I can’t figure out how to do that

3 true stories.

Story one.  Many years ago, when savings and loans still existed, I audited several.  One of my clients was a small rural savings and loan that only lent money for residential homes in their and surrounding counties.  One year I began the audit as I always did, and asked to see the new loan register for the year.  I was told by Lloyd, the president, that they made no home loans that year.  Zero.  I said you have got to be kidding.  That’s all you are in business to do.  He told me that he could not understand how the S & Ls locally and indeed all over the country were making loans at 8% by borrowing large amounts from money brokers.  Even though the borrowing rate was lower than the 8% he could lend at, if he could not borrow at passbook rates of 5.25% and lend at 7.25%, as he always had, he would not do it at all.  I paraphrase Lloyd:  “I can’t figure out how they are doing it and expect to continue it.  So we [his savings loan.  He viewed it as his, although it was a mutual company, to him it was his.] are not going to do it.”  We all know what happened to the entire industry.  Gone.  The hot brokered money ran, and the real estate market collapsed in the early 80’s.  Turns out Lloyd was spot on.  He merged with a successful local bank, the officers, directors, and the depositors came out fine.  Lloyd didn’t understand it, so he didn’t do it.

Story two.  For many years I worked with a classic hard charging entrepenuer.  He never met a market he did not wish to enter and conquer.  We were presented with the opportunity to invest in, or buy 100% of, a multi state radio station that was trying to build a national niche as a multi-market provider of local news.  Lots of issues involving sales, market size, advertising revenues etc.  But a unique concept.  Bear in mind this entrepenuer never met a market he did not wish to enter.  I already said that, didn’t I?  We hired a radio station “consultant” and went and did our due diligence.  Historic financials, market studies, cash flow projections.  Typical due diligence drill.  This man really wanted to buy these stations.  Finally, after much angst, he said to me (again I paraphrase, but this is really pretty close):  “When I lie down for a nap and think about the radio stations, I really want to get in that market.  Then I wake up, the feeling passes,  and I think I don’t understand how we can do that.  The market [local news delivered nationally] doesn’t make sense to me.”  So we took a pass.  Saved our money.  The stations went broke.

Story three.  One of my clients had been in the steel fabrication and contracting business for years.  He had been generally successful.  They would quote a job to erect a steel building, buy the steel, and do the construction.  Good profits.  For years.  Then it tanked.  Steel prices went through the roof, but the contractors were still bidding low and low balling one another.  Big losses.  Within just a few months, after 20+ years in the business, my client shut it down and auctioned off the property and equipment.  He made that move with lightning speed, especially considering how long he had been in the business.  I asked him about it.  Again paraphrasing:  “I could no longer figure out how to make money in this business [the construction and contracting side of steel buildings].  But I could figure out who always made money – the steel fabricators (the wholesalers who bought the steel, cut it, and delivered it to the contractors).  Whether the prices go up or down, they just pass through the steel price and make money on the fabrication.  So that’s the business we are going to do.”  He took the proceeds from the liquidation plus some lines of credit, began and built over the next 30 years what is today one of the largest and most successful steel fab and distribution businesses in the Midwest.  He did it because he could no longer understand the business he had been in.

Lesson learned:  If you can’t figure it out, you might be better off not doing it.  When you can’t compete on price, or logistics, or labor costs, or whatever, maybe there is good reason you can’t figure it out.  It just might not work.

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