Wednesday, January 23, 2013

Antifragile: Company Examples

I will soon finish N. N. Taleb's book Antifragile.  I cannot recommend this book highly enough.  One topic he explores, though not at length, is the fragility of companies, large vs. small, diversified vs. concentrated.

Taleb writes that large companies are often more fragile.  Since they are more complex and also because few of their employees have "skin in the game" (that is, they are not heavily exposed to their companies' fortunes other than, say, some stock options), the managers of large companies are more likely to damage the companies under their supposed care.

Two large companies come to mind, both of which have run into trouble recently.  Caterpillar, the world leader in manufacturing earth-moving equipment, just wrote off $550 million because of a fraudulent acquisition in China.  WTF?!  How could a company LOSE $550 million without doing "due diligence" on such a large acquisition in corruption-prone China?  Did not Cat's managers ever hear that China is FULL OF CORRUPTION?  Not all the facts have not come out yet, so we will have to wait and see who and what the full story will be.

Caterpillar has a solid reputation as a solid company.  There may be some manipulation at higher levels of the company to take an earnings hit now to help hide the (maybe) fact that worldwide sales of construction equipment are slowing.

Yet, Caterpillar's stock has not suffered in recent days...


The other great example of a fragile large company is TODAY'S exposure of the derivatives losses at Banca Monte Dei Paschi (of Siena, Italy).  BMPS is the world's oldest continuously operating bank, having been an operating bank since 1472.  Here's a link that shows what we know as of today:

BMPS is at least a fairly large bank, they have branches all over in north-central Italy.  The Zero Hedge link above notes that Giuseppe Mussari, who headed up BMPS during the financial crisis has RESIGNED from his new job: supervising Italian banks!

It appears that BMPS engaged in derivatives trading with German and Japanese banks.  They booked any gains and hid the losses...


Taleb notes that BANKS are particularly fragile, that almost all of them "blow-up" (destroy themselves in time).  Why?  Because they engage in fragile business: lend long / borrow short (putting their liquidity and short-term capital at risk) as well as making relatively little money (by loaning it out) while exposing themselves to higher risks than expected...

BMPS's stock was down some 15% vs. two days ago.

The cherry on top?  ECB Chairman Mario Draghi was supposed to have kept an eye on Italian banks in his job at that time...


Smaller companies (or even very small) are in many cases stronger (at least ones that have survived the critical first five years).  They do not have bureaucracies.  They are closer to their customers and to direct communication with them.

In the cases where smaller companies are not in debt, they can be very durable.  Think artisans (cabinet makers, specialty wine & cheese makers, restaurants...  Many of these businesses succeed (when they do) by word-of-mouth...  Or they fill a small niche and are hard to dislodge.

I will leave aside the example of Ameru down there in Peru for now, although we are trying to become stronger (low debt, niche products, and close relationships with our suppliers and key customers).  Later I may take a "Taleb-ian" view of Ameru.

Instead I will discuss here two very small businesses, both have TWO employees, the CEO and an assistant (the latter not just a secretary, but someone who can hold down the fort while the principal is out). m The first guy I know was (and still his) a mortgage broker, but has branched out into an interesting lending niche.  He gets 10% on money he loans out with near-perfect security!  I will not reveal anymore about his business model, but he is the only I know doing this...

The other guy I know (who is still doing his main real-estate management business) has found another sideline as well: he occasionally goes and buys a condo, and rents it out.  What is so special about that?  He knows how to buy at low prices, he is picky about his tenants, he is able to command high rents, and he knows (well) a good general contractor who will make repairs (etc.) for cheap (the man I know uses him exclusively and so gets his work done right and at lower cost).

What do these two guys share in common (other than being in the real estate sector)?  They both have found nice niches by being agile and flexible!  Agility and flexibility, the ability to aggressively move into a profitable niche that they can quickly understand, is a secret of their success.

Agility and flexibility are two key ideas of having "options", options to make serious money by placing oneself in the path of being able to make big money and keeping exposure to losses at a minimum:  that is antifragile!

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