The Most Dangerous Game

Welcome to another edition of Profit+, a weekly newsletter about what it takes to find meaning in the pursuit of modern success. This is the place where we explore big ideas at the intersection of markets, business, politics and life as we seek to empower readers to have an authentic impact on our world.

If investing is a game, it is a most dangerous one. What happens towards the end of all bull markets is that the game begins to look so easy that it presents as a sure thing. Nothing could be further from the truth.

What do I mean by dangerous? I’ll give you an example. Remember WeWork? It wasn’t that long ago when everyone thought this was a great business. It was an innovative, world-changing unicorn that was going to transform commercial real estate forever. Well, markets have a way of punishing such beliefs.

WeWork is now down a mere 96% from its IPO (and 99%+ from its peak pre-IPO valuation). When I say dangerous, this is what I mean. As an investor, it’s near impossible to recover from something like this.

Side note. If you remember one thing about the WeWork saga, remember this: it’s never a good idea to structure a business where there are a bunch of long-term liabilities (e.g. 10 year leases on office space) paired with short-term revenues (e.g. month-to-month membership contracts). It’s literally about as bad of a business model as they come.

Anyway, I wanted to highlight this example today because I think it’s a good reminder both for the sanctimonious critics of the supposedly invincible investor-class and those who hubristically dare to engage in the art of investing under false pretense. Both sides are wrong. For the critics I say this: as rigged as the system may seem, investors don’t always make money and for the believers, buyer beware!

7 or so years ago, right around the time my first son was born, I went through a transformational period of life. I didn’t know it at the time but it turns out I was doing all the necessary foundational work to make this Profit+ project come to life. Funny how life works sometimes! In the moment, I was just following my curiosity—reading every newsletter I could get my hands on and binging on podcasts and books.

A big part of the journey to become an investor is an exercise in self-discovery. Essentially, what you have to do is figure out the style of investing that works for you. It’s a very individual process, much like that of an artist. I realize now looking back that a lot of what I was doing during this transformational period was trying to figure this out.

In the course of my wanderings, I came across a brilliant investment framework, something that really resonated with my personality, belief system and psychological disposition. At the time, I was watching almost everything that came out of Real Vision and found myself captivated by this over 2-hour discussion between Grant Williams and Anthony Deden of Edelweiss Holdings.

You all should watch the entire thing. Whether it resonates for you or not, it’s a masterclass in understanding the journey of the investor.

At the core of Deden’s framework is a foundational question: how exactly do you go about making long-term investments? It’s a brilliant question because it presents as trivial when it is nothing close to that.

His answer? You need to find opportunities that have three core qualities:

1. Endurance (some reasonable basis for believing demand for the product or service will be around for a very long time)

2. Scarcity (some reasonable basis for believing that the business has a defensible competitive advantage)

3. Ownership (a way to participate as an owner in a way that is aligned with management, sustainable for the long-term and able to survive economic shocks)

I have borrowed much of Deden’s framework and made it my own, of course, in my work at Metros Capital. More on that another day.

What got me thinking about all this in the first place this week is what’s been happening lately with Vornado, one of biggest, most successful REITs in history. Back when I was discovering Deden’s framework, I happened to be exploring some opportunities with a family office that owned some incredible real estate. We’re talking Times Square stuff and I remember thinking to myself “that has to be the best real estate in the world…completely untouchable.”

It turns out I was completely wrong. Things like the COVID lockdowns and permanent work from home policies were the farthest thing from my mind back then. Manhattan office properties looked like a 10 to me in terms of Endurance and Scarcity.

Fast forward to today and this “best stuff in the whole world” is getting crushed.

Right now there is 94Msf of vacant office in Manhattan and last month only 1.5Msf of new leases. In other words, there is over 62 months of supply. Uh oh! REITs like Vornado are in big trouble and are already busy cutting or suspending their dividends altogether. Steven Roth, Vornado’s highly respected CEO, has even been talking lately about how this is just the beginning and things are about to get worse. Oh, how the mighty have fallen!

What I think this story highlights is that there’s just so much more uncertainty in the world than we’d like to admit. While things like prime Manhattan office might appear to have long-term endurance and scarcity, we just don’t know. In markets, uncertainty is the rule, not the exception and to assume otherwise is the ultimate act of hubris. It’s this profound degree of uncertainty is that makes investing an art.

Despite all the scientific and mathematical lexicon and all the charts and models, the real foundation of modern investing is much more philosophical. It’s more about things like creativity, self-knowledge, and psychological management than anything else. You all might be tired of me talking so much about Socrates but once again he has a point. His “I only know that I don’t know” is the best articulation of the mindset you want to keep as you go about trying to play this most dangerous game.

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