#243: Rethinking Cash Flows, Earning Complexity in Cooking, OMD Journal Update...
Hello! This week I bring you two thought pieces. One is how I thought through cash flow when investing in businesses. Another was getting a grasp on simplicity, process and complexity through cooking. A major project this week was creating the OMD Journal page on the website—something I address below. There are no essays in the introspection segment this week. It’s not that I didn’t write anything. It’s that I realized I’ll need more time to process what I’ve written.
As always, feel free to pick and choose from the categories below and I hope one of the things I wrote is of some value to you.
Business & Investing
Culture & Systems
Introspection & Habits
Business & Investing
All About Cash Flow
At the end of the day, investing is about cash flow. Prices will go up and down in the short term for all kinds of reason. A pure bet on price action is speculation. In the long term, a business will increase its value by increasing the amount of cash it generates. Then investing should be allocating capital to businesses that I think will generate more cash in the future than it does today.
That would mean, my decision to allocate capital relies on the capital allocating abilities of the business itself. Now, a business that can grow 20%, 30%, even 40% a year without having to spend any additional dollar would be amazing. But most businesses aren’t like that. Even the ones that appear to be like that are not.
Some may say Google’s built its search business once and it doesn’t have to do anything to it. But we know it hires more engineers every day and they have teams dedicated to the product. We know people want raises and higher bonuses with better performance. Companies like Google have to reinvest the cash flow it generated into people who won’t just maintain their products but make it better.
Still, let’s say a company like Google didn’t need to reinvest its cash. What should it do? Well, assuming I owned a business of my own like Google, what would I do with the cash? Well, if there is no use for the cash (i.e. not reinvesting to grow the business because it doesn’t need to) then I would pull the money out. I would pay myself a fat dividend with all the cash that’s generated.
What else could I do? That is, unless I thought there was another avenue to use that cash somewhere. It’s Finance 101. Companies that can’t use the cash for any growth pay out dividends. That’s one use of cash. But the company must find a place for the cash.
That means any investment into a business today is predicated on a belief the company will allocate current cash somewhere else to increase cash flow in the future. I mean, there are other reasons why people invest….but I would argue any form of intelligent investing requires the proper allocation of capital by management. When I say ‘proper’ I’m referring to redeploying the cash generated into other areas to generate further growth of cash flows. Without that, the value of the business will cease to increase. Then it would cease to be a good investment.
A company like Google could redeploy capital by hiring more engineers. Every person hired is an investment on the future of the business. Poor hiring will result in the destruction of the cash that was generated.
Let’s say my opportunity cost was a 20% return on cash—an hypothetical example. That’s how much I could generate with cash my investments paid out to me in dividends from a successful year of operations. For my investments to retain that cash. I would expect them to redeploy that capital in opportunities that would generate higher rates of return than my opportunity cost of 20%. If not, that would be value destructive for me.
So what does it mean when I see a company hold $30b or $100b of cash on their balance sheet? Well, it means the business is generating less than 5% returns on my cash. The cash I would find a better use for if they paid it out to me.
Ah, but some may retain them for a rainy day. That would be considered prudent and such cash amounts should be considered the cost of doing business. If that was the case, then so be it. But what if the company retains 2x or even 4x the amount it costs to operate the business? What if they keep all that cash even after deploying a chink of it to reinvestment opportunities?
Then, the cash generated from this business isn’t as valuable as the cash generated by a business that finds ways to reinvest every dime of it into opportunities that provide greater returns. With that, not all cash flows are equal. As important to the cash generated by the business is its opportunity to reinvest that capital—not to mention how rational they will be with their capital allocation.
This makes me pause on some of the monopolies I see today. What happens to these businesses that can’t find any further avenues for growth? What happens to companies that are considered so big that they aren’t allowed to acquire other businesses? What happens when they can’t just hire the world to work for them? What happens when the management of these businesses decide to not use any of the cash generated and let it pile on the balance sheet?
The business might be so great that it can still generate greater growth in cash flows by only deploying a fraction of the cash it generated. But is that the opportunity I want to invest in? These are all considerations I need to ask myself when I look at a business’s cash flows.
OMD Journal
Last week was the first issue of OMD Journal’s Powerlifting Journal. With it came the update on how the premium newsletter was evolving. Moving to the 48 issues a year format, I prorated the four weeks of no issues to result in three weeks well there won’t be any article (investing, powerlifting or writing-related).
Premium subscribers will notice an empty hole in their inbox this Sunday and that’s because I elected to take one of the three break weeks this weekend. I used it as an opportunity to update the OMD Ventures site and provide greater detail to OMD Journal and the vision for it.
If this sounds interesting please take a read.
Culture & Systems
Earned Complexity
Watching the dozens of Anthony Bourdain shows from No Reservations to Parts Unknown, I saw a noticeable difference between Asian cuisine and European cuisine. Actually, it’s Southeast Asian versus the Mediterranean. Then again, the main comparison in my head was Malaysian versus Italian. Yet, I could draw similar comparisons to Korean and Spanish for that matter.
The difference formed a thought around simple cooking. The type of cooking where the ingredients do the talking. Think about a steak seasoned only with salt and pepper. It could be handmade pasta cooked with cheese or charcuterie with toasted bread. There is no fancy seasoning. The taste is all in the simple ingredients.
This is a factor my uncle missed the most when comparing his lifestyle in Canada versus England. He reminisced about the fresh ingredients flown in every day from the Mediterranean. He said the ingredients made all the difference to his cooking.
Think about balsamic vinegar that takes a minimum of 12 years to age or culatello that take a minimum of 2 years to age. You eat them as they are and they’ll taste amazing. No sauce is required. You could even say the nonrenewable resource of time did all the flavouring to these simple ingredients. It might also be why fine aged ingredients demand high price tags given the difficulty of replicating them quickly.
Yet, my experience with Malaysian, Thai, Chinese or Korean cuisine isn’t like that. Now, granted, these cuisines have so many dishes and I can pick out the exceptions but the vast majority are often laden with sauce.
The sauce heightens the taste of the overall dish. But it masks the raw taste of the ingredients. You know what I mean. The kind of sauce that is so overpowering that you wonder how the ingredients themselves taste. A comparable function would be condiments in the West. Consider mayo, ketchup, mustard, and gravy.
I used to think they added flavour but they might’ve merely been an attempt to mask the uninspiring taste of low-quality ingredients. The kind that are mass-produced, filled with chemicals and lack all nutrition. Now, they are affordable and I’m all for that. That doesn’t take away from the fact that they taste like nothing—or worse.
Just think about your own groceries. How orange are your egg yolks? They might be a pale yellow. Think about the beef you see. Is it bright red or the pink of corn-fed cows? Do you know if your fish or meat were dyed with colour because they were grey?
One of the reasons I like to cook is because I like to have control. I like to pick out my own groceries. I have preferred places for vegetables, meat, and fruit. They can all be different places depending on the day. It might appear suboptimal for time but it’s optimal for cooking.
I thought about this daily act of cooking. It’s been part of my life since leaving home at 18. Yet, I realized cooking wasn’t as common as I thought. One of the top reasons from peers who avoided cooking daily was that they didn’t have the time. Come to think of it., cooking did take a decent amount of time out of my week. I never thought of it as time lost until people pointed it out.
I understand why people like to delegate grocery shopping to Instacart. I can understand why startup investors like Paul Graham and Naval Ravikant tell their entrepreneurs to stop wasting time cooking and only focus on building their company. But I also don’t understand how it makes sense to drop the ball on controlling your own health and delegating that off to other people.
Cooking wasn’t just about health. That’s where I thought about how I cooked and how I liked to default to very simple recipes. It wasn’t a matter of controlling the flavour I wanted (i.e. freedom of sauce mixology). It was a desire to maintain the integrity of what went in my mouth.
I don’t care about cheap eats or “tasty” dishes. I care for the integrity of whatever I’m putting in my mouth. Most restaurants have trash food and they douse it in sauce. But I expect that because eating at restaurants aren’t always about the integrity of the dish in front of me. It’s mostly about the experience
It’s about the people I eat with, where I eat, when I eat and why we are eating together. There’s so much more associated with eating out that the food becomes a small part of the overall equation. Yet, when it comes to cooking at home, I think the food and the process is everything.
That process starts with grocery shopping. It’s a process that starts with simple cooking at its core. A simple meal with rice, meats and veggies (or carbs, protein and fats) doesn’t need fancy flavours. It needs quality ingredients and it will taste amazing.
Like I said, it’s not a matter of flavour. I’m Korean and what Westerners call umami is akin to the simple notion of “taste” in my culture. There’s a reason why Koreans smuggle in our instant noodles, packets of kimchi and tubes of gochujang (Korean chilli sauce) whenever they travel to Europe or the Americas. It’s because to our tastebuds, these cuisines lack flavour. But no, simple cooking isn’t giving up this flavour.
Simple cooking allows the ingredients to speak and the integrity embedded in its quality will tell you if it tastes good or not. It’s only when this simple process is understood that complexity should be introduced.
Complexity, to me, is flavour. This is where all the sauces that make or break the various Asian cuisines I mentioned should come into play.
See, it’s not about pushing flavour away. It’s about understanding the beauty of simple cooking and the importance of making sure the process is solid. Simple cooking doesn’t allow for errors in purchasing quality ingredients. That will result in poor taste.
In this way, complexity is earned. The default shouldn’t be ketchup drizzled everywhere to hide the poor mistake underneath called food. This is no different from every other process in life.
Companies will hide the chinks in their armour or a crack in the foundations of the business with the space equivalent of shiny new acquisitions, new hires or fancy PR campaigns. The same could be said for all the self-promotion that happens on social media or the simple act of buying a sports car to sauce up the shitty human underneath.
Learn to cook simply. Then add the flavour.
Introspection & Habits
A Habit in Progress
I started taking 10 - 15 min walk to start my day. The aim is to expose myself to sunlight ASAP to reset the melatonin clock. It’s been the second week of this habit.