Winning by Default, Part 2

November 21st, 2008

(Summary of November 13 salon)

I’ve spent more than 3 decades pondering a mystery: the difficulty owners have in grasping economics. In the early years I thought I had it figured out. In those days my advice was based on so-called economic theory.

The theory applied to credit and prices seemed so obvious. Credit supply at the extremes of shortage or excess drove prices. Stupid prices always came from excess supply. Too cheap prices came from extreme shortage. It was never hard to tell when either extreme was the case. But it only reached the owner’s conscious when the extremes stuck them down the rush of black hole. Then it was no longer theory. But this sudden recognition was not a real conversion, it was just a foxhole conversion.

There is nothing like the near-death experience of a workout, turnaround, bankruptcy, or other disaster to enliven the desire to learn and understand. But these things are passing events, and most people return to old habits as soon as possible. Amongst large companies, less than 7% were better off just 2 years after major cost cutting. So what I thought were conversions–I had advised many through these things–were just passing sobriety.

About two decades ago we began to able to add hard data to economic theory. I was sure that with the facts, the theory would be undeniable. And it wasn’t, for some. Others didn’t bother to deny, and neither did they act. Still, I had fun pulling, crunching, and displaying data. It was fun because it confirmed my theory. It was even more fun for the refinement it what could happen and when led to advantages for our friends that didn’t require an overwhelming surge of unbridled uncertainty.

Even results don’t convert. I had not found a compelling argument in theory, facts, nor results.

The evidence, though anecdotal, piled up over the decades: almost all major crises were a bad decision or a failure to see a decision was needed a few years before. Fixing these things kept me busy, but the results were mixed for the owner. What makes more sense: planning to avoid a beating, or working to heal after the beating?

Providentially one company triggered my interest and led to an insight that is good enough to call an answer: Porsche.

Coming into to this century, Porsche hedged the dollar. It protected their ability to hold market share and margins at the same time. I liked it. It is my kind of thinking.

I should have seen it before. I bought commercial real estate in early 90’s. I bought First Bank after they turned a smart hedge into a stupid speculation. My friends lost their jobs, and I lost the bank that financed me in 1969 on that one (although I made money on the stock). I sold my house in 2004, half my stocks in 2006, and another third in 2007. That was merely on two economic theories: the affect of excess credit supply on prices and the necessary relationship between price and income. (I admit I listened to some others and didn’t sell everything. Holding oil worked. The rest, not so much.)

I should have known. I should have seen HOW one actual acts on economic volatility. Because for me, despite my assurance of what I knew and had advised for decades, I doubt I would have sold but for one thing. I was about to resign from all our retainers and begin to write a book, a 3 year proposition with an uncertain outcome.

I sold for a powerful reason. I did not want the distraction of mind, dilution of time, or financial peril to deflect me from my intended purpose. I was sure that what I was about to do was something much better and would prove to be worthwhile. There was to me only one risk, disruption. (The hard slog of reviewing my cases, 40-year career, research, dozens of outlines, bibliography, footnotes, and writing was more than hard enough.)

Well back to Porsche.

This isn’t the first time Porsche had to deal with currency exchanges rates. The last time was in the 80’s and it nearly ended them.

Porsche was founded on Ferry Porsche’s dream of a rear engine sports car you could drive every day. He started in the 40’s. Even a little knowledge of history reveals the incredible obstacles he faced. By the 80’s Porsche was moving rapidly away from rear engine. They were phasing out the 911. It had developed engine problems that were expensive to repair. Fixing it needed some straightforward engineering. They didn’t do it, but sold highly profitable repair kits instead.

Ferry Porsche’s dream was gone — rear engine, drive every day (which, among other things, means reliability).

The dream was restored under Peter Schutz. Schutz was CEO from 1981-1987. Accounting was next door to Schutz’ office. Ferry was in an outbuilding. Schutz moved accounting out, and Ferry in. Every morning over rolls and coffee, he would talk with Ferry. The dream was back. By 1996 there were no more front engine Porsche sports cars.

What was good enough to start Porsche in extraordinarily difficult times was good enough to bring it back. Imagine sipping coffee and searching to find the dream to bring about turnaround.

I was not surprised that the turnaround worked. Ferry Porsche’s dream was something he thought others would share. That made it a promise to himself and to others. Who were the others? Customers-to-be.

Having reset the firm from the outside, looking outside was possible–otherwise economic surprises would break the [renewed] promise.

At one time, if the matter of predictability was a matter of intellect, training, tools, data, statistics, and budget, then only large institutions could get it right. Now Lehman, Bear, Merrill and the House Banking Committee (Frank and Waters were warned two years beforehand) but they didn’t get it right. They made no promise? They broke a promise made?

It takes tools, training, data, and statistics. We offer all that. It takes a promise made and kept.

Next salon in January is Winning by Default, part 3, Antagonists to Entrepreneur.

P.S. Holger Haerter Porsche’s CFO, who designed the hedges, is an economist.