The Weekly: Edition #45 - May 15, 2020
Humility and Risk
"The biggest economic risk is what no one’s talking about, because if no one’s talking about it no one’s prepared for it, and if no one’s prepared for it its damage will be amplified when it arrives." - Morgan Housel
Humility is inextricably tied to first hand encounters with risk. Those who have experienced 'risk' - a business blow-up, a permanent loss of capital, an unforeseen insurance event, a competitive threat out of left field - tend to be more intellectually humble than those who have not experienced such an event. The hubris of business owners, investors, and entrepreneurs tends to be most prevalent during economic expansions, but quickly disappears during tumultous economic or geopolitical shifts.
Speaking of economic shifts...
Oil traded below $0 briefly as May futures contracts expired.
Filet mignon is being ground up into ground beef while supply of low-quality cuts are out of stock as meat producers can't keep up with demand.
Colleges are debating whether it's even worth the risk to bring students back to campus in the fall.
Some states are opening back up while some are determined to remain closed until further notice.
Hotels, airlines, and the travel industry have witnessed close to a 90% reduction in demand.
Technology trends that were already in place - remote work, online education, virtual meetings - have been accelerated by orders of magnitude in a short 2 months.
Pitch books are being circulated with EBITDAC numbers - pre-coronavirus financials - as if businesses get a free pass for what has occurred since the coronavirus broke out.
Who could have possibly foreseen any of the effects of coronavirus 3 months ago?
If we are honest, we can't begin to know what the outcome will be in terms of economic pain and loss of human life in a year, five years, or a decade from now. The one prediction that we will add to the mix is that there will be a marked dose of humility that enters the business world during the next economic recovery, but, as has mostly been the case in human history, humility will fade to hubris... and the cycle will repeat.
Many businesses, investors, and entrepreneurs viewed the world with rose colored glasses a mere 3 months ago. Optimism tends to accompany a desire for more leverage which can take the form of capital leverage, hiring, beefing up inventories, buying back stock, increasing financial incentives, and more.
Optimism doesn't always mix well with risk.
Risk is what you can't see (or predict). The more risk one has experienced in her life, the greater the humility with which she tends to approach a given set of possible outcomes and the greater discipline she tends to exert over leverage decisions. Greater humility allows for greater patience and longer term thinking. Longer-term decision-making optimizes for survival first and growth second. Humility acknowledges that to grow, you must survive first.
Let's be adults here: we've all been humbled to an extent the past 3 months with how events have unfolded in response to the coronavirus outbreak. Here at Permanent Equity, we attempt to minimize our risk by eschewing leverage and maintaining a rock-solid balance sheet for each of our portfolio companies. The coronavirus has affected each industry differently, and the tough truth is that in some cases a solid balance sheet has simply not been enough. If we can help you in this time of economic upheaval, please do not hesitate to reach out.
Back to work toolkit (Madrona Ventures)
+ "In early to mid April of 2020, we had more than 50 conversations with HR leaders, government and health officers. This site is the repository of documents that fit the practical needs of many company leaders –from HR to CEO to Facilities – to build a Safe Work Plan for Back to Work. This website offers both a slide deck of findings that was presented on April 27th, 2020 and documents gathered from many sources to help companies create their own Toolkit for Back to Work (BTW.)"
Pandemic spawns new reporting term ‘EBITDAC’ to flatter books (Financial Times)
+ "This week Schenck Process, a German manufacturing group, added back €5.4m of first-quarter profits that it said it would have made were it not for the hit caused by state-mandated lockdowns. Its operating profit for the period — “adjusted ebitdac” of €18.3m — was almost 20 per cent higher than the same period a year earlier, rather than 16 per cent lower."
The humbling of Exxon (Bloomberg)
+ "The coronavirus has laid bare a decade’s worth of miscalculations. Exxon missed the wild and lucrative early days of shale oil. An adventure in the oil sands of Canada swallowed billions of dollars with little to show for it. Political tensions doomed a megadeal in Russia. Exxon ended up spending so much on projects that it has to borrow to cover dividend payments. Over a 10-year period, Exxon’s stock has declined 10.8% on a total return basis, which includes dividends."
Beef producers are grinding up their nicest steaks, while retailers can’t meet demand for cheaper cuts (The Counter)
+ "“I’ve never seen this dynamic happen before,” said Matt Teargarden, head of the Kansas Cattlemen’s Association. “The combination of things that we’re seeing is unprecedented.” For the first time in recent history, producers have started to grind up higher-quality roast cuts, adding them to their ground beef since they are more likely to sell than if the cuts were kept whole. This in turn drives up the price of ground beef, since the meat that makes up the ground is of a higher quality."
For Joanna Gaines, home is the heart of a food and design empire (New York Times)
+ "In just seven years, since “Fixer Upper” began airing on HGTV, the couple has renovated more than a hundred houses and expanded the Magnolia brand into restaurants, craft markets, books, villas, real estate agencies, furniture, a magazine, a Target brand and — coming up shortly — their own cable channel, the Magnolia Network."
Advice is more important — and overwhelming — than ever. Here's how founders can cut through the noise. (First Round Review)
+ "The entrepreneur often already has the best answer to a problem. A good advisor will bring it out by forcing them to walk through the problem again and again."
5 questions that (newly) virtual leaders should ask themselves (Harvard Business Review)
+ As we adapt to new, more digitally-native workflows, these 5 questions will become more and more important for leaders to reflect on during COVID-19's forced work-from-home experiment.
COVID-19 is fueling a boom in the doomsday bunker market, thanks to some dubious marketing claims (The Verge)
+ "Prior to the pandemic, Vicino wasn’t making money off Vivos. “My goal is not to get rich off of this. I already was rich,” he explains. When the novel coronavirus started to spread in the United States, however, inquiries about new bunkers began to climb. At xPoint, the facility in South Dakota, Vivos has sold more than 50 bunkers and still has 500 to go. “We’re selling almost one a day right now,” Robert tells me. Two weeks ago, he says he made more than a million dollars on a single Friday. The following Monday he made $500,000."
The explorers who set one of the last meaningful records on earth - thirty six thousand feet under the sea (The New Yorker)
+ "Past twenty-seven thousand feet, the pilot had gone beyond the theoretical limit for any kind of fish. (Their cells collapse at greater depths.) After thirty-five thousand feet, he began releasing a series of weights, to slow his descent. Nearly seven miles of water was pressing on the titanium sphere. If there were any imperfections, it could instantly implode. The submarine touched the silty bottom, and the pilot, a fifty-three-year-old Texan named Victor Vescovo, became the first living creature with blood and bones to reach the deepest point in the Tonga Trench. He was piloting the only submersible that can bring a human to that depth: his own."
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