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August 25th, 2022

Water Off a Buck’s Back

Water off a buck’s back describes a dilemma we faced in an investment review. Recent news stories regarding the reallocation of the diminished water supply from the Colorado River among several western states reminded me of a duty we have as stewards of our investors’ capital.  That duty is to avoid investments which, even if profitable, might put Olympus or its investors in an uncomfortable public profile.  For example, the state of Colorado has unique riparian law that governs the use of water.  Just because one owns the land next to a river, a stream etc., it does not mean the landowner has the right to use that water as the riparian rights are separately owned.  Naturally, this leads to very predictable conflicts. The more dear water becomes both the profitability of the rights and the size of those conflicts grow.  We were offered the chance to invest in riparian rights in Colorado which is a legitimate, profitable activity.  We decided that the potential for such an investment to place us and our investors in an unfavorable public light as water arbiters was very high and decided to reject the investment.  Were there to be a drought or a situation where water was being allocated away from, say, farms to golf courses, the outcry was likely to be high and the headline risk substantial.  We are faced with these choices with some frequency.  Financial services seems to be rife with profitable enterprises that raise red flags for their stretching the band of ethical elasticity.    Areas we have rejected include Payday loan companies where the embedded cost to the customer is outrageous.  Particularly bothersome were expensive Payday loans offered to soldiers who were away at war and needed to fund family needs.  Rent to own furniture companies for furniture and appliances leave their customers often paying three times the original cost for a television or a sofa when finance charges are added.  Tax lien investing offers favorable discounts, but puts investors in the chain of evicting home owners. Many other ethically questionable, but profitable, enterprises do not survive our first look due to similar concerns. 

An idea that keeps creeping into the public eye is the need for a Cabinet level Secretary of Common Sense.  Prices for silicon memory chips and the earnings of the chip companies have been falling rapidly in 2022 as there is now a glut of memory chips, unlike the shortage that existed in 2021.  Although the chip shortage was significant in 2021, it ended as lower covid restrictions reduced the demand for electronic devices as people left their homes and the logistics issues for shipping chips were diminished.  Manufacturers of memory chips are lowering their capital expenditure budgets to reflect the supply demand imbalance. Into the breach jumps Congress to solve last year’s problem by hurling $52 Billion at an industry that is cutting expenditures due to slowing demand.  In addition, the Chips Act adds $1 Billion for carbon removal in memory chips, a puzzling idea as they are made from silicon, not from carbon.  Industrial central planning by government has never worked as it is incapable of reacting to rapid market changes.  The Inflation Reduction Act passed last month also needed to spend a few hours in the office of the Secretary of Common Sense.  A few of the political predicates for the bill were 1) diminish the wealth of the rich, 2) encourage the purchase of electric vehicles and 3) encourage United States sourcing of auto production. Yet, what are the consequences of the Act?  The current wait to buy a Tesla is a year so no actual increase in purchases are possible which means the $7,500 tax credit lets Tesla raise prices, thus further enriching its largest shareholder, Elon Musk, the world’s richest man.  Over the next few years new rules in the Act come into effect regarding domestic content requirements for each vehicle to keep them eligible for the tax credit.  Based on the current state of anticipated production of batteries and other components experts agree that no vehicle may be eligible for the tax credit by 2024 as the rules come into play.  Instead of letting policy wonks create unviewed text, the laws should be forced to marinate in the Secretary’s inbox. I’m Rob Morris and I approved this blog.

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