104th Edition – January 31, 2021
Knowing your story means living a considered life. Socrates had it right. An unexamined life is not really worth living. Maybe that’s a bit extreme, but without self-reflection, we never learn from our mistakes, condemned to repeat the same pattern over and over.Erin Callan Montella, former CFO at Lehman Brothers
1. Do You Like These Financials?
Consider the following financial stat line for the past three years for company X. The numbers flow as such: revenue | operating cash flow | total debt:
2018 … $9.2B | +$.4B | $0.8B
2019 … $8.3B | +$.3B | $0.8B
2020 … $6.5B | – $.4B | $1.2B
Furthermore, don’t expect this company to hit $7 billion in revenue soon. On December 31, 2020, this company’s stock was trading at just under $19/share. This week, the closing stock price finished just a hair under $350/share. By now, you know that I’m talking about GameStop.
I’m not blown away by what’s happening with the stock given the underlying reasons for its increase. I’m more blown away that this is a company with so-what financials. Seeking Alpha has a nice opinion piece by one of its writers if you want to learn more.
2. GameStop is Not a 100 Bagger
From 1946 to 1949, Pfizer’s stock went down. Ditto for the period from 1951 to 1956. Investors who had a long view saw the stock make 141 times their money who held on from 1942 to 1972.
There are many other stories of 100 Baggers in which Christopher Mayer writes about in a well-researched manuscript that reads fast.
Bottom line, GameStop will never be a 100 bagger because the fundamentals of its business model for continued scaling do not exist.
There’s gambling and there’s investing. One is about entertainment, the other is about building wealth. The lines get blurry-grey in between.
3. Failure Demand
Regarding financials, I’ve been a long-time admirer of the work of John Seddon. He’s an original thinker and a long-time business consultant. Beyond Command and Control is my favorite book he’s authored.
Failure demand is the customer activity that drives operating costs upward. Seddon contends that many call centers for example work hard at making operations more efficient and offshoring call centers to drive down costs. Seddon says to give customers exactly what they want (great customer service in this case, and costs will start dropping precipitously.
4. The Financial Impact of Attacking Failure Demand
These numbers might be dated, but Seddon says failure demand runs between 40% and 70% in financial services (of total customer demand). In utilities and public services, it’s closer to 90% or more. To clarify, this customer (failure) demand is driven by a flaw, a problem, an issue, or something else that could have been prevented by the seller well before the sale.
Seddon has proven time and time again that reducing failure demand expands a system’s capacity. When that happens, the cost of services falls too.
Seddon goes so far as to say that budgeting can be thrown out the window because costs without the failure demand are more predictable rendering budgets unnecessary.
5. Lehman Brothers Revisited
GameStop, 100 Baggers, better financial results by reducing failure demand. How about looking at a company from the past whose financial fate ended in failure?
Branching into mortgage-backed securities catapulted Lehmen’s stock price which peaked at more than $80/share in the summer of 2007, a year before the cracks in the foundation would cause the investment banker to fall hard.
I was reminded of the Lehman story this past week after finishing one of the most thought-provoking books I’ve read in more than a year. Erin Callan Montella stepped away from her CFO position at Lehman several months before the firm filed for bankruptcy.
Good luck in finding a book where any business leader is fully transparent by revealing their quest to put work first and foremost in their lives. If you lead a healthy and balanced life, this book is not for you – Full Circle, A Memoir of Leaning in Too Far and The Journey Back.
Personally, I’m proud of Erin and her new role. If you run a business, perhaps you should read it and ask, “Is this how I want my team members to live their lives?”
The Management Myth is probably the best management book I’ve ever read. It’s part memoir, part literary writing, part philosophy, and part history. It’s funny. It’s sarcastic. It’s even brash. I was thrilled to interview the author, Matthew Stewart on our podcast. Enjoy.
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Always be learning and growing.