Cost-Efficient Solutions

A toothpaste factory had a problem.  They sometimes shipped empty boxes without the tube inside.  This challenged their perceived quality with the buyers and distributors.  Understanding how important the relationship with them was, the CEO of the company assembled his top people.

They decided to hire an external engineering company to solve their empty boxes problem.  The project followed the usual process: budget and project sponsor allocated, RFP, and third-party selected.  Six months, and millions later, they had a fantastic solution - on time, on budget, and high quality.  Everyone in the project was pleased.

They solved the problem by using a high-tech precision scale that would sound a bell with flashing lights whenever a toothpaste box weighed less than it should.  The line would stop, someone would walk over, remove the defective box, and then press another button to re-start the line.  As a result of the new package monitoring process, no empty boxes were being shipped out of the factory.

With no more customer complaints, the CEO felt the millions was money well spent.  He then reviewed the line statistics report and discovered the number of empty boxes picked up by the scale in the first week was consistent with projections.  However, over the next three weeks, there were none.  The estimated rate should have been at least a dozen boxes a day.

He had the engineers check the equipment; they verified the report as accurate.  Puzzled, the CEO travelled down to the factory, viewed the part of the line where the precision scale was installed, and observed just ahead of the new multi-million-dollar solution sat a $20 desk fan blowing the empty boxes off the belt and into a bin.

He asked the line supervisor what that was about.  “Oh, that,” the supervisor replied, “Carl, the kid from maintenance, put it there because he was tired of walking over, removing the box and re-starting the line every time the damn bell rang.”

How to Play the Market Cynically

If you know how to play the market, and ride market sentiment, running a listed company is one of the easier ways to make money.  For example, when the economy is expanding, take advantage of cheap credit, and borrow from the bank to build something.  Anything.  It can be a warehouse, or a multi-storey carpark.  Create a tangential reason for that, and call it capital investment.

The market will anticipate growth, because they think you are building for new business.  They will then buy your stocks, and the share price would rise, creating "growth".  As a director, you can then borrow against the stock, pledging it as collateral to the bank.  This means, should the stock drop, the bank is left holding it, but you got the money.  And when the economy drops, you arrange the sale of the warehouse or whatever you built.  You then book it as a profit on your books, and this encourages the market to buy your stock, again raising share price in a depressed market.

Another method is to book a piece of technology at a valuation you decide, creating capital growth.  Who is to say that this gadget is not worth $100 million?  This is especially useful in industries that are the flavour of the moment, but not easily understood by small-time investors.  Examples would include telecommunications, and renewables.  They will see this on the book as capital injection and imagine there is revenue growth forthcoming.  You then amortised it and issue bonds, making even more money, when there is actually no new money coming in.

You can do this several times until someone calls you bluff.  You then seek creditor protection for the business and then leverage a bail out.  In the meantime, you have already taken out all that money, and made your fortune.  Your wealth is distinct from the company, and is held in trusts, which are distinct legal entities, out of the reach of creditors.  These are simplistic scenarios, but variations of it happen all the time.  All of this is perfectly legal.  Think Enron and Hyflux.

The Power to Ignore Conventions

Years ago, when I was just starting out in finance, I attended a meeting for a proposed acquisition of a five-star hotel, and the redevelopment of the land around it.  I came in a suit.  Everybody came in expensive suits.  The food was expensive.  The place was exclusive.

We ate, we talked, and we waited for the owner to come.  Prior to this, I had never met him.  When he arrived, he was dressed like he was going to wash dishes at a coffee shop.  He had a simple shirt, black pants and used a plain cane.  That man was the multibillionaire who owned the hotel, and the holding company.  I learned a valuable lesson that day.

The moral of the story: Power is the ability to ignore conventions.  When you have it, there is no need to show it.

How to Legally Defraud Investors

It is possible for the portfolio of an otherwise well-regarded entity to have, what is essentially, junk status.  This only becomes apparent when there is a collapse of the holding company, followed by massive write-downs in their asset values.  This does not happen often.  Most institutional investors are savvy enough to avoid such pitfalls, but even they may be taken in by hype, or greed.

One of the giveaway signs of such a portfolio is when all the assets, by way of share ownership in the cash-generating entities, were acquired by share swaps or asset switching.  Asset switching is a ploy to conceal the real value whilst being able to take out the cash flow from operations.  When the cash flow is off book, the registered asset value is not affected because, a switch in the asset in the form of a company with cash flow is again parked in.  However, in this later instance, the cash flow belongs to someone else who can access it without accountability to the principal, even if he is not the original owner of the cash flow.

Asset switching can be done if you have control of the subsidiary company or own it outright.  As they value the book value of the companies, they use a legal instrument by way of a deed of trust or assignment to move the title temporarily, in the view that they can then leverage it against bank lines.  It sounds complicated to the uninitiated, but it is not.

One way to discern the true financial health of the company is to look up the company board and key executives.  This is easier with listed entities.  But you then trace the relationship between the starting company and related entities, seeing the same group of related people on the boards of other companies or in key positions, all with a business relationship.  When I say related here, I do not mean familial relations, but business relations.  From there, we can track the equity lines.

Tracing these relationships to find the equity lines requires quite a bit of detective work, but it allows us to arrive at reasonable, and far more accurate values of the assets.  We need to consider the way certain companies’ annual dividends dwindle down to zero or some minuscule number.  We will find an entity with cash flow with a high burn rate where the spending is on another, sister company.  They are robbing Peter to pay Paul.

This is how money is taken out of the system into private hands.  They practise asset switching when it is convenient and asset leasing when security is needed to shore up the hollowed shell of a once profitable entity.

Some Psychological Tricks for Closing That Deal

The following are some methods to psychologically influence people to close that client.  People are eminently predictable, and they are open books.  This is especially so to anyone who is a sociopath, or a psychopath, and are not easily swayed by social norms.  We may be higher evolved, but we are still animals, and the social dynamic does not change.

Lev Nikolayevich Tolstoy wrote, in his “War and Peace”  “In the best, the friendliest and simplest relations, flattery or praise is necessary, just as grease is necessary to keep wheels turning. ”

Flattery gets us places.  It builds up people, and creates an environment of support.  People who are praised perform better.  However, we must ensure that flattery is not seen as insincere, otherwise it backfires and destroys the credibility of whatever you say.  There has to be truth in it.  You do not praise a buffoon for his “scintillating knowledge”, or a philanderer for his “morality”.  Even a fool knows when praise is undeserved.

There is a science to this.  Dr. Edward Ellsworth Jones, in his “Ingratiation: A Social Psychological Analysis” called it “complimentary other-enhancement”, which he defined as the act of using compliments or flattery to improve the esteem of another individual.  Dale Carnegie’s “How to Win Friends and Influence People” stated that we should be generous with our praise.  In all that time, psychologists have built up an impressive body of empirical evidence to prove that people respond better to those who praise them, but there are caveats to this.  Not all flattery is the same, and not all people respond in the same manner.  People who have high self-esteem, or those who have established their credibility in a certain area, and have competence in it, respond favourably to outright praise.  You are affirming what they already know.

But this does not work the same way with people who have a low self-esteem, or a doubt their ability in a certain area.  We cannot fundamentally alter the way people view themselves in a few words.  This will create resentment and will backfire.  Nobody wants to feel mocked.  As such, when you praise someone like this, temper it with some form of subtle criticism, or suggest ways they can “improve”.  Even a person genuinely good at signing, who doubts his ability, cannot be told he is a great singer.  He will doubt those words, no matter how sincere, and will treat you with suspicion, creating a barrier.  Instead, say, “That was very good.  And with more practice, I am sure you will get even better.”

The only time when effusive praise works for the person who has low self-esteem is when it is public, and from multiple others.  This overrides their cognitive balance embedded within themselves because many people cannot possibly be wrong.  Conversely, public humiliation can destroy a person of high self-esteem in the same way.

The second method is to be a social chameleon.  This is done by mirroring or mimicking their social conventions, their speech patterns and even their vocabulary.  This causes people to unconsciously see you as one of them.  You are immediately likeable because people find it difficult to hate themselves.  This means whatever you suggest to them is viewed as an internal decision within the group, and more likely to be taken up.

This has to be done subtly.  If you are caught being obvious, you are immediately viewed subconsciously as a threat, and your credibility with the group is destroyed.  But if you are successful, you have validated their worldview and enhanced their esteem.  The group will be nicer to you, and amendable to any offers.

In business, as in anything, timing is also important.  When people are tired, we tend to think they are much more difficult, or irascible.  But when people are tired physically, they are also tired mentally, and their guard is lowered.  This is an excellent opportunity to suggest something, or make a quick pitch.  It should not be more than a few sentences, preferably a few words.  It should require a dichotomous answer such as “Yes” or “No”.  The response you should expect would be, “I will think about it”, “I will get back to you”, or something similar.

The thing about people is that their brain tricks them into thinking they have made a commitment, and people generally keep their promises.  This does not work with people who have no credibility, or who are dishonest.  But then, you should not be doing business with such people.

This next method is a negotiating trick.  Telemarketers and roadshow marketing try to use it, but they tend to fail because they rush it.  It is getting people to agree to things they already believe it.  This lowers their guard, and they view you as an ally.  It works with perfect strangers as well.

People respond best when this is regarding things that elicit anger.

For example, you could say to a woman, “I think it is a disgrace that jail terms for rapists are not long enough.”  This may or may not be objectively true, but most women would agree because there is an emotive element here.  And then leave it at that.  You continue the conversation, and when you segue into selling her a padlock for her safety, she is likely to agree because the initial issue is still at the back of her mind.  She might not even need a padlock, but she will buy a “better” one from you.

Another way this is done is in business or political negotiations.  You open with a position that is in their interest to agree to, the offer they cannot refuse.  This might involve selling them something at below your cost price.  This changes the dynamic of the meeting and tricks the client psychologically into being more mendable to what you are really selling, at a price that benefits you.

The way this works is that the other side is convinced that they initiated the sale, and control the situation.  Sales are easier when the clients believe they made the call, and it was always their decision.

The next method is not correcting people.  Telling someone they are wrong, even when it is obvious, does not endear you to them.  The ego does not generally tolerate being diminished.  For people with low self-esteem, this is viewed as a personal attack.

If you need to correct someone, such as during a business negotiation, there are other, subtler ways, to accomplish this.  One of the most effective is called the Ransberger Pivot, named after Ray Ransberger and Marshall Fritz, from 1982.  The Ransberger Pivot is a debate technique where you find a commonality with the other side, and then turn that objection into an agreement with a watered-down version of your position.  You do this by listening to their position.  Get them to explain it in detail.  This is also useful in getting the other side to understand it may be incongruent or incoherent.  This also allows you to understand the underlying issue, and that is the real target.  You then build a bridge to that underlying issue by acknowledging its validity, and finding a common ground you can both agree upon.  You then subtly bring them to the issue you really want – to complete that sale.

The next method is paraphrasing.  You repeat what they have said in your own words, so that they know you understand what they are saying.  And as you paraphrase, subtly alter their objections into agreement.  This tricks them into psychologically believing that there is no objection, and they agree with you.

There is a secondary benefit to this.  When you paraphrase what the client says, it encourages them to open up and disclose more information that helps the sale.  This is how you get them to disclose their actual budget, because when people feel validated, it is a drug where they seek more validation and affirmation.  This lowers their guard, and they will give you more and more information.  This technique works in police interrogation as well.

With practise, these methods should help not only become an effective salesperson, but you are also perceived as charismatic and friendly.  Getting the approval of people is not that difficult.  Maintaining that approval, however, involves actually delivering on promises, not cheating anybody, and having values and integrity.