The most dangerous unforced errors: Major, self-inflicted mistakes can undermine a career – or an entire life

July 9, 2013 4:57 pm

The most dangerous unforced errors

By Luke Johnson

Major, self-inflicted mistakes can undermine a career – or an entire life

As Wimbledon has just ended, it feels appropriate to discuss the subject of unforced errors. I’m not referring to shots on a tennis court: I’m talking about big, self-inflicted mistakes that can undermine a commercial career – or indeed an entire life.

● One of the worst blunders is to be insufficiently optimistic when favourable circumstances present themselves. Great business and substantial market openings are rare. To cast them aside too swiftly is a frequent failing. After we took Topps Tiles public in 1997, the shares rose threefold, and it seemed to me that the stock market was overexcited – so I sold a big chunk of my holding. But the journey was only just beginning. The stock climbed at least 500 per cent more over the following years: I could only watch in irritation at the ascent. Gordon Moore, who went on to found Intel, said: “My biggest mistake at Fairchild [Semiconductor] was not appreciating how big the business for integrated circuits would be.”● Business leaders need to be confident, but when their egotism segues into arrogance, delusions of grandeur tend to take hold. So Tesco’s management thought they could teach the Americans how to run supermarkets – only to retreat a few years later after a $2bn write-off. In a small way I learnt the same agonising lesson, when we opened a big restaurant in Manhattan, thinking our Belgo formula couldn’t fail: $5m later we knew better. Dumb acquisitions, foolish investments – these poor judgments are often made after ignoring sound advice – because the decision makers are afflicted by hubris, and believe they always know best.

● The most common destructive behaviour that obliterates success is alcoholism. It shortens lives, causes immense collateral damage, and gradually asphyxiates even the greatest talents who fall victim to liquor’s awful spell. George Vaillant, director of the Harvard Grant longitudinal study – which has followed a cohort of college students since 1938 – states in his book Triumphs of Experiencethat alcohol abuse is the largest preventable disrupter of health and happiness. I have seen high achievers slide into havoc through booze: neither education nor intelligence are insurance policies against it.

● Personal guarantees are similarly toxic in business . Debt is usually necessary if you are highly ambitious and want to build a big business, and retain a large piece of it. But one should remember to take full advantage of the limited liability system, and not put one’s solvency on the line, whether for a loan, lease or any other obligation. Last year an old friend, who was a multimillionaire only 10 years ago, was declared bankrupt because he spent too much, backed the wrong companies – but principally because he had guaranteed borrowings.

● I’ve seen more opportunities annihilated through partnership bust-ups than any other cause. Sometimes there is a winner in such disputes: the ultimate buyer of the company perhaps, or the partner who cashes out and starts up again. Such rows typically entail mutual harm and an impaired business. Many of the best deals I’ve ever done were triggered by joint owners falling out. In such circumstances the emotional need for an exit often overwhelms economic arguments. Divorce is the domestic equivalent of such break-ups. Many of the more impoverished – but able – entrepreneurs I’ve known have suffered through multiple divorces.

● Wise entrepreneurs learn that profits are not necessarily cash. But many founders never understand this essential accounting truth. A cash flow projection is a much more important document than a profit and loss statement. A lack of liquidity can kill you; whereas a company can make paper losses for years and still survive if it has sufficient cash. It is amazing how financial journalists, fund managers, analysts, bankers and company directors can still focus on the wrong numbers in the accounts – despite so many high-profile disasters over the years.

Inevitably, there are a multitude of other lapses that can lead to catastrophe. But for me the above are probably the most frequent and dangerous. Of course knowing about them isn’t quite the same as avoiding them.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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