Archive for December, 2008

Dec312008

Let it die with 2008

You got it right.  Party animal I am not.  It’s 11:15pm on New Year’s Eve and I find myself compelled to write a small piece in effort to put some amount of good karma into the universe to eliminate the lunacy that has increased in the financial, real estate and stock markets in the last four months.

The best example I can find to top it all off, I mean, the real icing on the cake - the GMAC bailout.  The red flags and bells and whistles going off for this one are astounding.  For this company to get $5 billon in government bailout money and to then turn around and offer 0% financing with that money to General Motors customers with sub-prime credit positively astounding. An interesting short take on the GMAC situation can be read here.

Apparently, moral hazard is now a hollow concept.

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Propelling forward into 2009 - there are a few tenets that, in spite of economic conditions, war, government intervention and the like, should prove profitable for investors and entrepreneurs:

  •  irrational markets bring opportunties to patient investors- whether panic selllig in real estate, stocks or bonds, the time to pick up great deals is to buy when others must sell
  • tough economic conditions force weaker and marginal players out-this is good news if you can keep swimming
  • new opportunities are opening up - technologies and innovations are stil coming down the pipe
  • it is good to be alive - I just like to throw this one in there for perspective

In a slight departure from 2008, I will be broadening my asset classes for investment in 2009.  I have been increasingly scaling back my consulting company and focusing more on equity investments and some busines acquisition deals.  I am still very excited about real estate, though a little bit more on the commercial side now than at any other time.  Deals are literaly falling from the sky.  A few of them, believe it or not, have hit me on the head.

Please stay tuned for more from Radical Wealth Accumulation in 2009.  Things are looking up.

Published
by
Adam Davis
on December 31, 2008
in Bailout
. 4 Comments
Dec182008

Proforma Pariahs

Number cruncher.  Bean Counter.  Captain Spreadsheet.

Abacus

I freely plead guilty to being all of the above - for part of the day at least.  Being a ‘dyed in the cloth finance man’ as one of my former Indian colleagues labeled me, I cannot help but pass comment on one of the things that routinely trips up my fellow entrepreneurs and investors nearly right out of the gate - disillusion financial projections.

Trust me.  I have learned this lesson the hard way more than a few times over.  Your humble author would have gladly forked over a few more grand in college tuition than have forked over several times that in money lost in business.

In spite of the general contempt I felt toward “the man” when I was a crunching numbers in a cubicle, one of the most valuable lessons I learned while working in corporate finance was the art (and I use the word ‘art’ quite offensively to any true artists out there) of thoroughly evaluating financial numbers of businesses and operating units.

Many venture capitalists have grown quite long in the tooth preaching that it isn’t a good idea to plan in fantasy land, i.e.: “the market size is ‘X’, if we can capture just one percent of ‘X’, our company will make a killing,” or something along these lines.

Now, I know that many entrepreneurs are not finance people by nature, so they may be inclined to hire a CPA or consultant to assist with putting together their financial projections. Inevitably, most of these proformas are no good, still focused on obtaining some level of sales and working down to a bottom line number from there, often engineering a result that an SBA loan approval committee or venture capital investor wants to see.

Based on some experience, the best way to prepare financial projections, in my view, is to work from the bottom up, build in a healthy margin of safety and remove illusions of grandeur and 3 year IPO ‘liquidity events’.

1. Work from Bottom UP

Start with the basics:  what will it cost you to get a customer? what do you need to cover fixed costs?  Working from here will help you learn what it will really take to achieve the minimum profitability necessary to make your business start-up or acquistion a worthwhile endeavor.

2. Margin of Safety

Make sure to establish revenue projections that give you pricing flexibility.  Market forces could put pressure on your prices right away, even if you are a premium provider.  If you are going for a cost leadership-type position, someone else could have a similar idea or a new innovation could spark margin pressure for you.  Also, give yourself multiple marketing options and customer acquisiton options.  When companies limit themselves (and base financial forecasting upon) strategies that are too focused, bad things like ‘red-ink’ quickly follow.

3. No grandeur

Aim to build a profitable and sustaining enterprise.  Be happy if you have to keep your business forever.  If you can’t be happy with owning your business for a long period of time, then you are starting it (or buying it) for the wrong reasons.  Even though CNBC glorifies the leveraged private equity buyouts and raiding takeovers that aim to take quick profits and fip companies around like pancakes, very few of these stories ever end well (but it sure makes for good TV).  Don’t start with the 3 year exit in mind, it will only further delude you into thinking you are superman and batman combined.

Accomplishing these things in financial forecasting for entrepreneurs is going to be difficult, but not impossible.  If you need assistance, feel free to hire a consultant to help you. Of course, as many of you know, you can tap a global community of service providers that can aid you in this endeavor, and give you a good perspective from their viewpoint.

As an investor, the golden rule is to run far, far away and very fast from rosy financial projections.

Published
by
Adam Davis
on December 18, 2008
in Entrepreneurship and Finance
. 7 Comments
Dec162008

Fools Rush In (not the movie) + Bonus: Learn Why Banks Aren’t Lending to You

There isn’t much more to say than already has been said in the unfolding Madoff scandal (read more here) that has demolished portfolios from Wall St. to Palm Beach.

What I, and other people in the world are wondering is: “how?”

  • How could millionaire Palm Beach Florida residents blindly throw money at this guy?  Aren’t these millionaires supposed to be smart and have smart and expensive advisors to help them?
  • How could pension funds from muncipalities and companies lose so much money for their investors?  Why are they even allowed to invest in hedge funds in the first place?
  • How could a guy keep up a Ponzi scheme for longer than even Ponzi himself did?

The sad fact, I think is that this is another classic example of the powerful social psychology of “group think.” If a person, in this case Madoff, gets a few fat cats to throw some money in, the rest wonder if they are missing something and follow suit.  Reminds me a little bit like the ‘dot-com’ stock bubble of almost a decade ago.

Since emotional intelligence - that is, the ability to not be swayed by things other than fact and principle -  is the most fundamental principal of successful investing, it is only fitting that people continue to lose money in schemes like Madoff, Pets.com and others.

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60 Minutes had a great program this past Sunday.  I was most intrigued by the opening piece featuring House Banking Committee Chairman Barney Frank.  You can watch some of the clips from the show here.

During the piece, one of the things that Frank expressed was disappointment that Treasury Secretary Paulson had not done enough to force bailout participating banks to lend money.  Note the key word there: force.

Hold on a second…Isn’t this one of the large contributing factors to the credit disaster that we are suffering through now: Government madated lending?  I mean, Fannie Mae and Freddie Mac having their fires stoked by Congress and Presidential Administrations to ‘make home ownership available’ to more and more Americans - even those that were not qualified borrowers?

For those of you that want to know why banks aren’t lending money right now, I will tell you in one word: Capital.

As in, most borrowers don’t have any.  There used to be an old adage in banking that went like this: “banks only lend money to people that don’t need it.” The reason for this adage are the core issues of financial market intermediation (I usually try not to use big words, sorry).

If borrowers don’t have capital to contribute to their projects, then banks don’t want to lend on them.  Think about it, we just got done with institutions making ‘zero-down’ and 125% financing loans to people, effectively eliminating any financial risk (save for maybe a credit score) from the borrower - the institutions were taking all the risk - or, better yet, some investor in a convoluted mortgage pool was actually taking the risk.

Since most borrowers, businesses and consumers alike, are still leveraged to the hilt right now - think credit cards and maxed out business lines of credit - they don’t have any of their own organic capital to invest into projects.   This = a ‘no-go’ from a banker with half a brain cell.

When borrowers can come forward with good capital to invest, and the project is good, banks will make loans. I am sure that this stance won’t win as many votes for Mr. Frank as the “force them to lend!” rhetoric will, but I hope and trust logic will prevail.

Published
by
Adam Davis
on December 16, 2008
in Finance and Investing
. 2 Comments
Dec152008

How to get ahead…the Magic “P” Word

If I could impart the most important lesson that I have learned to date in business and investing, it would be: “patience.”

Warren Buffett has been quoted as follows: “the financial markets involves the transfer of wealth from the impatient to the patient. “  How true this is.

What is worth doing is worth doing well and usually takes time to implement and work.  There are no shortcuts, however much every late night information marketing genius would like to tell you about for three easy installments of $39.95.

The wealthiest investors and business owners that I know do not chase after quick and easy profits.  They don’t go for projects with marginal proforma profitability and based on heavy leverage.  They don’t take risks without commensurate reward.

When business and market conditions are tough and getting tougher, like they are now (and have been before) the route to take is patient, intelligent and rational.  Knee-jerk reactions simply won’t do much good for your net worth.  Unfortunately (or fortunately for some), most people will jump in and out of investments and projects, will push prices to and fro with their actions and open up opportunities for patient and rational investors to grow their wealth.

Keep watching for bargain investment opportunities to fall out of the sky.  Assets are going to continue to go off at ‘fire sale’ prices as the collective global economy “de-leverages” itself and purges the remains of the great credit hangover.

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I’m going to be launching another blog in the near future that is going to focus more on the financing aspect of my businesses and more of my personal interests and thoughts in that arena.  I will continue to post on this blog as regularly as I can, but it will be more of a general business and investing commentary and writing focus.

Stay tuned!

Published
by
Adam Davis
on December 15, 2008
in Business, Finance and Investing
. 3 Comments