08/11/99 Looking out my window I see that the grass is green. It looks nice, but what it means is that things are not working out this year as they’re supposed to. It’s not supposed to rain this time of year in this part of France. The guy who sold me this house told me categorically that it “never rains” from July 10 to Aug. 15. Not only has his family been here for hundreds and hundreds of years… he’s also a farmer. He should know these things.
But he’s also the guy who told me not to worry about the roof. “There may be a few little leaks,” he said, “but they could be easily repaired.” The Ducellier family had been living in the house ever since the French Revolution drove out the aristocrats and his ancestor bought the place. He ought to know if the roof leaked.
But a seller sees things differently from a buyer. Without being dishonest about it, he simply tends to think that what he has is more valuable than it really is. This has been confirmed by academic studies, though I can’t recall the specifics.
Fixing the roof of a chateau is not like fixing the roof of a mobile home, by the way. A tube of caulk just won’t do it. Instead, you have to send a crew of artisans up ladders, give them $50,000 worth of slate and let them peer in your windows and make crude jokes for about 6 months. David Ogilvy, who lived nearby until his recent death, had to fix his roof after a helicopter came too close and blew off the roof tiles. The repairs cost millions.
This was a sub-theme of Norman Rentrop’s speech yesterday to the publishers’ group. Norman is 42 years old and retired. He built a publishing business in Germany and made a lot of money. Now he is considering what to do with the rest of his life. He has plenty of money… but not as much as he used to have.
His story is a cautionary tale. Before East and West Germany were unified, business people who sold products into the East took a chance. The official currency exchange rate was not the same as the real, free-market rate. Businessmen in the late ‘80s knew the two marks would be brought together… but at what rate?
Norman sold aggressively into East Germany. He was selling information with a very short shelf life… and a very low marginal cost of production. He had little to lose, in other words. But luck favored him. Helmut Kohl wanted to make sure that the East got a good deal. He set the exchange rate at about three times as high as the market expected. Overnight, Norman’s ostmarks made him very wealthy.
What do you do with money? You’ve got to do something with it. Norman decided to apply the same approach that he used in his business. He would spread his money around, test different approaches and follow up with more money on whatever was working. This strategy works in a business. But it was a disaster in investing.
Norman bought real estate… a piece of land near Disney World… a parking lot in Philadelphia… various holdings in the north of England. He bought businesses too—conferences, publishing, radio. In some cases, these investments worked out. Mostly, they did not. He was often locked into partnerships with bounders and scoundrels. Like the summers with no rain and the roof that didn’t leak, Norman found the descriptions of investments didn’t match the reality. The sellers—intentionally or otherwise —overestimated the value of what they had to offer. He lost millions.
The lesson: What works in your own business doesn’t necessarily work in the world of investments. In your business, you have an advantage. You are the seller. You may overestimate the value of what you offer… but you understand the business. You still take risks, but they are calculated risks, where you have a good sense of the odds. They are not pure gambles. Overall, you have to emerge from these business risks a winner. If that were not so, you would have been driven out of business by bad bets long ago.
Imagine someone from outside your business trying to take calculated risks… without understanding the calculations. He would try the wrong things. What seems obvious would prove elusive He would think himself smart and wonder why the people in the business missed such an obvious opportunity. Then he would try it and learn something new about the business. Eventually, if his luck, stamina and money held out… he would learn the business and have the same advantage over newcomers that you have.
As an investor… you are a buyer. You are at a disadvantage. The seller usually knows more than you do. And he wouldn’t be selling unless he thought he could sell it to you for more than he thought it was really worth. Unless, of course, he just needs the money to fix his roof.
Bill Bonner
August 11, 1999
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