Archive for the 'Investing' Category

So you’ve got a good idea – now what?

Published June 28, 2009 Internet Business , Investing , NZ Business 9 Comments
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I’ve been getting an increasing number of ideas over the transom over the last few weeks. It started before the radio interview last week, accelerated because of that, and tomorrow it seems I’m in the latest issue of Idealog.

It’s really good to receive them, and I enjoy helping out and even starting some businesses. However last week I’ve been a bit slow to reply to some of those messages – and I apologize for that. Some of them I’ve been checking out, others I’ve been thinking through and still others I have just left. I will get back to everyone eventually though.

But there is one problematic category of ideas, and it’s one where I want to give some very strong advice. The note or call I receive will go something like this:

I’ve got a great idea, I’m not going to tell you what it is (at least not without an NDA), but I am going to invest or have already invested a bunch of money into it.

I’ve seen everything from $5000 to close to half a million invested in or required for companies and products that you have never heard of or are not even described. I’m always willing to help people in these situations but they need to be more honest with themselves about the value of the idea. Holding it too close to your chest means the idea won’t be as good, the speed of execution will be much slower and the amount of money invested will be much higher.

Instead here is my take on what to do once you have that wonderful idea for the next big thing.

Before you start

  • Check the competition – If it is a great idea then it may well be done already. Get online and search for the product – and be very persistent. Check different channels to make sure it isn’t being sold already, and make sure also that there isn’t a close substitute. Be very thorough in this and, importantly, keep doing it forever.
  • Share and improve the idea – Shop it around your friends and family, talk to potential customers, experts in the field and determine that it is a good idea. Along the way you’ll hopefully find some people that you respect and that are energised by the concept. Ask them to help. Your idea may be good, but with the assistance of others you can make it great.
    Be flexible with the idea and tweak it as you learn new things. Write it down in a structured manner – and have very crisp and consistent descriptions for the product or business, why it is better and will sell and your path to develop it.
  • Estimate the size of the opportunity, and be tough. This means numbers – how many widgets will you sell, at what price and what margin. It’s important to test your projections against the real world – what does 1000 sales per day really mean per sales outlet, will people actually pay the retail price, what are the wholesale margins in the channel you are using and and so on. Track your business against these numbers.

Starting up

  • Focus on the few. What few things do you need to believe, what do you need to do and and what results do you need to see before you can truly prove that the business will succeed. Write them down. Then spend your time focusing on those things, trying to get to them in the cheapest, fastest way. If you cannot prove something then you may need a leap of faith, but if you disprove something then change tack or move to the next idea.
  • Pay with equity – have some partners and pay them with equity. It’s the best way to save on start-up costs, it means better results as people have genuine interest in seeing the business succeed and it’s a heck of a lot more fun. Stay well away from large suppliers that deal mainly with corporate customers – their fees are far too high and you are a low priority for them. If you are struggling to find the right partners that will work for equity then perhaps there is a hint there, and your idea isn’t The One. Note that you generally need to pay for actual purchases (like raw materials) but work performed in the early stages should be for equity.
  • Don’t spend anything material until you know you will get a return. Great entrepreneurship has very little financial risk, so be miserly until you know it will succeed. Put very little money down at the start, investing only in the critical raw materials or services that you need, and focus on investing your and your partners’ time. Wait for revenues – if the idea and execution is good then there will be plenty of money later.

Growing

  • Be prepared to stop, and stop fast if at any stage it is clear the business will not succeed. You are passionate about your idea, but you also need to be dispassionate enough to exit before you waste too much money. An informal or formal board can help a lot here. If you have already sunk money into a business that isn’t proven, then treat it as such – sunk money that is gone forever. Don’t fool yourself into thinking your new venture is valued at the amount of total investment – look instead at what the profits are and will be.
  • Go full time – a full time CEO is the only way to really drive a business forward. Once you know the idea has legs then quit your other pursuits and focus on growing this business. Or perhaps you are not the right person to be the CEO, so find someone who is and cut them in. Don’t be distracted by the next business idea – that’s pointless until you’ve either made this one work or killed it.
  • Spend as little as possible – don’t pay your self (or anybody for that matter) any more than you need to live – and live frugally. Wait until the business is sustainably making money and then start increasing the salaries of the contributors, eventually to market rates.

When to resign from a board

Published June 2, 2009 Business , Investing Leave a Comment

Over at the SEC is an excellent letter from Richard E Middlekauff – who just resigned from the board of Heelys, Inc – a shoe company.

Here’s why:

1: The shareholders are not maximising their return after the company was in play.

The Board, in my opinion, should seriously engage potential buyers of the Company, unlike it did with Skechers USA, Inc. last year, in order to maximize the Company’s value for its stockholders.  I do not see the Company achieving this as a stand alone company.  Unfortunately, it appears that the majority of the Board charted a different course, giving scant attention to the offers from Skechers and other third party prospective buyers, and instead pursued an untimely and expensive restructuring of the Company by installing management having no actual experience in the shoe industry.

..My feeling is that CSW is not considering offers for the acquisition of the Company in a manner consistent with Delaware law.  I understand that CSW has its own internal issues with its stockholders; however, that should not cloud its fiduciary duties to the Company.  Any intentions regarding the Company in connection with any stock buy-back or plans to take the Company private should be disclosed to the Company’s stockholders as required by federal securities laws.

2: The board was not being consulted for important decisions

As a Board member, I have often not been consulted in advance of significant management decisions.

3: The board was given insufficient information and time to make decisions

I often did not receive sufficient information to properly prepare for meaningful participation in Board meetings to properly evaluate the information in connection with addressing critical matters affecting the Company.

Similarly, the recent Board meeting held on May 12th upset me greatly, but provides a good example of the short shrift treatment of the Board members when each director was given only two (2) minutes to speak on the significant issue of the strategic direction of the Company.  This was most unfair to me personally, as well as any other director who shared a very different point of view from the majority of the Board.

I’ve written about this before – and I’ll reiterate that if you find yourself in any of these situations then get out.

How Baupost’s goresight let them weather the storm

Published May 1, 2009 Investing Leave a Comment

Notes from Seth Klarman’s speech at Columbia Business School is, interestingly, the most popular clicked-on link from here, coming from The Baupost Story post. So let’s do a round up of coverage, find some more reading on the Baupost story and see what we can learn about how Baupost’s approach pays off for investors during tough times.

First here’s an excerpt from Seth Klarman’s wildly expensive “Margin of Safety” book – talking about liquidation value. I’m not so sure that it is entirely obeying copyright rules, so read it while you can.

Next have a read of some early Baupost Group letters (recently uploaded by Noise Free Investing and found through  Valueplays) to great insight to how Baupost operates. The letters refer to a smaller fund that is run alongside the main fund for friends and family of the main fund investors. It is remarkable to see the foresight in the commentary leading up to and through the dot com boom and bust and to see the letter series end in mid 2001 with the fund holding 48.6% cash. That no doubt set them up well for the post September 11 crash, and so I guess they continued to do well. I would dearly like to see the rest of the series of letters – in particular the returns over the last two years would be fascinating.

As it happens another letter has leaked out from the main fund from September last year. The comments are pretty telling, again showing Baupost’s foresight* and providing vindication for their cautious approach to investing. (I first miss-typed that as “goresight” which I thought was appropriate)

Market Folly has a good summary of Baupost’s recent behaviour – mentioning that Baupost has $14 billion in assets, which was mostly 50% cash in recent years and that over 25 years the compound annual return was 20%. It seems that Baupost is starting to spend that cash now as they see bargains that meet their rigourous requirements. It takes real discipline to sit on a hoard of cash and not invest it, and while you may miss out on the next dot com or housing boom by doing so, you’ll also miss out on the potential to lose everything when those bubbles burst.

A more recent interview with HBS on Market Folly and via Valueplays again lets us know that Klarman started with just $27m in the fund in 1982, and was paid a salary of a princely $35,000. The new news is that the writer also mentions that Baupost had cut their cash hoard in half – to about 25% – by December last year.

Compare that 25% cash figure to April 20  last year when  Baupost had 45% cash, 20% equities, 17% distressed debt, 11% real estate and an amazing 6% in South Korean equities.

45% cash in April 2008 was an astonishingly smart move – and Seth Klarman even mentioned that they would have gone to 100% cash if it made sense. That let them go on the gradually accelerating shopping spree.

The Korean move was interesting, as the market there hasn’t fared too well since then in USD terms – down 44%. However the Korean Won is also down 25%, so overall the market was down only 18% in Korean Won terms, and I imagine there was a currency hedge. That’s much better than the S&P500’s 35% loss in the same period, but still tough given Baupost’s “Rule 1: don’t lose money” philosophy. Baupost would have picked decent securities in the Korean market and probably had some interesting hedges against the high volatility events that happened.

The Korean market in US Dollar terms
Google
The Korean Won versus the USD
Google
The Korean Market in Korean Won terms
 Trading Economics

On the other hand Baupost may have simply closed out their Korean positions early.

Understanding our animal spirits

Published April 15, 2009 Business , Investing , Trade Me , media 2 Comments
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Prof Shiller (remember him from “Irrational Exuberance) has partnered with George A Akerlof in a strangely titled new book: Animal Spirits. I’m recommending it even before reading it.

It’s basically about why we don’t behave as rational consumers when faced with economic choices.

If you don’t want to wait, then there’s an excerpt from the book – the first chapter, which you can read over at Yale MBA’s Financial Crisis website.

Here are the five animal spirits – emotive things that often dictate our economic behaviour.

  • The cornerstone of our theory is confidence and the feedback mech­anisms between it and the economy that amplify disturbances.
  • The setting of wages and prices depends largely on concerns about fairness.
  • We acknowledge the temptation toward corrupt and antisocial behavior and their role in the economy.
  • Money illusion is another cornerstone of our theory. The public is confused by inflation or deflation and does not reason through its effects.
  • Finally, our sense of reality, of who we are and what we are doing, is intertwined with the story of our lives and of the lives of others. The aggregate of such stories is a national or international story, which itself plays an important role in the economy.

Just those five statements make for interesting pondering – so here is my quick take.

Confidence is everything – it is the difference between buying something (on credit even) and choosing to hunker down and not spend. When a depressed or optimistic feeling rolls out to entire populations then it causes and exacerbates busts and booms.

It’s true that we care most about parity and fairness when setting wages and paying prices. This is particularly evident in New Zealand where we tend to look down at those with unhealthily large incomes and spending habits and where we have a nationally loved TV program called Fair Go that goes after companies that rip people off. Interestingly the feeling of fairness to members was the overriding thing that governed our thinking in the days when I was involved in setting prices at Trade Me.

We also score pretty well as a country on corrupt and anti-social behaviour – scoring at of near the top of the list in the annual Transparency International surveys as a result. On the other hand we are a little divergent on our strong norms about what is anti-social behaviour – though we tend not to shoot each other and mostly we don’t rip each other off.

It’s true that we all tend to compare our income now to our income years ago, and fail to understand that $1m now is worth a whole lot more than $1m at retirement. This is the money illusion – where we look at the dollar figures and not at the real worth, the nominal not the real. Having grown up through inflationary times it did improve my own approach to this versus, say, my grandparents generation who often didn’t change the dollar value of their Christmas presents to grandkids (mine were a bit different). The trick is to constantly reset the current value of everything.

Finally I am guessing “stories” refers to the formal and informal coverage of things like bubbles and busts. Everyone was talking up dot coms in 2000, real estate in 2007/8 and stocks in 1929.  Fast forward a couple of years and the picture was (and will be) diametrically opposed – the media coming down hard on what were correctly seen in hindsight as speculative investments. I try to be contraian, using taxi drivers and ultimately my mother as the unfailing barometer – if Mum says buy, then I go ahead and sell.

They use these five animal spirits in the rest of the book to answer eight questions – such as why do economies fall into depression and why do real estate markets go through cycles?

Interesting stuff to be sure – I recommend just reading the first chapter and having a ponder – the answers may not be that difficult to work out, and if we can be internally aware of those “animal spirits” then perhaps we will make better decisions.

Now I need to decide where to buy it from. Fishpond don’t have it but Amazon who do. However I am really annoyed with them as most of the things I want (electronics, accessories) are not shipped to New Zealand.

Xero’s capital raising

Published April 9, 2009 Business , Internet Business , Investing , NZ Business 10 Comments

Staggering.

While I still believe that Xero’s IPO was expensive, I also believe in the business opportunity and how Xero is going about pursuing it.

While the latest round of share issues at $0.90 is dillutive to the original $1.00 IPO,  it is an excellent price nonetheless:

  1. The IPO was expensive – and that was proven as the price languished well below the initial price of $1 for most of Xero’s listing period. As an early stage deal the offer should have been for a larger share of the company per share as the information available (actual results and plans) was sketchy.
  2. Times have changed, and changed for the worse in for the economy and particularly for the money raising game. Getting any money at all is hard these days, and finding over $23 million is an excellent acheivement.
  3. The source of the funds is telling – one of the founders of MYOB, a lumbering giant that owns the top end of the market that Xero is intent on stealing. They must be feeling pretty desperate right now. MYOB have proven, and will no doubt continue to prove, that they are  culturally incapable of  replying to the threat from Xero.

Xero has managed to execute well on their business plan, with features coming out at a steady rate and after a slow start, pleasing customer growth. They have also cracked their approach to selling – convert the accountants and they will bring along their clients. That’s not exactly viral for now, but it’s a path to sustainability.

Well done to the entire team at Xero.

The money eases pressure for Xero, and means they can focus on the three tasks at hand:

  • Keep the feature improvements coming, becoming clearly superior in feature volume and usability than the competition. Also have some fun and offer features that the MYOB’s have no answer to.
  • Sell sell sell – expand within Australiasia and in particular the UK, and make a beachhead into the USA.
  • Become sustainable – in theory this should be the last capital round required for sustainablity, although the option remains for a much larger further round to really launch hard into the big Kahuna – the USA.

A great story.

The real estate market plunge

Published March 11, 2009 Global Macro Trends , Investing 5 Comments

Alex Tarrant over at Interest.co.nz had a couple of, well, interesting posts on the housing market in NZ.

There is a piece on the February housing statistics, which rose dramatically versus January, although the median price stayed down, and the number of days to sell was a record 62. Alex also looked at the REINZ commentaries over the last year, and to their credit REINZ has pretty much got it right each time.

So let’s look at the total year on year dollar transactions for the real estate market over the last year and a bit:(Red is older, green most recent)

REINZ

It’s been a pretty steady decline from October 2007, though February was an excellent month this year.

Let’s look at what is near and dear to the industry – estimated commissions. I’ve just used 3.5% as a wild guess – what’s important are the orders of magnitude. The fives months between September 08 and January 09 saw $182 million more less in commissions for the industry than the corresponding period a year earlier. $182 million pays for a lot of agents, and a lot of agents’ flash cars and investment properties.
REINZ, 3.5% commission estimated by me
Let’s also smooth out the effect of a lousy January and a great February – and apply the average of the two to them both. You can see that we are not really seeing a resurgence.
REINZ, my smoothing

Finally, as The Bank Manager notes in the comments on interest.co.nz, the February sales in 2009 were a huge drop from previous years. This chart is telling:

REINZ

Things are really not good for the real estate industry, nor for homeowners with large mortgages and uncertain jobs. Nice February statistics are a start, but is it a bounce or a dead cat bounce?

<update. Alistair from realestate.co.nz has introduced an excellent chart:
realestate.co.nz

This is really scary – it shows we still have quite a way to fall. Brace yourselves – and remember that these things tend to overshoot.>

Blame directors for failure, CEOs for success

Published March 11, 2009 Business , Investing , NZ Business 8 Comments
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Fairfax (Reuters) belatedly opines that Directorships are not a reward, but actual work. It’s an article based on US companies, but is applies to every jurisdiction.

I absolutely agree – a directorship is a very serious obligation.

I propose a simple philosophy

  • Blame the Board of Directors for failed companies
  • Credit the CEO and management team for successful companies

The Board is responsible to shareholders for the performance of the company. Their ultimate power is to take out the CEO and replace him or her with someone else. If they fail to exercise this power in time then value is destroyed, and (in a reasonable jurisdiction) they are opening themselves up for shareholder lawsuits and more.

The CEO on the other hand is there to do the best job he can do to increase the value of the company – and a smart board steps aside a bit and lets a successful CEO go for it. A smarter board will keep challenging the CEO with questions on strategy, implementation, culture and succession. They will also make sure the legal and fiduciary obligations are up to date and keep a very jaundiced eye on what could go wrong.

And plenty has gone wrong recently, often in companies ruled by a strong CEO/founder/majority shareholder.

So here are a few starter Q&A’s for existing and prospective board members

What should you do if you do not agree with the company’s strategy?

Voice your concerns. Your responsibility is to the shareholders, and you are their representative. So if you don’t like the strategy, then get the discussion going. You are on the board because your voice needs to be heard. If it is a matter of degrees, or if it is big but you can live with the alternative, then a good discussion (with well researched inputs, and a constructive atmosphere) is the right thing to do. If the strategy is wildly different from your beliefs then perhaps it is time to make a stand, or get out. More on that down the page.

What should you do if you think the CEO is “off”

CEO’s can go off – they may get stale, not grow with the company or change with the times. You may have employed the wrong person in the first place, or they may have out-grown the role and want to move on. Firstly talk to the other board members, and see if your concerns are shared. Then constructively engage with the CEO to help him change his ways or move aside for a successor.

However if the CEO is really going off the rails, or if you think there is fraud involved, then you need to get down and dirty. Call or meet with the other board members, or with the non-executive board members only. Agree on a course of action, which may be asking toe CEO to resign, issuing him with firm instructions or demands (or else) and/or shopping for a new CEO. It’s important to move together, and firmly.

What should you do if someone makes an offer for the company?

If they are serious, then you have a duty to the shareholders to maximise the value of their investment. This is a duty to all shareholders, not just the majority, and it is a duty taken very seriously by courts (at least in the USA). You should consider the company “in play” and the  independent directors need to step up to make sure that the interests of the executives and/or major shareholders do not come first.

Next you should retain professional advice (a great way to CYA), and seek to maximise what you can sell the company for. You firstly need  to have a very clear understanding internally of what you believe the company is worth – actually this is something that you should always have. If the offer is within reach of your internal range (or above your share price) then it’s time to create and run an auction process, whether public or not.

Should you accept board positions when the founder has a majority share?

Yes, But. Yes you can accept these, but the founder has to understand that you are putting your reputation and more on the line. That means he needs to accept that the board has a certain amount of “veto” power, and even more specifically that the independent directors have a de-facto veto over any major decisions. If they do not have this power then the board cannot represent the interests of all shareholders, and is a powerless advisory board only.

What should you do if the founder/majority shareholder/CEO/rest of the board doesn’t take your advice?

If it persists, then resign. You are not a figurehead, and if they demonstrate time and time again do not want to listen, then go gently into the night. After all you may be wrong, but like it our not as a board member you will be responsible for the failure of the company, and if you strongly believe they are going the wrong way, then you need to get off the ship. Of course this is a drastic action, but you have to keep your integrity.

What should you do if you see illegal activity happening by the company/founder/majority shareholder/CEO?

Resign, and quickly. This is the main power that you have, and you should also report any illegal behavior to the relevant authorities. Illegal behavior is a huge indicator of impending financial disaster, and so as a board member you should treat it with utter seriousness. It’s also, well, illegal, and you can go to jail yourself if you do not react appropriately.

On occasion the CEO (say) may have stepped out of line a bit, but not too  far, and the Board can place controls and mandates to bring things back into control. However as a board member your reputation and freedom are on the line so these will be treacherous waters.

What do you do if the board meetings unproductive or simply do not happen?

Step up and make the changes required. Boards that do not meet are asking for trouble, while poor board meetings will rubber stamp poor decisions. If you see this happening then it is your duty to shareholders to make sure that meetings happen and that the board it doing the right thing by shareholders. Once again it is your reputation and even perhaps freedom on the line.

How many boards should you be on?

Up to as many as you can cope with – and this is a function of what else you have on, but more importantly on how efficient and effective you are, and what else you have on your plate. It’s the old adage t0 give the busy person things to do and they will get done.

Should I recruit a “professional director”?

Rarely I say, and even then maximum one person. I’m defining a professional director as someone who is only doing directorships for income, they are usually older and retired from direct involvement in business. To me this risks losing perspective, as the professional directors are not engaged at the right level. It may make sense to have one elder statesman of this type for the history and network – but the majority of the board should be dynamic and involved. This doesn’t mean don’t get people that are experienced, but please make sure you have a mix of youth and experience.

I’m a founder/CEO – what sort of people should I have on my board?

People you respect, can learn from and will listen to – they have to hold you to account after all. People that are different enough from each other so they bring different points of view – be it from their skill set, industry experience, age, gender or ethnicity/country of origin or seniority. They are there to work, are are underpaid, so genuine interest and passion for the company is really important.

I’m a founder/CEO – how many people should I have on my board?

From 3 to 12, and it varies by the size of the company and the complexity of the business. The EBRD has a live-in board of 23 Directors and 20 alternates, along with a Board of Governors 126-strong (2 from each country). Somehow it works. I’ve also seen a board of 3 people work well for Lingopal. It’s the skill-set and the engagement around the table that is important, and you should get the minimum number that works.

How should you compensate board members?

Some research I saw (part-directed) at McKinsey was equivocal on a lot of board behaviors, but very clear on one. The more money on the table when the board meets, the better the results to shareholders. That means the major shareholders should be there, and that board members should have their own money at stake. It’s true for the 3 people Lingopal board meetings, and it is true for Microsoft and the EBRD. Let the non-investors accumulate shares, by earning them or buying them at a good price, (preferably not by options as it encourages risk taking) helping them pay for those shares with a loan. Pay them a bit in cash as well to help make ends meet.

That’s my take – Do you agree with these answers? What other questions are important?

Finda and Yellow: they had already lost

Published February 5, 2009 Internet Business , Investing , NZ Business 9 Comments

Business listings is a winner take all game right? After all – why would you have more than one set of Yellow Pages in your house? So Yellow’s purchase of Finda is a great move. Right?

Well not exactly. When was the last time you used Wises, Finda, Yellow Pages or UBD?

My answer is – I can’t remember.

On Monday I needed a Physio, and so I turned to Google and googled “physotherapist Wellington”. That was the actual  spelling, and after clicking the “did you mean..” I got a nice summary of what was around, along with the regular search results:
Google

From there I clicked through to a great map:
Google
Where I found a couple of options, clucked through to their websites, chose one (Te Aro Physio) and was delighted by their service. (Really – I recommend them)

So I tried the same search on Wises. Again I made a typo – it wasn’t deliberate. What I got wasn’t exactly compelling:
Wises
So I slowed down, typed it correctly and got this:
Wises
Well useful, but clearly the Google results are better. Firstly the zoom level was automatically correct, and secondly the number of Physios reported was just 10, versus 38 for Google. Worst of all Te Aro Physio – a fairly sizeable outfit – was not on the list.

Next I tried Finda, slowing down my poor typing so that the auto-guess system could work. I got this list, showing 26 in Wellington Central and 49 in the region. No maps, but I just noticed that there is a display in maps function. That gives an OK view, once zoomed in (same as Wises) but again there is no Te Aro Physio. No wonder I was able to get a same day appointment.
Finda

For completeness I tried to use a paper Yellow Pages to find physios as well. But there does not seem to be one in the house. It’s not even my house – I’m borrowing high speed internet at my parent’s place right now – they are over 70 and have no paper yellow pages.

So I tried the Yellow Pages site. They found 36 Physios in Wellington City, an did include Te Aro Physio. They had a link to the website, and even offered directions. So good on them.

 Yellow.co.nz
They had a map:
Yellow
 
But that map was small, ugly, and the site covered in advertisements that moved around and it just doesn’t feel nice. It feels like a money grubbing commercial site, and that login button didn’t help.

I’ll be sticking to Google, and knowing them they will keep improving so that they stay ahead of everybody else.

Back to the deal. Yellow’s website seems to be ugly, but already better than those of Finda et al. Taking Finda and co out will reduce competition for classified advertising dollars, but unless Yellow keeps them alive I can’t see a lot of upside in Yellow Pages listing prices. It’s a recession people. Perhaps Yellow feels that they can get more advertising spend from the sites, especially by sharing listings. But we are near the end of days.

To me it’s a play that slows the inevitable doom for Yellow. The “goodness” of the deal comes down to the sale price, and sadly we are not hearing what that is. But I will give a hearty “Well Done” to APN, for exiting out of a dead market.

What happened in 2008 (for Lance)

Published December 30, 2008 Investing , Life , Mobile Translation , NZ Business , media Leave a Comment
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(Apologies for the “all about me” post. This sort of thing helps to motivate me for the year.)

Early last year I posted a plan for 2008 – daring to call it a manifesto. I’d just  turned down some very good corporate career options and dared to invest more time into smaller opportunities.

How did I do? Frankly I hadn’t looked at the post since January, and with some trepidation let’s launch into it. (Don’t worry – there is no personal stuff)

First – There were no New Year predictions. Good one. What a year to destroy predictions.

Next – there was the plan to go crazy – completing the Norwegian Berkiebeiner ski marathon. Sadly I just could not make this work logistically, and I feel pretty bad about it. My friend Hans, who I now owe some substantial karma, managed, after some adventure, to complete the Birkie on a perfect day. Great stuff. 

The professional goal was to spend more time starting and nurturing businesses, while continuing to consult, in both NZ and Australia.

Consulting

Continue reading ‘What happened in 2008 (for Lance)’

Citibank and the $20 billion bailout

Published November 25, 2008 Business , Investing Leave a Comment
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If you are going to spend $20 billion on bailing out a bank that has a market capitalization of  about $20 billion, then surely you should end up owning the bank?

Not so with Citibank.

Indeed, if you owned equity in a company that had debts far great than assets, then wouldn’t you expect to see your equity wiped out, and that the debt holders would be the new owners?

Not so with Citibank.

Alternatively if a white knight or government came in and rescued the company you would expect again that your shares would lose value wouldn’t you?

Not so with Citibank.

In fact Citibank’s shares are up 50% so far this US trading day after the US Government announced it will guarantee an obscene amount of debt and inject $20 billion of new capital.

Last week at this time I shorted Citibank stock – both through selling the shares and by buying some $2.50 puts. The shares were a bit over $9 at the time, and I suspected that Citi’s time had finally come.

I covered the the shorts and sold the puts at prices between $5 and $3, closing out everything on Friday US time. While I made stellar percentage profits, they were not high dollar value due to the small size of the investments. I sold before the economic values because I suspected that this bailout could happen, and it did.

It needed to happen, but it didn’t have to happen in a way that rewarded the incumbent  management team and the owners of the stock. The equity holders and the management team should both be squeezed out in favor of debt holders, in this case the depositers.

Buffet’s biography Snowball

Published November 23, 2008 Business , Investing 2 Comments

Warren Buffet’s recently released authorised biography Snowball is excellent.

It is a larger book, but is extremely well written, and easy to read and a great book for these troubling economic times.

You just know he is out in the market right now looking for bargains, which is why my latest strategy with my US stocks (when not shorting Citibank) has been to build my Berkshire Hathaway portfolio. Someday I’d like to own a real share or 20, but for now I am sticking with the ones that cost $3000.

For Kiwis here’s the Fishpond page for Snowball, priced to sell at a breezy $87.

Please don’t bail out GM

Published November 18, 2008 Global Macro Trends , Investing 1 Comment
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I have to agree with Greg Saunders, posting at Tom Tomorrow on this:

“When it comes to bailing out the auto industry, count me in the “let them starve” camp. The auto industry has been outsourcing American jobs for 25 years now with little regard for the devastated communities they’ve left in their wake (seriously, re-watch Roger & Me sometime). The big three have also used their lobbying might to oppose every environmental regulation in their sights. And on top of all of that, their cars suck. Bailing out the auto companies whose single-minded devotion to SUV’s made them blind to the hybrid revolution is like bailing out a record company that hasn’t had a hit since “The Macarena”. Screw them.

The US economy is brutal in its supposed simplicity. The market is the decider – good companies prosper and bad ones fail.

That means if you make shitty products then you can generally expect to eventually go out of business. 

Unless you are a US bank, airline or a car manufacturer it seems.

Unfortunately and blatantly (Ford and) GM ignored the portends, and continued to make gigantic gas guzzling, poorly constructed unsafe vehicles. They have spent years reaping the benefit of lax tax rules on those massive vehicles and now pretend to be blinded by the high oil prices and the disappearing demand from the post-bubbly economy. GM wants $25 billion, and 100,000 GM jobs and countless other jobs that are dependent on GM are at stake.

Shut the doors I say, shut the doors.

It’s time these companies (and those crappy US Airlines) were pushed into the incinerator. Out of the ashes we can expect to see one, five or even ten or twenty new, innovative and cool companies that form to fill the vacuum. We will all be richer for it.

Put them into Chapter 7 (that’s receivership where you shut the doors), chop them into pieces and sell the assets off division by division. Canny buyers will grab factories, brands and even those car loans and will operate them far more efficiently. The debt holders are in charge in a receivership situation, and this is one situation where some tough decisions should be made.

Wouldn’t it be great to see those GM brands independent again? Not just the crappy ones like Buick, Saturn and GM, but businesses like Cadillac, Chevrolet and Holden that have some following and legacy. Then there are relatively unspoiled brands like Saab, Opel and Daewoo. Imagine them all under independent ownership, scaled back and concentrating on selling quality vehicles. Imagine their suppliers in the same way.

Wouldn’t it be better for employees in the medium term to work for smaller, more dynamic, local and much more fun companies? There needs to be some pain now though, as it is just not sustainable to keep making Ladas when the economy doesn’t demand it.

Some of that $25 billion (or whatever) could go towards covering the disappearance of the pensions for former US based workers, while adding yet another nail in the coffin of private health care. 

The rest could go to creating smart incentives for the new companies to invest in clean technology would help guide them, while other startups would also emerge to provide the required parts.

The motorcycle industry a few years back figured out that it was really easy to design, manufacture and sell a much vaster range of faster and safer bikes. The technology seemed to just be there and so now a young company (like Triumph or KTM) can create a compelling yet eclectic range of vehicles. Even staid BMW got into the game and is now producing everything from race bikes to 400 enduros and of course beefy adventure and touring bikes.

US based Harley Davidson is also producing great bikes these days, which begs a final thought – what if Harley Davidson and KTM each took over one of GM’s brands? Wouldn’t they make great vehicles?

 

<update. Ford is selling down their stake in Mazda from 33 to 13% – and lose control, while, and GM sold down their final 3% stake in Suzuki. Actually they sold 17% of Suzuki just 2 years ago to pay for “restructuring costs” and GM has now had Hummer on the block for a month or three>

<upate 2: Chapter 11 can provide some teeth – Ch11 is the “do a big reorg and trade out” version of bankruptcy. Here’s Micheal Levine in the WSJ.

After 42 years of eroding U.S. market share (from 53% to 20%) and countless announcements of “change,” GM still has eight U.S. brands (Cadillac, Saab, Buick, Pontiac, GMC, Saturn, Chevrolet and Hummer). As for its more successful competitors, Toyota (19% market share) has three, and Honda (11%) has two.

GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000

Federal law provides a way out of the web: reorganization under Chapter 11 of the bankruptcy code. If GM were told that no assistance would be available without a bankruptcy filing, all options would be put on the table. The web could be cut wherever it needed to be. State protection for dealers would disappear. Labor contracts could be renegotiated. Pension plans could be terminated, with existing pensions turned over to the Pension Benefit Guaranty Corp. (PBGC). Health benefits could be renegotiated. Mortgaged assets could be abandoned, so plants could be closed without being supported as idle hindrances on GM’s viability. GM could be rebuilt as a company that had a chance to make vehicles people want and support itself on revenue. It wouldn’t be easy but, unlike trying to bail out GM as it is, it wouldn’t be impossible.

I almost purchased an apartment

Published November 1, 2008 Investing , Life 3 Comments
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Along with stocks we are also seeing a plunge in housing prices. The mortgage payment/rent equation is still wacko (it should be about 1-1) but 3 weeks ago I decided to place a tender offer on an apartment that I liked in Wellington.

With tenders you place a binding bid into a box, and when the box is opened the tenders are examined by an independent person, and then passed on to the buyer. They usually take the highest cash offer and if it meets their price then the tender is accepted and the sale is final.

Two bids were in the box when it was opened – mine and one other, which was not bad in a plunging market with news of global financial turmoil swirling around.

Interestingly those offers (well mine – I don’t know about the other one) roughly paralleled this situation in Auckland, where a “million dollar property” sold at auction for $685,000. I constructed my offer from a grounds up equation  what would I spend on a mortgage, renovation and building fees versus what I believed I would pay in rent for the place/ I arrived at a figure around two thirds of what the apartment would have listed for in the middle of the bubble.

What happened next was also eerily similar to the Auckland situation, where the vendor has gone AWOL, I guess after being disappointed in a low result.

The tender amounts for the Wellington apartment were apparently well beneath the vendor’s expectations, and so while the financial crisis worldwide expanded some more both parties were invited to bump their offers, while the vendors expectations downshifted.

I did so, and then I won.

Well apparently my tender was higher, and the vendors were willing if not keen. With a tender that is it- take the highest cash offer and move on.

But no.

Relatives of the vendors then stepped in, insisted the property was worth about $150,000 more than the second round’s highest offer and wanted to start again. The beauty of a tender for the vendor is that buyers simply place their highest bid. There is no mucking about. With this situation I felt I was already past a reasonable valuation for the property, and there was no juice left.

So I gave them 24 hours to accept the offer and then withdrew.

Those relatives may eventually eek out more from the sale, but the numbers certainly didn’t work for me and I wasn’t going to get into an overpriced auction in the midst of a global financial crisis.

The mortgage to rent ratio, after adjusting for building fees and required renovations and the like was still over 2.5 times my current rent for a superior place in Wellington at my tendered price. The new price would raise that well over 3, which is a moronic financial decision in a market that can only see housing prices fall over the next few years.

So I shall continue to bide my time until sanity prevails, and keep reiterating that current prices are froth.

The upside to this is that there seem to be plenty of cool private start-up opportunities around to throw money at across Australasia. The medium term returns from those as a portfolio are substantially higher than the medium term prospects from real estate, and they each contain a chance for making substantially more. They are also a heck of a lot more fun!

Invest now – but only in quality businesses

Published October 29, 2008 Global Macro Trends , Internet Business , Investing 1 Comment
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Linked in just raised US$76m from some strategic investors, while over in Western Australia Tanami Gold grabbed AU$12m from almost all exisiting shareholders.

In Canada vBrick systems got $11.9m – they make enterprise video systems, and managed to get Menlo Ventures and Morgan Stanley on board, amongst others.

China is also showing life, with Intel Capital investing in 3 different companies. Meanwhile in Vancouver the Yaletown fund is succesfully raising money.

Why mention these? Because now is a great time to make considered investments in quality companies. If you are going to time the market then the rule is simple: invest when everyone else is selling, sell when everyone else is buying.

Considered means making your own analysi, and buying with a margin of safety.

Quality means companies with solid earnings, growth and management teams

I use really basic rules of thumb to determine value in a hurry.

1: Examine the earnings before interest and tax (EBIT). Ask what will it be next year, and the years after, given current events. Estimate the answer.

Apple’s earnings were $6.75 billion for the last 12 months, and despite the market and recent Microsoft efforts, everything points to them geting stronger again.

2: Multiply that number by 10. Make it 15 if it is growing in leaps and bounds. That’s the rough value of the company. (for companies with no revenue yet or wild growth a la Trade Me it is a bit harder – make a model and discount back)

Apple is growing a bit, so I’ll multiply that $6.75 billion by say 12 to get $81 billion.

3: Compare that to the total debt + equity value

Apple’s market rate enterprise value is $57 billion (today), which is 8.45 times EBITDA.

4: Invest only if there is a healthy difference between your valuation and the company’s valuation. These things have risk associated with them and you can lose if the market overshoots, which it does.

$81 billon is 42% greater than $57 billion, so Apple is a good investment.

You can also use Valuecruncher to get this data automatically for you, and to lay with the assumptions of revenue and so forth. Here is Apple’s page – go for it.

Saving New Zealand from the crisis

Published October 22, 2008 Investing , Life , NZ Business , media 5 Comments

Mark Welden and David Skilling went to Davos, got back to NZ, clearly talked a lot over beers and came up with what I can only term a business first over-reaction to the current global gyrations.

Good on them for the doing this though, and for the intention which they are following through of starting a conversation.

However their list of ideas to help deal with the incipient crisis are right wing oriented – placing business and wealthy individuals first.

I’ve sat on this post for a few days, as events are moving fast. The Australian solution is to give money to those that need it – the people on lower incomes. We all need to tighten our belts, and the higher income folk have more ability to absorb loss of income. As Obama famously said, if the lower income folk are able to earn more, then they will spread it around.

Here’s the original list of ideas, and my 2 cents worth of response:

Defer all provisional tax payments for next 24 months

That means slow paying money from business to the government. This reduces Government income, increases business income and puts an increased loan burden on the Government, meaning they need to go offshore to borrow more money, at current high interest rates exacerbated by a lower credit rating resulting from the increased debt. As a product of the Muldoon era I have a very real aversion to high levels on New Zealand Government debt with a declining currency.

Allow 100% depreciation of capital investment.

Companies pay a lot less taxes as they can expense all capital purchases (like cars, machines). The bulk of that capital would come in from overseas, so that would be really bad for the terms of trade, and again increasing our debt burden. This again reduces Government income, increases national debt and so forth.

Create a two-year tax rebate to cap income tax at 20% for returning Kiwis who have been away for over three years.

This means the Government gets less money, while highly paid ex McKinsey consultants from overseas get more money. I’d love this, but then I’d just leave each 2 years (which I seem to do anyway).

Besides, the tax rate is not really a concern with respect to living in NZ – it’s everything else. If we cared only about tax rates then we’d be in Hong Kong or Ireland. I’m not, and besides raw tax rates are higher in the USA or Australia than in NZ at the moment.

Firms that are not here do not pay tax. If firms move here, with more than ten people, give them two years of no company tax. {Financial, IT and environmental/science-based firms can move easily as they are essentially just people + broadband. }

This will reduce income to government, and encourage firms to screw with their location so they can clam tax benefits.

Actually I’d like to see the idea behind this and the previous one implemented, but the proposal is just a bit too naked and open to abuse, and would lead to a multitude of unintended consequences. The way to approach this one is to lower corporate tax rates for everyone, creating a level playing field that is better than those elsewhere. Sadly lowering corporate tax isn’t going to help balance the books.

Retain the R&D tax credit, to ensure that R&D investment is made in New Zealand.

I’m not a fan of targeted government money for business as it tends to focus businesses on Government aims rather than their market’s aims. This creates economic loss where that Government money is wasted on R&D that is not required and where business divert resources (time and money) to non essential work in order to obtain and keep a Government grant. The National proposal to remove the new 15% R&D credit is therefore good in a meta sense. Indeed I’m all for a very simple tax code – with low rates and no exemptions.

I’m beginning to believe that some Government seed money is useful, but I have yet to see it effectively applied in NZ.

I do have an investment in a company that has obtained decent amounts of Government grants over the years, but I would prefer that this tax credit just went away.

Retaining it means reduced Government income and reduced business expense. I’m beginning to detect a pattern.

Create KiwiCo. Commercial SOEs would be put into a new company similar to Infratil in New Zealand or Temasek in Singapore

We taxpayers already have Kiwibank, a good chunk of AirNZ, NZRail and the Kiwi share in Telecom. Meanwhile Infratil already exists, and while I’m sure they’d love Government money, they seem to be doing pretty well without the money nor the interference.

The SOE’s are doing just fine under the current arrangement, and another layer would just serve to add costs of the real and agency kind. Agency costs are where managers do things that the real owners (taxpayers) wouldn’t want – like NZRail under investing in infrastructure.

Create an at-scale taxpayer savings vehicle, using financial assets currently managed by the NZSF, EQC, and ACC.  There are a number of organizational options for this that would ensure that certain defined liabilities are recognized, but a material portion of these funds would take a long-term, Warren Buffet style investment approach, with a real expertise and focus on New Zealand – where it should have a real advantage, and really help New Zealand.

This is really scary. Government money would be used to boost the tiny NZ stock market rather than gaining the much higher and lower beta returns derived from a portfolio  of safe and diversified securities across geographies, industries and investment types. Warren Buffet’s Berkshire Hathaway isn’t invested in NZ, and this approach would see our taxpayers portfolio not invested in Berkshire Hathaway, which, for example, has dropped only a few percent in USD terms and soared in NZD terms over the last 3 months.

Convert KiwiSaver into a compulsory savings scheme. We must reduce our reliance on foreign capital and grow our savings pool.

Kiwisaver is doing just fine as it is, and making is compulsory will just increase compliance costs and the timing will really annoy people that don’t want to invest cash into something that is currently showing negative returns. This will increase investment into the NZX, and decrease income in the hand for average New Zealanders.

Eliminate the biases in the tax code that promote housing speculation.

This will slow home owners from buying homes and thereby move investment money into the stock market and banks.

It will also accelerate the decline of Real Estate values, making the crisis, well, more of a crisis.

Meanwhile along with Real Estate folks have also lost confidence in the markets and the banks are looking dodgy. This is shutting the gate far too late, and won’t let the horse back in.

Here are top of head three things that we can do:

1: Don’t panic. The daily market gyrations will eventually settle, and considered opinions can once again rule roost. The price versus earnings numbers have been showing crazily high values for some time now, so let the dust settle and valuations return to historical norms. Let the election play out, and don’t spend billions beyond a quiet guarantee of bank deposits.

At some stage it may pay to diversify our investment assets around the world, and take advantage of any major price/earnings discrepancies we see. This is fundamentals driven investment into global assets that show a good safe return.

2: Help those that need help, when they need it – right now people are still employed, but when problems mount then we need a plan to help get unemployed people eating, working and adding benefit to New Zealand. That does not mean borrowing to build dams, but having enough in the bank to start a few projects if we start to see large scale unemployment. There’s a recent Nobel laureate who thinks this is a good idea.

3: Open the books of the banks and finance companies. The really scary bit about this crisis is the massive value of securities that has been discounted to almost zero. That is, things that the market though were worth billions and billions are worth – well a lot less.

Forcing all operating financial institutions to open up their books and show exactly what they have will allow the market to fairly value them. I would guess that the banks operating in New Zealand have pretty conservative balance sheets, and opening the books will ease fears of investors, counterparties and individuals with deposits and loans. The “Aussie” banks are actually seperate NZ companies, owned but seperated from their Australian parents, and are subject to pretty good NZ rules on asset ratios.There aren’t really any finance companies left, but those that are woul need to do the same. I’d like to see exactly what the securities are, not just a S&P risk rating – which we now know is useless. In this computerised age there is no reason why we can ask for full, annonymised, disclosure, and let the analysts rip on to the actuals.

The NZX could push this level of disclosure out to all of the companies on the NZX, (along with increased frequency) and help restore investor confidence in the capacity of companies to absorb the hit and propser in the future.

While we wait the new Government could work on simplifying the tax code – even more. Get rid of the reasons for family trusts to exist, make company and personal tax rates the same, lose the naive capital gains tax, zero tax under say $25,000 income and so forth.

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Disclaimer These opinions are my own, and not that of any of my current or former clients.
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