A note on complexity versus accuracy. Sometimes the simple confounds the complex. A while back I traded in an independent manner which ended up being contrarian, it differed from a major investment bank’s research. In thinking independently I made the right call by the grace of God not because of any complex analysis but rather the reverse, using the kind of analysis you could write in pencil on the back of a napkin. I choose to see the simple, the straightforward, what was was right in front of me, rather than the complex. I bought the same stock when investment banks said avoid and began to sell down around a similar time when another major investment bank upgraded it to buy.

In a world preoccupied with degree of difficulty the best outcome isn’t necessarily the hardest one. The education system teaches us to value complexity, degree of difficulty and so forth above what is simple and right. The pages of history are lined with “geeks bearing formulas” who create algorithms that end up imploding. Oftentimes in life I have thought the hardest task was the most rewarding and most valuable. One personal discovery is, it isn’t necessarily true, in the same way success in business often is found where there is most demand. To understand such a concept means seeing past oneself. But we aren’t taught to think like that, we tend to think in terms of operations and individualistically.

One capital decision can in a purely financial sense equate to more than a lifetime of labour and operations. A distressed asset can offer more upside than some trophy asset, as it all depends how we measure. The strategic management of capital is as important if not more important than the operations of a business. Capital management is more about savings and investment. It is about saying no to certain roads. It is about character as much as it is about apparent effort where the ability to delay the gratification can be more fruitful than even activity itself.

Reflect first act second. How often have successful businesses gone broke through a capital acquisition that really had little to the existing business. If only they valued such decisions enough such that they devoted the same time and energy to them as growing. Or how often do businesses go broke during a growth phase where they ignore capital and their balance sheet. The mantra just make decisions and be proactive is a lie, taking the time energy and effort to make the right decisions trumps vain activity.

Decisions matter more. Operational success is not the same as financial strength. Growth in terms of common wisdom is synonymous with strength but it can actually be one of the riskiest periods in the life of a business. Because the way we measure conventionally is not necessary accurate. 

There is a particular phenomena I see time and time again. A company becomes preoccupied with growth and operations and doesn't keep an eye on the balance sheet, then one day it suffers some adversity which despite being temporary in nature, triggers a chain of events where the company’s wealth is destroyed because it lacks the capital structure to withstand the otherwise bearable change. Like a fine tuned race car that can’t go off road, there is an impracticality, whereas low gearing turns out to be the only sustainable gear. 

High debt levels trigger these series events. Suddenly the share price dives, covenants are breached and wealth is wiped out due to ironically a focus on operational success over financial strength. You would think they are one and the same but they are not. That is the difference in old school thinking.

The number of successful businesses that have been destroyed through excessive debt is quite significant because it ironically weakens the base of the firm to achieve growth at the expense of financial strength, rather than grow from a position of strength, and it often includes other bad capital decisions such as acquiring businesses for more than they are worth. 

The world of business is full of trickery where innocent people partake in transactions where they believe they are investors when really they are simply transferring wealth from one group to another. It has been said they consider themselves predators, but are prey. This often happens because of a fear of missing out, a lack of focus on capital and there is something about human nature wanting to be busy moving forward but often under appreciated virtues such as delaying gratification and self control, patience, saying no and the like can bear more fruit. 

Has the world lost the ability to measure and determine accurately? No better example of this than the cost of money in recent history. Further not all assets are the same, if you have every run a growing business you quickly realise capitalising paint on a wall during a growth phase that can’t really be exchanged is not the same as a liquid asset like money in the bank. Growth can be a risky phase in a business which is contray to common wisdom which associates growth with strength but this further highlights how we measure matters.

Old school thinking is a low gear is ultimately the only sustainable gear enabling one to capture value that that would otherwise seem unlikely in an apparently efficient market as liquidity ultimately trumps valuation.