Book Review #18:The Shipping Man: Author: Matthew McCleery

The book 'The Shipping Man', written by Matthew McCleery, tells the story Robert Harrison Fairchild, a New York based hedge fund manager who stumbles into shipping industry by accident. While looking for contrarian investment opportunities, he observes that BDI (Baltic Dry Cargo Index) had fallen almost 97% from its peak in 3 months. Curiosity piqued, he digs deeper into learning about the industry. 

As a hedge fund manager, his first instinct is to buy shipping industry loans of the cheap and foreclose them earning a few quick bucks in the bargain. In his quest to find cheap loans, he quickly finds two things. One, the loans in the shipping industry work differently from other loans and two, the centre of global shipping finance is in Hamburg in Germany and that the idea of a high rate of return for a German is the cost of capital for an American.

While he could not buy a shipping loan on the cheap, the shipping bug had infected Robert. Based on an invite from a Greek financier named Spirolaki, Robert flies down to Athens where, over the influence of a cup of wine, Robert ends up signing a contract to buy a ship. The cost of the ship would be 5 Million USD, with a potential EBIDTA of 4 Million USD in the first year !!!

Robert Harrison Fairchild has become a Shipping Man !!!

Owning the ship was only the beginning. Immediately after owning the ship, Robert experiences both the thrills and challenges of being a shipowner. Due to famine, the Russian Government banned the export of Wheat. This meant that a huge opportunity was created to export wheat from other parts of the world, especially the US. As luck would have it, Robert's ship was currently in American Ports and he gets an order to ship a container load of wheat to Djibouti in Africa.

However, getting clearance from US port authorities was a huge challenge. Post their inspection, Robert spend almost 100000 dollars to get the ship ready. He gets the order. However while in the waters of Somalia, his ship is attacked by pirates.

This is where the next part of Robert's life begins. His ship is rescued by the ship of Coco Jacobsen who is a Norwegian shipping magnate. Jacobsen is facing claims from his bank to deposit $200 Million in his bank to 'mark his loans to market', or face foreclosure of his loans and the attachment of his ships as collateral by the banks. Knowing that Robert was a former US hedge fund manager, Jacobsen, in return for rescuing the ship, asks Robert to help him raise the money in the US junk bond market.

The rest of the book is about how they try to raise the money in the US bond market. There is an obligatory love interest between Jacobsen and Alex, who manages the issuance of the junk bond in the US markets.

The book is full of gems of financial and life wisdom. Finance as applied to shipping industry upends the conventional rules and laws. Sample these nuggets on finance in shipping industry...

About making money in Shipping Industry, “There is only the market. If your timing is not correct, you will never make money even if you are very smart"

About the revenue model of the industry, “There are only three ways to get an advantage over your competitors in this business.”
“What are they?” Robert asked.  “Pay less for your ships, pay less to operate them or pay less for your capital. In a commodity business like shipping, the only thing that really matters is price."

"The amazing part, he learned from reading another article in The Economist, was that because ships could carry so much cargo, even a tripling of charter rates equated to a relatively small percentage of the value of most commodities that moved by sea. As a result, even high rates didn’t create demand destruction as they did with crude oil and other commodities. When you added the effect of financial leverage to the operating leverage, Robert quickly recognized that owning ships in a strong market was like printing money.  Flush with cash generated"

About availability of money, "Money hides when there is danger, but pops out whenever there is value,”

About making money in the industry, “That is the point; everyone will make money…everyone except for you!”
“The Norwegian sale and purchase brokers who sell you the ship will make money; the British banker who finances the ship will make money; the chartering brokers who find cargo will make money; and the manager who operates the ship on your behalf will make money. The lawyers will make money, the flag states will make money, the classification societies will make money, the…”  “Stop,” Robert sighed.

About valuation of a ship, “The value of a ship is determined by the cash flow that people perceive it will generate over a period time. Charter rates must remain at very low levels for a very long time before the confidence and psychology of shipowners is affected."

About Freight Rates, “Robert, my friend, as an investor, you should know that supply and demand alone does not determine freight rates,”
“The movement of cargo has a certain intrinsic value, but the cost of moving cargo is determined almost exclusively by the perception of the direction of the freight rates.”

“What is the Hanseatic approach?” Annie asked unsure to what her boss was referring.  “Oh please, you know the drill, Annie, just add up the total undiscounted cash flow that the vessel will generate for the remainder of her useful life based on 10-year average rates and use that figure as the value of the fleet,”

"everyone knows that a long-term investment is just a short-term investment gone wrong,”

“Anyway, people with a strong balance sheet spend too much time at lunch and think about girls instead of doing more business. There is nothing more dangerous than a strong balance sheet."

“Growth is a principle preached only by people who have nothing of their own to lose,”
“And what exactly is that supposed to mean?” Robert asked.  “What it means is that the people who want growth are the same people who are not satisfied with that they have. Governments need growth because they are a giant Ponzi scheme that needs more tax revenue, and people with nothing need growth to get something, and people who feel small think they need to grow to feel big.”

“The spot market does not care if you are big or small. And there are no economies of scale in the shipping business, not beyond a fleet of 10 ships. That is the perfect sized fleet. You can capture the rest of the efficiencies by being the big client of a third-party ship manager.”

Here are some nuggets of life wisdom....

"Robert Fairchild was beginning to question his own social utility; a dangerous form of soul searching that had ruined the lifestyles of many men before him. He knew that he had entered the treacherous waters of introspection and he had to be very careful."

“The experts are often wrong because they know too much about a market that is inherently unknowable."

“You strike me as a person who needs to learn things through experience,” Spyrolaki said, “which is fine, but also expensive.”

“You are going to successful at this business because you are a little crazy and you need to be a little crazy to be a shipowner. If you are crazy and you are a man of your word and you have money, then you have the chance to become a good shipowner.”

"so few Americans really know how to enjoy their life. They scurry around from place to place never stopping to enjoy the gifts of a healthy body and mind."

"Robert, a life without passion is not a life at all.”

"there are certain times in life when speed is more important than price,”

"two happiest days of a shipowner’s life are the one when he buys a ship and the one when he sells a ship for a profit"

"once you’re really rich, all you can do is lose,”

"It felt good to stand between an investment bank and a huge fee."

“The cycle of life and the cycle of shipping are not so different sometimes; enjoy it while it lasts.”

“When a man stops trying, then he is really in trouble. There will always be many good reasons not to do things in life, but people who achieve the great things are the ones who believe in themselves and find reasons to do things even when sometimes they do things that are not so smart,”

"as long as you show up and have a positive attitude, you will probably do just fine."

"success in life was basically random; it was a function only of being out in the world with a willingness to try new things."

Finally, you also learn a lot of terminologies used in the industry, without which no expert analysis of the industry can take place.

"NSF, shorthand for Norwegian Sales Form."
“Bunkers are the fuel that the ships burn at sea."
"ton miles are the total amount of cargo multiplied by the distance that it is carried by the ships."
"That is what SHINC stands for: Sundays and Holidays Included. It is a term in the charter party agreement."
"it is proper to use the female pronouns when referring to ships. This is because in the olden days, sailors were away from women for so long that they referred to everything they saw using female pronouns – even for the sea herself. They were lonely men.”
“Worldscale is just a standardized way to express how much money a tanker earns on a voyage. It takes into account port charges, canal transit fees and bunker prices,”

I read this book twice. While reading this book the first time, I was confused as to who the real hero of the story was. While the story starts off with Robert, the gripping story of his buying a ship, his adventures with running it and finally him having to sell it, all within a span of one year, was over by the 10th Chapter of a book of 23 Chapters. Other characters kept flitting in out out intermittently. The story of Coco Jacobsen, a Norwegian shipping magnate, and his attempts to raise money in the US junk bond market, dominates the second half of the story.

So who is the real hero of the book?

It took me a second reading to realize that the real hero in this book is the Shipping Industry. This book is a celebration of the industry. The shipping industry is presented to the reader with a lot of passion, almost bordering on love and affection. The triumphs of the industry are eulogised, the defeats underplayed. The quirks and the whims and traits of the industry are presented with elan and panache. 

After reading this book, you will come to know of the shipping industry in detail. You will know the drivers of the industry, its finances, the mysterious ship owners and their hardworking crew. You will know that traditional methods of valuation are useless in a shipping industry. You will learn the industry jargon, the acronyms used and the industry ecosystem. You will learn that Balance Sheet is useless in Shipping Industry and that making profits is almost impossible given the cost dynamics. Intermediaries make money in this industry, not the owners. You will learn that you have to use feminine pronouns when talking about the industry.

After reading this book you will be a better person. You will almost become a Shipping Man. 

You will become a better shipping man.....

What more do you need?