6 ms·

We need a way to include "black swan readiness" in corporate finance / valuation. Historically, it's not something investors have cared about, so corporations h

We need a way to include "black swan readiness" in corporate finance / valuation. Historically, it's not something investors have cared about, so corporations haven't done it.

RayMan1 7y ago
It is 2 black swans this time, coronavirus and gas prices, but yeah, you are right
- dragontamer 7y ago
  Low gas prices would be good for airlines normally, because gas prices are a large portion of their operating costs.
  - supdatecron 7y ago
    +1 to this. I think it was 4 years back, the oil prices dropped hard and the airlines bought futures quantities in large supply to hedge for future needs. It was a smart strategy
    - UncleEntity 7y ago
      ...then they sold the futures when prices went back up to make a quick, tidy profit. Except Southwest -- which had the other airlines whining because they had an "unfair advantage" with their locked-in lower prices.
      - rym_ 7y ago
        Wow, do you have a source for that last part?
- acdanger 7y ago
  Oil prices have cratered, that should be a positive for the transportation industry.
  - supdatecron 7y ago
    Yes, but demand is also down due to isolation/quarantine
    - 0xffff2 7y ago
      Yes, but that's still only one event.
- theandrewbailey 7y ago
  One is good (gas prices), but I'm skeptical that the other is even a black swan. Global pandemics have happened before (Spanish Flu), and airplanes have been grounded for a week in recent history followed by weak demand (9/11), but last I checked, planes have still been flying.
aguyfromnb 7y ago
>We need a way to include "black swan readiness" Black Swans cannot be prepared for, that's what makes them Black Swans. One of the principles is: The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities). How do you establish an emergency fund for something with a non-computible probability? How much money should you put aside for it?
- Invictus0 7y ago
  6 months of operating expenses would be a good start. Apparently they only put aside a few weeks worth.
  - missedthecue 7y ago
    That would be over $20 billion for a company like Delta. That's a decade of free cashflow just saved. No reinvestment in the business, no return to shareholders, none of that. Just saving every dollar for a decade. I think a lot of people just don't understand the math here.
    - akiselev 7y ago
      There are dozens of financial instruments they could have used to hedge their position without having to save decades of cashflow. That's what those instruments are ostensibly for. At the scale of companies like airlines that have a history of bailouts, the OTC markets offer plenty of options (no pun intended) with premiums a tiny fraction of $20 billion.
      - missedthecue 7y ago
        They can hedge fuel and they can hedge labor costs through contract, but no industry could realistically survive an 80-90% reduction in revenue.
        Dylan16807 7y ago
shoo 7y ago
It's not clear what "black swan readiness" means. In terms of a company having a healthy balance sheet, there are many well known metrics that can signal that a company is at higher risk of bankruptcy. E.g. acid test, interest coverage ratio, Altman z score: https://en.m.wikipedia.org/wiki/Altman_Z-score https://en.m.wikipedia.org/wiki/Altman_Z-score The Altman Z score was defined over 50 years ago and can be approximately competed using the standard accounting data that public corporations are required to report to investors. I'll push back a bit: there are ways of measuring/ estimating some of these. If you read an old school book on value investment, some of these ideas may be covered. Why not use them when considering how to invest wealth?

We need a way to include "black swan readiness" in corporate finance / valuation. Historically, it's not something investors have cared about, so corporations haven't done it.

RayMan1 7y ago

It is 2 black swans this time, coronavirus and gas prices, but yeah, you are right

dragontamer 7y ago
Low gas prices would be good for airlines normally, because gas prices are a large portion of their operating costs.
- supdatecron 7y ago
  +1 to this. I think it was 4 years back, the oil prices dropped hard and the airlines bought futures quantities in large supply to hedge for future needs. It was a smart strategy
  - UncleEntity 7y ago
    ...then they sold the futures when prices went back up to make a quick, tidy profit. Except Southwest -- which had the other airlines whining because they had an "unfair advantage" with their locked-in lower prices.
    - rym_ 7y ago
      Wow, do you have a source for that last part?
acdanger 7y ago
Oil prices have cratered, that should be a positive for the transportation industry.
- supdatecron 7y ago
  Yes, but demand is also down due to isolation/quarantine
  - 0xffff2 7y ago
    Yes, but that's still only one event.
theandrewbailey 7y ago
One is good (gas prices), but I'm skeptical that the other is even a black swan. Global pandemics have happened before (Spanish Flu), and airplanes have been grounded for a week in recent history followed by weak demand (9/11), but last I checked, planes have still been flying.

aguyfromnb 7y ago

>We need a way to include "black swan readiness" Black Swans cannot be prepared for, that's what makes them Black Swans. One of the principles is: The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities). How do you establish an emergency fund for something with a non-computible probability? How much money should you put aside for it?

Invictus0 7y ago
6 months of operating expenses would be a good start. Apparently they only put aside a few weeks worth.
- missedthecue 7y ago
  That would be over $20 billion for a company like Delta. That's a decade of free cashflow just saved. No reinvestment in the business, no return to shareholders, none of that. Just saving every dollar for a decade. I think a lot of people just don't understand the math here.
  - akiselev 7y ago
    There are dozens of financial instruments they could have used to hedge their position without having to save decades of cashflow. That's what those instruments are ostensibly for. At the scale of companies like airlines that have a history of bailouts, the OTC markets offer plenty of options (no pun intended) with premiums a tiny fraction of $20 billion.
    - missedthecue 7y ago
      They can hedge fuel and they can hedge labor costs through contract, but no industry could realistically survive an 80-90% reduction in revenue.
      - Dylan16807 7y ago

shoo 7y ago

It's not clear what "black swan readiness" means. In terms of a company having a healthy balance sheet, there are many well known metrics that can signal that a company is at higher risk of bankruptcy. E.g. acid test, interest coverage ratio, Altman z score: https://en.m.wikipedia.org/wiki/Altman_Z-score https://en.m.wikipedia.org/wiki/Altman_Z-score The Altman Z score was defined over 50 years ago and can be approximately competed using the standard accounting data that public corporations are required to report to investors. I'll push back a bit: there are ways of measuring/ estimating some of these. If you read an old school book on value investment, some of these ideas may be covered. Why not use them when considering how to invest wealth?