A Matter of Trust

We live in a world where trust is a rating out of 5. From travel to dining to where you stay. When we went to Europe last year, our daughter recommended that we use the Google rating out of 5 to determine where we ate. It was extremely useful. It didn’t matter if it was for a fine dining restaurant, a pizzeria, or a sandwich shop. We had a rule that it had to be 4.5 or better. It became the most important factor in choosing where we went.

On a couple of instances, we forgot to check and went to a place because it looked great, and we walked away disappointed. We’d look up their rating and sure enough it was a 3.5 or a 2.9. We were surprised at its accuracy. When we got back to Sydney, we looked up the scores of all our favourite places in Sydney, all were highly rated. The system works extremely well. The caveat being that the score needed to have a reasonably high number of reviews, a 4.9 with 10 reviews is not the same as a 4.6 with 1,000.

In business, the way trust and reputation are built may still be based on quality, price, reliability, or service. But the way trust and reputation are communicated is changing for all of us. Regardless of the industry you are in we have moved beyond the simple word of mouth that was the foundation upon which many great businesses were built. Technology results in businesses effectively scaling their reputation as their happiest and unhappiest customers register their experience for all to see. 

So, you must earn it. In Melbourne last week, an Uber driver was on his way to pick up my wife and I to take us to the airport. We had just been talking about this topic and she said sometimes the driver will get out and open the door for her and other times not. So, we were particularly keen to see what this driver would do. To our amusement, he remained seated in the car and opened the door by reaching behind himself and awkwardly shoving the door from the inside of the car with a backward push. Does that deserve a 4 rather than a 5 all else being equal? 

How should you rate a business? When it comes to Uber, for example, I would be hard but fair. One of the few things I spend money on is the Uber premium service. I expect it to be just that. I give the ranking that is deserved. My daughter would tell me ratings are powerful and giving someone a bad rating impacts their livelihood. But does that mean giving everyone a 5? For a little while after that conversation I did. But the reality is you should be marked up and down for how good your service is. If I give average service a 5 that’s not fair to the person who gives exceptional service and deserves the 5. 

I was reading an article in the Australian Financial Review (AFR) earlier this week about retailer Cettire which highlighted to me that rating systems have become so trusted that they are being used by investors to determine business quality. This quote in the article stands out “While investors have made money, review sites are littered with poor customer experiences for returns and refunds”. I couldn’t help but notice comments from a fund manager who didn’t invest saying that they couldn’t ignore the company’s poor review history. Ratings and reviews are a serious business.

Ratings and reviews in their various forms are increasingly relied upon as the source of trust in the global economy. What does this look like in the future as they become increasingly embedded in our daily lives. Do we end up with a consolidated score made up of all our interactions with every service provider we deal with? The point to all this is not to be flippant but to emphasize the changing nature of trust in the modern digital age. Where a rating out of 5 is now the most powerful way in which we both earn and give trust.  

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

An Economic Downturn is Inevitable but Normal

An economic downturn across the world, including Australia, is inevitable. It’s simply a part of the natural business cycle. I remember my mum talking about this when I was a kid. Dad had a small earth moving business in Geraldton in country WA. WA is probably more accustomed to the boom-and-bust nature of the business cycle than most economies given the mining industry. In Geraldton, you’ve also got farmers and crayfishermen. So, the ups and downs of a good or bad season are very much part of the fabric of the local economy. 

In the early days, Dad was a sole operator and business came in by word-of-mouth. No phones back then so you’d get calls on the house landline and take messages. Most people would call in the evening when dad was home to book in jobs in the days and weeks ahead. A plumber needs to hire dad and the backhoe to dig a leach drain for a new house, or a farmer needed him to dig the footings for a new shed. I was always proud that Dad had the reputation as the best operator in Geraldton. 

Usually, dad was really busy and worked 12 or 14-hour days, 6 days a week. He’d have Sunday off for family time. He charged an hourly hire rate so there were no wages, there was no safety net. So, you work when the work was there knowing that at some point it might not be. In the 70’s and 80’s various economic challenges arose. There were certainly times when work was quiet. If the phone didn’t ring there was no work, there was no money. 

When work was quiet one particular time, I was old enough to wonder if things would be ok. Mum’s answer was simple. Yes, it comes goes in cycles, quiet times don’t last, and it will get busy again, don’t know when, but it will. Booms and busts have been happening for years, it’s just how it works. And she was right. Many people understand the cyclical nature of the industries the economies of regional towns are built on. Farmers have good and bad seasons, and they know neither lasts forever. But these days we’ve become conditioned to only good times. Even when Covid hit, governments across the world made life easier for people to the point that many still have surplus savings from that period. 

But these extended good times haven’t made us more prosperous and helped us collectively put away more for a rainy day. It’s had the opposite effect because people have not had to worry about when things go bad for so long. So, they just stopped worrying and lived it up. That’s where we are at today, after 15 years or more of good times, complacency has set in and suddenly everyone is surprised at the prospect of a downturn and looking for someone to blame. 

No doubt there are various organisations, including the RBA and the federal government that have made the situation worse. What these organisations do really does impact the economy. They do significant damage to the economy and business when they get it wrong. Just ask anyone who paid interest rates as high as 18% back in 1990. To this day they have not forgotten the pain and difficulties of that time. Conversely though, today we’ve experienced too much of a good thing and now it is coming home to roost. 

While Paul Keating was much derided for his “Recession we had to have” comment in 1990, he wasn’t wrong conceptually. The Government and RBA nearly broke a generation of mortgage holders by forcing rates up too high. But the idea of a recession being needed once again rings true to me. In some respects, I think it's inevitable and just part of the natural business cycle. Something is lost when people don’t experience the full cycle of the good and the bad. The problem this time around is that people are woefully unprepared to deal with a downturn not just financially, but mentally in my view.

What’s created this is 3 things. A super cycle boom on the back of a once-in-a-generation urbanisation of China, low-interest rates by the government for the past 15 years in response to the aftermath of the GFC and a boom mentality that has been normalised. The third change is the biggest problem now, as this has conditioned people to expect good economic conditions or a safety net. This is understandable if that’s all you’ve ever known. But it will make the adjustment more difficult as conditions return to normal and the eventual bust is much bigger than it would otherwise have been. Ask anyone in small business in a country town, that's just how it works, but it's up to each of us to prepare for the tough times ahead.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Changing the World

I’ve always been fascinated by business and entrepreneurs. From a young age I would read the stories of any successful entrepreneur I could find, from Richard Branson to Steve Jobs overseas to Kerry Packer and Gerry Harvey in Australia. I was always interested in where they came from and how they built their empires. But there is a layer of mythology to these epic success stories that becomes problematic as well which we should also be mindful of. The way the stories of success are told and learned amplifies both the traits that are desirable but also those that are not. We can easily fall for the narratives that would make you believe you must be a relentless megalomaniac to achieve success.

Elon Musk is easily today’s poster child for aspiring entrepreneurs. Without a doubt he is as brilliant an entrepreneur as the world has ever seen along with people such as Steve Jobs and Howard Hughes. His ability to take on seemingly insurmountable problems, prove the naysayers wrong and create multi-billion-dollar businesses along the way is extraordinary. The fact that he can execute his plans across multiple businesses in different industries simultaneously is simply mind blowing. His combination of intellect, vision, and ability to relentlessly execute have made him the wealthiest man on the planet. Yet the biggest mistake aspiring entrepreneurs can make is to try to be like Elon Musk.

One of the reasons I started my podcast was that I still love learning about the journeys of people who have created successful businesses. There have been guests who have made me reflect more deeply on a topic and my recent interview with Kristy Chong had that impact on me. She is almost an accidental entrepreneur. I often hear people say they want to “change the world” or “solve big problems” and I get the sense that in many cases this is ego driven as people find their place in the world and make their mark. Nothing wrong with ego or ambition but it makes me think about what it really means to change the world and what defines a big problem to tackle.

Kristy created a business called Modibodi that has profoundly changed people’s lives. It’s not what you would describe as a traditionally cool or sexy business, in fact it might be the opposite. But what Kristy did was to solve a very real, very difficult problem. As a mum of four, Kristy came up with the concept in 2011 while training for a marathon and experiencing light incontinence. Upon finding there was no product available she spent the next 2 years creating one, patenting leak-proof underwear. From there it became obvious that this was a big problem for a lot of people who were desperate for her solution. Fast forward to 2022 and Kristy sold the business for $140 million. 

It struck me as we spoke about the use cases for her product that this was indeed a life changing product. Kristy soon discovered that post-natal women were not the only ones who struggled with embarrassing leakage issues. Before long there was demand from young girls to people with disabilities through to old men. Suddenly people had a solution that opened the possibilities of life and activities that they had avoided. Her product literally changed people lives overnight. It wasn’t something people felt they were able to talk about, there was no solution, until Kristy created it.

In a world where every entrepreneur seems to aspire to be the next Elon Musk, I would love to see a far greater emphasis on helping more and more people become the next Kristy Chong. 

General Advice Disclaimer. This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Should You Start a Business in a Bad Economy?

My 20-year-old daughter, Rachel, is embarking on a new business making boutique candles. She’s only just starting out and making them at night and on weekends, but she is really excited about it and has big plans. As we spoke about it, she asked me an important question that was causing her some concern. She asked, “should I be starting a business if the economy is going bad?” 

My answer was instant and unequivocal. Yes, you should 100%. Start it, give it everything you have and see what happens. You will either succeed or you will learn valuable lessons for next time. Never let the economy or other external factors stop you from having a go. There will never be a ‘right time’. Find something you love, forget the fear and do it. Be the best at what you do.

I would also add that you should do this as early in life as possible. It is far easier when you are young and have fewer commitments. But even when you are older if you want to pursue something go for it. There’s nothing like the pressure of starting a business to focus you on the task at hand. These days with more flexible work, it’s much simpler to start a little side business and build it up while still having the safety net of employment. It takes hard work, discipline, and commitment but if you really want it, go for it.

Just because times are tough or going to become tough doesn’t mean that you shouldn’t start a business. It should have no bearing on your choice. There will always be opportunities and a business that starts in the depths of the toughest times is very well positioned to prosper as the economy improves and returns to good times later. That goes for the smallest businesses through to the biggest.

On my most recent podcast, I interviewed Rhian Allen, the founder of The Healthy Mummy. Her story is great! Rhian started the business in 2010 as the world was emerging from the GFC. She was 6 months pregnant and discovered a gap in the market in relation to fitness for mums. She left her job and sold her house to fund the business. Rhian sold the business in March this year for almost $20 million.

I circled back during our conversation and asked how she felt on day one of starting the business. Was she a little scared? Her answer was very much in line with everything I had learned about her and the energy she brought to the conversation. She replied “no, I was just excited about doing something I loved. If it didn’t work out, I could start again.”

It reminded me of the time my wife and I packed up our little family of four kids in 2003 and embarked on the move from our hometown in Geraldton in country WA and moved to Perth. One conservative old Italian Aunty took me aside and said “Dion, this is a big move, you’ve got a young family, what if it doesn’t work?” My answer was instant: “Then we will just get in the car and drive back”. She gave me a pained expression and muttered something about it being a big move as she walked away shaking her head. 

It highlighted to me that many people perceive the risk to be high when it involves significant change but when you understand the worst-case scenario, the risk is actually quite limited. If you are the sort of person who becomes concerned about failure or having to start again then perhaps business isn’t for you. But where you understand the worst-case scenario, and you are ok with that, then take the calculated risk and go for it. That’s the opportunity. 

In their heart, most people know what they would do if they were guaranteed to succeed. Most hesitate because of a fear of it not working. So, I would ask, what would you do if you were guaranteed it would succeed? As the answer to that question is what you really want to do. Life is too short to let anything get in the way of that, including a bad economy.

General Advice Disclaimer: This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you. Historical performance is often not a reliable indicator of future performance. You should not rely solely on historical performance to make investment decisions.

Small Business Failure Is the Biggest Risk Emerging in the Economy

It has been about a month since my last update on Covid19 and the emergence of the delta variant. Without a doubt the NSW State government have made a mess of this in the last few months, somehow creating a worse outcome for both the health of the people and the economy. 

It is clear that the only way out of long-term lockdowns is by getting the population as close to fully vaccinated as possible. In a perfect world, it would be 95% plus but it’s going to take too long to get to that figure before we end up with mass civil unrest and small businesses collapsing. I expect both NSW and VIC to end their lockdowns in November once over 70% of the population are fully vaccinated.

From an economic perspective, the prospect of the lockdowns ending is obviously good news. People can go back to work and companies can get on with doing business. If this all goes ahead, then we will likely see pent up demand for goods and services and a great Christmas period to boost the economy back into gear.

From an investment portfolio perspective, at the moment, the share market remains largely unaffected regardless of whether we are in lockdowns or not. In many cases, the large companies listed on the stock market are somewhat insulated and have diversified income streams from across the world. They have access to capital and the ability to negotiate favourable terms with suppliers due to their size and scale.

That is not the case for all businesses.

The area I am increasingly concerned about is small and medium sized business, the real engine room of the Australian economy. In my opinion, there is a growing risk to the entire economy emerging as small business continue to be neglected by all sides of politics while bearing the brunt of the impact from lockdowns. They have neither the voice of unions like workers nor the deep pockets of the corporates.

Extended lockdowns for any reason, be it lower vaccination rates, materially higher ICU and death rates, or a new variant, will be a problem for many businesses already on the edge.

These businesses depend on local customers and have neither the size nor scale to access capital or negotiate favourably with suppliers when in trouble. They are increasingly finding themselves at the mercy of their banks and their landlords, both of whom are effectively accumulating unpaid interest and rent as debts. Small businesses have no leverage in this situation as it plays out.

It doesn’t show up as a problem at the moment because the banks are capitalising the interest and using it to increase their loan book. Landlords in many cases are accepting whatever the small business can pay as rent and accruing the unpaid rent as a debt. It all looks good on paper. At some point, the reality is that these amounts need to be paid.

When this side of the equation starts to play out it will be a problem. If small businesses are left with nowhere to turn then many will go broke. It’s that simple, it becomes their only option.

If there is a material spike in small businesses collapsing in the months ahead then there is the very real possibility that this leads to flow on effects for almost everyone; for the economy, unemployment, the property market, the banks and ultimately the big corporates listed on the stock market.

Significant economic problems always seem obvious in hindsight. Usually, they seem to come out of left field because everyone is too distracted or complacent to spot the real problem emerging. For years governments across the world have bailed out the biggest institutions because they are too big to fail. However, if we are not careful, it will be our disregard for small businesses that will be our economic downfall.

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.