23Taking risks
‘You’ve got three different shares. Which of the three companies
is the safest? Is it the supermarket, the luxury holiday company,
or Russian oil?’
The luxury gap
Staple products make for safer shares
‘The supermarket,’ said Anisa.
‘Why?’
‘The products it sells are day-to-day essentials. Sales of staple
products like bread or toilet roll don’t vary much with the
Rely on a fantasist for the majority of your profits, and make
sure no one controls him. Nick Leeson’s unsupervised trading
in derivatives reduced the value of Barings, Britain’s oldest and
stuffiest merchant bank, to a single, solitary pound.
Get left behind with your technology, and then think everybody
else has got it wrong. Hands up if you thought that iPhones,
BlackBerrys and Androids were not going to take over the world.
That’s what Nokia believed, and they lost their pre-eminent global
position in mobiles as a result.
Make faulty products, and try to hide their defects. Selling cars
that go faster when you press on the brake pedal can never be a
viable long-term strategy. Toyota’s reported refusal to come clean
led to hundreds of liability suits in the US, a country not known for
low legal costs.
Keep your customers in the dark, and hope they don’t
notice. Coca-Cola’s launch of the British version of Dasani, its
bottled water, was a disaster. The water was marketed as being
wonderfully pure, but the customers were dismayed to learn
that its source was a tap in Sidcup, a suburb of London not
synonymous with natural springs. Bad publicity meant that Coca-
Cola canned the product’s launch across Europe.
One-way ticket24
economic climate. People will drink the same quantity of tea
whether the stock market is up or down.’
‘You’re right,’ I said. ‘Sales are always going to be pretty steady,
whatever happens to variables such as ination, unemployment
or the yield to maturity on a forty-year Tibetan government zero
bond.’
Government bond in your country Safest
Shares in a supermarket Low risk
3 Medium risk
4 High risk
‘That leaves us with luxury holidays or Russian oil. What’s it to
be?’
Anisa delayed her response. ‘Both of them seem risky to me. To
be honest, I can’t decide between them.’
Luxuries make for more risky shares
‘There are two factors which drive luxuries. The rst is the
economy and the second is the strength of the brand.’
‘Let’s start with what’s happening in the economy. Are we
enjoying a massive boom or are we stuck in a deep recession?
Imagine this bank has a fantastic year and decides to pay you
a mega-bonus. What are you going to spend it on? Luxury
holidays, or more cornakes from the supermarket?’
‘I’m obviously going to spend more on luxuries,’ Anisa said. ‘But
my consumption of staple goods will stay pretty much the same.
During a boom the luxury holiday company is going to have
great sales.’
‘That’s right. A 2 per cent increase in economic activity might
lead to a 20 per cent increase in sales. Sadly the opposite is also
true. If economic activity falls by 2 per cent, sales of luxury goods
may drop by 20 per cent. But a supermarket remains relatively
25Taking risks
unaffected by the economic climate. It may sell more lobster and
pro teroles during a boom, and more white sliced bread and
baked beans during a recession, but core sales will stay the same.’
Luxury holiday sales – big rise
Economic
growth
3%
Sales
growth
20%
2%
0%
–2%
–20%
0%
–3%
Luxury holiday sales – big drop
Supermarket sales – small increase
Supermarket sales – small decrease
‘Luxury goods – expensive holidays, smart cars, branded clothing
– represent discretionary spending. They are not essential. You
only buy them when you’re feeling wealthy and con dent about
the future.’ (We’ll go deeper into slumps and booms in Chapters
20–22.)
‘But what about the super-rich?’ she asked. ‘Aren’t they insulated
from swings in the economy?’
‘Yes. David Beckham won’t cut back on his Armani because of a
rise in unemployment. But many customers will, and these are
the people who make most of the money for the luxury goods
companies. If the economy is booming, you might well be happy
to buy a pair of Jimmy Choo sandals for $400. But if you’re
scared about nding your rent that month, you’ll probably keep
your old ones or buy a cheaper brand. And that’s why a lot of
luxury goods companies lose their appeal for investors when the
economy is going bad.’
One-way ticket26
Government bond in your country Safest
Shares in a supermarket Low risk
Shares in a luxury holiday company Medium risk
4 High risk
A strong brand pushes up the share price
‘The second major risk factor is brand. When you buy branded
goods you are paying for an image that is as important as the
actual product or service. Companies spend signif-
icant sums inventing, creating and nurturing
their brand. Investors know that a successful
brand will lead to huge prots. But they also have
to be aware that a brand can be destroyed in a
matter of seconds. A company can spend decades
building up a reputation among customers, only
for stupidity, dishonesty or sheer bad luck to destroy it in
seconds.’
‘‘
a brand can
be destroyed
in a matter of
seconds
’’
Five destroyed brands
Here are some great examples of how to get it wrong.
Arthur Andersen
The supposedly independent and honest accountants shredded
papers which incriminated them in fraud at corruption-ridden
energy giant, Enron. When the news leaked out, Andersen’s
reputation collapsed and clients scrambled to move competitors.
In less than a week, the Big Five group of accountants became the
Big Four.
Atkins Nutritionals
What could go wrong with a diet that advised you to eat sausages,
fat, steak and more sausages? How about the death of its 117kg
inventor from congestive heart failure? Atkins filed for bankruptcy
case study
27Taking risks
in 2005 and, thankfully, has been rescued, so I can make a joke
about it being relaunched in a slimmed-down form.
Boo.Com
These style-leaders of the first dot-com wave did build a successful
– if short-lived – brand. Sadly, they also burned through £125
million to set up a website that no one could use. Famous for
flying junior staff first class to meetings, the company collapsed
with debts of £178 million against assets of £1.4 million.
Ratner’s Jewellery
Gerald Ratner worked hard to build up his family business until
the annual turnover touched £110 million. The next day he made
a few jokes about his products, including this zinger: ‘People say,
“How can you sell this for such a low price?” I say, “Because it’s
total crap”.’
His whip-sharp humour wasn’t appreciated by his customers, who
stayed away from his shop in droves. Within weeks, the company’s
market capitalisation had dropped by £500 million and the phrase
‘doing a Ratner’ became British slang for corporate stupidity.
Satyam
Ramalinga Raju, the founder and chairman of this Indian IT
outsourcing firm, resigned after disclosing that he had massively
inflated the company’s profits for many years. Shares fell 80 per
cent as Raju confessed that $1 billion of cash recorded on Satyam’s
balance sheet was fictitious.
One interesting side-effect of the Satyam scandal was that
the contagion spread to the Indian stock market. The Bombay
Stock Exchange Index fell by 7.3 per cent as the entire country’s
reputation was damaged. Investors were afraid other firms in India
would reveal similar frauds.
Unfortunate fact – three months before the scandal broke,
Satyam received the Golden Peacock award for excellence in
corporate governance.
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