Monday, October 28, 2019

Thoughts #18: Money Flees When You Need It

The recent collapse of Thomas Cook brought about an old revelation: money flees when you most need it and vice versa ie money attracts money until extraordinary investing returns are longer possible. On the former, Thomas Cook's share price below shows the story well.

Thomas Cook, the 178 year old company was not in any kind of trouble until late last year. Its share price was healthy and it even added airline capacity to capture strong demand during last year's summer. As usual, it was the bond markets that first saw the warning signs. Thomas Cook bonds started showing signs of distress when its prices traded down significantly in Oct 2018. Once the rumour came out that the firm might be in trouble, everyone withdrew support...

“There’s been a continuous knock-on effect,” said Richard Clarke, an analyst at Bernstein. “Their suppliers get wary, hotels ask them for more money up front, consumers become less willing to book with them . . . I’m sure that’s why we’ve seen continuous increases in the size of their rescue package.”

The excerpt from FT above captures it all. The financial industry works as such. Not only do suppliers and banks withdraw support when needed, short sellers short the stock, bond traders either sell the bonds or buy insurance against their bonds, further pushing up the price to insure and reinforce the notion the company could be in trouble.

Olam Lives!

It was the same story for Noble. When there's news of trouble, everything just go downhill, fast. The story for Olam panned out quite differently though as it got help from first Temasek and then Mitsubishi Group, two powerhouses that changed its destiny. When there's enough money, it attracts more. Today, Olam trades at a healthy SGD 6bn market cap.

The lesson learnt (or to relearn) here: leverage is a double edge sword. Be doubly careful of companies with too much debt, payables, hidden liabilities. When money smells trouble, it flees. A vicious cycle forms, bringing down businesses quickly. When things go too well, money attracts money, the big gets bigger and the strong gets stronger.

Friday, October 18, 2019

Books #6: Shoe Dog

This post contains spoilers for Shoe Dog, if you intend to read the book, click the "x" at the top left or right corner of the browser right now, thanks! Do come back next week!

Shoe Dog written by Nike's co-founder Phil Knight was published in April 2016. It was written in plain English and immediately shot up the bestseller list as one of the best business books ever. Phil described how he tried to build up Nike, the difficulties he faced, the juggles between work and family and the seemingly insurmountable task to beat Adidas, which in 1965 probably 100x bigger than Nike. It's really must-read for anyone who wants to startup a company.

We tend to see only the end result of spectacular startup successes and think we can do it. One tagline to encourage more startups in Singapore goes like this, "Tired of a 9-5 job? Start up your own company, be your own boss!" It is the same trick used to entice thousands to become Uber drivers. It's never that simple. The greater the success, the greater the effort put it to achieve it. Are we actually up to it? What is not said is that working at a startup is not 9-5 but 24x7x365x10. To be really successful, both the CEO and the new team have to work 24 hours a day, 7 days a week, 365 days for 10 years or even longer.

That is what it takes. It's a competitive world. It's the same story in all arenas of spectacular human achievement: gold medalist in the summer Olympics, Nobel Prize winners, Jeff Bezos at Amazon, Stan Drunkenmiller. You name it. Even in Singapore, past President scholars - how many hours did they put into their studies? Robert Kuok. His memoir was also published recently. Gosh, how hard he worked. That's the reality. The greater the success, the greater the effort put it to achieve it.

The story of Nike's employee #1 Jeff Johnson also came across memorably for me. He was Phil's good friend and a reliable worker. So Phil tasked him to do the most difficult stuff like firing people and then sending him across the country to restart the new office that was in a mess, with no advance notice, no resources and best still, no increase in salary. It's usually not a one man show. Great endeavours require great teams.

Nike was fortunate to have such a team. In my mind, Shoe Dog was, in essence, a remarkable story about teamwork. A good team rarely exists. Think of all the organization structures all over the world. People are simply put together based on their CVs. But a real team requires camaraderie, diversity, balance, trust in good leadership and also good advisors. Phil had his coach, Bill Bowerman, the other co-founder of Nike. He was a fatherly figure and the guy who originated the idea of Nike Air. We all need mentors in life to bounce ideas, to guide us towards better solutions. This is one of the most important takeaways for me after reading Shoe Dog.

The contrasting corollary to the above is soft partnerships. We must be mindful of people who were helpful when circumstances were good. In Nike's case, these were the Japanese partners that Phil worked with. It's nothing bad because it's business. These partners are not Nike's teammates. They had their own interest to look after. So, when the winds change, they have to part ways. Phil was good at reading this and moved quickly to secure Taiwanese and later Chinese partners. That's just business. I guess the lesson learnt here is to be able to read people well and where their ultimate loyalty lies

To sum up this post, I would like to circle back on hardwork, intelligence, luck and success. It takes a lot of hard work to start something. But hardwork itself is not enough. Bill Bowerman's quote above comes in right here. One needs to work hard and also work smart. Innovation brings about the step change to rise above the competition. But that's still not enough, Nike's story is full of lucky encounters of how one wrong step would have meant bankruptcy. Behind one successful Nike, there are hundreds of failures. Behind every successful startup, there are many more failed attempts. 

So, it's not just do it. In this internet age, think different, do no evil, move fast, break things on top of just doing it! 

Thursday, October 10, 2019

Charts #25: Trade War Update

Here's another trade war chart from BBC. The last two bubbles are simply increasing tariffs from 10% to 25%.

Interestingly, the cumulative amount of the trade war impact was smaller than Lehman's financial assets at USD 600 billion when it collapsed in Sep 2008.