Tuesday, March 21, 2023

ERJ's theory of profiting from business fads

Investors are at least as susceptible to passing fads as 7th grade girls.

Like the 7th graders, the environment is chaotic and the winners-and-losers change hourly. Theories, no matter how stupid, collect a following and that drives a self-fulfilling-prophesy-loop.

The engine that drives fashion is that fashion leaders create status by changing fashion and thereby making 97% of the other girls uncool because they are wearing styles that are obsolete.

Market makers create personal wealth by changing The-Next-New-Thing thereby making 97% of the other investors "behind" the curve. The 97%'s "old" investments, being uncool, cannot command a premium in the marketplace while the "new" investment is in short supply and is bid-up past mathematically defensible levels.

Supply enters the market, chasing the outsized profits. Prices stabilize. The cool-kids find a new, "must have" investment and most of the market is left with an investment they paid a premium for in a market where prices are cratering.

Over-and-over-and-over again.

What would the smart money do?

They might supply the start-ups with all of the countless, mundane support services the core-business needs and do it at a very hefty mark-up.

Payroll, building maintenance, custodial services, IT, supplies, code-compliance, banking...the list is very, very long.

The geniuses running the start-up see those support functions as a distraction. The market is flooding their industry with venture capital. They can throw money at the problem and focus on the arcane bits of their specialty: The witch-doctors' dance and shaking their rattles.

The smart money doesn't need to know WHICH casinos will win the most market share. They provide the same services to all of them and can seamlessly shift resources from losers to winners. They have chips riding on every slot of the roulette wheel. They don't need to worry if there is a huge shake-out in the number of cannabis dispensaries. Ditto for micro-breweries. The smartest-money provides mundane, nothing-special, services (that they can procure at commodity prices) to all of them at obscene mark-ups because they offer "turn-key convenience".

The Heller and Shannon story-line

Lon Turner has a problem. They are vampires sucking the blood out of viable businesses but they have to put the money SOMEWHERE. It is almost the same problem Heller and Shannon have.

Turner's band of thieves have been putting it in "Logistical Management Support" (the details of getting bacon, shrimp, prime-rib, toilet paper to the right place at the right time in the right quantities), Payroll and Personnel (Ce'Diff works for a temporary manpower agency), Building Maintenance, Media and Advertising, Accounting and Banking, Commercial Real-estate and so on.

All of those mundane functions are as invisible as the offensive line of a football team. They are invisible until somebody misses an assignment. All of those mundane functions are absolutely dependent on the steady injection/flow of money to ensure reliable execution.

Turner and Company also have the issue of convincing banks to make loans to the businesses they buy. They need to have SOME successes to counter-balance the stacks of exsanguinated corpses littering their back-trail. Those successes would be the service providers. Turner subsidizes them to grow them to size but then turns them into cash-cows.


  1. Professional commercial property management is very expensive. They suck up all your free cash flow fixing good enough at the moment. Bought Long Horn Steaks when it went public 30 some years ago. $20 a share. Within a few months it was at $3. Have not chased start ups since. Made up the loss by not eating there. Lessons learned. Recently hired a residential property manager. He told me give me the house and I will fix it and get it rented. Could not find the time to fix it myself or supervise those hired. Expensive but it is done. So I get part of it. The key is to watch for mistakes and act. Roger

  2. This reminds me of the old comment about a Gold Rush - the people who make money are the ones selling supplies services, not the miners.

    I've heard the analogy used in wind and solar, tech startups, and other "hot" fields.

    1. Us prospector types refered to it as "mine the miners".

    2. I kind of had a hunch that was what happened at the casino. How many other places are Lon & Company behind the curtain or the "silent partner"? When the gorillas start showing up bedside Lon will wish he was dead.

  3. Yes, the real money is in 'services'... Always has been, always will be. People have to eat, drink, etc.

  4. Some businesses start out in one area but reluctantly end up doing the service end of the primary business. The service end is so blood sucking it destroys the primary.

    Case in point residential solar energy.
    "Solar" loving guys start selling and installing solar systems (specifically non grid tied i.e. w,/ battery backup). Great business but woe soon comes when tech illiterate buyers CONSTANTLY call in for service jobs. People not even understanding the old lead acid battery need for occasional distilled water top off.
    Eventually the gung-ho sellers/ installers are bogged down by recurring low margin service calls.
    Soon the solar install biz dies from neglect and declining revenue.

  5. Thanks for the backstory about Lon Turner and his gang of thieves.

  6. That is a helpful background ERJ. I get the part about the money being in supplying the suppliers; I am little crosswise on the link to Lon - money was being funneled to him, and he in turn was "investing" it in a supply related business?

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