The world is a dangerous place. Much more dangerous than you think. If you look back in time, there is hardly a year in which the world wasn’t plagued by some big man-made or natural catastrophe. Given the uncertainty in the environment we live in, how can we invest safely? This is where I think the ideas of Nassim Nicholas Taleb can be useful. In his book Antifragile, Taleb showed how things in life can be classified into three categories: Fragile; robust; and anti-fragile. The first group will break when chaos strikes while the second will remain unchanged….
The world is a dangerous place. Much more dangerous than you think. If you look back in time, there is hardly a year in which the world wasn’t plagued by some big man-made or natural catastrophe.
Given the uncertainty in the environment we live in, how can we invest safely? This is where I think the ideas of Nassim Nicholas Taleb can be useful. In his book Antifragile, Taleb showed how things in life can be classified into three categories: Fragile; robust; and anti-fragile.
The first group will break when chaos strikes while the second will remain unchanged. The last group, the anti-fragile bunch, is special – they actually gain from disorder. That is to say, when the world is going to hell in a handbasket, it is the anti-fragile that will emerge from the troubles stronger than before.
Making business anti-fragile
In the realm of business, one key characteristic that I think imbues companies with anti-fragility is a strong balance sheet, one that is flush with cash and carries minimal debt. A great example is Japanese industrial robots maker Fanuc. The Nikkei Asian Review writes (emphases mine):
“Fanuc has amassed a huge pool of funds, and the way it is spending that money is only reinforcing its dominance…
… … 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.”
When Fanuc’s competitors had to batten down their hatches in a poor economic environment, the company could go on the offensive thanks to its strong balance sheet. That looks like anti-fragility to me.
The businesses that fall apart with chaos
The fragilising nature of debt is aptly-illustrated by the experience of London-listed mining giant Anglo American Plc.
You can see, in the chart below, the company starting to pile on debt in 2012 after it had deleveraged its balance sheet in prior years. Tragedy soon ensued. Just as Anglo American’s borrowings climbed, commodity prices started sinking. The company was caught off-guard and a profit of US$6.2 billion in 2011 had turned into a loss of US$7.0 billion in the 12 months through 30 June 2015.
To save itself, Anglo American will sell at least 55% of its assets, and slash 85,000 of its 135,000-strong workforce. Bloomberg Business recently wrote that “Like banks before the financial crisis or energy companies before the collapse of oil prices, Anglo American is the classic tale of over-extending during the good times only to be left with too much debt and too little money when markets take a dive.”
An anti-fragile bunch
As I’m surveying the landscape of Singapore’s stock market today, I see many companies with more cash than debt. There are some 303 such stocks to be exact. They include big blue chips like Singapore Exchange Limited (SGX: S68), mid-caps like Raffles Medical Group Ltd (SGX: R01), and small-caps like Kingsmen Creatives Ltd (SGX: 5MZ).
I can’t tell for sure if any of the three companies above – or the 303 that have rock-solid balance sheets – can come out of the next crisis stronger than they are currently. But, what I do know is that they are not shackled by debt – and that’s a solid step toward anti-fragility.
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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 owns shares in Raffles Medical and Kingsmen Creatives.