Introduction:
In my previous posts in the fragility series which can be found here Fragility Series, we have explored the four fundamental pillars of fragility which an investor needs to be aware of to eliminate fragility in their portfolio:
Pillar 1 - Avoid investing in Fragile Companies
Pillar 2 - Avoid investing in Overvalued Companies
Pillar 3 - Avoid investing in Companies having Management with fragile mindset
Pillar 4 - Avoiding Shorter timeframes
By diligently implementing the above pillars, we can reduce the severity of adverse events and allow favorable news to substantially enhance our portfolio.
While the four pillars mainly focus on eliminating fragility and reducing downside risk, we also need to create a portfolio that not only withstands adverse events but also capitalizes on positive events with unlimited upside potential.
Antifragility entails surviving adverse events and minimizing their impacts, enabling us to take advantage of positive events with non-linear impacts and unlimited upside potential. To achieve this, we must harness certain "Antifragile Powers" that will enhance the impact of positive events and make our returns non-linear. We acquire these “Antifragile Powers” only if we remove fragility from our investments which we can do by following the four pillars of fragility. I discussed one such Antifragile Power - Power of Population Explosion in my previous post. In this post, we will delve into another such Antifragile power - Power of Saying No.
Saying No
The significance of “Saying No" is showcased in the iconic movie "Rocky," recounting the journey of Rocky Balboa, a humble boxer from Philadelphia. The crux of Rocky's life narrative unfolds when an unforeseen opportunity arises to challenge Apollo Creed, the reigning heavyweight champion, subsequent to Creed's original opponent's withdrawal due to injury. Despite overwhelming odds, Rocky perceives this chance as a platform to prove his mettle and carve a distinctive identity in the realm of boxing.
Here’s the exact quote from the movie when Rocky confides in Adrian, his love interest, the night before his big fight with Apollo Creed, the world champion boxer:
"All I wanna do is go the distance. Nobody’s ever gone the distance with Creed, and if I can go that distance, you see, and that bell rings and I’m still standin’, I’m gonna know for the first time in my life, see, that I weren’t just another bum from the neighborhood."
The significance lies in the fact that Rocky's career teetered on the brink of collapse prior to the opportune encounter with Apollo Creed. His circumstances were inherently fragile, with limited avenues to propel his boxing career forward. Rocky lacked the luxury of the "Power of Saying No" to the match with Apollo Creed. Beyond merely Saying Yes to the bout, he was also required to prove his competence.
On the other hand, Apollo Creed is not fragile. As an established champion, Creed held the privilege of handpicking his opponents, opting for the relatively obscure Rocky as his adversary.
Moreover, it is worth noting that Creed possessed the power of “Saying No". Following a near defeat in the initial match against Rocky, Creed could have declined a rematch – a choice he opted against. Creed's actions underscore the notion that while the power of Saying No existed, it remained underutilized. In contrast, Rocky was devoid of such power, a predicament that dictated his inability to decline the original match or the subsequent rematch against Creed.
This concept extends beyond the realm of cinema. Consider two employees with comparable job roles. One (Employee X) carries lots of obligations, such as EMIs and children's education, leaving minimal room for financial flexibility. The other (Employee Y) boasts a substantial retirement fund and fewer obligations. Employee X's cannot afford to say no and always has the fear of losing his job. Employee Y, conversely, can confidently refuse tasks that do not align with preferences, embracing a stress-free work environment.
Similarly, companies which are not fragile can wield the Power of Saying No when encountering business propositions lacking favorable terms. Few examples are:
Reliance, Aramco call off $15 billion deal amid valuation differences: Sources - The Economic Times (indiatimes.com) Reliance did not go ahead with the deal as the valuation is not to their expectation. They used the Power of Saying No for the deal.
Why did Bajaj Auto/KTM pull out of Ducati?: Rajiv Bajaj, Auto News, ET Auto (indiatimes.com) Rajiv Bajaj said they called off the Ducati Deal
“For two good reasons: too much overlap with KTM and a valuation that is beyond our limited comprehensions”.
In Q2-FY2020 earnings call,, Wonderla Management informed the following with regard to Chennai Park:
The Government of Tamil Nadu has given the permission to exempt our park from the LBT (Local Body Tax) for five years from November 1, 2019. As per the Order, the Project execution period is also included in the exemption period of 5 years. This is an anomaly.
In a subsequent update in June 2023, company informed the following:
The Government of Tamil Nadu has granted waiver of Local Body Tax (LBT) of 10% for a period of 10 years from the commencement of commercial operations subject to the condition that the commercial operation shall be commenced within a period of 2 years from 2nd June 2023,, after persistent efforts by the Company
Wonderla already incurred a cost to the tune of Rs 109 Crs towards land acquisition for Chennai Project by the time the company started pursuing with the government. The company utilized its Power of Saying No in the form of not commencing the project and keeping the land idle till it could negotiate favorable terms.
Similarly as an investor, we also have the Power of Saying No in the following forms:
We only need to choose 10 to 20 companies out of 5000 companies to invest
We can say no to overvaluations
We need not invest incase of no good investment opportunities
Power of Saying No is acquired
Fragile companies do not have this power of Saying No.
Deal or Exit? Etihad to take final call on Jet Airways on 31 March | Mint (livemint.com) In the talks with Etihad, Etihad had the deciding power and not Jet Airways.
Like the Power of Population explosion, it is imperative to recognize that the Power of Saying No is a power acquired through the elimination of fragility. A company cultivates this power by fortifying its core resilience, thereby wielding the ability to negotiate favorable business terms, mirroring the principle elucidated in the example of the movie "Rocky."
As an investor, we acquire this Power of Saying No by investing only long term capital i.e. money which we don’t need for next 5 to 10 years and also maintaining a contingency fund. By doing this, we are not forced to exit during bear markets and need not be in a hurry to invest when we cannot find any good opportunities to invest.
While following the four pillars of Fragility helps reduce the impact of adverse events, enhancing the impact of positive events requires us to leverage various Antifragile Powers like Power of Population Explosion and the Power of Saying No.
However, failing to utilize these Antifragile Powers would limit our upside potential. Similarly, there are other Antifragile Powers that we "acquire" by removing fragility from our investments. In my subsequent posts, I will explore these various "Antifragile Powers" that will enable positive events to thrive in our portfolio.
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