We Study Billionaires - The Investor’s Podcast Network - TIP 096 : Billionaire Phil Knight & Nike - Shoe Dog (Business Podcast)

Starting point is 00:00:00 We study billionaires in this is episode 96 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll read the books and summarize the lessons. They'll test the waters and tell you when it's cold. They'll give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, hey, hey, how's everybody doing out there?

Starting point is 00:00:31 there, this is Preston Pish, and I'm your host for The Investors Podcast, and as usual, I'm accompanied by my co-host, Stig Broderson, out in Denmark. And today we've got a book for you. And this was a book that we thoroughly enjoyed. And we're excited to talk about this one because this just was released recently in April of 2016. And it's by the billionaire Phil Knight. So if you don't know who Phil Knight is, it's because Phil isn't really a guy that goes around talking about his business, or is just a really well-known billionaire, even though his net worth is $28.1 billion. For those of you out there that know who Phil Knight is, he's the founder of Nike. And so this book was really exciting for me to read simply because Phil took a completely different turn than most people when they write kind of their memoir. And this book was written by Phil, which was just awesome because a lot of the times you can tell that it's not necessarily written by the person that they, they, get a ghostwriter or whatever, but you can tell he wrote this book. And so what's so awesome about the book that I really liked is he tells the story about the start of the business. He goes back to the early 1960s when he was just starting, you know, as a student in Oregon

Starting point is 00:01:49 and talks about the entire experience as if he's like reliving it. And most of the book is all about the start of Nike and kind of getting to that point where they really started producing a lot of sales and had some big numbers. And the whole process that led up to it, a book that kind of comes to mind was the one about Boone Pickens. You know, I thoroughly disliked that book. It was not a good book. And Stiggs, not in his head. That was, go ahead, Stig. It was not a good book. Yeah, Preston. You're right. It was bad. It was a bad book. And most of it was all about, like, him now and the decisions that he made after he already had a net worth of like, you know, $100 million plus. And the whole book was about that. So you really don't.

Starting point is 00:02:31 get that sense. If you're a person listening to this and you're trying to get your start or maybe you're in college or whatever, it's really hard to have any type of correlation to that person's life in your life. And that's where this book was totally different. So I love the fact that it was all about all those steps and all those heartaches and putting people's shoes on, you know, they came over to his parents' house whenever he started his first company. Like those kind of things were what this book was all about. And so I love that about the book. Phil, he's really good at building up characters and you're definitely right. You feel like he is reliving it, but you're reliving it with him. It's not a really a management book or

Starting point is 00:03:12 how to make the best business decisions. Quite the contrary, as anything. It's more about his life and his emotions. And I think in that sense, you could be a business person reading this. You could be a completely other type of person reading this, but just listening to the lessons about life of all that has seen and experienced, all the disappointments, all the successes. I thoroughly enjoyed that with the book. I know it's a good book whenever I'm listening to it in my car because I listen to this one in Audibles. If you're listening to this and you want to listen to this book on Audibles, go to our website and click on our link through Audibles because you'll get your first book for free.

Starting point is 00:03:50 But anyway, I know it's a good book when I'm listening to it in my car and I get to my destination and I continue to sit there in my car, even though I need to get out and go do whatever it was that I was going to do at the destination. I continue to sit there for like another 15 or 20 minutes because I'm enjoying it so much. Without talking about the overall opinion of it, let's go ahead and just dive in and start talking about the whole book. So this all starts off and Phil talks about his time in Oregon and he's a track runner. But he talks about being on the team in Oregon, just kind of what it was like to be a runner for Oregon and more importantly he talks about one of his coaches that he had at Oregon. And the name of this gentleman, his last name is Bowerman.

Starting point is 00:04:33 And he always talks about Bowerman in this context of being this authoritative figure and this guy that he really looked up to and it was really kind of hard on them, but somebody that everyone respected. And so that was their coach for the team. And so Phil ends up writing this. And didn't he go to, did he go to Stanford when he wrote his? His, he goes to Stanford and he writes this business proposal. He had the write up, you know, it was one of his assignments.

Starting point is 00:05:03 He had to write up a business proposal. And he's talking about going over to Japan. And because the exchange rate and everything at this point in time, which is in the early 1960s, because of the exchange rate, he can buy shoes over in Japan at a discount and bring them back over to the states and sell them for a profit. And so he writes up this whole thesis, this whole business plan of doing this whenever he was a grad student at Stanford. And so, you know, he really was just fascinated with tennis shoes. And like he really got involved in this research and really became fascinated with this whole project that he did. You know, one thing led to another, but he never really kind of hung up this assignment.

Starting point is 00:05:46 He just really felt like, hey, I could actually do this. This could actually be something that I could do. really just to put it into context. This was not, it's not like today, right? You can just fly to Japan, but it was very different back then. Clearly, you could also fly to Japan, but the mindset was very different. It was not something you just did. And also keep mind, this is not too long after Pearl Harbor. And Americans, Japanese weren't really getting along that well. So for a young kid like that, just to travel to another continent and not knowing the culture, not knowing the language, and wanting to import shoes. And he had no capital, by the way, either. It was definitely a whole other ballgame

Starting point is 00:06:27 than today. And you can set up all those internet jobs and you can have someone else take the risk on the inventory and so on. So it was just a very courageous, some might say stupid decision. I think if Phil Knight was here, he would probably say the same thing. We'll get to some of this later. But just to give you an example, you know, whenever he started negotiating with these Japanese, again, he didn't have the money. Sometimes he would place order and then go. to a bank and say, you know, I already placed an order, could you please help me out with some cash? Because he knew they would say, no, if he didn't, the other way around. So we'll get to a lot of that later, but it was just, just that in itself just shows what a unique character

Starting point is 00:07:04 has. I think something else unique that he did with the book is came up with this idea that do this thing in Japan. And so he went and asked his father if his father would pay for him to basically take this trip around the world. And how old was he here? He's in his mid-20s, probably. He goes to his father and he's like, hey, can you give me some money to take a trip around the world? Like, I want to go to Hawaii. I want to go to Japan.

Starting point is 00:07:29 I want to go to Europe. All these different places. And he convinces his dad to do this. But what's interesting about in the book is he talks about this emotional relationship that he had with his dad at that point and like how he was frustrated with his dad. And what I love about the way he wrote this is he wrote it as if he was back. in his body, back in the 1960s of the way he felt and the way he had this emotional, you know, response to his father.

Starting point is 00:07:58 And that all comes out in his writing style. And it's really quite amazing because obviously his dad wasn't a bad guy because he paid for him to travel around the world back at that point in time when he was in his 20s. So, you know, he obviously had a great relationship with his father. But that didn't necessarily come out with the Phil Knight of today. he did a great job of being able to relive those emotions and capture that in the way that he wrote this. I mean, the guy's a fantastic writer. So the writing in this book is just phenomenal.

Starting point is 00:08:31 So Stig got a little bit into it. So let's go ahead and dive down this. So his dad pays for him to go on this journey. He starts off the journey going to Hawaii with one of his friends. He's there on the beach. He's just like, this is amazing. Do we even want to continue this or do we just want to set up shop right here on this beach in Hawaii and never move ever again? eventually he does move on and he flies to Japan.

Starting point is 00:08:52 And so, you know, we go back to the episode we did with Jesse Itzler, the billionaire NBA Atlanta Hawks owner. The guy just makes moves. I mean, just totally makes moves. And that totally came out with this book on Phil Knight. The guy flies to Japan. So most people, I mean, you don't speak the language. You get to Japan. Like, what do you do now?

Starting point is 00:09:14 Like, how do you even begin to set up a meeting? with one of these shoe companies as a 20-year-old something nobody who has no business. He has nothing at this point other than the fact that his dad gave him some money to travel around the world. So he finangles a deal to go in and meet with the Tiger shoe company. And Phil Knight was one of the main reasons that those shoes came to America. He sits down with the Tiger Shoe Company and he's like, hey, you know, I think that we could bring. bring this shoe to America and I would like to be that guy and I'd like to sell, you know, your shoes over there and whatnot. So they are very respectful and they ask them, well,

Starting point is 00:09:57 what's the name of your company? Well, Phil didn't even have a company. He had nothing. He said, um, and he thought of the first thing that he could, that came to his mind and he was like thought back to his room at his house and he had a bunch of his blue ribbons that he had won from his track races and his track meets. He had blue ribbons all over his wall. And so he just blurted out, blue ribbon was the name of the company. So they are like, oh, and then they, you know, blue ribbon, blue ribbon all down the boardroom where he was meeting with the Tiger Shoe Company. And so, lo and behold, they make him an offer.

Starting point is 00:10:37 They're like, okay, well, you know, we need something like $5,000 or $2,000. dollars back then or whatever it was for the first shipment of shoes and we'll send you however many shoes for that amount of money. And then if you sell these, let us know and we'll send you another set of shoes. So they give him a sample and he continues his trip around the world. So let me continue with the rest of the trip. So he goes to Greece. Is this correct where the whole name of Nike kind of comes up?

Starting point is 00:11:06 And I am absolutely horrible with Greek mythology. I mean, probably one of the worst people on the planet when it comes to Greek mythology. I don't know any of it. But I do know that the god of Nike is an important character. Stig, can you help me out here? Yeah, it's the god is personified. Victory. That's how bad I am in the Greek mythology.

Starting point is 00:11:30 Okay, so that's the end of the world trip. So he goes back to America and he's just waiting and waiting for these shoes to show up from Tiger Shoe Company. and they're just slow and lethargic and then finally he finally gets his first shipment of shoes. And so he takes the shoe because he had so much respect for his old coach at Oregon, Bowerman, and he takes the shoe to Bowerman and he says, is this a good shoe? Because one of the things that he talked about early on in the book was Bowerman was absolutely just obsessed with finding the right shoe. He felt that a lightweight shoe that had the right support and everything gave runners a very distinct advantage. And so Phil was like, this is the guy I got to go talk to because he was always so adamant and constantly changing and trying to research what the best shoe would be whenever I was at Oregon.

Starting point is 00:12:23 So he takes one of these tiger shoes to Bowerman to get his opinion and kind of tells him about his research paper at Stanford and how he's going to start selling these things. and Bowerman, you know, and I think Bowerman had a really quirky personality the way that he kind of describes him in the book. And so Bowerman looks at the shoe and he's like, wow, this is, this is a great shoe. And so he's there at like having a lunch or something in a cafe with his old coach. And you can tell the relationship between Phil and Bowerman is quite awkward. Like he still looks at him as like an authoritative figure and like he's the coach and he still feels like maybe the student at this point in time. And so Bowerman looks at Phil Knight and he says, I like this so much. I'd like to go in 50% with you on your blue ribbon company. And Phil

Starting point is 00:13:12 is just totally blown away. Like cannot believe that he has, and correct me from wrong stick, doesn't Bowerman have like this really prestigious background and running? Like he's won a bunch of major events and trained some like amazing people, maybe even like Olympics and stuff like that. Yeah, definitely. And yeah, he's. He's quite the character. And I think he bought like 50% for $500 or something like that, which might seem like Bowman is a great businessman. But I'm really not sure because after this, actually, after they get Nike's uprunning, he writes

Starting point is 00:13:45 a book about how to exercise. And it was a huge success, at least in some sense, because it's sort of like a million copies. But in that book, he's actually saying, and I see that you're laughing now present because you know what I'm about to say that the. shoes that you're running in, it's really not that important. And he owns a shoe company at that point of time. I mean, how is that a businessman for you, Preston? And so Phil talks about the first time he read this and how upset he was, because this was his business partner for the shoe company. So that was kind of their start. So when you think about the start of his business,

Starting point is 00:14:23 here he is. He's got these shoes that he's buying from Japan, probably maybe 50% off of the price that he's selling them for in the States. And then he's going around to all these different shoe stores across, you know, Oregon, down into California area, really kind of just the West Coast. And he's trying to sell these things to just regular shoe stores. I mean, that's really his business. He's a retailer or kind of like this distributor, if you will. He's a distributor to the retailers.

Starting point is 00:14:55 And so he starts off with 300 shoes was the first order. and then it just continued to kind of grow. So he sells those 300 shoes. He raises enough money to make another order and he doubles down. You know, the way that they really talked about was he starts off with 300. He goes to 600 and he's at 1,200. And each time he basically had the money from the previous sales in order to buy the next set of shoes. And so from a business model, when you look at his company and it talks about how you'd go back to get loans to help him pay for the next lot of shoes because he

Starting point is 00:15:29 want to buy more because his demand was there from these shoe stores that he was selling it to. But every time he'd go back to the bank, the bank would look at him and be like, listen, like, dude, you have no equity at all in this business. Like there's no retained anything. Every dollar that you make, you spend again on more shoes. So he had no equity on his balance sheet, if you will. So we talk a lot about the financial accounting, how to look at businesses. This is a business that Stig and I, you know, would absolutely pass.

Starting point is 00:15:59 on even considering because the financials were so bad. And so the bankers are giving him such a hard time. We're not going to lend you a million dollars. Like, what do we get back if you fail? Like all these shoes from Japan? Like, we want some cash in a bank account or something to show for, or at least a building. You know, he's running this out of his parents' house.

Starting point is 00:16:21 He's still living with his parents. So that was his start. And he talks about this frustration and anger that he had for the bank and how they couldn't see what it was that he was doing. And that his numbers were doubling and tripling in like short spans of time and that there was this enormous demand that he was creating by selling these tiger shoes in America. And so I found that discussion just really interesting to hear it because he goes into so much detail talking about his emotion, what his numbers were and how well it was growing.

Starting point is 00:16:55 It was just a fantastic way to really relive this whole experience. If you want to step back and see what it felt like to be like the founder of Nike at the infancy stage, like the startup stage, you've got to read this. It is such an awesome description. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord. and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:21:14 That's Shopify.com slash WSB. All right. Back to the show. I think one of the highlights that I have is it really comes back to some of the things that Jesse Isler said about being passionate. And I think Jesse was using the example of being a musician. Well, being a musician is not only receiving rewards and have lots of fans. That's not what it means to be a musician.

Starting point is 00:21:40 It means to travel around, to be rejected, a lot of other things that really comes with the territory. And I think the secret to feel not success is because what we're doing here on the podcast is really to look at very successful people and really decipher what has made them successful. And I think what's really making feel not successful is really to follow him through this emphasis stage. that he simply loves everything about it. And it might seem countertuity because if you read the book,

Starting point is 00:22:07 it seems like he's, I'm not saying he's complaining, but he's talking all about his negative emotions, all the struggles, all the adversity. And it's definitely not an easy ride for him. But still at the same time, at least I got the impression that he still loves it. He loved the bumper ride to Japan.

Starting point is 00:22:25 He loved the whole tension about, will I be bankrupt tomorrow? And I listen to him. interview with him recently and he said actually that he was willing to do this all over again. He would love to do this all over again, especially the beginning. And I just think it's interesting that he has so much drive, so much passion for doing this. That's really his secret to success because it was not easy at all here at the beginning. There's one thing that really sticks out in my mind from our interview with Jesse Itzler.

Starting point is 00:23:00 And it really was whenever he said, be passionate about the journey. And man, I will never forget that. And you know what? When you look at this story about Phil Knight, that was, I mean, that just reeks out of his writing is that he was so passionate about this journey to create this company. It wasn't, he liked running. He liked the shoes. So a lot of people might say, oh, he was passionate about running.

Starting point is 00:23:25 but I would totally argue after reading this book and hearing this whole story, he was passionate about this journey of building something big. That's what he loved doing. And I love that point stick. Something else I want to highlight that I found really, really interesting when we were reading this was that Phil was an accountant. So he got his degree. And then while he was trying to start this, he wasn't doing this full time. He was working as an accountant. And so he knew the numbers. Okay, he knew the numbers. He understood how accounting worked. He understood that he had to have equity and why the bank was giving them a hard time. I really think, and I know Stig and I say this all the time, it is so important for people to understand the terminology of finance in order to be successful in business because you just understand how the plumbing works whenever you have an income statement.

Starting point is 00:24:19 It moves to the balance sheet. Phil Knight could talk the numbers. He could go over to Japan and talk the numbers with a full-blown company that's bringing in millions of dollars every year. He was comfortable in that space because he had this accounting background. I think that's so important for people. And Warren Buffett says the language of business is accounting. And if you don't know the language, you can't communicate with other businesses and people and things like that. Just something to add to that person.

Starting point is 00:24:48 I also think – I know this is not like an entrepreneurial podcast in that sense, But I think because there are someone out there who's thinking about starting their own company, and I often advise people to start teaching what they're really passionate about, because then they'll get a cash flow while they can start up something else. Plus, they will talk about what they're passionate about with other people that are passionate about that. And I think that this is a really good highlight. So whenever you see these people, like look at the founders of Google, look at Jeff Bezos, look at Phil Knight, Phil Knight specifically, since that's the,

Starting point is 00:25:22 the book we're talking about. He had a bridging strategy. This company, this blue ribbon company that he started, it wasn't like he was working at the accounting company and he was like, hey, I've got this idea for a shoe company. I'm going to stop and I'm going to put 100% of my time into this new shoe company that I'm going to start. No, it was a bridging strategy. This was something that he was working two jobs for nearly a decade or whatever it was until blue ribbon became so big that the salary he could pay himself completely offset his full-time job. And it became somewhat stable. But he did that for years. This wasn't just like a one-year kind of thing and then he transitioned into it. And I think a lot of people don't know that. I think a lot of people think that you've got to save a bunch of money,

Starting point is 00:26:07 quit my job, and then go all in and dedicate. No, I don't think most people do it that way. I think most people literally work two jobs for a long period of time until they know it's a stable enough thing that they can just transition into it full time. I think that's the model that typically works. And you're always going to have one-offs, but I think when you look back at some of these people that have had enormous, enormous success, they almost always have this bridging strategy where they work two things for years before it takes off. So I think that's a tip for people that maybe are in that point or maybe thinking about starting their own business to consider. Okay, so let's go ahead and continue talking about the story here with Phil Knight. And

Starting point is 00:26:47 we'll quickly kind of wrap some of the rest of this up because for me a lot of the interesting stuff was early on and once he gets so big for me it got a little bit less interesting and to be honest with you he doesn't really go that far beyond really kind of 1980 it really the story really kind of stops there which shows you how much he loved that start and that journey up front you know Preston this makes me think about well like in the the book the power habits that we're going to call it later and they're talking about gambling and how people's brain react to gambling. And one thing that they actually observe is that for some people, when they are gambling,

Starting point is 00:27:27 and it looks like they're almost winning, so they would be put in front of a slot machine and then there'd be like two bars, but then it would just not get the third bar and hit a jackpot. It will really reward the brain with the same chemicals as if they won, no, if you're addicted. And I kind of feel it's the same thing with Phil Knight, so that's my bridging here. The best thing is to run a business and succeed, but almost as good is running a business and fail. To me, that seems like he can't do anything else. It is so ingrained in him to running a business that he's willing to take the biggest risks.

Starting point is 00:28:04 This is definitely a good story. It's definitely not how to start of a company book. He had a wife and three kids at the time, and he was willing to put anything on the line to make this succeed. And as said before, if he failed, he would be willing to do everything all over. And I think, again, it's not something I would do, but I think it's very inspiring that some people can be so passionate about the vision. And his vision was really to provide the best shoes for the whole world. And he had a phenomenal spouse that totally supported that as well. And he talks a lot about that in the book.

Starting point is 00:28:38 It's not something we're going to get into with the podcast. But he talks about his wife and how she supported these decisions. decisions and it was something that they were, you know, consciously making as a couple. Real quick about his employees. So he has a friend that he ran track with at Oregon. And he bumps into this guy. He's living down in California. So his last name is Johnson.

Starting point is 00:29:00 And he refers to him in the book the whole time as Johnson. And Johnson was just a workaholic. He hires this guy pretty much through commission, right? Stiglake, like however much he would sell, he gets a cut of whatever that is. So Johnson's living down in California, fills up in Oregon. And so he's basically pushing him shoes. And Johnson is just selling these things like crazy. He is a salesman to a tee.

Starting point is 00:29:27 And so Johnson is going around all of California. And the next thing you know, I mean, this guy is just blowing up California with these tiger shoes. And so Johnson comes up with all these different ideas of like how they can expand and grow even faster. I mean, he is just a growth animal. And so he's writing all these letters to Phil Knight. And through the book, Phil just keeps talking about how he ignored all of his letters and how he would never write him back. But then this guy was just making his blue ribbon business just explode. And so I found that relationship and how honest Phil was with really kind of his bad decision making of how he corresponded with Johnson.

Starting point is 00:30:07 Really refreshing. You get this feel of how much integrity Phil Knight has and how he's really trying to. capture the truth behind the entire story of how it all happened. And it was really awesome the way that he describes it. I have a good point, Preston, in terms of honesty, because we talked about stories. We told about Chibu and Piggins before. We could also include to turn on the equation as well. It seems like there was something that was always hiding from us. I kind of feel like I didn't get the whole story, right? And I really felt like I got the whole story. And not all of it was pretty. If anything, I think there were more bad stuff than good stuff. But you just

Starting point is 00:30:43 kind of felt like he just wanted to tell his story, not how he wanted to be remembered, but what actually happened through his eyes. Yeah, yeah, I totally agree. It was almost like those other two books that you reference were all about the amazing things that they had done and that they only highlighted those things where this was almost the opposite where Phil Knight was telling you about all the things that he did wrong and like it was just such a good story. So what I want to do is I want to transition to how he basically, How did he transition from selling tigers to building the Nike brand? So it gets a little bit at what Stig was talking about.

Starting point is 00:31:19 He blows this thing up. He is selling these tiger shoes almost nationwide at this point. He's selling them all over the place. And Tiger basically has an individual, the way that Phil describes them in the book, they have an individual that's in charge of their operations and growth within the company. It was a Japanese businessman that represented Tiger. and he was going to basically cut Phil Knight out and basically take over the distribution in the U.S. to all these different stores that Phil Knight had established that were selling tigers.

Starting point is 00:31:56 They gave him this lowball offer to buy blue ribbon, but Phil Knight saw the writing on the wall what was going down. So Phil starts preparing for all this and he's like, I've got to create my own brand. I've got to go and create my own shoe, my own shoe company, and then sell that to all these stores and all these connections that we've established through the years whenever we're building this distribution for Tiger. So he doesn't tell Tiger what he's doing. He goes to Japan. He finds a manufacturer and they create this brand. And this is something that I found really profound in this book. So they get to the point where they're going to launch their Nike shoes.

Starting point is 00:32:40 and they're at this convention for shoes, you know, like all the different Adidas, you know, Reebok or whatever. They're all there. And so was Tiger. And this was the first time that Phil Knight had basically showed the executives at Tiger that he's got his own shoe company. And, you know, he's talking about how his boxes were orange, which were completely different than any other shoe company that was selling shoes and they had their setup and everything. and all the main vendors that they had, you know, worked with in the past came over and they looked at the shoe. And there was a bunch of manufacturing issues that he ran into with the very first shoes. And he was kind of embarrassed with the way that they looked and the quality of the shoes.

Starting point is 00:33:24 But he had to go with it because they were at that point where they were going to launch. So his shoes are sitting there on the exhibit. And these vendors come by. And they're looking at his shoe. And they're kind of looking at it. And Phil just talks about how insecure he. is and how disappointed and scared he is as to them just looking at and walking away and not saying anything. But he actually got the exact opposite response. After these vendors looked at

Starting point is 00:33:52 the shoe, they came over and are like, hey, do we buy 10,000 of these shoes from you? And Phil was just blown away. And he says, well, why? Like, he just, he didn't understand why they were just so quick to buy this new brand that no one knew anything about. He, in his opinion, the quality sucked. And he says, why? And you know what the gentleman said to him? He said, well, Phil, we've been dealing with you for the last 10 years. And if you've always sold us good quality products, things that flew off the shelves.

Starting point is 00:34:27 And you're somebody that we trust. And that word trust just, I mean, just stuck. with me when I read this. And it goes back to that power of trust book that Stig and I read, you know, probably, I don't know, 10 or 20 episodes ago. And he was able to basically convert that goodwill that he had been establishing for more than a decade with all these vendors. And that immediately turned into a sale for him whenever he had a completely different product,

Starting point is 00:35:00 something that had never been proven, something that was brand new. They had no idea if they could sell these things. It was a brand that no one even knew. But people were willing to put in big purchase orders because of him, Phil Knight and his team of people because they were trustworthy and they represented, you know, good business habits. And I can't tell you how important I feel that that point in this story was. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:38:43 This is a paid advertisement. All right. Back to the show. So one thing I would like to ask you, Preston, is how much is luck and how much is skill here for Phil Knight? because that's something that people always seem to question whenever they hear about any entrepreneur becoming billionaire with a somewhat odd idea. And what some of the critics are saying is that he has just been incredible lucky. One thing is that you have the whole movement.

Starting point is 00:39:11 No one is exercising when he started. And then perhaps by chance people started to exercise. I'm just going to ask you, how much is luck and how much skills do you think in the philosophy example? So I've got a simple quote that will answer this question. is it Ford that had this quote stick? You already know where I'm going with this. I can see you. Yeah. It's Ford.

Starting point is 00:39:31 Okay. So Ford says, Henry Ford, he says, the harder I work, the luckier I am. And I totally believe in that quote. I think that when you look at where Phil Knight was at this point in time and the amount of work, because he talks about it and getting up to that point where I just told that story with launching the new brand, he had just worked his tail. tail off. I mean, he had worked so hard establishing all these connections, understanding what the power of a brand in shoes is all about, which is really celebrity endorsements and all that kind of stuff. Like, he understood all this stuff. But the only reason he understood it and had those smarts is because he had worked so insanely hard to get to that point. Was he lucky to get that

Starting point is 00:40:17 first deal with the Tiger Shoe Company? Yeah, you might be able to argue that he had some luck there, but you could also go back and say he had worked so hard at understanding accounting. He had gone to Stanford. He had worked hard to get to that point, even for that first interview, much harder than most kids at 25 years old, to get to that point. So again, I love that quote because I think it's so true. And I think people that run around saying, oh, I'm not lucky. Well, I would argue maybe you haven't worked hard enough in whatever particular area you're

Starting point is 00:40:52 trying to focus on to have luck in order to be able to claim that that's what it is. I really love that quote Preston. And another quote I'm thinking of is Bouti Allen's 8% of success is just showing up. And I'm just thinking who is showing up in Japan in the early 60s? No one. Well, there was one guy that was film night. Yeah. So very interesting start to Nike.

Starting point is 00:41:15 Now, he does get into talking about how he saw celebrities as being the corner to building this brand. When you hear him talk about this, it's really quite an interesting conversation. And you can see how powerful that is because when kids or adults see a celebrity on TV playing a sport and they go running by and they've got a Nike swoosh on their shoe or whatever, it's just, you know, that has so much power for him. I think we'll kind of wrap it up there, Stig, because really that's kind of where it ends. And it doesn't really go too much further into the story.

Starting point is 00:41:49 He gets a little bit into some aerospace engineer comes to the company with this idea for putting air into the bottom of shoes, which was kind of a little bit of a neat story. But then it really kind of stops and he kind of wraps up the entire book about Nike before you really kind of get into the Air Jordans and kind of all the success that he had from 1980 on is not even talked about in the book. So if you're really wanting that portion of Nike, you're not going to get it. But if you want everything before, you're absolutely going to get it in just like tons of detail. It seems like after all his early struggles and really, really become successful, the stories he tells them, well, first of all, they're really not that interesting. And it just doesn't seem that important to the story either. And he goes into a lengthy discussion about whether or not you should go public and eventually actually does go public.

Starting point is 00:42:42 And how it is to be running a company that is always cast strapped. and it seems like it go under every day, but at the same time, it's extremely valuable how to handle that. I think that's something that most entrepreneurs can probably relate to. I can only say that really to understand how it is to be a business owner from the early 60s and the next two decades, I think this is probably the book to read just for that. Okay, so something that Stig and I really want to do

Starting point is 00:43:10 because we haven't done this for a really long time is play a question from our audience. So right now, that's what we're going to do. Okay, so this week's question comes from Neftali. Hi, Preston and Stig. My name is Neftali. I'd like to thank you for this wonderful community you guys have built, which has really enabled me to learn a lot and has helped my friends and I

Starting point is 00:43:28 take your first steps into the value investing world. When I tried to calculate the margin of safety, I like to look at the book value and imagine what would happen were the business to liquidate tomorrow. If I buy a company for less than its book value and it goes bankrupt, that could actually make a profit. but in reality there are many companies that trade for below their book value. For instance, Fiat Chrysler.

Starting point is 00:43:50 Is it possible that the numbers and the books don't reflect the real liquidation value of the company? What tools can I use in order to estimate the true liquidation value of the company? And what other ways do you guys recommend I more accurately assess my true margin of safety? Thank you very much. So I love this question. I absolutely love this question because I think a lot of people whenever they start out with the value investing, they latch on to book value because it's very easily understood. For somebody listening to this and you might not know what book value is,

Starting point is 00:44:20 it's simply the equity that's in the company. So let's just take Nike, for example. If we were going to take Nike today and we were going to add up all their assets, subtract their liabilities, and the money that would be left would be the equity. And so when you talk about book value, all you're doing is you're taking that equity and you're putting it into a per share basis. So let's say that the equity is $100,000 and there's $100,000 shares. The book value would be $1.

Starting point is 00:44:49 That's how you would figure that out to make it simple for everyone to understand. So what Noftali's talking about is he's saying, if I can go in and I can buy a company that's below its liquidation value or its book value. So let's go to that Nike example. Let's say the book value is $1 per share. If I could go in there and I could buy Nike, let's say it was selling on the stock market for 90 cents a share, I'm actually buying it at a cheaper price than their equity that they have on the books. And so you will see this. You will see this in real companies right now, even with

Starting point is 00:45:23 super high market valuations, you will find companies that are in this situation right now. Because the market is very high and overvalued, you can find companies like this, but I almost guarantee you what you're also going to find with a company like that is that they're not profitable. They're not making money. And so what the expectation is is because that company's not profitable, they're not making money on their income statement, because when you're talking book value and all the assets, liabilities, you're talking the balance sheet. When you're talking about companies like this and they're losing money each quarter, the expectation is that the book value next quarter will be lower than it is this quarter because they're losing money on their product or their

Starting point is 00:46:06 service. So that's the consideration. That's what you've got to think about when you're buying a company potentially below its book value. Why is it so cheap? Why are other people not willing to pay a high price for this? Well, it's because the company's losing money. They're not even profitable. So that's a very strong consideration. And you have to look at that. So what I would tell you is, depending on where you're at in the credit cycle is where I would look at where this is more common versus not common. If you'd go back to late 2008, 2009, even 2010, and you saw companies trading below their book value, they could be profitable companies, but they're just being punished because of the severe credit contraction that occurred during that point in time.

Starting point is 00:46:52 So I would look at a company much differently back then than I would today where market prices are sky high if I saw a company that had a price selling below its book value. because now you've got to now your consideration at this point if it's selling below its book value with a sky high market price and when we're at today's market in 2016. As credit contracts and it becomes harder to pay off those debts, a company that's not even profitable today is definitely not going to be profitable as credit contracts and it gets harder and that environment gets harder. You're going to have a much harder time staying profitable if you can even stay in business

Starting point is 00:47:30 at that point. Now, I have one other thing that I want to talk about. And it's this idea that just because a company has positive equity or a positive book value today does not mean that they would go bankrupt at that price. The thing that you see with companies whenever they start to go bankrupt is that they will suck every last drop of equity that's left out of that business before they would go bankrupt. They're going to take on all sorts of debt. They're going to do all sorts of tricky things with preferred stock. They're going to be selling bonds. They're going to be doing all these things that put any value that's left in that business way ahead of your common stock position, equity position.

Starting point is 00:48:16 And you will lose all of that money. And that's something that I think a lot of people don't have an appreciation for is just how desperate corporate management gets and how much money they borrow trying to keep. that business alive. And you really kind of have two paths it will play out. Either that'll play out and it'll just be total destruction and you will get nothing from your common stock or another company will come along and buy it and who knows where the price will end up compared to where you bought it. Yeah, so I really like the question. I think it's a very insightful question. As Preston also mentioned, a book value is something a lot of people look at especially in the beginning. But I also think it's something that when people get more experienced, they typically

Starting point is 00:49:00 don't look at too much because it's really not a margin of safety. At least to me, margin of safety is more finding a really good, stable business, profitable business that has a higher intrinsic value than what you're paying for it. That's really my margin of safety. I think if you look at margin of safety in terms of a liquidation value, as Preston said, it's probably not what's going to pan out anyway. And I think the reason why we talk so much about it is, even though this is a general stock investing podcast, we really have our roots in Benjamin Graham and Warren Buffett and the whole value investing approach.

Starting point is 00:49:40 And I can see at the base of that, it makes sense to look at book value because if you read the intelligent investor and if you read security analysis, there's a lot of emphasis on how do you figure out what the liquidation investment. value as. And I just think in general, I think it's not a good approach for 99.9% of investors to be focused on that. You might look at book value because it might give you a glimpse of whether or not the business is overvalue, undervalued, sort of like you can look at the PE ratio and it might be four and it could be an indication that it's undervalued, but you just need like 99% more before you have a coherent analysis of that stock. But if you, you know,

Starting point is 00:50:22 you want to look at the balance sheet and see what is the true liquidation value. I would just without being too geeky, look at how is the balance sheet weighted, how much is at the top of the balance sheet? And when I say at the top of the balance sheet is because the most liquid assets are the top of the balance sheet. So the most liquid is cash. The more current assets you have typically, and once the current assets is the assets that you intend to become turned into cash or is already cast within the next 12th month. That's probably what you should be looking for. if you see too much long-term fixed assets, it's probably not going to turn into cash. So I would say if Warren Buffett would be responding to this question about margin of safety specifically,

Starting point is 00:51:05 the thing he's going to really talk about is an adorable competitive advantage of being able to keep the earnings and profit margins where they're at to be able to keep your margin share of the overall business. So if you're selling shoes, a company like Under Armour coming in would be imposing on that competitive advantage. That's something that he would be looking at as far as being able to protect that. That's giving him a margin of safety. And most importantly, his margin of safety really comes down to the price that he's paying. Whatever that discount rate that he's expecting to get, call it, if I buy Nike today and I get a 10% return and the rest of the market's giving me 5%. That's a margin of safety.

Starting point is 00:51:51 because I'm getting such a larger return at the current price that's being offered. Those aren't the real numbers. I'm just using those as examples for people. But that's where he sees his margin of safety. When you talk about book value and Benjamin Graham and where this whole idea of book value originated was with Benjamin Graham back in the early 1930s, this was more for a person that had enough money to take a controlling share of a business and basically liquidate the company because they, were able to take that controlling share. That's where that's at.

Starting point is 00:52:24 As an individual stock investor that won't be able to take that size of a position where you actually control and have the ability to liquidate the company, you can't do that kind of stuff. But that's what Warren Buffett and Benjamin Graham were doing back in the day because they'd find these companies that were trading below their liquidation value. They could take a position high enough in the company to actually influence that. That's where a lot of that stuff comes from. All right, so Nafthali, we're going to send you a free signed copy of our book, the Warren Buffett accounting book for asking your question.

Starting point is 00:52:56 It was a fantastic question. If somebody else out there wants to get their question played on our show, go to Asktheinvestors.com and you can record your question. And if we play it, you get a free sign book in the mail. So that's all we have for you guys. If you'd like to read this book via audio, make sure you go to our website, click on any of the links for audibles. You'll get this book completely for free or any other book that you want for your first book. We can't promote that highly enough because you get a free book and you get to use an awesome service that Stig and I use literally every single day as we're driving or whatever. It helps us to be able to do multiple things all at the same time by reading audiobooks.

Starting point is 00:53:33 So that's all we have for you and we'll see you guys next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www. www.theinvestorspodcast.com. Submit your questions or request a guest appearance to the Investors podcast by going to www. www.com. If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only.

Starting point is 00:54:03 This material is copyrighted by the TIP Network and must have written approval before a commercial application. TIP! TIP!

We Study Billionaires - The Investor’s Podcast Network - TIP 096 : Billionaire Phil Knight & Nike - Shoe Dog (Business Podcast)

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