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

Book Review - The Outsiders

A CEO has five essential choices for deploying capital raised through internal accruals, debt and equity. a) Invest in existing operations, b) acquisitions, c) debt reduction, d) dividends and e) buybacks.

Essentially, the most vital skill a CEO must have is capital allocation which will determine the return to shareholders. This crux is the key focal point of William Thorndike’s excellent book The Outsiders. In this book Thorndike writes about eight CEO’s whose average returns during their tenure have outperformed the S&P 500 and their peers by a huge margin. All these individuals were first time CEO’s with insignificant prior managerial experience but they still succeeded owing to their consistent analytical and rational thought process and having a long term perspective. The other significant trait common to all these CEO’s was none of them was obsessed with boosting up market capitalization. The eight terrific CEO’s featured are:

Tom Murphy – Capital Cities Broadcasting

Henry Singleton – Teledyne

Bill Anders – General Dynamics

John Malone – TCI

Katharine Graham – The Washington Post Company

Bill Stiritz – Ralston Purina

Dick Smith – General Cinema

Warren Buffett – Berkshire Hathaway

These eight individuals were champions in capital generation, capital allocation and decentralized operations. All of these CEO’s were “foxes” (as against “hedgehogs” – knows one thing, but knows very well) who knew many disciplines and were very efficiently able to make connections across industries and disciplines and this variety rendered fresh perspectives and innovation. For e.g. Buffett before becoming CEO was a highly successful investor and was fully prepared (his prior experience in evaluating an array of investments) for allocating capital as the CEO of Berkshire Hathaway. For fans of Charlie Munger, there are some inputs from him as well as the author interviewed him for some portions of this book.

These CEO’s made capital allocation decisions themselves (unlike at many organizations) and  firmly believed in independent thinking, razor sharp focus on cash flow based metrics and operating costs, buybacks as an investment opportunity and patience with acquisitions. Each one of them attracted doubt and uncertainty from peers and Wall Street during their tenure but increasing per share value was their primary goal and that translated in exceptional returns for their long-term shareholders. 

Lastly, the author provides a checklist to think like The Outsider’s CEO. This book is worth the money and time and one will surely gain many insights on a variety of businesses. Strongly Recommended!

Reinvent the Toilet Challenge - Global Sanitation

Bill & Melinda Gates have been doing tremendous work through their foundation. One of their key focuses is water, sanitation & hygiene. First a few facts:

1. The western "flush" toilet was invented in 1775 by a Scottish mathematician and watch maker named Alexander Cummings. It has been more than 230 years, but the basic "flush" toilet hasn't undergone any change. 

2. Worldwide there are 2.5 billion people (close to 40% of the world's population) without access to safe sanitation. About 1 billion people defecate in the open and another 1 billion use pit latrines.  

3. Diarrheal diseases are caused when food and water mix with fecal matters. Diarrheal diseases are responsible for 1.5 million annual deaths globally which is more than annual deaths from AIDS and malaria combined.

4. It requires on an average 3.5 gallons of water to flush each time.If every person on the planet flushes daily than the total daily requirement is a mind boggling 24.5 billion gallons of water.

Also, there are too many road blocks to developing flush toilets such as electricity, sewer system and plumbed water in many of the world's developing countries including India. Bill & Melinda Gates initiated 'reinvent the toilet challenge" and offered $42 million who came with a new kind of toilet system that does NOT require electricity, sewer system and water costs less than 5 cents a day for use. The culmination of the challenge led to some very fascinating findings. Click on the links below:

Reinvent the Toilet Challenge - Winners

Why we Need a Toilet Revolution

Fact sheet - Institutions Receiving Grants