By Bryan J. Kaus

Price is what you pay; value is what you get.

— Benjamin Graham, as recalled by Warren Buffett in the 2008 Berkshire Hathaway letter

On June 1, 2016, Waste Connections completed its combination with Progressive Waste Solutions. The deal created a company with roughly $4.1 billion in pro forma annual revenue, a fleet of collection trucks across the United States and Canada, and a network of landfills, transfer stations, and recycling facilities that neither company could have assembled on its own.

The announcement in January had followed the usual form. Complementary assets. Greater density. Approximately $50 million in annualized administrative savings within the first year, with more to come from operating improvements.

What the announcement could not say, because nobody fully knew it yet, was what the acquired business actually looked like from inside the cab of a truck.

Ron Mittelstaedt, Waste Connections’ chairman and chief executive, described it eight months later. Progressive’s operations had been turning over 42 to 44 percent of their employees a year. In the four years before the deal, those operations had recorded 31 fatalities. Six more occurred in the five months before closing.

On the fourth-quarter call he conceded that the company had assumed Progressive was better run than it turned out to be.

That is not the sentence a buyer wants to say in public. It is also the most useful sentence in the whole transaction, because it marks the moment the deal stopped being a financial model and became an operating business that somebody had to run.

What Mittelstaedt Actually Bought

A waste collection company does not earn its money from trucks. It earns it from the relationship between a route, a driver, a schedule, a disposal site, and a customer who expects the can to be emptied on Tuesday.

Turnover at 44 percent means nearly half the drivers on a route are new each year. New drivers have more accidents. Accidents take trucks out of service, raise insurance and workers’ compensation costs, and put experienced crews on overtime to cover the gaps. Missed pickups follow. Customers who are missed twice start taking calls from competitors. As customers leave, routes thin out, and the cost of serving everyone who stayed goes up.

Every one of those links is physical. None of them appears as its own line in an acquisition model. They show up later, as margin.

Waste Connections had spent two decades building a management system around exactly that chain. The company’s operating playbook is unglamorous: decentralized local accountability, disciplined pricing, a safety culture that treats incidents as a leading indicator of everything else, and a willingness to walk away from revenue that does not earn its keep.

Applied to Progressive, the results arrived faster than the plan.

By the end of 2016, turnover in the legacy Progressive operations had fallen to 26 percent. The accident and incident rate had dropped by roughly half. There had been no fatalities since the close. Management reported that safety, quality of revenue, and operating performance in the acquired business were running 12 to 18 months ahead of its original expectations, and that it expected to generate more EBITDA from those operations in 2017 than Progressive had in 2015, on about 10 percent less revenue.

Those are management’s figures, and they describe operating progress, not the ultimate return on $5 billion of enterprise value. But the shape of them matters. Less revenue and more profit, with fewer people leaving and fewer people getting hurt, is the signature of an operating system working on a set of assets. It is not the signature of a rising market.

Waste Connections did not buy routes and trucks. It bought a place to run its playbook.

That is what the buyer was underwriting, whether or not the press release said so.

The Arithmetic That Flatters a Deal

There is a second reason the announcement form tells you so little, and it has to do with how acquisitions are scored.

An acquisition can raise earnings per share without creating a dollar of value for the acquirer’s owners.

The mechanics are simple. A company whose stock trades at 20 times earnings buys a business for 12 times earnings and pays in shares. The acquired earnings arrive at a lower multiple than the shares used to buy them, so earnings per share rises. Nothing about the underlying business has to improve for the arithmetic to work. The same thing happens when a buyer borrows at an after-tax cost of 5 percent to purchase a business earning 8 percent on the price paid. The spread lands in reported earnings whether or not the acquired company is worth what was paid for it.

Immediate accretion, in other words, is often a statement about financing and relative valuations. It is not a statement about whether the capital earned its return.

The question that actually matters is whether the acquired business will generate enough incremental cash, over enough years, to justify the purchase price plus the cost of integration plus the capital that will have to be invested along the way, with something left over for the risk that it does not.

That calculation gets harder, not easier, when the model’s benefits depend on capabilities the combined company does not yet have. A buyer can negotiate a sensible price and still make a poor investment if integration consumes more cash, more management attention, and more time than the model allowed.

The reverse is also true. A deal that dilutes earnings for two years can be the best capital allocation decision a company makes in a decade, if what it buys is a capability that compounds.

Neither case can be read from the first earnings announcement.

The Second Investment Decision

I have come to think of every acquisition as two investment decisions dressed up as one.

The first is whether to buy, at what price, on what terms. This is the decision that gets the bankers, the lawyers, the fairness opinion, and the board’s full attention. It is negotiated to the decimal.

The second is how to invest in the business after you own it. What to preserve, what to change, how fast, how much capital to commit, and which capabilities have to be built before the promised improvements can exist at all.

The second decision is at least as consequential as the first, and it is routinely treated as administration.

Consider what Mittelstaedt’s team had to decide in the summer of 2016. Progressive had people in it who had buried colleagues. Some of its managers had presided over the conditions that produced those outcomes; others had been fighting them without the tools or the authority to win. Which was which? The playbook could not tell you. Somebody had to go to the yards and find out.

That is also where the diligence process reaches its limit. Diligence can establish the condition of the assets, the quality of the earnings, the contracts, the liabilities, and the plausible range of improvement. It cannot tell you which dispatcher is holding a district together, or which safety manager has quietly stopped reporting incidents because the last three reports got him nowhere. Those facts arrive after closing, and the owner’s response to them determines how much of the modeled value survives contact with the business.

Waste Connections found 44 percent turnover and treated it as the problem to solve first, ahead of the administrative savings that had headlined the announcement. That sequencing decision is the acquisition. The $50 million in SG&A was always going to be there. The margin that came from keeping drivers alive and employed was not, unless somebody chose to go get it.

Where This Would Be Wrong

The argument depends on being able to tell operating improvement apart from market luck, and it is worth saying how.

If Progressive’s results had improved because disposal pricing firmed across the industry, or because fuel costs fell, or because a competitor stumbled, the operating indicators would not have moved the way they did. Industry conditions do not cut a workforce’s turnover rate in half inside seven months. They do not drive incident rates down by 50 percent. And a rising market lifts revenue; it does not produce more EBITDA on less of it.

So the test for any buyer claiming an integration success is the same one. Show me the operating indicators that moved, show me that they moved before the financial result and not after, and show me that they are the kind of indicators the market cannot move on its own.

A buyer who cannot answer those questions may still have made money. He has not demonstrated that he knows why.

The Point Taken

The appeal of buying rather than building is real. An established business comes with customers, people, assets, and a record of generating cash, and it would take years to assemble those things from nothing.

But ownership is where the investment starts, not where it ends.

The price paid fixes the first decision. The decisions that follow, in the yards and on the routes, determine how much of the opportunity the owner keeps. Waste Connections paid for a company. What it got was a set of operations in worse shape than it had assumed, and a chance to prove that its way of running a business was worth the premium.

It took that chance seriously enough to put its CEO on the record about what it had found.

A good acquisition gives you something worth owning. What you build with it decides whether it was worth buying.

The deal is the price. The business is what you get.

© 2026 23.5 Strategies; The Point Taken™

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By Bryan J. Kaus

Putting out fires is not improvement of the process.

— W. Edwards Deming, Out of the Crisis

In 2004, BP’s Texas City refinery recorded the lowest injury rate in its history, roughly a third of the refining sector average. Management, by the Chemical Safety Board’s later account, believed the plant had turned the corner. On March 23, 2005, the isomerization unit overfilled during startup, a blowdown drum vented hydrocarbon to the atmosphere, and the vapor cloud found an ignition source. Fifteen people died, most of them contractors in trailers parked too close to the unit. One hundred eighty were injured.

The injury-rate chart was real. The people who built it had done real work. It measured slips, cuts, strains, and vehicle incidents, and it measured them accurately. What it did not measure was whether a 1950s-era process unit with a history of overfills and a disconnected relief system was any safer than it had been the year before. The board found that the focus on personal safety had let the company believe conditions were improving while process safety deteriorated. Fixed costs had been cut 25 percent across the company between 1998 and 2000. The refinery’s central training staff had gone from thirty people in 1997 to eight in 2004. Four process safety coordinator positions sat unfilled on the day of the explosion.

I spent the better part of two decades in and around refineries, and I have sat in rooms where an injury-rate chart earned a round of applause. The applause was not wrong. The number deserved it. The error was in what the room concluded from the number.

I have been thinking about that error since finishing Malcolm Gladwell’s The American Way of Killing, which came out last month. The book is about why the United States has so much lethal violence, and it is worth reading for the stories alone, whatever you make of the conclusions. I expect plenty of readers will argue with them. That argument is not mine to settle here. What I took from the book was a distinction that travels well beyond its subject.

Gladwell opens with a young gunshot victim in Washington, D.C., and the trauma team that saves him. The surgeons are extraordinary. American emergency medicine has become so good at keeping shooting victims alive that the survival rate itself has changed the statistics. That is a genuine achievement, and the patient and everyone who loves him would call it a miracle. It is also a separate question from whether fewer people are being shot. The physician manages the consequence. Whether the condition that produced it has changed requires different evidence and the work of institutions well beyond the hospital.

That is the distinction: managing the consequences of a problem is not the same as changing the conditions that produce it. The trouble is that the first can be done so well that it removes the pressure to attempt the second.

The people who keep everything working

Anita Tucker, then a doctoral student at Harvard Business School, spent 197 hours shadowing twenty-two nurses in eight hospitals. She and Amy Edmondson catalogued 120 instances of what they called operational failures: a missing medication, a broken piece of equipment, a linen delivery that did not arrive. In 92 percent of those cases, the nurse solved the problem on the spot and moved on. A unit short of linen borrowed from the unit next door. The patient was cared for. The nurse felt the satisfaction of a problem handled. And the reason the linen had not arrived went unexamined, which meant it would not arrive again next week.

Tucker and Edmondson named the two behaviors. First-order problem solving gets the work done. Second-order problem solving investigates why the work needed rescuing. The nurses they watched were skilled at the first and almost never did the second, not because they were careless but because the job gave them no time, no authority, and no mechanism to carry what they knew to anyone who could act on it. Tucker was explicit that the nurses were not to blame. The hospital had built a system that converted their competence into concealment.

Anyone who has run an operation will recognize the pattern. Customer service promises a delivery date against inventory data nobody fully trusts. The plant finds out on Tuesday. A scheduler tears up the week’s sequence, a supervisor finds someone willing to stay late, and the truck leaves on time. The customer gets what was promised. Every person involved did something worth recognizing. The process that made the promise has not improved by one hour, and next Tuesday looks the same.

Over time, experience in a business like that becomes partly the knowledge of how to work around the business. People learn which spreadsheet to believe, whose phone call releases an order, which commitments can only be kept by personal negotiation. That knowledge is valuable. It is also a dependency, and it stays invisible right up until the person who holds it leaves, or the volume rises past what one person’s judgment can absorb.

Employee resourcefulness is an asset. Leadership’s job is to know what it is being spent on. Judgment applied to a genuinely unusual situation strengthens a company. Judgment consumed every week by the same preventable failure is a tax on the people who have it, and a company paying that tax has less capacity for growth than its results suggest.

What an improving number can miss

Texas City is the severe case, but the mechanism is ordinary. A measure improves. The improvement is real. The organization draws a conclusion wider than the measure can support.

Strong margins can reflect better execution, a favorable market, deferred spending, or all three. On-time delivery can reflect a reliable process or a heroic one. A smaller headcount can reflect simpler work or the same work moved onto the people who remain. A rising maintenance budget can mean the plant is being protected or that it is breaking more often. In BP’s own account, maintenance and turnaround spending at Texas City had risen 40 percent over the five years before the explosion. Money was going in. It was going in to deal with what had already broken.

Before I treat a good result as evidence that a business has become stronger, I want to know what changed in its ability to produce that result again. Which constraint was removed? Which cost went away permanently rather than moving to a different line, a different quarter, or a different person’s evening? What did the result consume that will not be there next time?

Those questions separate an improvement that reduced a burden from one that relocated it.

Why the same problem keeps coming back

There are honest reasons organizations get stuck managing consequences. The immediate failure has a customer, a deadline, and a name attached. Prevention competes with all of that while offering a benefit shaped like something that never happens. The scheduler who saves the order is visible on Tuesday afternoon. The person who fixes order promising prevents fifty rescues nobody will ever see.

The recurrence also eats the capacity needed to end it. Managers spend their days clearing exceptions. The most experienced people become indispensable to keeping work moving and therefore unavailable to study why it keeps stopping. The people who understand the failure best are the ones with the least time to investigate it, and a proposed fix lands as one more demand on a stretched floor.

Under those conditions, telling people to take ownership accomplishes very little. A supervisor can see a recurring obstacle clearly and still have no control over the commercial policy, the system setting, or the staffing decision that produces it. The problem lives between functions, and each function, measured on its own, appears to be doing its job.

Growth and acquisitions sharpen all of this. The informal arrangements that hold a business together at one scale do not automatically survive the next one. A company can add customers, plants, and revenue faster than it builds the ability to coordinate them. The resulting strain gets described as a shortage of good people, when the good people are already spending most of their week holding the seams together by hand.

Southwest Airlines learned a version of this in December 2022, when a winter storm triggered cancellations that cascaded through a crew-scheduling system unable to keep up, grounding more than 16,000 flights over ten days. The storm was weather. The recovery capacity was something the airline had built, funded, and deferred over many years. The two questions have different answers, and only one of them is in management’s hands.

Giving the organization a chance to learn

Toyota’s production system contains a deliberate answer to first-order problem solving. Under the principle it calls jidoka, a machine stops itself when it detects an abnormality, and any operator can pull a cord and stop the line. The stated purpose is to keep a defect from moving downstream and to make the abnormality visible to someone who can address its cause.

What interests me is the willingness to let a problem interrupt the work. The quieter alternative, catching the defect at final inspection and fixing it there, preserves the appearance of flow while making the weakness harder to study. Toyota chose the interruption because an interruption produces information and a repair produces only a repaired part.

Applying that requires judgment. Not every irregularity justifies stopping an operation, and a reporting channel on its own changes nothing. Somebody has to investigate, somebody has to decide what to change, and somebody has to check afterward whether the change worked. For the plant that keeps rescuing Tuesday’s order, the first move might be pulling twenty expedited orders from the last quarter and tracing each one back to the moment it became an expedite. The answer could be inventory data, lead-time assumptions, equipment availability, or a sales incentive that rewards commitments the operation cannot keep. Usually it is several of these interacting.

The fix follows the diagnosis, not the other way around. New software does nothing if the commercial incentive still produces the same promises. More reporting consumes time if nobody can act on what it shows. And the test comes later: fewer rescues, less rework, the same service delivered with less intervention, and no new problem created somewhere else by solving this one.

One warning. Better visibility usually makes the business look worse before it looks better. Work that was being absorbed silently starts reaching people who can see it. That is progress, if the organization treats it as information rather than as evidence that something has gone wrong.

The judgment behind prevention

The argument has a limit. Demand changes, equipment fails, and circumstances arise that no economical design could have prevented. The ability to recover well is a real capability, and a company without it will not survive long enough to prevent anything.

Some exceptions are rare and cheap and should simply be handled when they occur. Others deserve investment despite years without incident, because the consequence if they ever arrive is unrecoverable. Texas City had gone decades. The judgment turns on exposure, severity, how much is actually known, how reliable the existing safeguards are, and what a proposed change can realistically accomplish.

What that judgment needs is an honest accounting of the recurring cost. Repair bills, overtime, and customer concessions are the visible part. The larger part is the skilled time absorbed by rework, the management attention pulled into familiar crises, and the growth that did not happen because the people who would have led it were busy saving Tuesday.

Prevention costs money. So does recurrence. The leader’s job is to see both sides of that ledger with equal clarity, and most organizations are far better at counting the first.

The Point Taken

What stayed with me from Gladwell’s book was not a conclusion about guns. It was a reason to ask more carefully what an improved outcome actually proves. A successful intervention can demonstrate extraordinary skill at handling a consequence. Changing the condition that produces the consequence is a separate commitment, usually spread across different people, different decisions, and different budgets, and it is the commitment that gets deferred when the intervention keeps working.

In business, that commitment starts with curiosity about the work behind the result. Recognize the people who delivered under difficult conditions. Then use what they know to understand why the difficulty keeps returning. Their resourcefulness is worth more to the company once the company learns from it.

A strong quarter deserves attention. So does the condition the business is in when it finishes one. Did it gain capability, free up time, and reduce its reliance on repeated rescue? Or did it deliver by drawing down reserves of effort and goodwill that will be harder to draw on next time?

For anyone who has led a team through a recurring problem, the telling moment comes after the pressure passes. The order has shipped. The customer has been reassured. Everyone is relieved. Does the organization make time to understand what happened, or does the next urgent demand carry that opportunity away?

The fire is out. What did we learn about why it keeps starting?

© 2026 23.5 Strategies; The Point Taken™

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By Bryan J. Kaus

The bad economist sees only the direct consequences of a proposed course; the good economist looks also at the longer and indirect consequences.

Henry Hazlitt, Economics in One Lesson (1946)

Technology companies tried to buy all the available electrical equipment for their data center developments. Suppliers pushed back because they had commitments to other projects.

That account appears in the Chicago Federal Reserve district’s October Beige Book, relayed by an equipment distributor.

I keep coming back to the customers on the other side of those commitments.

They did not need to be competing with a technology company for revenue to find themselves competing with one for equipment. Their projects could have sound economics, willing customers and adequate financing, and still depend on whether someone else had already reserved what they needed.

We usually define competitors by what they sell. In a constrained market, it is also worth asking what they buy.

The latest manufacturing and inflation releases point to a broader industrial-investment question. When capital concentrates in projects that draw on shared equipment and skills, how does that change what other businesses can build, when they can build it, and what they must commit to earn a return? Data centers make that competition unusually visible today. The implications extend across the businesses that depend on those same inputs.

The expansion is real. Its breadth is another question.

A Kansas City Fed bulletin published October 13 puts numbers around the unevenness. Inflation-adjusted factory construction spending averaged about 70% more in 2022 through 2025 than in 2015 through 2019, although it has since fallen 37% from its November 2024 peak. Since December 2019, selected high-tech manufacturing capacity has risen 72%. Those industries represent roughly 3% of manufacturing output; total manufacturing capacity is up about 2%. Auto capacity rose 14%, while capacity outside autos and selected high tech fell about 1%.

These are manufacturing measures, not a complete accounting of computing services or the eventual productivity effects of the technology being built. High-tech capacity indexes also reflect improved capability, rather than simply counting additional factories. The evidence supports a narrower conclusion: a substantial investment cycle has not yet produced a broad expansion of manufacturing capacity.

That does not mean the rest of industry has stopped growing. The October 16 industrial production release showed manufacturing output rising 0.3% in September, with gains in machinery, primary metals, electrical equipment and chemicals. The Dallas district reported robust, broad-based manufacturing growth, well beyond semiconductors.

A monthly improvement in output and a longer-term shortfall in capacity can coexist. So can spare capacity across manufacturing as a whole and acute shortages in particular products. An idle production line is little help to a customer waiting for equipment it cannot make.

That is why I hesitate over both sweeping versions of the story: that American manufacturing has returned, or that nothing meaningful is happening. The useful work begins below the aggregate, where the assets, products, customers and constraints become visible.

Competition crosses industry lines

The Kansas City research identifies a particular pressure point. Utilization in electrical equipment, appliances and components reached 87%, its highest since 2008, while that broad category’s capacity remained about 9% below 2019. Transformer and switchgear prices have nearly doubled. Estimated import volumes are substantially higher, though the increase depends on the price adjustment used.

The Beige Book adds operating texture. Kansas City manufacturers described military and data center demand crowding out other production. A Mountain West contractor reported that competition from data center projects was raising pay for electricians and other skilled trades.

Those accounts suggest a competitive map that looks different from the one in an industry presentation. A manufacturer planning an expansion, a utility replacing equipment and a data center developer may serve entirely different markets. Yet each can depend on the same qualified suppliers, installation crews and delivery slots.

The transmission is practical. A contractor changes which work it bids. A supplier reserves its next production run. A customer accepts a longer delivery schedule or pays more to hold the original one. A project that cleared its investment hurdle six months ago may need to be underwritten again.

That creates opportunity as well as pressure. A supplier able to deliver reliably may become more valuable to customers. A service business that can extend equipment life, improve throughput or shorten commissioning may help relieve a constraint without waiting for an entirely new factory.

But the opportunity is specific. A busy order book does not tell us whether a business has dependable earnings, adequate cash or an advantage that will survive the next round of capacity additions.

A cost increase can become a capacity problem

September’s consumer price index rose 0.6% for the month and 3.7% over the year, with gasoline accounting for more than half the monthly increase. That energy shock has its own causes. It should not be folded into an explanation about data centers simply because both can raise a company’s costs.

What matters here is how separate pressures can compound. A business paying more to secure equipment or retain an installation crew may also face a larger freight bill, without receiving any additional orders of its own.

The Richmond Beige Book contains a consequence worth considering: trucking contacts described fuel costs squeezing maintenance spending and delaying fleet purchases. A cost increase can initially appear as lower margin, then become a deferred investment that leaves the business less efficient or reliable.

For a manufacturer, a similar choice might involve postponing a plant improvement to preserve cash for more expensive inputs. The company gets through the immediate pressure, but the improvement that could have reduced its next round of costs remains undone. That is one way a temporary squeeze can leave a longer operating disadvantage.

A backlog is a set of obligations

Consider a hypothetical equipment supplier offered a large order from a well-funded developer. Meeting it requires more inventory, additional people and an expansion of the plant. The revenue opportunity is attractive. Whether the commitment is attractive depends on details that rarely fit into a headline backlog number.

Does the customer provide deposits or progress payments? Can it defer delivery after the supplier has bought materials? Who carries changes in input costs? If the project loses a permit or grid connection, what happens to the order? Can the additional equipment and workforce serve another customer?

A supplier can be right about the market and still accept the wrong obligations. It can also use a strong market to establish relationships, develop skills and improve processes that leave it more capable when conditions change. The difference will often be decided while orders are plentiful, even if it becomes visible only later.

For a company facing higher costs without a comparable increase in demand, the priorities may look different. It needs to understand which inputs are genuinely scarce, where procurement commitments are justified and how quickly customer prices can adjust. Buying early can secure a production slot; buying indiscriminately can consume the liquidity needed to operate through a delay.

Neither situation lends itself to a universal instruction to expand, stockpile, hedge or wait. Good judgment requires matching the commitment to the exposure.

That is where an operator’s view adds something to the market narrative. Demand matters, but so do the obligations accepted to serve it, the cash required along the way and the alternatives available if the sequence changes.

The supply response has its own clock

There is already investment aimed at relieving these constraints. Eaton is converting a South Carolina plant into a $340 million transformer facility, with production expected in 2027. Hitachi Energy announced a $528 million Mississippi transformer facility in September, with production scheduled for 2029. These are company plans, not completed output, but they make clear that suppliers are responding.

For customers planning projects today, the relevant question is when that response becomes equipment they can actually receive, install and operate. A manufacturing expansion scheduled for 2029 cannot resolve a missing delivery slot in 2026. Imports may bridge part of the interval, provided the equipment meets the project’s requirements and can arrive when needed.

The customer’s project has a schedule too. Texas’s September 21 directive pausing TCEQ environmental permits for data center projects pending ERCOT’s grid review illustrates how an approval can change the sequence after commercial commitments have been made. Equipment may be ready before the site can accept it, or the site may be ready while equipment remains unavailable.

That is why I would reconcile supplier delivery dates, project approvals, installation capacity and payment obligations in the same operating review. Each may look manageable on its own. A mismatch between them can leave one party funding inventory while another waits to earn revenue.

The Point Taken

For the businesses on the other side of the Chicago distributor’s commitments, the issue is whether their own projects can proceed on the terms they expected.

That is the part of an investment boom I think deserves more attention. Growth changes the conditions around it before the eventual benefits are fully visible. Some businesses gain orders, others gain costs, and many experience both. What follows depends on the capacity they can access, the terms they accept and the improvements they make while the market gives them room.

A useful question for the next operating review might be: whose growth is changing the assumptions underneath our plan?

The answer may sit well outside the industry we thought we were competing in.

© 2026 23.5 Strategies; The Point Taken™

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By Bryan J. Kaus

“There is surely nothing quite so useless as doing with great efficiency what should not be done at all.”

Peter F. Drucker, “Managing for Business Effectiveness,” Harvard Business Review, May 1963

In 2009, Avon began a global Service Model Transformation intended to improve order management and the way its independent sales representatives interacted with the company. Andrea Jung was chairman and chief executive. By late 2013, a Canadian pilot had caused significant business disruption and had not demonstrated a clear return. Under Sheri McCoy, who had succeeded Jung as CEO in April 2012, Avon halted further rollout. Avon subsequently reported a $117 million pretax noncash impairment associated with the project.

What interests me about Avon is that the case contains two decisions. The original objective was understandable: improving how a business receives orders and supports its sellers can create value. The pilot then produced evidence that the intervention was disrupting the commercial system it was meant to serve, and management stopped the broader rollout. We can examine what went wrong while also recognizing the discipline involved in limiting further exposure.

I have been studying Paul Singer’s Elliott Management, including the motivations behind its campaigns and how its approach has evolved. That work keeps bringing me back to a question about the companies themselves: when management announces a transformation, what has it actually committed the enterprise to, and why?

I have written before about the discipline required to govern an investment and the organizational capacity needed to deliver it. Here I want to examine the decision that comes before the program, and the obligation that outlasts its announcement: why this change, what is it meant to improve, and what happens to leadership’s credibility when the promised value does not arrive?

Markets change. Customer expectations move, competitive advantages weaken, and the economics of a business can shift across a cycle. Leadership has a responsibility to recognize those changes and respond. Adaptability protects enterprise value, and a company that remains competitive has a better chance of sustaining employment and creating opportunities for its people.

A new CEO may want to establish a direction. Investors may expect a response to a popular theme. AI may appear to demand an immediate, visible commitment. A fresh perspective can be valuable, and a company can miss an opportunity by responding too slowly. The difficulty is recognizing when those pressures sharpen our understanding of the business and when they begin to define the problem for us. We can end up inventing something to fix, or treating visible activity as evidence of progress. A persuasive narrative helps secure support. I am more interested in the strategic insight underneath it.

That leaves a question worth spending time with. How do we distinguish necessary adaptation from change that consumes the organization without strengthening it? And how early can we realistically know the difference?

What are we asking change to do?

I find it useful to begin with the business itself: the customer it serves, the economics it depends on, and the market it is trying to navigate. Where is it losing ground, or leaving a meaningful opportunity unexplored? Then comes a separate question: can the proposed change actually address what we have identified?

Nothing has to be broken for change to be justified. A company may need to invest before a threat becomes visible in its results. Waiting can destroy value too. But an opportunity still needs an explanation: why this opportunity, why this company, and why this commitment now?

A convincing reason to change still leaves the choice of intervention open. A declining business may have a structural problem that a reorganization cannot resolve. A customer problem may require a different proposition rather than a new system. Some problems call for a targeted repair; others may call for partnership, divestment, or exit. The diagnosis may be right even when the chosen response is wrong.

J.C. Penney’s 2012 transformation was led by Ron Johnson, whom the board had recruited from Apple’s retail business the year before. It set out to change pricing, promotion, product, branding, and store presentation. In that fiscal year, selling, general, and administrative expenses fell by $603 million, while total sales declined 24.8% and gross margin deteriorated. Johnson was gone by April 2013.

The company already faced commercial challenges, and these results do not prove that its previous strategy was sustainable. What gives me pause is the distance between an improvement in the cost structure and the performance of the commercial system. Customers were responding to a proposition that had changed in several ways at once, making it harder to isolate which assumptions needed correction.

Some benefits take time to emerge, and early disruption can accompany a necessary transition. That is part of what makes this difficult. How will we distinguish transitional strain from evidence that the underlying thesis is failing? Making assumptions visible, testing where practical, and scaling commitments as evidence develops gives others something substantive to examine. The narrative becomes useful when it helps people participate in that judgment.

What the project budget misses

Transformation uses money, management attention, and operating capacity. People must learn new systems, adjust responsibilities, resolve exceptions, and keep serving customers while the organization changes around them. Those demands are part of the investment.

Consider a hypothetical middle-market manufacturer that centralizes purchasing and reduces inventory. Lower unit prices appear in the purchasing report. Supplier delays then create downtime and expedited freight elsewhere in the business. Purchasing and operations could each give an accurate account of their results and leave us with different impressions of the same initiative. The purchasing improvement may be real, while its value to the enterprise is disappointing.

Culture belongs in that accounting as well. Employees carry knowledge about customers, processes, and the exceptions that keep a business functioning. A reorganization can remove unnecessary duplication, but it can also remove useful judgment or relationships that were poorly understood. That loss is part of the cost of change, whether or not it was intended. Some cultural disruption is unavoidable, and some established practices deserve to change. Distinguishing an inherited habit from a useful adaptation to the market can be harder than an organization chart suggests.

Trust affects the quality of execution. Employees who believe that difficult information is unwelcome may become less willing to surface problems. People who have absorbed repeated changes without seeing the promised improvement may be harder to enlist in the next one. These effects resist precise valuation, but their consequences can still be material. A business case that cannot assign them a reliable dollar value still needs a way to recognize them.

This is particularly relevant in smaller and mid-sized companies, where a few experienced people may hold a substantial share of the firm’s operating knowledge. A transformation can draw heavily on the same people the business depends on to perform today. Their capacity is finite, even when it does not appear as a separate line in the budget.

Following the promise into the business

Suppose a company announces that its transformation will produce $1.2 billion in savings. That is a hypothetical promise, but the question it invites is concrete: show me the money.

Estimates help a company plan and give people a basis for evaluating the commitment. Their usefulness depends on understanding what they mean. A recurring expense reduction, an annualized estimate, avoided future spending, and released capacity can all have value, but they are different benefits. Time saved creates a financial return through what the business can do with that time. An expense removed from one department may reappear in another. Following the promise into the business means looking at what was realized, over what period, and after which costs.

Kraft Heinz provides an extreme example of why the substance matters. In its 2021 enforcement action, the SEC described procurement accounting misconduct involving unearned supplier discounts and misleading contracts. A restatement corrected $208 million of improperly recognized savings. The SEC also alleged pressure to achieve unrealistic savings targets. The company settled for a $62 million civil penalty without admitting or denying the findings.

This sits at the extreme end of the problem. More ordinary disagreements may involve which costs count, when a benefit should emerge, or how much improvement came from the program rather than the market. Those distinctions can change our assessment considerably. Once reputations and incentives depend on an announced number, the ability to examine its substance becomes more consequential.

Once a transformation has a name, budget, timetable, and executive sponsor, it can acquire a momentum of its own. Careers and reputations become attached to delivering it. Completion can gradually displace the business objective, and an adjustment can feel like a retreat even when the evidence warrants it. I wonder how often the hardest part of adapting is making it possible to revise something the organization has already been asked to believe in. The resources already consumed do not justify consuming the next round, but knowing that intellectually does not make the decision easy.

Richard Feynman, in his appendix to the Rogers Commission report on the Challenger accident, wrote that “reality must take precedence over public relations, for nature cannot be fooled.” Markets are not physics. They do eventually return a verdict of their own.

Parliament’s review of the BBC’s canceled Digital Media Initiative found that no single individual had overall responsibility for both delivering the program and achieving its benefits. The chief technology officer owned the system, but not the projected benefits across divisions. That finding raises a useful question about any transformation: who is in a position to reconcile the progress reported by the program with the experience of the people expected to use it?

The same distinction applies to AI. Klarna reported approximately $39 million in savings from its AI customer service assistant in 2024. In September 2025, chief executive Sebastian Siemiatkowski told Reuters the company had “over indexed” on cost reduction and was correcting its priorities toward products, productivity, and service.

I find that combination more instructive than a simple verdict about whether AI worked. Reported savings can coexist with a need to improve the operating model. Different measures may point in different directions, and the priorities themselves may need adjustment. A continuing willingness to revise the approach is part of the adaptability that justified the investment in the first place.

Change that strengthens the business

LEGO provides a constructive counterweight. Its 2004 action plan was already being implemented under Kjeld Kirk Kristiansen when Jørgen Vig Knudstorp became chief executive that October. The plan connected substantial change to a specific diagnosis: financial risk, weak competitiveness, and a need to refocus on its construction system. The company planned to divest the capital-intensive LEGOLAND parks. Its 2005 report described fewer components, improved customer and product profitability calculations, and closer relationships with retailers. LEGO returned to profitability, while explicitly explaining that asset disposals contributed nearly half of pretax profit.

The distinction between operating improvement and disposal gains is especially useful. Both can serve a recovery, but they tell us different things about its durability. Separating them gives owners and the board a better basis for forming their own judgment about whether the business is becoming stronger and whether further commitments are warranted.

Substantial restructuring can be justified. It may require difficult decisions about activities, assets, costs, and employment. Preserving everything is no more a strategy than changing everything. The question I take from LEGO is whether the intervention helps a company recover the capability it needs to compete. Reasonable people may disagree about the scope, pace, or sequence. A clear diagnosis gives that disagreement somewhere productive to go.

Avon’s halted rollout and LEGO’s recovery leave us with different forms of adaptation to consider. One limited further exposure when the intervention failed its test. The other reported progress against a defined direction and distinguished the sources of its financial result. Neither offers a formula we can simply transfer to the next company. They do help make the judgments more concrete.

Credibility is part of the return

A transformation creates expectations among employees, customers, lenders, directors, and shareholders. When management claims benefits that remain difficult to demonstrate, it can spend credibility along with capital. Repeated disappointment may weaken confidence in its ability to allocate resources and execute the next commitment.

That is where the connection to activism becomes relevant. A missed transformation promise does not, by itself, make a company an activist target. But a widening gap between management’s claims and the enterprise’s performance can give an outside investor a stronger basis for questioning stewardship. Management’s own commitments become part of the evidence for an alternative direction.

An activist’s proposal deserves the same examination. Its estimates also rest on assumptions about execution, transition costs, customers, and capabilities. Influence over governance and capital allocation does not remove the operating consequences of the changes being proposed. At J.C. Penney, Bill Ackman, whose Pershing Square was then the largest shareholder, had championed Johnson’s hiring and served on the board. Activist judgment was part of the commitment too. The consequences landed in the same stores, with the same employees and customers.

In the middle market, that challenge may come from an owner, lender, board member, or prospective buyer. The underlying question remains the same: what value is the change creating, and can leadership explain the result?

The Point Taken

I believe in the importance of adaptability. Protecting a company through changing markets requires judgment and, at times, decisive intervention. My concern is what happens when the transformation itself becomes difficult to question. The organization may have committed to change while losing some of its ability to respond to what it is learning.

The standard I come back to is a clear strategic reason, an honest account of what the enterprise must absorb, and evidence that the intervention is creating the value claimed. Meeting that standard requires both conviction and a willingness to let the business challenge our interpretation. Culture, capability, trust, and credibility belong in that judgment, even when they make the calculation less tidy.

For those who have led, funded, or worked through a transformation, I suspect the most useful lessons sit in the moments when the plan met the business. What told you the change was strengthening the enterprise, or that the enterprise was simply getting better at sustaining the program? And what made it possible to act on that distinction?

A program can report progress while the business tells a different story.

© 2026 23.5 Strategies; The Point Taken™

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By Bryan J. Kaus

If we want things to stay as they are, things will have to change.

— Giuseppe Tomasi di Lampedusa, The Leopard

In 1964, a shipment of 300 pairs of Japanese running shoes arrived at Phil Knight’s parents’ house in Portland. He stored them in the basement and sold them from the trunk of his Plymouth Valiant at track meets across the Pacific Northwest. In 1971, Bill Bowerman, his former coach and business partner, melted urethane in his wife’s waffle iron while trying to build a sole that would grip a new track without tearing up his runners’ legs.

Neither man would have called this culture. They were trying to solve problems with little money, no reputation, and no margin for abstraction. They stayed close to runners because that was where the information was. They experimented because the established answers were not good enough. They learned faster because survival required it.

That way of working became Nike before Nike became a vocabulary.

On October 1, 2026, the company those men built reported quarterly revenue of $11.21 billion, down 4 percent from a year earlier. Greater China fell 26 percent on a currency-neutral basis, its ninth consecutive quarterly decline. Nike Direct fell 9 percent on the same basis. Nike’s performance business was growing, but the chief executive told analysts it was still not large enough to offset the pressure in Sportswear, Jordan Brand, and Greater China. Management announced another restructuring, including future layoffs and an operating-model overhaul expected to run through fiscal 2031.

After the earnings release, the shares traded more than 80 percent below their 2021 high. In September, after eighteen years in the index, Nike was removed from the S&P 100.

I do not own Nike shares. For several years the company has failed my standard for ownership, not because the brand lacks power, but because the operating system beneath it has not yet proved capable of converting that power into durable results.

Most accounts of Nike’s decline tell a strategy story. The company pushed toward direct-to-consumer sales, reduced wholesale distribution, relied too heavily on classic franchises, and ceded shelf space to hungrier competitors. That account is accurate. It is also incomplete.

The deeper problem was not merely that Nike chose the wrong strategy. It treated category expertise, retailer relationships, and proximity to athletes as pieces on an organization chart rather than as repositories of knowledge. In pursuing a plan that was defensible on paper, it weakened the culture and capabilities that might have made the plan work, or told management, early enough, where it was failing.

That is a culture story. And the pattern was described almost perfectly fourteen years ago by a writer who was not thinking about sneakers at all.

The money will always be there

Rich Cohen’s The Fish That Ate the Whale is a biography of Sam Zemurray, the Russian immigrant who began by selling overripe bananas beside railroad sidings in Mobile, Alabama, and ended up running United Fruit. Chapter 12 opens with an observation about what happens after the people who built a company are gone.

A corporation ages like a person, Cohen writes. The founders die and the bureaucrats of the second and third generations take their place. The reckless, forward-looking spirit that built the firm settles into comfortable middle age. The institution becomes self-conscious. It asks how a decision will look before asking whether the decision will work. If the business remains wealthy and strong, later generations acquire the most dangerous kind of confidence: “They think the money will always be there because it always has been.”

Zemurray bought United Fruit stock as its professional managers ran the company into the ground during the Depression. In 1933 he walked into a board meeting and took control. The men he displaced were not fools. They were accomplished executives running a company that had dominated for so long that dominance felt like a property of the institution rather than the result of anything people still had to do.

The important word in Cohen’s passage is generation. It does not have to mean family. It means managerial generation.

The first generation discovers how the business works through necessity. The second learns from the people who made those discoveries. The third is trained in systems designed by people who learned from the people who made them. By then, an institution can know exactly what it does without many people remaining who understand why it worked. Ritual replaces judgment. Vocabulary replaces behavior. The cash flow is there because it has always been there.

Kodak is the clean version of one failure mode. A Kodak engineer built the first digital camera in 1975. The technology existed inside the building for decades, but the company’s culture could not carry out a strategy that threatened the film business paying everyone’s salary. Kodak did not lack intelligence or invention. It lacked an organization willing to turn those assets against the answer that had always worked.

Nike illustrates the other failure mode. Culture can block a necessary strategy, as it did at Kodak. But strategy can also hollow out the culture and capabilities needed to execute it, as it did at Nike.

A resilient culture avoids both mistakes. It changes without forgetting how to learn.

Strategy and culture meet in execution

The management literature has spent decades staging a contest between strategy and culture. The famous line, usually credited to Peter Drucker, is that culture eats strategy for breakfast. Drucker almost certainly never said it, which is a small lesson of its own about what institutions repeat after everyone has forgotten to check.

The contest is false.

Strategy decides where to win and what the company will do differently. Culture determines how thousands of people interpret those choices once the plan meets a customer, a competitor, a delayed shipment, a failed product, or a number that has turned red.

Culture is not the values printed in the lobby. It is what information travels upward, what behavior earns promotion, where authority sits, how quickly the company corrects an error, and whether the person closest to the work is permitted to contradict the person highest on the chart. A healthy operating culture does not punish red. It punishes concealed red.

That is where strategy and culture meet: execution.

Strategy without a supporting culture remains a promise. Culture without direction becomes motion without progress. A stale culture protects yesterday’s answer. A hollowed-out culture can no longer generate tomorrow’s. Both produce the same symptoms: slower learning, sanitized information, and results that drift before the income statement makes the drift undeniable.

The strategy that changed the organization

Nike’s drift did not begin with an outsider. That matters.

Mark Parker joined Nike as a footwear designer in 1979 and eventually became chief executive. Under Parker, Nike announced its Consumer Direct Offense in 2017 and stopped selling directly to Amazon in 2019. The logic was already in motion before the board chose John Donahoe, the former Bain consultant who had run eBay and ServiceNow, to succeed him in 2020.

Donahoe accelerated the shift under a program called Consumer Direct Acceleration. Three decisions followed, each rational inside the logic of the plan.

First, Nike realigned product creation and category work around men’s, women’s, and kids’ rather than organizing first around individual sports. Running and basketball did not disappear, but authority, integration, and attention shifted. Teams that had developed deep knowledge of particular athletes were asked to operate through a broader consumer construct, supported by a more centralized and data-driven model.

The reorganization looked simpler from the top. It was less clear what disappeared below it. A category team is not merely a box on an organization chart. It is where product judgment, relationships, argument, memory, and apprenticeship accumulate. When the box is removed, the work can be reassigned. The accumulated judgment is harder to move.

Second, Nike reduced wholesale distribution. In 2020 it reportedly closed nine accounts, including Dillard’s, Belk, Boscov’s, and Zappos; other retailers followed as the direct strategy expanded. The margin case looked compelling. Selling through Nike’s own stores and apps allowed the company to capture the retailer’s markup, own more customer data, and control more of the experience.

But that was gross-margin logic, not whole-system logic. Direct sales also bring fulfillment, returns, digital acquisition costs, retail labor, and inventory risk. More important, a retailer is not only a route to market. It is part of the company’s sensing system.

A specialty running store sees the shoe on a customer’s foot, beside the competition, through the eyes of an employee who fits runners all day. It hears why the loyal customer changed brands, which problem a new model solves, and which marketing claim collapses after three miles. Nike did not merely surrender doors. It weakened a distributed network of observation, interpretation, and trust.

Third, the company leaned on what already sold. Dunks, Jordans, and Air Force 1s carried the numbers while the innovation pipeline thinned. The products generated cash without requiring the organization to exercise the full muscle that had once produced them.

Cohen’s sentence again: the money would always be there because it always had been.

None of these decisions came from foolish people. That is the point. Each could survive a board presentation. Each could be supported by data. Together they moved Nike farther from the athlete, the retailer, and the product-level argument that had once made the company difficult to beat.

The organization became more legible from the top and less perceptive at the edge.

Someone else took the shelf

Running exposed the damage first because it depends heavily on specialty stores and because running was where Nike had built its original legitimacy.

When Nike gave up space on the running wall, Hoka and On filled it. Their growth was not marginal. Hoka’s net sales increased from roughly $353 million in fiscal 2020 to $2.23 billion in fiscal 2025. On grew from CHF 425 million in 2020 to CHF 3.01 billion in 2025.

At Dick’s Sporting Goods, transaction data showed Nike’s footwear share falling from 39 percent to 32 percent during the first five months of 2024, while On rose from 8 percent to 12 percent and Hoka from 8 percent to 13 percent.

The challengers did not beat Nike with a better corporate vocabulary. They used the playbook Nike had written: build for a particular athlete, earn credibility through specialty retailers, listen closely, and let performance create broader desire. The upstarts practiced the culture Nike had begun to describe in the past tense.

Nike’s direct strategy was also supposed to improve profitability. In fiscal 2015, before the direct push became the organizing thesis, Nike’s gross margin was 46.0 percent. By fiscal 2025 it was 42.7 percent, pressured by discounting, channel mix, and inventory reserves.

That comparison does not prove that direct-to-consumer caused every lost basis point. Foreign exchange, freight, tariffs, product costs, and mix all mattered. It does disprove the easy assumption that removing the retailer automatically improves the economics. Nike captured more of the ticket price and more of the inventory risk. When the product did not move, the markdown belonged to Nike too.

The shelf belongs to no one

The principle does not care whether the company is an incumbent or a challenger.

The 2025 channel data had already begun to turn. On’s sales in U.S. independent running specialty stores fell 19.7 percent in the twelve months through September, the steepest decline among the major brands. Hoka declined there too. On a year-to-date basis, Nike grew roughly 35 percent and the smaller Topo Athletic about 30 percent.

This does not mean On or Hoka are broken. Both continued to grow globally. It means the shelf never becomes an inheritance. The brands that used proximity and specialization to challenge Nike must now defend their own scale against companies using the same methods.

No one stays on top by repeating what got them there. Markets change. Competitors learn. Technologies alter the work. People retire, and their replacements inherit conclusions without living through the conditions that produced them. Sometimes the institution becomes arrogant. Sometimes it becomes cautious. Sometimes it simply forgets.

Sports fans know this without needing a case study. The Yankees, Alabama, the Patriots. Dynasties end because personnel turn over, the competition studies the film, and the game moves. The Patriots are the useful case for anyone who assumes the problem only arrives with outsiders. Bill Belichick built the system, stayed after the quarterback left and the league adjusted, and the system stopped working with the builder still in the chair. Founders overstay too. The lesson is not that founders are safe. It is that leadership has to keep moving, because the answer that built the institution is rarely the one that keeps it.

Culture is not nostalgia. It is not preserving every role, process, or leader because it existed during better years. It is preserving the organization’s ability to see clearly, learn quickly, exercise judgment, and change before the market changes it by force.

Technology can accelerate the mistake

Artificial intelligence does not change this pattern. It compresses the time available to recognize it.

The tempting logic in a cost-conscious institution is straightforward. An analyst takes eight hours. The model takes eight minutes. Remove the analyst. Apply that logic repeatedly and the organization becomes cheaper while losing apprenticeship, context, institutional memory, and the people who understand why a process exists.

The output does not immediately get worse. It gets smoother, faster, and more alike. Everyone has access to similar tools producing increasingly plausible versions of the expected answer. For a company whose advantage depends on seeing something competitors do not, average is not a safe outcome.

The better use of the technology runs in the opposite direction: automate the mundane, widen access to information, preserve knowledge that used to leave at retirement, and give capable people more time to exercise judgment. The enduring asset was never the process itself. It was the judgment that knew when the process was wrong.

Professionalize without sterilizing. Institutionalize without bureaucratizing. Scale without hollowing out.

That is the work.

The ones that kept relearning

None of this is a law of decline. Some institutions age and some keep relearning, and the difference is observable.

In the late 1980s Hyundai was a punchline in the American market. The Excel was cheap and fell apart, and the brand became a joke. The company’s response was not a new slogan. Beginning with the 1999 model year it backed its cars with a ten-year, 100,000-mile powertrain warranty that no one in Detroit or Tokyo would match. Chung Mong-koo, the founder’s son, took over Hyundai Motor that year and in 2000 made quality the operating obsession of the company, tying engineering and factory careers to the results. By 2004 Hyundai tied Honda in J.D. Power’s initial quality survey, second only to Toyota. Today its electric vehicles compete with anyone’s.

Samsung’s version was more theatrical. In June 1993 Lee Kun-hee gathered his executives in Frankfurt for a seven-hour meeting and told them to change everything except their wives and children. The mobile phone division’s defect rate the following year was nearly 12 percent. In March 1995 he had 150,000 of those phones piled in a yard at the Gumi factory, smashed with hammers and burned, in front of about 2,000 of the workers who had made them. The company that had built cheap imitations became the one Apple had to beat.

Both companies were second generation. Both had the money. Neither assumed it would always be there.

The test any leader can run is the one those two ran on themselves. Who in this company still touches the customer, and does their report reach me unsanitized? What behavior actually earns promotion here, as opposed to the behavior we say we value? When was the last time someone below me contradicted a plan and the plan changed? Which capabilities would we have to rebuild from scratch if the people who hold them left this year? And what are we still doing because it worked, rather than because it works?

A company that can answer those questions honestly has a culture. A company that cannot has a history.

The turn is evidence, not a verdict

Nike’s board brought Elliott Hill out of retirement in October 2024. He had started as an intern and spent thirty-two years at the company. He was not a founder, and his long tenure did not make him immune to the habits of a later managerial generation. What he did carry back into the building was operating memory the institution had misplaced.

Hill reorganized the company around sports, its “fields of play,” rather than treating men’s, women’s, and kids’ as the primary organizing logic. He rebuilt wholesale relationships, reduced classic footwear franchises by more than $2 billion during fiscal 2026, and put performance product back at the center of the company’s offense.

The first gains appeared where the thesis would suggest. Nike’s performance portfolio reached roughly $16 billion in fiscal 2026 and grew by high single digits in the first quarter of fiscal 2027. North America returned to modest growth. In independent running specialty stores, Nike’s 2025 sales rebound was the strongest among the leading brands.

That is evidence that proximity, product focus, and category expertise matter. It is not proof that the turnaround has succeeded.

Sportswear, Jordan Brand, and Greater China together account for more than half of Nike’s sales and remain under pressure. Overall revenue is still falling. The company now expects a high-single-digit decline for fiscal 2027. The October earnings release also introduced Pace, another operating-model transformation that will consolidate Nike into three geographies, open a new enterprise campus in India, reduce jobs, and target $2.5 billion in cumulative savings through fiscal 2031.

Some of that work may be necessary. Bureaucracy is not culture. Protecting every layer is not stewardship. A company in decline cannot preserve its cost structure as a museum exhibit.

The question is what the restructuring removes. Which layers merely delay decisions, and which translate local knowledge? Does the new structure make Nike only cheaper, or more capable? Those are the same questions from the section above, and they determine whether the strategy can survive contact with reality.

The risk is not that Nike will change too much. It is that the company will relearn the value of proximity in one part of the business while reorganizing it away somewhere else.

The Point Taken

The companies that Cohen's words about the failure of greatness describe did not necessarily run out of strategies. United Fruit had intelligent executives. Kodak had digital technology. Nike had capital, data, a global brand, and direct channels around the world.

What each lacked was a living system capable of telling the truth, preserving useful knowledge, and converting a plan into thousands of sound decisions. That system is culture.

It is easy to misunderstand culture as the soft side of management: morale, language, rituals, benefits, belonging. Those things can matter. The harder definition is more useful. Culture is the mechanism by which an institution decides what to notice, whose judgment to trust, how to respond to failure, and whether to adapt before the evidence becomes a crisis.

Every managerial generation inherits both an enterprise and an explanation for why it works. The explanation is usually incomplete. The obligation is to test it against reality before the market does.

Strategy is the promise. Culture is how the promise gets kept when reality refuses to follow the deck.

Every generation still has to earn the company it inherited.

© 2026 23.5 Strategies; The Point Taken™

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Bryan J. Kaus

If objectives are only good intentions they are worthless. They must degenerate into work.

Peter Drucker, Management: Tasks, Responsibilities, Practices

About a third of the way into Eliyahu Goldratt’s The Goal, a plant manager named Alex Rogo takes his son’s Boy Scout troop on a ten-mile hike.

At two miles an hour, the trip should be easy.

It isn’t.

Within minutes the troop is stretched out along the trail. The quick boys at the front keep pulling away. Alex keeps calling them back. The boys behind the gaps have to jog to close them, then fall behind again.

Eventually Alex finds the constraint.

Herbie.

Herbie is the slowest hiker in the troop, and he is carrying the heaviest pack. When Alex finally lifts it, he nearly drops it. Inside are sodas, candy bars, spaghetti, tuna, pickles and an iron skillet.

Telling the fast boys to walk faster does nothing. They simply get farther ahead. The troop arrives when Herbie arrives.

So Alex changes the system. He puts Herbie at the front, where the pace of the whole line becomes visible, and spreads the weight in his pack across the rest of the troop.

Herbie speeds up.

So does everyone else.

Goldratt used the scene to explain what became the Theory of Constraints. The output of a connected system is governed by its binding constraint, not by the average speed of its parts. Improve everything except the constraint and you can create enormous activity without adding much throughput.

It is a manufacturing lesson.

I have come to think it is also one of the most neglected lessons in capital allocation. Companies load Herbie’s pack all the time.

And in most companies, Herbie is not the one who packed it.

The Capacity We Rarely Model

Most of my career has been spent around businesses where capacity is something managers understand in their bones.

A refinery has a nameplate rating. So does a pipeline, a terminal, a compressor station or a power plant. No competent operator writes a plan assuming an asset can run beyond its physical limits indefinitely without consequence. If the system is constrained, you debottleneck it, reroute flow, add capacity, change the operating plan or accept less throughput.

Organizations often get different treatment.

A board approves a transformation. A sponsor approves a value-creation plan. Management approves an acquisition. Then the company launches a pricing program, a procurement initiative, an ERP implementation, an organizational redesign, a cost-reduction effort and three new growth priorities.

Examined one at a time, every one of them may make sense.

Then somebody has to do all of it.

I have watched this happen at more than one company. The same core group would be working the sale of an asset, the launch of a major project and the messaging around both, while still running the business and getting through another earnings cycle. Calendars compressed. Meetings overlapped. The tension was built into the system before anyone noticed it was there. It is rarely intentional, often accidental and frequently consequential.

Ask the simple question, who will actually do the work?, and the answer is usually some version of the same small group of capable people who are already running the company.

That is the point.

Every strategy is also a claim on organizational capacity.

We rigorously ask whether a project has enough capital. We model plant capacity, pipeline capacity, warehouse capacity and balance-sheet capacity, often to the decimal. Management capacity rarely gets a line of its own. It disappears inside an assumption called execution.

Private Capital Has Less Room to Assume

This matters particularly now in private equity.

For much of the last cycle, leverage and multiple expansion did a large share of the work. StepStone Group’s analysis of buyouts completed between 2010 and 2022 found those two factors accounted for 59% of returns.

That arithmetic has changed. Bain & Company summarizes it as “12 is the new 5.” A decade ago, a typical deal could return 2.5 times invested capital over five years on roughly 5% annual EBITDA growth. With today’s borrowing costs, lower leverage and record entry prices, the same return takes something closer to 10% to 12%.

If the capital markets do less of the work, the business has to do more of it. Revenue has to grow, margins have to improve, acquisitions have to integrate and technology has to produce something more than another implementation project.

And people have to do all of that.

Sponsors know it. In a 2022 Teneo study of 25 private equity firms and specialist recruiters, 94% of responding general partners rated portfolio-company leadership as very important, and on average they credited it with 53% of investment returns.

The same study found that attention did not follow belief. When a portfolio CEO began to underperform, firms waited an average of six and a half months before acting. From the first warning sign to a return to full productivity took roughly two years.

It was a small study, and I would not pretend any single percentage in it establishes causality. But the shape of the problem will be familiar to anyone who has spent time around a value-creation plan.

We can spend months diligencing a company, build an extraordinarily detailed model, negotiate the financing, stress-test the downside and write a hundred-page operating plan.

Then we hand much of its execution to a management team whose available capacity we never really underwrote.

We are very good at asking how much capital a plan requires.

We are less consistent about asking how much organization it requires.

That is not an HR question. It is part of the investment thesis.

Management Is Part of the Productive Asset

That can sound soft until you look at the economics.

Economists working with the U.S. Census Bureau examined management practices across roughly 35,000 American manufacturing plants. They found wide variation in how plants were run, much of it between plants owned by the same company. Those differences accounted for more than 20% of the variation in productivity across plants, as much as R&D or information technology.

An earlier randomized experiment made the relationship more tangible. Beginning in 2008, researchers provided free management consulting to a randomly selected group of Indian textile plants and compared them with control plants. Better practices in quality control, inventory and daily operations raised productivity by 17% in the first year.

Years later, the researchers went back. About half of the adopted practices had disappeared. Two of the most commonly cited reasons were managerial turnover and lack of director time.

Lack of director time.

It may be among the least glamorous explanations for lost enterprise value ever documented. It is also one of the most believable.

We are used to treating equipment, technology and intellectual property as productive capital. Management capability tends to get filed somewhere else: overhead, culture, organizational development, the HR agenda.

That filing is wrong. Management is part of the productive system.

Capacity Is Not Headcount

There is an obvious response to all of this. If an organization lacks capacity, hire.

Sometimes that is exactly right. But capacity is not the same thing as headcount, and capital is not the same thing as capability.

The infrastructure buildout around artificial intelligence is making that visible in physical form. There is no shortage of money for data centers and substations. But capital cannot install a substation. People do that, and the Bureau of Labor Statistics projects roughly 72,700 openings for electricians every year through 2035. When the Department of Energy surveyed power-generation employers for its 2026 employment report, the positions they found hardest to fill were in management.

The same is true inside a company. You can fund a pricing program, but money does not create commercial judgment overnight. You can buy software, but money does not redesign the process around it. You can authorize a new strategy, but money does not add ten hours to the CEO’s week.

People do not come with nameplate ratings. What someone can contribute changes with experience, clarity, authority, motivation, trust, workload, systems and the people around them.

A study published in The Quarterly Journal of Economics this year shows how much that matters. The economist Virginia Minni followed personnel records at a multinational with about 200,000 white-collar workers across 100 countries, and used routine manager rotations to see what happened when employees landed under managers who had been promoted unusually fast.

The better managers did not simply extract more output. They moved people. They recognized what workers were good at and shifted them, laterally and upward, into jobs where those skills were worth more. Years after the manager had moved on, those workers were still earning more and performing better.

That is a useful way to think about leadership. A good leader does not merely ask the same people for more. A good leader changes what the organization is capable of producing.

It is also why a team of twenty with ambiguous accountability can move more slowly than a team of ten that knows exactly who decides what. Fred Brooks made a version of the observation half a century ago: adding people to a late software project makes it later, because the new people have to be recruited, taught, coordinated and reviewed.

And who usually does that work?

The capable people you were trying to relieve in the first place.

A talented executive with five clear priorities, a strong team and genuine decision authority can create extraordinary value. Give the same executive fifteen “top priorities,” six steering committees, unclear accountability and a weekly procession of approvals, and within a year someone may conclude that the executive has an execution problem.

Perhaps.

Or perhaps Herbie is not the problem.

Perhaps management put too much weight in Herbie’s pack.

Find the Load-Bearing People

This becomes especially important in an acquisition.

Talent diligence naturally starts at the top. Who is the CEO? Who runs finance, sales and operations? Who is staying?

Those are essential questions. But enterprise value is not always organized according to the boxes on an organization chart.

McKinsey has described a serial acquirer that nearly lost an individual contributor at a target company before discovering that this person was the only employee who knew how to run an important process. The acquirer kept the employee at the last moment and found a serious blind spot in how it identified critical talent.

I think of people like that as load-bearing employees. Every experienced operator knows some version of them.

The scheduler who knows what really happens when a customer changes an order at four in the afternoon.

The engineer who remembers why the unit behaves differently from the manual.

The controller who understands why an odd accounting treatment exists, and what breaks if you remove it.

The project manager who knows which contractor will actually deliver and which one merely wrote the best proposal.

Their importance rarely tracks their title.

Companies keep asset registers. They rank equipment by criticality and identify single points of failure in physical systems. It is worth asking whether we understand our human dependencies half as well. An acquisition can be strategically sound and financially attractive and still lose the capability that made the thesis work in the first place.

Leadership Creates Capacity

This is where Goldratt’s parable becomes more interesting than the simple identification of a bottleneck.

Herbie does not get faster because Alex gives a motivational speech. The troop does not improve because the fast hikers demonstrate more commitment. The group gets faster because the leader finally understands the system around it.

Good leadership does not merely consume organizational capacity. It creates it, or destroys it.

Leaders create capacity when they remove work that no longer matters, and when they decide which priorities are actually priorities instead of announcing that all of them are. They create it when decision rights sit where the information sits, so every judgment does not travel two levels up and two levels back. They create it when they put their strongest people around the real constraint rather than spreading scarce talent evenly across everything, and when they build successors and move knowledge out of one person’s head before either becomes a crisis.

They protect attention, perhaps the scarcest resource a management team has and one of the most casually spent.

And they connect people’s work to something worth accomplishing. Motivation is sometimes treated as an engagement accessory applied after the serious work of strategy is done. It isn’t. People perform differently when they understand what they are trying to accomplish, why it matters, what they own and whether anyone trusts them to own it.

Clarity adds capacity. Confusion consumes it. So does a portfolio of projects that nobody had the nerve to rank.

Which is why strong leaders sometimes create capacity by doing something particularly difficult.

They kill a good idea.

Not because it lacks value, but because the organization cannot absorb it without sacrificing something more important.

That is capital allocation too.

Underwrite the Organization

I have been thinking about this more in recent conversations around private credit, middle-market infrastructure and private equity. There is substantial capital looking for under-optimized assets, businesses that have outgrown founder-led systems and platforms that can support another acquisition. Many of those are compelling theses.

But eventually someone has to turn the thesis into an operating result. Someone has to renegotiate the contract, integrate the acquisition, fix pricing, recruit the team and decide what not to do.

Operational alpha requires operators. Not simply people with operating backgrounds sitting adjacent to an investment, but enough execution capacity inside and around the company to carry the plan all the way through.

That should change what diligence asks.

Consider a line that appears, in some form, in a great many investment cases: plus $20 million of EBITDA from commercial excellence.

As written, that line is incomplete.

Who owns it, by name?

What capabilities does it require, and does the company have them today?

What are those people already doing, and what has to stop so this can start?

Where does the required knowledge actually reside?

Which decisions can management make without escalation?

What happens if the three most important people in the plan leave six months after close?

And the hardest question of all: are we underwriting what this organization can reasonably become, or what we need it to become for the model to work?

Those are not soft questions sitting beside capital allocation. They are capital-allocation questions. Management attention, experience and trust are scarce, and scarce resources deserve to be allocated deliberately.

What This Does Not Mean

None of this is an argument for accepting mediocrity.

Capacity can become an alibi. Every organization contains people who will describe almost any additional demand as overload, and a leader who accepts that answer reflexively will never learn what the team can actually do. Standards matter. Urgency is a legitimate management tool. Some of the best periods in an organization’s life come when people discover they are capable of considerably more than they thought.

Nor is the constraint always human. Sometimes the asset is wrong, the market moved or the commodity price destroyed the economics. A great management team cannot make every investment good, and no amount of organizational underwriting will rescue a thesis that was wrong on the numbers.

There is no precise hurdle rate for organizational capacity. Human systems are too complex for that, and any attempt to reduce them to a single metric would probably create more false precision than insight.

But the absence of a precise number is not a reason to assume the answer is yes.

The objective is not to ask less of people. It is to understand what we are asking of them, and to build an organization that gives them a reasonable chance of delivering it.

The Point Taken

The scouts in The Goal did not reach the campsite sooner because the fastest hikers got faster. They got there when the person leading them understood what governed the pace of the entire troop and changed the system around the constraint.

When a business falls behind its plan, the instinct is to demand more urgency. Sometimes that is exactly right. More often than we like to admit, the better question is whether leadership built a system capable of producing the result it is asking for.

Capital has a hurdle rate. Strategy has a capacity constraint.

Every acquisition makes claims on people who already have jobs. Every transformation competes for management attention. Every value-creation plan eventually reaches the same point, where a human being has to turn the idea into something real.

Great investors underwrite the economics. Great owners also underwrite the organization, and before committing another dollar or adding another initiative, they ask one deceptively simple question.

Who will actually do the work?

If there is no convincing answer, there is not yet a strategy, only an ambition.

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© 2026 23.5 Strategies; The Point Taken™

By Bryan J. Kaus

A banana does not look like the foundation of an empire.

That may be the most interesting thing about it.

Walk into almost any grocery store in America and there they are: cheap, familiar and remarkably consistent. We barely think about how far they traveled, how quickly they spoil or the machinery required to move a tropical fruit thousands of miles and set it on a shelf at roughly the right stage of ripeness.

That ordinariness is an achievement.

I recently read, Rich Cohen’s The Fish That Ate the Whale is ostensibly the story of Samuel Zemurray, the immigrant who built a fortune in bananas and eventually took control of the United Fruit Company. But the banana is almost incidental to the larger lesson.

The more interesting story is how extraordinary economic power gets built around an ordinary product.

Land, transportation, ports, ships, distribution, information, capital and political relationships all became part of the same commercial system. None explains United Fruit by itself. Together they created something much larger than a company that happened to sell fruit.

That is what makes the history useful, and uncomfortable. It is a story about entrepreneurship, certainly, but also about capital allocation, vertical integration, organizational hierarchy, global trade and the way commercial advantage can eventually become institutional power.

And that progression matters far beyond bananas.

Find the Market Inside the Constraint

Zemurray’s first insight was almost absurdly simple.

Bananas had to reach the United States green enough to survive distribution. Some inevitably ripened too quickly in transit. The larger operators treated those “ripes” as impaired inventory because there was no longer enough time to move them through the normal system.

Zemurray saw a different problem. The fruit still had value. It simply needed another route to market.

He bought ripes cheaply near the docks, moved quickly and sold them into markets close enough to consume them before they spoiled.

That is entrepreneurial instinct, but the lesson runs much wider.

Every established institution develops rules around what fits its economic model and what does not. Those rules are necessary. Scale depends on standardization. A railroad, refinery, bank, manufacturing plant or distribution network cannot be reinvented around every individual transaction.

But standardization also creates blind spots.

An odd lot may be uneconomic for one operator and attractive to another. A customer may be too small for one company’s cost structure and exactly right for someone else. A manufacturing line that looks obsolete in one portfolio may become highly valuable under an owner with a different product mix. A piece of infrastructure can look stranded until someone connects it to another market.

We see versions of this constantly in energy. A barrel that is disadvantaged at one refinery may be advantaged at another because the crude slate, conversion equipment or transportation economics are different. A terminal that looks marginal on a standalone basis may become strategically important once it completes a logistics network. What looks like waste from inside one system can look like value from another.

The useful question, then, is not always simply what the market wants.

Sometimes it is: what has the existing system decided is not worth dealing with, and why?

There can be a great deal of money hiding in that answer.

The Banana Business Wasn’t Really About Bananas

Selling ripe fruit could make Zemurray rich. Building a durable enterprise required something else.

Bananas were perishable. Production sat thousands of miles from the customer. Timing mattered almost everywhere. A good crop meant little if it could not reach the port. A ship meant little without reliable volume. A plantation depended on transportation, communications and distribution that were at least as important as the fruit itself.

The answer was vertical integration.

By the early 1950s, United Fruit was far more than a grower of bananas. It controlled roughly three million acres, employed around 90,000 people and operated about 1,500 miles of railroad, some 65 ships, multiple ports and its own telecommunications network.

That is more than a fruit company. It is an operating system built around fruit.

The distinction matters because the same logic appears in industries that look nothing like agriculture.

A refinery can have excellent conversion capability, but crude access and product logistics determine much of what that capability is worth. A power plant can have attractive generation economics and still be constrained by transmission. A semiconductor designer can own world-class intellectual property and remain dependent on fabrication, packaging, power, equipment and logistics controlled by others. A retailer may appear to compete through merchandise while much of the actual advantage sits in distribution, inventory visibility, purchasing power and customer data.

The product is important.

But the system often determines who captures the economics.

That is why the strategic question is not simply whether the product is good. It is which interfaces around the product determine whether value can actually be created—and who controls them.

The answer does not always argue for ownership. There are plenty of businesses that destroy value by integrating into activities they do not need to own. Capital gets trapped. Management attention gets diluted. Complexity begins masquerading as strategy.

The harder question is which interfaces are so important that you cannot afford to misunderstand them, lose access to them or leave their economics entirely in someone else’s hands.

That is a different test.

Zemurray understood those interfaces partly because he stayed close to them. He knew the plantations and the ports. He understood the product physically, not merely financially.

That discipline gets harder as organizations grow.

A plant manager experiences an outage differently from the executive reading the monthly variance report. A salesperson hears a customer’s hesitation before it shows up in market share. A trader sees an emerging dislocation before it becomes a line in a strategy deck. A lender may see leverage building in a borrower before management has accepted that the business model itself has changed.

Hierarchy is necessary. Large institutions cannot function without abstraction.

But abstraction has a cost.

Every layer between the underlying business and the person making the decision creates another chance for reality to be summarized, interpreted and sometimes sanitized on the way up.

The point is not that the CEO should run the loading dock.

It is that the people making consequential decisions need enough proximity to recognize when the spreadsheet and the loading dock have started telling different stories.

Assets Matter. Connections Matter More.

Once enough of the system sits under common control, the pieces begin reinforcing one another.

Land supports production. Rail moves production toward the ports. Ports support shipping. Ships support distribution. Distribution creates volume. Volume justifies additional infrastructure, which creates still more advantage.

That is how commercial systems become powerful.

And it is why companies are so often misunderstood when they are evaluated asset by asset.

A collection of good assets is not necessarily a good system. The value may live in the connections between them.

This distinction matters enormously in capital allocation.

An acquisition that adds another plant simply because management wants more capacity is very different from an acquisition that closes a geographic gap, adds a customer channel, unlocks stranded production or improves the economics of assets already owned.

The same principle shows up in private equity. A platform becomes more interesting when each bolt-on strengthens procurement, distribution, customer density or operating leverage. It becomes less interesting when acquisition volume substitutes for actual integration.

It shows up in infrastructure as well. A pipeline, terminal or transmission asset may look only moderately attractive in isolation but become disproportionately valuable because it completes a network. Conversely, an impressive collection of disconnected assets can consume huge amounts of capital without ever creating real system-level advantage.

There is a difference between owning many things and owning things that make one another more valuable.

Capital is part of the connective tissue.

Scale gave United Fruit the ability to finance infrastructure whose economics might have been difficult to justify asset by asset but became compelling inside the larger system. That capability itself became an advantage: the company could build things others could not, connect markets others could not easily reach and continue reinforcing the network.

A superior network can carry an average asset.

That is why anyone allocating capital—management, boards, investors, bankers or private owners—should be asking a fundamental question when evaluating growth:

Does this strengthen the system, or just make it larger?

Those are not the same thing.

United Fruit understood reinforcement about as well as almost any company of its era.

But reinforcement contains its own tension.

The more economically central a system becomes, the more other people begin depending upon it.

And dependency is where commercial advantage begins to take on the characteristics of an institution.

When Advantage Becomes Power

United Fruit did not operate in a vacuum.

Its footprint across Central America brought enormous commercial capability into countries where state capacity, infrastructure and access to capital were often limited. The company owned land, built or controlled transportation and operated ships that connected production to international markets. It employed large numbers of people and interacted constantly with governments whose decisions materially affected its economics.

The complexity is that much of this infrastructure created real value.

Railroads connected production to markets. Ports and ships connected countries to trade. Employment, communications and company-built services filled gaps that governments often could not.

That is partly why the system became so powerful.

Dependency rarely forms around something that has no value.

The tension emerges when the provider of something economically important also controls the terms on which others can access it.

We see versions of that problem throughout economic history.

A railroad can open a region to commerce and simultaneously acquire enormous bargaining power over the producers who depend upon it. A pipeline can unlock a producing basin while becoming the critical route to market. A financial exchange can create liquidity while controlling an essential market interface. A technology platform can make thousands of other businesses possible and, precisely because of that usefulness, gain enormous influence over how those businesses reach customers.

Value creation and concentration of power are not opposites.

They can grow together.

That is what happened around United Fruit.

The result eventually became more than business influence. It became political power.

Zemurray himself helped return Manuel Bonilla to power in Honduras in 1911, after which his business received favorable concessions. Decades later, United Fruit’s interests became entangled with the conflict surrounding land reform in Guatemala and the U.S.-backed overthrow of Jacobo Árbenz in 1954.

The honest version is more complicated than saying a banana company simply dictated American foreign policy. Cold War fears were real. Guatemala had its own political divisions. Washington had its own strategic motivations.

But it is equally difficult to tell the history honestly while pretending United Fruit’s commercial interests, lobbying power and political relationships sat somewhere outside the story.

They were part of the system too.

This is where the strategic case becomes a governance case.

The rules change as power accumulates.

Resourcefulness in a company fighting for survival looks very different once other people depend upon that company. Hard negotiation between roughly equal parties means something else when one side owns the infrastructure the other side needs. Political access can help a company explain its interests and navigate regulation; it can also slide into dependency, favoritism or capture.

The instrument may be the same.

What changes is the context in which it is being used.

That is difficult because organizations are taught to repeat what works. Find the advantage, institutionalize it, scale it.

But leadership sometimes requires recognizing that the behavior responsible for building the institution is no longer appropriate once the institution itself has become powerful.

The challenger becomes the incumbent.

The outsider becomes the institution.

And eventually the institution becomes powerful enough that its decisions rearrange the environment for people who never chose to participate in its strategy.

At that point, strategy begins to overlap with governance.

Nature Gets a Vote

For all the land, railroads, ships, capital and political leverage accumulated around the banana trade, one participant in the system remained outside anyone’s control.

Nature.

The early export industry depended heavily on a variety called Gros Michel until Panama disease tore through plantations across Central America and the Caribbean.

The industry’s answer was another banana: Cavendish, which was resistant to the strain destroying Gros Michel and eventually became the dominant export variety.

Gros Michel did not actually go extinct, despite how the story is sometimes told. Nor is Cavendish the world’s only banana. There are many varieties of bananas and plantains.

But the export system standardized heavily around Cavendish.

Today another strain of Fusarium wilt, Tropical Race 4, threatens Cavendish production and other varieties.

There is something humbling in that.

Human beings built an extraordinarily sophisticated global commercial system around a biological product. They optimized logistics, standardized production, built infrastructure and concentrated capital.

Then biology changed the assumptions anyway.

That same reminder appears in different forms throughout business. Commodity cycles overwhelm the economics of carefully engineered assets. New technology erodes an advantage that once looked structural. Weather changes agricultural economics. Regulation changes the value of infrastructure. Consumer preferences move faster than installed capital can adjust.

Strategy is partly about exerting control over uncertainty.

Good strategy also requires knowing what remains outside your control.

The lesson is not that integration or standardization were mistakes. They helped turn a fragile tropical fruit into one of the world’s great traded commodities.

The lesson is that control is never quite as complete as it looks from inside the system.

Building Power Is Different From Governing It

That brings me back to Zemurray.

It would be easy to turn The Fish That Ate the Whale into another parable of the immigrant businessman who started with little, saw what others missed and eventually outmaneuvered one of America’s most formidable corporations.

There is truth in that version.

It would be equally easy to tell the story entirely as one of exploitation, corporate imperialism and interference in other people’s countries.

There is truth there too.

Neither is sufficient.

What makes the story worth studying is the tension between them.

Zemurray saw value in assets other people dismissed. He moved faster than larger institutions. He understood operating reality. He grasped that controlling the interfaces around a product could matter more than simply producing more of it.

Those are real lessons.

Naming them does not require excusing what the system did to people who absorbed its consequences.

The system explains the behavior. It does not absolve it.

The same appetite for advantage can produce very different consequences at different scales. The instinct that lets a challenger bend a constraint toward opportunity becomes something else once the challenger is powerful enough to bend the constraint toward itself.

That distinction matters well beyond United Fruit.

A founder fighting for distribution has a different relationship with a channel than the company that eventually controls it. A lender trying to protect its capital occupies a different position once it becomes indispensable to a borrower. An investor pressing management for discipline has a different responsibility once it effectively controls the board. A company that depends upon government policy has a different obligation once it has enough influence to shape the policy itself.

Scale changes the relationship.

The qualities required to build power are not sufficient to govern it.

Building takes ambition. Scaling takes systems. Allocating capital takes judgment. Governing a powerful institution requires something more: the discipline to recognize when not to take an advantage merely because it is available.

Power can compel cooperation for a while.

Durable institutions eventually need legitimacy as well.

That is not timidity, and it is not leaving value on the table because management lacks the nerve to act.

It is recognizing that some forms of value extraction weaken the system on which the long-term value depends.

That is not a soft distinction.

It is strategy.

Worth Reading

I recommend The Fish That Ate the Whale.

Not because Sam Zemurray belongs on a pedestal, and not because Cohen’s book is the last word on United Fruit, Central America or American foreign policy.

Read it because the story is messy.

Business is messy, and history is messier.

The book holds entrepreneurship and exploitation, innovation and concentration, global trade and local consequence in the same frame. Sometimes those contradictions exist inside the same institution. Sometimes they exist inside the same person.

That is more useful than the sanitized version of business history where the successful conveniently turn out to have possessed exactly the virtues we wish successful people possessed.

The point is not to copy Zemurray.

It is to understand the mechanics.

How does someone see value others have missed? Where does the real economic advantage sit? Which assets reinforce one another? How does capital turn isolated capabilities into a system? When does commercial leverage become institutional power? How does hierarchy change what leaders can see? And what obligations follow once an institution becomes powerful enough that other people must organize themselves around it?

Those are not questions only for founders.

They belong to the student trying to understand how markets develop; the manager trying to make an organization work better; the board deciding where capital should go; the investor deciding whether a collection of assets actually constitutes a strategy; the banker deciding where risk really sits; and anyone interested in how business institutions become consequential far beyond the products they sell.

They are every bit as alive today as they were when the product happened to be a banana.

The Point Taken

Great businesses rarely win on the product alone.

They win because they understand the system that allows the product to create value and build advantage at the interfaces that matter most.

That is the strategic lesson.

But success changes the problem.

The system that creates advantage can create dependency. Scale that lowers cost can concentrate power. Infrastructure that opens markets can also become a chokepoint. Capital that accelerates growth can reinforce the wrong things just as easily as the right ones.

The task, then, is not merely to build.

It is to understand what you are building as it becomes larger than the original product.

Put capital where the pieces genuinely reinforce one another. Stay close enough to the work to know what is actually happening. Understand which interfaces create value and which create vulnerability. Recognize when scale has changed the bargaining relationships around you.

And notice when winning has changed the nature of the institution itself.

Building power is one skill.

Knowing how to govern it is another.

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© 2026 23.5 Strategies; The Point Taken™

The limit to the size of the firm is set where its costs of organizing a transaction become equal to the cost of carrying it out through the market.

Ronald Coase

The Census Bureau counted 531,728 business applications in the United States in August.

That number caught my attention, though not because I think 531,728 new companies suddenly opened their doors. They didn’t.

The Bureau is careful about the distinction. A business application signals that someone may be preparing to conduct business. Separately, Census estimates how many of those applications are likely to become businesses with payroll tax liabilities. For the August cohort, that estimate is 28,501 within four quarters.

Those two numbers measure different things. Divide one by the other, call the result a national startup success rate, and you have a good social-media graphic and bad analysis.

But there is a useful truth inside the distinction.

Starting something and building something are not the same thing.

I have been thinking about that a lot lately because I am living some version of it myself.

Part of my time goes to advising businesses, studying companies and capital allocation, and talking with management teams about growth, integration and the ordinary operating problems that never make the press release. The other part goes to actually building things: an advisory firm, research systems, publishing platforms, and a few commercial ideas that began the way most businesses do, with somebody staring at a blank page and deciding whether there is enough there to make something real.

The difference between doing that today and doing it twenty years ago is remarkable.

I can sit at a desk on a Sunday morning and acquire capabilities that once required a surprisingly large organization. Research a market. Build a financial model. Design a website. Draft an agreement. Analyze competitors. Set up payments. Stand up a CRM, produce the sales material, test the idea and start reaching customers before the coffee is cold.

Some of that is AI.

A lot of it isn’t.

Cloud computing replaced the server room. Software-as-a-service replaced installed systems and much of the infrastructure required to run them. Shopify and Amazon collapsed the cost of distribution. Stripe simplified payments. Canva democratized design. LinkedIn changed prospecting. Contract manufacturers, outsourced logistics and fractional professional services let a company rent capabilities that once had to sit inside it.

Artificial intelligence is simply pushing the same logic further into cognitive work.

The result is extraordinary.

The cost of acquiring the capabilities of a company has fallen dramatically.

The cost of building a good one has not.

The Company You No Longer Have to Own

Ronald Coase asked a deceptively simple question nearly a century ago: if markets are so good at coordinating economic activity, why do firms exist at all?

His answer was that markets have costs.

Someone has to find the supplier, negotiate the terms, write the contract, monitor performance, coordinate timing and sort out the problems when the thing that arrives is not quite the thing that was ordered. Sometimes it is cheaper and more reliable to put those capabilities inside the company than to buy them, again and again, from outside.

That idea still holds.

What has changed is the arithmetic.

Technology has been lowering the cost of coordinating outside capability for decades. It is easier now to find expertise, evaluate suppliers, communicate, monitor work and buy specialized services without putting all of those people on one payroll.

So the efficient boundary of the firm can move inward.

From a capital-allocation seat, that can be a very good thing.

The purpose of a business is not to accumulate employees or own every capability it uses. Size has never been evidence of quality.

A company that turns fixed cost into variable cost, preserves flexibility and reaches excellent outside capability without giving up quality may build a better economic model than one that owns everything because that was simply how companies used to be organized.

Return on invested capital can improve. Break-even points can fall. The business keeps its optionality, and management can point scarce capital at the few things that actually create advantage instead of rebuilding commodity functions in-house.

That is the financial case for the smaller modern firm.

It is a good one.

But it hides a trap.

Renting capabilities is not the same thing as building capability. Having access to the functions of an enterprise is not the same thing as creating one.

The website can be excellent. The analysis can be sophisticated. The software can work. The deck can look like it came from a company with three floors in a downtown tower.

Then Monday morning arrives, and someone still has to get a customer.

Tuesday morning arrives, and someone has to deliver what was promised.

The invoice has to be collected. The next customer has to show up. Quality has to hold. The economics have to survive taxes, slow stretches, working capital, a few bad decisions and the occasional customer who treats “net 30” as a philosophical suggestion rather than a payment term.

If the business is going to grow beyond the founder, eventually somebody else has to know what good looks like.

That is when it starts to get interesting.

The Bottleneck Moves

Markets teach the same lesson over and over: when something becomes abundant, it stops being a source of advantage.

There was a time when simply having a professional website meant something. Good design cost real money. Sophisticated analysis required specialized people. Software required engineers. Distribution required physical infrastructure. Even access to information could be an edge.

Those things still matter.

They just tell you less than they used to about the company behind them.

A beautiful website can sit in front of a wonderful business or a terrible one. The website does not know the difference.

The same is becoming true of competent writing, ordinary software, market analysis, polished presentations and a long list of administrative work.

When the inputs become abundant, scarcity moves.

It moves toward judgment: which problem is actually worth solving.

Toward trust: whether a customer will put money, reputation or career risk in our hands.

Toward execution: whether we can do tomorrow what we promised yesterday.

Toward capital allocation: which opportunity earns another dollar, another hire or another month of management attention.

And toward leadership: whether capable people can make good decisions without routing every one of them back through a single person.

Those have always been scarce capabilities.

Technology is simply making them easier to see.

We have democratized the tools of entrepreneurship far faster than the disciplines of enterprise.

I Know the Temptation

This is not a criticism I am making from the outside.

I understand the temptation because I am in it.

The tools let me do things myself that I would once have handed straight to someone else. Often that is the right answer.

Why add permanent cost when technology can do the job well?

Why build an internal capability before demand justifies it?

Why hire ahead of the economics because an org chart says a company of a certain size ought to have that function?

I am biased toward keeping fixed costs low until the economics prove they deserve to become fixed.

Capital should earn its place.

So should organizational complexity.

But there is another side to that discipline.

The ability to do something yourself can become an excuse never to build the organization that could do it without you.

That is its own kind of capital-allocation mistake.

The scarce capital in a young business is not only cash.

It is management attention.

When every meaningful decision, every customer relationship, every pricing question, every quality issue and every exception ends up on the founder’s desk, the company has concentrated its most important operating risk in its most expensive and least replaceable resource.

The founder.

AI can make that founder extraordinarily productive.

That does not solve the problem.

It can hide it.

A highly capable person surrounded by increasingly capable technology can produce the output of an organization while remaining the nerve center through which everything important still passes.

Every difficult sale comes back to the founder.

Every strange customer issue comes back to the founder.

Every real judgment comes back to the founder.

Every new opportunity competes for the same calendar.

The business gets more productive.

The founder gets busier.

And the enterprise quietly grows more dependent on one person, not less.

There is nothing wrong with that, as long as you know what you have built.

The danger for the founder may not be that AI replaces him.

It may be that AI makes him so productive he never has to replace himself.

Business Is Not a Headcount Contest

This is where the argument needs some discipline.

America has nearly 30 million businesses without paid employees. They generated about $1.7 trillion in receipts in the Census Bureau’s 2022 data.

Those are not pretend businesses.

A consultant with no employees can have a very good one. So can a carpenter, chef, designer, writer, tradesperson or adviser who deliberately organizes around personal skill and reputation.

There is dignity and real economic value in that.

Scale is not virtue.

Neither is complexity.

I have seen enough large companies to know that adding people can just as easily add meetings, handoffs, misaligned incentives and fresh places for accountability to disappear.

The question that matters is what the owner is trying to build.

If you want a craft practice that produces an excellent income and gives you control over your life, build that.

If you want a business whose distinguishing asset is your own skill, protect that.

But if you want a company that eventually outgrows your own capacity, the test changes.

It stops being:

Can I do this?

And becomes:

Can the organization do this?

That transition is harder than forming the LLC, standing up the website or shipping the first product.

It is also where much of the value is created.

From Founder Leverage to Enterprise Leverage

I think about this as the difference between founder leverage and enterprise leverage.

Founder leverage makes one person dramatically more productive.

That is what the new tools do exceptionally well.

Enterprise leverage lets the organization create value without that person’s continuous, direct intervention.

Eventually you need both.

A useful test starts with demand.

Would customers still arrive if the founder stopped personally creating every opportunity?

Then delivery.

Can someone else, or some system, produce work at a standard the founder is willing to put his name behind?

Then economics.

Does the business throw off attractive cash after paying for the people and systems required to run it properly?

That one matters more than it looks.

Apparent margins built on unpaid founder labor are not business margins.

They are compensation the founder has not yet accounted for.

Then judgment.

Can people make ordinary but important decisions without turning the founder into an approval queue?

Then institutional memory.

When the company learns something expensive, does the lesson become part of how the company operates, or does it stay trapped in one person’s head?

And finally the simplest test of all:

What happens if the founder disappears for sixty days?

Not permanently.

No dramatic succession event.

Take a long trip. Get sick. Spend two months buried in a book or camped at a customer’s site. Pick your reason.

Do customers still get served?

Does cash still get collected?

Can suppliers resolve a problem?

Does anyone understand the economics?

Can people tell an exception worth escalating from one they should simply handle?

Does the company slow down?

Or does the machinery stop?

That answer tells you something headcount cannot.

It tells you whether you have built leverage around the founder or leverage beyond the founder.

Good Leadership Changes the Arithmetic

This is also where entrepreneurship becomes a leadership problem.

Founders get rewarded early for exactly the behavior that constrains them later.

Move fast. Solve everything. Know the customer better than anyone. Catch the mistake. Make the sale. Jump into the problem. Protect the standard.

Indispensable when the business is small.

A ceiling when it is not.

The fix is not simply delegation.

I have always thought “just delegate more” misses most of the real issue.

Delegation without standards is abandonment.

Delegation without information is guessing.

Delegation without authority is theater.

Delegation without trust just means the founder redoes the work afterward.

Good leadership builds the conditions under which judgment can move outward.

People need to know what matters. They need enough context to make intelligent trade-offs. They need to know where their authority begins and ends. They need to know what a good outcome looks like.

And they need to believe that an honest mistake made while exercising sound judgment will be treated differently from carelessness.

That takes time.

There is no prompt for it.

Technology can help document the process.

Leadership is what turns the process into an institution.

The Financial Question Beneath the Organizational One

There is a financial reason to care about all of this.

Businesses are assets, and the quality of an asset depends in large part on how durable and predictable its cash flows are.

If revenue disappears when one person steps away, the cash flow carries key-person risk.

If every incremental dollar of revenue demands another equivalent hour of founder labor, scalability is limited.

If quality erodes every time volume rises, growth destroys value instead of creating it.

If the business needs more permanent overhead than its economics can support, scale becomes a liability.

And if the founder adds people mainly to look larger, fixed cost eats the very optionality that made the company attractive.

So the objective is not to build a big company.

It is to build the smallest organization capable of reliably creating the value you intend to create.

Own what differentiates you.

Rent what does not.

Automate what should be automated.

Standardize what should be repeatable.

Keep judgment close enough to the work to stay intelligent, and distribute enough of it that one person never becomes the operating system.

That is good leadership.

It is also good finance.

Technology May Help Build the Institution Too

There is an obvious objection to all of this.

The same technology making it easier to start a business may also make it easier to build the systems that turn one into an enterprise.

I think that is probably true.

AI can help document processes, train people, preserve institutional knowledge, monitor quality, automate the back office and put specialized expertise within reach of a small team.

Organizations that once needed a bureaucracy to do those things may soon do them with a handful of people.

That is exciting.

The company of the future may employ fewer people, own fewer support functions and rent far more capability than the twentieth-century corporation did.

That does not make it less of an enterprise.

It changes what the enterprise has to own.

The most valuable thing inside the company may become less the capability itself than the judgment required to coordinate it.

The system can generate the analysis; someone decides whether it makes sense.

The software can recommend a price; someone understands the relationship with the customer.

The model can produce a staffing plan; someone remains accountable for what kind of institution results.

Technology can distribute information. It can support judgment. It can automate more of the routine every year.

It cannot remove responsibility.

That part stays ours.

The Point Taken

This is an extraordinary moment to start something.

That deserves to be said plainly.

People can reach capabilities that used to require serious capital, a payroll and real infrastructure. The barriers to experimentation are lower than they have ever been, and the ability of one talented person to turn knowledge into economic activity has probably never been greater.

I am benefiting from it too.

But building a business is still different from assembling its parts.

Customers still have to trust you.

Promises still have to be kept.

Cash still has to be managed.

People still have to know what good looks like.

Capital still has to be allocated.

Someone still has to decide when the facts are incomplete.

And if what you want is an enterprise rather than a more productive version of yourself, the organization eventually has to carry weight without your hands underneath every piece of it.

Technology is moving the boundary of the firm.

It may sharply reduce the amount of organization required to create value.

That is progress.

But the disciplines that let a business endure stay stubbornly familiar: trust, judgment, execution, capital allocation, and the willingness to build a system strong enough to run when the founder is no longer standing in the middle of it.

Starting is increasingly a transaction. Building is still a discipline.

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© 2026 23.5 Strategies; The Point Taken™

By Bryan Kaus

Twenty-five years is a strange threshold. Long enough for memory to begin becoming history, but close enough that those of us who lived it can still feel the weather.

Millions of people will offer reflections today. I wondered what mine could add. Still, I felt compelled to say something. September 11 was too profound, and remembrance is not made less meaningful because it is shared. Remembering is not a performance, and it is not a contest for the truest grief. It is a right, and for those of us who watched the world change in real time, it is very nearly a need. The shock of that morning was not something we read about later. It was the floor going out from under an ordinary Tuesday, the disbelief that came before the grief, the slow and terrible understanding that it was real and would not be undone.

Every generation has its trying times. The ones before us lived through world wars, economic panics, famine, the Great Depression, the Dust Bowl, Vietnam, political violence and staggering technological change. My generation holds no monopoly on suffering, or on innocence lost. To be honest, history has never spared anyone its confrontation with uncertainty.

But this was ours.

We did not all live it the same way. Some were inside those towers, or buckled into those planes, or climbing the stairwells in turnout gear. Some were in the city, close enough to breathe it for weeks. Others of us were far away and safe by no virtue of our own, watching from a classroom or a kitchen or the front seat of a truck. Those of us who were fortunate still had our worlds shaken and our innocence taken, and that is worth saying plainly. The memory of that morning is one thing we all share and, at the same time, a different thing carried inside each of us, marked by exactly where we were standing when we learned the world had changed.

For many in my generation, it marked a profound loss of innocence. For the country, it shattered a sense of invulnerability: the belief that we were somehow above the fray, insulated from the ills of the world and the worst ugliness of human nature.

We had come of age in the can-do optimism of the 1990s. The Soviet Union had fallen. The internet seemed to open an unlimited future. The economy boomed. Even the federal budget was balanced. America appeared to have won something larger than a war. We may have believed we had won history itself.

The fractures were already there: financial bubbles, corporate malfeasance, unresolved injustice and the consequences of our own power in the world. But the veneer held.

Then that morning.

I can still see myself in Ms. Ivens’s social studies classroom, second floor of the history wing. It was a beautiful, sunny late-summer morning in rural Hunterdon County, the kind of day when the biggest thing on your mind is whether you finished the reading for the lesson. She had begun the lesson, then another teacher knocked at the door and summoned her to another office where they were listening to the news on the radio. We thought it was weird that she had left. She came back to the room stunned and crying. “Oh my God.”

We did not understand.

Another teacher brought a television to an adjacent classroom and connected it to an antenna. Several of us made our way to that room. I remember watching CBS, Channel 2, which remained available through its backup transmitter at the Empire State Building while other channels broke into static.

A plane had also hit the Pentagon? What the hell was going on? We were under attack? How was this possible? Who could possibly do such a thing? Where were they going to hit next?

Our focus was largely on NYC, because it loomed so large to us suburbanites living in the shadow of the great megalopolis. We had always felt somehow safe in the ruralness of the New Jersey countryside, “The Slice,” as one teacher had termed it, an idyllic slice of paradise adjacent to the greatest city on earth. It was a myth, and it shattered in that moment.

Someone wondered aloud how long it would take to repair. And just then the South Tower fell. Our young minds could not hold what we had just seen. Then someone insisted that surely everyone had gotten out. Another person said it would be strange to see the skyline with only one tower. People leaned closer to the screen, as if our eyes had deceived us, as if it had been some trick of the light.

Then the second tower fell.

Silence. Deafening silence.

Then a furious vice principal came and had the teachers shut the television off. I drifted out into the hallway and into Mr. Mazetta’s sophomore chemistry class, where I was supposed to have been at least a half hour before. Most did not know what had happened. Those of us who had found our way into Miss Vandervleet’s history room were some of the only ones who had seen it. There were searching looks across people’s faces as I walked in.

“They’re gone.”

That was all I could say. Disbelief, anger, uncomfortable laughter, the kind that has no rational grounding, the kind of response people can have when they are literally in shock.

Remember, this was before a live feed sat in every hand. Information arrived in fragments, and the loudspeaker was our window to the world beyond that classroom, a world that had changed in the space of a morning and would never change back. Its crackle broke the quiet, and a name followed, then another, students called down to the office. Many were simply being picked up by frightened parents. But plenty of children in our community had parents who worked in the city, some in Lower Manhattan, some in those very towers. A small change in routine spared some lives. Other parents never came home, as was true at far too many tables across the tri-state area and beyond.

A solemn veil settled over us that day. I don’t know that it was ever entirely lifted. Perhaps it simply evolved.

In the days that followed, we kept reaching for the newest details, as if enough information might somehow make the thing make sense.

Today there are adults in the workforce who were not yet born when this happened. What we watched unfold in real time is archival footage to them. What remains a visceral memory for some of us is a historical event to them.

That is why we build memorials. Why we write things down. Why we study history, return to our own experience and challenge what we believe we remember. “Never forget” cannot be only an annual instruction. It is a responsibility to preserve the human beings inside the history.

Betty Ong, the flight attendant aboard Flight 11 who stayed on the telephone, calmly relaying what was happening.

Todd Beamer and the passengers and crew of Flight 93, who learned what had happened elsewhere and decided to act. “Let’s roll.”

Battalion Chief Orio Palmer, who carried some 50 pounds of gear up 37 flights to reach the 78th floor of the South Tower, and who radioed that there were two pockets of fire he believed they could knock down with two lines. Even there, with minutes left, he saw work that could be done and people who might still be saved.

Melissa Harrington-Hughes, 31 years old and trapped on the 101st floor of the North Tower. She called her husband in California. It was still early there, and he did not answer. So she left him a message, telling him that she loved him and always would.

They were among the nearly 3,000 people killed that day, each with a name, a family, a history and a future that should have been theirs.

We remember those who survived and still carry the scars. We remember those who ran toward the danger. We remember those who searched the wreckage and later sickened and died from what they breathed. We remember the families for whom this is not history at all, but an absence twenty-five years long.

There is no justice equal to this kind of loss.

Accountability matters. Evil cannot be allowed to pass unanswered. But no punishment, no war, no verdict, no memorial and no explanation returns the dead to the people who loved them. Nothing restores a family to breakfast that morning. Nothing carries us back to the ordinary morning before any of this began, when those lives still held plans, expectations and an unwritten future.

The ledger never balances.

Perhaps that is the hardest truth that emerges from any tragedy. We want justice. We want to get even. We want the pain visited on those responsible to somehow equal the pain they inflicted on us. That desire is human. But no act can cancel another or wash away the grief of those left behind. However necessary accountability may be, it cannot, for all of its intent, resurrect the dead or restore innocence.

It is okay to be angry. It is okay to be broken, to grieve, to be confused, to feel betrayed. Those feelings are not failures of resilience. They are evidence that something irreplaceable was taken.

There is no fully making sense of it. We can study the causes, trace the failures, assign responsibility and examine everything that followed. We should. September 11 pierced assumptions about the safety of our systems and the reliability of our institutions. The years afterward challenged our confidence in our own judgment, and honest remembrance requires that humility. But understanding how a thing happened does not make the horror reasonable, and there does not need to be a grand conspiracy behind human failure. Human beings and human institutions are imperfect enough.

Humanity is capable of profound evil. We have seen it in Oklahoma City, at the World Trade Center, and in wars that have ravaged the face of the earth for centuries. We see it still. Violence destroys the innocence of those who live through it and leaves its consequences to generations not yet born.

That truth should humble us. The people who committed these atrocious acts were human beings. That does not forgive them. It states a fact. So were the people who ran toward the towers, who fought back aboard Flight 93, who opened their homes in Newfoundland, who searched the wreckage, who called someone they loved in their final moments.

Humanity contains both capacities. We need to remember that.

That is what makes hope something more demanding than optimism. Hope does not require us to deny evil, excuse failure or pretend that everything happens for a reason. It asks us instead to see clearly what human beings are capable of and to choose, anyway, what kind of human beings we intend to be.

For a time, the categories that divide us seemed painfully small. Democrat and Republican, American and foreigner: grief and decency crossed all of them. In Gander, Newfoundland, people welcomed thousands of strangers whose planes had been diverted when American airspace closed, providing food, shelter and kindness. Around the world, people saw an attack on human beings and answered as human beings. The unity was never as perfect as memory sometimes makes it. But it was real.

That unity did not hold. The years that followed gave us reasons to question our institutions and one another, and grief sometimes hardened into suspicion. Anger has its place. So does accountability. But neither relieves us of the responsibility to distinguish the guilty from the innocent, or to recognize the humanity of someone whose experience differs from our own. Remembering what was taken from us should deepen our care for what remains: the people beside us, the communities we share, and the generations learning from what we choose to carry forward.

The truest memorial is not a grievance we keep sharpening. It is a community we keep choosing to build.

We remember, but we do not live in the past. We live with our truth today. We honor memories. We reflect on our own imperfections.

Freedom is not free. Humanity is not certain. Goodness is never guaranteed. There is always work to do.

But we can find commonality. We can find joy. We can find strength. We can mourn. We can honor. We can respect. We can endure even after our conception of the world has been shattered.

We do not move on from losses like these. We move forward, carrying them.

I do not know whether innocence, once lost, can ever be restored. Perhaps something harder and more honest takes its place: a hope that has seen what humanity is capable of and still refuses to surrender its faith in what humanity might yet become.

That is the audacity worth preserving. The belief that, imperfect and humbled, we can still become better than we are.

Good can prevail.

History offers no guarantee that it will. It leaves the choice, and the work, to us.

Bryan J. Kaus

Happy families are all alike; every unhappy family is unhappy in its own way. - Leo Tolstoy, Anna Karenina

I have been reading Alfred Sloan’s My Years with General Motors.

Sloan is not a fashionable management thinker anymore. Born in 1875, he became president of General Motors in 1923, later served as chairman, and spent decades building much of the management architecture behind one of the defining industrial enterprises of the twentieth century. His book was published in 1964, and parts of it unmistakably belong to another era.

What surprised me is how much of the underlying logic does not.

Sloan believed sound management required a continuous, factual approach to a changing business. Markets change, technology changes, customers change, competitors respond. He warned, in effect, against letting an idea that worked once become permanent simply because it had worked before.

That has been on my mind lately. So has something much older.

Newton’s third law says that for every action there is an equal and opposite reaction. Economics is not physics, and the analogy breaks down the moment you try to make it literal. Economic reactions are not neatly equal. They are not always opposite. They can arrive late, surface somewhere unexpected, be amplified by leverage, dampened by inventories, or partly erased through productivity and substitution.

But the instinct is useful. Push on a complicated system and the system responds.

The problem is that the response rarely manifests uniformly. That distinction matters more than it sounds.

The same shock, different economics

We talk about economic events as though the event itself determines the result. Rates rise. Oil rises. Labor gets expensive. A regulation changes. A shipping route closes.

But those are pressures entering a system populated by businesses, households and institutions with radically different capacities to respond. One company passes a higher input cost through to its customer. Another absorbs it in margin. A third pushes it backward onto a supplier. A fourth changes the product, substitutes an input, or redesigns the process altogether.

The pressure is the same. The economics are not.

A large carrier with contractual fuel surcharges experiences a diesel spike very differently from an independent operator bidding loads in the spot market. A cash-rich household experiences higher gasoline and grocery prices differently from one already carrying revolving debt. A company with no meaningful maturities until 2032 experiences the credit market differently from a leveraged business that has to refinance next quarter.

That is where the idea becomes more useful than simply saying costs flow through an economy. Pressure can be absorbed, in margin, cash flow or purchasing power. It can be transmitted, to customers, suppliers, workers or lenders. It can be adapted around, through substitution, rerouting, financing structures, automation or productivity. And sometimes part of it disappears outright, as demand is destroyed, a bottleneck is removed, or a substitute finally becomes viable.

Most real shocks do several of these at once. The interesting question is where. More precisely: where does the capacity to keep absorbing, passing or adapting around the pressure finally run out?

That is often where an economic inconvenience becomes an economic event. It is also, very often, where opportunity begins.

Sloan and the problem with managing averages

This is where Sloan becomes particularly useful.

One of his central problems at General Motors was how to manage something enormous and varied without pretending the whole enterprise was a single homogeneous business. His answer became known as decentralization with coordinated control, and the words matter together. The operating businesses needed enough autonomy to respond to their markets and make decisions close to the facts. The center still had a role: financial discipline, capital allocation, common standards, and an understanding of how the pieces fit. He rejected two bad choices at once. Manage everything monolithically and you lose the differences that matter. Let every business become an independent silo and you lose the economics of the portfolio.

That distinction travels well beyond General Motors, because management teams, and plenty of consulting exercises with them, tend to simplify until the nuance disappears. This is our fuels business. This is our consumer exposure. Rates are high. The economy is strong.

Aggregation is necessary; no organization runs without it. But simplification becomes dangerous when it hardens into homogenization. Two businesses in the same industry can react very differently to the same cycle, because their assets, contracts, feedstocks, customers and debt structures are different. Two businesses with quite different economics can rationally belong in the same portfolio, one throwing off extraordinary cash when conditions tighten, another holding steady through the trough.

There is a caveat I would not want lost. Diversification is not a substitute for economics. A countercyclical business still needs economics good enough to survive until the cycle in which you need it. A strategic platform that destroys capital in every regime does not become attractive merely because it balances the portfolio. Portfolio value comes from differentiated economics, not from pretending the differences do not matter.

The same applies to reading an economy. GDP, employment, inflation, industrial production and credit spreads are the consolidated numbers. They are real and they matter. But by themselves they cannot tell you which operating divisions are carrying the pressure.

The last few weeks offered some unusually good examples.

Energy: the system reacted

Take the Strait of Hormuz. The simple model is intuitive: constrain one of the world’s most important oil transit points, fewer barrels move, supply tightens, prices rise. And some of the visible data looked extraordinary. Kpler counted only four commodity vessels transiting Hormuz on Thursday, September 3, against a ten-day average near fifteen.

If that were the whole story, the conclusion would be easy. It was not.

The visible count excluded vessels traveling with transponders off. Dark transits were being reconstructed after the fact. Cargo was moving through ship-to-ship transfers and Gulf of Oman shuttle arrangements. Kpler’s broader measure of reconstructed clearance had been running near 8.6 million barrels a day since mid-June.

That does not make the disruption imaginary. It means the system reacted. And this is where the discipline has to work both ways. If I argue that a falling crude price does not prove a physical constraint has vanished, I also cannot look at a collapsing visible ship count and insist the barrels disappeared when better operating evidence says otherwise. The facts have to be allowed to change the explanation.

What actually happened is more interesting. Some of the pressure stayed in physical availability. Some appeared in freight and war-risk insurance. Some moved into refined-product margins. Some was absorbed in added logistical complexity. And some routes, assets and operators became more valuable because they offered an alternative. The reaction existed. It simply did not manifest uniformly.

Credit: one market, very different realities

Credit may be the cleaner example. As of early September, U.S. borrowers rated CCC and below faced effective yields near 14.9% and spreads over Treasuries above ten percentage points. BB borrowers were operating in the same market, against the same Treasury curve, with spreads of roughly 1.5 points.

It is tempting to summarize both with one sentence: capital is expensive. True, and insufficient. For whom?

There is an enormous difference between capital that costs six or seven percent and capital that costs fifteen. The stronger borrower can still choose. The weaker borrower increasingly cannot, and that loss of choice is the whole story. A company that can refinance can wait. A company that cannot may have to sell an asset, issue equity, restructure, or accept terms it would never take in normal conditions. Meanwhile the buyer with liquidity acquires leverage of a different kind.

Williams closed a roughly $5.5 billion acquisition of contracted natural-gas infrastructure in early September. That does not prove higher rates are irrelevant. It proves something more useful: capital does not disappear uniformly when financial conditions tighten. It becomes more discriminating, and discrimination redistributes optionality. One balance sheet loses it; another gains it. The same rate environment is a threat and an opportunity at once, depending on where you sit.

That is why the cost of capital, taken as a single number, tells us less than we think. The macro environment sets the weather. The balance sheet determines how you experience it.

Productivity: the reaction can solve part of the problem

Labor is the important counterexample, because otherwise this framework becomes too mechanical. Not every cost gets handed to someone else. Sometimes the response changes the economics themselves.

Companies spent the past several years confronting expensive and scarce labor, higher input costs and harder operating conditions. They responded. They automated, redesigned work, invested and changed processes. The latest Bureau of Labor Statistics revision showed manufacturing productivity rising at a 2.4% annual rate in the second quarter, output up 5.4%, and manufacturing unit labor costs actually falling 0.3%, the first quarterly decline since 2021.

That combination matters. Output grew faster than the labor required to produce it. Part of the original pressure was not absorbed or transmitted. It was answered.

The consequences did not disappear; they changed. The manufacturer able to fund automation experiences labor scarcity differently from the competitor that cannot. The business that can lift output per hour can raise wages without the same rise in unit cost. The business that cannot improve productivity takes the pressure directly, in margin or in price. Same pressure, different capacity, different economics.

Capacity buys time

Underneath all of this sits a variable that deserves more attention than it usually gets. Time.

Cash buys time. Inventory buys time. An undrawn credit facility, a long-dated maturity, a second supplier, a contractual pass-through, a flexible asset: each one buys time. And time matters because adaptation is rarely immediate. The company that can tolerate six months of disruption can find another supplier, redesign a product, renegotiate a contract, or simply wait for the market to normalize. The company forced to act Monday morning has none of those options.

That is why pressure so often becomes significant at the exact moment someone stops being able to wait. A borrower has to refinance. An owner has to sell. A customer has to trade down. A producer has to curtail. At that point an abstract market pressure becomes a forced decision, and forced decisions change bargaining power. That is where risk accelerates. It is also where opportunity becomes unusually attractive.

Which is the part worth holding onto: nuance is information. The difference between a BB borrower and a CCC borrower tells you something. The gap between a visible ship count and a reconstructed physical flow tells you something. The divergence between rising wages and falling unit labor costs tells you something. The mistake is never simplifying. It is simplifying away the one variable that determines the outcome.

The Point Taken

Newton’s third law works cleanly because physical forces obey a symmetry markets do not. Economic systems are messier. But the instinct survives. Apply pressure and the system reacts, and the reaction can be every bit as consequential as the original action. It just will not necessarily arrive with the same participant, in the same variable, at the same time, or in the same size.

The system pushes back. It simply does not push back everywhere at once.

That is why an economy can grow while parts of it contract. Why the same credit environment creates distress for one company and an acquisition for another. Why an energy constraint can enrich one part of the value chain while compressing another. Why higher labor costs can eventually produce lower unit labor costs for the company able to adapt. None of it is a contradiction. It is a system of participants with different economics and different capacity to respond, and Sloan’s contribution is the discipline not to lose those differences inside the consolidated result.

Newton gives us the instinct to look for the reaction. The work of the manager or the investor is to follow it far enough to ask who can absorb the pressure, who can pass it on, who can adapt, and then the question that matters most. Where does the capacity to respond finally run out?

That is usually where the real economic event begins. And very often, it is where the risk and the opportunity were hiding all along.

Don't ask whether the pressure disappeared. Ask who is absorbing it now. Where? How much? Why? What is the next order impact?

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© 2026 23.5 Strategies; The Point Taken™

Bryan J. Kaus

Renewable fuels are having a substantially better year.

After a difficult stretch for renewable diesel economics, margins have recovered sharply. German demand for HVO is increasing. European sustainable aviation fuel requirements are becoming more tangible than the voluntary corporate commitments that carried much of the early discussion around SAF. In the United States, renewable diesel production is expected to reach another record, while the regulatory credits that support the economics of producing it have strengthened materially.

It would be fairly easy to look at all of this and conclude that the renewable-fuels thesis has finally reasserted itself.

There is some truth in that. The demand being created by regulation in Germany is real. Renewable diesel has become a meaningful part of the North American distillate pool. Years of investment in feedstock processing, refining capacity, logistics, carbon markets and commercial infrastructure have produced capabilities that did not exist at anything like this scale a decade ago.

But I think the more interesting question is not whether renewable fuels are working again. It is what, exactly, is doing the work.

Several things are moving together right now, and they do not all tell us the same thing about the durability of the underlying business. Regulation is creating incremental demand. Conventional distillate supply is unusually tight. Russian refined-product availability has been disrupted, Middle Eastern product flows remain constrained, and American refiners have responded by running exceptionally hard while U.S. product exports have increased. At the same time, RIN values, tax policy and feedstock eligibility are changing the economics both upstream and downstream of the renewable refinery itself.

There is real money being made in that environment. The harder work for management is separating the portion that reflects a stronger underlying business from the portion being supplied by an unusually favorable market, understanding where else in the value chain some of that value is being captured, and deciding what to do with the cash while the opportunity is there.

Germany provides a useful place to start because almost the entire problem can be seen in one market.

When the mandate meets the river

Argus Analytics estimates German HVO demand at approximately 2.1 million metric tons in 2026, compared with roughly 800,000 metric tons in 2025. Germany’s implementation of RED III entered into law in June and eliminated double counting for certain advanced feedstocks, increasing the physical volume of renewable fuel required to satisfy the country’s greenhouse-gas reduction obligation.

That increase alone should give us some pause before accepting the increasingly broad assertion that Europe is simply walking away from decarbonization. European governments are clearly reconsidering parts of the policy architecture, and in a number of cases they have good economic and industrial reasons for doing so. Some of the assumptions embedded in the first iteration of policy have collided with cost, competitiveness, consumer behavior and the physical limitations of the systems they were intended to change.

But the movement is not uniform. In Germany’s transport-fuels market, an important compliance obligation has become materially more demanding, not less.

If the analysis stopped there, this would be a relatively straightforward HVO demand story. Germany needs considerably more physical renewable fuel, and the producers capable of supplying it should enjoy a stronger market.

The Rhine made it more complicated.

Low water at Kaub, one of the important chokepoints on the river, restricted barge loading and made it increasingly difficult to move physical HVO economically into parts of the German market. Some obligated buyers responded by purchasing greenhouse-gas quota compliance from other market participants rather than buying the physical HVO they otherwise might have used to satisfy the obligation.

That is interesting enough on its own, but the economics make it more instructive. On an equivalent cost-per-compliance basis cited by Argus in July, Class II HVO was around €344 per metric ton of CO₂ equivalent while advanced quota was approximately €373; Class IV HVO was around €452 compared with other quota at approximately €480. In other words, this was not simply a case where the physical molecule had obviously become the more expensive compliance option. The quoted economics could still favor HVO, but the logistics involved in actually getting the product where it needed to go changed the commercial answer for at least some buyers.

Anyone who has worked around physical commodity markets will recognize the distinction. A benchmark can tell you a great deal about a market, right up until somebody actually has to move the product, finance it, store it, deliver it and have it available in the right place at the right time. The screen can suggest one answer while the deliverable position produces another.

The German obligation did not go away because the Rhine got shallow, and neither did the economic value associated with satisfying it. What changed was the most efficient mechanism for getting there and, as a result, the part of the value chain best positioned to capture the incremental economics.

This is one reason I have always been somewhat uncomfortable discussing renewable-fuel economics as though they begin and end inside the refinery. The chain starts much farther upstream with the feedstock and its carbon intensity, runs through conversion, storage, logistics and trading, and ultimately ends with a physical customer or a regulatory obligation. Any of those points can become the constraint.

If eligible feedstock is scarce, the producer of that feedstock can capture more of the value. If conversion capacity becomes scarce, the refinery has greater leverage. If the destination is difficult to serve, inventory, storage and logistics become more valuable. If moving the physical molecule becomes sufficiently difficult while compliance can be obtained in another form, the owner of that compliance position can suddenly have more economic leverage than the producer of the fuel.

The mandate creates value, but it does not tell us where that value will ultimately settle.

For that reason, the commercially important question in Germany is not simply whether HVO demand reaches 2.1 million metric tons. It is where the constraint sits when the obligation actually has to be satisfied, how long it is likely to remain there, and whether the companies operating across the chain have enough optionality to capture the economics before the system inevitably begins adjusting around it.

That question travels quite naturally to the United States.

Renewable diesel is also a diesel barrel

The U.S. renewable-diesel market is strengthening at almost exactly the same moment that the conventional distillate system is operating under exceptional pressure, and it would be a mistake to analyze those developments independently.

Refiners have been running near the practical limits of the U.S. system because the economics of producing the next barrel remain unusually attractive. EIA’s August outlook expects strong crack spreads to support elevated refinery runs through year-end and commercial crude inventories to remain below the bottom of their recent five-year range as high refinery demand combines with lower net imports.

The global market helps explain why. Product availability has been disrupted by the conflict in the Middle East and continued pressure on Russian refining infrastructure, leaving the United States as an increasingly important supplier into an already constrained global refined-products market. Reuters recently estimated that global refining output was running nearly two million barrels per day below demand, with U.S. refiners being asked to fill a meaningful part of that deficit.

The United States is not the only balancing mechanism, of course. Markets respond to economics. Strong diesel margins are encouraging higher refinery runs elsewhere in Asia, Chinese exports are beginning to return, and traders are moving Asian barrels into markets that had previously relied more heavily on Middle Eastern supply. That is exactly what should happen. Scarcity creates margin, margin attracts supply, trade routes reorganize, and eventually the constraint begins moving.

That broader context matters enormously for renewable diesel because renewable diesel does not somehow leave the physical fuels economy when we attach a carbon attribute to it. The carbon intensity and the regulatory value matter enormously to the producer and to many customers, but at the end of the chain the customer still receives a fungible distillate barrel.

I was reminded of the practical significance of that recently in a conversation with a fuel buyer in California who was feeling the constraint directly. He was trying to secure enough diesel to keep his operation supplied at a time when conventional availability had become increasingly difficult. We were not having an abstract conversation about decarbonization or whether his company should pay a premium in order to make progress against a sustainability target. He needed fuel. Renewable diesel was available, and in his particular situation it had become something close to the saving grace that allowed him to maintain supply.

That is a very different value proposition from the one around which much of the early renewable-diesel narrative was built.

For the person responsible for keeping trucks moving, equipment operating or an agricultural supply chain functioning, the distinction between renewable and conventional diesel becomes rather less philosophical when one barrel can actually be delivered and the other cannot.

I would not turn one customer conversation into evidence of some new national demand paradigm. It does, however, expose something that can get lost when renewable fuels are discussed almost exclusively through the language of climate policy. Renewable diesel has now reached enough scale and commercial maturity that it can provide incremental resilience to the broader distillate system. There is value in having another usable barrel available when the conventional system becomes short.

The complication is that the same scarcity demonstrating that value proposition is also helping make the economics look exceptionally attractive.

The customer needed renewable diesel partly because diesel itself was difficult to secure. That tells us something important about the product’s usefulness. It does not necessarily tell us what a normalized through-cycle margin on producing that product ought to be.

This is where the underlying diesel market has to become part of any serious discussion of current renewable-diesel economics. A stronger conventional product market raises the underlying physical value of the renewable barrel before the RIN, the tax credit, the carbon-intensity value or any other regulatory attribute is added.

The RIN market has then provided another substantial layer.

Biomass-based diesel D4 RINs reached $2.41 in early June. Because renewable diesel generates approximately 1.6 to 1.7 RINs per gallon, those credits represented more than $3.50 per gallon of potential value at the time. More interestingly, EIA noted that RIN values had risen relative to the traditional soybean-oil and heating-oil spread, suggesting that renewable diesel and biodiesel production economics had improved materially from 2025.

Then the policy discussion shifted again. EPA extended a biofuel compliance deadline, uncertainty increased around small-refinery exemptions, and biomass-based diesel RINs weakened toward $1.92.

As of the end of August, the administration was considering a considerably larger small-refinery exemption package, potentially releasing more than 1.8 billion RINs while also considering changes to future renewable-fuel obligations that could offset some of the impact. The final policy outcome remains uncertain, and it may change again after this is written.

But that uncertainty is itself useful.

High conventional fuel prices can create political pressure for refinery relief. Refinery relief can change the supply-demand balance in the compliance-credit market. That can change renewable-diesel economics even while the physical diesel market remains tight. Nothing particularly dramatic has to happen inside the renewable refinery for one meaningful layer of its margin to move.

I do not think that makes the margin artificial. Regulation is part of the market. A RIN has economic value because the law creates an obligation around it, just as a tariff, tax rate, transportation basis or environmental specification changes the economics of any number of other physical businesses.

The question is what we learn from the resulting earnings.

If cracks widen because the global refining system is short product, management did not create the shortage. If RIN prices rise because obligated demand tightens against available credits, management did not create that market either. But management absolutely has responsibility for whether the asset is available to capture the opportunity, whether feedstock is sourced intelligently, whether yields and energy consumption are competitive, whether the carbon intensity is optimized economically rather than cosmetically, whether barrels reach the market with the strongest actual netback, and whether the contracts surrounding the business preserve enough flexibility to respond when any of those variables change.

The distinction becomes visible in recent company results.

HF Sinclair’s adjusted refining gross margin rose 57% year over year to $25.95 per produced barrel sold, while adjusted EBITDA in Renewables moved from negative $2 million to positive $123 million. The company pointed to stronger RIN pricing, higher producer tax-credit benefits and increased volumes. Phillips 66 showed a similar pattern, with conventional refining benefiting from stronger market cracks while Renewable Fuels benefited from higher regulatory-credit pricing and increased production.

Neste is another useful example, particularly because its operations span both conventional and renewable fuels and because the company is relatively transparent in explaining where the changes came from. Renewable Products’ comparable sales margin increased from $361 to $1,223 per metric ton in the second quarter, while Oil Products’ total refining margin moved from $10 to $25.80 per barrel. Management described the period as an exceptional market environment, identified higher RIN prices as the primary driver of the strongest U.S. renewable-diesel margins in several years, and pointed to exceptionally wide middle-distillate cracks as a major contributor to conventional refining performance. The company was also benefiting from its own performance-improvement work while dealing with production limitations in Renewable Products.

That combination is more useful than trying to reduce the quarter to either operational excellence or market beta. Neste has spent years building genuine capability in feedstock sourcing, carbon markets, refining, logistics and renewable-fuels commercialization. That capability matters. What it cannot do, nor can any management team, is repeal the external market.

The operating skill is in capturing the opportunity when the market presents it and then deciding what should be done with the proceeds.

Follow the value backward

The same logic applies upstream.

If public policy increases the value of renewable fuel, there is no reason to assume that all of the incremental economics remain with the refinery. Feedstock suppliers see the same market developing and respond accordingly.

The United States is not the only balancing mechanism, of course. Markets respond to economics. Strong diesel margins are encouraging higher refinery runs elsewhere in Asia, Chinese exports are beginning to return, and traders are moving Asian barrels into markets that had previously relied more heavily on Middle Eastern supply. That is exactly what should happen. Scarcity creates margin, margin attracts supply, trade routes reorganize, and eventually the constraint begins moving.

That broader context matters enormously for renewable diesel because renewable diesel does not somehow leave the physical fuels economy when we attach a carbon attribute to it. The carbon intensity and the regulatory value matter enormously to the producer and to many customers, but at the end of the chain the customer still receives a fungible distillate barrel.

I was reminded of the practical significance of that recently in a conversation with a fuel buyer in California who was feeling the constraint directly. He was trying to secure enough diesel to keep his operation supplied at a time when conventional availability had become increasingly difficult. We were not having an abstract conversation about decarbonization or whether his company should pay a premium in order to make progress against a sustainability target. He needed fuel. Renewable diesel was available, and in his particular situation it had become something close to the saving grace that allowed him to maintain supply.

That is a very different value proposition from the one around which much of the early renewable-diesel narrative was built.

For the person responsible for keeping trucks moving, equipment operating or an agricultural supply chain functioning, the distinction between renewable and conventional diesel becomes rather less philosophical when one barrel can actually be delivered and the other cannot.

I would not turn one customer conversation into evidence of some new national demand paradigm. It does, however, expose something that can get lost when renewable fuels are discussed almost exclusively through the language of climate policy. Renewable diesel has now reached enough scale and commercial maturity that it can provide incremental resilience to the broader distillate system. There is value in having another usable barrel available when the conventional system becomes short.

The complication is that the same scarcity demonstrating that value proposition is also helping make the economics look exceptionally attractive.

The customer needed renewable diesel partly because diesel itself was difficult to secure. That tells us something important about the product’s usefulness. It does not necessarily tell us what a normalized through-cycle margin on producing that product ought to be.

This is where the underlying diesel market has to become part of any serious discussion of current renewable-diesel economics. A stronger conventional product market raises the underlying physical value of the renewable barrel before the RIN, the tax credit, the carbon-intensity value or any other regulatory attribute is added.

The RIN market has then provided another substantial layer.

Biomass-based diesel D4 RINs reached $2.41 in early June. Because renewable diesel generates approximately 1.6 to 1.7 RINs per gallon, those credits represented more than $3.50 per gallon of potential value at the time. More interestingly, EIA noted that RIN values had risen relative to the traditional soybean-oil and heating-oil spread, suggesting that renewable diesel and biodiesel production economics had improved materially from 2025.

Then the policy discussion shifted again. EPA extended a biofuel compliance deadline, uncertainty increased around small-refinery exemptions, and biomass-based diesel RINs weakened toward $1.92.

As of the end of August, the administration was considering a considerably larger small-refinery exemption package, potentially releasing more than 1.8 billion RINs while also considering changes to future renewable-fuel obligations that could offset some of the impact. The final policy outcome remains uncertain, and it may change again after this is written.

But that uncertainty is itself useful.

High conventional fuel prices can create political pressure for refinery relief. Refinery relief can change the supply-demand balance in the compliance-credit market. That can change renewable-diesel economics even while the physical diesel market remains tight. Nothing particularly dramatic has to happen inside the renewable refinery for one meaningful layer of its margin to move.

I do not think that makes the margin artificial. Regulation is part of the market. A RIN has economic value because the law creates an obligation around it, just as a tariff, tax rate, transportation basis or environmental specification changes the economics of any number of other physical businesses.

The question is what we learn from the resulting earnings.

If cracks widen because the global refining system is short product, management did not create the shortage. If RIN prices rise because obligated demand tightens against available credits, management did not create that market either. But management absolutely has responsibility for whether the asset is available to capture the opportunity, whether feedstock is sourced intelligently, whether yields and energy consumption are competitive, whether the carbon intensity is optimized economically rather than cosmetically, whether barrels reach the market with the strongest actual netback, and whether the contracts surrounding the business preserve enough flexibility to respond when any of those variables change.

The distinction becomes visible in recent company results.

HF Sinclair’s adjusted refining gross margin rose 57% year over year to $25.95 per produced barrel sold, while adjusted EBITDA in Renewables moved from negative $2 million to positive $123 million. The company pointed to stronger RIN pricing, higher producer tax-credit benefits and increased volumes. Phillips 66 showed a similar pattern, with conventional refining benefiting from stronger market cracks while Renewable Fuels benefited from higher regulatory-credit pricing and increased production.

Neste is another useful example, particularly because its operations span both conventional and renewable fuels and because the company is relatively transparent in explaining where the changes came from. Renewable Products’ comparable sales margin increased from $361 to $1,223 per metric ton in the second quarter, while Oil Products’ total refining margin moved from $10 to $25.80 per barrel. Management described the period as an exceptional market environment, identified higher RIN prices as the primary driver of the strongest U.S. renewable-diesel margins in several years, and pointed to exceptionally wide middle-distillate cracks as a major contributor to conventional refining performance. The company was also benefiting from its own performance-improvement work while dealing with production limitations in Renewable Products.

That combination is more useful than trying to reduce the quarter to either operational excellence or market beta. Neste has spent years building genuine capability in feedstock sourcing, carbon markets, refining, logistics and renewable-fuels commercialization. That capability matters. What it cannot do, nor can any management team, is repeal the external market.

The operating skill is in capturing the opportunity when the market presents it and then deciding what should be done with the proceeds.

Follow the value backward

The same logic applies upstream.

If public policy increases the value of renewable fuel, there is no reason to assume that all of the incremental economics remain with the refinery. Feedstock suppliers see the same market developing and respond accordingly.

Used cooking oil, yellow grease, tallow and soybean oil now sit inside a transportation-fuel value chain in which carbon intensity, country of origin, regulatory eligibility and tax treatment can materially change what the feedstock is worth. These are not merely waste or agricultural commodities being purchased by a refinery. In the right circumstances, they carry an embedded regulatory option.

The revised 45Z framework makes that more consequential. For clean transportation fuel produced after December 31, 2025, qualifying fuel generally must be derived exclusively from feedstocks produced or grown in the United States, Mexico or Canada. The special higher applicable amount that had previously been available to SAF has also been eliminated for post-2025 production.

That inevitably changes the sourcing map. As renewable diesel, biodiesel and SAF compete for qualifying lower-carbon feedstocks, some of the additional value created downstream can be bid upstream into the cost of securing the feedstock in the first place.

This is why I am wary of evaluating these businesses primarily around a headline refinery margin. A plant can run exceptionally well and still surrender a large share of incremental regulatory economics in the feedstock procurement process (I’ve seen miscalculation of this brutalize margins). A commercial team can obtain a very attractive destination price that becomes considerably less impressive once freight, inventory exposure and working capital are included. At the other extreme, a producer can become so determined to extract every possible downstream dollar that it takes on logistics and destination risk for relatively little incremental enterprise value.

There will be times when clearing the renewable refinery closer to the gate is the better answer. There will be other times when the carbon value, destination premium, customer position or logistics advantage makes carrying that same barrel farther downstream overwhelmingly more attractive.

The point is not that one commercial model is always better. Rather, the point is that the economics belong to the enterprise.

One of the concepts driven into me when I was younger in this business was the idea of the general interest. It was a simple expression for something companies often find surprisingly difficult to do in practice. The job was not necessarily to maximize the apparent economics of your desk, terminal, refinery or business unit. The job was to produce the best economic outcome for the company, wherever in the chain that margin was ultimately captured.

Sometimes that meant one part of the organization apparently giving something up because the company could make more money somewhere else.

It sounds obvious until the arithmetic collides with the organizational chart, internal politics, or lack of clarity in what is actually happening inside of the business - this is why organizations need to be transparent about how the enterprise is performing. Without that, and yes, this is something I’ve seen too, there is no way for the organization to truly optimize - at least not efficiently.

Feedstock procurement is measured on what it pays. The refinery is measured on utilization, yield and cost. Logistics wants to minimize freight. Sales wants the best customer price. Trading sees the arbitrage. Sustainability sees carbon intensity. Finance is managing cash and working capital.

Every one of those functions can make a rational decision and the company can still make the wrong one.

That is not merely a commercial problem. It is an operating-model problem, and I think it has been underappreciated in parts of renewable fuels precisely because so much attention has understandably been spent building the physical and regulatory capabilities required to create the industry in the first place.

As the sector matures, the standard has to move.

The company needs the analytical capability and the organizational permission to look across the whole chain and ask what the feedstock available today should become, where the resulting product should go, which attributes should be monetized, what risks the company should continue to own, and where the best risk-adjusted enterprise return actually sits.

That question becomes particularly interesting when the choice is not merely where to sell the molecule, but which molecule to make.

SAF and renewable diesel share many feedstocks and, in flexible HEFA facilities, much of the same processing infrastructure. But they are not economically interchangeable products with different marketing labels. Their yields, processing requirements, customer structures, compliance mechanisms and demand profiles differ.

Europe now provides a more structural component of SAF demand through ReFuelEU Aviation, which requires SAF to represent at least 2% of aviation fuel supplied at EU airports and increases that requirement to 6% in 2030, with considerably higher obligations beyond that. That is economically different from depending primarily on a voluntary corporation’s continued willingness to pay a green premium.

At the same time, the U.S. incentive structure has changed with the removal of the special higher post-2025 45Z applicable amount for SAF.

For a flexible operator, the right answer therefore cannot be reduced to comparing the selling price of SAF with the selling price of renewable diesel. A higher SAF premium does not necessarily create a higher enterprise return if additional processing, yield loss, hydrogen requirements or foregone renewable-diesel production consume the advantage.

The real comparison is the net economic contribution of each pathway after the feedstock, yield, hydrogen, energy, carbon value, regulatory credits, contractual premiums, freight, working capital and opportunity cost of the alternative are considered together.

That answer will move with the market, which means the operating model needs to be capable of moving with it.

The conventional system offers the same lesson

Conventional refining provides a useful comparison because the industry is dealing with another version of the same problem today.

When every additional barrel is exceptionally valuable, there is an obvious incentive to run.

For the week ending August 21, U.S. refinery utilization reached 97.4%, with crude inputs of approximately 17.4 million barrels per day, after an unusually sustained period above 95%.

Media and analyst coverage, as well as commentary from earnings calls have captured that some refiners shifted maintenance in order to capture exceptional product margins, while noting that past periods of prolonged high utilization have sometimes been followed by greater unplanned outages as maintenance needs accumulated.

I would be careful about what conclusion we draw from that. Changing the timing of maintenance is not inherently irresponsible. Turnaround schedules are not locked calendars, and nobody who has actually operated industrial equipment should pretend that every piece of work has identical urgency. Unit condition matters. Inspection results matter. The work list matters. Good operators are constantly determining what needs to happen now, what can safely move, and what continued production is worth.

But the equipment does not know the crack spread.

Maintenance that can safely be deferred is still maintenance. Catalyst ages. Equipment wears. Inspection intervals eventually arrive. The economics of operating today do not make the physical requirement disappear.

That does not mean refiners are compromising safety to make money, and I would not make that accusation without evidence. It means something more useful from a management perspective: reliability becomes increasingly valuable as scarcity increases.

When product markets are comfortably supplied, the system can absorb an outage through inventory, imports, unused capacity elsewhere or adjustments in trade. When the global market is already short and the U.S. system is running close to its practical limit, the replacement barrel becomes substantially harder to find.

The same strong market therefore increases the value of another week of production and the economic consequence of unexpectedly losing the unit.

That is where the optimization becomes difficult.

Commercial sees the crack and knows what another week is worth. Operations understands the physical condition of the equipment. Maintenance understands the work that is accumulating. Finance sees the extraordinary incremental cash generation. Management’s job is to integrate those physical realities rather than allow whichever function has the loudest number that week to determine the answer.

There are circumstances where continuing to run is absolutely rational. The incremental cash generated during an unusually strong market can more than pay for a larger turnaround later. But that conclusion needs to come from a disciplined understanding of the asset and the economics together.

The U.S. Energy Information Administration expects some of that balance to shift this fall. After crude inputs of roughly 17 million barrels per day through August, the agency forecasts refinery inputs dropping below 16 million barrels per day on average in October as normal seasonal maintenance reduces utilization and product output.

That matters because product markets do not necessarily normalize simply because one source of disruption eases. Inventories have to rebuild. Trade patterns have moved. Russian product availability remains uncertain. U.S. refineries then enter maintenance season after an unusually demanding summer run.

The market can solve one constraint and discover the next one already waiting behind it.

The Point Taken

I do not come away from any of this bearish on renewable fuels.

The structural improvements are real. Germany has tightened its transport-fuels compliance framework and the resulting HVO demand signal is substantial. Europe is creating mandated SAF demand rather than relying entirely on voluntary customer ambition. U.S. renewable-fuel requirements continue to provide a regulatory demand base. And renewable diesel has demonstrated another source of value that deserves more attention: when the conventional distillate system becomes short, another fungible barrel can matter simply because somebody needs the fuel.

But the current economics are the product of several things at once, and those things will not necessarily move together forever.

Some of today’s margin comes from structural regulatory demand. Some comes from conventional-product scarcity. Some comes from RINs and tax credits. Some reflects an advantaged feedstock position or a logistics network that puts the company in the right place. And some is the result of management actually doing the work better: running reliably, sourcing intelligently, optimizing the product slate, contracting well and allocating capital with discipline.

Those are all legitimate economics. They simply have different durability and, importantly, do not always accrue to the same participant.

A German compliance obligation is not the same thing as low water on the Rhine. A European SAF mandate is not the same thing as a customer’s voluntary willingness to pay a premium. An advantaged feedstock position is not the same thing as an unusually high RIN price. A refinery that has earned superior reliability across a cycle is not the same thing as an asset that happened to be available during an exceptional quarter.

Eventually the returns on capital make those differences visible.

That is why I think the useful question for a board today is larger than whether renewable diesel or SAF happens to be attractive at current margins. The question is whether management really understands why the margin exists, where in the chain the economics are being created and captured, which parts of that advantage the enterprise can reasonably defend, and what the company is doing with the cash that the market is currently giving it.

Treating peak economics as permanent is one way to squander a cycle. Permanent costs get built around temporary margins. Feedstock commitments are signed because today’s credits make the arithmetic work. Projects are sanctioned using assumptions that happen to reflect an unusually favorable moment. Operating problems that would be obvious in a weaker environment disappear beneath a strong benchmark.

The other choice is to use the same period to strengthen the balance sheet, invest in reliability, improve feedstock optionality, remove structural cost, sharpen commercial and logistics capability, manage working capital and preserve the flexibility to move among products and markets as the economics change.

Neste’s leverage fell from 34.3% at the end of 2025 to 29.9% at the end of June. That does not prove anything sweeping about the company or the industry, but it does illustrate what an exceptional market can make possible when strong cash generation is allowed to build resilience.

Renewable fuels are back in the money. That part is not especially difficult to see.

The harder question is what changed, which parts of the improvement actually belong to the business, and whether the companies benefiting from it are using the opportunity to become stronger before the market changes the question again.

The best time to figure that out is while the margins are still good.

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© 2026 23.5 Strategies; The Point Taken™

The author previously worked in the renewable fuels industry, including at Neste and Phillips 66. This article is based entirely on personal perspective, publicly available information and industry experience.

Bryan J. Kaus

Wind extinguishes a candle and energizes fire.
— Nassim Nicholas Taleb, Antifragile

I watch Walmart earnings for some of the same reasons I watch commodity balances, freight movements or industrial production. No single company tells you what is happening in the economy, but enough activity moves through Walmart that changes in its business can tell you something about what is happening underneath it. Consumers become more selective. Higher-income customers migrate toward value. Discretionary purchases get deferred. Price begins to matter differently.

There was plenty to consider in Walmart’s latest quarter. What caught my attention, though, was not simply what it said about the consumer.

Walmart U.S. e-commerce grew 24 percent. Marketplace sales increased more than 50 percent. Store-fulfilled delivery continued growing rapidly, while advertising and membership expanded alongside the digital business.

Those are impressive growth rates, but the more interesting story is what they reveal together.

Walmart has been changing what a dollar of customer traffic can become.

For most of its history, the basic engine was straightforward: use extraordinary purchasing power, distribution scale and inventory efficiency to offer compelling prices, attract enormous volumes of customers and multiply relatively thin retail margins across a tremendous number of transactions.

That remains the foundation. But the same customer can now create a digital transaction, fulfillment volume, marketplace economics, advertising inventory, purchasing data and a membership relationship. Walmart’s stores themselves increasingly perform several jobs at once: retail location, pickup point, returns center and local fulfillment infrastructure supporting a broader digital business.

The asset did not suddenly become something else. The number of economic jobs it can perform increased.

That is where the Walmart story becomes useful well beyond Walmart.

Build More Than One Way to Win

We tend to talk about diversification as though it means owning several businesses. I think that definition is too shallow.

A company can have five divisions and still make essentially the same economic bet five times. Five oil fields still answer to the oil price. Five consumer brands can depend on the same household wallet. Several industrial businesses can all discover at once that their customers have stopped spending.

The more important question is what actually drives the cash.

The strongest form of diversification comes when a company develops different but reinforcing economic engines around assets, capabilities or relationships it already possesses. Those businesses do not need to move perfectly opposite one another. They simply should not all deteriorate for precisely the same reason at precisely the same time.

You can see versions of that architecture elsewhere. Caterpillar has spent years building parts, services and aftermarket economics around an installed base created by inherently cyclical equipment sales. PACCAR, the maker of Peterbilt and Kenworth trucks, has a similar relationship among new trucks, parts and financing; when new-truck economics weakened sharply in 2025, those other businesses behaved very differently. Airlines discovered an even more dramatic version during COVID, when loyalty programs built around the core customer relationship became financeable assets at a moment when normal passenger economics had nearly disappeared.

None of those companies escaped its underlying cycle. Each had simply created something beyond the original transaction that retained economic value when conditions changed.

Different industries. Different mechanisms. Same underlying question:

What does the core business create that can still generate value when the original economic driver becomes less favorable?

Sometimes the answer is an installed base. Sometimes it is infrastructure, distribution, service requirements, data, contracts, customer relationships or brand permission.

The best countercycle may already be hiding inside the business.

That does not mean every adjacency deserves capital. A manufacturer can waste enormous amounts of money chasing services it has no advantage operating. An acquisition can be strategically adjacent and financially mediocre at the same time. Walmart itself is investing heavily to build its digital and fulfillment capabilities.

The arithmetic still matters.

But the strategic opportunity is worth looking for because resilience is not simply about having more revenue streams. It is about building more than one way for the enterprise to create value.

I have spent much of my career around businesses where cyclicality is not an abstraction. Commodity prices move. Margins compress. Inventories build. Capacity comes online. Demand shifts. Capital becomes more expensive. Eventually, very intelligent people with sophisticated models discover once again that reality did not bother to read the forecast.

You keep forecasting anyway. Understanding the environment matters.

But eventually another question becomes at least as important:

How much does being wrong have to hurt?

Good cyclical businesses rarely succeed because they abolish volatility. They build choices around it. Storage creates timing flexibility. Logistics provide access to different markets. Feedstock flexibility creates another sourcing option. Contracts can protect portions of cash flow. Commercial capability can redirect products toward the better economic outlet. Liquidity and balance-sheet strength buy time.

None of those eliminates the cycle. They change the company’s relationship with it.

The principle is broader than financial diversification. In an operating system, resilience may come from redundancy, alternative supply routes, spare capacity or layers of protection. In infrastructure, it may mean having several ways to manage the same physical risk rather than allowing a single intervention to carry the entire burden. In safety, it means designing the system so that one failed assumption, one piece of equipment or one human error does not become the final barrier between normal operations and catastrophe. In an organization, it may mean avoiding dependence on one customer, one person, one funding source or one path to execution.

The underlying discipline is the same: understand what can impair the system, then make sure it cannot remove every available response at once.

Sometimes another business actually gets stronger when the core is under pressure. Sometimes it simply holds. Sometimes its greatest contribution is continuing to produce cash while something else is being tested.

That can be enough.

The Real Asset Is Choice

This is where diversification connects to capital stewardship.

I am not particularly interested in stable earnings simply because investors prefer smoother charts. Some excellent businesses are volatile, and sometimes that volatility is inseparable from the return.

Through-cycle resilience matters for a more practical reason. It preserves strategic agency.

There is a point in most difficult cycles when management gradually stops deciding what it wants to do and begins doing what the balance sheet will allow. Cash flow deteriorates. Working capital absorbs liquidity. Leverage rises. Credit becomes more expensive. The menu of available decisions gets smaller.

That is where fragility becomes costly.

Assets get sold because cash is required rather than because the price is attractive. Strategic investments are delayed. Equity gets issued at poor valuations. Debt gets refinanced when capital is most expensive. A company can own excellent assets and still destroy substantial owner value because it reached the wrong part of the cycle without enough financial capacity to wait.

That is why I distinguish between capital capacity and capital deployment.

If a more resilient set of cash flows gives a company additional borrowing capacity, management does not have to immediately consume it. Levering the company back to its maximum simply because the market will allow it can eliminate much of the option the resilience created.

Unused capacity can look inefficient when conditions are easy. When the market changes, it can become strategic inventory.

It can allow a company to continue investing while competitors retreat, buy an asset from someone who needs liquidity, tolerate temporary margin pressure, avoid issuing equity at an unattractive valuation or simply wait.

Sometimes the best capital allocation decision is having enough strength to say, not yet.

That does not mean hoarding cash or avoiding intelligent leverage. Capital has an opportunity cost. The discipline is deciding whether deploying the next dollar creates more value than retaining the flexibility that dollar provides.

Diversification can just as easily undermine that discipline as strengthen it. A good business generates cash, a weaker one consumes it, and headquarters keeps moving money between the two because admitting the weaker investment failed is harder than funding it for another year.

That is why every business still has to earn its place.

The goal is not to create more places to put capital. It is to create more good choices for capital.

The Through-Cycle Test

The practical test changes somewhat depending on where you sit, but the underlying questions do not. A board may be looking at the resilience of the portfolio and the balance sheet. A CEO or founder may be deciding which capabilities deserve another dollar of investment. A business-unit leader may be looking at customer concentration, supply routes or the dependence of a plan on one critical assumption. A line manager may simply need to know what happens when the supplier does not show up, the system goes down or the person who knows how to fix it is unavailable.

In each case, look past the organization chart and ask what actually drives the outcome. What happens when demand falls, customers defer spending, input costs move or credit tightens? Which parts of the system keep functioning and which become constraints? Which existing assets can perform another economic job? Does the next investment strengthen the core while adding a genuinely different source of capability or cash flow, or does it simply make the organization larger?

And when circumstances finally create an opportunity, does the organization still have the capacity to act?

Those are not retail questions or energy questions. They are questions of stewardship: of capital, assets, systems and ultimately the ability to respond when circumstances change.

That is what interested me about Walmart in the first place.

Not that it found another revenue stream. Not that advertising is growing quickly. The larger idea is that Walmart has spent years making assets created by its core business economically useful in more ways. Customer traffic supports more than merchandise margin. Stores support more than store sales. Distribution supports more than Walmart-owned inventory.

That principle can apply almost anywhere.

Look at what the business already creates. An installed base. A customer relationship. Infrastructure. Distribution. Data. Service requirements. Contractual positions. Physical assets with unused economic functions.

Then ask what else those things can become.

Not because every company needs another business line, but because eventually the future will refuse to cooperate with the forecast.

When it does, the strongest organization may not be the one that predicted the turn most accurately. It may be the one that entered it with several ways to create value, enough capacity to absorb the surprise and enough discipline to keep choosing while others are forced to react.

The Point Taken

That is the real test of diversification and resilience.

Not simply how many businesses, assets or capabilities you have, but how many good options remain when circumstances change.

The objective is not to eliminate volatility. It is to avoid becoming captive to it. Build the business, the asset base and the operating system so they can absorb being wrong, preserve the capacity to act, and remain ready for the opportunities that uncertainty eventually creates.

Forecasting matters. Judgment matters. But no forecast deserves enough confidence that the strategic freedom of the enterprise depends upon its being precisely right.

Compounding requires something more durable: enough resilience to absorb mistakes, enough discipline to preserve capacity before it is needed, and enough judgment to deploy that capacity when the opportunity finally becomes attractive.

The cycle is inevitable. Fragility is not.

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© 2026 23.5 Strategies; The Point Taken™
Bryan J. Kaus

By Bryan Kaus

It is a bad plan that admits of no modification.
- Publilius Syrus

I have already argued that AI has become a capital-governance test. This is the narrower question that follows it: what happens after capital responds to a real shortage?

In looking for an example for this piece, I found myself drawing on the history of the renewable fuels buildout as useful lesson.

AI infrastructure can be necessary, strategically important and part of an extraordinary long-term growth market, and still produce poor investments at the margin. A growing market and a good investment are not the same thing.

What matters is not simply whether demand exists. It is whether the project can still earn an adequate return when financing changes, capacity arrives, pricing normalizes or some other assumption underneath the original model moves.

That is the lesson I would rather learn before the stress test than after it.

The stress test I know

I touched on this challenge in my recent piece on ConocoPhillips, but for me, the most useful recent case study is renewable fuels, particularly renewable diesel and sustainable aviation fuel. I spent a lot of time thinking about those markets from inside the industry, including in my strategy work at Neste.

The long-term demand case was real. So were the policy signals. Capital was available, incentives were powerful and companies across the industry responded rationally to what the market appeared to be telling them. They cleared FID and they built.

One of the risks I kept coming back to was not that renewable fuels would somehow cease to matter. It was that capacity could grow faster than the economics supporting it.

I was not predicting that renewable fuels would fail. I was worried that some of the business models being built around them would when put under stress. Markets are cyclical and it can be difficult to read the cycle, even in mature sectors, that is doubly hard for those that are a bit more nascent.

That distinction eventually became visible. Renewable diesel capacity expanded, while credit economics, feedstock realities and conventional refining margins moved. By early 2025, U.S. renewable diesel production was down even as installed capacity had increased, and major producers reported operating losses. EIA’s data captured the disconnect between capacity and profitable utilization.

Facilities were idled. Projects were delayed or cancelled. Some companies ultimately went under. The demand itself had not disappeared; the economics underneath some of the capacity had.

That was the first lesson. The second was more useful: waiting for competitors to die is not a strategy.

The stress test has to change the business

A downturn can clear market excess. Weak balance sheets can fail. Supply and demand can rebalance. None of that, by itself, makes the survivor a better company.

The stress test has to change the operating model. Reliability has to improve. Structural cost has to come down. Working capital has to be governed more carefully. Investment has to become more selective. The balance sheet has to be capable of absorbing another disappointment rather than merely celebrating survival of the last one.

That is part of what makes the current renewable-fuels recovery interesting. The market itself has improved materially, and the exceptional 2026 margin environment is a major part of the rebound. But the operating base has changed too. Neste, for example, reported a cumulative €594 million run-rate improvement versus its 2024 baseline by the end of the second quarter, while leverage fell to 29.9%. Those improvements do not replace the market recovery; they change how effectively the company can capture it.

That is the distinction I care about: a stronger market can rescue earnings. A stronger business makes the recovery more durable.

I will write more about renewable diesel and SAF in the coming weeks because that cycle deserves its own treatment. For now, the lesson is enough. Genuine demand does not rescue an operating model or a capital structure that only works under favorable conditions.

What this changes for AI infrastructure

Today’s AI buildout is not an exact replay of renewable fuels or the zero-rate environment. The hyperscalers have enormous cash flows and balance sheets. Much of the capital is abundant because the strategic urgency is real, not because financing is free.

But abundant capital can create the same behavioral problem. Everybody sees the shortage. Everybody sees the attractive return. Everybody reaches for capacity at roughly the same time.

The mechanism is simple. Scarcity creates pricing power. Pricing power attracts capital. Capital creates supply. The new supply changes the scarcity that justified the investment in the first place.

The original demand thesis does not have to be wrong for the marginal project to become a poor investment when market conditions change.

That is why I would separate companies monetizing existing scarcity from companies underwriting large amounts of future scarcity.

If I already own the site, the interconnection, the gas position, the manufacturing line, the skilled workforce or the power asset, stronger demand may improve utilization and return on capital already deployed. If I have to commit billions today because I assume the current shortage still exists when a project enters service five years from now, I am making a different bet.

Both can be viable truths. The second, however, carries more duration, execution and forecasting risk.

Own optionality before you build capacity

This is the principle I keep returning to across refining, pipelines, power and manufacturing: own optionality before you build capacity.

That does not mean never building. It means preserving the right to learn. Expand incrementally where you can. Stage commitments. Secure customers before capacity where the structure allows it. Reuse assets that can serve more than one future. Match long-lived investments with financing that does not force a decision at the worst possible time (this is key).

The best project is not always the one with the highest modeled return. Sometimes it is the one that still has options to success when the model is wrong.

Capital has a price, and the hurdle should move with it

A recent Dallas Fed working paper I caught in my inbox last week, adds a useful macro reminder. The researchers find that government debt financed from foreign borrowing has a larger estimated effect on interest rates than debt financed from domestic savings, and that net international creditor countries tend to face a smaller rate effect than net debtors.

I would not turn that into a rate forecast. I would take the simpler lesson: the marginal provider of capital matters, capital has alternatives and the return required to attract the next dollar moves.

Hurdle rates should move too.

A project that created value in one financing environment does not automatically create value in another. Clearing the weighted average cost of capital is not a permission slip to deploy money. A long-lived asset has to pay for execution risk, forecast error, illiquidity and the opportunity cost of committing capital that may not be recoverable for decades.

Concrete and steel is less forgiving than code. An asset built around the wrong assumptions can sit there being wrong for a very long time.

So do not build a plan that requires capital to become cheap again. If it does, great. Let that be upside, not the assumption holding the economics together.

Capital stewardship is the ability to remain adaptive

The hard part of this is behavioral. Executives want to win. Boards want growth. Investors want returns. Then a competitor announces something enormous and restraint can begin to feel like falling behind.

That is how favorable conditions get promoted into permanent assumptions (and then become a liability).

Capital stewardship is not the avoidance of risk by any means. It is taking risk without building a structure that requires everything to go perfectly to plan. Liquidity, operating flexibility and balance-sheet capacity are not signs that management lacks conviction. They preserve the ability to act when the facts change.

The goal is not merely to survive the stress test. It is to have enough flexibility to learn from it, enough discipline to change the business and enough financial strength to participate when the opportunity improves again.

That was the deeper lesson in renewable fuels. It is the one I would carry into AI infrastructure.

The Point Taken

The useful question is not whether AI demand will grow. I think it will. It is whether a particular investment still creates value if demand arrives later, capacity arrives faster, financing stays expensive or execution is imperfect.

I would watch who already owns scarce and useful infrastructure, who can add capacity incrementally against visible demand, who has customers willing to support the economics and who preserves enough optionality to change course when one of the assumptions moves.

That is the distinction between participating in a boom and stewarding capital through a cycle.

A growing market is not necessarily a good investment. A downturn is not necessarily a failed thesis. And a recovery is not enough if the business learned nothing from the stress.

Cheap capital is not a business model.

© 2026 23.5 Strategies; The Point Taken™ Bryan J. Kaus

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Bryan J. Kaus

He who overcomes others is strong; he who overcomes himself is mighty. Lao Tzu

I read the Odyssey the way most people do. In a classroom, at fifteen, because it was assigned. I understood the words. I did not understand the book. It sat in the canon the way a monument sits in a park, important because generations of people had said so, and I took their word for it and moved on.

This past weekend I went to see it on a screen, and something had changed. Not the poem. Me.

There is a kind of understanding you cannot reach ahead of experience. You can explain longing to a young person, or loyalty, or temptation, or regret, or the particular shame of doing a thing you knew was wrong while you were doing it. They will follow every word. They will define each term back to you correctly. And they will still be reciting a map of a country they have not visited. Knowing what a thing means is not the same as having lived enough to recognize it when it arrives.

That may be why the old stories last. You come back to them carrying more than you left with, and the adventure you remember turns out to have been a report on human nature the whole time.

The Structure Around the Animal

The question underneath the monsters is a plain one. What holds our baser instincts in check?

The comfortable answer is that civilization tamed the animal in us. It did not. It is still there, in all of us, at full strength, the appetite and the impulse and the older, more primitive wiring underneath the manners. Civilization is not the absence of that instinct. Civilization is the structure we build around it. Hospitality, obligation, loyalty, restraint, justice, the recognition that the stranger in front of you is a person and not an opportunity. It is the apparatus by which we subordinate appetite to something higher than appetite.

And across the Odyssey, that apparatus keeps failing.

Men give way to the animal in them. Hosts betray guests. The suitors eat their way through another man’s house because they have decided no one is coming to stop them. When Troy finally falls, ten years of siege become ten years of stored rage arriving all at once through an open gate, and the men who pour through are not villains by nature. They are ordinary men who were handed permission.

That is the part worth sitting with, because it does not stay inside the poem. Human beings can carry resentment and humiliation and the appetite to settle a score for a very long time, quietly, indefinitely, while behaving well. What changes is rarely the person. What changes is that something opens the gate.

Sometimes it is war. Sometimes it is a crowd. Sometimes it is political permission. Sometimes it is anonymity, the discovery that no one will know it was you. Sometimes it is nothing more than a new tool that puts distance between the hand and the consequence. The technology is new in every generation. The human being holding it is not.

We are trained to ask whether a given capability can be built. That is the easy question, and lately we answer it faster every year. The harder question is what people do with a capability once it is in their hands, at scale, with the consequence far enough away that it stops registering as one. The same instrument that amplifies creativity and knowledge amplifies resentment and cruelty by the identical mechanism. The gate does not care what opens it.

The Hero Is Not Pure

The Odyssey could have made this simple by sorting the world into the civilized and the barbaric. It refuses, and it refuses through its own hero.

Odysseus is brave, loyal, and genuinely brilliant. He is also vain, deceptive, cruel when it suits him, and reckless in ways that cost other people their lives. Sometimes he sees the wrong in what he is doing as he does it. Sometimes he shrugs and calls it the way of the world. Sometimes the understanding arrives only afterward, once the damage is finished and cannot be recalled. This does not make him a lesser character. It makes him a recognizable one.

Self-awareness is not self-control. We can know a thing about ourselves and fail at it anyway. We can understand that pride is dangerous and be proud. We can know that anger deforms judgment and act from anger with our eyes open. We can recognize that something around us is wrong and take part in it regardless, because everyone else treats it as normal and the cost of objecting is high. And then we live with it.

That tension does not resolve. It runs the length of us. Strength and brutality. Justice and revenge. Courage and fear. Loyalty and temptation. Intelligence and vanity. Duty and appetite. No one reaches a final settlement where the better impulse wins for good and the other goes quiet. Character is not the elimination of the struggle. It is staying awake to it, and deciding, again and again, which part of yourself gets to govern this time.

There is a counterweight the story insists on, and it matters. Restraint is not passivity.

When Odysseus comes home, other men have spent his absence helping themselves. The suitors eat his stores, drink his cellar, occupy his hall, court his wife, and diminish his son, and they do it on a single theory: that his inability to stop them is the same thing as their right to continue. It is not. There are people who will consume exactly as much as you permit them to consume, and the list runs well past food. Your time. Your work. Your dignity. Your position. Your goodwill. A peace bought entirely through surrender is not peace. It is a slower kind of loss. Sometimes what is right requires confrontation. Not violence. Assertion. And sometimes the just thing, the actually moral thing, is to stand in the doorway and refuse.

Which returns the hard question with its edges still on. How do you tell strength from brutality? Justice from vengeance? The confrontation a situation genuinely requires from the plain pleasure of winning? The poem hands you no rule. Odysseus himself does not always know the difference in the moment. That may be exactly why it has lasted. Its hero fails, rationalizes, suffers, learns, sees some of it too late, carries the contradictions, and keeps walking home anyway. That is a truer account of a person than the flattering idea that wisdom eventually turns us good. Wisdom may do something more modest. It may only let us see the struggle more clearly while it is happening.

No One Owns the Human Condition

There was a second thing the story raised, and it deserves to be kept separate from the first.

Afterward, talking it over, Monica caught how much of it rhymes with the Book of Job. A man is tested. He suffers. Forces entirely outside his control rewrite his life, and the question becomes what is left of a person once certainty and comfort have been stripped away. She is right that they rhyme. What interests me is not whether one borrowed from the other. It is that human beings keep writing this.

Civilizations separated by oceans, centuries, languages, and gods keep arriving at the same short list of questions. What is justice. What do we owe a stranger. What does power do to the person who holds it. What happens when pride outruns wisdom. When, if ever, is violence permitted. How should the fortunate treat those beneath them. What does suffering expose in a character. Religion takes up those questions. So do philosophy, mythology, and literature. And often enough, cultures that never met arrive at answers that are nearly the same.

This should not be mysterious. They are all studying one subject. Us. Everyone, everywhere, has had to contend with envy and hunger and grief and status and scarcity and love and betrayal and death. It would be far stranger if the great traditions did not overlap.

We accept as much in other domains without a second thought. Discoveries about the physical world get made independently, in different places, by people who never corresponded, because the world was sitting there to be found by anyone who looked hard enough. Moral knowledge can work the same way. Different peoples run into human nature and each conclude, on their own, that unchecked pride is dangerous, that a community cannot hold together without reciprocity, that cruelty rots the person committing it, that power needs a bridle, and that how you treat the people below you says more about you than anything you say about yourself.

Hospitality is one of the great structures in the Odyssey. Zeus himself stands behind the bond between host and stranger, and characters are judged, again and again, by whether they honor it. Anyone raised near Christianity or Judaism will find that familiar. Welcome the stranger. Care for the ones without power. Do not let wealth make you contemptuous. Treat a person as carrying a dignity that does not depend on what he can do for you. Different theology. Different names for the divine. The same human problem.

And the poem is honest about the failure that shadows the rule. People proclaim the law of hospitality and violate it in the same breath. Human beings are remarkably skilled at using a moral code to certify their own righteousness while quietly exempting themselves from its demands. We say the gods are with us. We say God is with us. We say history is with us, or justice is, and once that is settled to our own satisfaction, we turn astonishingly flexible about what we are willing to do to whoever we have placed on the other side. The code stops being a constraint on our conduct and becomes a proof of our superiority.

That inversion is the property of no one faith or party or flag. Religion does it. Politics does it. Nationalism and ideology do it. Movements built expressly around justice do it. It is not the defect of a particular creed. It is a human default. We reach, every time, for the moral system that indicts our enemies over the one that disciplines ourselves.

From Below

Which is why the idea from the film that has stayed with me longest is also the simplest. The truest way to measure a man is from below.

Power corrupts the evidence before you ever get to read it. People flatter whoever can reward them. They turn agreeable. They laugh at the joke. They accommodate the mood. They offer deference because proximity to power might pay. So watching how a person treats someone above him tells you almost nothing, and watching how he treats an equal tells you a little more. Watch instead how he treats the person who can do nothing for him. The waiter. The subordinate. The stranger. The opponent already beaten. The one whose approval carries no value. There the incentives fall away, and character, with nothing left to perform for, finally shows itself.

That test belongs to no tradition. Not Christianity, not Judaism, not the old Greek gods, not secular humanism. It belongs to the human condition, which is the entire point. You can hold your own tradition with your full weight without pretending it invented compassion. A Christian need not believe the pagans never glimpsed justice. A secular person need not treat every religion as morally empty. To insist that righteousness lives in one lineage alone is to confuse owning the vocabulary with owning the truth. If a thing is actually true about human beings, we should expect to find people stumbling onto it across every age and every map. And the recurrence itself may be the evidence worth weighing.

The Point Taken

Thousands of years apart, in languages that never touched, we keep writing down the same warning in different hands. Power without humility becomes domination. Appetite without restraint becomes destruction. Loyalty without conscience becomes cruelty. Law without self-examination becomes hypocrisy. Strength without justice becomes brutality. And a morality aimed only outward, only ever at other people, has already quietly stopped being a morality at all.

So the question was never which civilization wrote the rule first. The rule is not scarce. It is everywhere, in every tradition, waiting.

The question is the one the poem keeps asking, under the monsters and the wars and the long way home. When appetite and power and pride and fear and love and duty collide inside a person, which one does he let govern. And the honest form of that question comes with a price, because the answer only counts on the days it costs you something.

The gate is always there. Who you are when it opens is the only thing it was ever testing.

© 2026 23.5 Strategies; The Point Taken™

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Bryan J. Kaus

To copy an example of success, without understanding it with the aid of theory, may lead to disaster.

- W. Edwards Deming

At the General Motors assembly plant in Fremont, California, cars used to come off the end of the line useless, unable to move. They had to be towed away to be fixed. That was considered normal.

By the early 1980s Fremont had the worst vehicle quality in General Motors, a history of wildcat strikes, absenteeism that made staffing a daily improvisation, and a relationship with the United Auto Workers that had stopped resembling a negotiation. GM closed it.

In 1984 the same building reopened as NUMMI, a joint venture with Toyota, with Toyota managing the operation. Roughly 85 percent of the start-up workforce were UAW members from the plant that had just failed. Another five to ten percent came from a shuttered Ford facility down the road in Milpitas. The people GM management had privately regarded as the problem, including the men with reputations as agitators, walked back through the same gate.

Inside of a year the plant went from the worst quality in General Motors to the best.

Same building. Same workers. Same union. The thing that changed was the production and management system.

The lesson everyone drew, and the one that mattered

The obvious conclusion was that GM should copy Toyota, and GM was in an unusually good position to do it. This was not industrial espionage or reverse engineering from the outside. GM owned half of NUMMI. It could send its own managers through the plant, and it did.

It still took the better part of two decades to move much of that capability into the rest of the company, and by most accounts the transfer was partial at best.

The usual explanation is that GM’s culture resisted it, which is true and also unhelpful, because culture is the name we give to a mechanism we have not bothered to better define and specify. The more useful account is that what traveled from Japan to Fremont was not a set of practices. It was a set of conditions that made those practices rational for the people actually executing them.

An Andon cord that lets a line worker stop production only functions if management has genuinely accepted the cost of a stopped line and will not punish the person who pulled it. Standardized work only improves anything if the people doing the work own the standard and can change it. Small-lot production without buffer inventory requires strong supplier relationships and equipment reliability that take years to build and that expose you badly if either fails. Problem-solving at the line requires that surfacing a defect be safe for the person who found it.

Toyota did not ship a toolkit to Fremont. It shipped the playbook and the conditions, and it spent enormous effort installing them, and the tools then worked.

What GM subsequently tried to move into its other plants was the visible layer. The cords, the boards, the terminology, the kaizen events. Those artifacts were photographable and could be installed quickly. The conditions underneath them could not, and without the conditions the artifacts were theatre, and the workforce identified them as theatre immediately, because workforces always do.

The precedent traveled once and failed to travel the second time, and the same company was on both ends of it.

Sixteen samples

I read across a lot of sectors, on the theory that the way things actually work tends to repeat from one to the next, and the clearest version of an idea often turns up a long way from where you need it. This one turned up in a medical journal.

Most of what the world knows about Ebola comes from two strains. There is a third, called Bundibugyo, different enough that the people studying it were candid that the existing knowledge might not carry over. And the entire evidence base for it, across every outbreak on record, is sixteen samples.

Sixteen. That is what a response team works from when an outbreak starts and the decisions cannot wait. The only real body of knowledge available is about two related but genuinely different viruses, and nobody gets to postpone the call until better evidence shows up.

That is not a failure of science. Rather, it is the ordinary condition of any consequential decision, and it is where an operator or an investor lives most days.

What this costs in business

The transfer error is the most common analytical mistake I encounter, and it almost never looks like a mistake while it is being made. It looks like pattern recognition, which is what we pay experienced people for.

Margins from one geography imported into another where the competitive structure and conditions are entirely different. Adoption curves observed among early users applied to a mass market that wants a different thing for different reasons. A management team that performed brilliantly at one scale, in one industry, in one capital environment, hired on the assumption that the performance was the person rather than the fit. Commodity behavior from one regime carried into another where the marginal supplier has changed or economics are different - think conventional oil and gas versus renewables; I’ve written on this exact point before. Returns generated across a decade of nearly free capital extrapolated into an environment where money costs something. Project economics from one power market moved into another with a different market design, a different queue, and a different regulator.

In each case the precedent is real. Somebody did achieve that margin, that adoption curve, that return. The reasoning failure is not fabrication, rather it is the silent assumption that the result was produced by the thing you can see rather than by the surrounding conditions you did not inventory.

The trap is that a precedent is not evidence in the way it feels like evidence. That the past resembles the future, or that this case resembles that one, is not something the numbers prove. It is something we assume, and then arrange the numbers on top of. That does not make experience useless. Experience is information. It makes it a tool with a stated tolerance, and using a tool past its tolerance is how people get hurt and results miss the mark.

So the question to ask of any analogy is not whether a precedent exists. Precedents always exist, and a diligent analyst can find one for nearly any proposition.

The question is which causal conditions produced the precedent, and which of those conditions are present here.

Then, immediately: which are absent, and do the absent ones strengthen the case, weaken it, or break it entirely.

Where this argument breaks

The failure mode of everything above is an organization that has learned to say “our situation is different” and has thereby immunized itself against all outside evidence and blind belief in its own exceptionalism.

That sentence is the single most common defense of a bad practice inside a struggling business. Every plant is different. Every market is different. Every customer relationship is unique. All of which is true and none of which is a reason to keep doing something that works nowhere. Demanding perfect transferability before acting is not rigor, but rather, it is polite paralysis, and the people who practice it usually get to be right about the risk and wrong about the outcome.

The right posture is the one those same doctors took. Faced with sixteen samples, they did not throw up their hands and they did not pretend the gap was not there. They used what they had, said plainly where they expected it to fail, and built a way to find out fast from the people closest to the outbreak.

That has three parts.

1. Use the imperfect precedent, because it is what you have.

2. Name precisely where you expect it to fail.

3. And build the mechanism that will tell you which, fast, from the people on the ground.

The last part is the one many companies skip. Headquarters tends to see the pattern across the portfolio and mistakes that for seeing the mechanism. The plant manager, the field engineer, the regional commercial lead, and the crew running the equipment know which conditions are actually present in a way no comparative analysis will surface. And I say this as someone who started their career in a plant. Excluding them is not merely a discourtesy. It removes the only instrument capable of measuring whether the analogy holds and the principles can be deployed effectively.

The Point Taken

Experience is worth a great deal, and it is worth almost nothing in the form most people carry it. What most of us store is outcomes. What transfers is mechanisms, and the two get filed in the same drawer.

Three questions before you rely on any precedent, whether it is a case study, a prior success of your own, or the thing that worked at the last company.

1. What were the conditions that produced that result, stated specifically enough that someone could check whether they exist here.

2. Which of those conditions are absent in this case, and is any single absence sufficient to break it.

3. And who on the ground would know first if the analogy is failing, and what would have to be true for them to tell you in time.

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© 2026 23.5 Strategies; The Point Taken™

By Bryan J. Kaus

There is nothing more difficult to take in hand, more perilous to conduct, or more uncertain in its success, than to take the lead in the introduction of a new order of things.

- Niccolò Machiavelli, The Prince, 1513

Tesla lost roughly fourteen percent of its value in a single day after its second-quarter report.

The reason was not hard to find. The company generated $4.7 billion of operating cash in the quarter and spent $5.8 billion building things. Free cash flow turned negative for the first time in two years. Capital spending more than doubled from a year earlier, and management guided to more than $25 billion for the full year, nearly triple what the company spent in 2025. To help fund it, Tesla arranged a credit facility of up to $30 billion.

That is enough to make any serious investor stop and look harder.

Capital has consequences. Money spent today has to become more money tomorrow, or it was never investment at all - it was speculation. Tesla still earns most of its revenue selling cars, and most of the programs now drawing its capital and its attention have yet to prove they can pay for themselves. The market was not wrong to want evidence.

But I think the reaction missed the more interesting thing.

Tesla is not spending more to build better cars. It is trying to become a different company.

That distinction is the whole essay.

Follow the capital

Companies describe themselves as transforming all the time. A new slogan. A reshuffled org chart. An innovation office. A few extra slides in the investor deck. The underlying business goes on doing exactly what it did before.

A real repositioning looks different. Capital moves. Facilities change. Talent gets redirected. Management accepts near-term pain because it believes the future company will need capabilities the present company does not yet have.

The budget is ALWAYS where you find the truth. A company will tell you many things about itself in its language. It tells you what it actually believes with its money, its people, its equipment, and its attention. On that measure, Tesla’s spending is not the behavior of a car company buying growth or innovating in its lane. It is the behavior of a company changing what it is.

The stated destinations for the capital are compute and data centers, expanded manufacturing and research capacity, company-operated fleets of AI-enabled assets, and the service and charging infrastructure to run all of it. This is a stunningly obvious observation once you pause on it for a moment. Operating expenses jumped forty-seven percent in the quarter, driven by AI, the Optimus humanoid robot, and the robotaxi program. Tesla has also begun building the unglamorous physical scaffolding that autonomy actually requires: cleaning, maintenance, charging, security, teleoperation, fleet management. None of that is a laboratory experiment. Those are actual assets, buildings, and payrolls.

Cars remain central to the story. But their role is quietly shifting. They are still products sold to customers. They are also becoming data-generating machines, distributed computing and power platforms, nodes in a network, and the first commercial expression of a broader ambition to connect software intelligence to the physical world.

None of this means Tesla will succeed. It means that judging the company only as a carmaker placing expensive side bets may be the wrong frame entirely.

The identity gap

There is an awkward stage in any real repositioning. The old business still explains the income statement. The new business increasingly explains the capital account. The company has started to move, and the financial evidence has not caught up.

I think of that as the identity gap.

Inside it, everyone is looking at a different clock. Management sees the system it intends to build. Investors see the cash leaving. Employees feel the shift in resources and status. Customers still judge the product in front of them. And the board has to decide how long to fund the difference between what the company earns today and what it is trying to become. That is the crux of it.

Markets tend to struggle in that space. Not because they are foolish, but because the evidence is genuinely incomplete. The old metrics no longer capture the strategy. The new metrics are too immature to price accurately.

That is uncomfortable. It is also where the most consequential corporate decisions get made.

An operator’s view of the same gap

I have watched a version of this from the inside.

When Phillips 66 was spun off in 2012, the market reached for the most legible frame it had and saw a refiner. That was fair on the numbers. It was also incomplete. I remember working through exactly this with the excellent Ed Hirs, one of the leading market voices on our presence at the time, whose words were misreading who we were. And in doing so I realized it was not that Ed was being unfair. It was that we had been unclear about what we were actually going to be when we grew up, even though we had already put far more in front of the market than the market had absorbed. Management was building something the reporting structure did not yet show: logistics, chemicals, storage, pipelines, export access, a connected physical network meant to earn more durably than refining margins alone ever could, funded by the cash the refineries threw off. For a while the two descriptions did not match. Over time, capital, disclosure, and results converged, and the market came to understand a company that was not the one it had started pricing years earlier. That was a remarkable thing to watch and to be part of.

I raise it only in passing, because it taught me a distinction I have never stopped using.

A strategic repositioning can be real before its economic success is proven. Those are two separate judgments, and confusing them is where most of the analytical errors live. Management can correctly identify what a company must become and still sequence the capital badly. It can hit every construction milestone and still earn an inadequate return, no matter how thorough the scenario planning. The market can misunderstand what a company is becoming and still be right to question how the transition is funded and how the balance sheet is positioned. Both can be true at once. Tesla deserves that same double-vision.

Others have crossed the gap

Some companies make it through.

For years, the market understood Microsoft through Windows, personal computers, and packaged software licenses, even as management was rebuilding the company around cloud infrastructure and recurring subscriptions - and, of course, the Steve Ballmer launch-day dance routines. The new identity did not become credible because leadership kept saying “cloud.” It became credible when commercial-cloud revenue climbed from roughly twenty billion dollars toward fifty billion within a few years, and Office customers moved to recurring subscriptions. The story did not carry the transition. The reported economics did.

Amazon is a slightly tighter version. For most of its life the market read it as a thin-margin online retailer that reinvested every dollar it could find. The infrastructure built to run that store became Amazon Web Services. By 2025, AWS generated about $128.7 billion in sales and $45.6 billion of operating income, the majority of Amazon’s profit. Only when revenue, operating profit, and customer usage made the shift measurable did the market re-rate the whole enterprise.

That is the tell. A repositioning that is just a proclamation is a slogan. Words. Anybody can do that. A repositioning that earns a new valuation frame is one that eventually produces its own irrefutable, tangible, touchable evidence.

Tesla has not yet crossed that line. Which is exactly why this period matters so much.

More than one man

Any honest analysis of Tesla crashes head-on into Elon Musk, and there is no point pretending otherwise.

I will say plainly that I have reservations about the way markets sometimes value anything with his name attached. Enthusiasm expands simply because he is involved, and reputation becomes a valuation input long before any of the real economics show up. So I try to look beneath it, and across it, and around it.

This quarter offered a clean example. Tesla put $2 billion into xAI in January. Weeks later, when SpaceX absorbed xAI, that stake converted into a sub-one-percent position in SpaceX. After SpaceX went public in June, Tesla booked roughly a billion-dollar gain on the holding. On the earnings call, management walked through the growing web of connections among Musk’s ventures: chip fabrication with SpaceX, Starlink hardware in the Cybercab, shared robotics work. Follow those arrows far enough and the org chart stops resembling a corporate structure and starts resembling a family tree.

Some of that may carry real strategic logic. But capital deployed to build compute, factories, autonomy, and robotics belongs squarely inside the repositioning thesis, while capital and paper gains that exist because the chief executive’s companies orbit one another are a different category. Proximity to Musk is not a sound strategy. It is a fact about the map.

And yet Tesla cannot be reduced to the man either. Whatever you make of his forecasts or his conduct, the institution has accumulated real capability: engineering, manufacturing, battery and power electronics, software, energy, supply chain. In the quarter, Tesla delivered a record 480,126 vehicles, its first year-over-year delivery growth in roughly two years, and deployed 13.5 gigawatt-hours of energy storage. Those are not decorative bullet points on a slide. That is real, touchable, tangible output.

Past success deserves consideration. It does not deserve exemption from scrutiny. Musk’s record genuinely changes the odds and the speed-to-market potential. But every celebrated builder eventually meets a problem that does not yield to the methods that produced the earlier victories. Confidence can curdle into overconfidence. Speed can become haste. Stars lose their shine eventually, sometimes because the environment changed, sometimes because the institution grew too dependent on the star to challenge the thesis at all.

The real question is narrower and harder. Do Tesla’s accumulated people, assets, data, and operating capability give it a legitimate right to win in physical AI, and is the organization disciplined enough to find out honestly when they do not?

The operator’s problem

Repositioning a company at this scale is not a communications exercise. It is an actual physical operating problem, and it looks much the same in a refinery, a software company, or a car plant. Management has to run two systems at once.

The first job is to protect the business that pays for the transition, and it is the one that most often gets missed. I saw this across a good part of the renewables and transition wave. Too many of those efforts set their economics, capital structures, and cash flows on the wrong footing from the start, which I believe explains much of the sector’s retrenchment after the boom years of 2018 to 2023. The ones still standing are, by and large, the ones that secured advantaged feedstocks and optimized their supply chains for genuinely low-cost inputs before the music stopped. If you had oil and products, the disciplined move was to use their cash-cow properties to build a proper beachhead for the transition initiative, so it had a fighting chance when the wind shifted and the favorable economics, especially the ones buoyed by incentive subsidies, eroded and the business got stress-tested. That is the world you have to plan to survive in. Prove survival through that stress test and you are viable. If not, it is a bad bet, because it is chance rather than calculated risk.

The same logic sits directly under Tesla. Automotive revenue was roughly $20.5 billion of the quarter’s $28.2 billion. The future may be broader than cars, but the present depends on them completely, and the core supplies far more than cash: manufacturing knowledge, supplier relationships, customer access, real-world data, and the plain institutional credibility that lets the company raise its bets at all. The most common way transformations fail is that leadership treats the core as yesterday’s problem before the new business can carry the weight. The old engine gets to become less important. It does not get to be neglected while it is still running the whole thing.

The second job is the opposite discipline: giving the new business enough separation to breathe. A new operating model rarely survives inside the metabolism of the old one. Force it through the habits of the core and the core rejects what does not fit. Cut it loose entirely and it loses the assets and data that were the whole reason to attempt it under one roof. There is no formula for that balance, at Tesla or anywhere else.

Then there is sequencing. A budget is really a decision about what does not get funded this year - anyone who has been through the process knows it. The core, the new capabilities, the balance sheet, and the shareholders all draw on the same pool of cash, and the order in which those claims get paid is not an accounting detail. It is the strategy. Tesla ended the quarter with about $43.5 billion in cash and says it can throttle spending if the ramp comes slower than planned. That flexibility is worth something only if management is willing to use it. Once a strategy becomes fused to the identity of a celebrated founder, slowing down starts to feel like weakness rather than discipline. Part of a board’s job is to protect management’s ability to change the sequence without treating every revision as a betrayal of the vision.

The deepest discipline applies to any transformation: define the evidence before enthusiasm becomes immune to it. Agree in advance on what would actually prove the repositioning is working, and make it operating truth rather than demonstration. For Tesla that means autonomous miles and safety performance, fleet utilization, cost per mile, the manufacturing cost of Optimus, and, above all, the rate at which the new businesses stop leaning on automotive cash. Without those gates, every delay gets recast as further investment and every overrun as proof the prize is even bigger. That is not strategic patience. It is narrative immunity, and it is how good companies talk themselves into bad outcomes.

Finally, preserve reversibility. The goal is not to eliminate risk, which would eliminate the possibility of transformation. The goal is to make sure a single wrong assumption cannot take the whole institution down with it.

The investor’s problem

Turn the same problem around to the outside, and it belongs to any company caught in the identity gap. An investor needs two theses, not one.

The first is about the company that already exists. What are the present businesses actually worth on current revenue, margins, competition, and capital intensity? For Tesla, that is automotive, energy, and services, valued honestly rather than assumed away.

The second is about the company being built. Those options should not be marked at zero because the outcome is uncertain, and they should not be capitalized as though the uncertainty were already resolved. Each bet comes with a gate you can watch: what has to work technically, what regulators have to permit, what the economics look like at scale, how much more capital the road demands. And the question that quietly undoes more investors than any of the others, in any transformation story: how much of the happy ending is already sitting in the price.

The discipline is old and unglamorous, whether the company makes cars, software, or steel. Value the business you can see. Identify the embedded options. Assign probabilities you can defend. Update as the evidence changes. Possibility is not probability, and uncertainty is not zero.

Who carries the transition

Shareholders are never the only people asked to fund a transformation.

Employees in the core will watch status, resources, and promotions drift toward the new thing. The veteran who knows why the body line jams on a humid morning, and how to keep it moving anyway, notices when the interesting money and the interesting problems have quietly relocated to another building. A company can lose its best operators from the core long before the new organization is ready to catch them, and those are the people it misses first.

Customers are entitled to ask whether service and quality still get the attention they deserve. A car company’s reputation is won and lost in the service bay and at the charging stall on a cold night, not on the earnings call. No company gets to claim it is building the future while degrading the experience of the people currently paying for it.

Suppliers, regulators, and communities each carry their own piece: tooling decisions made on assumptions about future volume, and new factories, data centers, and fleets that each demand their own permission to operate. Technical capability does not automatically grant that permission. Legitimacy has to be built alongside the assets.

The board’s task is to know which of these stakeholders is absorbing the cost of the transition, and whether management has been honest with them about the trade being asked.

What would change the thesis

A thesis worth holding, about any company, names the conditions under which you would give it up. Without them, it is not a thesis. It is a hope with a spreadsheet attached.

For Tesla, strengthening evidence would be autonomy expanding safely at scale, improving robotaxi economics, Optimus doing economically useful work, and the new businesses generating their own cash. Weakening evidence would be repeated delays without improved economic visibility, escalating capital requirements, deterioration in the automotive core, and, most telling of all, management that refuses to revise its assumptions when the evidence moves against it.

The honest test is the same for any enterprise that sets out to become something else. Over time, the uncertainty should narrow. If each passing year requires a larger narrative to explain why the economics remain somewhere just beyond the horizon, the story is not progressing. It is receding.

The Point Taken

Tesla has entered the largest investment period in its history while the businesses that investment is meant to build remain unproven. That is a gamble, and the market is right to price it as one. But it is not a random pile of speculative projects. There is a coherent logic connecting vehicles, batteries, storage, manufacturing, compute, fleets, and robotics. That logic may prove right. It may also badly overestimate how easily one set of capabilities transfers into another. The verdict is genuinely open, and anyone who tells you otherwise is selling something.

None of this is really about one company. Every enterprise that sets out to become something new lives in the gap for a while: the old identity explains the earnings, the new one explains the capital, and everyone attached to it is asked to fund the distance between the two. The discipline is the same each time. Protect the engine that pays the bills. Give the new thing room without cutting its supply lines. Decide in advance what would prove you right, and what would prove you wrong. Keep enough in reserve that one bad assumption cannot end the whole story.

The present income statement tells us what Tesla has been. The capital program tells us what management believes it must become. The operating evidence, and only the operating evidence, will eventually tell us whether the transition was real. The market is right to question the cost.

It may still be underestimating what is being gambled for.

© 2026 23.5 Strategies; The Point Taken™

Bryan J. Kaus

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

- Charles Mackay

Watch enough financial news and you stop hearing the content. You start hearing the appetite underneath it. The same story, told with the same conviction, by the same people who were selling a different story with the same conviction a quarter ago. Nobody sounds unsure. Everybody sounds early. And the room leans in, not because the argument is sound, but because it is exciting, and because everyone else is already leaning in.

Last week I wrote about the ways we misread the past. Survivor bias, confirmation bias, the quiet editing that turns a lucky run into a law. If it survived, we tell ourselves, it must be so. That sentence is comfortable. It is also the machinery that has emptied fortunes for four hundred years. This week I want to follow it one layer down, to the thing that makes the machinery run. Not the error itself, but the hunger for it.

Charles Mackay catalogued the wreckage in 1841. Holland lost its head over tulip bulbs, a few of them briefly priced above a working man’s house. France handed its economy to John Law and his Mississippi paper, and the crowd pressed so hard into the Rue de Quincampoix that a hunchbacked man made a living renting out his back as a writing desk. England answered with the South Sea Bubble. Mackay’s subject was never really the flowers or the shares. It was the crowd, and the fact that the same fever kept finding new hosts. The costumes change. The disease does not.

Error, the oldest acquaintance

The chapter of Mackay that stays with me is not the bubble arithmetic. It is a quieter one he called the love of the marvelous and the disbelief of the true. He put the mechanism plainly. Of all the offspring of Time, error is the most ancient, so old and familiar an acquaintance that Truth, when she finally arrives, is met like an intruder.

Read that twice. It is not that people are stupid. It is that a thrilling falsehood and a dull fact never compete on level ground. The falsehood is already seated at the table, comfortable, welcome, wearing the face of a friend. The fact knocks at the door and is asked to explain itself. We do not weigh the two. We carry a standing preference for the one that flatters us, moves fast, and promises more than any ledger can support.

That preference is not a relic of a credulous age. It is human wiring, and it sits in the analyst and the allocator as surely as it sat in the tulip trader. We like to think we retired it with data. We mostly just gave it faster tools.

The warrant does the work

You do not have to reach back to Holland for the pattern. Look at the last decade.

Theranos told the world that a single drop of blood could run hundreds of tests, and the world believed it, not because the machines worked, but because the story arrived with a warrant. The board was a wall of statesmen and generals: two former secretaries of state, two former secretaries of defense, a former senator. At its peak the company was valued near nine billion dollars. What it lacked was a device that did what it claimed, and the people saying so, a young whistleblower and a reporter, were disbelieved and pressured long before they were believed. The marvelous claim carried a warrant. The plain truth did not. Holmes is now serving more than eleven years.

FTX ran the same play in a different market. A rumpled young founder who had supposedly cracked crypto, wrapped in the language of doing the most good, on the magazine covers and the conference stages, courting regulators with a reformer’s smile. The warrant was the halo. The dull truth was that customer money was not where he said it was. The crowd disbelieved that until the withdrawals could not be met and the whole thing came apart in a week. He is serving twenty-five years.

WeWork is the quieter case, and maybe the more instructive, because no one went to prison. It leased office space and lost money doing it. That is a dull, true sentence. The marvelous version, that it was a technology company elevating the world’s consciousness, carried it to a forty-seven billion dollar valuation, right up until the prospectus forced the plain numbers into daylight and the offering collapsed in about six weeks.

Notice what these share. None of them was unknowable. In every case someone was saying the true thing out loud, and sophisticated boards and famous investors disbelieved it, because it lacked a warrant and because it was not the exciting story. That is not a failure of information. It is the love of the marvelous, wearing this decade’s suit.

The efficient sameness

Individual frauds are the loud version, and they are almost comforting, because they come with villains and verdicts. The version I actually watch for is quieter, and it has no perpetrator at all. It looks like efficiency.

The mania of this moment is not one wrong idea held by everyone. It is the decision, made by nearly all of us at once, to outsource judgment to the same source and call the result thinking. The tools are genuinely capable. They can rationalize a position faster than most of us can frame the question. That speed is real, and I will use it. But speed is not sense, and a confident answer is not a considered one.

When everyone reaches for the same easy button, the outputs converge. Every memo reads well. Every deck lands. None of it is anyone’s own. Follow that out a few orders and you arrive at the part that should worry anyone who cares about growth rather than the next quarter. Innovation is a function of divergence. It comes from the outliers who trust their own ground truth over the confident consensus, the ones willing to be wrong in a direction no one else is looking. Flatten that variance and you do not get a boom. You get a very efficient sameness.

The image is the monoculture. A single crop, bred for yield, planted fence to fence, posts the best numbers per acre anyone has seen, right until one pathogen finds the weakness they all share. The field traded adaptive variety for short-run efficiency, and the trade looked brilliant until it wasn’t. Homogenized judgment is the same bargain. High yield now, thin resilience later, and a slower arrival of whatever was supposed to come next.

There is an optimistic case, and I want to be fair to it. Perhaps a few crack the code, build enormous winners, and the losers fall away. Even then I am not comforted. If novelty concentrates into a single winning source, you have built something efficient and fragile at the same moment. Growth over decades is a recombination problem. It needs many independent experiments to draw from. Narrow the pool to one and you have not secured the future. You have mortgaged it.

The worship of the thief

Mackay has a chapter that reads strangely until you sit with it. He called it the popular admiration for great thieves. His subject was the highwayman and the robber, the bandit the public did not condemn but celebrated, cheered toward the gallows and sung about in ballads for a generation. The crowd did not merely tolerate the man who took what was not his. It admired him for the taking.

We have not outgrown this. We have only refined it. Before the verdicts came in, we put these same founders on the covers and the stages and asked them how they did it. We reserve a particular reverence for the one who seems to have cracked the code, who games a structure everyone else agreed to play straight and narrates the extraction as vision. A dull edge does not draw a crowd. A daring theft does.

The reason this matters, beyond the moral of it, is that the admired thief is usually the same figure as the single winning source from a moment ago. When a crowd decides in advance to worship whoever cracks the code, it has already handed concentration its warrant. The applause is not incidental to the flattening. It is the mechanism that licenses it.

One by one

There is a trap in writing any of this, and it is worth naming before it swallows the argument.

Mackay is the herd’s favorite book. Everyone who has ever quoted the line about men thinking in herds pictures himself as the lone sane figure watching the stampede thunder past. That is the comfortable read, and it is the wrong one. The delusion is never the other crowd. The discipline Mackay is actually asking for is harder and lonelier: not diagnosing someone else’s tribe, but dissenting from your own.

Look again at his line on recovery. Crowds go mad together, all at once, for free. They come to their senses slowly, and one by one. That asymmetry is the whole argument. Madness is collective and costs nothing. Sense is individual and costs something every time. It means cultivating your own knowledge past the base you were handed, doing the work when the easy button is right there, and holding a boring true thing while the room celebrates an exciting false one. Nobody hands you that. You build it alone, or you do not have it.

That is the part I will not surrender. The tools are marvelous and I will use them. But this is still our world to reason about, and reasoning is not something you can outsource without eventually forgetting how it was done.

The Point Taken

Mackay borrowed a small story from Lord Bacon that says more than any bubble ledger.

An old woman refuses to believe her sailor son could have seen a flying fish. Her Bible makes no mention of such a creature, so it cannot be. In the same breath she gladly believes he hauled a golden, jewel-encrusted wheel up out of the Red Sea, because her Bible tells her Pharaoh drowned there, and a sensible captain confirmed it. The marvelous falsehood arrived with a warrant, so she welcomed it. The plain truth arrived without one, so she turned it away.

That old woman is every board that waved through the statesmen and disbelieved the whistleblower. We accept the marvelous when it carries a stamp of authority and reject the true when it shows up unaccredited and inconvenient. It is the same appetite that priced a tulip above a house, and it has not aged a day.

The crowd will always love the marvelous. It costs nothing to join and it feels like insight. The only defense anyone has ever found is unfashionable, unscalable, and entirely your own.

Recover your senses one by one, and do not wait for the herd to go first.

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© 2026 23.5 Strategies; The Point Taken™

Bryan J. Kaus

Sure thing. Save this card and watch it closely. Samuel Benner, 1875

There is a chart that keeps coming back.

Sepia paper, hand lettering, sawtooth peaks marching from 1924 out to 2059. Three rows, labeled panic, good times, hard times. It resurfaces every few years with a line attached, and the line is always some version of the same claim: an Ohio farmer in 1875 predicted 2008.

The dates land close enough to matter. 1927, near the crash of 1929. 1999, just ahead of the technology collapse. 2007, just ahead of the mortgage crisis. Off by a year or two, and the concession does real work, because a near miss reads as humility and humility reads as credibility.

It is a compelling object. It is also the most expensive idea in finance, wearing a costume.

The chart itself is harmless. Almost nobody is allocating against it. What is not harmless is the appetite that keeps pulling it back to the surface, because that appetite does not stay in the antique aisle. It shows up in trading accounts. It shows up in board packets and price decks. It showed up in the risk models of the largest financial institutions in the world, and it cost roughly a decade of growth. And it is now being wired, quietly and at scale, into the systems we are asking to think on our behalf.

Nobody sets out to destroy capital. That is the thing worth sitting with. Capital gets destroyed sideways, by people who were being careful, using good tools, right up until the moment the tool stopped describing the world and started replacing the judgment that was supposed to check it.

The chart is just the cleanest specimen of the impulse. So start there, then follow it into places where the money is real.

Start with the artifact, because the artifact is already lying

Before we evaluate the prophecy, look at the paper.

The card circulating as Benner’s 1875 forecast is not straightforwardly Benner’s. The “Periods When to Make Money” broadside is a business card of the George Tritch Hardware Company of Denver, compiled in 1872 and carrying copyright dates from the 1880s and 1890s. Benner published Benner’s Prophecies of Future Ups and Downs in Prices in 1875, a study of hog, corn and pig iron prices, and his original forecast ran out somewhere around 1891. The version now in circulation, the one that reaches 2059, is a later extension. Attribution between the two men is genuinely contested, and the chart most people are passing around is not the chart most people think they are passing around.

This is not a footnote. It is the first data point.

A complicated nineteenth century argument about agricultural and industrial commodity prices, of uncertain authorship, extended by a hardware merchant, has been compressed into seven words: a farmer predicted 2008.

The compression is the product. Every step that made the story shareable also made it less true. If the artifact cannot survive a provenance check, it is unlikely to survive a capital allocation decision.

Prediction by proximity

Grant the chart its best case anyway. Assume Benner drew every line himself.

The apparent accuracy is manufactured by proximity and by elastic categories.

“Panic” can absorb a recession, a correction, an inflation, a geopolitical rupture, or an event in an adjacent year. “Good times” can mean growth, high prices, or merely a moment that later looks like a decent exit. “Hard times” can mean a bear market, weak sentiment, or any period in which something eventually turned out to be cheap. Define the target broadly enough and widen the window enough, and history will always hand you a match.

But close is not a neutral word when you are moving money.

An investor who sold in 1927 did not simply dodge October 1929. He also handed back two years of one of the great bull markets in history, and he had to survive professionally while doing it. Someone who braced for the 2019 panic year and positioned defensively gave up a strong year in equities, and then the event that arrived had nothing to do with a nineteenth century commodity cycle. It was a virus.

Being early is indistinguishable from being wrong for anyone who has to report to a board, an investment committee, or a margin clerk.

And notice what happens to the misses. They vanish. The hits get screenshotted. This is survivorship bias applied not to funds but to ideas: a century and a half of charts, waves, cycles and warnings have been produced, nearly all of them forgotten, and the handful that can be retrofitted to later events keep getting rediscovered. The survival of a forecast is then mistaken for evidence of its accuracy.

Cycles are real. Clocks are not.

None of this requires denying that cycles exist. They plainly do, and anyone who has run a physical business has lived inside one.

Credit loosens. Leverage builds. Capacity gets added because returns look attractive and everyone is looking at the same returns. Supply overshoots. Prices break. Weak balance sheets fail, assets change hands cheaply, and the cycle reloads. Anybody who has watched a refining margin cycle, or a shale capex cycle, or a tanker rate cycle, knows the shape by feel.

Recurrence is real. Periodicity is fiction.

A capital cycle is not a planetary orbit. It runs on human decisions, and humans learn, institutions change, technologies emerge, central banks intervene, and, decisively, the act of anticipating the pattern changes the pattern. Markets are reflexive. They respond not to events but to beliefs about events, then to the strategies built on those beliefs, then to the consequences of thousands of participants adopting the same strategy at the same time.

October 1987 is the cleanest illustration. Portfolio insurance was designed to protect institutions by selling into declines. It was sound enough for one investor. Deployed simultaneously across the market, the selling triggered declines, which triggered more selling. The model did not merely observe the risk. At scale, it manufactured it.

Hold that thought. We are going to need it again shortly.

How capital actually dies

Long Term Capital Management is the case everyone reaches for, and usually for the wrong reason.

LTCM was not following anything as crude as a sepia chart. It was arguably the finest concentration of financial intellect ever assembled in one firm, including two Nobel laureates, trading small and genuinely observed pricing relationships among similar securities. It returned roughly twenty percent, then forty three, then forty one, then seventeen.

Here is the detail that matters, and it is an operator’s detail, not a mathematician’s.

At the end of 1997, LTCM returned capital to its investors without reducing the size of its book. The positions stayed. The equity underneath them shrank. By year end the fund was carrying something on the order of thirty dollars of debt for every dollar of capital.

Nobody voted to increase risk. Risk increased anyway, as a mechanical consequence of a decision that looked like discipline. That is how capital dies. Not in a dramatic wrong call, but in a structural change that no one re-underwrote because the model still said the trades were sound.

When Russia defaulted in August 1998, the spreads that were supposed to converge diverged, in nearly every case at once. Liquidity vanished. Positions that appeared diversified turned out to be one position: a leveraged bet that normal relationships and normal liquidity would return on a schedule the fund’s balance sheet could survive. It could not. On the twenty third of September, fourteen firms put roughly three and a half billion dollars into the fund in exchange for ninety percent of it, in a recapitalization the Federal Reserve Bank of New York brokered without lending a public dollar.

The lesson is not that the models failed. Every model fails to represent reality in full. That is what a model is for.

The lesson is that model confidence, leverage, concentration and illiquidity were stacked on top of one another until a temporary analytical error became a terminal one.

Ten years later the same epistemic mistake showed up wearing better clothes. Mortgage securities were rated using models built on historical default behavior from a period in which national home prices had not fallen, with assumptions about correlation across regional housing markets that turned out to be badly wrong. When prices fell everywhere at once, instruments assumed to be diversified failed together.

The Financial Crisis Inquiry Commission put it more plainly than any of us could. Its conclusion was that financial institutions and the rating agencies had come to treat mathematical models as reliable predictors of risk, and that in doing so they let the models stand in for judgment.

They let the models stand in for judgment. That is the whole essay in a line.

The regulators have not forgotten. In April of this year the Federal Reserve, the OCC and the FDIC rescinded the model risk framework that had governed banks since 2011 and replaced it with revised interagency guidance, on the view that models are simplifications whose usefulness and whose limitations arrive together, and that material model risk survives even rigorous validation.

That is not an argument against models. It is an argument against worshipping them.

The same error, in a nicer suit

Everything above happens in boardrooms too, and it is harder to see there because it is denominated in slides rather than basis points.

A single price deck carries a ten billion dollar project. Utilization is assumed to climb in a smooth line because it climbed in a smooth line before. Synergies are modeled as though identifying them in a spreadsheet makes them operationally inevitable. Demand is extrapolated from the most recent three years because that is the dataset most readily at hand. The base case hardens into the plan, the plan hardens into the budget, and by the time anyone asks what happens if the deck is wrong, the steel is on order.

The precision of the presentation conceals the fragility of the assumption. A strategy is not robust because the model balances.

And the failure is almost never the forecast. It is that no one wrote down which two or three variables the entire conclusion was resting on, and no one went back to look at them when the world moved. The forecast was wrong in the ordinary way all forecasts are wrong. The capital died because nobody had built anything that could survive being wrong.

The new pattern machine

Which brings us to the part of this I find genuinely worth worrying about.

The tempting move is to ask whether AI is the new railroad, the new dot com, the new tulip. It is the wrong question, and it is wrong in an instructive way, because it is a question about where we sit on a cycle. It assumes the schedule.

The better question is what happens when the tool we increasingly use to reason about the future is, by construction, a pattern extractor trained on the past.

A large model does not know that 2026 is not 2007. It knows what text about 2007 looked like. It is exceptionally good at producing the most probable continuation of a pattern, and it is exceptionally fluent while doing it, which means it delivers regression toward the historical consensus in the register of confident analysis. It is, in a precise sense, a machine for manufacturing the feeling the Benner chart manufactures. The pattern is found. The pattern is stated cleanly. The uncertainty is smoothed off, because uncertainty is not what fluent text sounds like.

Then recall 1987. The danger of portfolio insurance was not the logic. It was the correlation. Thousands of institutions running the same rule turned a hedge into an accelerant.

We are now installing broadly similar models, trained on broadly overlapping data, into the analytical layer of the same industries, at the same time, reaching similar conclusions from similar priors, and telling everyone the same thing at once. That is not a bubble question. That is a correlation question, and it is the one worth asking early.

The agencies are already asking it. Alongside the revised model risk guidance, the OCC, Federal Reserve and FDIC have said they intend to issue a request for information on model risk management that specifically addresses banks’ use of AI, including generative and agentic systems. That is the right question arriving at the right time, which is unusual enough to notice.

The correct posture is not to refuse the tools. The tools are extraordinary and I use them daily. The correct posture is to remember what they are: instruments that compress the past into a confident sentence. Confidence is the output. It is not the evidence.

The frictionless era

Meanwhile every remaining obstacle to acting on a hunch is being removed.

Prediction markets have industrialized. Total volume across CFTC registered prediction markets ran past twenty five billion dollars in 2025, and the number of listed event contracts went from roughly sixteen hundred a day in April 2025 to about a hundred and sixty two thousand a day a year later. That is a hundredfold increase in the supply of things to have an opinion about, and the CFTC is now building a framework to govern it.

Prediction markets are useful. They force beliefs to be quantified, they aggregate dispersed information, and they update. But a contract at seventy cents does not establish that an event is seventy percent likely. It establishes that capital is currently clearing at seventy cents, given the participants, liquidity, incentives and contract language in that market at that hour. That is information. It is not permission to stop thinking.

At the same time the friction on the retail side is gone. FINRA has eliminated the pattern day trader designation and the twenty five thousand dollar minimum equity requirement that stood since 2001, replacing them with real time intraday margin standards. The SEC approved it in April. It took effect the fourth of June, with firms phasing in through October of 2027, so your broker’s treatment may still vary.

Lower the barrier and you have not created an edge. You have only removed the thing that was slowing down the mistake.

The evidence on that is not close. Barber and Odean studied sixty six thousand four hundred sixty five households at a discount broker from 1991 to 1996. The most active traders earned 11.4 percent annually against a market returning 17.9. The average household turned over three quarters of its portfolio a year to underperform. Their explanation was overconfidence, and their title has aged better than anything else written on the subject: trading is hazardous to your wealth.

When every belief can instantly become a position, uncertainty starts to feel like a problem demanding action. A headline demands a trade. A chart demands an entry. A model output demands a decision. But activity is not analysis, and the ability to transact is not the presence of an opportunity.

The question is never whether the thing can be traded. It is whether you know why the person on the other side is willing to trade it with you.

What discipline actually looks like

The alternative to false certainty is not paralysis, and it is not the fashionable pose that nothing can be known. Businesses can be valued. Capital cycles can be read. Some outcomes are plainly more likely than others. The discipline is simply to keep three things separate that weak analysis always collapses into one.

A thesis explains why something creates value, and it names the causal mechanism. A forecast estimates how that mechanism might unfold. A decision determines how much capital, time and reputation to commit given that the forecast may be wrong. Strong analysis holds all three apart. Weak analysis fuses them into a single confident story and calls the story conviction.

In practice that means a small number of questions asked before the money moves, and asked again after it has.

Which is observation and which is interpretation. Revenue grew is an observation. Revenue will keep growing because the company has reached escape velocity is an interpretation wearing the clothes of an observation.

What is the base rate. Before asking whether this acquisition will work, ask how acquisitions of this type have generally worked. The specific case has to earn its departure from the record.

Which two or three assumptions are carrying the entire conclusion. Almost every model is driven by a handful of variables, and finding them is worth more than another decimal place on the output.

What would prove me wrong, and what would I do about it. If every decline is a buying opportunity and every delay is temporary and every contradictory fact is the market failing to understand, the thesis has stopped being a thesis and become an identity.

What happens if I am directionally right and temporally wrong. This is the one that kills people. LTCM’s trades eventually converged. The fund was not there to see it. Liquidity and timing are not secondary details. They determine whether you are still in the room when you turn out to have been correct.

Good leaders are not the ones with the best forecasts. They are the ones who know which assumptions matter, who size their bets accordingly, who protect the downside, who stage commitments where they can, who preserve the option to be wrong, and who update faster than their competitors.

Their advantage is not clairvoyance. It is preparedness.

The Point Taken

The Benner chart is not worthless. Its value is simply not the value assigned to it.

It is evidence that the hunger for a schedule is very old. It shows that investors have always converted recurring human behavior into claims of fixed numerical law, and that the conversion has always felt like insight rather than like appetite. That it still circulates, and still persuades serious people who allocate real money, tells us how little the hunger has changed in a hundred and fifty years.

We still want the card. We still want someone to tell us when to buy, when to sell, and when the panic arrives. We still prefer a clean line to an untidy distribution. And we will take that line from a nineteenth century hardware catalogue, a prediction market price, an analyst target, or a language model, because what we are actually purchasing is not information. It is relief.

The relief is the product being sold. The capital is what pays for it.

Use patterns as questions. Use probabilities as estimates. Use models as tools, and know precisely where each one stops describing the world.

Then build something that does not require prophecy to survive.

The future does not belong to those who predict it most confidently. It belongs to those who allocate capital, attention and effort most intelligently while knowing they may still be wrong.

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© 2026 23.5 Strategies; The Point Taken™

By Bryan J. Kaus

The first principle is that you must not fool yourself, and you are the easiest person to fool. - Richard Feynman, Caltech commencement, 1974

The captain had forty years at sea. He had taken ships through this channel in fog and in blackout, read currents that would have put a lesser sailor on the rocks, and in four decades he had never once left a hull where it did not belong. On the night the ship went aground, none of that saved him. The tide sat differently. The load rode differently. One variable he had watched a thousand times lined up in a way he had never quite seen. His experience told him where the deep water was. The water had moved.

We have a phrase for this. We say his experience worked against him. It is a strange thing to say, because experience is supposed to be the asset, the thing we pay for in gray hair and close calls. But the phrase is honest about something most of us would rather not examine. What the captain trusted on that last night was not the channel. It was his belief about the channel. And belief, it turns out, is built out of repetition, not out of the thing itself.

The mind counts the sides

David Hume mapped this machinery three centuries ago. Even where there is no such thing as chance in the world, he argued, our ignorance of the real cause of an event produces belief all the same. Watch a die in your hand before a throw. The side supported by more faces turns up more often as the mind runs the possibilities, and that frequency of rehearsal is what we come to feel as likelihood. Belief, in Hume’s telling, is nothing grander than a conception held more vividly than imagination alone can manage. The concurrence of many views prints the idea harder. It gains force. That force is the whole of what we call conviction.

Hume was careful to separate two things we tend to blur. Some causes are uniform and have never once failed. Fire has always burned. Water has drowned every person held under it long enough. Gravity has not taken a day off. Those we can lean on. But most of what we forecast in a market, a business, or a life is not that. It is the die, not the flame. And with the die, the mind still manufactures the same steady sensation of knowing, on evidence that does not warrant it. The feeling of certainty and the actual odds are two different quantities. We are wired to confuse them.

When everyone rehearses the same view

Turn that private machinery loose in a crowd and you get the oldest story in finance. Charles Mackay catalogued the pattern more than a century ago. Dutch households mortgaged their homes for tulip bulbs. All of London chased the South Sea Company. In France, a Scottish gambler named John Law sold shares in a company that held the monopoly on Louisiana, promised the territory was thick with gold, printed the paper money people used to buy the shares, and watched the whole thing climb nearly twentyfold before it collapsed in 1720 and erased a generation of savings. Not one buyer had ever laid eyes on Louisiana. It was mostly mosquitoes. In each case the crowd was not so much lied to as reinforced. Every neighbor buying was another view concurring, another face added to the die, until the imprint was total and the belief felt exactly like fact, right up to the morning it did not.

The same reflex wears a suit. Michael Porter, in his work on competitive strategy, described companies falling into herd behavior, each imitating its rivals on the assumption that the others must know something it does not. Everyone benchmarks against the same best practices, everyone drifts toward the same position, and the industry converges until the firms are hard to tell apart. Porter’s warning was blunt. Operational effectiveness is not strategy. Doing the same thing faster is not an edge, it is a race everyone is already running. The essence of strategy, he wrote, is choosing what not to do. That is a discipline of trade-offs, and trade-offs are uncomfortable, which is precisely why the crowd prefers the warmth of the consensus view.

“We have always done it this way” is the boardroom translation of Hume’s die. It is a belief assembled from repetition and mistaken for a law of nature. It is where money gets left on the table, where the position gets missed, where a good company runs aground in a channel it has navigated for years.

The job is not the crystal ball

Markets punish this error on a schedule. The models that ran Long-Term Capital Management were built by Nobel laureates on a recent, calm stretch of history, and a Russian default that sat outside that history took the fund apart in a matter of weeks. The mortgage machine of 2008 rested on a quiet assumption that home prices would not fall across the whole country at once, because in the data on hand they never had. The one scenario that mattered was the only one the model could not see. In the spring of 2020, crude oil printed a negative price. Sellers were paying buyers to haul the barrels away, a thing that could not happen, because the paper market had never counted the storage that was already full and the oil that had nowhere physical to go. In every case the certainty was real. The odds were never what the certainty claimed.

This is why I distrust anyone selling a single confident number about the future. The honest posture is not prediction. It is preparation. When I put a $157 mark on crude, I was not forecasting that the tape would print it. I was naming a boundary, a level of pressure at which the physical system would be forced to reconfigure, and asking the only questions that matter at a boundary. What breaks first. What moves next. Which levers are in my hand if it comes. I have spent enough time in the rooms where a number like that gets argued to know that the people worth listening to are never the most certain ones. They are the ones holding the most branches at once. A scenario is not a guess in better clothes. It is a rehearsal that leaves you standing when the die lands somewhere you did not expect. You do not need to see the future. You need to have already walked the branches.

A note on the machines that agree with us

There is a modern wrinkle worth flagging, and it is only a note, because the failure underneath it is human and old. We now carry tools that are very good at handing our own views back to us. A recent review by psychiatric researchers, surfaced in the Wall Street Journal, named three traits that let a chatbot warm its way into a person’s thinking. It flatters, agreeing rather than challenging. It mirrors your vocabulary and cadence until it sounds like you. And it tailors itself to everything it has learned about you across past conversations. Any one of these is mild. Together, the researchers called it an amplification spiral, a loop in which the machine keeps affirming a view until the view drifts loose from reality.

Read that as a warning about far more than software. Matching another person’s syntax and rhythm is a known way to build rapport. It is taught in negotiation and on the public stage precisely because it lowers resistance. A hyper-detailed profile of who you are is what lets a message feel as though it was written from inside your own head, whether the sender is a chatbot, an advertiser buying your attention, or a vendor seeking your business. The defense is the same one Hume’s die demands. Trust, then verify. I use these tools every day, and I build friction in on purpose, because a voice that only ever agrees with me is not a counselor. It is a mirror, and a mirror has never once caught my error. That is also why I read outside my field, and why I go looking for the argument that contradicts something I already believe, to see whether it holds water. Experience is not a feeling of certainty. It is a larger pile of data points to draw from, and some of the most valuable points in the pile are the ones that prove you wrong.

The assumption the physical world does not honor

Nations make this mistake at scale, and here the industrial and energy story I spend most of my time inside becomes the case study. For a generation the consensus held that manufacturing was a relic, that a mature economy naturally graduates from making things to servicing them, that globalization would lift every boat. It was a confident belief, rehearsed across boardrooms and editorial pages until it carried the weight of law. Vaclav Smil, in Made in the USA, took that belief apart. No advanced economy prospers for long without a strong and innovative manufacturing base, he argued, and the retreat of American industry was neither the tidy evolutionary step the consensus described nor something that had to happen.

The part that should hold your attention is the mechanism. Cheap energy built American industrial dominance, and rising energy costs in the 1970s helped unwind it. That is not sentiment. That is a physical constraint overriding a paper assumption, the same pattern that puts a negative print on a crude screen. For anyone weighing the industrial future now, as capital moves back toward the grid, toward domestic production, toward the molecules and electrons that sit underneath everything else, the lesson is to hold the consensus loosely. The story everyone is repeating is the die, not the flame. The opportunity tends to sit exactly where the crowd’s certainty is thinnest.

The Point Taken

Strategy works best when agility and humility are built into it. That is not complacency, and it is not permission to go slack. It is the opposite. It is composure. When a decision carries weight, gather your thoughts before you move, and take the emotion out of your thinking, because emotion is how you lose composure, and lost composure is how you underperform. Demand clarity as the price of continuing. If the picture is not clear, that is information, not a reason to press ahead. Stay fixed on your purpose while everything around it moves. Control the situation by restating your position plainly, to yourself and to the room, so that the crowd’s noise never quietly becomes your belief.

This is negotiation training, but it does not stay at the table. It is how you read a market, run a business, and think through any decision where the sides are uncertain and the mind is trying to hand you a certainty it has not earned. Weigh the possibilities. Name your levers. Then act, and keep watching, because the honest operator carries the conviction and the doubt in the same hand.

The die does not care how sure you are. Prepare as though it already knows.

© 2026 23.5 Strategies; The Point Taken™

by Bryan J. Kaus

When we try to pick out anything by itself, we find it hitched to everything else in the universe. John Muir, My First Summer in the Sierra

The price of urea fell by more than half this spring, and almost no one outside agriculture noticed. In late February, a ton barged up from New Orleans ran between $455 and $470. During the worst of the fighting around the Strait of Hormuz it touched $782. By late June it had slid to roughly $340, the lowest level of the year. Markets read that decline as relief. The strait was reopening. The shooting was winding down. The cargoes would flow.

The physical system tells a slower story.

Most people read Hormuz as an oil story. It is. But it is also a fertilizer artery, and fertilizer is the quiet hinge between energy and food. A falling urea price says that traders expect supply to return. It does not say that the supply has returned. Those are different facts, and the distance between them is where this piece lives.

Fertilizer is where energy becomes calories.

Fertilizer is energy in agricultural form

Start with nitrogen, because nitrogen is the nutrient that carries most of modern yield. The feedstock is natural gas. EIA describes the chemistry plainly: ammonia is made by the Haber-Bosch process, which pulls hydrogen from natural gas through steam methane reforming and combines it with nitrogen taken from the air. Ammonia is then the base for the nitrogen fertilizers a farmer actually applies, urea and UAN and anhydrous ammonia among them. In the United States, ammonia is used mainly as fertilizer or as feedstock for fertilizer. The molecule is, in effect, natural gas wearing an agricultural uniform.

Phosphate runs on a second, less obvious input: sulfur. Sulfur becomes sulfuric acid. Sulfuric acid, mixed with mined phosphate rock, makes phosphoric acid. USGS describes the rest of the chain directly: treating phosphate rock with sulfuric acid produces phosphoric acid, the basic material for most phosphate fertilizers, and reacting that phosphoric acid with ammonia yields DAP and MAP. So the two workhorse nutrient families both trace back to the energy complex. One starts at a gas field. The other starts at a sulfur cargo coming off a refinery.

A bag of fertilizer, read closely, is a balance sheet of energy inputs. That is not a metaphor. It is the supply chain.

Hormuz is not only an oil chokepoint

The Strait of Hormuz closed on February 28, after the operation known as Epic Fury and the Iranian response that followed. The world watched crude and LNG, and for good reason. But the Persian Gulf is also one of the most concentrated fertilizer corridors on earth. By Argus Media’s estimate, the region normally supplies roughly a third of the world’s traded urea, and most assessments put the Gulf at close to half of seaborne sulfur. When the strait shut, those volumes did not reroute. They sat behind the chokepoint, physically trapped, because Gulf fertilizer cannot easily find another door.

A two-month agreement reopened commercial traffic in mid-June, without tolls. That is genuine progress. It is also where the paper story and the physical story split. Vessels move through the strait in a priority order, and fertilizer is near the back of it. Passenger ships first, then oil and gas, then fertilizer and sulfur. Bloomberg Intelligence counted roughly 40 loaded fertilizer vessels, mostly urea, still waiting behind the strait in the days after the agreement. India alone reported sixteen stranded ships bound for its ports, including eight carrying about 330,000 tons of urea and four carrying about 257,000 tons of DAP, with ammonia and sulfur behind them. Restarting an idled urea plant is not a light switch. There is lag built into the system before that material reaches a dealer, let alone a field.

This is the part worth sitting with. The urea price fell on the expectation of reopening. The cargoes that would justify the price are still in the queue. Marine insurance on some routes has run 300 to 600 percent higher, adding roughly $40 a ton to delivered cost, and total landed cost on affected lanes is up somewhere between 12 and 25 percent. The screen says relief. The water off Musandam says wait. Markets reprice hope on a headline calendar. Physical systems normalize on their own.

The United States is more insulated than most, which is worth saying so the picture stays honest. Domestic plants supply the overwhelming majority of American ammonia, so the nitrogen buffer at home is real. But even here, a meaningful share of urea and phosphate consumption rides on Gulf exports that have to clear Hormuz. Insulation is not immunity, and the countries with neither are the ones to watch.

The farmer sees it as working capital

For the operator on the ground, a fertilizer shock arrives first as a cash-flow problem, not a price headline. Inputs get bought before the crop generates a dollar. USDA’s Economic Research Service has it as a major line: from 2010 through 2019, fertilizer ran 33 to 44 percent of corn operating costs, and the relationship has held since. Most US corn goes in the ground in April and May, with inputs often purchased months ahead. So the farmer is financing chemistry on credit, in advance, against a harvest that does not yet exist.

When that input gets more expensive or less certain, the farmer rarely stops cold. More often the response is to optimize. Prepay earlier to lock a price. Delay and gamble on a cheaper window. Substitute one nutrient blend for another. Apply somewhat less than the agronomic ideal and accept the yield risk. Each of those choices protects the balance sheet. Each one also moves a small amount of risk downstream, from this season’s cash position into next season’s output. The decision looks financial. The consequence is biological.

The consumer sees it months later

None of this reaches a grocery shelf quickly, and anyone who promises that it will is selling drama. Fertilizer disruptions run on agricultural calendars. A crude shock can show up at the pump in days. A fertilizer shock shows up through tender prices, dealer inventories, prepay behavior, planting choices, application rates, yield outcomes, and processor margins, over many months, and only if several other things break the same way.

That conditionality is the whole point. Weather can absorb a lighter application rate, or it can punish it. A strong currency can swallow a higher import bill, or a weak one can magnify it. Credit availability, carryover stocks, and local subsidies all sit in the path and can blunt or amplify whatever started upstream. This is a risk-transmission argument, not a prediction of scarcity. The chain is real, and it is also contingent at every link.

Where it does travel, it travels quietly. Corn and soybeans are not only food. They are feed, which means fertilizer cost can surface later in beef, pork, poultry, dairy, and eggs. Corn is also ethanol feedstock, so the loop can even run back toward fuel, energy into fertilizer into corn and partway back into energy. By the time any of it reaches a household budget, the original cause is several steps removed and effectively invisible. Consumers see bread, rice, and meat. They do not see ammonia, sulfur, or a ship riding at anchor off Oman.

Where the pressure lands first

The cleanest place to watch the chain complete itself is an import-dependent economy with thin foreign-exchange reserves. Bangladesh is the current example. On June 26 the World Bank approved $1.1 billion in emergency support, explicitly tied to fertilizer, fuel, and food pressure from the Middle East conflict. Of that, $300 million is earmarked to import 600,000 metric tons of fertilizer, half of it urea, enough to cover roughly 1.4 million hectares of rice. The country imports more than 85 percent of its fertilizer, and the two seasons this financing protects account for about 90 percent of national rice production. Half the population works in agriculture. Earlier in the disruption, four of the country’s five domestic fertilizer plants had gone idle.

That is the asymmetry, stated in numbers. A well-capitalized farmer absorbs a higher input bill on credit. A poorer one applies less and hopes the weather cooperates. A wealthy government subsidizes imports. A constrained one rations scarce dollars across fuel, food, fertilizer, and debt service, and has to choose. The same shipping disruption produces a manageable margin squeeze in one place and a sovereign financing event in another. Energy logistics, followed far enough, becomes social stress.

The Point Taken

Energy security and food security are usually discussed as separate files, handled by separate people, debated in separate rooms. They are not separate systems. They are one system, joined by chemistry, by logistics, by financing, and above all by timing. Natural gas and sulfur enter at one end. Calories come out the other. A chokepoint in the middle does not have to stop a single food shipment to raise the price of food. It only has to disrupt the inputs that make food possible, and then wait.

What I would watch from here is not the urea screen, which has already priced the hope. I would watch the physical tells: how fast the stranded vessels actually clear the strait once energy cargoes take their priority slots, how quickly idled Gulf urea capacity restarts, what India and Brazil pay in their next tenders, what dealer inventories and farmer prepay behavior look like into the application window, and which import-dependent governments follow Bangladesh to the financing window. Those are the readings that tell you whether the paper recovery and the physical recovery are converging or still drifting apart.

There are two clocks here, and the falling price invites you to read the wrong one. The backlog clears in months. The shock clears in seasons. The price has already passed through this year’s planting math, and a field that got less nitrogen this spring will not report back until the fall harvest, and that grain will not move into feed, then meat and dairy, until the year after. The institutions are already pricing the longer one. The World Bank wrote Bangladesh’s fertilizer support to cover seasons that run into 2027. That is not a relief check. It is the system conceding that this is a multi-season problem.

The strait will reopen on a political timeline. The fertilizer will move on a logistical one. The crop will respond on a biological one. And the grocery bill, if it moves at all, will move last and most quietly of all, long after the headline that started it has scrolled away.

The molecule moves first. The grocery bill moves last.

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© 2026 23.5 Strategies; The Point Taken™