Nassim Nicholas Taleb, a current professor of risk engineering and a highly successful derivatives trader prior, explained in his book, Antifragile: Things That Gain from Disorder, his very interesting view of how things work in the world: Systems, countries, companies, or even organisms (both human and non-human) can be either fragile, robust, or antifragile. The first group (fragile) collapses when confronted with uncertainty or chaos; the second (robust) merely survives when things go crazy; the third (antifragile), meanwhile, emerges from uncertainty and chaos even stronger than before. The world as I see it, is not improved or weakened by small incremental…
Nassim Nicholas Taleb, a current professor of risk engineering and a highly successful derivatives trader prior, explained in his book, Antifragile: Things That Gain from Disorder, his very interesting view of how things work in the world: Systems, countries, companies, or even organisms (both human and non-human) can be either fragile, robust, or antifragile.
The first group (fragile) collapses when confronted with uncertainty or chaos; the second (robust) merely survives when things go crazy; the third (antifragile), meanwhile, emerges from uncertainty and chaos even stronger than before.
The world as I see it, is not improved or weakened by small incremental steps – it’s often shaped by unforeseen events that come with massive consequences of either the good or bad variety (Taleb calls these events Black Swans). In other words, the world’s chaotic and unpredictable.
Given this, we, as investors, quite obviously wouldn’t want companies which are fragile. Robustness may be okay, but it’d be ideal if we can get hold of companies that are antifragile. It’s thus an important endeavour to think of the characteristics that a company should have which can enable it to thrive when things don’t go according to plan.
Turns out, something simple like a company having massive cash resources on its balance sheet to deploy at all times can be one such characteristic.
Cash is king
Japanese industrial robots maker Fanuc is a great example. In a recent profile of the somewhat reclusive Fanuc, Nikkei Asian Review staff writers Hiromi Sato and Shinnosuke Iiyama has this to say (emphasis mine):
“Fanuc has amassed a huge pool of funds, and the way it is spending that money is only reinforcing its dominance.
The company has some 1 trillion yen ($8.14 billion) in cash reserves, or the equivalent to 140% of its sales for the year ended March. President Inaba sees that stockpile as a strategic buffer against adversity. “If we have 1 trillion yen, we can cope even if we are simultaneously hit by falling demand, heavier competition and plant damage due to a natural disaster.”…
… With so much cash sloshing around, the company is able to make investments with almost unparalleled freedom. “Fanuc came out of the 2008 global financial crisis unscathed,” said Kazushige Okuno, chief investment officer at Japan’s Norinchukin Value Investments. “The company expanded investment [during that time] because it had the financial means.”
In 2009, the value of machine tool orders plunged 66% on the year. While many manufacturers reined in spending, Fanuc built a numerical control system factory and made other investments. In the year through March 2011, when exports to Asia increased, Fanuc overwhelmed competitors with its supply capacity, which enabled it to boost sales and post a record operating profit.
If it had been dependent on banks for money, it may not have received a single yen, given how risk-averse financial institutions were at the time. But thanks to its deep pockets, Fanuc has the luxury of not having to be overly concerned about near-term market trends and can instead make investments based on the likely demand picture several years down the road.”
Put simply, Fanuc was able to widen the gap between itself and its competitors during the financial crisis period by virtue of it having a strong balance sheet. The company was antifragile – it had managed to emerge from a period of stress and uncertainty even stronger than before.
Antifragile candidates in Singapore
What are some of the companies listed in Singapore which are best suited to play offense during times of financial and economic upheaval while weaker competitors are shrinking?
I trawled through data provider S&P Capital IQ, and here’s a list of the five companies with the highest net-cash balance (total cash minus total borrowings) amongst the group of non-financial institutions with a market capitalisation of more than S$500 million:
- Singapore Airlines Ltd (SGX: C6L); net-cash balance of S$3.80 billion (data as of 4 July 2015)
- Genting Singapore PLC (SGX: G13); S$3.56 billion
- Singapore Exchange Limited (SGX: S68); S$867 million
- Singapore Technologies Engineering Ltd (SGX: S63); S$725 million
- Dairy Farm International Holdings Ltd (SGX: D01); S$629 million
Having a strong balance sheet alone doesn’t mean a company is antifragile – like I said earlier, it’s just one of the characteristics that a company should have. Also, it’s worth noting that having lots of cash to use is great, but the ability to use it wisely is a different matter altogether.
So, I’m not here to say that SIA, Genting Singapore, Singapore Exchange, ST Engineering, and Dairy Farm will definitely come out of the next big crisis even stronger than they are today. But, what we do know is that they have a large pool of cash resources on hand at the moment and that can at the very least, be a step in the right direction toward antifragility for them.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn't own shares in any companies mentioned.