That won't be a black swan
It'll be white as a snowflake, a silent rebel in the face of winter's harsh dominion, standing out against the cold, gray world.
Red alert
You must have some of them in your network, whether it’s LinkedIn or Twitter, Instagram or TikTok, MySpace or Caramail. They are everywhere, and they are loud: those goddamn startup specialists, digital transformation consultants, and trading enthusiasts, commenting on every single piece of informational noise as if they get it. They want you to be aware of their points of view and really need to make sure every single soul on their professional network is impressed by their visionary insights and amazing decision-making.
Spoiler alert : "They are no visionaries; they only display their rare few good decisions, if any1.
Another spoiler alert: Their decision-making process is horribly flawed, and all of them end up going bust when an anomalous context no longer occurs, but we'll talk about that later.
Modern free markets combined with social networks have slightly distorted some incentives. You don't actually have to be a trader to say you are a trader, nor do you need to invest your money to claim you are an investor2. Again, and I can't emphasize this enough, talking has never been cheaper.
However, it actually becomes a problem when some individuals specialize in the widespread dissemination of digital garbage and invest other people's money in what seems like a good deal to them. It becomes a bigger problem when a good deal doesn't even need to be reflected in actual profits, but only in social bragging and horrific public peer validation on LinkedIn through cringe posts and hypocritical comments3.
I feel like some of them will disappear at light speed in the coming years.
I feel like they're going to call it a black swan 4.
It won’t be a black swan, it will be a white-as-hell swan, and history may be unfolding right under our noses.
The power of context
In the last few years, the economic context was extraordinarily particular due to low interest rates.
That context gave birth to a large number of investors who were only able to make money - through brokerage fees mostley - when there is free lunch, and without actual returns. It also led to frenetic rounds of investing in money-losing companies. Companies so bad at generating profit that they are almost structurally designed to lose more as they get bigger. However, in a world where someone filled with this free money will always buy your invaluable asset for a higher price, this doesn't matter.
Or maybe, this used not to matter, but now it does. Let's explain a bit.
Interest rates are a crucial tool used by central banks for managing monetary policy. They affect borrowing costs, investment, spending, and, ultimately, inflation and economic growth. When interest rates are low, they tend to encourage borrowing and spending because they make loans cheaper. Conversely, higher interest rates generally discourage borrowing and promote saving, as they increase the cost of borrowing and offer better returns on savings.
You're right; we have just experienced a long decade of historically low interest rates. This made money cheaper than ever before and saving less attractive. So, what was the consequence? Large pension funds and big institutional investors had little interest in keeping their money safe in traditional savings or bonds. Instead, they were motivated to fund venture capitals, which in turn invested in riskier assets with potentially higher returns, such as startups. You see it coming.
However, keeping interest rates low for too long can lead to high levels of borrowing and could contribute to financial market bubbles. And now, here we are, with the tech market resembling nothing more than a real-life Ponzi scheme, where no asset has actual value based on cash flow, but rather some hypothetical future value if you manage to sell your equity to some even dumber investor.
To my readers who have not read about economics and financial history, that situation is anomalous. Historically, the average interest rate set by central banks (like the Federal Reserve in the US) has typically been around 6%. In recent years, this average has significantly decreased, with rates even approaching zero or going into negative territory in some countries. These ultra-low or negative interest rates are unusual because they represent a departure from historical norms5.
Giants with feet of clay
Here is your white swan: money-losing companies going bankrupt because there are no longer free billions to sustain money-losing growth internationally.
If you open a bakery business, you don’t need to be Warren Buffett to understand that if you lose a dollar on each piece of bread you sell, you won’t sustain yourself for very long. You may lose money at first to inject capital and build up your brand, but your growth should be accompanied by revenue, reducing losses, and hopefully, net margin at some point.
The point here is not that big investments at the very beginning are not good. Innovation needs fresh capital. My point is that when you invest millions in companies that are bound to lose money as they grow, while bringing nothing too valuable to the market because they have no moat, there is nothing black swan-ish to think somebody will go bust.
Everywhere you look, from the US to Latin America, there are companies that fit this troubling mold.
In the US, there are companies like Uber and Airbnb, and in Latin America, there are firms like Rappi and Kavak. These companies have a few commonalities that raise red flags for discerning investors. First, they lose money as they grow. That's not a good sign, as businesses should ideally become more profitable as they scale6.
Second, they don't bring much product innovation to the table. Their offerings often don't differ significantly from their competitors in the market, and they don’t improve over time. They typically scale horizontally by adding more and more features to their apps, making them close to dysfunctional and creating operational burdens that fuel bureaucratic behaviors within the company. This approach can lead to an unwieldy, inefficient organization that struggles to adapt and respond to market changes effectively.
Third, their markets no longer have a real moat. There are cheap alternatives that already exist, or local solutions like WhatsApp-based delivery that can easily compete with these companies. Finally, and perhaps most concerning, is that these companies may never be able to become consistently profitable. Reimbursing their losses might be an insurmountable challenge, and the return on investment could be nonexistent or even profoundly negative, possibly running into the billions.
The real black swan here is believing these companies were ever invincible in the first place.
When the free money dries up, impostors get wiped out.
This won't be a black swan, it will be a lesson in humility.
I prefer fasting and boxing, and cooking my roasted red peppers.
AirBnbs full of stupid nomads, food delivery, and Netflix is the recipe for towns turned hell.
Love,
Voss
Note that they often display horrible decisions as great decisions. Read investors, analysts, bankers, some VCs, and consultants post online : they are never unhappy about something they did. Their feedback loop is not only broken, it just doesn’t exist.
Big-up to all the “investors” never investing a dime from their pocket, and living on a monthly salary paid by LPs.
Great post, so insightful !
Black Swan: The term "black swan" was popularized by finance professor and former Wall Street trader Nassim Nicholas Taleb in his 2007 book, "The Black Swan: The Impact of the Highly Improbable." A black swan event refers to an extremely rare and unpredictable event that has significant and often catastrophic consequences. The metaphor of a black swan comes from the old belief that all swans were white, as black swans were thought to be nonexistent until they were discovered in Australia in the 17th century.
Central banks have adopted these policies in response to the global financial crisis, the COVID-19 pandemic, and other economic challenges. These actions were meant to encourage borrowing, spending, and investment to stimulate economic recovery.
Gross margin may decrease, but volume should increase sufficiently to compensate the gross margin loss