Lessons From the Squeeze
The coming solar boom is going to quickly elicit comparisons to previous booms--and busts. The dot.com boom will of course be the most tantalizing parallel for pundits to make, however it doesn't hold much in the way in lessons. When people buy stocks based on complete fantasy, it's not hard to figure out why things went wrong.
The solar boom, however, will be based on real products being shipped and real profits being made. First Solar, for instance, has factories, warehouses and trucks. Its valuation might be insanely high, but at least its all being calculated on real kilowatthours being produced.
A better place to learn about how to deal with booms is in the current bust of financial stocks. In this case there are many fundamental points that are similar: the impact of subsidies on the run-up; the lack of expertise in analysis of complex subjects; and the mistakes made in how executives dealt with the capital markets. I'll write about all three, starting with the last one today.
There is a mistaken assumption that capital markets do what they are supposed to do: provide capital to business projects that are worthy while turning away unworthy suitors. That's because the capital markets ability to do things right are limited by the sum wisdom of the human beings who run them. When bull-fever is rampant, the capital markets overinvest. When a credit squeeze clamps down, they underinvest. The reason is simple: fear. A banker who is afraid of losing his job because of underperformance in comparison to his fears in the midst of a bull market will overinvest. A banker who is afraid of losing his fear out of losing the bank's money will underinvest.
So how does Buddha CEO ride this tiger known as the banking industry? The lesson of the current credit squeeze is clear: when the capital markets are flowing, take as much capital as you can. Because when the squeeze is on, there is simply nothing that can be done.
Let's take banking stocks today as an example. These companies had no difficulty finding private equity cash, sovereign wealth fund cash and lots of other kinds of cash in 2006. They were riding on the back of a housing boom that everyone wanted to benefit from. The Buddha banks (mainly JP Morgan and Goldman Sachs) took the cash while limiting their exposure to the very thing that was causing the cash flood: mortgage-based securities.
The rest of the banks took the cash too. But they reinvested their capital into the same thing that was causing people to wave bundles of Ben Franklins at them: the housing market.
The moral of the story for the solar industry is that when the floodgates open--take the cash. I'm not talking venture capital--that's a different type of beast and is not a limiting factor in the solar space now. I'm talking about debt. There will be a time in the near future where bankers will be beating a path to the Buddhha CEO's door, begging to lend money. Let them.
The key for managing the inevitable credit squeeze that will follow a few months or years later is not whether you got financing on the right terms. It will be in how you spend the money. Corporate jets and fish fries with celebrities for your sales staff are not Buddha moves. Creating real factories, real project development, real panels and real kilowatthours is what will make you look like a Buddha when the credit squeeze inevitably tightens.
To put it another way, take a hint from long-distance runners. When running uphill, they put their minds in a downhill mindset. When running downhill, they put their minds in an uphill mindset. During the boom, spend your new capital as if there were a credit squeeze. If you do that, then you will still be able to afford credit when it becomes outrageously expensive--the track record you've established will be what opens the closed gates.
The solar boom, however, will be based on real products being shipped and real profits being made. First Solar, for instance, has factories, warehouses and trucks. Its valuation might be insanely high, but at least its all being calculated on real kilowatthours being produced.
A better place to learn about how to deal with booms is in the current bust of financial stocks. In this case there are many fundamental points that are similar: the impact of subsidies on the run-up; the lack of expertise in analysis of complex subjects; and the mistakes made in how executives dealt with the capital markets. I'll write about all three, starting with the last one today.
There is a mistaken assumption that capital markets do what they are supposed to do: provide capital to business projects that are worthy while turning away unworthy suitors. That's because the capital markets ability to do things right are limited by the sum wisdom of the human beings who run them. When bull-fever is rampant, the capital markets overinvest. When a credit squeeze clamps down, they underinvest. The reason is simple: fear. A banker who is afraid of losing his job because of underperformance in comparison to his fears in the midst of a bull market will overinvest. A banker who is afraid of losing his fear out of losing the bank's money will underinvest.
So how does Buddha CEO ride this tiger known as the banking industry? The lesson of the current credit squeeze is clear: when the capital markets are flowing, take as much capital as you can. Because when the squeeze is on, there is simply nothing that can be done.
Let's take banking stocks today as an example. These companies had no difficulty finding private equity cash, sovereign wealth fund cash and lots of other kinds of cash in 2006. They were riding on the back of a housing boom that everyone wanted to benefit from. The Buddha banks (mainly JP Morgan and Goldman Sachs) took the cash while limiting their exposure to the very thing that was causing the cash flood: mortgage-based securities.
The rest of the banks took the cash too. But they reinvested their capital into the same thing that was causing people to wave bundles of Ben Franklins at them: the housing market.
The moral of the story for the solar industry is that when the floodgates open--take the cash. I'm not talking venture capital--that's a different type of beast and is not a limiting factor in the solar space now. I'm talking about debt. There will be a time in the near future where bankers will be beating a path to the Buddhha CEO's door, begging to lend money. Let them.
The key for managing the inevitable credit squeeze that will follow a few months or years later is not whether you got financing on the right terms. It will be in how you spend the money. Corporate jets and fish fries with celebrities for your sales staff are not Buddha moves. Creating real factories, real project development, real panels and real kilowatthours is what will make you look like a Buddha when the credit squeeze inevitably tightens.
To put it another way, take a hint from long-distance runners. When running uphill, they put their minds in a downhill mindset. When running downhill, they put their minds in an uphill mindset. During the boom, spend your new capital as if there were a credit squeeze. If you do that, then you will still be able to afford credit when it becomes outrageously expensive--the track record you've established will be what opens the closed gates.
posted by Sam Jaffe at
8:57 AM
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