Fine Print
WHEN LIFE GIVES YOU LEMONS
Imagine you decide to open up a lemonade stand. A lot factors into your business. You want to setup somewhere with decent foot traffic - maybe a near a park, maybe near a construction site. You want the weather to be warm enough so that people want lemonade, but not too hot so that they don't go out.
You'll have expenses too. Some of these will depend on how much you make and sell: lemons, water, sugar, cups. Some will be more of a decision: a sign (“LEMONADE!”), a table etc. It's just like any business.
There's a lot outside your control. What if the city decides to renovate the park? What if the construction project gets delayed and the workers stay home? What if it rains all winter? What if the price of lemons shoots up? What if…
PUT THEM IN A BOX
These are all pretty standard questions business face. They are questions LCM wrestles constantly.
When investing, in a lemonade stand or other business, it helps to know something about the future. The whole idea of "investing" is that you pay something today and get back something more tomorrow. So, probably, if you know whether the future is going to be good or bad, sunny or rainy, that might change how you think about an investment.
Somethings that might be helpful to know about are the economic climate - income, unemployment, inflation, etc. These things affect businesses. We know a lot about these things today and a lot about them in the past. And that's helpful to know where we are and where we came from.
We can generally say that income - GDP - will grow with population and productivity, but anything more specific runs high risk of being very specifically wrong. There's even less to say about future unemployment and inflation. Where they'll be any distance in the future is a guess. Most guesses turn out wrong.
But what if we know, roughly, how a business might do regardless of GDP, unemployment or other factors outside its control, that seems like it could put some of those “what ifs,” some of those looming challenges in a tidy box, right?
Some businesses exercise more influence over their future income by introducing some heft, some structure to their dealings. Some enter into difficult to break contracts with their customers - these may benefit the customer too ensuring steady supply or price stability. Other businesses do things like bolt their product to the customers' counters and collect a regular fee.
LCM has discussed how the lack of exactly this type of feature undid Silicon Valley Bank here. It also discussed a different kind of contract here. Relationship bonds like these establish some foundation for future earnings and present some interesting opportunities for investment. By reducing the number of “what if” questions and by acting when contracts promises more than LCM has to pay for an investment, it can find chances that offer lower risk and attractive future returns.