el queso, los huevos, el cafe, las tortillas) and +$5k is now a liability (debt) for which we owe the bank interest until pay back day for the $5k “principal”.
Now a fundamental property is that both sides must balance. In Private Equity modeling (just pretend) we will stay up until 5am trying to get a 3 statement model to “balance” because the intricacies of PIKs toggling on/off exponentiates errors but makes us feel proud to include the word “PIK”, not “debt”.
][WHO CARES: ultimately everyone will. You can’t hire good people on broken B/S, or partner with great clients or grow or get more financing. I’d venture to guess that 90 percent of the 90 percent small business failure rate during first 2 years is due to misunderstandings of the Balance Sheet, specially of the competition.
Reserve releases, equity/debt calibrations, working capital optimization, cash focus, leverage-ability of each line item in the BS - its all there. And of course if you get too excited and don’t mind the rules, you get LTCM, Lehman, Hertz, Northwest Air, Theranos, a long very long list.
On flip-side today Bloomberg reported that leaked court docs reveal Apple Stores (the bricks/mortar) have a 78% margin - that is unheard of in anything in the physical world…and guess what, it comes back to the Apple Balance Sheet for which we are happy owners of through direct + BRK + 401K + S&P500 replicators, etc (always note disclaimer below).
][Homework? Write down your OWN balance sheet. You have an implied DCF and the 3 fin statements and an Annual Report - you may just not realize it! Do not worry, you are in great company. Frankly most companies don’t understand their own balance sheet and they fail to account for terrible NPS scores and great talent magnates and amazing influencing capabilities (big tech, in the face of the US Govt and many antitrust watch dogs, still remains the_most_popular industry/employer across dozens of normal-people-employee rankings). So just do it on 1 page; if Uncle Warren only uses 1, so can we.
][Extra-Credit: the revolutionary aspect of the Balance Sheet concept is that it applies globally and when some really grow in importance, investors start to correlate their value or prices (which emanate from each B/S). We won’t cover this yet, but it’s important to get our feet wet - so take a look at these 3 pictures that were published today [always click to enlarge] — I bet by next year our friends at Morgan Stanley will include BTC on this…oh well, some are so slow to evolve…
][WRAP-UP: when first arriving to check in for the 2nd vax shot, an older Asian man was standing in line confused and not understanding/communicating due to language, with his young son next to him. The lady look a tad confused until the young man spoke up:
“My dad has an appointment”
Well yes, yes he does son, he has an appointment with the ALL-AMERICAN-ASIAN-AFRICAN-LATIN-EURO dream. A better life for his son, than for himself. But today the roles are reversed, for today you get to give him some priceless equity:
True equity.
The kind that Moody’s/S&P can never downgrade and will never reside on the SEC’s Edgar:
HUMAN EQUITY.
//END = Visit us with your friends at: erraticnarratives.substack.com
][ @ErraticNars ARCHIVE: #0 1 yr later [] #1 It was inevitable [] #2 JLo’sSuperShakiraBowl [] #3 My Word is My Bond [] #4 YOU are not a Doctor! [] #5 The VIX Doctor [] #6 Mall of America [] #7 Nirvana the End?
//Disclaim: Individual, non-corporate; not investment advice; may be long/short\\
][APPENDIX: Erratic Nars = late-2020s AP Finance letters for future High-Schoolers:
1] Dear India not only has top 2 population globally, but has ### cities with 1M+:
https://en.wikipedia.org/wiki/List_of_million-plus_urban_agglomerations_in_India
2] As mentioned many times, while DonQ live on endless inputs, Sancho Pansa is the more calm, serene investor of the two, and as he’s off in new lands he will only write from time to time. But one thing they continue to share is a love for numbers of all kinds. Like the fact that Coinbase has more accounts than Fidelity and Robinhood…COMBINED. And even more punchy - that Ethereum (pre 2.0) settles MULTIPLES of what PayPal settles, and 2x BTC value.
Dear Metcalfe, your breakthrough rule is calling, it appears to be going to the moon ;)