The Change Creates Opportunity Doctrine

While traveling last week, I picked up a copy of ‘The Wall Street Journal’ (Thursday, December 4, 2008).  While perusing through the paper, I noticed a few interesting headlines confirming to me my long held theory of “Change creates opportunity” is true.

On the front page of ‘The Journal’ was a story about the Harvard Endowment fund.  In the first 4 months of this year, the fund is down 22%.  While in today’s volatile markets, a 22% drop might not seem all that out of the ordinary, it does cut directly and drastically to available resources in the fund.

Harvard’s endowment, not surprisingly the largest of any university, had $39.6 billion in assets as of June 30, 2008, meaning that the losses suffered recently amount to about $8 billion.  That $8 billion loss is larger than the entire endowment fund of all but 6 colleges and universities.  Harvard is bracing for more losses, predicting a total decline in the endowment fund of approximately 30% by the end of the fiscal year ending in June of 2009.

In the same issue of ‘The Journal’, it was reported that the United Auto Workers was offering two big concessions to the auto makers before they returned to Washington to get in the busy government corporate cheese line.  The union stated it would allow car manufacturers to delay billions of dollars of payments into funds that would cover health care costs for retired workers. 

The union also agreed to suspend a fairly controversial ‘jobs bank’ program under which workers continue to collect most of their wages after they’re laid off.

‘The Wall Street Journal’ reported on December 9, 2008 that congress and the automakers were inching closer to a bailout deal to save the automakers.  According to preliminary reports, this deal would have the government take an ownership position in the automakers and appoint an “auto czar” in order to “protect the interests of the US taxpayer” a notion that’s simply ridiculous when you look at the numbers.

Take General Motors for example.  GM is asking for a $10 billion loan but has a market capitalization (the total value of GM’s stock) of $3 billion.  Didn’t we just use taxpayer money to bail out a banking system that made loans that were under-collateralized?  Now, the government is following suit, making ill advised loans with taxpayer’s money.

But, the potential damage doesn’t end there.  If the government does inject $10 billion in cash into GM, what happens to the value of the stock that current GM shareholders own?

One would have to believe that the value gets diluted; however, in true Washington political style, the method under which the government would take ownership in GM is still ambiguous at this point. 

Finally, if the auto bailout bill is passed as its currently written, this government appointed “auto czar” would have the final say on any transaction or contract valued at $25 million or more.  Good idea?

What do you think?  Take a look at the business decisions Washington has made in the past.  There’s a long track record of mismanagement and undue influence of special interests.

Hear that noise?

It’s the sound of lobbyists getting in line to have a nice friendly chat with the “auto czar”.

As a free market capitalist at heart, it deeply saddens me to see capitalism as we once knew it in this country dying.  Government ownership of industries is never a good thing from the perspective of a capitalist; this will be no different long term either, but back to my theory – ‘change creates opportunity’.

In the same December 4 issue of ‘The Wall Street Journal’, there’s a story about Thomas H. Lee.  In 1974, Mr. Lee started his leveraged buyout firm in Boston.  Since that startup, Mr. Lee has become an expert with an amazing success track record when it comes to finding the opportunity that’s often created by change.

In 1992, Mr. Lee’s company purchased Snapple, the juice and tea company, for $135 million.  In 1994, Snapple is sold to Quaker Oats for $1.7 billion.

In 1997, Mr. Lee, along with his partners, purchased TRW’s information systems unit for $1.01 billion.  He renames the company Experian and sells it 7 weeks later for $1.7 billion, a profit of about $100 million per week of ownership.

Mr. Lee is now revamping a $1.5 billion hedge fund after it recently suffered a 40% loss.

While it remains to be seen what the outcome of this latest Lee project will be, it’s safe to say that Mr. Lee is looking at the massive change that’s currently taking place and finding what he perceives to be some opportunity.

How about you?

Are you finding opportunities with your assets in this market?

Is this change creating opportunity for you?

While many buy and hold investors have experienced the kind of losses that the Harvard Endowment fund has experienced, other investors who’ve utilized exit strategies in their portfolios may have fared better.

For more information, click here:  www.usawealthmanagement.com.

Securities offered through USA Advanced Planners (Member FINRA/SIPC).  Advisory services offered through USA Wealth Management. USA Advanced Planners and USA Wealth Management are affiliated companies.  The opinion expressed herein is that of the writer and not necessarily that of USA Wealth Management and/or USA Advanced Planners.

·          Exit strategies are employed to lock in a profit or prevent a significant loss by determining at what point an investment will be sold.  No exit strategy will be 100% accurate.  Having an exit strategy does not guarantee a profit and/or guarantee against loss.