A must-read for shipping investors--and even if you're not, it will likely make one out of you. It's a fun story, hilarious at times, and it teaches readers all kinds of nuances about investing.
Our main character, running his own little hedge fund, finds out by pure accident that the Baltic Dry Index is down 97% (!) over the course of just three months. It makes him curious, and this curiosity takes him on a downright Dantean journey through the shipping industry.
He's outwitted left and right: first by savvy bankers in Germany, then by even savvier Greeks. And then, in an awful moment of weakness, he gets lured into buying a "tramp" (a very old, nearly used-up ship needing massive repairs) at what seems like a good price. The industry nearly eats this guy alive more than once, but he comes out the other end a true Shipping Man.
This should be mandatory reading for MBA students. I think back to all the terminally boring "case studies" I had to read over the course of my MBA program (many) years ago, and The Shipping Man out-teaches them all by miles. You learn how supply/demand shifts can make a business unbelievably profitable or unimaginably money-losing; you learn how commodity industries (of any sort) get distorted by exogenous events, coincidences, and even pure luck, and can shift catastrophically in a matter of days or even hours.
You learn about the humbling role of luck: Even a really crappy old tramp of a ship can solve somebody's problem--as long as you can find the somebody who needs what you have! Our main character manages to find a customer who is "short" shipping capacity (he's contracted to deliver grain but lacks a ship to transport it), and both avoid bankruptcy by inches. In the shipping industry you can make a ton of money if you're right (or lucky), but you can just as easily get your face ripped right off.
And there's a tremendous insight on knowing you may very well be wrong, so it's worth figuring out ways to retain some optionality when a bet goes against you. A key character in this story uses all sorts of methods to retain upside to a ship even after he sells it, via commissions, maintenance contracts, finders' fees, liens, etc. There are lots of ways to skin a cat.
Finally, a reminder for investors on the enormous difference between investing and actually operating a company. Investing, sadly, is a sanitized reality of ticker symbols and passive, theoretical ownership. You can buy your shares of Coca-Cola stock, collect your quarterly dividends, and never have to worry about sugar prices, aluminum prices, labor problems, conflict with politicians and governments, nothing. Owning and operating a business, especially a complicated and messy business like shipping, is a completely different ball game. One I'm clearly not cut out for.
Notes/Quotes:
* A hedge fund manager (accidentally) types the letters BDI into his Bloomberg terminal, discovers the Baltic Dry Index, and stares at disbelief that something could fall 97% from an all-time high in just three months. He concludes that he has just stumbled onto "a historic contrarian investment opportunity."
* "Listen to me my friend, and listen carefully; when it comes to buying ships the best deals have the worst cash flow."
"What? But that makes no sense," Robert said.
"Nevermind," Spirolaki said, knowing that the American would need to learn shipping's most valuable lesson the hard way: "you generally don't get a good price and good cash flow at the same time."
* "As far as mid-life crises went, buying ships with other people's money seemed relatively benign."
* [I think back to my first foray into this industry, my first halting buy of Scorpio Tankers stock in 2000 when the price of oil briefly went negative. I had no idea what I was doing either. I still don't.]
* High shipping rates do not reduce demand!
* The last shipping supercycle started when China entered the WTO in 2002, this drove a huge uptick in ship orders, and that led to a huge oversupply of ships and shipping capacity, which hit the market exactly when the 2008 Great Financial Crisis began. A disaster on every level.
* Our main character, Robert Fairchild, at first attempts to buy loans secured by vessels "from terrified German banks" who he thought would be already stuffed to the gills with subprime mortgages, thus they'd be more than happy to sell off their ship loans at a steep discount to face value. Fairchild's idea was to then foreclose on the ship ("loan to own") just like in mezzanine debt markets. He meets with a German banker, and then learns he's the tenth American fund manager to see him in the past week.
* He gets a lecture from the German banker. "If you believe that there is any hidden value in this industry, Mr. Fairchild, then you are operating under a major misunderstanding.... The market is too efficient. The sale of every single cargo ship is equivalent to a competitive auction held on a global basis among thousands of buyers more knowledgeable than you. If you want to make money in shipping you must pay the market price for your asset at that time and hope the market goes up. There is no other way..."
* Fairchild then goes to Greece and is basically led like a lamb to slaughter. The Greek character, Spyrolaki, is a sort of Virgil, helping him journey into Hell and back.
* Spyrolaki, the Greek, spouts some legit wisdom:
- "The experts are often wrong because they know too much about a market that is inherently unknowable."
- "You strike me as a person who needs to learn things through experience, which is fine, but also expensive." [Holy cow is this ever true in investing: the more things you can learn vicariously the less rudely you get separated from your money.]
- "...everyone will make money... everyone except for you!" [This is yet another investing meta-lesson: if you enter any investment assuming "everyone except for you" will make money, it helps you stay humble, it helps you size the investment correctly, it helps you remember to put backup plans and contingency plans in place, and it helps you avoid ruin.]
* Fairchild spontaneously buys a ship, lured into it by the svengali-like Spyrolaki. "'Yes I am going to be a ship owner,'...but knowing it would soon yield to a nightmare beyond anything he had experienced thus far in his privileged life." He visits his ship--a "handy bulker"--just in time to see two of the four loading cranes break. Worse, the ship loses its revenue source when the charterer customer cancels its contract.
* Note the tremendous difference between buying a stock (and thus "running" your investments from your office) versus "running" an actual business, with all the messy complications involved in operations. The main character feels more alive than ever, even though the stress and all the things going wrong are overwhelming him. "For better or worse, he was in control. His ship had a problem and he'd be damned if he wouldn't do his best to solve it."
* Fairchild thought he "would have an ocean-going ATM machine that would spit cash at him... Now it appeared as if he were the ATM machine, spitting cash at the ship." [I bet everybody thinks this when they first stumble on to shipping stocks. I certainly did.]
* "And you also know that the Norwegian government bailed out Hilmar Reksten in 1975?" Hilmar Reksten was a famous shipping magnate who blew up in the mid-70s. Note also that his shipping company blew up, not his personal assets... this is a key nuance that the book touches on repeatedly: the savvy shippers are always quick to get wealth out of their shipping companies during upturns so they can stay wealthy through the downturns.
* "Your problem is that you think I can't afford to be in the spot market when the truth is I can't afford not to be in the stock market." Coco Jacobsen, a Norwegian shipper, realizes he can rescue Fairchild's ship from pirates and use him to get access to the US junk bond market to salvage his nearly-bankrupt shipping company.
* We meet Jimmy Chen, who runs a COA (Contract of Affrieghtment) business, but who lacks a cheap enough ship to haul the freight at anything but a loss. Spyrolaki calls him and offers to sell him Fairchild's ship! [Even a really shitty old tramp of a ship can solve somebody's problem--in this case there was somebody out there who had contracted to deliver grain but was short economical ship capacity.]
* [A thought on retaining optionality, another key theme in this book: note how Spyrolaki, even after selling his ship to Fairchild, keeps exposure to the ship via liens, commissions, fees, etc. He uses these mechanisms to retain upside--even when he was totally wrong about what would happen.]: Some telling dialog here: "Moreover, and I didn't want to tell you this before, but if those wildfires hadn't struck Russia, your ship would be on the beaches of Bangladesh being torched into thumbtacks and paper clips as we speak. Her scrap value is less than $1 million and it would have cost you nearly that to get the ship from the US Gulf to the breakers."
"What? Is that really what you thought would happen when you got me drunk and sold me the ship?" Robert asked, crestfallen.
"Yes," he laughed. "But I was wrong. You see, this is what makes the shipping market so interesting. Someone is always wrong and it's often the guy who knows the most. Besides, just think how much more interesting you are because of that ship; that is real return on investment in shipping." [Note here that Spyrolaki "knew the most" but was still wrong, but yet he still captured much of the upside.]
* Robert Fairchild meets Coco Jacobsen in Oslo, he finds him praying to Hilmar Reksten. "Help me, Hilmar. Help me, Hilmar."
* "When the freight market is high, I never have enough open ships. When the freight market is low, I have too many open ships. Don't you see?" [This is how capacity works in every industry, just that in shipping it's on steroids. And this is likewise true in investing more generally: if it's a bull market, you're never long enough; when it's a bear market you're always way too long.]
* On making a roadshow lunch seem more crowded than it actually is to imply more demand for the paper: "...nothing got an investor as aroused as the possibility that he might be denied the opportunity to make a particular investment."
* Coco Jacobsen: "Let me give you guys some good advice. When you are looking at shipping you should just forget the fleet growth numbers and the scrapping and order books and all of that supply side stuff. All you really need to look at is OPEC production and how many ships are in the Arabian gulf. If there is demand for oil, there will be stems [charters for shipping cargo]. If there are stems, ship owners will finally have a little confidence and, because of this confidence, oil traders and oil companies will lose their confidence; then they will start crying like little babies and taking more ships for longer periods. Thank you very much."
* "Alex wasn't thrilled with Coco's presentation but, then again, she figured that his unpolished nature would give investors the impression that he could be taken advantage of."
* A key cornerstone investor in the deal comes up to ask a hilariously ignorant question: "what's a bunker?" "...As he explained the half-truth about bunkers to John Harris, Robert had an epiphany; he realized that he was staring at the embodiment of himself six months earlier."
* This bond deal event in the book is both believable and hilarious: "Guys, look, a lot of things will change between now and the maturity of this bond, so let's just agree to cross that bridge when we come to it, okay?"
* "Here is the thing; if we are going to end up defaulting in the end, we might as well default at the beginning." Coco's company Viking Tankers joins the NCAA club: "no coupon at all." (!) But then Coco uses the escrowed cash from the deal to buy his own bonds back at 50c on the dollar. (!!)
* [Also, some useful information for tanker investors on dayrates and how large dayrates can be relative to the value of the crude oil carried by a large ship. A VLCC with 2 million barrels of capacity, running 45-day round-trip voyages at $150,000 dayrates (in other words stupidly high dayrates) produces earnings of about $6 million/day for the ship, and even at this ridiculously high charter rate the transport costs work out only to about 16c/gallon of oil carried, or about $6.72/barrel. (!!) In other words you can get to immensely profitable dayrates without impacting transport costs too much, since the cargoes are so huge.]
* On getting your wealth out of the shipping industry when times are good: "This is why we take the dividend when we can in the shipping business."
* [Note how the shipping industry has larger-than-life characters, rather than soulless corporations: even today among the key listed shipping tickers, the shipping industry just seems more interesting, with its unusual characters like Robert Bugbee at Scorpio Tankers, or the unfortunately surnamed Hugo de Stoop, who until recently was CEO of Euronav.]
To Read:
Ben Mezrich: Rigged
Matthew McCleery: Viking Raid
Matthew McCleery: Exit Strategy