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

Nation Branding

 I found the following definition of the word ‘Brand’ on the MASB (Marketing Accountability Standards Board) website based in Florida, USA.

 A brand is a "name, term, design, symbol, or any other feature that identifies one seller's good or service as distinct from those of other sellers.

Also, the following was something of interest on Wikipedia:

The word "brand" is derived from the Old Norse brandr meaning "to burn." It refers to the practice of producers burning their mark (or brand) onto their products.

The oldest generic Brand, which is in continuous use in India, since Vedic period, 9000–10000 years ago is known as 'Chyawanprash'. It is widely used in India and many other countries and is a herbal paste of 45 herbs made for revered Rishi named Chyawan.

Branding can be for a personality or a company/organization or for a country too. I have been sometimes wondering that why India with such a rich olden times, different and vibrant society and above all a well branched out NRI populace doesn’t not brand itself. The names which immediately come to mind when nation branding comes are the ‘Malaysia – Truly Asia’ slogan or ‘Discover Australia’ one. The last to join the league is South Korea. I read an interesting article in the Korean Herald regarding the South Korean branding. South Korea has been performing superbly and has churned out global giants like Samsung, LG and Hyundai.

China did a similar branding exercise in the city of Rome (early 1970’s) as the Chinese government supported migrants to open diners in the city and residents of the city learnt the Chinese culture from there as laid out in the article.

Korea heading to level playing field for nation branding

Book Review - Breakout Nations

Ruchir Sharma (Head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management) has written an absolutely worth reading book; Breakout Nations – In Pursuit of the Next Economic Miracles. This book comes at an opportune moment when the world at large is looking at emerging markets for increased growth. Sharma very convincingly debunks many myths and takes the reader on a very interesting tour. The great thing about this book is that the author backs every argument with lots of captivating and logical data. 

The author has travelled extensively around the world and typically spends one week per month somewhere in the world and takes the reader from Lagos in Nigeria to Seoul in South Korea. This book is a vast collection of ground realities of more than two dozen countries Ruchir has minutely observed and the book absorbs the reader at almost every page. For e.g in the chapter on India, “The Great Indian Hope Trick”, there is a fine piece on ‘High Context’ and ‘Low Context’ societies. Also, in the chapter ‘The Fourth World’ he talks about Frontier Markets and mentions how Nollywood (Hollywood of Nigeria) with cheap technology and entrepreneurial spirit has become the second biggest employer in Nigeria. 

The key argument that the author makes in the book is that the past decade of extraordinary growth in the emerging markets is coming to end. He correctly points out that the growth in the emerging market countries came more from the global free money flows and less from domestic policies. He argues that going forward one cannot view emerging market countries as one group, but have to understand them as individual nations. For e.g. in the segment on Russia the author mentions that the outflow of private capital from Russia hit $80 billion in 2011 which was $42 billion in 2006, and that key things to watch out for Russia would be non-oil based growth and reversal of capital flows. 

The author right through the book offers various ‘Rules of the Road’ to watch out for potential ‘Breakout Nations’. The author explains that the break-out game is all about beating growth expectations relative to one’s per capita GDP level and in order to find the next breakout nations, one has to look at different wealth category. According to the author, in the $20,000 - $25,000 income range Czech Republic and South Korea have a best chance. In $10,000 - $15,000 category Turkey and Poland could be potential winners. The author believes that Thailand could surprise on the upside in $5,000 - $10,000 income range. Under $5,000 Indonesia, Philippines, Sri Lanka and Nigeria have a chance. According to the author India has a 50-50 chance to breakout.

The author also presents in the book some innovative ways of looking at facts. One of the things he mentions is ‘The Billionaires Index’ which means that if a country is generating too many billionaires relative to the size of the economy, the economy is not well balanced. The key thing is which sectors are generating billionaires and there has to be churn in the billionaires list. More billionaires generating from industries (Real Estate, Mining, Oil & Gas) where there is government patronage is a not a good sign. Sharma also touches upon developed countries such as USA and Germany and persuasively mentions that how USA will maintain leadership in technological innovations and will keep up the pace in the global growth game. 

Lastly, the author has an art for smart lines and some in the book are quite fascinating. For e.g. in the chapter on the global commodity mania, the author mentions that those countries (Brazil, South Africa etc.) that have solely depended on the growth in commodity prices are heading for a tough landing. In author’s words “Meanwhile the nations that have reveled in the commodity boom are likely to face a disheartening return to the mundane ordeals of a normal life. Buddhist monks have a phrase for it: After the ecstasy, the laundry”.

Breakout Nations is certainly worth reading!

Wait: The Art and Science of Delay

In what it seems to be a wonderful book,  Wait: The Art and Science of Delay the author Frank Partnoy (who previously wrote the fantastic F.I.A.S.C.O. and other two books) probes into the theme of the choices we make given the time frame we have. The author argues that sometimes a delay in decision making or procrastination leads to a superior decision. He supports the argument that delaying decisions in everyday choices could lead to better lives.

I havent’ read the book (plan to read it very soon) but found the video below on YouTube quite interesting.

Wait - The Useful Art of Procrastination

Rural India by Harish Manwani

A must read speech by Mr. Harish Manwani of HUL. The topic of the speech was "Rural India - An Emerging Powerhouse". You can read the speech here.

One of the top most management gurus of all time – the late C.K.Prahlad – in his breakthrough book The Fortune at the Bottom of the Pyramid discussed new business models on how private sector had a critical role to play in alleviating global poverty and the world’s several billion poorest offered terrific new market opportunity. In his book he had mentioned about Hindustan Lever’s Lifebuoy and Annapurna salt stories and how HUL’s brilliance catapulted the brands position in the rural India.