Author Archives: Sabah al-Binali

The Investing Edge: The Win / Pay Odds Gap

September 11, 2017 By in Investments Tags: , , ,

Investing is too often looked at using a handful of academic models. Successful investing involves thinking about the investment process in as many different ways as possible. This article takes a look at investing using alternative views.

From Betting to Investing

Many of the ideas used by the investment community are adopted from the horse track and casino betting communities. Much of the failure that has dogged the investment community is due to rocket scientist PhDs misunderstanding the successful models of plebeian punters. The use of betting as an example is not an endorsement, just history.

To understand how the securities markets work you have to look no further than the horse bookies. Bookies take bets from the bettors. This is the first point that the public begins to misunderstand how betting, and therefore investing, works.

There are two potential misunderstandings:

  1. Assuming that each horse has a uniform probability of winning, i.e. they are all just as likely to win.
  2. Assuming that the bookie offers one to one payout odds, i.e. pays $1 for each $1 that is bet.

Grasping the significance of these statements is the key to successful investing. The bookie, equivalent to the investment bank or broker, will always make money. Always. They do this because they do not set payout odds depending on which horse they think will win, they set payout odds based on how people bet. Continue reading →

Understanding integrity

September 9, 2017 By in Corporate Governance Tags: , 3 Comments

Integrity: Constantly acting and behaving in a manner consistent with one’s values.

That is my definition of perhaps one of the most misunderstood and misused words linked to morality. The point here is that integrity is not a synonym for morality or honesty. There are words for that. This is about how we behave. It is easy to label a person as honest, or even as dishonest. But for said person to act with integrity, it has to be with respect to their values, regardless of whether you believe those values to be positive or negative.

So why is integrity deemed to be such a difficult quality to attain? It has to do with constantly acting in a manner consistent with your values. It is too easy to take shortcuts and ignore your values. In business, at work, in the corporate world, how many times have we remained silent in the face of action that violates our values, all for fear of the repercussions? When we say corporate governance failed, what we mean is that integrity failed. Continue reading →

Fast asset growth can mask weak margins

September 8, 2017 By in Analysis Tags:

Growth for the sake of growth is the ideology of the cancer cell.

– Edward Abbey

A recent Financial Times (FT) article discussed the “great aviation disrupters of the 21st century” referring to Emirates, Etihad Airways and Qatar Airways. The article was analysing deteriorating performance amongst these three once high performing carriers. Of particular interest are two points: The first is that annual growth in scheduled seats for these carriers ranged from low to mid teens from 2012 to 2016 but that current schedules forecast 2% – 3% for the UAE carriers and an actual drop of 1% for Qatar Airways. The second interesting point is that the UAE carriers are reported to have a large negative impact on P/L. Qatar Airways apparently does not provide the same levels of transparency as the UAE carriers. Perhaps they would benefit from reading my articles on the value of transparency and corporate governance.

Why are these points interesting? Well, growth went from strong to about flat and yet somehow this hit P/L hard. If growth stops, then P/L should match that of the previous year. One argument that the FT article gives is that lower oil prices is impacting domestic outbound business. But this doesn’t explain things as lower oil prices reduce operational costs. Let’s look elsewhere for some insights. Continue reading →

Your health depends on a balanced healthcare playing field

September 4, 2017 By in Economy, Government, Analysis Tags: , , 1 Comment

It is my opinion that one of the greatest moves to support free market capitalism in the UAE is the cancellation for Abu Dhabi Thiqa insurance beneficiaries of the 20% co-pay for treatment at private healthcare facilities.  The 20% co-pay was introduced in June 2016 and at that time there was discussion on the effect on patients.  There was also, however, a massive impact to the economy, but I felt that at that time the personal and social issues should take precedence over the economy. I think that now might be a good time to review that impact of that decision with respect to the economy and the positive effects of the cancellation of the decision.

Why is the co-pay issue important? As a first pass, clearly applying a 20% co-pay to private hospitals would incentivise beneficiaries to choose public hospitals. Money isn’t the only issue for a patient in determining which healthcare facility to visit but in the absence of specialisation issues it is clear that money becomes one of the predominant deciding factors.

The consequence, of course, is material negative impact on the finances of these private hospitals. The effect was quickly felt at three long-term healthcare centres in the Emirate of Abu Dhabi who quickly had their co-pay requirements waived in January 2017,  and the quick government response allowed these institutions to continue providing important healthcare services.

The positive social impact is clear. But what is the positive economic impact? It is the strengthening of the healthcare sector, not because Thiqa is willing to pay for the full cost but because giving private institutions the same economic opportunities as public institutions allows them to not only thrive but to also take risks that only private companies take. Risks such as acquisitions that lead to consolidation in the health care sector and thereby a strengthening of the sector. Continue reading →

A case study on reporting and transparency of company results

September 1, 2017 By in Corporate Governance, Analysis Tags: ,

In April of this year I talked about  some of the puzzling moves at Shuaa Capital, one of the better known investment banks in the region which is headquartered and listed in Dubai. Last month Shuaa released their H1 2017 financial results and there was quite a bit of commentary around these results. This commentary seemed to contradict the behaviour that I outlined in April. So I waited and read through the results, the press releases, the news articles and TV interviews. Now I’m ready to give a more realistic analysis of the results. My analysis will be dual, of the actual performance and of how the performance is reported. The latter is critical, as I have pointed out earlier this year on less than optimal reporting or commentary by First Abu Dhabi Bank, Abu Dhabi Commercial Bank, Emirates NBD, Mashreq Bank, Arabtec and Etisalat but stellar reporting by Dubai’s SWF ICD (all links are to my articles on reporting and transparency by these companies which were published in The National). Continue reading →

Zombie companies can be harmful

August 28, 2017 By in Finance, Economy Tags: ,

The term “zombie company” has recently entered people’s lexicon as the phenomenon manifests itself in China. Yet this issue did not start with China, it is closely linked to the problems faced by Japan that started in the early 90’s, called Japan’s Lost Decade and sometimes the lost two decades, which arrested the development of their economy for at least a decade, even though the nation is known to be hard working and efficient. After all, Japan is the home of global super-companies such as Toyota and Sony so understanding how the economy stagnated could yield important lessons.

There are many closely related definitions for zombie companies but I will use one defined in the academic paper Zombie Lending and Depressed Restructuring in Japan published in the American Economic Review 2008. The definition that they give is:

A company with poor productivity and profitability that should have withdrawn from the market but continues to do business only thanks to support from creditors or the government.

Sound familiar? Continue reading →

SWFs as endowments

August 27, 2017 By in Economy, Finance, Government Tags: , ,

Different sovereign wealth funds (SWFs) have different mandates. The largest are presumed to have a mandate similar to that of an endowment. The idea is that the state owns a large but fixed amount of a valuable commodity, usually oil, and that this oil is the property of not just the living citizens but also of all future citizens. Therefore, some of the income from today’s sale of the commodity needs to be saved for the future. So in effect the SWF is a future generation fund.

The question becomes, how much needs to be saved to make this all fair? Well, one way to define fair is that the government expenditure per citizen across all time should remain the same, adjusting for the time value of money. Another way to state this is that the purchasing power per capita remains constant. I think that most reasonable people would consider this fair. Continue reading →

Your idea of success is completely wrong

August 22, 2017 By in Management, Analysis Tags: , ,

There is this idea that success is 100% correct decision making. For some people, they understand this to be 90% or even 80% correct decision making. This idea is completely wrong. A success rate of 56%, implying 44% incorrect decisions, is a great result. Here’s why.

Let’s simplify things. Assume that you are the chief executive of a company and that each decision you make has, on average, an equal impact on the company performance. Let’s say that if you make a good decision you increase profit by USD 1 million and if you make a bad decision you decrease profit by USD 1 million.

What does this mean in terms of the company performance? Continue reading →

Why corporate governance fails

August 20, 2017 By in Corporate Governance Tags: 2 Comments

I am about to take my annual break from writing to refresh and energise. It reminds me of the summer holidays I used to have as a child at school. The first school I attended was The British School – Al Khubairat in Abu Dhabi, where I was one of a handful non-British students. I remember the class covering the children’s tale “The Emperor’s New Clothes” by the legendary Hans Christian Andersen. If you haven’t read it, here is Wikipedia’s summary:

[The tale is about] two weavers who promise an emperor a new suit of clothes that they say is invisible to those who are unfit for their positions, stupid, or incompetent. When the emperor parades before his subjects in his new clothes, no one dares to say that they don’t see any suit of clothes on him for fear that they will be seen as “unfit for their positions, stupid, or incompetent”. Finally, a child cries out, “But he isn’t wearing anything at all!” And everyone starts laughing and pointing at the naked emperor.

In the class discussion afterwards my British classmates focussed on the question of how people can be manipulated.

It says something that all I could think about is “What happened to the child who exposed the manipulation?”

It was decades later that I understood the relevance of this child’s tale to business. The formal theory is called the “spiral of silence theory”. It explains how boards, executive management teams and other commercial groups, which, although made of individually decent people, can act in a fraudulent or corrupt manner. Continue reading →

A letter from the CEO you should have had

August 11, 2017 By in Leadership, HR, Leadership Cornerstone Tags: , 1 Comment

CEOs have not valued their employees equal to the rest of their stakeholders.

Today I write the letter that your chief executive should have written to you. I’m assuming you are a man, but it is the same for a woman. Well, most of it, I won’t get into the issue of sexism as that would require whole volumes.

Dear Employee,

I would like to apologise to you. The past three years have been challenging, stressful and, quite frankly, confusing. It is a situation that I have never seen before, that no executive can be prepared for. This situation has created multiple dilemmas for me on how to manage the company. I have focused on profits, I have focused on the board, I have focused on shareholders, I have focused on suppliers, I have focused on clients. To my greatest shame I have not focused on you.

Did I start this letter with “Dear Employee”? I should have said “Dear Valued Employee”.

To apologise and to make amends I must first walk you through what I faced. In mid-2014 oil prices dropped fast. These things happen. It was a point of concern, but not much. All media reports and announcements from the relevant authorities pointed to a short-term price correction. Every indication was that the oil price would recover back to over US$100 per barrel within months. Continue reading →