In Fortress Balance Sheets I said that I had exited my investment in Aston Martin at a 42.5% loss and I quoted one of my favourite adages: "When you don't get what you want, you get experience." Back then I had - and I still have - every intention of making this experience count. My Aston Martin foray made me very curious about business failure so I kept asking myself: why do some corporations seem to last forever, whilst others struggle to stay alive?
If we avoid the losers, the winners will take care of themselves. -H. Marks
In that spirit, I went on to read Scott Fearon's Dead Companies Walking, which is chock-full with anecdotes and insights acquired over an investment career spanning more than three decades. Fearon identifies six company leadership mistakes, which help him spot losers. In this post I want to touch on each of these fatal management errors:
1. They learned only from the recent past.
We frequently - usually unwittingly - learn from the recent past rather than the entirety of history. This is somewhat analogous to relying on anecdotes in lieu of base rates (if you know the first thing about probability, you know that this is a recipe for disaster!). Business leaders, as well as investors, must guard against myopic vision, for it leads to error. Fearon also applies this to individuals': A successful track record and a degree from a good school...can create a kind of historical myopia, a mistaken belief that one's past successes guarantee similar results in the future.
2. They relied too heavily on a formula for success.
Using a formula without thoughtfully considering its limitations and relevance to the situation at hand is a fool's errand. Maslow explained the law of the golden hammer best: I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail. It is also important to remember that a formula can be plain wrong even if it appears to have worked for a period of time. In fact, a formula is most dangerous when it has worked for a long time, because we have a tendency to forget that it is not gospelspeak. I would love to have a foolproof formula for success (who wouldn't!!!), but I'm not sure one exists.
3. They misread or alienated their customers.
The classic product-market-fit problem has wrecked countless companies. There is at least one of two key things at work in almost every case: (i) the product is targeted at the management, instead of the consumer; (ii) management failed to account for the way in which people in the real world actually behave. REMEMBER: A truly valuable company is one that provides a product or service, which possesses significant value in the eyes of its target customer.
4. They fell victim to mania.
Largely self explanatory... If management bets the ranch on the latest cool thing, they will almost certainly lose the ranch. Instead of bold bets, you want companies to invest in new initiatives and ideas by making small, calculated bets, which can be scaled up if and when they yield promising results. If this is done well and the organisation learns from past mistakes, this will allow the company to go from strength to strength and move forward (with caution!).
5. They failed to adapt to tectonic shifts in their industries.
When the entire industry changes and a business fails to adapt, the entity must die. This is because no business can outlive its utility; fewer customers will inevitably (at least eventually) mean that the corporation will be deprived of the lifeblood of any business: revenue growth. I would go so far as to say that tectonic shifts in their industries, which materially alter the economics of doing business can undo even the most nimble, well run company. Hence the sage Buffetism: turnarounds seldom turn.
6. They were physically or emotionally removed from their companies' operations.
This post is all about leaders' mistakes which can destroy a business. To me it is blindingly obvious that management matters!!! It is no surprise then, that this error rounds-off Fearon's list of fatal mistakes. If management is not actively engaged with trying to understand the business and getting a feel for its pulse, how can they steer the company in the right direction? In case you didn't realise, that was a rhetorical question: they can't!
For me, Fearon's book is a guide for becoming better at avoiding disastrous losers and maybe benefiting from their often self-inflicted and predictable deaths. I would unreservedly recommend this book to all other aspiring investors!
