Beyond Fear and Greed

Warren Buffett says his guiding principle is to “be fearful when others are greedy and greedy when others are fearful.” There’s certainly plenty of fear out there, and thus plenty of opportunities to get greedy. Greed, however, does not necessarily translate into wealth.

In “Beyond Fear and Greed: Capitalizing on Opportunities in the Current Crisis,” we draw on our two years of research into more than 2,500 major corporate failures and our related consulting work to describe the landmines that companies are mostly like to hit as they try to capitalize on the turmoil that has roiled many markets since the summer of 2008. We also lay out a process for stress testing new business strategies, ensuring that greed does not send you down the wrong path and increasing the chances that you’ll pick a highly prosperous road.

Read the introduction below and click to download the entire article in PDF form.

Beyond Fear and Greed:

Capitalizing on Opportunities in the Current Crisis

Paul B. Carroll and Chunka Mui
The Devil’s Advocate Group

The Opportunity

Even more than most economic downturns, what has been dubbed The Great Recession is fundamentally changing the business landscape. Many companies, long venerated, are falling by the wayside. Many others, not generally thought of as leaders, are emerging in dominant positions.

Little-known Golub Capital has raced past mighty GE Capital in lending to small businesses. New York Life got aggressive and leapfrogged AIG, Hartford Financial Services and Lincoln National in sales of life insurance and annuities—New York Life’s share of the U.S. market has jumped to 5.4% from 3.6%. Two builders, Toll and Lennar, are on a land-buying spree, taking advantage of others’ weakness. In one major deal, Lennar bought back land it sold in 2007, paying 18% of the earlier price.

Numerous markets will stay depressed or at least uncertain for several more quarters, or even years, so the change has just begun. Where companies will end up depends on their strategic choices in response to the crisis.

History is replete with success stories about those who made the most of recessions. Several of the “robber barons,” including Andrew Carnegie and John D. Rockefeller, took advantage of the Panic of 1873, which occurred after the bursting of the post-Civil War railroad bubble. They bought competitors at fire-sale prices and built empires. Southwest Airlines expanded rapidly in the recession in the early 1980s. Although it was a small upstart at the time, Southwest became a major force by the end of the decade, and CEO Herb Kelleher soon became a household name. After 9/11, while other airlines cut back, Southwest lowered fares and stepped up advertising to gain market share. It is now the most successful in the industry. Similarly, in the early 1980s, Intel was skating on the edge of bankruptcy. Yet it responded to horrible problems in the memory-chip market by making a bold move into microprocessors, where the company soon won a near-monopoly in the personal-computer market. Since then, Intel has consistently invested in additional capacity during downturns. In the process, it has outdistanced IBM, Sun, Motorola, Advanced Micro Devices and many other formidable competitors—making heroes out of Gordon Moore, Andy Grove and other Intel CEOs.

As Grove has said, “Bad companies are destroyed by crisis. Good companies survive them. Great companies are improved by them.”

A study of 400 companies in the last recession, by Diamond Management & Technology Consultants, buttresses his claim about the potential for improvement. It found that above-average performers increased their stock-market value by a total of $350 billion and improved their gross margins by 20 percentage points by the time the recession ended in 2004.

There are, however, also plenty of examples of strong companies that pursued the wrong opportunities in a crisis—the poorer performers in the Diamond study shed $200 billion of stock-market value in the last recession. And this recession has been far trickier. There’s a saying on Wall Street: Buying stocks in the kind of scary market we’ve seen over the past year is “like catching knives.” You can buy stocks—or whole companies—but you might lose a hand in the process.

Look at Bank of America’s decision to buy Merrill Lynch. BofA CEO Ken Lewis thought he got the deal of a lifetime, but now the combination is being referred to as one of the worst in memory. The mortgage-backed securities owned by the combined company may lose more than $100 billion. Meanwhile, BofA’s middle-class culture is having trouble absorbing Merrill’s white-shoe brokers. Merrill’s CEO, John Thain, has already lost his job, and BofA CEO Ken Lewis is very much on the hot seat.

Yet problems can be spotted ahead of time. Our two years of research into 2,500 major business mistakes of the past quarter-century and our work with consulting clients let us see, for instance, that the BofA-Merrill deal was wrong-headed. In our blog (, we wrote in September 2008 that the BofA-Merrill deal seemed a lot like the fiasco involving Green Tree and Conseco that we covered at length in our book, Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years. Green Tree built a house of cards in much the same way that the sub-prime lenders did recently, then was purchased by Conseco. Conseco soon filed for bankruptcy protection, in the third-largest bankruptcy in U.S. history to that time. Digging into the details, it seemed that Merrill had played the role of Green Tree, while BofA was in danger of playing the role of Conseco, and that’s certainly how things would have played out without government intervention. Even with the unexpected government help, BofA is in for a rough time. We also wrote on our blog that clothing retailer Steve & Barry’s didn’t seem to have a sustainable business model. Steve & Barry’s was losing money on the sales of its inexpensive clothing but camouflaging the losses with onetime payments from mall operators to open stores in their facilities. The only way to sustain the fictional profitability was to keep opening stores. But how long was that sustainable? Obviously, not long enough. Private-equity firm Bay Harbour Management went ahead and bought Steve & Barry’s out of bankruptcy for $168 million—then announced three months later that it was liquidating the retail chain.

The question is, how do you identify and eliminate the clearly bad ideas and just focus on the ones that give you a chance of major success? To put it another way: If someone writes a front-page piece in the Wall Street Journal about you in two years, how can you make sure you’re treated like Andrew Carnegie, Herb Kelleher or Andy Grove and not like Ken Lewis or the folks at Bay Harbour?

In this paper, we will lay out a process that will make it far more likely that you receive Andy Grove treatment.

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