Money management: Is it a profession or a business?

Any great business has some or the other kind of sustainable competitive advantage that allows the business to earn return on invested capital that is above the industry average. One of the so called entry barriers is the initial amount required to start the business. If the amount is quite high, not everyone can enter the industry and the incumbents have a good run. The question is should the government/regulator impose such high capital requirements and dissuade passionate and highly bright individuals from the entering the industry? One of the questions going around in the Indian Mutual Fund industry is whether the minimum net worth required to set up an AMC (currently INR 100 million) should be increased or stay at current levels.

Renowned value investor Mr. Parag Parikh has written a fantastic article articulating his thoughts on the same. You can view the article here

The Real Lessons From the Fates of BlackBerry and Nokia

A fine article in Business Week on the recent change of events at BlackBerry and Nokia. From the investing standpoint, I wrote a few lines about the same here.

Click here to read the article. 

The decline of BlackBerry

The abrupt decline of BlackBerry is an example of how consumers and investors taste changes these days for technology products. If these companies miss a trend, the market doesn't even give time to breathe. Four years ago BlackBerry had 51% of the North American smartphone market which currently is 3.4%. Hope BlackBerry doesn't go down the history aisle as a Palm or a Gateway. Kodak met with the same fate as well when its executives failed to recognize the onset of digital photography. 

Instead think of businesses such as Coca Cola, Nestle, IKEA, Nike, Walmart, Costco, McDonald's etc.  where there is no technological obsolescence. These companies are doing exactly the same thing today what they were doing 50 years ago. The predictability of such businesses is extremely high. How could we have known 10 years ago that Google in 2013 will have its operating system or will be in the smartphone business? Who knows what Apple will be in 2023? Is Tesla valuation sustainable? Tesla stock is up 392% year on year. Tesla's profit history is very poor. 

This is one of the main reasons why great investors hardly touch technology based companies.  

Book Review - Grinding it out – The Making of McDonald’s’

McDonald’s needs no introduction. The seeds of this great franchisee were sown in the year 1940 when Dick and Mac McDonald opened McDonald’s Bar-B-Q drive-in restaurant in San Bernardino, California. The 15 cent hamburger became staple in 1948 and the world famous french fries were introduced to the menu in the year 1949. But it was 1954 that changed the fortune of McDonald’s when a 52 year old multimixer salesman by the name Ray Kroc visited the brothers to sell more multimixers. Ray Kroc was fascinated to see the terrific business the drive-in was generating and came to know from the McDonald’s brothers about their national franchising plans. Ray Kroc soon signed an agreement which gave him the right to franchise the McDonald’s operations everywhere else in the United States. Today, McDonald’s has 34,000 restaurants and serves 6.9 crore people in 118 countries every single day and sells 75 hamburgers every second!! The book ‘Grinding it Out’ is Ray Kroc’s autobiography on how he went on to create this hamburger giant and he tells his story with pride and panache…

Ray Kroc’s bazooka moment in life came when he was 52 years old when many have started planning for retirement homes, but as Joe Kennedy Sr. said “when the going gets tough, the tough gets going” and Ray Kroc started his marvelous journey creating one of the world’s best corporations and certainly the granddaddy of the restaurant business. Kroc had a tough time initially in his career and started as a paper cups seller for $35/week and played part time piano to support his wife and daughter. But he was an opportunistic man & after selling paper cups for 17 years saw opportunity in the milk shake machine called Multimixers and he grabbed it. Luck, it was during one of his sales trip that he landed onto the San Bernardino McDonald’s.

Kroc was smart and never changed the original name, but was a technocrat in his business and had a deep knowledge of even the moisture level of the potatoes!! Kroc got on board smart people to work with him and who stayed all throughout. Kroc trusted his people but made the two most important decisions about the menu and the real estate locations. One of the key reasons for Kroc’s success was that he was flexible and changed as the time and market demanded (It wasn’t until 1966 that the first in-dining McDonald’s was opened). He remained glued to the McDonald’s quick service staple food model and never ventured out of his core competencies. For e.g. McDonald’s doesn’t serve a pizza or a hotdog. Kroc like all great business creators believed in decentralized operations and a tight leash on costs.

Below are a few interesting things by Kroc from the book,

·  “So, the risk of seeming simplistic, I emphasize the importance of details. You must perfect every fundamental of your business if you expect it to perform well.”

·     “It requires a certain kind of mind to see beauty in a hamburger bun.”

·    “My attitude was that competition can try to steal my plans and copy my style. But they can’t read my mind; so I’ll leave them a mile and a half behind”.

·    “It has always been my belief that authority should be placed at the lowest possible level. I wanted the man closest to the stores to be able to make decisions without seeking directives from headquarters”.

·   “After we find a promising location, I drive around it in a car, go into the corner saloon and into the neighborhood supermarket. I mingle with the people and observe their comings and goings. That tells me what I need to know about how a McDonald’s store would do there”.

Ray Kroc gave us a great place to mingle and in the process did teach us very valuable business and life lessons. Strongly recommended!!

Ruchir Sharma in Conversation with Nandan Nilekani

The recently concluded Jaipur Literature Festival had a very impressive list of guests and speakers. Among them one was Ruchir Sharma - Author of Breakout Nations. You can read the book review here. Nandan Nilekani engaged in an interesting conversation with Ruchir Sharma which I believe is a very interesting video for anyone interested in enhancing his/her knowledge about the emerging markets. Click on the link below:

Ruchir Sharma at Jaipur Literature Festival

Secret Ingredient for Success

A fine article in New York Times on how self awareness is a key ingredient for success. By Camille Sweeney and Josh Gosfield.

Secret Ingredient for Success

Origins of Growing Money

An informative article in Forbes India by Jasodhara Banerjee summarizing key financial innovations such as bonds, merchant banking, private equity and others. Click on the link below:

Origins of Growing Money