Johannesburg - Around 35 000 Lonmin employees had secured their future ahead of the festive season after the company’s shareholders backed a key plan to raise money, Franz Stehring, the United Association of SA’s divisional manager for minerals, said on Friday.
These comments come as Lonmin shareholders last week approved a $407 million (R5.7 billion) bailout that will see it continue trading amid a situation when around 50 percent of the industry is loss making after being rocked by strikes and a sliding platinum price that last week fell as low as $846.10 (R11 789), the metal’s lowest level since late 2008.
Approved
Lonmin, which has seen its share price plummet by more than 99 percent this year, lost as much as 87 percent on Friday after shareholders approved the rights issue on Thursday.
The shares closed down 85.64 percent to 29 cents, which valued the company at R742m.
“Although there is a Section 189 (restructuring notice) over our heads, the majority of employees have a future, and can go into the festive season knowing they have a future. We are thankful for the jobs,” Stehring said. Lonmin is cutting unprofitable production through the closure of shafts.
About 6 000 jobs are expected to be lost by September next year as a result of this restructuring as part of a business plan to turn things around.
“Ben Magara, Lonmin chief executive, has assured us that the new business plan is based on a low platinum price. At the end of the day, we will have 6 000 jobs down the drain, but the 6 000 jobs will help protect thousands of jobs. We have to have a balance. I can assure you that he is a very relieved man,” said Stehring.
Eric Gcilitshana, the National Union of Mineworkers’ health and safety secretary, said he was hoping the bail-out would help prevent job losses.
“If you follow Lonmin’s plan, it hopes to see returns by 2018 and that by 2020 it will operate fully without any problems. It gives us hope,” he said.
Gcilitshana wants Lonmin to strengthen its policies.
“We see that either Lonmin or the Association of Mineworkers and Construction Union (Amcu) run the show. Amcu does as it wishes without considering the outcome for the company. If Lonmin continues to allow this, the bail-out is not going to help,” he added.
Majority union Amcu said last week that it was hoping Lonmin would exercise capital discipline. “The company has to plan properly about how it will manage cash flows better,” Amcu’s national treasurer, Jimmy Gama said.
Lonmin was not yet out of the woods, despite the rights offer, added Stehring. “It has made promises which it needs to fulfil, their neck is on the block,” he said.
Magara told Radio 702 that the company had 38 000 jobs last year and the figure had declined to 35 000, after 3 000 employees left the company. “We will get down to 32 000 jobs by end of next year,” he said.
“We are pleased because of co-operation with our unions in persuading members to take voluntary severance packages and retirement packages. We are 50 percent through the plan of cutting jobs,” Magara said.
Magara said Lonmin’s relationship with unions had improved.
Lonmin is not only raising $407m, but also $370m in debt from the banks, which gives it $770m to execute its business plan.
BUSINESS REPORT
Lonmin too ‘complex’ for a buyout
November 13 2015 at 07:30am By Dineo Faku
Johannesburg - Lonmin, with its plunging share price, is unlikely to attract suitors looking for a cheap takeover, amid platinum metal prices at multiyear lows, legacy issues, high cost inflation and low investor confidence in the company.
A $407 million (R5.78 billion) rights issue announced this month that is aimed at boosting its balance sheet and cushioning the blow of the impact of the 27 percent decline of the platinum price over the past year, saw Lonmin’s share price fall by as much as 45 percent on Tuesday.
Lonmin’s share price yesterday lost a further 6.42 percent to close at R2.04, which valued the company at R1.2bn, and over the past year, the share price has fallen by 94 percent.
A factor that will put off prospective buyers is that the company has been raking up losses. The company posted a $207m loss before impairment charges of $2bn in the year to September.
Marc Elliott, an analyst at Investec Securities in London, said it could be a struggle to take over Lonmin, given the depressed platinum price.
The spot platinum price yesterday fell as low as $872.85 an ounce, which was the metal’s lowest level since late 2008. Platinum was last quoted down 0.85 percent at $876.63 an ounce.
Unlikely
“There are a lot of unknowns, and uncertainties around the depressed platinum price,” Elliott said, adding that the entire platinum industry was in a difficult space. He believed Anglo American Platinum (Amplats) and Impala Platinum, the world’s biggest and second-biggest platinum producers, respectively, were unlikely to take over Lonmin.
“Amplats and Impala have enough on their plate. I don’t think they need additional challenges,” said Elliott, adding that “Lonmin is caught between a rock and a hard place”.
Peter Major, an analyst at Cadiz Corporate Solutions, said: “Why would people run Lonmin? Nobody can run that company.”
Adrian Williams, an analyst at Avior Capital Markets, also doubted Lonmin could turn into the target of a takeover.
“Lonmin’s assets require a lot of capital, and anyone who purchases Lonmin takes over its legacy issues,” said Williams.
The difficult labour issues that have dogged Lonmin are also likely to put off investors.
But even if an outright takeover of the whole company does not take place because of the inherent risks, it is still possible, however, that some suitors may find it attractive to buy Lonmin in pieces.
In other words, its value may lie not in the sum of its parts but in its parts.
Lonmin was rocked by a five-month wage strike last year, and more than 40 people were killed during violent protests over wages at its Marikana Mine in mid-August 2012.
Williams believed that potentially Sibanye Gold might be interested in taking over Lonmin’s concentrator and refining assets, but that Amplats would have no interest.
“Taking over Lonmin would go against Amplats’ goal of increasing its production of mechanised ounces,” he said.
Sibanye Gold has been bulking up on platinum after agreeing to buy Amplats’ Rustenburg operations in October and announcing plans to acquire Aquarius Platinum a month later. Sibanye’s spokesman, James Wellsted, said on Wednesday that Lonmin was “complex”.
“I think we have consistently said that we would consider any options that could be value accretive and support our dividend strategy and vision of creating superior value for all stakeholders.
“That said… It is obviously a very complex issue and reading the different reports would suggest that the value is not that obvious or apparent to everyone,” said Wellsted.
Impala made a bid to take over Lonmin in the mid-1990s, but the bid was prevented by the European competition authorities over concerns of the creation of a monopoly.
Precluded
Impala spokesman Johan Theron said the company made a bid to acquire Lonmin in the past, but under different circumstances and in a different time.
“We were precluded from the deal because of anti-competitive concerns by European authorities,” he added.
“We have just finished raising cash to boost our shafts in Rustenburg,” he said, referring to the R4bn capital raise to bolster the company’s balance sheet. “Our priority is to focus on implementing our strategy. It is not for us to comment on our competition. Everybody in the platinum belt is in a difficult space,” said Theron.
Lonmin spokeswoman Sue Vey said she did not think the firm would be the subject of merger and acquisition activity.
“The question of whether Lonmin could be bought by, or merged with, another entity is something we cannot answer now or at any time.
“But what we are certain of is that if the rights issue is approved, then Lonmin can better sustain the continued weakness in platinum group metals (PGM) prices and it will be in a better position to benefit from any recovery in PGM prices in the medium to long term,” said Vey.
In some quarters, there have been calls for the government to buy or bail out Lonmin to save jobs. The National Union of Mineworkers’ health and safety secretary, Eric Gcilitshana, said the union was ”really worried”.
Gcilitshana noted that the vote by Lonmin shareholders regarding the rights issue would impact on more than 35 000 employees.
“We are appealing to shareholders to vote in favour of the cash injection to save jobs… If they are against the financial inject, the government has to step in by giving Lonmin a loan, just like it did with Volkswagen in Port Elizabeth,” said Gcilitshana.
The Association of Mineworkers and Construction Union was not available for comment yesterday, but had said previously that the government should revoke Lonmin’s mining licence as some of its challenges were as a result of management blunders.
Last month, Mineral Resources Minister Mosebenzi Zwane said that the government planned to use the rout in commodities prices to buy assets to widen public participation in the mining industry.
TIMELINE
November 9: Lonmin says its $407 million (R5.78 billion) rights issue would be be discounted by 94 percent.
November 2: Lonmin indicates that it will likely report an operating loss of $207m before impairment charges of between $1.8bn and $2bn.
October 21: Lonmin announces plans to raise around $400m and, at the same time, enter into amended debt facilities with its lending banks for a total of $370m, maturing in May 2020, conditional on credit committee approvals.
July 24: Lonmin says it will close or mothball high production cost shafts, which will affect 6 000 jobs.
June 25: The Farlam Commission of Enquiry finds Lonmin wanting and that the company had failed to provide enough safety measures for employees, especially the non-striking workers, which the company had compelled to go to work despite the violence and intimidation during strike.
Africa's largest money manager may raise current holding of 7%
Public Investment sees $38 million cost of share sale as high
South Africa’s Public Investment Corp. said it will take up as much as 25 percent of Lonmin Plc if some of the platinum producer’s investors don’t follow their rights in a proposed $407 million share sale.
The pledge from the state-owned Public Investment Corp., which already owns about 7 percent of the world’s third-largest platinum producer, comes as shareholders are due to vote this week on whether to proceed with a deeply discounted share issue that will also unlock new debt from banks. Lonmin is reeling from a plunge in metal prices that cut its profit and erased 95 percent of its market value this year.
“The rights issue is the best possible approach to re-capitalizing the company in the current circumstances,” the Public Investment Corp.’s Chief Executive Officer Daniel Matjila said by e-mail on Monday. “Not supporting Lonmin would put the company at risk and it could potentially be harmful to the industry and the communities where Lonmin operates.”
The investment manager views the estimated $38 million cost of the share sale as high, Matjila said. The costs include rolling debt with banks, advice on the rights issue and underwriting fees, he said.
Three banks, including HSBC Holdings Plc, will guarantee the share issue, Lonmin saidin a Nov. 9 statement.
Violence at Lonmin's Marikana mine in 2012 left 44 people dead
Ramaphosa cleared of blame by commission of inquiry in June
Victims of a shooting by police at Lonmin Plc’s Marikana mine in South Africa are suing the company and Deputy President Cyril Ramaphosa for about 1 billion rand ($69 million) in damages, according to a lawyer acting for the group of mineworkers and their families.
The summons on behalf of more than 300 victims seeks compensation for “negligent and intentional acts in connection with the Marikana massacre,” attorney Andries Nkome said by phone on Friday.
Ramaphosa has instructed his lawyers to “defend the action,” according to an e-mailed statement from the South African Presidency on Thursday. Sue Vey, a spokeswoman for Lonmin Plc, confirmed by phone that the world’s third-largest platinum producer received the summons, declining to comment further.
Violence at the mine in August 2012 that erupted from a dispute over pay left 44 people dead -- including 34 shot dead by police on a single day. Ramaphosa was a non-executive director of Lonmin at the time of the killings and chairman of Shanduka Group Ltd., which indirectly held a 9 percent stake in two of Lonmin’s South African units.
Murder Charges
In July, South Africa’s second-largest opposition party, the Economic Freedom Fighters, brought murder charges against Ramaphosa over the deaths of the workers. Ramaphosa, 62, was cleared of blame for the police shooting at Marikana in a report by an independent commission of inquiry released in June. The report said prosecutors should consider charging police officials for their handling of the situation, and criticized Lonmin for failing to provide adequate housing and for ordering employees to go to work while their colleagues where on a violent strike.
President Jacob Zuma suspended police chief Riah Phiyega last month after the commission’s findings questioned her integrity and competence to hold office.
Lonmin declined 8.1 percent to 9.19 pence at 11 a.m. in London, extending the plunge this year to 95 percent.
Ramaphosa on Thursday declined to answer a lawmaker’s question about compensation for the families of the slain miners because of the civil suit, Johannesburg-based Business Day reported on Friday.
For Ramaphosa to become South Africa’s next president, he must win the leadership of the African National Congress, which has ruled the country since the end of apartheid in 1994, at its national conference in 2017. Under party rules, the winner will be its presidential candidate when Zuma steps down in 2019 after serving a maximum two terms.
The Rise and Fall of a Mining Company That Tried to Buy Harrods
Lonmin says it might close should $400 million share sale fail
Founded in 1909 to acquire mining rights in the Rhodesias
From Cecil Rhodes’s legacy in southern Africa to takeover battles gripping the British public and a massacre at one of its mines, the 106-year-old epic that’s Lonmin Plc risks entering its final act.
The company, whose businesses spanned gold mining, hotels, textiles and newspapers in the 1980s, later focused its efforts on platinum and is the world’s third-largest producer of the metal. Managementwarned on Wednesday that it might have to shut down should shareholders reject a $400 million stock sale as it succumbs to the slump in commodity prices.
Lonmin's platinum mine in Marikana
Photographer: Alexander Joe/AFP via Getty Images
Should investors decide not to cough up the money, one of Britain’s most prominent companies of the 20th century and a symbol of the country’s blend of imperialism and capitalism would be consigned to history less than two decades after the death of the man who built it.
“It’s gone from darling of the stock market to completely distraught,” said Bernard Swanepoel, who has been in the mining industry for 30 years and was chief executive officer of Harmony Gold Mining Co. He owns Lonmin shares. “It’s a cyclical business, but no one could have predicted the perfect storm of circumstances."
Unraveling
A failed attempt to mechanize in the mid-2000s, the killing of protesting mineworkers by police at Marikana in 2012, a five-month labor strike last year and a 58 percent drop in the platinum price since 2008 has left Lonmin on the brink of collapse.
In addition to selling new stock, Lonmin aims to refinance $370 million in debt to stem losses from falling metals prices. Investors are due to meet on Nov. 19.
South Africa’s Public Investment Corp., one of the company’s biggest shareholders, supports the share sale, yet Lonmin’s future remains precarious and its place in corporate history all the more remarkable.
Founded in 1909 to acquire mining rights in Northern and Southern Rhodesia, now Zambia and Zimbabwe, the heyday started when Roland “Tiny” Rowland took over as CEO in the 1960s.
Under his leadership, the company’s precursor, Lonrho Plc, turned into a conglomerate owning London’s Observer newspaper, Princess Hotels and Volkswagen dealerships with a few fights along the way that made Rowland and the company into household names in Britain and popular among small shareholders.
Face of Capitalism
Earning his ironic nickname because of his towering frame, Rowland, who died in 1998 at age 80, battled with his own directors in the courts. Then Prime Minister Edward Heath in 1973 called Lonrho the “unpleasant and unacceptable face of capitalism.”
Later, Rowland led a high-profile, bitter and ultimately unsuccessful scrap with Mohamed al-Fayed for control of London department store Harrods. It involved Rowland reporting to police that al-Fayed had broken into his deposit box at the store. The Egyptian businessman settled the dispute with Rowland’s widow.
The late 1990s saw Lonmin reconfigure to focus on platinum and other metals. A company presentation in 2001 said the platinum business had been “buried within a conglomerate.” Lonrho still exists as a company investing in food supply chain management in Africa.
Platinum Story
“People liked the platinum story -- Chinese demand, stricter car emissions standards, no one mentions that anymore -- and Lonmin was the only major producer listed in the U.K.,” said Andrew Lapping, who helps manage 458 billion rand ($32.8 billion) at Allan Gray Ltd. in Cape Town. “The company was extremely profitable for some time.”
Between 2005 to 2007, the stock soared more than 350 percent. Under then-CEO Brad Mills the company attempted to mechanize in the mid 2000s, switching from tens of thousands of workers using hand-drills to larger drilling machines.
“It was a complete failure and is the root cause of the company’s current problems,” said Lapping.
The wheels started to come off in 2008. The global financial crisis gave way to a collapse in commodity prices and a plunge in platinum prices. The company raised about $457 million from shareholders in 2009 and a further $817 million in 2012.
More controversy came in 2012 as South African police opened fire on striking miners at a facility that Lonmin owned in Marikana province. At least 44 people were killed.
The slump has only deepened this year. Earlier this week, the company said it will write down the value of its assets by more than half by taking an impairment of as much as $2.05 billion. The current market value is $187 million, down from $13 billion in 2007.
"The equity holders made good returns for a number of years, but they’re also the first in the queue when there’s significant value destruction," Swanepoel said. "That’s capitalism."
WASHINGTON -- The U.S. Treasury Department will release new "targeted guidance" this week designed to reduce the tax benefits available to U.S. companies that move their tax addresses overseas.
Treasury Secretary Jack Lew informed lawmakers of the coming announcement in a letter on Wednesday, which provided no details on its intentions.
The administration previously has said it was examining "earnings stripping," a practice by which companies load up their U.S. operations with deductions and effectively push profits to low-tax countries.
A person familiar with Treasury's plans said the guidance would indeed focus on earnings stripping.
The Treasury's notice of action comes as Pfizer Inc. considers a merger with Allergan PLC that could be structured as an inversion, where the new company would have its legal address outside the U.S. Pfizer would become the largest U.S. company to invert.
"Later this week, we intend to issue additional targeted guidance to deter and reduce further the economic benefits of corporate inversions," wrote Mr. Lew, who renewed his call for anti-inversion legislation.
The administration wants Congress to prevent U.S. companies from inverting by buying smaller foreign firms.
"Unless and until Congress acts," Mr. Lew wrote, "creative accountants and lawyers will continue to find new ways for companies to move their tax residences overseas and avoid paying taxes here at home."
Rep. Sander Levin (D., Mich), the top Democrat on the House Ways and Means Committee, said he was "encouraged" by Treasury's coming action.
"The fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend," he said in a statement.
In September 2014, the Treasury Department announced a first wave of steps against inversions, including rules that could limit companies' ability to use their offshore profits to finance a deal.
Those rules led AbbVie Inc. to abandon a planned inversion, though other companies moved ahead.
The Treasury hasn't yet issued the formal regulations it promised last year, and congressional efforts to revamp the international tax system have stalled.
The September 2014 announcement included a warning that the Treasury Department was considering rules against earnings stripping and that if those rules applied only to inverted companies, they would be retroactive to Sept. 22, 2014.
That means the Treasury announcement coming later this week could affect companies such as Medtronic PLC and Mylan NV that finished their inversions in the past 14 months.
Companies pursuing inversions often promote the deals based on their ability to move cash around the world in ways they couldn't if based in the U.S.
Often, the real benefit comes from earnings stripping, typically achieved through intracompany transactions that concentrate deductions in the U.S., with its 35% marginal tax rate, and concentrate income in jurisdictions with lower rates.
Earnings stripping has been challenging for the government to address with regulations, partly because there are some rules already written into the tax law and partly because the government wants to avoid harming legitimate cross-border transactions.
Treasury's latest move also could cast doubt on the future of more than half a dozen inversions deals that were signed after September 2014 and haven't yet been completed.
Among them: CF Industries Holdings Inc.'s purchase of Dutch fertilizer rival OCI NV and the merger of Coca-Cola Co.'s global bottling operations.
En mathématique, dans les pays utilisant l'échelle longue (c'est-dire tous les pays à l'exception des pays russophones, arabes, anglophones et du Brésil), un trillion représente 1 milliard de milliards (109x109) soit 10 puissance 18 ou, en notation scientifique à 1018, c'est-à-dire 1 000 000 000 000 000 000, encore un million de millions de millions (106x106x106). Un trillion est alors égal à un million à la puissance trois, d'où le terme. Le préfixe correspondant à ce nombre dans le système international d'unités (SI) est l'exa. Le SI est également utilisé dans les publications scientifiques anglo-saxonnes (non destinées au public). Dans l'échelle longue, mille trillions (103 × 1018) est égal à un trilliard (1021).
Dans les pays utilisant l'échelle courte et notamment dans les publications scientifiques anglo-saxonnes destinées au public (vulgarisation d'articles scientifiques, la précision est importante car elle a fait l'objet d'une loi aux Etats-Unis), un trillion représente mille milliards ou, en notation scientifique à 1012, c'est-à-dire 1 000 000 000 000. Il est appelé billion dans l'échelle longue (ce qui ajoute à la confusion lors des traductions). Le préfixe correspondant à ce nombre dans le système international d'unités est le téra.
En informatique, on utilise rarement ces termes et ce symbolisme, préférant les préfixes du système international. On parle plutôt d'un disque d'un téraoctet, bien que la dénomination anglophone de terabyte se généralise.
Rien n'interdit d'utiliser la même convention dans les autres domaines, ce qui évite tout risque de confusion. Toutefois, il faut garder à l'esprit qu'il faut respecter les lois édictées en ce domaine (notamment aux Etats-Unis sur l'usage de l'échelle courte).
Les sommes en économie et en finance ainsi que les grandeurs en informatique, astronomie et en physique peuvent atteindre ces ordres de grandeur et on trouve fréquemment des erreurs de traduction entre le sens anglophone de trillion et son sens francophone ou dans le reste du monde.
You Just Got $1 Million. Now What?
Nov. 18, 2015 10:28 AM ET
Summary
What do you do with a windfall?
Why do most people fail at handing it?
How do you avoid the common traps?
Congratulations
Congratulations, you are a newly minted millionaire and are looking at what to do next. Learn the proper technique for lighting cigars with a rolled up $100 bill? Find the nearest shop that sells monocles and gold-tipped canes? Should there be a mad rush to invest it all in the S&P 500 (NYSEARCA:SPY) or ahedge fund?
Being a millionaire
It ain't what it used to be.
The first written use of the word 'millionaire' in America was in the 1843 obituary of Pierre Lorillard II. He was one and he also created many more through his tobacco company which is now part of Reynolds (NYSE:RAI). But things aren't what they once were.
If you make a million of today's dollars each year in New York City, you probably lack a washer and dryer, a parking place (or car to park on it), and struggle to send your kids to one of the better preschools. After the ravages of 172 years, 5 months, and 26 days of inflation, it takes over $30 million in 2015 to equate what the obit writer meant by "millionaire" back in 1843.
Receiving a windfall
If you earn your money slowly over time, you have a chance to acclimate to having and using it. But what do you do if you get your money all at once? The record of windfall beneficiaries keeping their new riches is not a happy one. A significant number of lottery winners, professional athletes with short but spectacular careers, and heirs (especially those who did not anticipate an inheritance) lose everything and are subsequently worse off than they were before. How do you avoid joining them?
Staying anonymous
Catch your breath and keep your own counsel. The best way to avoid being pressured, manipulated, robbed, or merely pestered is to keep quiet. If you want help (or you want to help someone else), then seek out the people you want to interact with. Don't let them seek you out. That will help meaningfully cut down on the number of charlatans that you will have to contend with.
Stop and think
Don't just do something, stand there.
- The White Rabbit in Disney's (NYSE:DIS) Alice in Wonderland
When in doubt, do nothing.
- Mikhail Kutuzov
Principals make money when there are returns while agents make money when there is activity. So as soon as you are surrounded by brokers, lawyers, private bankers, and accountants, they will all have different ideas of what to do, but they will be unanimous that you should be doing stuff. Wait.
Year 1 - Defense and preparation
One of the keys from transitioning from "get rich" to "stay rich" is to remind yourself that you don't have to do anything. You will have to be your own advocate in terms of minimalism, simplicity, and radical selectivity. Situate yourself so that you can pause for a full year while you plan for the future.
You have to put the money somewhere. To start off with, get it into federally insured increments. You can get a Goldman (NYSE:GS), JPMorgan (NYSE:JPM), or Bank of America's (NYSE:BAC) U. S. Trust to deal with the deposits, but it is not that complicated and pretty much any bank can help. If you have a masochistic streak, you can do this all yourself, but the paperwork will be substantial and your mailbox will be stuffed with statements on a daily basis. I recently wrote up some quirky but attractive places to park cash, but only look if you are interested in such things.
Once the money is safe and secure in federally insured accounts, then you can begin to map out your priorities. The first two will probably include paying any taxes owed on the windfall and paying off any bad debt that you have accumulated. Once you are dealing with your after-tax money and it has been netted out against any high interest loans, you can think about next steps. Over the course of the year, you can plan out your top priorities for your giving, investing, and spending. Here are some priorities that I set for 2015 for myself; I will go through the same exercise for next year. You should go through the same exercise of setting your own annual priorities for giving, investing, and consuming.
Refocus on everything that is important to you in your life other than the newly secured windfall. Between a library card, running shoes, and family, much of the happiness that you could have with $30 million or more is identical to the happiness that you could have with $0. If you are able to read, run, goof off with your kids (or whatever free or virtually free activities bring you joy), then it takes off an enormous amount of pressure to succeed in using your money well. It just matters less and so will create less anxiety. What do you love to do that is free or virtually free? You should have a good answer to that question and should dedicate much of this year to focusing on those activities.
But is there enormous cost in taking off 2016?
Probably not. The US total market capitalization is about 119% of GDP. Historically, prospective annual equity market returns from the S&P 500 have been under 1% from such prices. There will probably be plenty of chances to deploy capital when the market cap is less than the GDP.
Another measure to follow is the Shiller PE. It is currently about 26, over 50% above its historical average of around 17. Historically, when the equity market is priced at this level, the prospective return on the S&P 500 is slightly negative.
Both of these measurements have their limitations and their detractors. My conclusion is not one of pessimism, but one of patience. If there is a reason to go slow - as I believe there is when dealing with a windfall - then these metrics offer no countervailing encouragement to rush.
What about the bond market? The US 10-year government bond currently yields about 2.25%. Spreads between that yield and corporate bonds are tight as are spreads on "high yield" bonds. As with the equity market, the cost to waiting is probably either low or negative.
Planning Year 2 with Warren Buffett's 25-5 Rule
Berkshire Hathaway (BRK.A/BRK.B) CEO Warren Buffett has a prioritization strategy that works well here.
Step 1: Write down your top twenty-five goals; in this case, I would have a list of twenty-five each for philanthropy, investing, and spending for a total of seventy-five priorities.
Step 2: Circle your top five goals in each category.
Step 3: Eliminate any distraction from the other sixty items until you have accomplished the top five priorities in each category.
Dealing with new topics at a new scale, success is going to depend upon protecting your focus and keeping it simple. This 25-5 process will force you to make decisions and choose what is important to you.
Year 2 - Protecting capital and priorities
If you combine cautious sizing with limiting yourself to about five positions, you can make an initial allocation of anywhere from 5-10% of your new capital. This balances putting real money to work with allowing yourself an opportunity to learn from your mistakes with actual funds. Many investment problems that were hard to notice when you were building a model portfolio become clear once real money is moving around.
Take much the same approach to philanthropy. Whatever your budget is (I will assume 10% of the windfall, but it will of course vary based on your priorities), plan to allocate about five gifts worth 1-2% of that allocation. Before you allocate any additional money, See what happens in practice and how the use of these gifts compares with your intent and instructions. While you are not personally capturing the value that is being created, philanthropy is otherwise much the same as investing. All of the same concepts apply - what matters is the probability-weighted relationship between risk and reward and the relationship between cost and benefit.
It is essentially never a good idea to give away any money to someone because they ask. Too high a percentage of people who ask are either dishonest or irresponsible. Instead, be intentional about your priorities and seek out the beneficiaries you deem to be most worthy.
In my case, I simply explain that I do not make any direct gifts or loans; I have a foundation that handles philanthropy but it does not take requests and we have policies in place that prevent me from altering our process. All of that is true and coincides with my preference to spend none of my time being asked for money.
In terms of spending on consumption, put as much time as possible between your enthusiasm and your purchases. Let early adopters pay big premiums to get stuff first. Let seasonal premiums come and go. Track prices and only pounce after they are down. In my experience, waiting even a few months for big purchases can save a lot. Prices can come down. However, the bigger impact is that I frequently lose interest and don't want to buy the same things, even for a discounted price. That being said, if you go ahead and put down adeposit on a significant boat or plane, that deposit can easily be resold, often with an attractive gain.
Get used to saying, "I can't afford that". It is harder for someone to argue with than if you say, "I don't feel like it". Even if you have the money to buy something, it can always be true that you cannot afford the opportunity cost to spend money on something that is not a top priority.
Evasion and deception defense
When you have a windfall, you will also have liars who want your money. While you will make plenty of mistakes, make sure that the mistakes are yours. It will be crucial to cultivate skills at detecting evasive and deceptive behavior. One book that has been particularly helpful to me on the topic is The Gift of Fear. The more that you know about evasive and deceptive behavior, the harder a target you will become.
It would also be useful to study the details of people such as Bernie Madoffwho defrauded investors and Greg Mortenson who defrauded donors. They were both friendly. They both offered people exactly what those people were looking for in return for money and trust. Neither would have stood up to even cursory due diligence.
Throw your weight around
The more money you have in your wallet, the less you have to pull it out. You should be able to get the best treatment from financial institutions for the lowest possible price (in terms of percentages if not dollars). Make certain that everyone you deal with is focused on price and knows that you will notice price carefully (they need to be on notice because unless you let them know, they might confuse you for any number of customers who don't care enough about price to do anything about it). Don't pay fees for anything. Let service providers know that the relationship will work on the basis of scale and a long-term commitment, not by gouging you for petty fees.
Act like you own the place
With deference to the virtues of adequate statistical diversification, you should also concentrate your investments enough that your interests and opinions are taken into account by managers. This does not require you to be an "activist", only to act as if you are an owner when, in fact, you are one. This can be an opportunity for board seats or at least a value-adding relationship with company managements.
Wait 'em out
Windfall recipients should do what they can to protect your capital while securing at least a reasonable rate of return. If possible, beat the market as represented by the S&P 500 over the long-term. One of your best advantages is the ability to wait 'em out. You are in no rush; in fact, you could just keep the money in the bank and don't need to do anything with it. So your time horizon is essentially infinite. Use that time-insensitivity to exploit the time-sensitivity of others. You can take advantage of having strong hands to become a service provider for the short-term needs of panicky traders.
Whenever you look at an investment, start at the end and consider its ultimate terminal value plus whatever cash it will generate in the interim. Don't worry too much about what will happen next. In your circumstance, why should you really care about the immediate future? Just figure out an approximation for the net present value for what you will get over time, even if it is a lot of time.
For example, when volatility is extremely high and markets are pricing in a lot of uncertainty, you can be perfectly positioned to bet that volatility will eventually decline and that uncertainty will eventually be resolved. If there is reputational cost associated with owning something, then you can be well positioned to buy (at a steeply discounted price, of course). You can set up shop as a permanently available buyer of last resort wherever and whenever there is a market whose other participants are losing their minds. Even without any other advantage in terms of information or judgement, your new scale is an advantage when it is used opportunistically.
Conclusion
In short, you should keep quiet, go slow, and avoid being tricked out of your windfall. If you accomplish those seemingly easy and obvious tasks, you will be way ahead of most people who have ever been in your situation. You will have some chance to still be in this enviable situation once you are used to it. In time, you can strengthen your position by taking every possible advantage of your new scale.
Additional disclosure: Chris DeMuth Jr and Andrew Walker are portfolio managers at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.
