- Chamath Palihapitiya, the CEO of Social Capital, has developed an intuitive framework for thinking about investments during today’s coronavirus-driven stock sell-off.
- With this methodology, he’s able to zero in on sectors and specific names that should benefit well into the future.
- “It is excruciatingly boring, numbing, time-consuming — but in it is where you’ll find, I think, the nuggets,” he said.
- Palihapitiya made headlines recently after he went on CNBC and said the US government should let debt-laden “zombie” companies get “wiped out” by the coronavirus pandemic.
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It’s safe to say that Chamath Palihapitiya — the CEO of Social Capital, chairman of Virgin Galactic, and part owner of the Golden State Warriors — has a knack for making sound investment decisions.
“If you’re going to allocate capital well over decades, what you really are — better than anybody else — is just a good observer of the current moment in time,” he said on “The Pomp Podcast.” “It’s taken me a long time to sort of practice and refine a tool kit.”
Last year, Palihapitiya’s refined tool kit generated $1.7 billion in cash and cash equivalents for Social Capital through a handful of public investments — Slack, Tesla, Amazon, and Virgin Galactic, to name a few — and a broad base of private holdings.
Since the firm’s inception in 2011, he’s generated a 997% gross internal rate of return — more than triple the S&P 500.
Social Capital
Palihapitiya is perhaps best-known lately for his polarizing CNBC appearance in which he said that the US government should let debt-laden “zombie” companies get “wiped out” by the coronavirus pandemic. When he was asked whether the US should let the airlines fail, he replied, “Yes.”
So while it’s safe to say that Palihapitiya is steering clear of airlines and other debt-heavy companies, he also has a proactive playbook for figuring out what to buy in their place. To him, it all comes down to three elements: prioritizing needs, asking what won’t change, and investigating.
Let’s take a closer look.
1. Prioritizing needs
“What this moment is good at doing is clarifying the hierarchy of needs,” Palihapitiya said. “And so the first thing that we’re doing — and this is for us, and my team and I, a multiweek process — is just re-underwriting what are our basic needs. And that’s what I’m doing right now.”
2. What won’t change?
“I’m trying to ask myself just really simple, kind of basic questions where I can look at my kids, and if I tell them, ‘Here are the things that will never change,’ they’ll be like, ‘Yeah, it makes sense,'” he said.
“The way that I’m asking the questions right now is, first and foremost: What is not going to change? And there’s a bunch of things that are not going to change,” he added. “You’re still going to go out, eventually. You’re still going to travel, eventually. You’re still going to buy things offline, eventually. You’ll still want to make things that will require energy, eventually. You’ll still need to eat; you’ll still need to clothe yourself.”
3. Investigate
“From there — and we’ve done this because we’re a little bit further ahead in some of those sectors that we identified early … they’re not super complicated — but then what we’ve said is: ‘Which companies have now been disproportionately punished, despite basic needs that should remain relatively inviolate over the long arc of time,'” Palihapitiya said.
“We’ve been monitoring, very closely, all sources of alternative data,” he added.
A big bet on commercial real estate
By leveraging data from OpenTable, Yelp, Second Measure, and TomTom, Palihapitiya is able to build an informed perspective and identify patterns within the prevailing economic landscape.
As a result of this strategic way of thinking, he now believes that commercial real estate is “fundamentally impaired.”
He pointed to how the video chat in which he’s conducting the interview costs nothing and is just as productive as an in-person meeting — all without the exorbitant costs of cross-country flights and lodgings. To Palihapitiya, this is bad news for the sector — but that doesn’t mean there aren’t opportunities.
“There are certain REITs that only service big-box retailers, specifically Walmart, Amazon distribution, and groceries,” he said. “Now they’ve seen 50% drawdowns as well because you throw the baby out with the bathwater when things like this happen. And so we’ve been going bottoms up in certain REITs, literally looking at property by property, trying to figure out — are these things valued fairly or reasonably.”
Palihapitiya clearly thinks that real-estate investment trusts invested in the types of properties that service big-box retailers will be able to survive and prosper going forward.
Although Palihapitiya doesn’t provide specific names, investors looking to mirror his strategy may want to consider Prologis (PLD), Duke Realty (DRE), and Terreno Realty (TRNO). All three invest heavily in real estate for big box stores.
“You got to be a worker in moments like this, a humble worker,” he said. “It is excruciatingly boring, numbing, time-consuming — but in it is where you’ll find, I think, the nuggets.”
He added: “But that’s what we’re doing: We’re prioritizing needs. We’re asking ourselves: ‘What won’t change?’ And then we’re looking at things — and essentially what that leads us to is a bunch of offline businesses or hybrid businesses.”
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