A relaxed, easy and practical way into global nance.

-Jan Gurander, Senior Vice President and CFO,

Volvo Cars
Former CEO of Saab Treasury AB & former Senior Vice President for Finance of Scania
Copyright 2012 by Ulf Egestrand. All rights reserved.
No part of this book may be reproduced or distributed in any form or by any means, or stored
in a database or retrieval system, without the prior written permission of the publisher.
This publication is designed to provide general information regarding the subject matter
covered. However, laws and practices vary from state to state and from country to country,
and are subject to change. Because each factual situation is different, specic advice should be
tailored to the particular circumstances. For this reason, the reader is advised to consult with
his or her own advisor regarding that individuals specic situation.
The author has taken reasonable precautions in the preparation of this book and believes the
facts presented in the book are accurate as of the date it was written. However, neither the
author nor the publisher assumes any responsibility for any errors or omissions. The author
and publisher specically disclaim any liability resulting from the use or application of the
information contained in this book, and the information is not intended as legal, nancial or
other professional advice related to individual situations.
Published by 300 Publishing
Printed in Latvia
Editing by Jennifer Nicholson-Breen
Illustrated and designed by Dan Au
ISBN 978-89-97411-04-7 (e-book)
ISBN 978-89-97411-03-0 (hardcover, colour)
ISBN 978-89-97411-02-3 (paperback, b/w)
www.henhouseworld.com
To
Aliza and Timtam
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acwowtrncrmrwvs
Im thankful to all those around me whove been supportive of this
project and also to everyone Ive met and learned from throughout my
working life. You have all contributed to this book.
Special thanks to: Ben A. Ratje without you there would be no book;
Jennifer Nicholson-Breen, my editor, who took my words but made
them new; Yoav Korn, my initial editor, who suggested I explain finance
through hens and eggs; Dan Au, who gave colour and imagination to the
book; Mikael Propst who wrote the Swedish summary and offered great
marketing tips; Peter Srne who explained egg-farming finance; as well
as Alexander Szekely and Mikaela Propst, for sharing their marketing
tools and know-how.
Im eternally grateful to my wife, Aliza, who put up with
my absentmindedness during this long process, when I was
always talking, dreaming and thinking about The HenHouse.
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cowvrwvs
Foreword
Introduction
cuavvrn 1 Tims Problem 1
cuavvrn z Traps & Cop-outs 25
cuavvrn s Money 51
cuavvrn Ground Rules 81
cuavvrn s The HenHouse Layout 109
cuavvrn e Banks 129
cuavvrn : Interest 163
cuavvrn a Currency 189
cuavvrn s Cash Flow 217
cuavvrn 1e PPACE 249
cuavvrn 11 The CHOOK 281
cuavvrn 1z The Dream HenHouse 315
About the Author
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ronrwonn
Globalisation is accelerating at an unprecedented rate. Financial
markets are at the very centre of this globalisation, with a before-
unthinkable amount of capital flowing between borders and across
continents. This integration means that everyone, both financial
professionals and laypeople, must adopt to a new global reality.
As the founder of GMM Global Asset Management
1
, a currency hedge
fund, I have been active in the financial market for more than 25 years,
mainly focused on the currency market. I have witnessed many economic
crises, and have tried to learn from each one. Many of these left deep
impressions on me. I remember the ERM crisis in the early 1990s, when
many currencies were devalued, including the Swedish krona, the Italian
lira and the British pound. In the late 1990s we saw the Asian economic
crisis of 1997, the Russian default in 1998 and the collapse of LTCM in
1998. In the first decade of this century, we experienced the bursting
of the dot-com bubble, the Lehman crash and the beginning of the EU
crisis.
A common thread running through these events is that they were all
preceded by serious warning signs but very few took any notice. It
was during this period of financial turmoil when I first met the author of
this book, Ulf Egestrand, who has since become one of my best friends
and also serves as GMMs chairman.
For almost 20 years I have had the privilege of having Ulf as a sounding
board to talk over the complexities of financial markets and life. Ulfs
long-earned insight has not only helped me make sense of whatever
1 #1 Currency Hedge Fund 2008 by EuroHedge
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issue was pressing at the time, but has also helped me make sound
decisions about the future this has been invaluable to me as a trader.
Ulf is not only an excellent teacher and a captivating speaker; he has
the rare gift of being able to combine his extensive financial knowledge
with a real understanding of human nature. Ulf is able to bring finance
to the human level. Ulf finds a way to relate to his audience, no matter
their background; likely owing to four decades of living and working all
around the world. To me, Ulf is a living example of thinking global.
The HenHouse is a great reference tool, an excellent tutorial and an
all-around good read whether youre a student, a homemaker, a small
business owner or a Fortune Global 500 CEO.
Im sure youll enjoy The HenHouse as much as I have.
Peder Mlerin, Founder, GMM Global Asset Management
twvnonucvtow
Tell me, whats the best-selling product in the world?
Cars?
Rice?
Handbags?
This book? (Sadly, no.)
Whatever else youd say, Id guess youd be wrong. Ive asked this
question many times and never received the right answer.
During my 40 years as a senior executive in finance, Ive met countless
people board members, executives, project managers, employees,
colleagues, politicians, students, teachers and friends who feel hazy in
their understanding of the basics of our global financial system, banking,
currencies, interest rates, funding, etc.
Their fuzziness on these matters leads them to believe they know
less than those around them (not always the case), therefore they dont
want to ask questions to expose their ignorance. Thus, a vicious circle
of avoidance begins, where it can seem easier to stick their head in the
sand than try to make sense of it all.
The HenHouse operates on two levels. Its a self-help guide to
international finance. But its also an entertaining read about the dreams
and challenges of an egg farmer, Tim, and his new neighbour, fresh-
from-the-city Ulf, a retired financier.
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Chapter 1
Tims
Problem
You dont need a background in finance to relate to Tim. Like him,
youll soon have a handle on the ins and outs of the banking system
and global finance. Youll be able to talk to financial professionals with
confidence and in their own language. On top of that youll identify the
best-selling product in the world and understand the reason why.
The story is set in Sweden but the books lessons are universal. With
the exception of myself, Ulf, all the characters in the book are fictional.
Lets begin our 12-day journey.

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Morning, Tim.
Friday morning, May 27''
It s 10 o cl ock on a cl oudy morni ng i n the peaceful farmi ng communi ty
of Smehul t i n southern Sweden. Here two nei ghbours stand on opposi te
si des of the fence. Ul f i s a 50-somethi ng i nternati onal banker who s j ust
bui l t a reti rement farm here wi th hi s Austral i an wi fe, Al i ce. Ti m runs a
professi onal egg farm wi th hi s wi fe, Kate; he and Kate are i n thei r l ate-30s
and have l i ved here al l thei r l i ves. Ul f and Ti m have met j ust a few ti mes.
Morning, Tim.
Tim looks up from the tractor hes fixing near the fence.
Good morning, Ulf. How are you?
Im okay. Ulf looks up at the grey sky. Do you think itll be like this
all day?
Well, I listened to the weather this morning and they said it would
be cloudy in the morning, maybe clear up in the afternoon.
Hmm . Im not a morning person. I love the sun. So I guess Im a
bit bearish today. Ulf chuckles at his own joke.
Tim says nothing and looks up at the clouds.
Ulf carries on, not seeming to notice Tims hesitancy.
Like the stock market. Not good. And did you see that the krona has
been weakening? It was strong just a month ago, its been as high as 8.70
vs. the euro until just recently. The markets sure are choppy these days.
Tim looks down and returns to his work on the tractor. Is that so?
Ulf continues. Yesterday I talked to someone who runs a hedge fund.
He thinks the market will continue to be turbulent for some time. Take
the debt situation in Greece and the new requirements from the EBA .
Tim looks up, eyes narrowing. This is not a subject for me on a Friday
morning, Ulf.
Why not? This can and will affect the CDS market. And that will make
the ECB really nervous.
4 5 +nv nvnousv +ms vvovvm
Ulf, all these initials might be interesting for you, but not for me. I
have an egg farm to take care of.
But it affects you
Im not a banker. Tim motions out to the farm. Were out in the
country, if you havent noticed.
But cant you see that everything is inter-connected? Dont you
understand anything about global finance?
Tim shoots Ulf a fiery look and starts packing his tools. The only
thing I know is that when things go wrong, its not you bankers who
suffer, whatever you say. Its the rest of us who have to foot the bill for
your bad decisions.
What do you mean by that?
Well, whatever happens to the economy, bankers find excuses for
their mistakes and still end up with big bonuses.
You cant blame it all on the banks. You have to take some responsibility.
Tim is getting red in the face. How can you blame me for the banking
crisis?
Ulf sighs. I dont mean you personally. Just as a part of society, we
have to take responsibility for our actions and not just blame the banks
for everything.
Are you talking about me or not?
Well, youre part of it.
Can you explain how I can have anything to do with what happened
in 2008? It was some whiz kids in the banks who messed everything up.
Its not that simple.
Youre darn right, its not that simple. Kate and I were so scared wed
lose all our money back then. We had some saved, but that couldve been
gone if the government hadnt stepped in and saved the system. And
then I as a taxpayer had to step in and save the banks.
I think youve misunderstood me .
I think I hear you loud and clear, Ulf, and I dont like what Im hearing.
Youre saying that Im to blame for what happened when Im the one
whos been suffering and footing the bill.
Hang on a minute. This is getting a bit out of hand
Tim stands up, his face quite red. You hang on. I think its the height
of rudeness to put any sort of blame on me for what happened to the
banks. Dont come here with your fancy words to lecture me on finance.
Im running a successful egg farm here, Ulf. You, on the other hand, just
waltz in here from your big banking world and think you can accuse me
of things that I couldnt possibly have been a part of.
Tim turns his back on Ulf and heads for his house.
Goodbye.
Ulf stares blankly after Tim.
Goodbye ?
Alice is sitting in the kitchen when Ulf walks in. She glances up from
the International Herald Tribune shes spread out on the table.
Back already?
Yes he was busy.
After 21 years of marriage, Alice knows Ulf all too well. She knows
something went wrong, but she also knows she doesnt need to push him
to tell her. Ulf cant keep things to himself. She returns to her newspaper.
By lunchtime, Ulf is ready to talk.
6 7 +nv nvnousv +ms vvovvm
Ulf shakes his head. I just cant understand why he didnt get it.
Get what?
When I met Tim this morning I got to talking about the foreign
exchange market. I mentioned that the krona had been choppy and then
explained that whats happening in Greece and the new requirements
from the EBA wont help.
Alice sighs. Whew. If you started in like that I can understand why
your conversation didnt last very long.
It wasnt just that. He got really angry at me and just walked away.
Ulf, you know how sensitive this issue is since the crisis in 2008.
Finance is an abstract topic for most people and a lot of people are
nervous to talk about it. But we live here now, and you have to be more
sensitive. Everyone is upset about what happened in 2008 and not
everyone knows the things you do about finance. Think of it this way,
what do you know about hens?
Not much.
Just think how youd feel if Tim began using his specialist hen-raising
terms and jargon with you while chatting over the fence. I bet youd be
very irritated if he gave you that same Im an expert attitude so early.
Yes, I know. Dont rub it in.
I know that youre excited about these things, and love to help people
with finance, but you cant force it on him you have to wait until hes
ready. Give him time and space.
I know, I jumped the gun.
Just try to make it right with him, be humble and friendly next time.
Maybe you guys can exchange some knowledge. We could use some
advice about hens and eggs; theyve been running their farm a long time.
Youre always talking about inter-dependence. And theyre such a nice,
hardworking couple.
Okay, I will. If he ever speaks to me again .
Oh Ulf, try not to worry about it, it will all work out. Just consider
where hes coming from. Lets try to enjoy our lunch.
Ulf manages a weak smile. Ill try.
Later the same day
Alice looks out to see Kate coming up the path with a plate in her
hands. Alice opens her kitchen door, a bit sheepish.
Oh Kate, I feel bad. I should have come to you first, to apologise for Ulf.
No, no, its us. Im sorry for how Tim behaved towards Ulf. He was
out of line.
I think it was Ulf who was out of line. He got a bit carried away, going
on about finance like that Ulf still isnt used to all this peace and quiet,
I think he just wanted to talk. With all the time alone writing his book,
sometimes he feels as cooped up as a chicken himself.
Kate shakes her head. No, its Tim, hes a bit of a nervous wreck at
the moment. Its all because our neighbour called us a few days ago and
8 9 +nv nvnousv +ms vvovvm
asked us if we wanted to buy his big egg farm. He has to sell it fast. Its
a great opportunity for us to expand, but Tim is worried. Hes afraid of
the money side of it. Its such a big deal, such a big chance, for us, and
Tim doesnt understand finance. Hes intimidated by all the figures and
complicated language.
You know Ulf would love to help Tim but dont just stand there,
come in.
Thank you. I brought some bullar for afternoon coffee.
Mmm. Freshly baked, I can smell.
Yes, hope you like it.
Sit down and Ill make some coffee.
While Alice prepares the coffee Kate asks about Ulfs work and background.
Oh, where do I start Hes now the chairman of a hedge fund that
trades only in currencies. Hes held executive positions at Scania, was
the CEO for Saab Treasury AB, was Assistant Treasurer for Investor and
Saab Scania, and in the 1980s was trading currencies and interest rates
at SEB, the Wallenberg family bank, in Sweden and in the UK.
Kates eyes widen. SEB and Investor!? Investor is a Wallenberg-dominated
holding company with big stakes in some of the biggest companies in
Sweden, like Atlas Copco, Astra Zenica, ABB just to mention some that
start with A. The Wallenberg family are pretty important in the history of
Swedish industrial development and still today.
Kate sits back and soaks it all in. Wow, Ulf has worked with some
heavy hitters.
Alice just laughs. You know a lot about it, Kate, Im impressed. But
you know, as his wife, I am getting tired of listening to all of this. He
cant stop talking about currencies, interest rates, geopolitics
Kate jumps in. and hes worked for Scania, perhaps the best heavy
truck producer in the world The King of the Road!
There you go. You sound just like Ulf.
Kate chuckles and leans back. Alice, you should be proud of your
husband and what he has done.
Alice sighs. Of course I am, just sometimes, with all the moving
around, adjusting to life in new countries, it gets a bit much. In recent
years weve been living in Germany and Korea where Ulf was running
the leasing companies for Scania.
So has Ulf always been in finance?
Yes, he has loved banking since the first day he walked into a bank
when he was 15. His first job was as a messenger boy in a local bank
office in Kalmar. And hes never left the finance world since.
Thats interesting, that he had such a humble start. Knowing this would
help Tim let down his guard a bit. You know, he has a hard time trusting
people who havent, as he puts it, put a little dirt under their nails.
Oh yes, hes put in his time. And you know, Ulf is so proud of being
Swedish. He never stops telling me about the success of Swedish industry
or about the foreign and currency trade expertise Sweden has developed
due to the export industry. Hes always bragging that Sweden was the
biggest currency trading nation in the world in the 1960s. This is because
the Germans, the British and the Americans could always import and
export in their own currencies.
Interesting. I didnt know that.
Neither did I, until Ulf told me. Did you know that Sweden had the
third-biggest government bond market in the world in the 1980s?
Gee whiz.
Ive heard it so many times now that I practically chant it in my sleep.
Because of all this, Sweden had no choice but to learn how to handle the
exposure. Ulf says this is the reason why Swedish companies developed
such internationally renowned treasury departments.
What exactly does a treasury do? You mentioned it before but I forgot
to ask you.
10 11 +nv nvnousv +ms vvovvm
Its like the bank within a company. They handle everything that
has to do with money and banks: currencies, borrowing, lending, bank
accounts that kind of thing.
Wow. With this big decision looming about whether or not to expand
our business, its a good thing we have you and Ulf as neighbours.
Kate, Ulf would be honoured to help you. I know he got off to a bad
start this morning with Tim, but he loves to give advice and share the
knowledge hes cramming into this book of his. You know he came here
to write a book, to demystify finance to people outside the industry.
Sounds like Tim has a lot to learn from Ulf.
Well, we have a lot to learn from you, too. You know, we cant get our
hens to lay eggs consistently! But you know, Ulf also has a hard time
asking for help. Maybe our husbands can both be proud
Kate nods. and stubborn. Thanks Alice. Ill talk to Tim.
Saturday morning, May 28''
Its a sunnier day today, just one day after Ulf and Tims stand-off at
the fence. But each has a slightly different view of the man on the other
side than they did 24 hours ago. After Ulf talked to Alice, he understood
Tims situation a bit better, and why Tim wasnt in the mood for a finance
lecture yesterday. And Kate explained to Tim that Ulf just cant keep
quiet on these topics. Tim was also interested to hear of Ulfs humble
start in finance. Even so, neither is in a hurry to approach the other side
of the fence.
Finally, Ulf gathers the nerve to walk over to Tim. Tims still tinkering
with his tractor.
Good morning, Tim. Uh sorry about yesterday.
Good morning, Ulf. No need to apologise.
Hey, you still look upset. Not with me, I hope.
Tims worried face breaks into a laugh. No, not today. Ive just got a
lot on my mind.
Whats up?
Thursday evening we had a thunderstorm and the fan in the hen house
broke. I had to order a new one and it wont be delivered until Monday.
I hate it when the conditions arent the best for the hens.
Is that it?
Well, there is something else.
Tim sighs and puts down his spanner. My neighbour Tom called me
a few days ago. He offered us first dibs on buying his egg production
farm. Its 10 times the size of ours.
Yes, I know. Sounds like great news. Whats the problem?
You know, Ive had my egg farm for 13 years now and I know my
business really well whats that book, by Malcolm Gladwell ?
Outliers?
Thats it. Ive done my 10,000 hours, which means that I should be an
expert in egg farming at least when it comes to finding customers and
satisfying them with high-quality eggs, and all thats involved. But finance
is such an undeveloped side of mine. I started my business by taking on
a very small loan. Then Kate and I grew our business by putting back
everything we earned into the farm. Were not that small anymore. And
wed like to expand, now is the perfect time. The kids are big enough and
we have the energy and time to put into a bigger business. But finance
is a black box for me, and from what I read in the newspapers and on the
Internet, and from what I hear on TV, you cant trust anyone when it comes
to money. Thats what I was talking about yesterday.
Just look at what happened in 2008 the bankers left us high and dry
but they left the table with big bonuses, and most of them still have their
jobs. And here I am facing a big financial decision with no education or
knowledge in the field of finance. Everything in my life is dependent on
12 13 +nv nvnousv +ms vvovvm
finance: my business, my retirement, my kids education. In some ways
it has touched everything that is important to me. But it feels outside
my control. Tim sighs and takes a deep breath
Slow down, Tim, youre putting the world on your shoulders. Is this
all about expanding the farm?
Yeah, my heads been a whirl ever since Tom called me.
Okay, lets just take it apart piece by piece. You have the knowledge
to run a bigger farm. Is it too expensive?
No, it is a fair price and it has always been my dream to run something
really big. And after 13 years in the business I know that I wouldnt
have any problems running that size of egg farm. And Kate thinks its a
fantastic opportunity. We dont even have to move.
I think Kates right.
Yes, but
Yes, but here we go. The careful Tim.
Tom didnt give me much time to make up my mind. Hes in serious
financial trouble. And he can only hold off the lenders for two more weeks.
Ulf sees the calendar in his head. Today is Saturday. And you need
to give Tom an offer before the Saturday after next. The banks normally
have credit committee meetings on Fridays. And they need a couple
of days to prepare. That means you must be ready to go to the bank on
Thursday of next week. That leaves you 12 days to get ready.
Tim frowns. That makes it even two days fewer. Thanks a lot, Ulf.
Hey, dont blame the messenger. Continue.
After that he cant promise the price of 10 million (US$1.6 million)
any longer. He thinks the lenders want to do something else with it,
maybe build something big that would destroy the property and perhaps
encroach on our business. That would be terrible, but Im hesitant with
such an investment.
What exactly are you worried about?
Well, wed have to borrow a lot of money and thats a big risk. I dont
like that. You get to be so dependent on the bank. And you cant trust
them after what happened in 2008.
Ulf rolls his eyes. Here we go again ....
But its something to think about. Maybe one day theyll just cancel
my loan for whatever reason. I dont know anything about finance. On
top of that, Toms customers are not only Swedish. It will create financial
risks all over the show.
Ulf takes a deep breath and leans against the fence. Lets wind it back.
I have a couple of questions.
Okay.
First, do you want to buy it?
I would love to, as you know.
Second, why is Tom losing money? Did he tell you?
No, he didnt. But from what I have picked up from the conversations
weve had over the past three years hes had his egg production, he has
problems delivering the product he promises.
Why do you think that?
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Its quite obvious, at least to me. His staff is not accustomed to free-
range egg farming, and Tom himself has an urban background. His eggs
arent the highest quality. On top of that, he hasnt got the feel for how
to get the best out of the hens. You can just hear it from his hens.
You can hear it?
When you hear hens cluck, you know theyre happy. You dont hear
that when you walk into Toms hen house. And did you know that hens
can show empathy?
You must be joking. Hens?
I always knew it, but now a research team at a university in the UK
has done studies on it and came to this conclusion. By testing hens and
their chicks they found that the hens heart rates sped up when their
chicks were threatened.
Okay, there you go, you are an expert. Tom has a background in finance
from the big city. What do you expect?
Good point.
It just tells you that just because youre good at finance doesnt mean
that you can run an egg-farming business, or any other business for
that matter.
And this should give me some comfort?
No, but if you dont understand your basic business it doesnt matter
how much finance you know. As you can see, unhappy customers are
not a good recipe for business. But if you understand your customers
and how to deliver products to their expectations, you are more than
halfway home to running a good business.
Have you calculated how you could make his business a profitable one?
Yes, Kate and I have, of course, because we could see what was coming.
And it looks good.
Tell me more.
First, he has a good customer base and we know that we would be able
to deliver what they want. To be honest with you, weve already done a
bit of work on that part. Kate and I always attend the semi-annual farm
convention in Hanover. By chance, we got to meet the purchaser of our
type of eggs for a big supermarket chain thats buying eggs from Tom.
The purchaser asked us if wed supply eggs to them, because hed heard
about the high-quality eggs we produce.
Ulf smiles. Tim, there you go. As the saying goes: Well begun, half
done. You have the customer in your pocket, already proof that you have
something going for you.
The Customer is also the first letter in what I call the CHOOK, a kind
of checklist Ive made for what you need to outline when you go to the
bank to get financing for your business. A chook is what they call a hen
or chicken in Australia and New Zealand.
Tim laughs. So thats why Alice always talks about your chooks. Thats
what she calls hens.
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Ulf raises an eyebrow. You noticed. Speaking of the CHOOK, you
already have the first three letters in your pocket: C for Customer, the
man you met at the convention and your existing customers; H for
History, youve run a successful business for more than 10 years and
youve paid off your debt; and O for Opportunity, with the fair price and
location. Youre more than halfway there. To finish, we just have to flesh
out your Objective and show your Keenness, or how committed you
are well do that a bit later. The CHOOK covers the five things every
bank will look for in considering your loan. By doing this you will show
that you are aware of the financial implications and understand your
business. This establishes trust with the bank. Everything in finance is
about trust.
I like the sound of the CHOOK. But I dont know anything about finance.
If I make a mistake I could lose it all. Its a big risk. And you talk about me
getting the bank to trust me, what about me trusting the bank?
Tim, trust has to be based on something. Trust is kind of like the
top point in a pyramid, with the foundations of the pyramid being
Understanding and Awareness. Understanding is related to facts, in
this case business and financial contracts, how they work. Awareness is
more the understanding of the human element, how humans can behave,
being aware of these factors. Without understanding and awareness,
theres no foundation for trust. But trust begins with yourself.
Tim looks down. I guess youre right. But right now I dont trust my
financial knowledge.
Thats why were doing this, to arm you with what you need to feel
confident that you know whom to trust, and to be able to trust your
ability to make financial decisions. I have a couple of other tools, The
HenHouse and PPACE, that can help me explain exposure to you.
Ulf leans forward and continues. Okay, lets see whats missing in your
business plan. You have customers, you know how to run an egg farm,
and you have a great opportunity. What other concerns do you have?
Some of the new customers are German and Danish; I wont just
have Swedish clients anymore. It will mean when I export that I will get
income in currencies other than Swedish krona. That is currency risk.
Okay, so you have currency exposure in your sales.
Also, Tom is leasing all the equipment from an English firm and the
invoices are in British pounds
So thats new for you.
Yes, before I bought most of the equipment from Swedish producers.
But nowadays the suppliers are from other countries because they dont
make the equipment here anymore.
Anything else?
I am also looking at importing feed from Brazil to aggressively cut
18 19 +nv nvnousv +ms vvovvm
costs. And heres the borrowing we would have to do.
Tim hands Ulf a piece of paper hes had folded in his back pocket. I
have it all written down here.
Ulf studies the paper. Youll have exports and imports, which does
create currency exposure. And you have to borrow money, which creates
interest rate exposure. But you understand your business, right? And
youre confident that you can satisfy your customers?
Yes. But it feels like a big step in just two weeks. I dont understand
all the risks and implications but I do understand we need financing if
we are going to expand like we want. If we buy Toms farm, we will have
so many more financial risks
Define your exposure
Ulf cuts Tim off. hey, take a step back.
Tim looks confused and lifts his foot off the ground.
Not literally, just meaning lets take this step by step. Now, youve
already done some of the work in dealing with the currency issues. You
have located the new exposure.
New Ri sks
Exporti ng eggs
Importi ng feed
New loans
Currency
Currency
Interest rate
These are real risks.
You have to stop saying risk. It could also be a reward, like an
opportunity. And you have no clue what the risk is before you understand
your exposure. When you say risk, youre jumping to conclusions. Risk is
just one component in calculating a worst-case scenario. Yes, if you buy
the farm, there is most definitely a bigger possible negative compared
to today if something goes wrong. But you have to make it neutral and
visual. You have to start from the beginning and not at the end.
What do you mean?
Ulf pauses and finds a comfortable position leaning on the fence. A
few days ago a friend in town asked me if I thought it was good to invest
in Africa.
For me that question indicates that he sees an opportunity. And hes
looking for a reply on which he can base his decision.
But how can you reply to such a question? If youre a salesperson for
investment in Africa, then the answer is obvious.
But experienced investor Warren Buffet, one of the richest men
on earth, has some basic rules: Never invest in something you dont
understand; believe in the management and the business; and always
look for positive cash flow. These are some guidelines I gave the person
asking me about African investments.
Tim considers this. Makes sense.
Ulf nods. Warren Buffet thinks the best book in the world on this
subject is The Intelligent Investor, written by his mentor, Benjamin
Graham. If you make an investment without following Buffets advice,
youre looking at many restless nights given your total reliance on
someone else. From there on its just down to luck.
But you can make an investment using Buffets model: you understand
your business; you will be the management. You and Kate have made
some calculations concerning cash flow. What is left to look out for is
20 21 +nv nvnousv +ms vvovvm
exposure: you have to be aware of and understand how to manage it.
Ulf pauses to catch his breath. Do you want to hear another example
about the importance of understanding your exposure?
Tim shrugs and chuckles. Do I have any choice?
Ulf just smiles. A friend, a professor in computer science, asked me:
What is the difference between exposure and risk, isnt it just risk? I
said: Its like not knowing what baking soda is when youre baking a
loaf of bread. If you dont know your exposure, you have no clue what
risk youre taking on. Who wants to have dead bread? He then replied:
In Japan geologists had proof of a tsunami as big as the one in 2011 way
back in 800-something. But no one took notice of these facts, this history
that could inform the future. Japan had real exposure to a tsunami.
Ulf pauses, then continues soberly. Anyway, we all know what
happened next.
1
Tim is silent, lost in thought.
Ulf continues. Let me ask you a question: Do you feel safe flying?
Its okay.
Many say no, even though its one of the safest ways to travel.
Statistically speaking, travelling by car is far more dangerous. But back
to flying, when you hear the word flying a lot of risks come to mind:
engine failure, bad weather, terrorism, and so on. These are risks. But
because you understand flying at some level, you can easily visualise the
exposure involved that leads to risks. But when something is abstract
like finance, its hard to see what the exposure is. You dont even know
what to look out for. In finance, this is the case for most people, even
professionals in finance. Its not the risk that gets you, its the exposure.
1 Source: Yomiuri Shimbun, 12 June, 2011.
See also: http://factsanddetails.com/japan.php?itemid=1749&catid=23&subcatid=152
under Warnings Based on Previous Earthquakes and Tsunamis
Tim, I will coach you to a solid understanding of finance in 12 days:
what you should look out for with the banks and some rules that Ive
learned through my time in finance. Well detail the CHOOK checklist,
and that will clarify your exposure. Ill also explain my two other tools:
The HenHouse and PPACE. These tools can be used in any company:
big or small, national or international. On top of that, Ill give you my
Five Rules, Five Traps and the Four Ps of Money.
Tims forehead wrinkles. That sounds like a lot. Are you sure we can
manage it all?
Ulf gets serious. Absolutely we can. But you have to be committed
and give a lot of time to the process over the next two weeks. Can you
do that? Because, if not, theres no reason to start.
Tim pulls himself up, slightly defensive. I can. I know what it means
to take on something new. Ive built up this farm, after all.
I understand that, but I just wanted to clarify it with you. I want you
to succeed. How much time can you set aside for our talks each day?
Ive already thought about that. Ill have to rely a bit more on our part-
timer, John. If we buy Toms farm hell be full-time, which is what he
wants. I didnt tell him the reason, but Ive already talked to him about
working extra hours next week. Maybe Ill have to help him with certain
things but its good for him to take on some more responsibility, which
can free me up for other things.
Ulf nods. Delegating. Thats good. It shows me youre committed,
because its not always easy to delegate. To some it feels like a loss of
control, but delegating well is the sign of a good leader.
Ulf puts his hands together. Were all set then. My 40 years of financial
experience packed into 12 days. Thats 12 days to a solid foundation in
finance, to trust in yourself and your knowledge. The first four days are
about awareness, today was the first; then there are four days about
understanding; and finally four days about tools. The tools are the
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cement in the trust pyramid, the foundation that leads to action.
Ill explain currencies and interest rates in a way thats practical and
easy to understand and Ill talk about the beauty of cash flow, and why
cash flow and business are inseparable. You dont need an economics
degree to follow me here; by the end youll understand the ins and outs
of the banking system and global finance, enough to feel on the same
level with the bankers, simply based on your trust in yourself.
Tim shakes his head. Listen, Ulf, if you can really give me that kind
of understanding of finance within 12 days, Ill give you free eggs for
the rest of your life.
Ulf laughs. Tim, all I want in return is for you to help me get my hens
to lay eggs more eggs. Not only are they laying eggs inconsistently, now
they seem to be laying even fewer!
Well, I can have a look and try to find out whats wrong.
Thanks, so tell me, have you learned anything today?
Well, already Ive learned that we need to look for the exposure, not
to jump ahead and assume risk.
Ulf nods. You know, everything in life is about exposure, be it standing
in the sun or in the rain. Risk is just a consequence of how much and
how long and many other factors. Your job is to determine your exposure
and visualise the new parts of your business, and above all, to gain trust
in yourself.
Tims conclusions, Day 1:
I can use the CHOOK checklist as a tool to help me gain the banks trust,
by outlining my business plan and illustrating my financial awareness.
Ive already got the first three letters, Customer, History and Opportunity
pretty well defined. Im ready to seek financing when I have clarified my
Objective and Keenness, and for that I need to understand the currency
and interest rate exposures involved.
Ive realised that I cant know whether or not I can trust the bank until
I trust myself, and that requires understanding and awareness. When
Im armed with these and the tools Ill master in the next 12 days, Ill
have a better sense of security.
Also, in terms of what could go wrong, Ill take my focus off risk and
instead focus on exposure.
What Ulf learned, Day 1:
Even hens can show empathy.