COPPER, DATA AND THE GENIUS OF MICHAEL LEWIS 

June 9th, 2023

Michael Lewis is one of my favourite authors.  He tends to write about sports and finance which align pretty well with the interests of this former athlete portfolio manager.  His books are nearly always on fascinating topics that are well researched and he paints great verbal illustrations that always bring the reader into the book.

Many others would share in this view.  Afterall, he is the New York Times bestseller author of Flash Boys, The New New Thing, The Big Short, Moneyball,  The Undoing Project, The Premonition, Liar’s Poker and others.   

For the second time recently, I have appreciated him for something else entirely.  The business of his writing. 

Without thinking much about it I would assume that authors do author-y things all the time. They would be smoking pipes, driving their Volvo to an independent bookstore for a book reading or getting into arguments about some obscure historical or grammatical minutiae. 

Of course their attire would fit the stereotype too.  I imagine authors wearing a brown corduroy jacket with elbow patches and making hand gestures with glasses they never seem to wear.

I imagine them struggling financially and otherwise through years of research to publish a book that may be appreciated in their field of study but goes unnoticed by nearly everyone else. 

Somehow I don’t include Michael Lewis in these mental stereotypes.  He seems much to charismatic and business savvy for this. 

The first time I was struck by this was in the aftermath of the 2008 financial crisis.  I had picked up Panic: The Story of Modern Financial Insanity.   I was expecting to pick up another one of his great books that I had loved in the past.   Was this the case?  Nope.  Not at all.  

What I had missed was the insertion of a single word on the cover.  I had missed the insertion of “Edited” before the “by Michael Lewis” on the cover. 

Instead of finding a book full of Michael Lewis’ own words, understandings and descriptions, I found a collection of stories that the editor had introduced or linked together with some scant text.  It still went on to become a New York Times bestseller.

What sorcery is this? 

Don’t get me wrong, I enjoyed the book but it was hardly the work I was expecting to read.  Still, I had to appreciate the business savvy of Michael Lewis to be able to have a book published under his New York times best selling name where he only did a very small percentage of the writing.  

Genius! 

It was only later when I realized just how genius it was. 

I’ve mentioned before that I am a big fan of podcasts.  I typically alternate between NPR’s How I Built This, The Daily from the New York Times, Invest like the Best and Founders podcasts from the Collossus podcast network.  

Michael Lewis has created his Against the Rules podcast to join Malcolm Gladwell’s great Revisionist History Podcast both being published by Pushkin Industries. 

Lewis’ storytelling through the podcast format is just as good as it is in his writing.  He is charismatic, warm, funny and puts his listeners and interviewees at ease.  Largely, he has done similar types of stories that has made him famous, deep dives into interesting areas you largely wouldn’t think about.  One season was dedicated to experts, one season to coaching and one season to referees.     

None of these would necessarily get him out of my elbow patch wearing, Volvo driving author mind space. 

Recently though he launched a new podcast product he calls “On Background”.  For this he interviews different experts in their field about topics that are relevant for his latest book.   Typically, authors would need to conduct hours and hours over several years on this type of unpaid legwork to build the base understanding before intelligently writing on a topic.

Forget that!  Not Michael Lewis, why not monetize this cost?

I listened intently to 34 minutes of edited calls to experts, interviewing data sciences experts and legal experts in preparation for his book about FTX and the downfall of Sam Bankman-Fried. He made his biggest cost scalable, monetizable and even did some marketing for his next book!

Genius!

Then I realized that his book Panic: The story of Modern Financial Insanity mentioned earlier was likely just his pre-podcast version of “On Background” monetizing his leg work for “The Big Short”.  He would have had to educate himself on financial crashes and the reasons they happen before writing knowledgeably about the topic for The Big Short.  Why not gather together the best of the articles and sell it as another book.  Why not monetize the by-product of your primary business?

Double Genius!

What a fantastic business idea?  Make every cost and by-product of your primary business scalable and monetizable.  Are there other industries where this is possible?

The first example that immediately comes to mind is the mining industry.   I am not particularly fond of commodity based businesses as I have written about before.  Often when miners of gold extract and refine the ore they also get copper.   While not the primary target, copper is a very important base metal that can be sold easily and make a investment financially possible, if no less volatile. 

Another area where this is possible is data.  In the normal course of business every enterprise generates data.  In fact everything we do can generate data. 

The large technology companies were early adopters of this and have been built by monetizing this data.  Facebook, attempts to monetize every aspect of your online life.   Waze, a navigational tool, utilizes the positioning data by-product of users smartphones to create better interactive maps to provide better guidance.   There are many more examples in the technology space. 

There can be great opportunities when traditional businesses begin to adapt to this new way and begin to try to monetize their data.  

A personal example we had invested in was the attempt by Altus Group, a real estate services company, to monetize their data.  At the time Altus Group was a real estate advisory company that largely made their money by valuing commercial property.   The group would either be paid as a consultant to appraise a building for financing, or for helping building owners debate their property tax bill with the municipalities or to determine the cost of constructing a new building. The company had grown by acquiring local appraisal services firms to the point where it was the one of the largest real estate appraisal firms in North America. 

There wasn’t much room for growth left and the success of the firm was very much tied to the cyclical commercial real estate field. 

In 2011, the firm purchased Argus Software, the leading software tool that helps real estate investors easily model the cash flows for various buildings for $130M.  The Argus Software purchase immediately brought in 4,600 clients in 45 countries who were already using the DCF software tool.      

This no doubt was a very large purchase for the +/- $250M market cap Altus Group who already had +/- $130M in debt.  Altus financed the purchase poorly by paying $80M in cash and $50M in debt to the vendors of Argus.  This doesn’t seem unreasonable when Altus had a $250M market cap but on fears of change in direction, added debt and overpaying the shares dropped down to a market cap low of $57M. 

Had Altus group not been able to refinance the $50M vendor debt then they would be forced to convert the debt to equity at a very unfavourable price effectively giving away the company.

This created a great opportunity to buy the shares for the rebound and for long term growth of monetizing the data.  (Sadly this purchase was before we established the Canadian Focused Equity Portfolio)

In the following years, Altus group:

• Refinanced the vendor debt
• Transitioned Argus to a SaaS model
• Transitioned Argus to the cloud
• Made other acquisitions to boost their software offerings
• Monetized data generated in their primary businesses and through Argus
• Rebounded and grew to be a $2.2B company today

There are many other examples that investors can find where smart companies will look to monetize their by-products and costs. 

I will keep looking out for Michael Lewis’ latest book to drop.  I feel that he has a lot of great stories to tell about businesses with his writing and we can learn even more from watching how he handles the business of his writing.  

 

David Mudge, MBA. Portfolio Manager, Canadian Focused Equity Portfolio

CIBC Private Wealth Management

David.Mudge@cibc.ca