Friday, November 1, 2019

SoftBank’s problems aren’t so surprising if you understand this one thing about the company

Throughout the manic phase of SoftBank and the Vision fund there was almost no mention of the fact that at the start of this century Masayoshi Son was the richest person in the word:
"But Son’s fairytale didn’t last long. After the dot-com bubble burst, his company Softbank’s shares plunged 75 percent in two months and was 93 percent lower by the end of 2000.
The business almost went bankrupt and Son ended up losing USD 70 billion, the highest ever recorded financial loss for a person in history."
MoneyControl, October 13, 2017
We had a couple posts around the time of the above that touched on the craziness but not the past history:
SoftBank In Talks To Acquire U.S. Treasury
Sprint, T-Mobile Plunge: SoftBank Calling Off Merger, Will Use Cash to Buy Canada

See also semi-varience, after the jump.

From MarketWatch:
Founder Masayoshi Son has always made large bets in hopes of owning a market
The humbling of the world’s biggest technology investor has come quickly.

SoftBank’s Vision Fund went from zero to $100 billion in two years, shaking up the venture capital industry with huge bets on household names like Uber UBER, -0.03%, WeWork and Slack WORK, -1.09%. But now the fund is in damage-control mode after WeWork canceled its IPO.

The office-sharing company’s fall from grace has been dramatic. In its last round of private funding, it boasted a $47 billion valuation. But then growing concerns about steep losses and the company’s governance structure prompted the CEO to resign and pushed the company’s valuation to under $10 billion, according to some reports.

With Uber’s and Slack’s respective market values down big since their public debuts, SoftBank’s Vision Fund is facing billions in losses. This has sparked questions from the fund’s backers over how SoftBank founder Masayoshi Son lost his Midas touch.

Surprise over Son 
The dominant tone in coverage of the WeWork debacle has been one of surprise that Son, who acquired a deserved reputation as a visionary with SoftBank’s early investments in Yahoo and Chinese e-commerce platform Alibaba BABA, +0.11%, could have so badly misjudged a business and its founder. But for those who understand the venture capital industry and SoftBank’s history in Japan, its current problems aren’t so shocking.

The common image of SoftBank is of a cutting-edge Japanese technology firm. But, in fact, SoftBank is a strange hybrid of unsexy subsidiaries rooted firmly in traditional, industrial Japan. SoftBank is essentially a telecom company.
It didn’t make much sense then, and it makes even less sense now.

A large number of SoftBank’s executives come from the railway industry through its 2004 purchase of Japan Telecom, which emerged from the privatization of Japan Railways. The company’s executive team comes from that staid industry, along with bankers and private-equity specialists picked up in SoftBank’s 2017 acquisition of Fortress Investment Group.

Two moves
Son has had two basic moves since the earliest days of SoftBank. The first was to buy distressed assets on the cheap and use them to create cash flow for further operations and acquisitions. That includes his purchase of the Comdex computer trade show and the Ziff Davis publishing company in 1995, followed later by Japan Telecom....MUCH MORE
When the swings are as big as Son's are you need a bankroll that is gigantic. Even if you are right and have an edge, the natural variation can kill you and the last downturn will be the last downturn.
Some related links:

"Is semi-variance a more useful measure of downside risk than standard deviation?"

"The Equation that Will Change Finance"

What Proportion of Your Bankroll Should You Bet? "A New Interpretation of Information Rate"

Gambler's Ruin and Bet Sizing 

Repost: Dreamtime Finance (and the Kelly Criterion)
I've been meaning to write about Kelly for a couple years and keep forgetting. Today I forget no more.
In probability theory the Kelly Criterion is a bet sizing technique used when the player has a quantifiable edge.
(When there is no edge the optimal bet size is $0.00)

The criterion will deliver the fastest growth rate balanced by reduced risk of ruin.
You can grow your pile faster but you increase the risk of ending up broke should you, for example bet 100% of your net worth in a situation where you have anything less than a 100% chance of winning.

The criterion says bet roughly your advantage as a percentage of your current bankroll divided by the variance of the game/market/sports book etc..
Variance is the standard deviation of the game squared. In blackjack the s.d. is 1.15 so the square is 1.3225.

As blackjack is played in the U.S. the most a card counter can hope for is a 1/2% to 1% average advantage with much of that average accruing from the fact that you can get up from a negative table.
Divide by 1.3225 and you've got your bet size.

It's a tough way to grind out a living but hopefully this exercise will stop you from pulling a Leeson, betting all of Barings money and destroying the 233 year old bank. 
"How did Ed Thorp Win in Blackjack and the Stock Market?"

Markets, Risk and Gambler's Ruin

Journal of Investment Consulting: Interview With Edward O. Thorp

Finally, another rule of life:

Cassandra's (Not so) Golden Rules About Investing (And Not Investing)
#21. NEVER double-down (except when you have material non-public information and deep pockets) or if you're Ed Thorp, or if you're playing at The Martingale Room.

Don't double down, double up.