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“A relaxed, easy and practical way into global finance.”

-Jan Gurander, Senior Vice President and CFO, Volvo Cars

Former CEO of Saab Treasury AB & former Senior Vice President for Finance of Scania

Copyright Š 2012 by Ulf Egestrand. All rights reserved. No part of this book may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. This publication is designed to provide general information regarding the subject matter covered. However, laws and practices vary from state to state and from country to country, and are subject to change. Because each factual situation is different, specific advice should be tailored to the particular circumstances. For this reason, the reader is advised to consult with his or her own advisor regarding that individual’s specific situation. The author has taken reasonable precautions in the preparation of this book and believes the facts presented in the book are accurate as of the date it was written. However, neither the author nor the publisher assumes any responsibility for any errors or omissions. The author and publisher specifically disclaim any liability resulting from the use or application of the information contained in this book, and the information is not intended as legal, financial or other professional advice related to individual situations. Published by 300 Publishing Printed in Latvia Editing by Jennifer Nicholson-Breen Illustrated and designed by Dan Au ISBN 978-89-97411-04-7 (e-book) ISBN 978-89-97411-03-0 (hardcover, colour) ISBN 978-89-97411-02-3 (paperback, b/w)

To Aliza and Timtam



I’m thankful to all those around me who’ve been supportive of this project and also to everyone I’ve met and learned from throughout my working life. You have all contributed to this book. Special thanks to: Ben A. Ratje – without you there would be no book; Jennifer Nicholson-Breen, my editor, who took my words but made them new; Yoav Korn, my initial editor, who suggested I explain finance through hens and eggs; Dan Au, who gave colour and imagination to the book; Mikael Propst who wrote the Swedish summary and offered great marketing tips; Peter Särne who explained egg-farming finance; as well as Alexander Szekely and Mikaela Propst, for sharing their marketing tools and know-how. I’m eternally grateful to my wife, Aliza, who put up with my absentmindedness during this long process, when I was always talking, dreaming and thinking about The HenHouse.



Foreword Introduction Chapter 1

Tim’s Problem


Chapter 2

Traps & Cop-outs


Chapter 3 Money


Chapter 4

Ground Rules


Chapter 5

The HenHouse Layout


Chapter 6 Banks


Chapter 7 Interest


Chapter 8 Currency


Chapter 9


Cash Flow

Chapter 10 PPACE


Chapter 11 The CHOOK


Chapter 12 The Dream HenHouse


About the Author



Globalisation is accelerating at an unprecedented rate. Financial markets are at the very centre of this globalisation, with a beforeunthinkable amount of capital flowing between borders and across continents. This integration means that everyone, both financial professionals and laypeople, must adopt to a new global reality. As the founder of GMM Global Asset Management1, a currency hedge fund, I have been active in the financial market for more than 25 years, mainly focused on the currency market. I have witnessed many economic crises, and have tried to learn from each one. Many of these left deep impressions on me. I remember the ERM crisis in the early 1990s, when many currencies were devalued, including the Swedish krona, the Italian lira and the British pound. In the late 1990s we saw the Asian economic crisis of 1997, the Russian default in 1998 and the collapse of LTCM in 1998. In the first decade of this century, we experienced the bursting of the dot-com bubble, the Lehman crash and the beginning of the EU crisis. A common thread running through these events is that they were all preceded by serious warning signs – but very few took any notice. It was during this period of financial turmoil when I first met the author of this book, Ulf Egestrand, who has since become one of my best friends and also serves as GMM’s chairman. For almost 20 years I have had the privilege of having Ulf as a sounding board to talk over the complexities of financial markets and life. Ulf’s long-earned insight has not only helped me make sense of whatever 1  #1 Currency Hedge Fund 2008 by EuroHedge


issue was pressing at the time, but has also helped me make sound decisions about the future – this has been invaluable to me as a trader. Ulf is not only an excellent teacher and a captivating speaker; he has the rare gift of being able to combine his extensive financial knowledge with a real understanding of human nature. Ulf is able to bring finance to the human level. Ulf finds a way to relate to his audience, no matter their background; likely owing to four decades of living and working all around the world. To me, Ulf is a living example of “thinking global.” The HenHouse is a great reference tool, an excellent tutorial and an all-around good read – whether you’re a student, a homemaker, a small business owner or a Fortune Global 500 CEO. I’m sure you’ll enjoy The HenHouse as much as I have. Peder Målerin, Founder, GMM Global Asset Management


Tell me, what’s the best-selling product in the world? “Cars?” “Rice?” “Handbags?” “This book?” (Sadly, no.) Whatever else you’d say, I’d guess you’d be wrong. I’ve asked this question many times and never received the right answer. During my 40 years as a senior executive in finance, I’ve met countless people – board members, executives, project managers, employees, colleagues, politicians, students, teachers and friends – who feel hazy in their understanding of the basics of our global financial system, banking, currencies, interest rates, funding, etc. Their fuzziness on these matters leads them to believe they know less than those around them (not always the case), therefore they don’t want to ask questions to expose their ignorance. Thus, a vicious circle of avoidance begins, where it can seem easier to stick their head in the sand than try to make sense of it all. The HenHouse operates on two levels. It’s a self-help guide to international finance. But it’s also an entertaining read about the dreams and challenges of an egg farmer, Tim, and his new neighbour, freshfrom-the-city Ulf, a retired financier.


You don’t need a background in finance to relate to Tim. Like him, you’ll soon have a handle on the ins and outs of the banking system and global finance. You’ll be able to talk to financial professionals with confidence and in their own language. On top of that you’ll identify the best-selling product in the world and understand the reason why. The story is set in Sweden but the book’s lessons are universal. With the exception of myself, Ulf, all the characters in the book are fictional. Let’s begin our 12-day journey.

Chapter 1

Tim’s Problem



Tim’s Problem


Friday morning, May 27th It’s 10 o’clock on a cloudy morning in the peaceful farming community of Smehult in southern Sweden. Here two neighbours stand on opposite sides of the fence. Ulf is a 50-something international banker who’s just built a retirement farm here with his Australian wife, Alice. Tim runs a professional egg farm with his wife, Kate; he and Kate are in their late-30s and have lived here all their lives. Ulf and Tim have met just a few times.

“Morning, Tim.”

“Morning, Tim.” Tim looks up from the tractor he’s fixing near the fence. “Good morning, Ulf. How are you?” “I’m okay.” Ulf looks up at the grey sky. “Do you think it’ll be like this all day?” “Well, I listened to the weather this morning and they said it would be cloudy in the morning, maybe clear up in the afternoon.” “Hmm …. I’m not a morning person. I love the sun. So I guess I’m a bit bearish today.” Ulf chuckles at his own joke. Tim says nothing and looks up at the clouds. Ulf carries on, not seeming to notice Tim’s hesitancy. “Like the stock market. Not good. And did you see that the krona has been weakening? It was strong just a month ago, it’s been as high as 8.70 vs. the euro until just recently. The markets sure are choppy these days.” Tim looks down and returns to his work on the tractor. “Is that so?” Ulf continues. “Yesterday I talked to someone who runs a hedge fund. He thinks the market will continue to be turbulent for some time. Take the debt situation in Greece and the new requirements from the EBA ….” Tim looks up, eyes narrowing. “This is not a subject for me on a Friday morning, Ulf.” “Why not? This can and will affect the CDS market. And that will make the ECB really nervous.”



Tim’s Problem


“Ulf, all these initials might be interesting for you, but not for me. I have an egg farm to take care of.” “But it affects you —” “— I’m not a banker.” Tim motions out to the farm. “We’re out in the country, if you haven’t noticed.” “But can’t you see that everything is inter-connected? Don’t you understand anything about global finance?” Tim shoots Ulf a fiery look and starts packing his tools. “The only thing I know is that when things go wrong, it’s not you bankers who suffer, whatever you say. It’s the rest of us who have to foot the bill for your bad decisions.” “What do you mean by that?” “Well, whatever happens to the economy, bankers find excuses for their mistakes and still end up with big bonuses.” “You can’t blame it all on the banks. You have to take some responsibility.” Tim is getting red in the face. “How can you blame me for the banking crisis?” Ulf sighs. “I don’t mean you personally. Just as a part of society, we have to take responsibility for our actions and not just blame the banks for everything.” “Are you talking about me or not?” “Well, you’re part of it.” “Can you explain how I can have anything to do with what happened in 2008? It was some whiz kids in the banks who messed everything up.” “It’s not that simple.” “You’re darn right, it’s not that simple. Kate and I were so scared we’d lose all our money back then. We had some saved, but that could’ve been gone if the government hadn’t stepped in and saved the system. And then I as a taxpayer had to step in and save the banks.” “I think you’ve misunderstood me .…”

“I think I hear you loud and clear, Ulf, and I don’t like what I’m hearing. You’re saying that I’m to blame for what happened when I’m the one who’s been suffering and footing the bill.” “Hang on a minute. This is getting a bit out of hand —” Tim stands up, his face quite red. “You hang on. I think it’s the height of rudeness to put any sort of blame on me for what happened to the banks. Don’t come here with your fancy words to lecture me on finance. I’m running a successful egg farm here, Ulf. You, on the other hand, just waltz in here from your big banking world and think you can accuse me of things that I couldn’t possibly have been a part of.” Tim turns his back on Ulf and heads for his house. “Goodbye.” Ulf stares blankly after Tim. “Goodbye —?”

Alice is sitting in the kitchen when Ulf walks in. She glances up from the International Herald Tribune she’s spread out on the table. “Back already? “Yes … he was busy.” After 21 years of marriage, Alice knows Ulf all too well. She knows something went wrong, but she also knows she doesn’t need to push him to tell her. Ulf can’t keep things to himself. She returns to her newspaper. By lunchtime, Ulf is ready to talk.



Tim’s Problem


Ulf shakes his head. “I just can’t understand why he didn’t get it.” “Get what?” “When I met Tim this morning I got to talking about the foreign exchange market. I mentioned that the krona had been choppy and then explained that what’s happening in Greece and the new requirements from the EBA won’t help.” Alice sighs. “Whew. If you started in like that I can understand why your conversation didn’t last very long.” “It wasn’t just that. He got really angry at me and just walked away.” “Ulf, you know how sensitive this issue is since the crisis in 2008. Finance is an abstract topic for most people and a lot of people are nervous to talk about it. But we live here now, and you have to be more sensitive. Everyone is upset about what happened in 2008 and not everyone knows the things you do about finance. Think of it this way, what do you know about hens?” “Not much.” “Just think how you’d feel if Tim began using his specialist hen-raising terms and jargon with you while chatting over the fence. I bet you’d be very irritated if he gave you that same ‘I’m an expert’ attitude so early.” “Yes, I know. Don’t rub it in.” “I know that you’re excited about these things, and love to help people with finance, but you can’t force it on him – you have to wait until he’s ready. Give him time and space.” “I know, I jumped the gun.” “Just try to make it right with him, be humble and friendly next time. Maybe you guys can exchange some knowledge. We could use some advice about hens and eggs; they’ve been running their farm a long time. You’re always talking about inter-dependence. And they’re such a nice, hardworking couple.” “Okay, I will. If he ever speaks to me again .…”

“Oh Ulf, try not to worry about it, it will all work out. Just consider where he’s coming from. Let’s try to enjoy our lunch.” Ulf manages a weak smile. “I’ll try.”

Later the same day Alice looks out to see Kate coming up the path with a plate in her hands. Alice opens her kitchen door, a bit sheepish.

“Oh Kate, I feel bad. I should have come to you first, to apologise for Ulf.” “No, no, it’s us. I’m sorry for how Tim behaved towards Ulf. He was out of line.” “I think it was Ulf who was out of line. He got a bit carried away, going on about finance like that … Ulf still isn’t used to all this peace and quiet, I think he just wanted to talk. With all the time alone writing his book, sometimes he feels as cooped up as a chicken himself.” Kate shakes her head. “No, it’s Tim, he’s a bit of a nervous wreck at the moment. It’s all because our neighbour called us a few days ago and



Tim’s Problem


asked us if we wanted to buy his big egg farm. He has to sell it fast. It’s a great opportunity for us to expand, but Tim is worried. He’s afraid of the money side of it. It’s such a big deal, such a big chance, for us, and Tim doesn’t understand finance. He’s intimidated by all the figures and complicated language.” “You know Ulf would love to help Tim … but don’t just stand there, come in.” “Thank you. I brought some bullar for afternoon coffee.” “Mmm. Freshly baked, I can smell.” “Yes, hope you like it.” “Sit down and I’ll make some coffee.” While Alice prepares the coffee Kate asks about Ulf’s work and background. “Oh, where do I start … He’s now the chairman of a hedge fund that trades only in currencies. He’s held executive positions at Scania, was the CEO for Saab Treasury AB, was Assistant Treasurer for Investor and Saab Scania, and in the 1980s was trading currencies and interest rates at SEB, the Wallenberg family bank, in Sweden and in the UK.” Kate’s eyes widen. “SEB and Investor!? Investor is a Wallenberg-dominated holding company with big stakes in some of the biggest companies in Sweden, like Atlas Copco, Astra Zenica, ABB … just to mention some that start with ‘A.’ The Wallenberg family are pretty important in the history of Swedish industrial development and still today.” Kate sits back and soaks it all in. “Wow, Ulf has worked with some heavy hitters.’’ Alice just laughs. “You know a lot about it, Kate, I’m impressed. But you know, as his wife, I am getting tired of listening to all of this. He can’t stop talking about currencies, interest rates, geopolitics —” Kate jumps in. “— and he’s worked for Scania, perhaps the best heavy truck producer in the world … ‘The King of the Road’!” “There you go. You sound just like Ulf.”

Kate chuckles and leans back. “Alice, you should be proud of your husband and what he has done.” Alice sighs. “Of course I am, just sometimes, with all the moving around, adjusting to life in new countries, it gets a bit much. In recent years we’ve been living in Germany and Korea where Ulf was running the leasing companies for Scania.” “So has Ulf always been in finance?” “Yes, he has loved banking since the first day he walked into a bank when he was 15. His first job was as a messenger boy in a local bank office in Kalmar. And he’s never left the finance world since.” “That’s interesting, that he had such a humble start. Knowing this would help Tim let down his guard a bit. You know, he has a hard time trusting people who haven’t, as he puts it, ‘put a little dirt under their nails.’” “Oh yes, he’s put in his time. And you know, Ulf is so proud of being Swedish. He never stops telling me about the success of Swedish industry or about the foreign and currency trade expertise Sweden has developed due to the export industry. He’s always bragging that Sweden was the biggest currency trading nation in the world in the 1960s. This is because the Germans, the British and the Americans could always import and export in their own currencies.” “Interesting. I didn’t know that.” “Neither did I, until Ulf told me. Did you know that Sweden had the third-biggest government bond market in the world in the 1980s?” “Gee whiz.” “I’ve heard it so many times now that I practically chant it in my sleep. Because of all this, Sweden had no choice but to learn how to handle the exposure. Ulf says this is the reason why Swedish companies developed such internationally renowned treasury departments.” “What exactly does a treasury do? You mentioned it before but I forgot to ask you.”



Tim’s Problem

“It’s like the bank within a company. They handle everything that has to do with money and banks: currencies, borrowing, lending, bank accounts … that kind of thing.” “Wow. With this big decision looming about whether or not to expand our business, it’s a good thing we have you and Ulf as neighbours.” “Kate, Ulf would be honoured to help you. I know he got off to a bad start this morning with Tim, but he loves to give advice and share the knowledge he’s cramming into this book of his. You know he came here to write a book, to demystify finance to people outside the industry.” “Sounds like Tim has a lot to learn from Ulf.” “Well, we have a lot to learn from you, too. You know, we can’t get our hens to lay eggs consistently! But you know, Ulf also has a hard time asking for help. Maybe our husbands can both be proud —” Kate nods. “— and stubborn. Thanks Alice. I’ll talk to Tim.”

Tim’s worried face breaks into a laugh. “No, not today. I’ve just got a lot on my mind.” “What’s up?” “Thursday evening we had a thunderstorm and the fan in the hen house broke. I had to order a new one and it won’t be delivered until Monday. I hate it when the conditions aren’t the best for the hens.” “Is that it?” “Well, there is something else.” Tim sighs and puts down his spanner. “My neighbour Tom called me a few days ago. He offered us first dibs on buying his egg production farm. It’s 10 times the size of ours.” “Yes, I know. Sounds like great news. What’s the problem?” “You know, I’ve had my egg farm for 13 years now and I know my business really well … what’s that book, by Malcolm Gladwell —?” “Outliers?” “That’s it. I’ve done my 10,000 hours, which means that I should be an expert in egg farming … at least when it comes to finding customers and satisfying them with high-quality eggs, and all that’s involved. But finance is such an undeveloped side of mine. I started my business by taking on a very small loan. Then Kate and I grew our business by putting back everything we earned into the farm. We’re not that small anymore. And we’d like to expand, now is the perfect time. The kids are big enough and we have the energy and time to put into a bigger business. But finance is a black box for me, and from what I read in the newspapers and on the Internet, and from what I hear on TV, you can’t trust anyone when it comes to money. That’s what I was talking about yesterday. “Just look at what happened in 2008 … the bankers left us high and dry but they left the table with big bonuses, and most of them still have their jobs. And here I am facing a big financial decision with no education or knowledge in the field of finance. Everything in my life is dependent on

Saturday morning, May 28th It’s a sunnier day today, just one day after Ulf and Tim’s stand-off at the fence. But each has a slightly different view of the man on the other side than they did 24 hours ago. After Ulf talked to Alice, he understood Tim’s situation a bit better, and why Tim wasn’t in the mood for a finance lecture yesterday. And Kate explained to Tim that Ulf just can’t keep quiet on these topics. Tim was also interested to hear of Ulf’s humble start in finance. Even so, neither is in a hurry to approach the other side of the fence. Finally, Ulf gathers the nerve to walk over to Tim. Tim’s still tinkering with his tractor. “Good morning, Tim. Uh … sorry about yesterday.” “Good morning, Ulf. No need to apologise.” “Hey, you still look upset. Not with me, I hope.”




Tim’s Problem


finance: my business, my retirement, my kid’s education. In some ways it has touched everything that is important to me. But it feels outside my control.” Tim sighs and takes a deep breath “Slow down, Tim, you’re putting the world on your shoulders. Is this all about expanding the farm?” “Yeah, my head’s been a whirl ever since Tom called me.” “Okay, let’s just take it apart piece by piece. You have the knowledge to run a bigger farm. Is it too expensive?” “No, it is a fair price and it has always been my dream to run something really big. And after 13 years in the business I know that I wouldn’t have any problems running that size of egg farm. And Kate thinks it’s a fantastic opportunity. We don’t even have to move.” “I think Kate’s right.” “Yes, but —” “Yes, but … here we go. The careful Tim.” “Tom didn’t give me much time to make up my mind. He’s in serious financial trouble. And he can only hold off the lenders for two more weeks.” Ulf sees the calendar in his head. “Today is Saturday. And you need

to give Tom an offer before the Saturday after next. The banks normally have credit committee meetings on Fridays. And they need a couple of days to prepare. That means you must be ready to go to the bank on Thursday of next week. That leaves you 12 days to get ready.” Tim frowns. “That makes it even two days fewer. Thanks a lot, Ulf.” “Hey, don’t blame the messenger. Continue.” “After that he can’t promise the price of 10 million (US$1.6 million) any longer. He thinks the lenders want to do something else with it, maybe build something big that would destroy the property and perhaps encroach on our business. That would be terrible, but I’m hesitant with such an investment.” “What exactly are you worried about?” “Well, we’d have to borrow a lot of money and that’s a big risk. I don’t like that. You get to be so dependent on the bank. And you can’t trust them after what happened in 2008.” Ulf rolls his eyes. “Here we go again ....” “But it’s something to think about. Maybe one day they’ll just cancel my loan for whatever reason. I don’t know anything about finance. On top of that, Tom’s customers are not only Swedish. It will create financial risks all over the show.” Ulf takes a deep breath and leans against the fence. “Let’s wind it back. I have a couple of questions.” “Okay.” “First, do you want to buy it?” “I would love to, as you know.” “Second, why is Tom losing money? Did he tell you?” “No, he didn’t. But from what I have picked up from the conversations we’ve had over the past three years he’s had his egg production, he has problems delivering the product he promises.” “Why do you think that?”



Tim’s Problem


“It’s quite obvious, at least to me. His staff is not accustomed to freerange egg farming, and Tom himself has an urban background. His eggs aren’t the highest quality. On top of that, he hasn’t got the feel for how to get the best out of the hens. You can just hear it from his hens.” “You can hear it?” “When you hear hens cluck, you know they’re happy. You don’t hear that when you walk into Tom’s hen house. And did you know that hens can show empathy?” “You must be joking. Hens?” “I always knew it, but now a research team at a university in the UK has done studies on it and came to this conclusion. By testing hens and their chicks they found that the hens’ heart rates sped up when their chicks were threatened.” “Okay, there you go, you are an expert. Tom has a background in finance from the big city. What do you expect?”

“Good point.” “It just tells you that just because you’re good at finance doesn’t mean that you can run an egg-farming business, or any other business for that matter.” “And this should give me some comfort?” “No, but if you don’t understand your basic business it doesn’t matter how much finance you know. As you can see, unhappy customers are not a good recipe for business. But if you understand your customers and how to deliver products to their expectations, you are more than halfway home to running a good business. “Have you calculated how you could make his business a profitable one?” “Yes, Kate and I have, of course, because we could see what was coming. And it looks good.” “Tell me more.” “First, he has a good customer base and we know that we would be able to deliver what they want. To be honest with you, we’ve already done a bit of work on that part. Kate and I always attend the semi-annual farm convention in Hanover. By chance, we got to meet the purchaser of our type of eggs for a big supermarket chain that’s buying eggs from Tom. The purchaser asked us if we’d supply eggs to them, because he’d heard about the high-quality eggs we produce.” Ulf smiles. “Tim, there you go. As the saying goes: ‘Well begun, half done.’ You have the customer in your pocket, already proof that you have something going for you. “The Customer is also the first letter in what I call the CHOOK, a kind of checklist I’ve made for what you need to outline when you go to the bank to get financing for your business. A chook is what they call a hen or chicken in Australia and New Zealand.” Tim laughs. “So that’s why Alice always talks about your chooks. That’s what she calls hens.”



Ulf raises an eyebrow. “You noticed. Speaking of the CHOOK, you already have the first three letters in your pocket: C for Customer, the man you met at the convention and your existing customers; H for History, you’ve run a successful business for more than 10 years and you’ve paid off your debt; and O for Opportunity, with the fair price and location. You’re more than halfway there. To finish, we just have to flesh out your Objective and show your Keenness, or how committed you are – we’ll do that a bit later. The CHOOK covers the five things every bank will look for in considering your loan. By doing this you will show that you are aware of the financial implications and understand your business. This establishes trust with the bank. Everything in finance is about trust.”

“I like the sound of the CHOOK. But I don’t know anything about finance. If I make a mistake I could lose it all. It’s a big risk. And you talk about me getting the bank to trust me, what about me trusting the bank?” “Tim, trust has to be based on something. Trust is kind of like the top point in a pyramid, with the foundations of the pyramid being Understanding and Awareness. Understanding is related to facts, in this case business and financial contracts, how they work. Awareness is more the understanding of the human element, how humans can behave, being aware of these factors. Without understanding and awareness, there’s no foundation for trust. But trust begins with yourself.” Tim looks down. “I guess you’re right. But right now I don’t trust my financial knowledge.”

Tim’s Problem


“That’s why we’re doing this, to arm you with what you need to feel confident that you know whom to trust, and to be able to trust your ability to make financial decisions. I have a couple of other tools, The HenHouse and PPACE, that can help me explain exposure to you.” Ulf leans forward and continues. “Okay, let’s see what’s missing in your business plan. You have customers, you know how to run an egg farm, and you have a great opportunity. What other concerns do you have?” “Some of the new customers are German and Danish; I won’t just have Swedish clients anymore. It will mean when I export that I will get income in currencies other than Swedish krona. That is currency risk.” “Okay, so you have currency exposure in your sales.” “Also, Tom is leasing all the equipment from an English firm and the invoices are in British pounds” “So that’s new for you.” “Yes, before I bought most of the equipment from Swedish producers. But nowadays the suppliers are from other countries because they don’t make the equipment here anymore.” “Anything else?” ”I am also looking at importing feed from Brazil to aggressively cut



Tim’s Problem

costs. And here’s the borrowing we would have to do.” Tim hands Ulf a piece of paper he’s had folded in his back pocket. “I have it all written down here.” Ulf studies the paper. “You’ll have exports and imports, which does create currency exposure. And you have to borrow money, which creates interest rate exposure. But you understand your business, right? And you’re confident that you can satisfy your customers?”

“These are real risks.” “You have to stop saying risk. It could also be a reward, like an opportunity. And you have no clue what the risk is before you understand your exposure. When you say risk, you’re jumping to conclusions. Risk is just one component in calculating a worst-case scenario. Yes, if you buy the farm, there is most definitely a bigger possible negative compared to today if something goes wrong. But you have to make it neutral and visual. You have to start from the beginning and not at the end.” “What do you mean?” Ulf pauses and finds a comfortable position leaning on the fence. “A few days ago a friend in town asked me if I thought it was good to invest in Africa. “For me that question indicates that he sees an opportunity. And he’s looking for a reply on which he can base his decision. “But how can you reply to such a question? If you’re a salesperson for investment in Africa, then the answer is obvious. “But experienced investor Warren Buffet, one of the richest men on earth, has some basic rules: Never invest in something you don’t understand; believe in the management and the business; and always look for positive cash flow. These are some guidelines I gave the person asking me about African investments.” Tim considers this. “Makes sense.” Ulf nods. “Warren Buffet thinks the best book in the world on this subject is The Intelligent Investor, written by his mentor, Benjamin Graham. If you make an investment without following Buffet’s advice, you’re looking at many restless nights given your total reliance on someone else. From there on it’s just down to luck. “But you can make an investment using Buffet’s model: you understand your business; you will be the management. You and Kate have made some calculations concerning cash flow. What is left to look out for is

New Ri sk s Expo rting eggs

Curre ncy

Im po rting feed

Curre ncy

New lo ans

Intere st rate

“Yes. But it feels like a big step in just two weeks. I don’t understand all the risks and implications but I do understand we need financing if we are going to expand like we want. If we buy Tom’s farm, we will have so many more financial risks —”

Define your exposure Ulf cuts Tim off. “— hey, take a step back.” Tim looks confused and lifts his foot off the ground. “Not literally, just meaning let’s take this step by step. Now, you’ve already done some of the work in dealing with the currency issues. You have located the new exposure.”




Tim’s Problem

exposure: you have to be aware of and understand how to manage it.” Ulf pauses to catch his breath. “Do you want to hear another example about the importance of understanding your exposure?” Tim shrugs and chuckles. “Do I have any choice?” Ulf just smiles. “A friend, a professor in computer science, asked me: ‘What is the difference between exposure and risk, isn’t it just risk?’ I said: ‘It’s like not knowing what baking soda is when you’re baking a loaf of bread. If you don’t know your exposure, you have no clue what risk you’re taking on. Who wants to have dead bread?’ He then replied: ‘In Japan geologists had proof of a tsunami as big as the one in 2011 way back in 800-something. But no one took notice of these facts, this history that could inform the future. Japan had real exposure to a tsunami.’” Ulf pauses, then continues soberly. “Anyway, we all know what happened next.”1 Tim is silent, lost in thought. Ulf continues. “Let me ask you a question: Do you feel safe flying?” “It’s okay.” “Many say no, even though it’s one of the safest ways to travel. Statistically speaking, travelling by car is far more dangerous. But back to flying, when you hear the word flying a lot of risks come to mind: engine failure, bad weather, terrorism, and so on. These are risks. But because you understand flying at some level, you can easily visualise the exposure involved that leads to risks. But when something is abstract like finance, it’s hard to see what the exposure is. You don’t even know what to look out for. In finance, this is the case for most people, even professionals in finance. It’s not the risk that gets you, it’s the exposure.

“Tim, I will coach you to a solid understanding of finance in 12 days: what you should look out for with the banks and some rules that I’ve learned through my time in finance. We’ll detail the CHOOK checklist, and that will clarify your exposure. I’ll also explain my two other tools: The HenHouse and PPACE. These tools can be used in any company: big or small, national or international. On top of that, I’ll give you my Five Rules, Five Traps and the Four Ps of Money.” Tim’s forehead wrinkles. “That sounds like a lot. Are you sure we can manage it all?” Ulf gets serious. “Absolutely we can. But you have to be committed and give a lot of time to the process over the next two weeks. Can you do that? Because, if not, there’s no reason to start.” Tim pulls himself up, slightly defensive. “I can. I know what it means to take on something new. I’ve built up this farm, after all.” “I understand that, but I just wanted to clarify it with you. I want you to succeed. How much time can you set aside for our talks each day?” “I’ve already thought about that. I’ll have to rely a bit more on our parttimer, John. If we buy Tom’s farm he’ll be full-time, which is what he wants. I didn’t tell him the reason, but I’ve already talked to him about working extra hours next week. Maybe I’ll have to help him with certain things but it’s good for him to take on some more responsibility, which can free me up for other things.” Ulf nods. “Delegating. That’s good. It shows me you’re committed, because it’s not always easy to delegate. To some it feels like a loss of control, but delegating well is the sign of a good leader.” Ulf puts his hands together. “We’re all set then. My 40 years of financial experience packed into 12 days. That’s 12 days to a solid foundation in finance, to trust in yourself and your knowledge. The first four days are about awareness, today was the first; then there are four days about understanding; and finally four days about tools. The tools are the

1 Source: Yomiuri Shimbun, 12 June, 2011. See also: under ‘Warnings Based on Previous Earthquakes and Tsunamis’




Tim’s Problem

cement in the trust pyramid, the foundation that leads to action. “I’ll explain currencies and interest rates in a way that’s practical and easy to understand and I’ll talk about the beauty of cash flow, and why cash flow and business are inseparable. You don’t need an economics degree to follow me here; by the end you’ll understand the ins and outs of the banking system and global finance, enough to feel on the same level with the bankers, simply based on your trust in yourself.” Tim shakes his head. “Listen, Ulf, if you can really give me that kind of understanding of finance within 12 days, I’ll give you free eggs for the rest of your life.” Ulf laughs. “Tim, all I want in return is for you to help me get my hens to lay eggs more eggs. Not only are they laying eggs inconsistently, now they seem to be laying even fewer!” “Well, I can have a look and try to find out what’s wrong.” “Thanks, so tell me, have you learned anything today?” “Well, already I’ve learned that we need to look for the exposure, not to jump ahead and assume risk.” Ulf nods. “You know, everything in life is about exposure, be it standing in the sun or in the rain. Risk is just a consequence of how much and how long and many other factors. Your job is to determine your exposure and visualise the new parts of your business, and above all, to gain trust in yourself.”

Tim’s conclusions, Day 1:


I can use the CHOOK checklist as a tool to help me gain the bank’s trust, by outlining my business plan and illustrating my financial awareness. I’ve already got the first three letters, Customer, History and Opportunity pretty well defined. I’m ready to seek financing when I have clarified my Objective and Keenness, and for that I need to understand the currency and interest rate exposures involved. I’ve realised that I can’t know whether or not I can trust the bank until I trust myself, and that requires understanding and awareness. When I’m armed with these and the tools I’ll master in the next 12 days, I’ll have a better sense of security. Also, in terms of what could go wrong, I’ll take my focus off risk and instead focus on exposure.

What Ulf learned, Day 1: Even hens can show empathy.

Henhouse chapter 1  

Read the first chapter an then order the book which is available in hardback en e-book editions.

Henhouse chapter 1  

Read the first chapter an then order the book which is available in hardback en e-book editions.