“It’s only when the tide goes out that you discover who’s been swimming naked,” said Warren Buffett, “the Sage of Omaha”, one of the world’s richest people and one of the canniest of investors.
What Buffett meant was that when the economy is booming, even if it is just one sector, then things like dodgy accounting, poor governance, or wild risk-taking tend to get overlooked.
As the business cycle turns, problems are revealed that seem obvious when you look back on them. Twenty years ago, massive accounting frauds came to light at the energy trader, Enron, and at the telecoms company, Worldcom. Their practices had not been questioned in boom times. A decade ago, the “Emperors of Wall Street” such as Merrill Lynch and Lehmans were humbled, indeed crushed under the weight of losses. These were all cases of ropey governance and poor risk management.
It is worth considering where the next big-ticket scandal or failure will come from. Interest rates are low and debt is escalating – when rates rise, there may be some casualties among the highly indebted.
And then you might find some poor governance going on in Big Tech that is booming in spite of, or more likely because of the pandemic. Investors seeking higher returns (given generally low interest rates) are piling into riskier and riskier ventures despite all the current uncertainty. They may not be looking too closely at the governance of these ventures nor the risks they represent.
As an example, companies, funds and individuals are expected to pour money into the Chinese rival to Uber, Didi Chuxing, which is said to be valued at $100bn, however it has so far accumulated only losses – $13 billion to be precise.
When the tide goes out, as it surely will, who is going to be exposed? If key suppliers go down or if investments lose their value, it may hurt even well run organisations.
Data Source: The Economist magazine