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Restauranteur A and B both have profitable restaurants and $1 million in savings. A invested his profits in stocks. B invested his profits in the building that houses his restaurant. A's resto is bankrupt. B's is on sabbatical. Vertical integration as a de-risker.
There is a very powerful lesson here. It looks like vertical integration but it's not. The removal of obligations is an ingredient in long-term success. Once you have a profitable business you should seek out your obligations and remove them:
- Debt - Pensions - Promises to purchase - Leases This is the stuff that kills you.
Plenty of entrepreneurs (my maternal grandfather and great grandfather among them) have made more from the appreciation on the buildings they bought for their businesses than they ever did from the businesses themselves.
My parents owned a mortgaged brownstone around 68th street in Manhattan in the early 80s. It housed their medical devices business. They sold it in the 80s and moved operations to CT. That brownstone sold for like 3x the business 30 years later.
If the crisis lasts for 2 years, Resto A walks away from restaurant and gets stock dividends. Resto B makes no restaurant money and makes no rent money. So Resto B has a lot of concentration risk.
Trade offs :) I might argue that stocks won’t be paying any dividends over 2 years or that B could turn his restaurant space into a grocery store, testing clinic, or some newly demanded retail space, but I do agree with you. Though, dividends are a shitty consolation prize.
At this rate we are going to unlearn all the management theory since 1980--core competency, outsource non core activities, optimize capital structure etc.
I think some redundancy in our system ought to be government led/mandated, i.e. essential product supply chain. To your point, here's a way of selling to the HBS crowd:https://twitter.com/Molson_Hart/status/1243988416947159040 …
So A has a liquid ~$600k but is bk?
A's resto would file bankruptcy, yes.
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