Beware of the Eccentric Entrepreneur

Image by Gerd Altmann from Pixabay 

One of the major attributes of entrepreneurship is innovation. Entrepreneurs frequently disrupt the older ways of working and introduce the new, perhaps revolutionary, way of doing things. Obviously, this requires the entrepreneur to be unconventional with his outlook. He should be able to spot opportunities or trends that may not be readily visible, keep faith in his idea and be rigorous to implement it. If he is successful, unimaginable riches may be in the offing.

Selectivity bias causes us to overestimate entrepreneurs. We are naturally drawn to those who are successful and don’t even have an idea of the countless that fail. This makes us see the successful ones as demigods. Even if they are entirely reckless, we don’t see that as a problem but as a part and parcel of entrepreneurship. This is a mistake. Today, quite a few eccentric entrepreneurs have captured the limelight. The CEO of an American electric-car maker doesn’t spare an opportunity to stir controversy and sensation. For some reason, investors have bought into his vision, not minding the company’s financials, his behavior, exposure to multiple cash-guzzling businesses and so on. It’s only a matter of time before the moment of reckoning arrives.

A major factor that has increased the acceptability of the eccentric entrepreneur is easy money flowing into startups. Startups defy business sense. With scant regard to profits, they want to grow large first. This encourages risky business practices and unfortunately crowds out smaller sensible businesses. This is a shame. A Japanese billionaire runs a huge fund that invests in such startups. It has yet to be profitable and has attracted flak due to its recent goof-ups. Covid-19 has muzzled the supply of this easy money, thus resulting in a crisis at startups run on easy money. If the situation continues, many will perish. 

Business is a serious business. It’s not about risky, stupid or senseless actions. While entrepreneurs do take risks, they are also conservative and don’t want to lose money. They understand that many people’s lives depend on their businesses. They feel the weight of this responsibility and quiver at reckless business practices. Warren Buffett is a staid businessman and investor. If you read his annual letters, you will realize how conservative he has been, yet that has not stopped him from being immensely successful. 

Unconventionalism may be an attribute of entrepreneurship but sensibility lies at the heart of it. Real entrepreneurs never lose sight of this fact.

Why the Stock Market Is Overrated

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Many are baffled about the recovery in the stock market over the last one month, even when the economy is suffering and has bleak prospects. Experts are trying to make sense of this disjunction. Some are saying that the market has run up ahead of the fundamentals. Others are anticipating a sharp recovery with the lifting of the lockdown.

The stock market has been made out to be what it is not. To see the stock market as some robust mechanism that predicts what will happen in the real world or that reveals a picture otherwise hidden is a mistake. The market has been erroneously given more respect than it deserves, when it is a random mechanism at best, at least in the short run. 

Investors and analysts tend to make sense of a company’s performance or a policy decision from how the stock market reacts to it. Some call it a “discounting mechanism.” Others consider it as a crystal ball that helps them look into the future. The US president boasted of the new highs in the stock market as a signal of his successful management. The abrupt fall in the market shakes governments, which start wondering if what they did was indeed right.

By bludgeoning a stock, the market gets control of the fate of a live company. Because the stock has been beaten up, there must be something wrong with the company, investors wonder. This turns into a self-fulfilling prophecy. A free-falling stock price can be lethal for finance companies and those that have taken up debt or have high promoter pledging. Not surprisingly, the top management rushes to soothe the market’s nerves before much damage has been done. It also uses the share-price performance as a gauge of its competence.

All this is a mistake. The stock market is not an efficient mechanism. You can’t always trust its ups and downs to have any real-world implications. In the short run, traders determine its course. Stocks move up and down because there are vested short-term interests. With the onset of algo trading and other automated ways, the frenzy in the market will only increase. That won’t mean things are changing dramatically. Reading too much into market moves can only dilute your focus and returns. 

At best, the stock market is a buy–sell mechanism. Its main job is to provide liquidity. If you entrust it with any more responsibilities, that’s a recipe for a life of anxiety and pessimism.

Covid-19: The Great Differentiator

Image by Gerd Altmann from Pixabay 

Warren Buffett once said, “Only when the tide goes out do you discover who's been swimming naked.” In good times, everything seems to be gung-ho. It’s difficult times that differentiate among the good, the bad and the ugly. Covid-19 is a great differentiator. It has already started to show its impact. Many companies are complaining of an acute cash crunch as their operations have come to a halt. Some have cut their staff’s salaries. Others have plans to lay off workers. 

Covid-19 isn’t the real problem; it’s just made out to be so. It’s been two-three months of its onset and some companies are already teetering. In reality, these companies were never doing well. Only that they were able to hide their incapacities behind the veil of economic growth. If a crisis persists, everyone suffers, that’s understandable. But if in a month or two, your very survival is at stake, then that requires some close examination.

Many of these companies never built emergency reserves. They worked on hot money that optimistic investors kept injecting. The so-called “start-ups” are a case in point. Without any profits and in absence of fresh funding, they will find it hard to sustain themselves. Some will showcase greed and opportunistic behavior by their promoters and owners. It’s easy to lay off workers, so they will do so.  

Obsolete business models will start surfacing. Primitive ways of working that should’ve been dead but which survived on the ventilator will be exposed. Take for instance the auto sector. It’s production has come to a halt. Or aviation—there are no flights. If work can go on without travelling and flying, that itself raises the question how these industries flourished to date. Much of their demand was artificial.

Investors have a great opportunity to observe how companies respond to the pandemic. That will show their character and strength. Solid companies won’t complain about the situation; they would be busy adapting to the new normal. They won’t beg for government support. When things get back to normal, many of these not-so-good ones will also get back on their feet but the good ones will have actually thrived. It’s by investing in those good ones that you will build wealth.