When ever my Grandpa Jerry came over, I'd always get excited for story time. Grandpa was a gregarious serial entrepreneur; therefore, many of his stories were animated tales of profit, loss and deals made along the way. He'd always find a way to surreptitiously include a lesson or two into these stories. But because I'm a slow learner, it took me many years to notice.
One of grandpa's businesses was called Friedland Shipping International. As the name suggests, his firm engaged in international shipping. Particularly, heavy machinery and white goods between the US and Iran during the reign of the Pahlavi dynasty as well as with customers in Saudi Arabia and to a lesser extent the UAE. His firm employed a few dozen people and was based in the New York City's World Trade Center.
During the 1960s and 1970s Iran was growing rapidly and required bulldozers, cranes and other equipment that my grandpa was able to source and ship to his customers. As part of his business, my grandpa traveled to the Middle East to monitor shipments, build relationships with customers and learn about their culture. Many of the stories he'd tell regarding Iranian and Saudi culture fascinated me, from drinking strong coffee, the heat of the desert, the challenges of being a Jewish trader in the Middle East and polygamy.
At one point in the mid 1970s while his business was going really well, my grandpa explained that he was contacted by some Hong Kong based merchants that wanted to trade with China and they asked him if he'd like to trade with them. At the time, China was impoverished and closed to direct trade. He also felt that he lacked Chinese language skills and requisite cultural understanding. Moreover, his business with the Iranians was going so well that he didn't think it was a good return on time. He declined the Hong Kong merchants' offer.
A few years later in 1979, the Iranian revolution occurred and his business was mortally wounded. During one of the last conversations I had with him, he told me that one of his biggest regrets regarding Friedland International Shipping was his decision to pass on trading with the Chinese.
While I didn't understand it at the time as such, my grandpa taught me about two deeply related business concepts:
Political risk can be thought of as a situation where theft and breach of contract by your trading partner both become legal - the rules of the game no longer apply. In this instance, the Iranian revolutionary government confiscated private property and refused to pay outstanding debts. Accounts receivable become write-offs.
Diversification is best thought of as putting your eggs in many baskets located in different countries with a range of political regimes.
Diversification is the only way to reduce the pain of adverse political risk.
If you're ever concerned with government policy or leadership, I strongly suggest you consider this lesson too.
Thank you grandpa.