Posts Tagged ‘entrepreneurs’

See like an entrepreneur… how will Telstra be like in 2010?

Wednesday, February 14th, 2007

Today, we heard an interview on Sol Trujillo, the Managing Director of Telstra, on the Eureka Report podcast. In the interview, Sol was asked what will be the main drivers of revenue for Telstra in 2010.

Sol replied, ?By 2010, Telstra wouldn?t any longer be called just a telecom business. It?s going to be a media-comms business, which means our revenue profile [will] change.? He then went on to explain that revenue streams from Telstra’s traditional telephone services (PSTN) will decline, while other revenue streams will gain in prominence. Growth areas include wireless Internet broadband (NextG), mobile phone services, media content (Foxtel) and online and print directory services (Sensis). Furthermore, Telstra is expanding overseas, buying an online real estate business in China, which Sol affirmed that it was ?growing at triple digits? as the Chinese real-estate market is rising exponentially.

This is what we expect to hear. Back in November last year, we said in Is the Telstra T3 offering worth a buy?:

Will Telstra remain just a telecommunication company in the future? This is a very interesting question. If the answer is ?yes?, we would not be keen in investing in Telstra because there are much more lucrative opportunities elsewhere. We suspect the answer will be ?no? because if we were Sol Trujillo, we would have taken the strategic path to transform Telstra to one that is more than a telecommunication company. We believe this strategy is the key to Telstra?s future.

One of the pre-requisite skills of an atypically excellent investor is the possession of entrepreneurial foresight. Entrepreneurs see the future creatively and understand the big picture. If you can see the future through the eyes of an entrepreneur, it will lead you to today?s small businesses that may be on the way to become big businesses of the future. If you invest in such small businesses today, your returns can multiply in terms of hundreds and thousands of percent. Of course, such investments are not without risks. What separates the best investors and the mediocre ones are how they deal with risks. For the excellent investors, they mitigate risks with knowledge, understanding and skill. For the average investors, they mitigate risks with wholesale diversification.

Stock analysts, by definition, are usually not entrepreneurs. The dichotomy between their analysis and entrepreneurs? foresight is illustrated by Sol?s comment in this article, Hurdles, but Trujillo’s Telstra a winner:

Trujillo opened up on the sort of long-term group returns he is aiming at when I pointed out that most of the analysts say that Telstra will generate big future cash flows but not substantial profit rises. “Yeah, well, the analysts here in Australia that have written about Telstra have been absolutely wrong almost across the board,” he says. “Look back at what they said in November 2005 and what has happened since then. So that’s why some people are analysts and why some people are managers and leaders.

We guess many stock analysts will be insulted by Sol?s comments. By insults aside, let us see why analysts are often ?wrong.?

We believe the reason is in the difference between the thinking of analysts and entrepreneurs. Analysts, by definition of their job description, look at businesses through the eyes of the status quo. Yes, they may engage in the forecast of future earnings of a business, but their forecasts are usually made by extrapolating from the status quo or some other derivations from it. Entrepreneurs, on the other hand, look at businesses from the eyes of what can possibly be in the future. As such, what others see as ?impossible? is an opportunity for entrepreneurs to force the camel through the eye of the needle.

Thus, we would not go as far as to say that analysts are ?wrong? as Sol had done. The job of analysts is to base their analysis on what is already solid and ?proven,? which is usually what the eye can see as the current state of affairs. But the job of entrepreneurs is to take risks and turn the current order of things upside down and sweep the status quo aside. With luck, determination and skill, entrepreneurs may succeed. Or they may fail.

As investors, we rather go along with the entrepreneurs and try to understand the risks they take instead of shying away from them by diversifying and diluting our investments.

Example of mal-investments?dot-com bubble

Wednesday, February 14th, 2007

In our previous article, The first step in an economic slowdown?mal-investment in capital, we mentioned that one of the causes for slowdowns in the business cycle is the presence of mal-investments. Mal-investments will eventually have to be liquidated, resulting in a cyclical slowdown of the economy. In that article, we discussed about the structure of capital, which gives rise to the concept of mal-investments, which is unique to the Austrian School of economics. It should be emphasised that unlike other schools of economics, the Austrian School makes a distinction between overinvestment and mal-investment. It is the latter that is of primary concern in Austrian theory. Today, we will look at a real-life example of mal-investments and its effects.

During the dot-com bubble of 1996-2000, the NASDAQ flew from around 1000 to around 5000. Credit for ?investments? were abundant and plentiful. Any stocks related to the Internet were soaring well beyond its fundamentals. Spending on IT projects were mushrooming up everywhere; loss-making dot-com companies were floated; consumer spending, which were fuelled by the monetary print press (and not from sound savings), remained strong; Real-estates in the Silicon Valley sky-rocketed. Indeed, IT investments were running very high.

This is an example of a mal-investment.

Entrepreneurs, as a whole, invested as if all capital goods will be available at their disposal to ensure the success of all their plans. From the hindsight of today, it is clear that this was not true?there were shortages of programmers, network engineers, and technical managers. We recalled the days when a fresh IT graduate, who hardly had any experience and skills on the latest technologies, could fetch a salary of more than AU$50,000! Consequently, all the idealism of wealth through technology crumbled when reality sets in. As many IT start-up companies realised, the cost of staying in business was so prohibitive that eventually, a large number of them had to be liquidated. Today, only a few survivors remained alive. The resulting deflation of the bubble led to a recession (albeit the mildest one ever).

The first step in an economic slowdown?mal-investment in capital

Tuesday, February 13th, 2007

In our previous article, The real story behind the phenomena of booms and busts, we mentioned that when the central bank finally raise interest rates, the economy will slow down as ?entrepreneurs will slow down their rate of investments, which means that employees will be laid off, projects cancelled, and cost being cut.?

Why would entrepreneurs have to slow down their rate of investments, which result in an economic slowdown? To answer this question, we have to understand that capital can be mal-invested. The reason why capital can be mal-invested is because it has structure, which is one of the key insights of the Austrian School which is not found in other school of economics.

What is the structure of capital?

Recall that in The myth of financial asset ?investments? as savings, we mentioned that capital goods are ?goods that help in the production of consumer goods?they increase the future productive capacity of the economy.? Capital goods that are directly used in the production of consumer goods are termed ?first-order? capital goods. An example of a first-order capital good is a sewing machine that is used to produce clothing for consumers. Capital goods that are used in the production of first-order capital goods are called ?second-order? capital goods. An example of a second-order capital good is the robot that put together the sewing machines in the assembly line. The third-order capital good are then used in the production of second-order capital goods and so on. Thus, capital goods can be arranged from the first-order up to the higher orders?this is the vertical structure of capital. Capital can also have horizontal structure. Some capital goods are complementary to other capital goods in the production of other goods. For example, computer software and hardware are complementary capital goods. In reality, the capital structure can be more complex?capital goods can play different roles in the horizontal and vertical chains simultaneously and may perhaps function as a consumer good at the same time.

As Ludwig von Mises said in Chapter 20 (Interest, Credit Expansion and the Trade Cycle), Section 6 of Human Action: A Treatise on Economics:

It is customary to describe the boom as overinvestment. However, additional investment is only possible to the extent that there is an additional supply of capital goods available. As, apart from forced saving, the boom itself does not result in a restriction but rather in an increase in consumption, it does not procure more capital goods for new investment. The essence of the credit-expansion boom is not overinvestment, but investment in wrong lines, i.e., malinvestment. The entrepreneurs employ the available supply of r + p1 + p2 as if they were in a position to employ a supply of r + p1 + p2 + p3 + p4. They embark upon an expansion of investment on a scale for which the capital goods available do not suffice. Their projects are unrealizable on account of the insufficient supply of capital goods. They must fail sooner or later. The unavoidable end of the credit expansion makes the faults committed visible.

Now, we return to our original question: why do entrepreneurs have to slow down their rate of investments? Based on our new understanding capital structure, it is more accurate to say that entrepreneurs not only have to merely slow down their rate of investments, they may even have to liquidate their investments due to their errors in judgements. As the economy booms, entrepreneurs make plans and invest in the belief that the economy’s capital structure will provide the necessary higher-order and complementary capitals in the future. What happens when capital are mal-invested, leading to an unbalanced structure of capital in the economy? The entrepreneurs’ plans will fail, which mean they will have to liquidate their investments. When that happens en masse, it will result in what we see as layoffs, cancelled projects and so on.

How would this work out in real life? Stay tuned!

What cause booms and busts? Explanation of Austrian Business Cycle Theory metaphor

Wednesday, February 7th, 2007

In our previous article, What cause booms and busts? Introduction to the Austrian Business Cycle Theory, we introduced the Austrian Business Cycle Theory (ABCT) with a metaphor. Today, we will explain the meanings of the metaphor from the book, Economics for Real People.

As we all know, since we live in a world of scarcity, the economy has a finite amount of resources (e.g. land, capital, labour, technology, raw materials, etc) to produce the goods and services that consumers want. Thus, the gas in the bus represents all the available finite resources in the economy.

The economy is always producing goods and services. Thus, the trip across the desert represents a period of time of economic activity.

In any economy, there is a class of people called the ?entrepreneur.? They are the business people who take risks by anticipating what consumers may want in the future and create the products and services that meet these anticipated needs. A very good example of an entrepreneur is Henry Ford who introduced the motor car to the world. In the metaphor, you, the bus driver, represent the entrepreneurs in the economy.

Then there is a class of people called the ?consumers.? Basically, consumers enjoy the fruits of the economy?s production of goods and services?they ?consume? resources of the economy. The passengers in the metaphor represent the consumers of the economy. As we said before in The myth of financial asset ?investments? as savings, there is a need to make a choice ?between producing consumer goods for current consumption or capital goods which will help in producing future consumer goods.? In the metaphor, the choice to use how much air-conditioning for comfort represents the choice of the consumers in how much they want to consume now at the expense of saving for future consumption.

In the economy, the entrepreneurs will borrow capital to engage in investment spending in order to fulfil what the consumers may want or need in the future. The speed of the bus represents the amount of investment spending to undertake.

Finally, the bogey man who tampered with the passengers? survey results is the central bank, which sets the interest rates. Please note that we are not accusing the central banks of any misconduct?they happened to fit the villain in our choice of metaphor.

So, how do all these fit into the explanation of the business cycle? Stay tuned!