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The investment lesson from the rise of Nike

The book 'Shoe Dog' may not dispense the usual tips for success of more traditional corporate biographies but it still contains important investment insights for those who care to see them

07/12/2017

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

Read pretty much any history of a successful business or entrepreneur’s autobiography and you will find it following the same sort of pattern.

Sure, there might be a stumble along the way, the occasional obstacle to overcome – it all adds to the drama – but there is almost always a sense of inevitability, this feeling that everything is going to turn out fine.

Read Shoe Dog, however, and you will be continually amazed that, most days, entrepreneur Phil Knight was able to drag himself out of bed.

From the moment the idea he pitched to his fellow Stanford MBA students – selling Japanese-made shoes in the US – was greeted with a mixture of amusement and disbelief, Knight rarely felt the hand of history upon his shoulder.

Things didn't start so well

Blue Ribbon Sports, the company he founded with a $50 loan from his father, appears to have lurched from crisis to crisis – forever on the verge of going bust, it has ongoing problems with its suppliers and its bankers always seem to come within a whisker of turning down Knight’s requests for new loans.

And since – just in case things do not work out – Knight is also training to be an accountant, he does not really blame them.

Any profits the company does make, Knight just spends on ordering more shoes to try and grow the business and, at this point – if you are unaware of what happens next – you might be wondering why anybody would ever bother reading Shoe Dog.

After all, as we suggested at the start, these kind of books thrive on their subjects’ success and people read them to gain insights on how they might emulate that themselves.

Things don't get much better

Anyway, eventually the relationship between Blue Ribbon Sports and its Japanese suppliers becomes so fractious Knight breaks away to set up another company.

Even then, however, things do not run smoothly – Knight is not convinced by the now-iconic ‘swoosh’ logo he pays an art student $35 to design and he wants to call the new business 'Dimension Six' before his staff persuade him to go with … that’s right … Nike.

Not traditional insights, but there is a lesson here

If you peruse the reviews on Amazon, you will find many readers have been left disappointed by the book – acknowledging it as a great story but one very short on the expected insights into how to build a successful brand or business.

Well, maybe – but, here on The Value Perspective, we would argue there are certainly investment insights for those who care to see them.

For one thing, the probability Nike would become a global success was very low.

That, of course, is the case with any nascent business – and yet it is by no means the impression someone would gain if, say, their sole source of financial information was the literary sub-genre we might call ‘corporate biography’, the great majority of which fall foul of behavioural sins such as narrative fallacy and hindsight bias.

Narrative Fallacy

We recently touched on the former – the human desire to impose some sort of story on events, regardless of whether any exists – in What’s more dangerous.

Hindsight Bias

Meanwhile hindsight bias – the inclination of human beings to see an event, once it has occurred, as having been wholly predictable, even if there was no chance of that ever really being the case – is discussed in articles such as Any point in history.

Once more distancing himself from any sense of inevitability or foreseeability, Knight notes some of his diary entries underline events did not happen the way he remembers them decades later.

For our part, how we guard against these biases, here on The Value Perspective, is to record the reasons for our investment decisions at the time they are made – so we can learn the right lessons, whether those decisions turn out to be good or bad.

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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