Wednesday, February 8, 2017

Steve Wynn on Risking The Business (and a ramble along the liquidity trail)

We take liquidity seriously.

"Liquidity is expensive but illiquidity is much more so, 
because it destroys the very existence of a firm"
-William Manchester, The Arms of Krupp*

Via Value Investing World
Billionaire Steve Wynn: Building Las Vegas (2014 video) [H/T @iancassel] (LINK)
"We never risked the firm. Never risked the firm. My responsibility to my employees, my stockholders and such; that I can't promise to be right all the time. No one can. You make calls. Sometimes they're right, sometimes they're wrong. But capital structure allows you to survive the inevitable cycles of business, which go up and down as surely as sunrise and sunset, except we don't know the timing. They allow you to survive your own miscalculations. Capital structure, I learned at a young age, thanks to Mike Milken who taught me this story; capital structure is everything. And I've always had a capital structure that was bulletproof."
[Wynn's answer about building a good company culture from the 33:50-40:58 mark is also worth a close listen.]
HT: Value Investing World

In 2015's iteration: "Oaktree's Howard Marks’ Master Class on Liquidity"

*Regarding the Manchester, here's November 2014's "The Coming Liquidity Implosion":
A couple times per year I dust off a quote I first used on these pages during August 2007's quant quake:

Liquidity in Business and Markets
'Liquidity is expensive but illiquidity is much more so, because it destroys the very existence of a firm"
I don't remember if it was Johannes or Ernst, it was a long time ago that I read Manchester, quoting one of the Schroeder boys on the insolvency of Krupp. That line has stuck with me. Here's the book.
That 2007 post contained another interesting bit:
Alexander Campbell at Risk: Over the Counter brings us a timely paper:
According to this (fortuitously topical) paper, liquidity is hugely valuable: "a liquid asset can be worth up to 25% more than an illiquid asset, even though both have identical cash flow dynamics". Or, to put it another way, a sudden absence of liquidity could in effect mean a 20% drop in portfolio value, even if the assets - and their market prices - remain constant. Nasty.
For more on the quantpocalypse here's MIT's uberquant Andrew Lo via the New York Fed:

"What happened to the quants in August 2007? Evidence from factors and transactions data∗"
(77 page PDF)

If you want to take the other side, you can do a bit of intertemporal arbitrage and own the Warren Buffett holding period: "forever" or at least the old insurance investment line, "The only quarter to worry about is the next quarter-century":