Opportunism

Twelve years ago, my uncle starts his first car wash company which has ten branches and worth 30 million RMB now. However, back to that time, he was just a ordinary worker at his mid-thirties. Without enough money to invest on this car wash company , he started selling his idea to all relatives, my father included. Although having many positive responses, my father was the only one who said ‘OK, I am  in’. Not knowing too much about the business, he invested 10 thousand RMB and  asked  30% of the total profit every year for return. The business was not quite good at the beginning because not many people could afford a car. Things started to change in two years. With the development of economy, the number of car owners started to propping up and all of a sudden, my uncle’s car wash company became a bank-note printer. In the next two years, the profit my father got exceeds the amount he invested.  Then, just like other stories, problems occurred at the acme.

In 2009, on the second day of Chinese New Year, my uncle came to visit us and gave the 30% profit of last year to my father. For me, it seems a yearly routine between them but  the sound of arguing I heard in the study room made it a little bit different. My uncle thought it was his effort that made the business successful and he wanted to buy my father’s shares back at current price. Knowing the growth rate of the business and believing it will worth a lot more in the future, we would support him if he decided not to give up the opportunity. After thinking it the whole holiday, my father finally sold his shares back to my uncle. He told my uncle that he always put his family at the first place and he believed the car wash company would be even more successful in days to come.

I think it is a good example of not acting opportunistically around me. My father actually consulted his lawyer about the ownership and indeed he could insist on keeping his shares. If he did so, he could have the 30% of the 30 million RMB today. However, instead, he gave up because he treated family as his priority in his life. For him, earning more money can not compensate the breakup of brotherhood. With the view of economics, it is easy to analyze my dad’s decision. Based on his joint utility function which consist of family and money, the marginal utility function of money shows low marginal utility while that of family has a steep upward slope. And this slope is decided by the education he took as well as his personal experience. However, the slope is not that stable and is somehow related to some psychology variables. This may explains why he needs thinking about this decision for the whole holiday time. On the other hand, the reason why the marginal utility of money is comparatively small is because he has his own company as well. Without taking advantage of that opportunity, he also did not need to worry about money. But it really depends as well, many people do enjoy keeping adding zeros before the dollar sign.

In addition, the expectation also plays an important role when he struggled. My father treated it as kindness and support from family rather than the serious investment. So at the beginning, the expected value of the business is quite low or approximately equal to zero and what happened next is more like lottery winnings for him. Low expectation; not desperate for money and values on family explain why my father did not act opportunistically when he got the chance. I can not judge his decision, but as his son, I am proud to have a father who always put his family at first.

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2 comments

  1. profarvan · September 21, 2014

    This is a good essay. It gets at the themes in the prompt very well. Big amounts of money do put stress on family. But otherwise those bonds are very strong.

    You should ask yourself whether this same story would have happened if your father and uncle were not related, but were instead friends. Likewise, what if they were only business acquaintances?

    There is also a question in the story of how efficient the market is in valuing assets like your uncle’s company. The way you told the story, the then current value at the time of sale was really below what it should have been. I gather the company shares weren’t otherwise traded. If that is true, how was current value determined? Was some formula applied based on current cash flow and other related variables?

    If the valuation was really the market valuation, then it is less clear that what your father did was to refrain from opportunism. He would have been compensated fairly for his shares. There is always confusion when looking backward on events whether what came next could have been predicted ahead of time. Your story makes it seems like that being possible in the case of your uncle’s business.

    There are these factors that are also related. Early entrants typically make above normal return in a growing market. But if growth slows and entry is unimpeded, those profits erode and the company beings to make a more normal rate of return. Is this happening with your uncle’s business now? The high valuation that you mentioned suggests not. But as with the earlier valuation, what is that based on?

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    • shiyuchen1992 · September 23, 2014

      Since my father is a business man, I can say that I grew up with those stories about business acquaintances and close friends broke up because of personal welfares. I do believe without very strong bonds like family, as long as there is enough profit, the so-called ‘close relationships’ could be destroyed. I guess it is a reason why my teacher in Chinese business school (I am a transfer student) told us not to start your business with your close friends when you do not have a contract on how to allocate your profits and debts. For my uncle’s car wash company, it is still making a big amount of money every year but with a lower profit rate compared with three or four years ago. The value of the company keeps growing up since the car market in China is still enlarging and I can give a number for the current value of this company is because someone had offered that price for buying it. I actually don’t know about the price my father got but I guess 30%*equity+30%*discounted future profits( three years ) will be fair.

      Like

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