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One Ring to Rule them All is Often Suboptimal
Watching those having the unenviable task of deciding whether or not school students should return to school as we try to learn how to manage covid in a “non elimination” world, a striking constraint is the fact that in an education system where there is but one approach which has to be applied (more or less) uniformly to all education, through one system utterly dominated by one “Ministry” and one set of institutional settings options is needlessly limiting.
As time marches on and the pandemic unfolds what is clear is that there is remarkable diversity in the nature and form of exposure and risk scattered through myriad communities in quite different geographies, demographic character, exposure profiles, vaccination states and vulnerability status. Successful management is most likely to reflect nuance, adaptability, wide variation and scope for a dynamic approach.
A set of institutional settings that is founded at its very heart on a “make one size fit all” dictate is likely to be overly dictatorial, inflexible, capable of generating conflict and inadequate – almost by definition. A centralised template is most likely more of a hindrance than a help. Greater reliance on the capacity of communities to develop their own solutions has a good deal to offer that is swept away in pursuing central dictate as a way forward.
Experts Going Off-Piste May be Unhealthy
One of the more dangerous phenomena identified by those working in economics and the cognitive behavioural domain in recent years is the “Halo Effect”. This refers to situations in which expectations of the success and wisdom of those having expertise, experience, skill and success – perhaps even notoriety – in a given field such as sport, medicine, politics, art, mathematics, company management, politics or indeed any particular reasonably well defined arena is unjustifiably extended into other unrelated fields. This seems to be common.
Thus it is not uncommon to find All Blacks professing expertise in selecting the best garage door to buy, actresses promising longer, wrinkle free lives for all, and celebrities in almost any field lauding the benefits of goods, services and behaviours unrelated to their core knowledge and expertise.
There may be some underlying generic attributes which justify an element of this. Characteristics such as determination, energy, passion, dedication to an objective might be examples. However in a number of cases the halo reaching well beyond its originating point seems far fetched and unlikely to emanate from any serious basis for favourable compariuson.
At present we appear to suffer this problem in the health area. Expertise in epidemiology for example would seem no basis for predicting likely human behaviour in the light of public policy initiatives, significant success in diagnosis and treatment of various health conditions is not necessarily a crucial component in understanding behaviour patterns of groups or crowds or even individuals.
Prediction of economic outcomes and behaviour patterns in particular off the back of medical or public health expertise is likely a doomed enterprise subject, at the very least, to risks of enhancing uncertainty, offering inappropriate levels of risk aversity, ignoring critical factors (such as the relevant opportunity costs) and failing to come to grips with risk management optimisation or the need to avoid absolutes as benchmarks when desirable outcomes are inextricably bound up with comparative assessment.
A more sound approach then is for experts to “stay within their circle of competence” to quote Warren Buffett, and in particular refrain from making attention earning or seeking, melodramatic assertions regarding “problems” and their “solution”.
Cost of Capital in the December Quarter
Estimation is currently challenging…. as it ever is!
A few points and my current (as always subject to the Rev. Bayes) estimate for N.Z.:
- the estimate is always expectational
- most important not to get overly side tracked by the short run
- most important not to confuse Govt “policy attempts” to set prices with what may happen
Thus I note:
Riskfree rate? 5 year govt stock may still be the best rough long run approximation. Say 4%
Equity Risk Premium (Rm – Rf)? Damodaran option estimate after tax and sovereign risk adjusted 4.7%
This gives us 8.7% as a market post investor tax based cost of equity capital for NZ. Say 9%.
For those interested in WACC, recent Commerce Commission work suggests that the average premium for corporate debt might be in the order of 2% at present, and observation of the NZX50 suggests a debt to total capital ratio of around 38%
When Financial Economics and Music Collide
In the late 80s it was popular amongst the more buttoned down and starchy of my investment banker and legal colleagues to be fairly sniffy about what were termed “buyout firms” which designed and implemented leveraged takeover bids for underperforming companies then seeking to re-structure, lift performance and add value to often moribund under performers with lazy balance sheets and extensive empires.
A favourite (and not always popular) LBO firm of mine, expert in this area, was Kohlberg, Kravis Roberts or KKR. Their first high profile success was a bid for RJR Nabisco. Management had made a bid to buy RJR for some $66 a share. A competitive bidding process ensued with KKR, eventually winning control of the company for $129 a share – a 95% premium on management’s claim of what was “fair value”.
The company was taken private and a total overhaul, including sale of the company’s management air travel fleet – known colloquially as the “RJR Airforce”. Once performing well – some three years later – RJR was floated again and that, at a significant premium to the $129 a share KKR paid. Consolidation of assets, management and a ruthless focus on customers had served to both add significant value to owners and for customers.
Much more recently another American icon, Gibson Guitars, whose products helped drive two generations of blues, rock, fusion and jazz and a bevy of household name guitar heroes (including, yes, purveyors of the unmentionable “Stairway”) to fame lost touch with its customers. Quality control was poor and pricing strategies were so bad that Gibson’s became known as “guitars for doctors and lawyers”. A travesty to us musicians and cause of much hand wringing.
Not a recipe for success and bankruptcy followed.
Enter my favourites – KKR. The company was bought by KKR (now regarded as a seasoned and respectable – or at least more respectable “Private Equity” firm) and a new CEO, formerly of Levi Strauss and a guitar enthusiast as well as turnaround manager was installed. A significant turnaround was implemented – quality improved, costly but failing innovation attempts were abandoned and pricing was re-worked to realistic levels.
The resulting recovery and success was accelerated by lockdown driven demand from Covid responses (home grown guitarist numbers soared), and currently demand outstrips supply by a heathy margin.
Lessons aplenty. Focus on shareholders is critical and the primary means to add value for shareholders is through satisfying all elements of customer demand in a comprehensive fashion.
And of course….. don’t be sniffy.
Eye2theLongRun 