06-Aug-02
From Dan Peña – Executive Coach and Mentor to the High Performer.
Dear Friend and Subscriber,
EXPAND IN A DOWN MARKET
I hope this newsletter finds all subscribers doing well by using QLA Methodology to achieve their dreams.
In recent months my incoming correspondence and calls have declined vis-�-vis new deals, etc. from the readers and others. Having just answered a Dan Peña Bulletin Board question it prompts me to write this letter. Yes there is a QLA Bulletin Board – since late June. Thus far the dialogue is good, I have answered a couple of the questions myself, though it was designed for the users of the site and readers of this newsletter. My secret code is DSP!
As I have written and said more times than I can remember, much if not most of my successes were accomplished in down markets and, or against major trends.
In early 2000 and 2001 I wrote, I perceived the market as measured by the stock markets worldwide would take a beating. I said I didn’t know what the reason would be, but the pundits would come up with some rational. Of course we all know in 2000 the dot-com market collapsed followed by the high-tech in 2001, then telecoms, bla-bla-bla and then the Enrons and Worldcoms of this world in 2002, in conjunction with Anderson. The entire profession of keeping correct numbers fell in to an abyss! All these are pretty good reasons. Together they are formidably overpowering! Of course now the pundits are talking about the "double dip" phenomenon. To the non-professional this merely means the economy will go down again after looking better. In the 60’s "double dip" meant something else to teenagers!
You have also heard me say I don’t like when I am right (all the time) – especially when the countless toll on humanity is so catastrophic. More importantly, I am not an economic forecaster, or anything like it. All my prognostications are based on the simplest of fundamentals and leading economic indicators and over 30 years watching the various markets and indicies. And more importantly know "conventional wisdom" is almost always wrong!
You have heard or read, my most famous, or infamous deed is turning $820 into $445,000,000 in 8 years whilst oil went from $41 to $8 per barrel. I always liked turning a $60,000 option in to $50,000,000 in 3� months a lot more! Both events were in the same very bad market – the worst in 50 years! In fact a few choice individuals that had grit, when I wasn’t present, called me "Down Market Dan".
Categorically the best time to expand by QLA Methodology is when the others aren’t!
LONDON, BIG BEN, PARLIAMENT AND BRAVEHEART! Last week I attended 5 financial institution interviews, in London. I joined two colleagues from The Guthrie Group (TGG). I am going to describe the salient points of the meetings and whom they were with, only generically to protect the guilty, and why they were picked. The two colleagues attend about 7 to 10 meetings more than I do, per week on average. They have about that many meetings every week, whether they need, it or not – sometimes more! These are with NEW financial institutions, or different parts of the same institutions, or NEW potential CEOs to head a buyout. Why will come later.
About a year and a half ago when I wrote the second "bad news, newsletter" I decided we needed a "deal generation" person at TGG in preparation for when the market turned. Since I am always approached by young (relative term) and enthusiastic people that are willing to work for a piece of the pie whilst learning, I didn’t believe it would be too difficult to find.
I also decided it was time to expand the group, after a couple of years of no expansion, during the high tech craze. I had learned long ago to expand during times of crisis! Getting financially mature individuals who still wanted new challenges would be more difficult.
Since then I have interviewed 10 and offered and retained 4. These 4 joined us in the last 6 months. When I say interviewed, I mean usually many meetings over a 4 – 6 month period. I want to observe them in as many different situations as possible; i.e. in a deal situation, travelling, drinking, with families etc. Of course this takes time, which I now know after 30 years is the only reasonable method of acquiring personnel and potential partners. I could write an entire book about headhunters, which on the whole I don’t like! It is also the reason I have used various professionals who represented me that I was impressed with in my projects. Three of the 4 additions are in "deal generation".
FIVE MEETINGS
In down markets the competition is less difficult in seeing people about new deals, because the market place is perceived to be too tough so everybody just sits tight. I believe in being proactive. And being active means lifting the phone up to cold call and attending meetings with new people as much as you can. Even CEOs of big companies should have a goal of seeing as many new faces as they can. Four or 5 a month is a good goal for even the most heavily scheduled executive.
As a side bar comment, private equity providers are different from venture capitalists (VCs). VCs are smaller funds and usually take more risks with less mature businesses, even start-ups. Private equity providers are very large (normally) and want mature businesses that are not loss making. Obviously these definitions are not cut in store.
# 1
I attended the first meeting, not just because a large insurance company owned it. I attended because I wanted to know and understand why they had apparently turned down an idea suggested to them by someone, they and a specific industry as a whole, hold in very high regard. Not that my colleagues couldn’t do it, I decided to attend to ascertain the why. Hard questions are just better asked from more experienced people. The challenge is to ask in a non-obvious, or abusive way so as not to let the idea out of the bag. The way not to do it would be – Hey, why didn’t you do the billion pound, so and so deal that Prof Do Good suggested, six months ago? I know this because people that knew me, said I did so in the early 70’s!
This is why QLA uses a Dream Team who have attended such meetings and asked questions like this many times before in their long careers. I had done business with this firm before, though I choose not to disclose it. In fact they were a major shareholder of mine at one point. Organisations that large normally can’t keep track of some of what they do, let alone all of it! It wasn’t germane they had invested with me and made money. Most would have used this historical fact to add credibility. They inadvertently gave me my answer. I was happy I went along!
#2
The next meeting was with a huge international bank I had also done many deals with over a long period of time. In this case I wasn’t looking for money, but I was looking to recruit. I met with two senior Managing Directors. I knew morale was low at this bank, so I was there talking over lunch about another low morale bank. I knew due to market conditions, virtually all the large investment houses were cutting back and great opportunities for very experienced people were available.
It was an interesting lunch. It was the fourth meeting for one and the first with the other, TGG model was clearly not right for the one, but there would be a fifth meeting with the other.
#3
The third meeting was with one of the largest and oldest private equity firms in Europe. Again I had done business with them long before and this time I did mention it. Again, I wanted to understand why they had not moved on an idea brought to them by the same very senior, well-respected guy. As it turned out the way our model works at TGG fits almost perfectly with how they run their business, so a lot was accomplished on different fronts.
The idea, both large private equity providers didn’t follow through on was due to "no follow throughitiss". This normally prevails at large firms. If the idea doesn’t have a strong and committed champion pushing it, probabilities are it won’t get started, let alone get done! New controversial ideas easily get lost in the "research process" that can take years. The idea our well-regarded man gave us was very good and we have followed up accordingly. If it happens, it will be a �2 billion deal.
#4
The fourth financial institution was a large foreign bank that just, in the last months, set up a new profit centre in London. I was interested because my intuition was they were in need of good new deals now to justify their existence. Suffice to say, it is our task now to find them the appropriate deal – to help them in their quest! It was a pleasant experience. As expected they couldn’t do enough for us. Unlike the normal aggression the investment community is famous for these days and, I continue to hear about all went well! When you are merely one of 100 you don’t mean much to them unless you are GM. If you are first they never forget. It’s much like the first love of your life.
As I said in my book and on my tapes I used to look for new banks opening up. Why? They had no business! No customers! And lots of money! A perfect scenario for a new idea. I used to show up in my limo. I’d get there very early so I was first through the doors – no appointment! No call! I still remember the young (MBA) bank manager. I was the banks very first customer. What a deal I had! Needless to say I followed him to his next bank!
#5
The fifth meeting I went to was at 5pm on Thursday with a boutique financial institution. It specialised in particular kind of finance. I was happily surprised one of the founders chaired the meeting. He was senior to me and that doesn’t happen often. They provide a special product for the likes of KKR and all the major investment houses. Why was the founder there up till 6:15pm? When business is tough – the tough get going!
But attending meetings made by someone else (as he did) isn’t the same as instigating meetings cold to fulfill your own agenda and needs. I attended because this boutique is considered the best in Europe at what they do. It was a plus the founder was in attendance. In fact he was the only one representing them at the meeting. There were three of us, which was actually one too many.
I wanted to know and understand why a certain type of secondary form of finance wasn’t used more often in transactions. As per my usual analysis, it was through no fault of the product, but rather because it wasn’t considered a real competitor yet at that time. Everybody will jump on the bandwagon like sheep! What this meant was that there is probably a market that needs to be filled. What next you might ask? Well in QLA, it means it is worthy of a test – no more research. Of course others had been asked the same questions, but the best boutique was the last to be queried! The founder closed by saying with a great smile, I hope it doesn’t change anytime soon! What he was really saying was I hope the market doesn’t wake up anytime soon!
I just talked to a senior colleague and asked how many new meetings they had last week – 12. And next week – 14! I wanted to check to make sure! Of course deals take precedent over meetings to meet new people!
For those of you looking for money and, or a Dream Team – how many meetings with new institutions, or people do you have this week – next week? These are only new meetings – no follow-ups!
For those of you that aren’t with Goldman Sachs, or Merrill Lynch, no one will call you. You must be the proactive initiator! Though the big guys should as well! They don’t! It is easier to get to see these institutions and people during hard times. Their calendars are not full! They are hungry for business. Help them, so they can help you achieve your dreams!
If today was a test, how did you do? What grade would you give yourself? Did you pass?
To Your Quantum Leap
Daniel S. Peña, Sr
P.S.
The next newsletter will be about a QLA devotee that waited and suffered for six years to reach his goal of his first deal. It was a good one – $3.5 million! I hope that now that he participates in our QLA Bulletin Board by sharing his knowledge. There are very few I have met in my entire professional life that have been more committed to success!
P.P.S. Here is an article from the WSJ titled "The past is the prologue" I recommend Kindleberger’s book Manias, Panics and Crashes: A History of Financial Crisis. He is 91 years old. He taught for MIT for years. He is considered one of the best on the planet.
A 91-Year-Old Who Foresaw Selloff Is ‘Dubious’ of Stock-Market Rally
By JON E. HILSENRATH
Staff Reporter of THE WALL STREET JOURNAL
LEXINGTON, Mass. — In a well-manicured Boston retirement community, Charles P. Kindleberger has watched the stock-market turmoil unfold during the past two years with a sense that he has seen it all before.
Mr. Kindleberger , a retired economist, wrote the 1978 economics classic "Manias, Panics, and Crashes: A History of Financial Crises." The book, required reading for many Wall Street trainees and students of economic history, documents four centuries of boom-and-bust financial cycles. It ranges from a fleeting bubble in the market for Dutch tulips in 1636, to rampant speculation and subsequent collapses in railroad shares in 1847 and 1857, to the Depression in the 1930s, to the rise and fall of Japan’s property market in the late 1980s and early 1990s.
At the age of 91, Mr. Kindleberger , who taught economics at the Massachusetts Institute of Technology for 33 years, is one of the few retirees unshaken by the current market turbulence — with the Dow Jones Industrial Average down 18% from the start of the year, despite Wednesday’s big rally. "I’m ashamed to say I enjoy the decline in the stock market," he says. "It is what we call schadenfreude, a joy in the troubles of others." Mr. Kindleberger is gloating because he warned readers in the foreword of the third edition of "Manias, Panics, and Crashes," released in 1996, of what looked "suspiciously like a bubble in technology stocks." Paul Samuelson, a colleague and Nobel prize-winning economist, admonished readers on the book’s cover, "Sometime in the next five years you may kick yourself for not reading and re-reading Kindleberger’s [book]."
"It is one of the most important books for people on Wall Street to read," says Richard Sylla, who teaches a course on financial history at New York University’s Stern School of Business and has his students spend two weeks examining the book.
Just knowing that he was right is reassuring, says Mr. Kindleberger . "You get to sleep easier." Mr. Kindleberger said he was "very dubious" that Wednesday’s rally signaled much of anything. Investors might rush in to a market in the midst of a downturn, he says, but it takes a more sustained rally to signal a real bottom.
Mr. Kindleberger’s own savings are in certificates of deposit, money-market funds and bonds. His fortunes are also helped by a recent uptick in sales of his book, according to John Wiley & Sons, the book’s publisher. A fourth edition was released in late 2000, in the wake of Asia’s financial meltdown in 1997 and 1998.
Mr. Kindleberger says he would love to write a fifth edition full of details from the latest corporate scandals, or a book about a housing-price bubble he sees developing, but he doesn’t feel up to it. Still, he hasn’t stopped working. In November, he wrote an essay on how to invest when you’re 90 and contemplating death. As you get older, he says, it makes sense to become more risk-averse because there is less time to ride out market volatility. His advice: "subtract your age from 100, and that is the percentage you should have in equities.
" A widower with four children, he still drives a 1989 Ford Escort, which he uses to visit the barber and friends such as 94-year-old former Harvard University professor John Kenneth Galbraith, another giant among economic historians and author of "The Great Crash of 1929." A few weeks ago, he met with Mr. Galbraith. "I said, ‘What should we talk about?’ and he said, ‘Enron! Enron!’ " Mr. Kindleberger says, adding: "I love that. We all love talking about Enron." Mr. Kindleberger says that history offers little consolation for victims of swindles such as Enron because the victims rarely get their money back. "Lawyers get most of it," he says.
Manias, Panics, and Crashes" lays out the familiar pattern of boom-bust cycles. They start with a fundamental change in the real world, such as a war or new technology, which creates new profit opportunities in some sectors. Investment expands, often fed by easy bank credit. Before long, however, investment becomes speculation, then becomes totally detached from reality and turns into mania, sometimes spreading internationally. Ultimately, he says, it ends in a crash and "revulsion" in which investors flee falling markets. Authorities are left to wrestle with how to stabilize and then fix the financial system.
Mr. Kindleberger’s stories of financial crises feature legendary swindlers such as Robert Knight, who helped cook the books of the South Sea Company. The 1720 British equivalent of an Internet stock, it had no profits but big plans for trade in slaves to Latin America. Its shares soared more than fivefold in four months’ time and then flamed out as copycat companies multiplied and insiders started selling shares. Knight fled England, ended up in an Antwerp jail and then broke out.
The Dutch tulip bubble offers another example of how these cycles have played out. It started with the development of exotic new breeds of tulips and was fueled by a booming Dutch economy. At its height, investors traded land, houses, farm animals, paintings and gold for colorful tulips. One Viceroy tulip bulb, writes Mr. Kindleberger , commanded a down payment of eight pigs, a dozen sheep, two oxheads of wine, four tons of butter, a thousand pounds of cheese, a bed, clothing, some wheat and rye, and a silver beaker.
Some great crashes of history, such as the one during the time of the railroad boom, did set off recessions. The severity and depth of the downturn, Mr. Kindleberger says, depends a lot on how aggressively authorities fight it.
Federal Reserve Chairman Alan Greenspan has done a masterful job fighting off previous crises, including the 1987 market crash and the 1998 collapse of hedge fund Long Term Capital Management, Mr. Kindleberger says. Today, he’s not convinced the Fed is up to the job because the bubble was so big and consumers are heavily indebted after bingeing on loans tied to equity in their homes.
"I think we’re going to bounce along the bottom for a while," he says.
The object of his greatest fascination today is the real-estate market. For weeks, Mr. Kindleberger has been cutting out newspaper clippings that hint at a bubble in the housing market, most notably on the West Coast. Nationwide, median home prices are up about 7% from a year ago, even though the stock market has tanked and the economy has floundered. Over the long term, economists agree, housing prices can’t continue to outpace growth in household incomes. Mr. Kindleberger says he isn’t certain there is a housing bubble yet, "but I suspect it is."
The trick with spotting real-estate bubbles, he says, is that they don’t always spread. In 1925, for instance, real-estate prices in Florida soared and crashed, but that didn’t spread to the rest of the country. Yet he notes that something is distinctly different about the nation’s housing market today, when compared with 1925. Fannie Mae and Freddie Mac, two large government-sponsored enterprises, own or guarantee nearly $3 trillion in mortgages, helping to keep the mortgage market liquid with cash. That is a boon to homeowners, but Mr. Kindleberger says he fears that Fannie Mae and Freddie Mac’s deep nationwide presence in the market is fueling a speculative fire.
"Banks will make a mortgage and sell it to them. It means that the banks are ready to mortgage more and more and more and more. It’s dangerous, I think," he says.
A Fannie Mae spokeswoman describes the argument as "preposterous," and notes Mr. Greenspan dismissed the chances of a housing bubble in testimony to Congress last week. Robert Van Order, chief international economist for Freddie Mac, says home prices might decelerate in the months ahead, but they’re unlikely to crash because interest rates are so low, the inventory of unsold homes is also low and the economy has proven surprisingly resilient.
Yet Mr. Kindleberger isn’t convinced. "If I was 30 years younger," he says, "I’d write a small book on Fannie Mae and Freddie Mac."
P.P.P.S. Here follows a recent letter from another QLA devotee.
As you will read in my next newsletter there is a common thread to the people who succeed with QLA:
To Dan Peña: Remembering a quote by Walt Disney.
"You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you"
Dan, I wish to say "Thank you" for the following "kicks" you have given me to date. I recorded them in this note, lest I dare forget!
First and foremost – The Opportunity – you opened the door!
1. Tolerance (I am was an emotional risk!)
2. Not to talk about alternative topics to third parties.
3. Not to mention my Networking Background.
4. No bullshitting (Exaggerated talk).
5. "Get it done" means "Get it done" period!
6. Do not justify (in return), valid corrective advice.
7. Leave "micro" behind, move to "MACRO" now!
8. "Danny" – NO – It’s Dan.
9. Lose any inferiority.
10. I don’t need to know all the answers to get rich.
11. Don’t "pick fights" with people.
12. No negatives re progress, to TGG team members.
13. Inform of any "unavailable" times in advance.
14. "ASAP" is only to be used for emergencies.
15. Eating scabs (a metaphor) if OK if it gets the big deal done!!!
I’m sure there will be more. I look forward to further growth, change and the QL to come! Thanks Dan.
