Picking Winners and Losers

I have long time clients that are professional fund managers and serial angel investors. I have tremendous respect for these risk takers that play a vital role in funding businesses.  We have also been investors ourselves and served in roles within private investment funds.  It probably goes without saying that we like the space and and feel like it is an area where you can “do good and do well.”  But successfully investing in startups and businesses that are little more than ideas is really hard–it is an industry predicated upon a high failure rate. It’s just incredibly difficult to pick winners.

However, as hard as it can be to predict winners, it is often pretty easy to pick losers.  Some business pitches really scream “crash and burn” from the start. There is no shortage of really bad ideas out there. All Aboard Florida’s idea to build a profitable high-speed train between Miami and Orlando is as bad as it gets. More on that below but what is really interesting to me is that some of these obvious losers require billions in capital, are promoted or originated by very sophisticated parties and are sometimes even funded with their own money.  Like all things crazy, many of these ideas seem to originate in Florida and are welcomed by grinning politicians that are nowhere to be found when it all blows up. Will All Aboard Florida be another funded fool’s errand? Some opponents of All Aboard Florida are already throwing in the towel and concluding that raising $1.75 billion in bonds is a done deal.

A Bright Future for Florida Citrus?!?

To find a recent example of billion dollar nonsense, one need only look back a few years in order to find a prime example. In 2013, while an incurable disease was decimating Florida’s citrus industry, Coca-Cola Company thought it would be a great time to plant 50,000 acres of new citrus. The cost: a mere $2 Billion.  Coca-Cola proudly heralded that “the future of Florida orange juice is looking brighter today.” It wasn’t. In fact, it had never looked more bleak. Turns out Coca-Cola’s future was looking a whole lot dimmer too.  Stating the incredibly obvious, I sent the following tweet:

What has happened since then was all too predictable. The disease has still not been cured and Florida is experiencing its lowest production of oranges in more than 50 years.  The prognosis is actually getting worse. I don’t know exactly what has happened to Coca-Cola’s new groves, but I’m guessing it wasn’t good. Florida has lost at least 100,000 acres of groves to disease and $3.6 billion in revenues since 2007.   It was a really dumb plan and it was initiated by one of the oldest and largest corporations in the world. It is stunning to me that seemingly sophisticated managers of funds (in this case, shareholder funds) can be so obviously stupid.

Now Florida’s Transportation Future Looks Bright!

But at least it was on Coca-Cola’s nickel. Over the last few years, All Aboard Florida has been pimping this high-speed passenger train service between downtown Miami and the Orlando airport. In 2013, I wondered whether there could be something dumber than planting 50,000 acres of oranges in the face of incurable disease. Well ladies and gentlemen, we have our winner!  The pure lunacy of this train as an investment opportunity has been well chronicled by Carl Hiaasen here and here. Because I could not possibly make this case better than one of America’s most talent writers, I commend those articles to your reading. It does say something to see a writer who seems to have little experience in financial reporting so effortlessly dismantle the All Aboard Florida business model.

As obviously flawed as it may be, I nearly spewed my coffee when I saw All Aboard Florida’s recent proclamation that “The Future of Florida’s Transportation Looks Bright.” Sure . . . just as bright as its citrus industry did in 2013.

While I was tempted several times, I have not written anything outside of Twitter about this half-baked idea because I have been certain that it will die under its own weight. After all, All Aboard Florida apparently needs $1.75 billion in tax exempt bond sales to make the train a reality. Unlike Coca-Cola, these guys are looking to use other people’s money. It is currently being marketed as “junk bonds” to institutional and high-income investors with a minimum $100,000 buy-in. Even though we have seen dumb ideas get funded before, surely no sophisticated party would make a six-figure investment into a bond as uniquely risky as the bonds financing this moronic train. I guess we will soon see if history repeats itself again and asset managers do the truly unexplainable.

Fund Managers Not Getting Aboard

I was encouraged that the financial world has not completely lost it’s mind when word started to circulate last month that efforts to sell these bonds has been falling on deaf ears.  Lyle Fitterer, managing director for Wells Capital Management was quoted as saying “We looked at it, but we are not going to be participating, . . . It came down to a credit decision.” That would be fund manager-speak for “there is no way in hell we would get our money back.” I also enjoyed the quote from Jim Colby, who apparently manages about $1.6 billion of high-yield municipals: “It was not priced to demand . . . That is about all I will say.” Apparently Jim Colby is no fool either. I’ll say what he won’t. For anyone to take this kind of extreme risk, the investment returns would have to be so sky high that the train would have to be projected to belch golden bricks from its smokestack. The jury was still out as to whether Daniel Solender of Lord Abbett & Co. in Jersey City, New Jersey is as sharp as his contemporaries. The firm apparently oversees $17 billion but he reportedly had not decided whether to invest as of the publication of the article. I’ll assume he was either just being political or had not yet really taken a look. 

Next week, Merrill Lynch will be taking these junk bonds to the U.S. municipal market to help fund All Aboard Florida. What could possibly go wrong? We will see how many bond fund managers know less about investing than Carl Hiaasen. After all, the outlook couldn’t be brighter, right?