Value Recap – Cyclical Vs Structural
What doesn’t kill you will only make you stronger, true in business and in life.
Temporary or Permanent Damage
Cyclical vs Structural, the art of understanding between temporary setback and permanent disintegration; both in business and your state of mind.
If you look at the private business world, when a business owner realized that his/her business has limited growth in their field and the business is facing more and more challenges every year, sometimes the business owner will make the wise decision to sell off the business and reinvest in other businesses that have friendlier economics.
However in a public company setting, more often than not, companies facing structural problems in their industries, the managers or owners seem to hold on to the idea that their business will and should last forever. It seems that the thought of a losing one’s job and the shame of losing the status of a public company is more important than the basic concept of owning the business in the first place; to make more money! This in turn creates an irrational behavior in managers desperately trying to invest more and more money into the dying business just to keep it alive.
There lies the problem for the outside investors; how do we know if the crisis the company is facing is due to temporary market conditions or structural flaws in the company’s operation and economics? This might proved to be a challenge as understanding the business required more than a good feel of the numbers and how the company operates but more on recognizing how the industry should evolve and do the managers has the ability and conviction to follow through. It requires the investor to understand the relationship between supply and demand in the industry. Most importantly, do you believe that the bad situation will reverse (e.g. Most commodity companies) or are they in a “damaged” industry (textile in high cost country)?
Once we formed an opinion, we can act on it; for an idea without action is still just an idea. An ideal situation often plays out like this, we act on an idea which the market strongly disagree with us.
Questions we have to ask ourselves:
– How confident are we about our opinion?
– Why is the market wrong and we are right?
– Do we have the patience to wait for the market to realize their mistake?
– Do we have the humility to admit that we might be wrong?
Investment is very much a psychological battle than a battle of intelligence. Those who have the mental strength to withstand the constant ridicule from the market and the humility to admit their mistake will have the greatest potential of success in the long run. For we do not have to be right all the time, we just have to know when we are wrong.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim doesn’t own shares in any companies mentioned above.
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