Motley Fool Hidden Gems Investing - Are SPACs Done?

Episode Date: September 22, 2022

What does it say that no private company wants a check for $1.1 billion? (0:21) Bill Mann discusses: - The stock market being surprised that the Fed raised rates by 0.75% (as almost everyone expected) - Chamath Palihapitiya shutting down two SPACs and returning money to investors - Whether SPACs are essentially over (13:02) Rachel Warren talks with author Ross Dawson about his new book Thriving on Overload: The 5 Powers for Success in a World of Exponential Information. Got questions about stocks? Drop an email to [e-mail] or call the Motley Fool Money Hotline at 703-254-1445. Host: Chris Hill Guests: Bill Mann, Rachel Warren, Ross Dawson Producer: Ricky Mulvey Engineers: Dan Boyd, Brandon Gentry Learn more about your ad choices. Visit megaphone.fm/adchoices

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Do I have to do everything myself? You want more? I'll give you more! Mobland, new season hits September 18th on Paramount+. Chris Hill. Was anyone surprised by the Fed's interest rate hike yesterday? Turns out, yeah, a lot of people actually were. Motley Fool Money starts now. I'm Chris Hill. Joining me today, he's backed by Popular Demand, Motley Fool Senior Analyst, Bill Mann. Thanks for being here. That guy asked for me to come back, and that's all it took, huh? Well, in this case, that guy is me,

because I wanted to talk to you about the Fed and the announcement yesterday afternoon. And I said on yesterday's show, I think the way to bet in terms of what happens is that there will be some sort of extreme reaction. And I feel like I won that bet because Jay Powell came out and said, we're going to hike rates by three quarters of a percent, which is the number that almost everyone who has been talking about this used when talking about this. And the market just went straight down. And I asked you, who was surprised by this? Who was just like, holy cow, I didn't think this was going to happen. It's like, really? That was all anyone was talking about for days, if not weeks. What's that like? You were serious about that?

Yeah. In all seriousness, though. It really wasn't my cousin Vinny reaction, wasn't it? It was. And I got to say, I'm a little confused by this because I thought, all right, No one should be surprised by this. I assumed that the expectation that it would be a three-quarter percent hike, which is what we got once again, was already priced into an S&P 500 that's getting cheaper by the day. Chris, what's absurd about this is not just, I'm going to give you partial credit for the extreme reaction because there were actually three extreme reactions. Right when they announced, the market tanked, and then the market rallied. At one point, the S&P 500 was up. I mean, it was up a percent, a percent and a half, but it was up about 3% over where it had been a few

minutes ago prior, and then it tanked again. You're right. If this wasn't something that people saw coming in huge numbers, it just puts a lie to the mere concept that the market is efficient. Now, some of the things that were being reacted to were different from the actual rate hike itself. Primarily, Powell coming out and essentially stating that he was willing to risk recession in order to get inflation under wraps, that inflation was the thing that they considered to be the highest risk. So, I think maybe people were looking for him to say, well, we're doing this, but we're also paying attention to these other things, and it's okay. There was nothing assuring for people who are interested in having equity and cost of capital go down over time.

They didn't get anything that they liked out of this. So maybe that had something to do with it. To me, it was all so predictable that I just, I don't understand it. I'm glad I'm not the only one who felt that way. I know that's great for people. Hey, I'd love to know what you think. Well, I don't understand it. Back to you, Chris. It's just two guys who are scratching their heads, not understanding the reaction of the market. What is your feeling on Jay Powell, just as the head of the Fed? Years ago, I remember talking about, I don't remember if it was when Powell was getting ready to take

the job, but I remember talking probably on the MarketFoolery podcast about, I don't really care who is the head of the Federal Reserve. I just care that they are qualified and I care that they seem like they are in control. That's all I want. I want basic qualifications and I want someone who looks like they're the picture of calm. I feel like we got that with Bernanke, we got that with Janet Yellen. I'm not saying we don't have that with Jay Powell, but he just comes off a little shakier than the other two. It bears remembering that prior to Paul Volcker, that the Federal Reserve Board was barely ever talked about. Paul Volcker was the Fed Chair,

he was the head of the New York Fed during the Reagan administration. He was the guy who came out and said, we're going to lick inflation no matter what. The next thing you know, the Fed fund rate was in excess of 18%. It bears remembering that there was a point in time in which they did not have much visibility in the average person's lives, and they weren't as reactive as they are now. I tend to think of the tools that the Federal Reserve has. Do you remember those ads, the American Tourister ads, where they had the gorilla throwing around the suitcase? That's basically the level of precision that they have with the instruments they have. They're either making money cheaper or more expensive. And so, everything else that flows

out of that, I think, is stuff that they have a really hard time predicting. Now, look, from a data perspective, they've got the good stuff, but it is very much a blunt instrument So I agree with you that he does not seem quite as calm as past Fed chairs, but it bears remembering that in the past, they didn't tend to react much at all. And we definitely didn't have a huge sense of who they were and what their personalities were. Let's move on to SPACs. And I'll just lead, I'll provide the context in a second, but let me lead with this question. I'm wondering if you think SPACs are over, just as a tool, because three years ago, Chamath Palihapitiya. Oh, that's so good. It's so good. Chamath Palihapitiya.

Thank you. He took Virgin Galactic Public via SPAC, and SPACs were as hot as anything in the market gets hot. This week, he announced he's actually winding down two SPACs and returning the money to investors. When I say money, one of the SPACs had nearly half a billion dollars in it, and the other had $1.1 billion in it, because you can't find a merger candidate for either. And what does it say to you that we're in an environment where no one wants to take these blank checks? I don't know that I would say that nobody wants to take these blank checks, but it bears remembering that there in 2020, there were in the range of 600 SPACs that were stood up. Another term for SPAC is a blank check company. It's basically a bank

account that's got a stock ticker attached to it. The reason why they became so hot, particularly in the beginning of 2021, and it went right along with the rapid rise in some of meme coins like Dogecoin and AMC and the meme stocks like GameStop going crazy. This was a way that people believe they were going to be able to get into companies pre-IPO. Where there is that type of an understanding, even if it is wrong, and it was always wrong, it benefits promoters to try and go and get some of that money. So, there were hundreds of companies that were stood up as SPACs at that time. Now, SPACs have a two-year period by statute by which they can find a merger partner. So, I ask you, $174 billion worth of SPACs out there earlier this year,

600 different companies, blank check companies looking for partners. Even in an economy as large as this one, there aren't that many private companies that need to go public, that need to get that money. So, it has been a disaster for SPAC shareholders and people who have invested in SPACs. So, Chamath Palihapitiya, this last week, after he'd already said he wanted to delay shutting them down, said, no, actually, I'm going to be shutting them down. This is a huge, huge loss for him out of potential gains because the promoters get a lot of money for bringing SPACs public. But, you know, kind of in the same way that the Fed, you know, like people reacted to the Fed raising 0.75, to me, this was always the most likely outcome for that many companies

is being stood up at the exact same time with the exact same limitations that they had. Do you think Palihapitiya finds companies willing to take these plague chinks if the environment in the stock market is better than it is now? Do you think at least part of this has to do with, 2022 has been a rough year for the stock market. Yeah. No, I think that what we're seeing in 2022 is a result of the excesses of particularly early 2021. This was always going to be the end result, not necessarily for Jamath Palihapitiya's SPACs, but for SPACs in general. All SPACs are a different way for companies to go public. There are some benefits in terms of the types of filings that they can do, and there are some benefits in terms of the structure and ease. In particular,

the belief was there, and I think this is entirely true, that the company and the insiders would end up with more of the money, and outsiders would end up with less of the money in the form of an IPO pop. What SPACs have ended up doing has been a wealth transfer from individual investors to the promoters. One more benefit for the people involved in SPACs is they don't have to file an S-1. There's less scrutiny. They don't have to share as much information. Yeah. There was a point, there was a really interesting article in The Wall Street Journal. It was talking about what electric vehicle companies that had come public through SPACs had promised. And there were five that

said they were going to have $10 billion of revenues or more within the first five years of operations. There's only one company in history that's done that, and that's Google. So yes, they were able to promise a lot more. And I just think it was a point in time in which people's willingness to believe was at its height. Bill Mann, always great talking to you. Thanks so much for being here. Thanks, Chris. Computers can beat human beings in chess. Should investing be any different? Ross Dawson is author of the new book, Thriving on Overload, The Five Powers for Success in a world of exponential information. Motley Fool contributor Rachel Warren caught up with Dawson

to talk about a key advantage that investors like us have over the bots. One of the things that has kind of stuck out to me, we look over the last few years, in early 2020, 66% of Americans reported being worn out by the amount of news coming at them at all times. And it seems that this constant stream of information has really only increased since that time as we've been in the age of the pandemic. We've seen so many changes in the world of work and more. That's really just kind of the tip of the iceberg. And it's easy to feel overwhelmed by information overload. But there is also this way, as you were mentioning, that that surplus can be used to our own advantage. How is that possible? This is the distinctive skills

where everyone has the same information, essentially. I think that's one of the interesting things, in particular in the markets. You know, if we think about, say, the 30s, 1930s, and those markets were characterized by information asymmetry, as in some people had information and some people didn't. And now we've come a long way where it's not only we have information, we can have it at the same time, same pace.

So whether we are a massive institutional investor or we're an individual, we actually do have similar information at similar pace. And the distinction is then our ability to make sense of that, to be able to work out what is worth doing. So this is now where, as individuals, our ability to move ahead is simply be able to keep pace with that information, to make sense of that. And the majority of people, be they professionals or individuals, are getting this sense of overwhelm, getting this sense of drowning. So this is the fundamental skill. You know, an overlay, you can build areas of expertise and what you learn, and that's part of what we can develop over time. But this really becomes the master skill, this capability of creating value with information, making sense of the maelstrom of all of the updates we are getting, and to make sense and to synthesize that. So the master investors, such as Warren Buffett and Charlie Munger and so on, are the ones that have honed those skills over time.

And that's exactly what they do. They build better mental models. They distill, they take the time to see the information there is to be able to build out solid investment thesis, to challenge these over time. These are the kinds of skills which have been valuable and are becoming far more the ones that can distinguish us in our performance. How can we, not just as individuals, but also as investors, how can we apply these lessons to, you know, for example, decisions we make about our investment portfolio?

how we study the market and potential investments. What kind of insight can you offer there? One of the starting points is that we do want to be distinctive in our knowledge. And so part of it is to choose where is it that I become an expert, be that in asset classes, be that in particular industry sectors, be that in particular stocks, and being able to assess those and not to try to know everything because you can't know everything, but to choose what it is you do know. And so then you can identify some of the right information sources. You can build your expertise. You can build the frameworks that enable you to have a nuanced understanding of the opportunities and trajectories of those companies. One of the second points is that we all understand

investment portfolios, where we have different asset classes which are less correlated and that if we have the right portfolio, we can get better return for risk profile. In exactly the same way, we need to build information portfolios. And as investors building our investment portfolios, we need to design information portfolios. These are the different classes of information. this is we get suitable diversity in those in terms of their perspectives and how they you know come in and then being able to build the frameworks as i mentioned in terms of building that understanding and i suppose that you know the final point i'll make is that this is about investment theses you know and we talk about mental models a lot in investment and i think

that's a very powerful and valuable way of thinking. What is our mental model around why it is we think the market will or won't perform in particular ways? What are the sectors? What are the stocks? What will happen with interest and so on? But as we build our investment thesis, and these do need to be distinctive, of course, if we want to outperform the market. If we're doing the same as everyone else, we'll listen to everyone else, then we can't outperform. So building our own distinctive models. But as we build those models, continually looking for the information that will help us refine that. So as we understand what our thesis is, which of course helps inform our investment decisions,

we can also use that as a signal for saying, well, what information will help me hone my investment thesis? What is contradictory? What is confirming information? What is information that might make me want to question and refine that? What is any complementary perspective? So you're building richer and more robust models of your thinking about the markets and how to invest as a result of that. Now, I think every aspect of information, money is information, and every aspect of

investing is essentially that task of taking in information, making sense of it, having that unique perspective enables you to make the better decisions. I think those few points I just made are some of the most important ones that investors need to consider. I want to talk a bit again as well about this impact on the future of work. What do the insights in your book tell us about the future of work, the impact of AI in this space? We've seen such rapid evolution in the workplace over the last couple of years, many people think it's really just the beginning. And I'd love to hear your thoughts on that. It is just the beginning. And that's one of the things where it's wonderful to look at the history of artificial intelligence, how it's

grown. There's been a number of what have been called AI winters, where there's been very little progress for the last 10 years or so. There has been a pretty extraordinary pace. And all that feeding on itself amongst other things as we are growing, building new algorithms, there's more computing capacity. And in fact, some of the algorithms are designing other algorithms in turn. So it feeds on itself. And we see in the application, of course, there's just about any game that we play, computers can beat humans. And in fact, in any specific domain where we can get a lot of data, that essentially machines are outperforming humans in prediction, in analytics. So the one area where humans exceed machine capabilities and will for the foreseeable

future is in synthesis. So one of the aspects of machine learning that is always specific to a domain, you have to feed the data within a specific domain. And then if you do that, you can actually get a lot of great insights and analysis in that domain, but it's useless. It's absolutely meaningless outside of that. What humans can do is to see different perspective, to see different elements and understand how they relate, to be able to pull them together. And it's interesting from an investment perspective because analysis and synthesis are opposites analysis is the breaking of down things into smaller and smaller pieces and we have to analyze we have to pull down and

go into balance sheets and to understand specifics of companies and their supply chains and there's we need a lot of detail but to truly create value from that we need to be able to synthesize that to pull together the broader perspectives on the nature of how balance sheets themselves are changing what's a different uh perspectives on what might be happening in different countries around you know again the structure of supply chains might be chaining so that what they are tomorrow is different from what they were in the past so this is the domain of humans is the synthesis the pulling together the making sense the forming of the whole and that's the capability that will keep us ahead of machines for as long as we can imagine.

And it's something which we have to nurture, not just in ourselves, but also through our schooling system and education system and also in organizations. This is why we need to create the workers of the future, is by building their capabilities of synthesis. Chris Hill. As always, people on the program may have interests in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.