Week ending 19th April 2013

Whenever you look back on the previous week, whether it’s your own week or the world’s in general it has usually been a series of ups and downs and this is the theme for TWb4TW this week.

What goes up must also come down.

This has certainly applied to two particular investments recently, gold and shares in Apple.  Last week gold hit a two year low and is down over 20pc from its previous record high of $1,921, dropping almost 13pc in just two days.  Apple shares, having hit $700 in September, making it the world’s most valuable company went below $400 last week.

This demonstrates once again that human emotion can be a much more significant factor than the realities of supply and demand, economic conditions, or even world events.  For example investing in gold is supposed to be a means of “storing wealth”, to protect its value against inflation, currency devaluation and other economic and financial shocks that can reduce the value of cash and other investments.  So fear causes investors to buy gold to protect their wealth.  This causes the gold price to rise.  Then the greed factor kicks in and it becomes not about protecting wealth but about increasing wealth so more and more investors pile in.  Then someone notices that some of the underpinning assumptions no longer apply or different factors have emerged such as Cyprus’ proposals to sell its gold reserves to finance its bailout.  Fear takes over again and the price goes down, often quite rapidly.

In the case of Apple it was the greed factor that drove the share price up on the assumption that it could produce blockbuster new products and profits on a more or less continuous basis.  Then it dawned on people that Apple is run by human beings not some super race and the likelihood of new I phones, pods or pads generating ever increasing profits for ever and ever was, in a word, unlikely.  The adjustment to this reality was bound to happen when the fear factor kicked in.

If you can stand apart and observe the greed and fear at work you have a chance of making rational decisions.  However this is more difficult to do than you might think as illustrated by legendary Wall Street investor John Paulson.  He made billions from betting against the US sub-prime bubble.  However his bullish stand on the gold price is estimated to have cost him hundreds of millions of dollars over the past two weeks.  So if even people like John Paulson can go up and down so can almost everything else.

Facebook – down and staying down?

Last week Sheryl Sandberg, Facebook’s COO, made a rare visit to their HQ in Britain.  Ms Sandberg has recently published a book and judging by the content of her press conferences and interviews promoting her book was the main reason for her visit.

One thing she did not appear to comment on was Facebook’s share price.  Just about a year ago it carried out an IPO at $38 a share.  Since then the shares have mostly gone south and ended last week at $26.59.  Greed having driven the rush to buy the shares soon turned to fear when it became apparent Facebook did not know how to make money out of mobile phone content.  This was actually apparent before the IPO but was ignored in the rush to get in on the “next big thing”.

Apart from announcing that “To say that mobile is important to Facebook is the biggest under-exaggeration of all time” Ms Sandberg was giving nothing away.  I suspect that this is because there is nothing to give away and that we are left with just fear and greed to determine where Facebook’s share price goes next.

Tesco- down but maybe going up?

Staying with the emotional theme Tesco is not one of those businesses that people like, but many still shop there.  Many of the people who vehemently oppose a new Tesco superstore still go and shop there when it opens based on an unemotional judgement about convenience and low prices.  Consumers don’t “love” Tesco like they “love” John Lewis so many have been quietly pleased to see them struggling recently.

Last week we learnt that Tesco had taken the unemotional and rational business decision to pull the plug on its US venture and to write down the value of its land bank in the UK as they called a halt to further large scale store expansion here.  Given both the financial and emotional investment involved this is a text book example of business brain over ruling heart.  Big as the losses are Tesco can afford to do it right now, so right now is the time to do it.

CE Charles Clarke stated that “I have been working for Tesco for nearly 40 years and I can tell you this – it already looks, feels and acts like a different and a better business”.   However if Tesco is really to become a “different and better business” then Mr. Clarke will have to find a way of getting to rest of the business to share his enthusiasm and excitement for his vision of the future.  Tesco has done the hard nosed, rational and unemotional business stuff very well for years.  What people are looking for now is something that makes them feel good about spending their money with Tesco that is not about fear and greed.

What this tells us is that rational business logic on its own is never enough.  You need the emotional factors as well and the trick is to get the balance right and that is the challenge for Tesco to get back to growth.

Dell – going down to get back up

Earlier this year Dell Computer founder Michael Dell put forward an offer to take Dell private at $13.65 a share.  The logic is that as a private business removed from the pressure of quarterly results, Michael Dell will be more able to take the decisions and actions needed to switch the company’s focus from PCs to faster growing software sales and services.   This is because in the strange world of public companies shareholders will often not tolerate the adverse short term consequences of decisions that need to be taken in the longer term interest of the business.

Michael Dell’s offer took account of the fact that in order to go back up you may first have to go down.  So inevitably some shareholders complained he was buying the business on the cheap.  It also prompted private equity firm Blackstone to put in a rival bid at $14.25.  However after the slump in PC sales worldwide in the first quarter Blackstone withdrew their offer.  This pretty much vindicates Michael Dell’s proposition and even though he still has to persuade some shareholders to accept his chances are looking better.

Michael Dell clearly has considerable emotional investment in the company he founded so he has both personal and financial motivation to secure its future.  However in order to make the hard and rational business decisions needed to turn the company round he must first remove it from an arena where the emotions of fear and greed rule.

So that was some of the week before this week. We hope you found some of the above thought provoking and useful for you and your business. We trust you had a good weekend and hope you have a great week this week.