Let’s start with a story about arm wrestling. In 1992, the irreverent and unconventional Southwest Airlines received a copyright claim. The airline had come up with a catchy marketing phrase ‘Just Plane Smart’. Unbeknownst to Southwest, Stevens Aviation, a small South Carolina based airlines company had been using it as its motto for years. To resolve this thorny issue, Kurt Herwald, the CEO of Stevens, sent a challenge to Herb Kelleher:
‘We challenge you to a duel to see who gets to keep “Plane Smart”- big ol’ Southwest or little bitty Stevens. (Please – no lawyers!). We challenge you to a sleeves-up, best two-out of-three arm-wrestling match between you and chairman.
PS: Our Chairman is a burly 38 year old former weightlifter who can bench-press a King Air’.
Herb Kelleher, ever a showman and on the lookout for fun issued his response:
‘Our Chairman can bench-press a quart of Wild Turkey and five packs of cigarettes a day. He is also a fearsome competitor who resorts to kicking, biting, gouging, scratching, and hair pulling in order to win. When really pressed, he has also been known to beg, plead, whine and sob piteously. Can your pusillanimous little wimp of a chairman stand up against the martial valor of our giant?’
What followed was a thoroughly entertaining event, heavily publicized as the ‘Malice in Dallas’ that benefitted both companies. Though Herwald won the competition, he generously decided that both companies would share the slogan. Southwest and Stevens both saved hundreds of thousands in legal bills, generated tremendous publicity (then president George Bush sent a note to Herb Kelleher in the aftermath) and also improved the employee morale tremendously.
So what’s all this to do with barbells?
Over the course of my studying businesses, a feature I have observed in many of the entrepreneurs I respect is their conservative-aggressive approach to business. They are extremely aggressive and equally conservative - both at the same time. And while reading Taleb’s Antifragile, I came across what I thought to be a much cooler term for this – the barbell strategy (my wife rolls her eyes at my idea of coolness).
Antifragility, as discussed here, is the property where an object becomes stronger under stress. As Taleb explains, the barbell is one of tools by which one can harness antifragility. The logic of the barbell is that in order to be antifragile, one must first remove fragilities. As the image that the word invokes, the barbell approach is composed of two extremes. There is extreme risk aversion on one end and extreme risk taking on the other, but there is no middle path.
By following extreme risk aversion or paranoia, one protects the downside, while the extreme aggression on the other end exposes him / her to tremendous upside.
To understand this better let us once again turn to the fanatic Herb Kelleher:
‘My employees know that if anybody talked about seat market share I would punch their nose. I would rather have a 5% market share and be profitable rather than have a 90% market share and be unprofitable… We decided that while we may have a Maverick marketing image in the marketplace, we will maintain a very conservative financial structure to ensure our survival.’
This is classic barbell strategy. The focus of Herb Kelleher from the beginning was to remove the downside to the extent possible. Being a voracious reader and an extremely astute businessman, he was fully aware that the base rates of the airline industry were horrible. And his solution to this problem was financial prudence to the point of paranoia. Southwest has one of the soundest balance sheets among the airline companies across the world.
At the same time, he encouraged a maverick internal culture and marketing image for the company. It involved arm wrestling to resolve legal issues, painting planes (with swimsuit models, killer whales, etc), hilarious flight attendants among other things.
It might sound counter-intuitive, but it is the extreme risk aversion on fiscal matters that allowed Southwest to have an extremely aggressive business strategy. Southwest never laid off employees during downturns, has never made a loss since 1973 and during periods of stress increased its market share. When its competitors were restructuring their operations, and exiting markets, Southwest was expanding its capacity and entering newer markets. And that, is the very definition of antifragility.
Oberoi Realty, valued at ~$3 billion, is the second most valuable listed real estate company in India. Unlike a majority of its peers it is present only in a single location – Mumbai, where it currently has 12 million sq. ft. of residential projects under development. And unlike a majority of its peers it is almost debt free. It is extremely rare for an Indian real estate company to enjoy a balance sheet as strong as Oberoi’s. The architect of this unusual company is Vikas Oberoi.
Just as in the case of Southwest, Vikas Oberoi has run Oberoi Realty with that strange mix of extreme caution and extreme aggression.
Vikas Oberoi completed his first real estate project at the age of nineteen. His aversion to debt, an important part of his business strategy, was as a result of his experiences early in life. In one of the early projects, his father Ranvir Oberoi had borrowed money from banks to develop a land parcel. But he could not sell the flats on time to make the interest payments. To repay this loan, the family had to sell their home and move to a rented apartment. The financial difficulty also put tremendous emotional pressure on his father. This incident had a deep impact on Vikas and since then he has been extremely wary about debt. Today, Oberoi Realty is among the least leveraged, if not the least leveraged real estate player in India.
Deepak Parekh, the Chairman of HDFC, has this to say about Vikas Oberoi -
`In case of Vikas, every banker and lender felt he had the strongest balance sheet. He had cash and was never in financial trouble in all the years I have known him. Vikas is the least leveraged developer I was aware of. Even today I can say that. He is the least leveraged developer.’
Vikas Oberoi’s conservatism extends to other business matters as well. Despite being in real estate for more than 30 years, his company has still not stepped out of Mumbai, forget Maharashtra. This is not for the lack of trying. The company has explored other cities for years but is patiently waiting for the right opportunity and partner to begin a project outside Mumbai. And even then, Vikas Oberoi is willing only to bet a small portion of the company’s capital in any such project.
The other side of the barbell: Vikas Oberoi conservatism is matched by his aggression in land purchases. He is not blindly averse to debt. By following a conservative debt practice coupled with substantial cash balance, and strong recurring rental income (from malls, commercial property and hotel), the company was able to leverage whenever opportunities arose.
Land is the key raw material for any real estate player, and when he believed the odds were in favour Vikas Oberoi has been extremely aggressive in acquiring parcels. In 2004 and 2005, he spent $60 million to purchase 77 acres of land across Mumbai. To put it in context, the balance sheet size at FYE07 was $230 million, and at FYE18 is $1.6 billion. When prime land of 25 acres was available in Borivali, the company was able to complete the entire payment within 30 days due to its balance sheet strength. This ability strengthens the confidence of various players in the value chain in Oberoi’s ability, and makes them more willing to do business with the company.
Vikas Oberoi has also been aggressive in ensuring the best quality for his customer. For a project in Worli, Mumbai, Oberoi has brought in Samsung as the general contractor, whose previous project includes Burj Khalifa. All projects of Oberoi are handled by some of the top designers and contractors in the world.
Just as in Southwest, it is the hyper conservative approach towards fiscal matters that allows Vikas Oberoi to employ a hyper aggressive approach to running his business.
Thus we arrive at a strange conclusion – a conservative strategy is probably the most optimal aggressive strategy.
A barbell attempt in daily life
Let us try and apply that powerful idea of inversion to the concept of barbells. If some of the smartest people out there are applying the barbell strategy to run their companies, then maybe it might make sense to apply this strategy to personal life as well.
Capital: Probably the simplest area to apply this concept is in one’s personal finance. It might make sense to develop a deep allergy to debt, and keep a sharp eye on fixed recurring and discretionary costs. Keeping debt, fixed costs and consumerism spending low allows you to spend aggressively on experiential avenues.
Time: Time is probably the most underrated currency in the world. It is also probably one currency that can never be overrated. While money once lost can be made again, time lost does not come back. Applying the barbell approach here would be to be extremely stingy with activities that subtract value but be extremely generous with those which add value.
My personal attempt at implementing the barbell approach in life is a work in progress and far from complete. But since I began investing full time, I stay absolutely away from debt (no mortgage, or any other kind of loan) and try my best to reduce what I consider unnecessary discretionary spending like clothes (much to the chagrin of my loved ones). This deep aversion to what I believe will tie me down, allows me to be aggressive on spending and take decisions that I believe to be vital for my growth – books, meeting people, traveling, etc.
My barbell approach to time management started with deactivation of my Facebook account. I also used to binge watch a lot of series and movies which I have reduced significantly (though I confess I am eagerly awaiting the new Avengers movie- I am only human). Simultaneously, I upped my aggression in meeting people, spending more time with family and friends, and also reading.
Ian Cassel has written a wonderful post on his barbell approach when he began his investment career.
A sidebar - The innocence, courage and arrogance of youthMany people when young have dreams and ambitions, which slowly fade away as they age. The reasons they lose this courage and arrogance of taking on the world are many and are complex. But there is one important reason. As people age and start making money, the consumerist society that we live in encourages us to own things. These things that we own in turn have an insidious way of owning us with time. Thus as time passes, the focus shifts unbeknownst to us from the courage to achieve something to the fear of losing things and comfort. Life thus becomes more fragile. But as discussed, antifragility is the removal of fragilities where possible. While the barbell approach is not a solution to all problems, it could possibly make us more antifragile, and help rekindle some of the courage and arrogance of our youth.
Disclaimer: We may/may not have positions in the companies mentioned in the blog. This case study/article is not a stock recommendation. We are not SEBI registered investment advisors. Our Intelligent Fanatics Case Studies and Articles are meant to retell the stories and strategies used to create exceptional businesses so that we can learn from them.