Skip to main content

Fittest Ones Survive During Easy Times, Thrive During Hard Times

Imagine a time when it is easy to borrow money at extremely low rates. The supply of capital is abundant. I know it’s hard to imagine nowadays but these sorts of environment do emerge time to time, a time when anyone with the hold of idle money is ready to supply the capital in exchange of whatever small return possible. Many supplier of capital also seek risky ventures. Suddenly, their risk appetite go up. 

New businesses form. Many of the existing businesses load up debt. They increase the capacity to serve wider market ignoring the fact that their competitors are doing the same thing and the market can only consume a fraction of the increased supply. They cut prices and are okay to do business at low margins. Now, the hurdle rate is low. Earn a low return, because you can finance it at low rate. 

Most businesses spend lavishly because it’s the boom time. The businesses that have been avoiding too much debt is now at the mercy of the expansionists. They don’t load up debt or overspend because they know easy times don’t last forever. Easy time is followed by hard times. 

During easy times, ‘unnatural selection’ happens (borrowed the term from the book: Price of Time). Weaker ones also get the space to play. The fittest ones survive in the crowded market but take their time to thrive. 

When the tables turn and capital becomes short in supply, hurdle rates go up. Only the fittest ones who saved their energy can jump above the line. The weaker ones disqualify. ‘Natural Selection’ sets its order again. Now is the time for the fittest one to thrive. 

Easy time doesn’t only mean low interest rate. It also means the absence of or relaxed rule of law, when businesses can find means to bypass the law and compliance to do whatever they want. 

During easy times, maintaining low debt to equity ratio and preserving the spending discipline seems like a conservative approach. But the same strategy turns out to be smart move during hard times. 

Fittest ones thrive during hard times.  

Popular posts from this blog

What Drives Stock Return

How does a stock generate return for investors? There are lots of ways to break it down, but in this article I will focus on one of the simplest breakdowns. I will borrow the Grinold-Kroner Model .  You buy a stock of a company from the exchange. You have a finite time horizon, after which you want to sell the stock in the exchange. During your holding period the price may fluctuate a lot. What matters is at what price you buy and what price you sell. In between these two points, you will receive some dividends if the company disburses some of its cash flow to the stockholders.  Now you understand, you can make money in two ways from a stock. The price appreciation, if the selling price is higher than the purchase price, and the dividend that you receive during your holding period.  Dividend: A company that generates handsome cash flows and don’t have much option to reinvest that cash, will most likely share the cash flow with the stockholders either in the form of divid...

Money Supply Equation of Bangladesh Revisited

To measure a country's money supply and liquidity, we often use broad money (M2). If we want to understand what drives the money supply in Bangladesh, we can look at the breakdown of the M2 and understand how each driver of the M2 is affected.  Here is a visual representation of the breakdown of M2. Net domestic assets and net foreign assets sum up the broad money.  Source: Bangladesh Bank Broad Money Growth: As of Jun'24, net domestic assets contribute 85.6% to the total broad money, M2. The rest is contributed by net foreign assets. At its peak since June 2001, net foreign assets contributed 26.2% to the total broad money Broad money growth has been growing at one of the slowest paces in recent two decades. See chart below.  Source: Bangladesh Bank Net Domestic Assets: Net domestic asset growth has also slowed as of Jun'24, however, it was on the higher side as of Jun'23 and Jun'22 which were offset by negative growth of net foreign assets.  Source: Bangla...