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A Weekend in Omaha

June 9, 2017 l 50 www.outlookbusiness.com

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Whatâ&#x20AC;&#x2122;s on your mind, Mr. Buffett? The Oracle of Omaha continues to stay bullish and now has India on his radar. Will he invest big money in the country?

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| EDITOR’S NOTE |

Moat versus growth 6

This is the ��h edition of A Weekend in Omaha where we cover the Berkshire Hathaway Annual Meeting and bring you features and interviews with value investing luminaries. Attending the meeting and writing for the edition has always been an enlightening experience. There are so many aspects to Warren Bu�ett’s style of investing that you can never get tired of reading, writing or ruminating about them. Bu�ett’s approach is amazing because it lays down a simple framework through which you can minimise the risk of loss by evaluating factors that help a �rm create value. The concept of investing in companies with strong moats, an important but not the only aspect of Bu�ett’s approach, is that it eliminates the reliance on growth, as you’ll read in the cover story on page 56. While Bu�ett steadfastedly avoids “bad” businesses, the beauty of moat companies is that whether the industry is rising, stable or falling, these companies can continue to deliver a superior return. It might be a bit of an exaggeration to say that if you have a moat you do not need growth and if you have growth you don’t need a moat, but there is a grain of truth in that. Apart from the size constraint, this may explain why Bu�ett has not looked at India. Even though its growth

rate may be tapering, the United States still o�ers Bu�ett a vast number of companies, which have a strong competitive advantage and great earnings potential, to choose from. India’s growth rate is higher and companies which have a strong moat and earnings predictability are richly priced. That leaves our market with opportunities which require us to make a lot of assumptions about future growth. And those assumptions may not always play out. Being a ‘growth’ investor is actually much harder as it relies on correctly predicting a lot of moving parts. The fact that you have to make those calls more frequently makes it even riskier. The idea is to make fewer decisions and channelise the energy into getting them right. While it may be time for Bu�ett to take cognisance of the growth opportunity in India, it is also high time that Indian investors start looking at global markets for moat opportunities.

N Mahalakshmi

www.outlookbusiness.com | email: mahalakshmi@outlookindia.com 9 June 2017 / Outlook BUSINESS

Contents Volume 12, Issue 12, June 9, 2017 | Released on stands on May 26, 2017

COVER STORY

BUYING LIKE BUFFETT Indian stocks that might make the cut for Berkshire Hathaway 26 Q&A: Warren Buffett and Charlie Munger answer it all at the Annual Meeting 40 Photo feature: From newspaper throwing to Bridge at Borsheims, the weekend was picture perfect as usual 44 Column: Jasmine India Fundâ&#x20AC;&#x2122;s Chetan Parikh takes a look at the moat magic of the worldâ&#x20AC;&#x2122;s biggest tech giants 9 June 2017 / Outlook BUSINESS

50 Column: Owner-manager Abhishek Dalmia on the business and life lessons he learnt from the Oracle of Omaha

Contents www.outlookbusiness.com Editor: N Mahalakshmi Executive Editors: Rajesh Padmashali, V Keshavdev FEATURES Deputy Editors: Kripa Mahalingam, Krishna Gopalan Assistant Editors: Himanshu Kakkar, Jash Kriplani Correspondents: Khushboo Balani, Laveena Iyer, Shilpa Elizabeth Abraham COPY DESK Sub-Editors: Naini Thaker, Tasneem Pocketwala ART Design Editor: Manish Marwah Chief Designer: Kishore Das Trainee Designer: Pallabi Sutar PHOTO Photo Editor: Soumik Kar Chief Photographer: RA Chandroo Principal Photographer: Vishal Koul Photo Assistant: Ram Dharne

84 Interview: Michael van Biema on his investment style, picking fund managers, and his take on India

92 Interview: Shane Parrish of Farnam Street on the art of reading, investing and multidisciplinary thinking

REGULARS 16 View: Chaitanya Dalmia on what qualiﬁes for a bigger tamasha: the stock market or the IPL?

20 Imagenation: India has overtaken China as the world’s biggest twowheeler market

102

C’est la vie

101

102 The Pursuit of Happiness: L&K Saatchi & Saatchi’s Anil Nair braves treacherous roads for a greater cause 104 Hardbound: Ambi Parameswaran reviews Yuval Noah Harari’s Sapiens, a book on the rise of our species 106 Good Life: Capture some of life’s priceless moments with the latest from Canon, Nikon and Sony 108 High Five: Reliance Mutual Fund CIO Sunil Singhania shares his list of ﬁve must-read books on investing COVER IMAGE: AP

9 June 2017 / Outlook BUSINESS

Consultant: Rashmi Shinde BUSINESS OFFICE Executive Director: Indranil Roy Associate Publisher: Vidya Menon Associate Publisher(Special Projects): Ramesh S Vice President: Meenakshi Akash National Head (Special Projects): Archana Browne Senior General Managers: V Sridhar (South), Prashanth Nair (Zonal Head-West), Preeti Sharma (North) Deputy General Manager: Anuj Gopal Mathur Regional Manager: Monica Ghose Chief Manager: Ashish Narang Senior Manager: Sameer Sayyad Deputy Manager: Suparna Saha MARKETING Head-Brand and Marketing: Shrutika Dewan Digital Team: Suhail Tak, Amit Mishra, Chirag Patnaik CIRCULATION National Head: Anindya Banerjee (Circulation) Assistant General Managers: G Ramesh (South), Vinod Kumar (North) Zonal Sales Manager: Arun Kumar Jha (East) Managers: Shekhar Suvarna, Vinod Joshi PRODUCTION General Manager: Shashank Dixit Chief Manager: Shekhar Pandey Manager: Sudha Sharma ACCOUNTS Assistant General Manager: Diwan Singh Bisht Company Secretary & Law Ofﬁcer: Ankit Mangal HEAD OFFICE AB-10, Safdarjung Enclave, New Delhi 110029; Tel: (011) 33505500; Fax: (011) 26191420 Customer Care: (011) 33505533, 33505607 Fax: (011) 26191420 Mumbai: (022) 33545000, Fax: (022) 33545100; Kolkata: (033) 46004506, Fax: (033) 46004506, Chennai: (044) 42615225, 42615224 Fax: (044) 42615095 Bengaluru: (080) 45236100, Fax: (080) 45236105; Printed and published by Indranil Roy on behalf of Outlook Publishing (India) Pvt. Ltd. Editor: N Mahalakshmi. Printed at Kalajyothi Process Pvt. Ltd., Plot No.W-17 & W-18, MIDC,Taloja, Navi Mumbai- 410208 and published from AB-10 Safdarjung Enclave, New Delhi 110029 Published for 27 May-9 June 2017 Total number of pages: 106 + cover

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Finding your ikigai

SC ruling may trip Adani Power’s net worth 12

The Supreme Court (SC) ruling on April 11 that power generation companies will not get any compensatory tari� to cover the surge in imported coal prices has given a jolt to power stocks. While Adani Power has lost 29% of its market value, Tata Power has erased 7.75% of its m-cap. Adani Power and Tata Power were seeking compensatory tari� on grounds that regulatory changes in Indonesia in 2010 led to an increase in Indonesian coal prices, adversely a�ecting their coal sourcing costs. A�er almost a decadelong tussle, the Central Electricity Regulatory Commission (CERC) came out with a compensation formula in December 2016 that allowed the companies to recover the increase in costs. But the apex court’s ruling has now nulli�ed that order. The impact is likely to be more adverse for Adani Power, which has been recognising the compensatory tari� in its books since FY13. Over the past three years, it has booked revenues worth #3,619 crore as compensatory tari�. As on Q 3FY17, compensatory tari� receivables stood at #8,820 crore, that is 116% of the company’s reported net worth as on H1FY17. The ruling has dealt a body blow to the already overleveraged company. Data from Ace Equity shows that the company had #53,051 crore of consolidated debt at the end of FY16. Over the past three years, its debt to equity ratio has stayed in the range of 7x- 8x. As on FY16, interest costs accounted for 68% of its operating pro�t with the interest coverage ratio hovering just a shade over...

9 June 2017 / Outlook BUSINESS

As a life coach as well as in dealing with young people, I am o�en faced by a familiar dilemma: “I am confused. I don’t know what course or career to follow. Can you guide me?” Invariably, I �nd myself divided in answering this question. It is so easy to put people in familiar boxes created by our education system and society as a whole. To make matters worse, the market is inundated with many aptitude tests. There are enough ponti�cal career gurus who direct you in one or exactly its opposite direction with great self-assuredness. Contrary to popular opinion, there is neither a singular nor absolute answer to this question. However, I do know one thing with certainty. People are happier if they follow their passion rather than a course, degree or ability. Let me share the Japanese concept of ikigai. “Iki” refers to life and “gai” pertains to what one hopes for. In a simpler sense, ikigai means your reason to get up in the morning and, at a more meaningful level, a reason for being. All of us have an ikigai. The French have a similar concept of “raison d’être” which literally means “reason of existence”. The ikigai is highly unlikely to be discovered through aptitude tests or analysing scoring patterns. The search is simpler and more intuitive. There are four simple steps to �nding your ikigai. Try and discover: What you love doing: We all know this one innately even if not overtly. It usually relates to and is derived by what we value most in...

| VOICES |

“These utility-style regulations — are like the proverbial sledgehammer being wielded against the ﬂea — except that here, there was no ﬂea

“It’s the people with the money who normally get to make the rules in society ICE chief executive ofﬁcer Jeffrey Sprecher on London’s dominant role in clearing euro derivatives

FCC Chairman Ajit Pai on the dismantling of net-neutrality rules

“Even with electrification of vehicles, I want the prefix “I love’ to be affixed to those cars Toyota CEO Akio Toyoda on the Japanese automaker’s electric vehicle strategy

“The punishment for going through a red light is not to lose your license… we will address his compensation

“There are certain signs of a certain... paranoid attitude to Russia and to every single contact with Russia real or imagined Sberbank CEO Herman Gref on the deterioration in US-Russia diplomatic ties

9 June 2017 / Outlook BUSINESS

Barclays Plc Chairman John McFarlane on CEO Jes Staley’s well-criticised move of hounding a whistle-blower

view | MARKETS |

CHAITANYA DALMIA CIO, Renaissance Group

The Great Indian Circus WITH MINDLESS MONEY INVESTED AND UNREALISTIC VALUATIONS PREVAILING, WHAT QUALIFIES FOR A BIGGER TAMASHA — THE STOCK MARKET OR THE IPL?

he Indian Premier League (IPL) is completing its decennial celebrations. For the uninitiated, it is a six to eight-week long and eight-team strong T 20 cricket tournament held during peak summers in India. A 20 -over match with all the ten wickets available per side, T 20 is a hybrid between the Double Wicket that used to be played more than a decade ago and the normal One Day International (ODI). IPL started o� in its old avatar as the Indian Cricket League without the blessings of the Board of Control for Cricket in India (BCCI) and it was, therefore, grounded within a couple of years to make way for BCCI’s own product. It was a de�ning moment in Indian cricket. A sport was transforming into a tamasha. The odds were heavily loaded in favour of the batsmen with dollops of Bollywood glamour and sprinkles of masala thrown in. Purists who treat sport as a form of recreative expression or a hobby or an exercise or a gentleman’s game may kindly take a backseat. As it’s now a form of entertainment bigger than one’s imagination, much like it used to be in the Colosseum. Thank God! It’s not gruesome, except for the bowlers!

vine right to (mis)govern anything to do with organised cricket in the country. Such authority was not very valuable then, but has become highly valuable now, so much so that we have people from di�erent walks of life drooling over each other �exing their muscle up the ladder. If we were to look at the ‘value chain’ of IPL , BCCI is the originator whose sources of revenues are the fees it collects for team ownership, title sponsorship and media broadcast rights. The team owners have a symbiotic relation with the national governing body for cricket in India — paying it fees and sharing revenue from other sources as above, while having expenses and some other income of their own. For instance, Sony Pictures Networks being the official broadcaster of the league pays a he�y fee to the BCCI and earns its revenue from advertisers. The franchise owners collectively are barely breaking-even (some make money, some lose). Sony manages to make some money by bundling few other sister-channels with the one showing IPL . But on the whole, the sponsors/advertisers are paying BCCI for having the right to hold the event with the other constituents acting as conduits. I don’t have the statistics but I suspect that most of these advertisers are related to the mobile telephony industry including both handset makers and service providers. This industry globally is known to be pretty notorious, and yet we have this industry funding this tamasha. The two main Chinese handset makers pouring money into the IPL are both privately-owned with not much information available in the public domain (at least not for the English-reading world). Nokia once ranked among the top �ve brands in the world but its

The odds were loaded in favour of batsmen with dollops of Bollywood glamour and sprinkles of masala

THE ECONOMICS In the case of IPL , the BCCI holds all the rights (including title sponsor and media), which it sells to various advertisers and platforms. It shares some of these revenues with the team owners and keeps the rest for itself. It was born in the pre-independence era at the behest of our rulers to coordinate with various state cricket associations to organise matches. It somehow earned the di9 June 2017 / Outlook BUSINESS

view | MARKETS |

the original owners of two other teams Businesses (BCCI/Advertisers) are under investigation and since then their ownership has changed. (One team’s owner went bust and that team ‘Invest’ in businesses has a new owner and the other team Pay fee has been relegated for non-payment Investors of fees). Not just this, the impropriety (Team owners) was so rampant that some heads rolled Intermediaries even at the BCCI. However, despite all Create and sell stories (Broadcasters) this the juggernaut seems to roll along Pay fees stronger than ever. There is as much masala on the pitch as there is o� it in this potboiler. Neeraj Pandey, are you Speculators (Crowd) listening? Coming to the stock market, promoters of businesses are akin to the BCCI which own the right to a product or service. The di�erence is that these businesses are owned privately and many of them are managed better. Another di�erence market share was eroded to such a large extent that it is that the business owners themselves double up as adhad to ultimately be sold o� to Microso�; similar fates vertisers. Then we have the intermediaries (brokers, diswere su�ered by Ericsson, Motorola, Siemens, Alcatel tributors, advisors, merchant bankers etc.) who are the and Sony (all early movers and deep-pocketed playstory tellers. They are akin to the broadcasters in the ers in handsets). They have either sold out by virtue of nearly going bankrupt, have negligible market share or IPL model. The di�erence here is that they get mostly have vanished from the scene. It would be interesting to paid by business owners (and in parts also by investors) know if any one of them made any money selling mobile unlike the IPL where it’s the other way round. And, �phones for a good part of a decade. The latest entrant in nally, we have investors who are akin to team-owners the mobile services space is the lion of the Indian indusand who (directly or indirectly) ‘invest’ in businesses. try in general but not in telephony until recently; and it Outside this whole system, are speculators who are like has got all the incumbents running for cover. It’s such a the crowd who enjoy the action and the gossip. The big serious move that even the RBI has asked banks to make di�erence here is that unlike the crowd in matches, the speculators in the stock markets take part in the shadprovisions for some loans given to this industry. ow (shares) of the main action (businesses). When (too much) money chases (relatively fewer) ideas SAME PITCH, DIFFERENT SPORT (or business opportunities), its not the reasoning that All in all, loads of private capital is being burnt into an wins, it’s the guy with the money bags who does (till it industry known to have a bottomless pit; and the money lasts anyway). Mutual fund industry veteran John Bois going to the BCCI, which has no owner as such and gle’s Expected Return Formula has three elements — which just happened to be bestowed with the divine dividends, earnings growth, and P/E re-rating (or deright by a stoke of luck decades ago. That’s capitalism rating). The �rst two elements are fundamentals and at its destructive and somewhat ambiguous best. As for the third is more speculative, in his own words. Most the franchise owners, they are happy sinking in capital of the recent returns in the stock markets are coming too in the garb of creating a brand value, never mind from the third element. It is futile to get into a sensible they haven’t made money in a decade. That’s another debate about the current state of the markets. Enjoy the nouveau capitalism concept, where brands are created ride, while it lasts; and it may last for another decade for without making money in perpetuity (well for a counall you know. That’s the mysterious beauty about this try where the risk-free rate is 7- 8%, 10 years is akin to beast — it always keeps you enthralled and excited withperpetuity); or maybe creating brands takes much lonout always promising to oblige, just like the IPL! But ger and all of them are waiting for that glorious day; or maybe its just a trophy asset many would like to own. beware, while the next round of IPL broadcast rights Or is it that money is indeed being made by underhand may fetch an even higher price as long as the headless wheeler-dealers, which is what ensures that the show Chinese continue to line up to capture the ecstatic Ingoes on? A�er all, we have had the original IPL convedian mobile user, bear markets are an integral part of the stock market. Caveat Emptor. b ner absconding, two teams have been suspended while 9 June 2017 / Outlook BUSINESS

| IMAGENATION |

9 June 2017 / Outlook BUSINESS

Full throttle While China remains one of the fastest growing economies in the world, when it comes to two-wheelers, India has overtaken the Dragon as the world’s biggest twowheeler market. Two-wheeler sales in India hit 17.7 million in the just concluded �scal in comparison to 16.8 million units sold in China. The growing infrastructure in rural India, rising income and easier �nance options are fuelling the boom. In the case of China, two-wheeler sales have been declining for a couple of years a�er touching a high of 25 million units, as locals switched over to cars. However, electric two-wheelers are growing in popularity. Indonesia follows China with an annual sale of approximately 6 million units. The current leader in the Indian scooter market, Honda believes the industry will continue to grow by 9 -11%. Other premium brands Royal En�eld, Harley Davidson and Triumph Motorcycles too are eager to cash in on the demand. Looks like the fun has just begun.

Getty Images

Outlook BUSINESS / 9 June 2017

| FOREIGN POSTS |

MOVING OUT

Not enough shine 22

Colgate-Palmolive Co, the 211-year-old oral healthcare major, is up for grabs. Battling sluggish demand across its lineup of products, chief executive ofﬁcer Ian Cook is open to a sale and is seeking a price of $100 a share, valuing the company at over $88 billion. According to media reports, Colgate-Palmolive, which is currently worth $63 billion, is being stalked by London-based giant Unilever besides probable buyers Johnson & Johnson, Procter & Gamble Co and Kraft Heinz Co, backed by 3G Capital and Berkshire Hathaway. Though Latin America remains a bright spot and accounts for about a quarter of its sales, Colgate has struggled with growth. If the deal takes place, it could potentially end up creating the largest consumer products company in the world.

THE NEW MEDIA BULL Dietrich Mateschitz is known as the man behind the world’s top selling energy drink, but the reclusive 72year old Austrian billionaire wants a slice of the digital media industry. With an estimated net worth of over $16 billion, the Red Bull co-founder and CEO plans to launch a Germanlanguage news site called “Na her an die Wahrheit,” which translates to “Closer to the Truth”. While over six billion Red Bull cans are sold every year, it will be worth watching how well Mateschitz’s digital foray clicks. 9 June 2017 / Outlook BUSINESS

The script is fast turning from bad to worse for Jia Yueting, who once spearheaded LeEco’s push into electric cars. The founder is stepping down from the helm of LeShi, though he remains chairman of the listed subsidiary and LeEco, the unlisted parent group. The exit comes on the back of abandoned deals and the scrapping of its EV unit in the US. LeEco also cancelled its $2 billion acquisition of Californiabased Vizio. Jia’s stint has proved to be costly for LeShi, which is now saddled with $2.7 billion in debt.

PREMIUM BUILT-UP

New York is the world’s most expensive place in terms of construction cost. The Big Apple has unseated Zurich, as the world’s priciest construction market, with sky-high construction-worker wages averaging $100 an hour. More than half — 56% — of the 43 countries surveyed, reported a shortage of workers. Nevertheless, construction continues to boom with New York spending an all-time high of $42 billion in 2016. In contrast, Bengaluru, Beijing, Dar es Salaam, Warsaw and Nairobi are now the world’s ﬁve cheapest places to build.

| A WEEKEND IN OMAHA |

THE WARREN AND CHARLIE SHOW Warren Bu�ett and Charlie Munger’s marathon banter at the 2017 Berkshire Hathaway Annual Meeting prompted a shareholder to remark that they have iron bladders. Excerpts of their wit and wisdom as they answered questions from the press, analysts and shareholders.

9 June 2017 / Outlook BUSINESS

PHOTOGRAPHS BY AP

Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA |

PHOTOGRAPHS: GETTY IMAGES

THE WELLS FARGO SCANDAL 28

� A major part of the problem was the decentralized structure which gave too much autonomy to the bank’s leadership. How do you satisfy yourself Berkshire is not subject to the same risk? Warren Bu�ett: We count very heavily on principles of behavior rather than rules. Charlie and I believe if you establish the right sort of culture, and that culture to some extent self-selects who you hire as directors and managers, that you will get better results that way in terms of behavior than a thousand-page guidebook. You’re going to have problems regardless. The real question is whether the managers are thinking about �nding and correcting any bad behavior, and whether if they fail in that, whether the message gets to Omaha and whether we do something about it. Clearly, at Wells Fargo there was an incentive system built around the idea of cross-selling a number of services per customer, and the company in every quarterly investor presentation highlighted how many services per customer. It was the focus of the organization – a major focus – and undoubtedly people got paid and promoted based on that number, at least partly based on that number. It turned out that was incentivizing the wrong kind of behavior. Bad behavior has to stop when the CEO learns about it. The main problem is they didn’t act when they learned about it. It’s bad enough having a bad system, but they didn’t act. 9 June 2017 / Outlook BUSINESS

Charlie Munger: It doesn’t mean everyone should solve their problems by having more compliance. We’ve had less trouble over the years by being careful of whom we picked to have power and having a culture of trust. I think we have less trouble, not more.

HIS INVESTMENT STYLE � In the HBO documentary, Becoming Warren Buffett, you had a great analogy comparing investing to baseball. Ted Williams knew his sweet spot was a pitch right down the middle. What attributes make a sweet spot that you will invest in? Warren Bu�ett: It would tend to be a business we can look out 5, 10 or 20 years and decide that the competitive advantage that it had at the present would last over that period, and it would have a trusted manager that would not only �t into the Berkshire culture but was eager to join the Berkshire culture, and then it would be a matter of price. When we buy a business, essentially we are laying out a lot of money now based on what we think that business would deliver over a period of time. The higher certainty in which we make that prediction the better we feel about it. The �rst outstanding business we bought, which was kind of a watershed event, was See’s Candies, a relatively small company. When we looked at See’s Candies, in 1972, we asked would people still want to be eating and giving away that candy in preference to

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| A WEEKEND IN OMAHA | other candy. We paid $25 million for it, net of cash, and it was earning about $4 million pre-tax then. We took $2 billion or something like that out of it since. We felt that people would not necessarily be buying a lower priced candy. And we made a judgment about See’s Candies, it would be special – probably not in the year 2017 – but we thought it would be special in 1982 , 1992 , and fortunately we were right on it. We are looking for more See’s Candies, only a lot bigger. Charlie Munger: We were very lucky early to buy horrible businesses because they were real cheap. They gave us a lot of experience trying to �x un�xable businesses as they headed downward toward doom. We were very good at avoiding it therea�er. I would argue our early stupidity helped us.

CONTINUOUS LEARNING � Mr. Munger, in your career and business dealings, which one sticks out in your mind as your favorite?

Charlie Munger: I don’t think I’ve got a favorite. The one that probably did us the most good as a learning experience was See’s Candies. The power of the brand, the unending �ow of ever increasing money with no capital. I’m not sure we would have bought Coca-Cola if we didn’t buy See’s. I think a life properly lived is just to learn, learn, learn all the time. I think Berkshire has gained enormously in their investment decisions by learning through a long period. Every time you appoint a person who has never had big capital allocation experience, it’s like rolling the dice. We are better o� because we’ve done it for so long. But the decisions blend. The one feature that comes through is the continuous learning. If we had not kept learning, you wouldn’t even be here. You would be alive probably, but not here. Warren Bu�ett: There’s nothing like the pain of being in a lousy business to make you appreciate a good one. We bought a department store in Baltimore in 1966 – there’s really nothing like having the experience of trying to decide whether you will put a new store in an area that hasn’t developed and where it won’t support it, but your competitor may move there �rst. Then you have the decision of jumping in. Now you have two stores where even one store isn’t quite justi�ed. How to play those business games, you learn a lot by trying. What you really learn is which ones to avoid. If you stay out of a bunch of terrible businesses, you are o� to a great start. We’ve tried them all.

INVESTING IN TECHNOLOGY � For years, you stayed away from technology companies saying they are hard to predict and didn’t have moats. Then you invested in IBM and recently in Apple. Do you view IBM and Apple differently and what have you learnt about investing in technology? Warren Bu�ett: I do view them di�erently. When I started buying IBM six years ago, I thought it would do better in the six years that have elapsed than it has. I think Apple is much more of a consumer products business. In terms of sort of analyzing moats around it and consumer behavior, it’s obviously a product with all kinds of tech built into it. In terms of laying out what their prospective customers will do in the future as opposed to IBM’s, it’s a di�erent sort of analysis. That doesn’t mean it’s correct. They are two di�erent types of decisions. I was wrong on the �rst one. We will �nd out whether or not I am right on the second. I do not regard them as apples and apples, and I don’t quite regard them as apples and oranges. It’s somewhat in between on that. Charlie Munger: We avoided tech stocks because we felt we had no advantage there and other people did. I think it’s a good idea not to play where the other people are better. If you ask me in retrospect what was our worst mistake in the tech �eld, I think we weren’t smart enough to �gure out Google. Those ads worked so much better in the early days than anything else. I’d say we failed you there. We were smart enough to do it and didn’t do it. We knew that.

There’s nothing like the pain of being in a lousy business to make you appreciate a good one

9 June 2017 / Outlook BUSINESS

THE BET ON AIRLINES � You avoided airlines in the past because of low switching costs, rising fuel prices, high price competition and limited buying power. After consolidation, are airlines different enough this time around? How do the airline competitive advantages compare to railroads? Warren Bu�ett: The decision, with respect to our $10 billion investment in four airlines, has no connection with getting involved in the railroad business. You named a number of factors that make for terrible economics. It’s a �ercely competitive industry – the question is whether it’s a suicidal industry – which it used to be. It has been operating for some time now at 80% or better o� capacity. You can see what deliveries are going to be. I think it’s fair to say they will operate at higher degrees of capacity over the next 5 to 10 years than historical rates, which caused all of them to go broke.

| A WEEKEND IN OMAHA |

They actually at present are earning quite high returns on invested capital – higher than even Fed Ex or UPS. It’s no cinch that the industry will have more pricing sensibility in the next 10 years than they had in the last 100 years, but the conditions have improved. If the company is worth the same amount and there are fewer shares of stock outstanding, over time we make decent money. All four of the major airlines are repurchasing their shares. There will be low-cost people that will come in, the Spirits of the world, Jet Blue, but my guess is all four of the companies will have higher revenue and fewer shares outstanding by a signi�cant margin.

GROWING BERKSHIRE’S INTRINSIC VALUE � At what rate has Berkshire compounded intrinsic value and at what rate can intrinsic value be compounded in the future? Warren Bu�ett: Intrinsic value can only be calculated in retrospect, but the true de�nition would be the cash to be generated between now and judgment day discounted at an interest rate that seems appropriate at the time. That’s varied enormously over a 30 or 40 -year period. If you pick out 10 years, and you’re back to May of 2007, we had some unpleasant things coming up. I’d say we’ve probably compounded intrinsic value about 10 % annually since then. I think that’s tough to achieve – almost im9 June 2017 / Outlook BUSINESS

possible to achieve if we continue in this low interest rate environment. If you ask me to give the answer to the question – if I could only pick one statistic to ask you about the future before I gave the answer, I would not ask you about GDP growth or who was going to be president, I’d ask you what the interest rate is going to be over the next ten or twenty years on average. If you assume our present interest rate structure is likely to be the average, I would say it would be very di�cult to get the 10%. If I were to pick for the whole range of probabilities on interest rates, I would say that that rate might be doable. If you’d say we can’t continue these low interest rates for a long time, I’d ask you to look at Japan 25 years ago. We couldn’t see how their low interest rates could be sustained. We are still looking at the same thing – I don’t think it’s easy to predict the course of interest rates at all. Unfortunately, predicting interest rates is embedded in giving a good answer to you. I’d say the chances of getting a terrible result in Berkshire are about as low as anything you could �nd. Chances of getting a sensational rate are also about as low as anything you could �nd. My best guess would be in the 10% range, but that assumes somewhat higher interest rates, not dramatically, but somewhat higher interest rates in the next 10 or 20 years than we experienced in the last seven years.

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Charlie Munger: The future with our present size in terms of percentage rates of return is going to be less glorious than in the past. We keep saying that and now we are proving it. Warren Bu�ett: Do you want to end on that note, Charlie? Charlie Munger: I think we have a collection of businesses that on average has better investment values than say the S&P 500 average. I don’t think you shareholders have a terrible problem. Warren Bu�ett: We do have more of a shareholder orientation than the S&P 500 as a whole. This company has a culture where decisions are made as a private owner would make them. That’s a luxury we have that many companies don’t have. One of the questions I ask the CEO of every public company that I meet: “What would you be doing di�erently if you owned it all yourself?” The answer is usually this, that and a couple of other things. If he would ask us, the answer is, we are doing exactly what we would be doing if we owned all the stock ourselves. Charlie Munger: I think we have one other advantage. A lot of other people are trying to be brilliant. We are just trying to stay rational. It’s a big advantage. Trying to be brilliant is dangerous, particularly when you are gambling.

earning large amounts of money required considerable reinvestment of capital and large amounts of equity capital. The railroad is a good example. That world has really changed. I don’t think people quite appreciate the di�erence. You literally don’t need any money to run the �ve companies that are collectively worth more than two and a half trillion dollars and who have outpaced any number of names that we are familiar with if you looked at the Fortune 500 list 30 or 40 years ago. We own a few businesses that earn extraordinary returns on capital, but they don’t grow. We still love them, but if they had yields that would grow, believe me, they would be number one on our list. We aren’t seeing those that we can buy. You’re absolutely right, that’s a far, far better way of laying out money than what we are able to do when buying capital-intensive businesses. Charlie Munger: The capital-intensive companies of America at one time were wonderful investments. DuPont was sold at 20x earnings. They kept building more complicated plants and hiring more PhDs, chemists, it looked like they owned the world. Now most chemical products are commoditized – it’s a tough business being a big chemical producer. In come all these other people like Apple and Google, and they are just on top of the world. The world has changed a lot, and the people who made the right decisions of getting into these new businesses that are so di�erent from the old ones have done very well.

Trying to be brilliant is dangerous, particularly when you are gambling

THE CHANGING NATURE OF BUSINESS � Berkshire generates substantial cash ﬂows. Are Berkshire shareholders better off if you continued to invest in capital-light businesses?

ON THE ABILITIES OF THE SUCCESSOR Warren Bu�ett: There’s no question that buying a high return on assets, very light capital-intensive business that is going to grow, beats the hell out of buying something that requires a lot of capital to grow. The �ve largest American companies by market cap [Apple, Alphabet, Microso�, Amazon, and Facebook] have a market value over two and half trillion dollars. I don’t know what the aggregate market cap of the US market is – but they are probably getting up close to 10 % of the whole market cap of the US. If you take those �ve companies, essentially you could run them with no equity capital at all. None. That is a very di�erent world than when Andrew Carnegie was building a steel mill and getting very rich in the process or Rockefeller was building a re�nery and buying tank cars. But generally speaking for a very long time in our capitalism, growing and 9 June 2017 / Outlook BUSINESS

� Will bouncing ideas off one another on capital allocation continue long into the future? Charlie Munger: It can’t continue very long. Warren Bu�ett: Don’t get defeatish, Charlie. Any successor that is put in at Berkshire – proven capital allocation abilities are certain to be upper most in the Board’s mind, in the current case, in terms of my recommendation and Charlie’s recommendation, for what happens a�er we are not around. Capital allocation is incredibly important at Berkshire. Right now we have $280 or $290 billion of shareholders’ equity. If you take the next decade alone, nobody can make accurate predictions on it, but in the next ten years, if you take – appreciation right now is another $7 billion a year, or something on that order. The next manager during the decade will have to allocate maybe $ 400 billion or something like that.

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Ten years from now, you need a very sensible capital allocator CEO. We will have one. It would be a terrible mistake to have someone in this job where capital allocation will not be their main talent – it should be very close to their main talent. We have an advantage at Berkshire in that we do know how important that is. There is that focus on it. Many people get to the top through ability and sales, all di�erent sides of business. They then have capital allocation sort of put in their hands. They may establish strategic thinking divisions and listen to investment bankers, but they better be able to do it themselves.

ON 3G CAPITAL’S METHODS � Berkshire partners with 3G Capital on deals. What do you think of their extreme cost cutting and elimination of thousands of jobs? Warren Buffett: The 3 G management believes in having a company as productive as possible, and of course, the gains in this world for the people in this room and the people in Omaha and the people throughout America have come from gains through productivity. If there had been no change in productivity, we would be living the same life as people lived in 1776. The 3G people do it very fast, and they’re very good making a business productive with fewer people than operated it before. We’ve been doing that in every industry whether it’s steel or cars. That’s why we live as 9 June 2017 / Outlook BUSINESS

well as we do. We at Berkshire prefer to buy companies that are already run e�ciently. Frankly, we don’t enjoy the process at all of getting more productive. It’s not pleasant, but it is what enabled us to progress. Personally, we have been through the process of being in a textile business that employed a couple thousand people and went out of business over a period of time. It’s just not as much fun to be in a business that cuts jobs rather than a business that adds jobs. Charlie and I would probably forgo having Berkshire buy businesses where the main bene�ts would come from increasing productivity by actually having fewer workers. I think it is pro social to think in terms of improving productivity, and I think the people at 3G do a very good job. Charlie Munger: I don’t see anything wrong with increasing productivity. On the other hand, there’s a lot of counter-productivity publicity to doing it. Just because you’re right doesn’t mean you should always do it.

ON NOT INVESTING IN AMAZON � You admire Jeff Bezos. Why have you not invested in Amazon? Warren Bu�ett: I was too dumb to realize what was going to happen. I did not think Je� could succeed on the scale he has or even think about the possibility of doing anything with Amazon web services or the cloud. If you asked me the chances that while he was

| A WEEKEND IN OMAHA | building up the retail operation, he would also be doing something that was disrupting the tech industry – that would have been a longshot for me. I underestimated the brilliance of the execution. It is one thing to dream about doing this stu� online, but it takes a lot of ability. You can read his 1997 annual report, and he laid out a roadmap. He has done it and done it in spades, and if you haven’t seen his interview with Charlie Rose three or four months ago, go and listen to it because you will learn a lot, at least I did. The stock always looked expensive. I did not think he would be where he is today when I looked at it 3, 5, 8, or 12 years ago. Charlie, how did you miss it? Charlie Munger: It was easy. What was done there was very di�cult. It was not at all obvious that it was all going to work as well as it did. I don’t feel any regret about missing out on the achievements of Amazon. Other things were easier, and I think we screwed up a little.

Charlie Munger: My �rst memory, when Warren got on the subject, I asked Warren what he would like said at his funeral. He said, “I want them all to be saying that’s the oldest looking corpse I ever saw.” Warren Bu�ett: That may be the smartest thing I ever said. To me, it’s pretty simple. I really like teaching. I’ve been doing it formally and somewhat informally all my life. I certainly had the greatest teachers you can imagine. If someone thought I did a decent job at teaching, I’d feel very good about that. Charlie Munger: To making teaching endurable, there has to be a bit of wise-assery in it, and that we both have been able to supply. Warren Bu�ett: Those of you who are old-time basketball fans, on Wilt Chamberlain’s tomb it was reputed that it was going to say, “At last, I sleep alone.”

UNFINISHED BUSINESS � Everyone has a personal dream at a different age. What’s your dream now?

VALUING THE CHINESE STOCK MARKET � In looking at the Chinese market vs the US market, what is the best valuation method, market cap/GDP or the Cyclically Adjusted P/E?

Appointing a person with no big capital allocation experience, is like rolling the dice

Warren Bu�ett: Both of the standards you mention are not paramount at all in our valuation of securities. The present value of the future cash that can be taken out of the business is the important factor in valuing a business. People are always looking for a formula. There’s not an ultimate formula. You don’t know what to stick in for the variables. Every number has some degree of meaning. Valuation of a business is not reducible to any formula where you can actually put in the variables perfectly. The most important thing is future interest rates. People frequently plug in the current interest rate saying that’s the best they can do. The 30 -year bond rate should tell you what people who are willing to put out money for 30 years and have no risk of dollar gain/loss at the end of the 30 -year period expect to earn. I’m not sure I can come up with a better �gure. That doesn’t mean I’m going to use the current �gure either. Charlie Munger: The �rst rule of �shing is to �sh where the �sh are. A good �sherman can �nd more �sh in China now. It’s a happier hunting ground.

LEAVING A MARK � What would you & Charlie like to be known for, a hundred years from now? 9 June 2017 / Outlook BUSINESS

Charlie Munger: My dream? Well… Warren Bu�ett: Let’s skip the �rst one. Charlie Munger: Sometime when I’m especially wishful, I think, oh, to be 90 again! I’ve got some advice for the young. If you’ve got anything you really want to do, don’t wait till you’re 93 to do it. Warren Buffett: That’s the same thing I would tell students. When you go out in the world, look for the job that you would take if you didn’t need a job. Don’t postpone that sort of thing. Kierkegaard said life must be evaluated backwards, but it must be lived forward. Charlie says all he wants to know is where he will die so he will never go there. You do want to do a certain amount of reverse engineering in life. That doesn’t mean you can do everything that way. Think about what will make you feel good when you get older about your life, and you atleast generally want to keep going in that direction. You need some luck in life, and you got to accept some bad things that are going to happen as you go along. Life has been awfully good to me and Charlie so we have no complaints. Charlie Munger: You don’t want to be like the man who had his funeral and the minister said now is the time for someone to say something nice about the deceased, and nobody came forward. Surely, somebody can say something nice about the deceased? Finally one man came up, and he said, “Well, his brother was worse.” b

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IT’S THAT TIME OF THE YEAR With the price of a Class A share hitting an all-time high of $263,000, Berkshire Hathaway shareholders were in a merry mood during the 2017 annual meeting

LAUGH RIOT: Right from chomping on a Fudge Bar, the paper tossing contest or just posing with Berky Boxers, Warren Bu�ett entertained the crowd as he made the rounds of the exhibition hall 9 June 2017 / Outlook BUSINESS

PHOTOGRAPHS BY AP & N MAHALAKSHMI

Outlook BUSINESS / 9 June 2017

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HARDSELL: Talking Warren Bu�ett Secret Millionaire’s Club dolls, Customised street signs and special edition Coke cans were among the Berkshire merchandise available for sale at this year’s annual meeting

�

9 June 2017 / Outlook BUSINESS

SO NEAR... Borsheims is a favourite hunting ground for sel�e-hunters and the Warren frenzy continued unabated the next day at the premium jeweler where Bu�ett and Bill Gates turn up every year during the annual meeting weekend for a customary round of table tennis and Bridge

� Outlook BUSINESS / 9 June 2017

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Machine learning and a learning machine In a digital era, Google, Apple and Amazon are examples of companies with the right trappings that will reinforce their moats CHETAN PARIKH Director, Jasmine India Fund

“It was a very good sign that Warren bought Apple. Either he’s gone crazy or is learning. I prefer to think he’s learning.”

44 —Charlie Munger, Berkshire Hathaway Annual Meeting 2017 A recent issue of The Economist (May 6, 2017) had a cover story titled, “The world’s most valuable resource...”– data – which the magazine called “the oil of the digital era”. It went on to state: “Machine learning will extract more value from data...This abundance of data changes the nature of competition. Technology giants have always bene�ted from network e�ects...With data there are extra network e�ects. By collecting more data, a �rm has more scope to improve its products, which attracts more users, generating even more data, and so on...Vast pools of data can thus act as protective moats.” Mr Bu�ett noted at the recent Berkshire Hathaway Annual Meeting: “The �ve largest US market cap companies are $2.5 trillion, close to 10% of the US market. One could run them with no equity capital at all. It’s a very di�erent world than Carnegie’s steel mills and Rockefeller’s tank cars.” So, how di�erent are the moats and the economics in this world – the world of the Apples, Amazons and Googles – from those of the past century on which much of our understanding of competitive advantage and strategy is based? Go back to an article in the April 2016 issue of the Harvard Business Review titled, “Pipelines, Platforms and 9 June 2017 / Outlook BUSINESS

the New Rules of Strategy”. The authors distinguish between conventional “pipeline” businesses that have been dominant for a long time and whose value creation can be understood by examining the value chain, versus technology-based “platform” businesses which facilitate interactions between participants and increase their value as the network grows. Modern “platform” businesses rely extensively on information technology that reduces the need to own physical infrastructure, makes scaling up relatively simpler and cheaper and enhances the ability to capture, analyse and exchange large amounts of data that increases the platform’s value. Some businesses, as will be seen later when analysing Apple, have both “pipeline” and “platform” assets, which reinforce and strengthen their moats.

BUILDING YOUR MOATS Recent history has not been kind to pure play “pipeline” businesses, owning high quality tangible and intangible assets, when “platforms” (whose assets are hard to copy like community and the resources its members contribute) enter the same marketplace – “platforms” usually

have won. And when there have been “platform wars” for dominance in a given domain, the outcomes have had a “winner take all” stamp about them.Supplier and buyer power are menacing (“depletive”) in the “pipeline” world; they may actually add value and be “accretive” in the “platform” world. Governing the ecosystem and understanding which activities are “accretive” and “depletive” is a key challenge in the “platform” world. Google and Apple o�er contrasting studies of “platform” rules and architecture. Google kept Android “open”, betting on scaling quickly in a then highly fragmented mobile operating space. Apple based the iPhone on a “closed” iOS, preferring control. Both made sense in those days given their respective strategies and objectives. But today, in the era of machine learning, which is one of the main arti�cial intelligence techniques, open systems have the edge. Turn to Apple which has both “pipeline” and “platform” parts that are so harmoniously inter-meshed. Apple is vertically integrated, owning its own chip manufacturing, controlling manufacturing, having extremely strict so�ware standards and having a tight

ILLUSTRATION BY KISHORE DAS

Outlook BUSINESS / 9 June 2017

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control over all parts of its value chain right up to its proprietary retail stores. Apple’s retail stores give a sense of what is so distinctive about the “pipeline” part of the company. Apple’s retail innovations (“concierge” greeting customers; the Apple Genius Bar) were inspired by the luxury hotel chain Four Seasons and its founder Isadore Sharp, who like Steve Jobs was a perfectionist. Sharp’s guiding principle was: “So much of long-term success is based on intangibles. Beliefs and ideas. Invisible concepts.” And Steve Jobs did ask, “What would the Four Seasons of retail look like?” Jobs was also Disney’s largest shareholder and he studied the consistently superior guest experience that was the hallmark of Disney. So, branding has always been incredibly important to Apple and its founder. Apple has never gone for early adopters or the budget-conscious, targeting instead customers who had the patience and were willing to pay for highly sophisticated product designs. It has always sought the premium end. Jobs from his early days saw computers as consumer accessories, believing that “it is the intersection of technology and liberal arts that make our hearts sing”. According to Jobs, all activity at Apple started with the question, “How easy will it be for the user?” Any consumer products company will agree with what Jobs once said: “Our brand is like a bank account. We have the opportunity to put deposits in the bank account by making a great product, something they really love, or we can do withdrawals, putting something out there that we know is not good enough but still putting our name on to it.” Mr Bu�ett was spot on in stating at the AGM that Apple was much more of a consumer products company, in terms of analysing the moat around it. But there is also a “platform” part of Apple which complements the “pipeline” parts of products, retail and branding. In 2007, there were �ve major mobile phone manufacturing companies – Nokia, Samsung, Motorola, Sony Ericsson and LG – which collectively made 90% of industry global pro�ts. That feasting did not last with the introduction of the iPhone that year. By 2015, iPhone generated 92% of the industry’s pro�t and only Samsung on the Android operating system (from Google) made money. The incumbents had moats of brand, scale and intellectual property. However, at that time, they were all “pipeline” businesses. Apple brought a “platform” business (iTunes and the App Store) with its iPhone, connecting

app developers on one side and app users on the other. Switching costs were non-existent between Apple products but severe for a user migrating out of the ecosystem. Which areas could Apple potentially disrupt with its pipeline/platform complementary assets? It has already introduced the watch in the “wearable technology” category. Other areas could be in gaming (where the combination of high process speeds and video refresh rates in the iPad along with streaming technologies in the TV market could prove a threat to high-end gaming consoles); home entertainment (Jobs talked to Walter Isaacson in his biography of a uniquely easy-to-use television); payments (the Apple Pay product on the iPhone 6 could leverage on the installed base of 800 million iTunes customers who have credit cards on �le); retail services (building on its in-store tracking technology iBeacon, Apple could assist brick-andmortar retailers in providing personalised shopping recommendations) and mobile wellness and health care solutions (health and �tness monitoring applications to be incorporated on all its mobile computing devices) among others.

RETAIL JUGGERNAUT

IN THE ERA OF MACHINE LEARNING — ONE OF THE KEY AI TECHNIQUES — OPEN SYSTEMS HAVE THE EDGE

9 June 2017 / Outlook BUSINESS

At the recent Annual Meeting, Mr Buffett also spoke on Jeff Bezos and Amazon. He said: “We didn’t think that Bezos would succeed like he has in retail. We underestimated the brilliance of the execution. You can read Bezos’ annual report in 1997, and he lays it all out. And he has done it and done it in spades. It just always looked expensive.” Amazon is a “platform” business and accounts for 51 cents of every dollar spent on online retail owing to its broad product o�ering and Prime membership bene�ts (Prime is Amazon’s premium home delivery service and attracts a growing following of highly loyal and pro�table customers). Its founder and CEO Bezos is in ‘Day 1’ mode because according to him in his 2016 letter: “Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. And that is why it is always Day 1.” Amazon is the 800 pound gorilla of online retail but is facing attacks from the world’s biggest retailer, WalMart, on its online turf. So, what are Amazon’s moats and what does it need to execute correctly to keep on widening and deepening them? Wal-Mart has been making acquisitions to build its e-commerce presence, having spent almost $4 billion in the past eight months. It is not betting on books, electronics or toys but on product areas that are becoming popular online such as apparel, fresh food and drugstore items. Amazon prefers to grow organically,

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largely owing to the lessons learnt from its acquisition spree in the late 1990s when it failed in the numerous start-ups that it bought. And of the few acquisitions that it has made in the past two decades, it has preferred marketplaces and not brands owing to their larger addressable size and scalability (inventory is carried on the books of merchants who deal on its platform; the inventory though is stored in its numerous ful�llment centres). Wal-Mart has been buying brands and multi-brand retailers so that it can deal with ‘long-tail’ categories (endless assortment of products that online retailers can o�er). As a result, WalMart’s online inventory will increase. A �nal di�erence in strategy is that as Wal-Mart continues to buy brands, Amazon is bringing out private labels (with higher pro�t margins) based on the huge data set that it has accumulated over the past two decades. What is Amazon doing which gives it an edge and which Wal-Mart will not be easily able to replicate? More ful�llment centres and quick deliveries? Wal-Mart has probably more distribution centres and certainly more storage space. Rejigging that network for e-commerce ful�llment would not pose a challenge. Last-mile delivery? Amazon has drones, delivery robots and an on-demand human delivery network. These can be outsourced by Wal-Mart. They are not Amazon’s moats. Amazon built its own tech infrastructure and later converted it into an external product – Amazon Web Services. Beyond the obvious �nancial bene�ts, opening that operational piece to external customers helped that part remain in a “Day 1” mode. Many parts of Amazon’s operations could be converted into externally consumable services, just like the ful�llment services for even non-Amazon orders. There would be �nancial bene�ts but the primary objective would be that customer-centricity remains and “Day 2” does not arrive. A culture of forcing many parts of its internal operations to compete for external clients would more than any other factor ensure lower prices, lower costs of shipping, faster deliveries and operational excellence. Could Wal-Mart not replicate this? Maybe, but there would be a long learning curve and high costs associated with the tuitions. The ‘Day 1’ culture is Amazon’s biggest moat.

Alphabet’s Google relies on its search-based advertising platform for the bulk of its current revenues. Google’s key assets are the quality of its algorithms that run on its data and the “smart creatives” and the talent that the �rm has hired to develop them. And the recipes (algorithms) have kept improving with the amounts of ingredients (data). The accumulated knowledge that resides in Google’s data re�neries makes it di�cult to replicate asset. Arti�cial intelligence-powered services by Google will probably remake everything the company does. Google’s arti�cial intelligence platform could, potentially, impact the ecosystem of every single industry. The threats to its moat go beyond challenges such as downward pressure on its mobile ad monetisation. Can Google maintain its massive lead in data capture? Social networks are becoming popular enough to limit the usefulness of internet searches. Niche search engines could gain more traction against Google’s generalised system, although it has attempted to counter this. The early lead that Amazon has going in its Alexa voice-operated service could translate into dominance in voice search which could dent Google. Finally, regulatory risks concerning data protection and antitrust cannot be ignored, but this is a risk faced by all techbased “platform” companies.

GOOGLE’S KEY ASSETS ARE THE QUALITY OF ITS ALGORITHMS AND THE TALENT THAT IT HAS HIRED

MASTER OF THE WEB “Google has a huge new moat, in fact; I’ve probably never seen such a wide moat.” —Charlie Munger in 2009 9 June 2017 / Outlook BUSINESS

WHAT REALLY MATTERS There are three questions that every investor should ask when looking at “moats”: 1) How wide and deep are the moats? 2) Are the moats growing? and 3) How sustainable and durable are the moats? The last question is probably the most di�cult and the most pertinent when looking at tech-based “platform” businesses. But in the digital era, where “platforms” can quickly change shape and have been and can be a disruptive threat to every “pipeline” business, the last question on moat durability is probably the most important for every investor while analysing any business. Henry Ford once said, “Anyone who stops learning is old, whether at twenty or eighty. Anyone who keeps learning stays young. The greatest thing in life is to keep your mind young.” Little wonder then that Mr Bu�ett keeps getting younger every year. Investors should too. b THE WRITER IS A CO-PROMOTER OF JEETAY INVESTMENTS PVT LTD AND JASMINE INDIA FUND

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Learning from the master An avowed drinker from the Bu�ett fountain of wisdom on what he has imbibed ABHISHEK DALMIA Executive chairman, Revathi Equipment

his story goes back to 1996, when I was living at our plant site in Orissa. I am sure most of you have never been to a cement plant and many would never have lived in an industrial town. Being a colony set up around the factory, these places are quiet a�er sundown. Home to work is about 6 minutes, so, commute does not eat up your time. As a result, once you get home, you have a lot of time – to play your favorite sport, to catch the news, to read and to think. I was reading a lot of books on leadership, strategy and general management at the time. One day, I do not quite remember how, I stumbled upon the book, “The Warren Bu�ett Way”. It was a pretty thin book and once I started reading it, I couldn’t put it down. Not that the book was great but the topic and the personality covered made it immensely readable. That was the �rst book that I ever read on investing. Given my chartered accountancy training, the subject just hooked me. During my articleship days at Price Waterhouse (as it was called then), I had seen many of my colleagues discuss stock ideas but at the time I never got sucked into the conversation. But once I read this book, I just had to learn more. Once I had got initiated, I just had to go to the source, so I went straight to the Berkshire Hathaway website and downloaded all the letters Mr Bu�ett had written to his shareholders. Though he had been writing to his shareholders since 1957, the website only had letters starting since 1977. I read each of those letters taking furious notes along the way. Then it was one book a�er another, some on Mr Bu�ett, some on investing. I had ef9 June 2017 / Outlook BUSINESS

fectively enrolled in the Investing 101 program, in some ways, like Eklavya. It was long distance learning, with no direct contact with the guru. Around April 1997, I had come to Delhi to attend my �rst child’s sports day at a play school in Nizamuddin. There, I bumped into an old friend from the Price Waterhouse days. During our conversation, I learnt that after he completed his chartered accountancy program, he had got into investing. And not just any kind of investing, he had got into value investing – the very subject I had been reading about over the past year. That was the start of my investing journey, a�er spending a bit over a year just reading. To be a great investor, you need to be wired in a certain way along several dimensions. Just being good with numbers alone will not take you very far. Understanding human psychology alone will not take you very far. Having a great memory alone will not take you very far. Great people skills, while critical to do well in life, will, by itself, not lead you to great �nancial success. Appreciation of the innards of several businesses, by itself, is not a guarantor of investing success. Enjoying reading and being able to speed-read will, by itself, not lead to �nancial freedom. Having humility, though a critical trait, is not going to make you rich. Finding your passion early in life will not make you abnormally rich. Having unwavering passion for the same subject for �ve decades will lead to excellence in whatever �eld you choose, but may not be �nancially as rewarding as investing could be. Getting exposed to other geniuses like Mr Benjamin Graham and Mr Charlie Munger, the two biggest in�u-

ences in the life of Mr Bu�ett as an investor, was circumstance. Not to mention, a great mind. The genius of Mr Bu�ett is that he is wired to be an expert along most of these dimensions. This is not to say that he has not worked very hard for his success, but the point is that he had the key ingredients when he came into this world. Many other investors have tried hard to replicate that success. Why is there only one Warren Bu�ett? It is because, as Mr Munger says, you need to have several in�uencing factors going in the same direction to get a lollapalooza e�ect. So, let’s get started on what I learnt from Mr Bu�ett. I have learnt along so many dimensions that if you are reading this article to get investing insights, you will be disappointed. Let me start with thinking about how to think. And then talk about a few other things that I learnt from the inimitable Mr Bu�ett.

PERMUTATIONS, COMBINATIONS AND PROBABILITY THEORY Human minds have evolved to react to threat perceptions. And the response mechanism is usually hard wired, based on several millennia of real life experiences. See lion – run kind of responses. These shortcut responses have a purpose in life. It is to take decisions fast without wasting the computing capacity of the mind. However, the system, like any other system, also has drawbacks. It tends to oversimplify and forces you to take a decision, which ends up being suboptimal. In the investing world, this manifests as greed and fear. When the front pages are �lled with negative news, the automatic response is �ight to safety – keep money in a bank �xed deposit. Never mind that the bank itself might go bust. What works better is to �nd out what are the key possible outcomes, what might happen if each of those scenarios play out and what is the

probability of each of those scenarios playing out. So, if the economy is in trouble, it need not mean that everything is in trouble. There will always be things that will be needed in any kind of economy. And it is precisely at the time of a crisis that it makes sense to buy them. Now it takes a lot of mental courage to get yourself to write the cheque at times like that, but if you have run through the decision tree with the probability of each branch of that tree, you are much better equipped to pull the trigger. The same principle applies to almost anything you do in life, even running a business.

CHECKLISTS The human mind has other limitations too. It tends to remember the big issues that need to be dealt with. However, in life, not much is achieved without rigor. As they say, God lies in the details. So, while the mind is not equipped to remember a long list of to-dos; that is precisely what is required to do a thorough job. Whether it is investing or performing a medical procedure or �ying an airplane or, for that

WE NEED TO THINK WHERE THAT GROWTH IS GOING TO COME FROM AND HOW MANY BACKUP PLANS THERE ARE TO CREATE THAT GROWTH

Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA | matter, running a business. For doing a thorough job at anything that is mildly complex, there is no substitute for checklists. Of course, if you are Rajinikanth, my apologies for suggesting the use of checklists.

PSYCHOLOGY

To be able to handicap odds of any event on any decision tree, it is critical to understand human psychology - why people do what they do, what are the forces that a�ect their decisions, what kind of compromises might be made in making the decision, etc. These are all aspects which are important in assigning a probability to major outcomes on a decision tree. So, if you are studying a company for a possible investment and you want to �gure out how the company might do in future, you would be well served if you are able to analyse the psychology of the key players in the industry, key players in the customer industry, the ministry that in�uences that industry, etc. The bad news is if you are a numbercrunching kind of investor, you could be completely misled by the spreadsheet which has no qualitative input built into it. The good news is if you keep abreast of going on in the country and the industry, over time, you will have a reasonable understanding of what might happen in certain situations. And you can use that experience to attach odds to various possible outcomes.

I am sure all of you would have heard of the term critical mass. Usually, it is used when describing a raging bull charging towards you! However, it has other applications as well. It takes a lot of e�ort to get a business o� the ground – just like the infancy years of a new born. The mother struggles for years before she can start sleeping according to a routine again. Then come the kiddish years, when a lot of supervision is still needed but less than an infant. Gradually over time, the child becomes an adolescent and starts helping with house chores and other stu�. And when s/he �nally becomes an adult, s/he contributes to the earnings of the family, sometimes dramatically increasing the household income. Business works the same way. There is a point in any good business where incremental e�ort shows up disproportionately in the pro�t �gure. Investors call this the hockey stick growth phase in the life of the business. Investors who can �gure out where that point is can land themselves in the land of the 100 -baggers. People who invested decent sums of money in companies like Infosys, Hero or Bharti at the in�exion point never needed to buy another stock, if they chose not to.

NUMBERS ARE NOT CAST IN STONE AND FROM TIME TO TIME, THESE APPROXIMATIONS WILL GO WRONG

BACKUPS, BREAKPOINTS AND CRITICAL MASS Anyone who has ever worked on a Windows machine knows what a powerful concept backup is! In life, Murphy’s Law is everywhere, not just inside your computer. And therefore, when a company prepares a business plan, it needs to have backups. Life is unpredictable and without a plan B and a plan C and sometimes a plan D, E and F, results achieved will be very di�erent from plan A. But how does this apply to investing? When we sit down to project earnings growth, we need to think where that growth is going to come from. And while making our own assessment of earnings growth, we need to be aware of how many backup plans there are to create that growth. The fewer the backup plans, the more fragile the growth assumption. Likewise breakpoints are a great model. A rubber band will take only so much stretching before it reaches breakpoint. Likewise any balance sheet and income statement will take only so much leverage and no more. A diligent investor must be able to assess what that breakpoint is and what could happen beyond that. 9 June 2017 / Outlook BUSINESS

ACCOUNTING

Bean counters are not the most respected souls on the planet. That said, understanding what accountants understand is critical to being a good investor. Mr Bu�ett himself endorsed this by saying that accounting is the language of business. To understand what results a business is producing, it is imperative that you have a good understanding of accounting. I am a chartered accountant by training, so I understand the nuts and bolts of numbers fairly well. But a�er I started investing, I was able to connect business to numbers in a completely di�erent way. It is the di�erence between knowledge and wisdom. When you have knowledge you know about it, but only once you have experienced something do you get wisdom. Only by reading Mr Bu�ett’s writings did I learn what to look for in the numbers and how to interpret some key numbers. I also learnt to appreciate that accounting is only a crude approximation and not a science. So, one should understand that numbers are not cast in stone and that from time to time, these approximations will go wrong.

CIRCLE OF COMPETENCE This is a big one. Sounds simple enough – know what you know. But when you start applying this principle in life, you learn what you thought you knew, but never really did know. And it’s all relative. You might know something but unless you know it better than the others in

| A WEEKEND IN OMAHA | FIVE LESSONS FROM WARREN BUFFETT

Find your edge, hone it: Unless you know something better than the others, the dots won’t connect

Don’t torture numbers: Spreadsheets have no qualitative inputs, so squeeze them, but not so hard

Check, double check, recheck: You are better off with managements that have more than a plan

the game, you have no comparative advantage. It is possible to know very little and make a lot of money but you must know exactly what you know. As an example, many years ago, we were looking to buy some land. We looked at various options of similar land and decided to buy the one that was near an important site. All other things being equal, land near that site should have been equal or more expensive than other comparable land. On the contrary, it was cheaper. This is classic market ine�ciency. We knew what we were doing, we understood the risks and we bought. Over the six years we have held the land, the price has multiplied 15 times.

MARGIN OF SAFETY 54

When projections do go wrong, either due to error in estimation or worse, due to error in business judgment, you need chapter 20 of The Intelligent Investor – Margin of Safety. In many ways, if you learn this lesson really well, you probably do not need much else of what I have written in this article. The concept is that if you buy anything cheap enough, relative to its intrinsic value, it becomes almost impossible to lose money. And interestingly, once you make sure that you will not lose money, it is almost guaranteed that you will make super-normal returns. How? Think of an iPad, which retails at say $500. Now let us say that is its intrinsic value to a buyer. If you are trading in iPads and buy it close to or higher than $500, you will almost never make money. In fact, there is a high probability that due to the price you paid and obsolescence risks, you will likely lose money. On the contrary, the lower the price you buy it at, the higher the probability that you will �nd a buyer at a higher price (not lose money) and the more money you will likely make (higher upside). In value investing, return is inversely proportional to risk. The lower the risk, the higher the return! The principle is that simple and it applies equally to buying equity or anything else for that matter. It is just good old wisdom that you have seen your mother practice when she took you along while going shopping. Let me now talk a bit about what I have learnt from Mr Bu�ett as a human being. 9 June 2017 / Outlook BUSINESS

Margin of safety: If you buy anything cheap enough, it is almost hard to lose money

Think things through: Run through your investment checklist again and again

DEALING WITH PEOPLE Mr Bu�ett is a great judge of people. He has seldom erred in choosing his business partners. Once he chooses the right people to partner with, he never loses an opportunity to praise them publicly. Of course, it is all genuine praise, but I have seen many who fear that praise may go to the executive’s head. And so, they refrain unless they absolutely have no choice. On the �ip side, as and when he is in disagreement with something or someone, he makes sure he never criticizes the person in public, if at all. The principle he follows is be speci�c in praise and general in criticism. These are simple principles, which we have all heard of while growing up, but as we grow older, we stop practicing these things, despite the fact that they are hugely important for building great relationships.

HUMILITY The more successful you get, the more enemies you get. People get jealous and try to pull you down. That is part of human psychology. It is not only in the Mahabharata and in textbooks. It happens in real life. And one way to minimize the con�icts that arise from comparisons and jealousies is to be humble. Mr Bu�ett still lives in the same house that he bought way back in 1958.

PHILANTHROPY The other big thing that neutralises jealousy is philanthropy. When you publicly give away a big part of your fortune to the underprivileged, people in general will respect you. That’s not to say that one should give away wealth for this reason. Giving, by itself, is a very enriching experience. The feeling of being able to change the quality of lives of people is a massive reward in itself. I could go on but I guess you get a picture of the complexity of what it takes to be a great investor. To say that Mr Bu�ett is simply a good value investor is to oversimplify, greatly, a nuanced human being. Charlie Munger once said, the concept of value investing is simple, but that does not mean practicing it is simple. I hope I have been able to explain in some detail why it is not so. And why there is only one Mr Bu�ett. b

| A WEEKEND IN OMAHA |

So Charlie, should we? THE ORACLE OF OMAHA HAS INDIA ON HIS RADAR, BUT WILL HE INVEST BIG MONEY IN THE COUNTRY? N Mahalakshmi & Rajesh Padmashali

9 June 2017 / Outlook BUSINESS

lbert Einstein may or may not have remarked about compound interest being the eighth wonder of the world but there is one investor who has used it to lollapalooza e�ect. His name: Warren Edward Bu�ett. Like most things that he talks about, compound interest is easy to understand but hard to execute where it is most needed — to multiply one’s net worth. Financial stupidity like self-pity is self-compounding and hence while investing in a stock one needs to get it right o� the bat. The hallmark of Bu�ett’s investment style is that it has predictability as its centerpiece. It divides the world between ‘knowables’ and ‘unknowables’, and he focuses only on the ‘knowables’. Gordon Gekko’s line, “I don’t throw darts at a board. I bet on sure things” does come to mind except that Gekko was alluding to being in the know about what others are doing and Bu�ett is about knowing what he is doing. “Bu�ett’s success is a result of his evolution from a price-primary investor to a quality business accumulator. He likes businesses that do not consume a lot of capital and have a durable competitive advantage. His gi� is quantifying quality — be it in companies or people,” says Pat Dorsey, founder, Dorsey Asset Management. Given that he started investing at the age of 11, Buffett’s understanding of everything under the sun has also only compounded over the years. Other than the company that he is micro-scoping, interest rates are the only external factor that he pays heed to. Now, the most critical part of investing is to determine a company’s ability to earn a superior return on capital over a sustained period of time. This is what Bu�ett and his partner Charlie Munger call economic moat. “We buy barriers. Building them is tough… if you’re buying something at a huge discount to its replacement value and it is hard to replace, you have a big advantage. One competitor is enough to ruin a business running on small margins,” Munger had remarked in the 2012 Berkshire annual meeting. Moats are essentially formidable barriers to entry. In a ‘free market’, any business that earns a supernormal pro�t will attract competition to the point where the pro�t gets aligned Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA |

Bu�ett is best known for his brand-investments, but that does not mean he has not looked at other kinds of moats

Bu�ett decided to invest in Lubrizol, as its 1,600 patents gave it a durable competitive advantage

Nearly all its (BRK’s) retail operations including jewellery and furniture sellers have shrinking moats

—PAT DORSEY

—TREN GRIFFIN

—MOHNISH PABRAI

Founder, Dorsey Asset Management

Senior director, Microsoft

Founder, Pabrai Investment Funds

to a normal rate of return. The wider the moat, the harder it will be for competition to eat your lunch. Milton Friedman did say, “There’s no such thing as a free lunch” but it never stops people from trying and Friedman wasn’t around either to witness what Wall Street helped itself to a�er the subprime crisis. Ever since Bu�ett �gured out the power of sustainable competitive advantage, he started accumulating moat companies both in the public and private market. That is how American Express, Geico, The Washington Post, Coca-Cola, Gillette, Moody’s, Wrigley’s, Burlington Northern, Duracell, etc came about. A consistently high return on capital employed is an indicator of a moat and that is typical of brand companies. Building a brand takes several years or even decades and that’s why they can’t be dislodged easily. “The most potent moats are when you have high di�erentiation, low costs and scalability,” says Raamdeo Agrawal, co-founder, Motilal Oswal Financial Services. The litmus test to determine the strength of a brand is whether a competitor can replicate or weaken the moat by pumping in loads of cash. “If you gave me $10, $20, $30 billion to knock o� Coca-Cola, I couldn’t do it,” said Bu�ett in the 2012 annual meeting. Also, the popular perception that Bu�ett only buys into companies with strong brands is only partly true. “Bu�ett is best known for his brand-investments, but that does not mean he has not looked at other kinds of moats,” says Dorsey. Geico is a great example of a company, whose advantage is low cost. Geico was one of the �rst companies to use the direct marketing route, which meant that they could o�er policies at a lower cost. “Given that it is a commodity product, low cost is a huge advantage,” asserts Dorsey. Tren Gri�n, senior director, Microso� and who also blogs at 25iq says 9 June 2017 / Outlook BUSINESS

a classic example of a company Bu�ett picked because of patents is Lubrizol. “At the 2011 Berkshire meeting, Bu�ett reiterated that he decided to invest in Lubrizol because he thought that the more than 1,600 patents held by it would give the company a durable competitive advantage.”

WHOLE NEW WORLD With investing becoming increasingly competitive over the years and obvious bargains becoming nonexistent, Bu�ett has responded by expanding his circle of competence. Then, moats too, widen or narrow depending on the operating environment a�ecting the return on capital that a company earns. In fact,

“If you gave me $10, $20, $30 billion to knock off Coca-Cola, I couldn’t do it,” said Buffett in the 2012 annual meeting Berkshire Hathaway also has companies where the moats are weakening. Mohnish Pabrai, founder, Pabrai Investment Funds, who professes to have built his investing career cloning Bu�ett, says, “BRK has many shaky moats, nearly all its retail operations (except Nebraska Furniture Mart & Borsheims) are shrinking; Pampered Chef is shrinking, nearly all their jewellery retailers and furniture sellers have shrinking moats.” Dorsey adds, “There are other companies like Brooks Shoes, a specialised shoemaker, which is in a tough spot relative to the big-

| A WEEKEND IN OMAHA |

Cherry picking Bu�ett’s additions to portfolio (besides airlines) over the past two quarters show a range of mispricing opportunities Wells Fargo

BNY Mellon

Apple

Monsanto

Sirius XM Holdings

Liberty Global

Axalta Coating

266.81

48.91

800.89

50.91

23.2

31.03

7.61

Price/Earnings TTM (x)

13.3

14.5

17.9

26.9

31.1

13.5

105.1

Price/Book (x)

1.5

1.4

9.2

—

6.1

Rev Growth (3 Yr Avg) (%)

1.8

0.4

8.1

-3.2

9.7

14.9

0.9

Net Income Growth (3 Yr Avg) (%)

0.1

7.3

-18.7

25.5

—

ROA TTM (%)

1.1

14.3

9.4

9.8

1.3

ROE TTM (%)

11.6

9.6

34.6

39.7

—

17.6

6.3

M-Cap ($ billion)

Source: Morningstar

ger brands and Benjamin Moore, a paint company, is also battling Sherwin-Williams.” Another is Fruit of the Loom, which makes underwear and t-shirts. In fact, in the latest annual meeting Bu�ett was asked if Fruit of the Loom is feeling the heat from online shopping. Jonathan Brandt of Ruane, Cunni� & Goldfarb had also asked in 2013 about Fruit of the Loom losing ground to competitor Gildan. Buffett had then said, “We keep costs down, constantly work at brand building and work hard to keep customers happy… the non-branded aspects of the business have hurt Fruit in the last 10 years certainly… it’s not a business that you can coast on. It’s not Coca-Cola. But it’s not an unbranded product either. I think Fruit will do reasonably well but will not get anything like the kind of pro�t margins you can get in certain branded products.” Munger added, “We may average out in terms of market share but we’re not going to win every skirmish or battle.” Worrisome may be companies whose moats may be narrowing because of a certain technology or trend that a�ects the very business. As Bu�ett himself feels, Geico may see its moat narrowing because of driverless cars. Or for that matter Coke, which is battling slowing volume growth. At Coke, the threat is less about the brand and more about demand, points out Dorsey. “Coke’s volume could decline as people prefer to have something other than Coke but it could still earn a good margin on what it sells because it is able to price itself at a premium to other colas. Its challenge is whether it can adjust its cost structure to changing demand,” he adds. It may be intuitive to infer that industries where organic growth is weak may be a bad place to invest. This is precisely where deep understanding of a moat makes all the di�erence. See’s Candies is a phenomenal example of pricing power that has delivered exceptional earnings growth. Bu�ett explained See’s moat 9 June 2017 / Outlook BUSINESS

Price data as on May 24, 2017

in his 2007 letter. See’s sold 16 million pounds of candy when Bu�ett bought the company in 1972 and by 2006, the company sold 31 million pounds, a growth of 2% annually. Bu�ett bought the company for $25 million when sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to run the business was $8 million, and including some seasonal debt, the company was earning 60% pre-tax on invested capital, primarily because it sold for cash (so no accounts receivable) and both production and distribution cycles were short, meaning minimum inventories. In 2006, See’s sales were $383 million, and pre-tax pro�ts were $82 million, on a capital of $40 million. The total pre-tax earnings since the acquisition are over $2 billion. The moral of the See’s story seems to be that pricing power can indeed overcome tepid volume growth. Conversely, if the industry is experiencing great growth, then you might not need a moat. Bu�ett’s famous saying — “It’s only when the tide goes out that you learn who has been swimming naked” — is true of businesses and not just the stock market. As much as a See’s Candies is hard to �nd, growth is equally hard to predict. “Finding a company in an industry with high returns or avoiding a company in an industry with low returns is not enough. Finding a good business capable of sustaining high performance requires a thorough understanding of both the industry and �rmspeci�c circumstances,” explains Michael Mauboussin, head, global �nancial strategies, Credit Suisse.

STYLE EVOLUTION While the acquisition of See’s Candies is legendary, what has got many scratching their heads is Bu�ett’s investment in Apple. For long, Bu�ett refrained from investing in technology ruling it out as a domain outside his circle of competence. What he meant was that he did not understand it deep enough to predict the company’s ability to sustain its profit. Destruction

| A WEEKEND IN OMAHA |

BLAST FROM THE PAST Bill Miller’s question on airlines asked by Becky Quick at the 2013 annual meeting

The airline industry is plagued with terrible economics. With the pending merger of US Air and American … the industry has been consistently profitable with double-digit returns. It has been terrible historically but now, the top four carriers will have 90% of the traffic. Do you think the industry’s economics are likely to improve? Warren Buffett: The question about the industry is interesting because it’s true it has consolidated. In some industries there are only two competitors and they still beat each other’s brains out. Freddie Mac and Fannie Mae. They drove prices for insuring loans down to improper levels and did stupid things. Certain industries once down to certain levels do extremely well and others even when there’s two of them still don’t do that well. Coke and Pepsi in the US are the only two colas people can name and 50% of drinks sold are colas, but if you go into the market on a weekend they’re pricing the product at low prices and competing vigorously. It’s industry-specific. The airline industry has very low incremental cost per seat with enormous fixed costs. The temptation to sell that last seat at a very low price is very high. It’s labor-intensive and capital intensive and a largely commodity type business. It has been a deathtrap for investors; a capitalist should have shot down Orville Wright. If it ever gets down to one airline and no regulation, it will be a wonderful business. Is it a good business yet? I don’t know the answer but I’m skeptical. Charlie Munger: The last time we were presented with an opportunity like this was in railroads where you had consolidation and the industry improved. We missed it and came back to it late. We proved to be slow learners. It’s conceivable that Miller is right in what he suggests. It goes into my too hard pile. Warren Buffett: Mine too. Charlie Munger: But he could be right. Warren Buffett: And it will be fun to watch. But we like to have stronger feelings about them. We don’t think things will change dramatically. Look at See’s Candies. Even there real profitability is limited to the West Coast but we don’t see competition coming along and taking away business. Charlie Munger: You really couldn’t create another railroad. And you could create another airline. And that’s what I don’t like about it. Warren Buffett: I’ve had a dozen proposals from people who want to get into airline business. It is sexy for some reason. If you go into an office of a CEO and talk about a new airplane, you are in the door. You ask to talk about hauling coal, it is harder. Some have gone bankrupt more than once. US Air, it went into bankruptcy twice, we were very lucky to make money. US Air was in trouble before my check cleared. They never made their projections. We weren’t very popular because we pointed that out at the board meetings. 9 June 2017 / Outlook BUSINESS

in technology can be overnight and the high pace of change makes it harder for the magic of compounding to play out. Bu�ett surprised everyone by logging into Apple last year. The trade is in the money but skepticism about how long Bu�ett will hold on abounds. Dorsey believes the skepticism is unjusti�ed as Apple is unlikely to go the Motorola or Nokia way. The handset titans today are a pale shadow of their former self. Dorsey explains, “Unlike in the case of Nokia and Motorola, where the value was in the hardware, in the case of Apple the value is in the so�ware.” You have two operating systems that rule the world — Android and iOS. The switching cost of moving from Android to iOS or vice versa is meaningful as you are locked into the ecosystem. That creates dependence. “If I am used to my apps and data on iOS, I’ll follow the path of least resistance and my next phone will most likely be an iPhone,” says Dorsey. Apple does not need to grow its customer base, most likely it won’t because it is a premium product and the next billion consumers who will buy smartphones will come from lower income markets. But its prevailing customers are unlikely to throw their iPhones and buy an Android. In this year’s meeting, Bu�ett didn’t quite elaborate on his thinking but defended it as more of a consumer play. But in the end, for him and Munger, it is about identifying a moat and buying with a margin of safety than with the greater fool theory in mind. Even more surprising is his investment in airlines after publicly denouncing it as a business, which has incessantly destroyed shareholder value (see: Blast from the past). “People today are buying less clothing and taking more vacations. They would rather travel than

The airline investment is up in the air but it only demonstrates Buffett’s ﬂexibility and constant pursuit of value buy some fancy handbag. That is part of the airline thing,” says Gri�n. The airline investment is up in the air but it only demonstrates Bu�ett’s �exibility and constant pursuit of value. The easier thing would have been to be dogmatic. The ability to continuously evaluate change and keep one’s mind open to grab mispricing opportunities is fundamental to investing, something Bu�ett has perfected over the years. If one extrapolates his new-found openness to venture into areas that he has historically steered clear of, then a gradually increasing exposure to India seems

| A WEEKEND IN OMAHA |

Behind the scenes Berkshire Hathaway’s India presence — Operating Companies LUBRIZOL Has a tie-up with Finolex Industries for the manufacture of CPVC pipes and ﬁttings; Indian Oil for automotive and industrial lubricants MARMON GROUP Group companies include Astha Amarillo Gear Private Limited/Astha Sterling Crane Private Limited/ Cornelius/Filtrex Technologies/Radiant–RSCC Specialty Cable Private Limited GENERAL RE Has obtained reinsurance branch licence FRUIT OF THE LOOM Licence to Rupa for manufacturing, distribution & selling TAEGU TEC - IMC GROUP Milling & metal cutting tools MOUSER - TTI Distributor of semi-conductors & electronic components SHAW INDUSTRIES Sourcing

Berkshire Hathaway’s major portfolio companies in India KRAFT HEINZ, COKE, APPLE, AMEX, IBM, MOODY’S, BURGER KING, UNITED AIRLINES

can sell, like he did in the case of IBM. But with private companies, he cannot sell as that would hurt his reputation. So, he tends to keep them,” reminds Gri�n. When Bu�ett visited India the �rst time in 2011 amid a corporate agency tie-up with Bajaj Allianz, it was rumoured that Berkshire would pick up a stake in Bajaj Finserv. While the rumour turned out to be just that, Bajaj Finserv’s stock price has since rocketed 8x. Banking and insurance is a domain that Bu�ett knows like the back of his hand or maybe better than the back of his hand, so the sector is always on his mind not only in India but worldwide. Bajaj Finserv has partnered with Allianz for its insurance venture and the German major was also reported to be a minority partner when he tested the waters in 2011. General insurance is of particular interest to Berkshire and it will not be surprising if his next big acquisition is related to insurance. There could well be an unwritten understanding between Bu�ett and his 3G Capital partner, Jorge Lemann about the sectors that they would focus on in terms of acquisition. 3G so far has been focused on building a portfolio of marquee foods and drinks brands and it could continue doing that. It also helps that 3G has its roots in �nancial services and can pitch in if needed.

OPTIONS GALORE

64 like a cinch. So far, Berkshire Hathaway has been present in India through its operating companies (see: Behind the scenes) and the default exposure through its portfolio holdings such as Coca-Cola, IBM, American Express, Heinz, Apple, Moody’s, Restaurant Brands, etc. Even Wells Fargo has been operating a back o�ce in Hyderabad for over a decade now. Along with General Re setting up an India o�ce and obtaining a reinsurance branch licence, the local units — Berkshire India and Berkshire Hathaway Services India Private Limited have seen the addition of new directors. Lubrizol Corp recently hiked its stake in Lubrizol India from 50% to 74% in the auto and industrial lubricants joint venture that it has with Indian Oil. Lubrizol also has a tie-up with Finolex Industries for the manufacture of CPVC pipes and �ttings. Bolt-on acquisitions in the $50 million to $300 million range at Berkshire’s operating companies cannot be ruled out in India. Gri�n says Berkshire is a home for people wanting to sell their family businesses. “It has a reputation for treating the owner’s company with respect. In comparison, a private equity buyer will milk it for every penny it is worth. So, they rather sell to Warren at a lower price than they would get from the highest bidder. Warren also lets them run the business and a lot of people love that.” There is a �ipside though. “When his calls go wrong with public companies, he 9 June 2017 / Outlook BUSINESS

As far as the public market is concerned, traditionally, Indian arms of multinational companies have been considered to have the best moats: Nestle India, P&G Hygiene, Castrol, Colgate, Glaxo, Bosch, 3M, Unilever, to name a few. But the problem with consumer companies in India is two-fold. Bu�ett can and has invested in their parent or in the case of Unilever tried to buy them outright. Instead of buying P&G here, he might as well play white knight to the parent, which is being pushed by activists. It makes more sense given the exuberance re�ected in the relative valuations of the Indian arms compared with the parent. Suzuki’s Indian arm, Maruti, is a �ne example: the company is on a roll with stellar growth and has a deep moat where both supply-side and demand-side economics are at play. But today Maruti trades at a market cap of $32 billion, re�ecting a multiple of 25, compared to Suzuki, whose market cap is $20 billion or that of Honda at $50 billion. The second problem with big brand companies in India is that they face intense competitive pressure from low-cost single-product or nimble-footed regional players. Pabrai says, “Wal-Mart & Costco in the US and VMart in India sell store brands that are clones of the established brands. Packaging is similar, it is placed right next to the branded product and pricing is lower. Look at V�Mart’s store version of Parachute Coco-

| A WEEKEND IN OMAHA |

India’s Economic Moats There are companies with strong moats across industries but none of these trade cheap Market Cap ($ billion)

P/E (x) TTM

ROE (%) 10-Year Avg

ROCE (%) 10-Year Avg

P/E (x) 10-Year Avg

EPS CAGR 10-Year (%)

HDFC Bank

61.93

26.37

18.78

20.28

24.13/3.98*

24.56

Kotak Mahindra Bank

27.39

34.87

15.89

13.09

24.52/3.35*

12.32

Asian Paints

16.13

54.06

41.28

52.67

34.60

23.32

Eicher Motors

11.48

44.74

27.32

35.07

25.78

20.09

GAIL (India)

10.15

19.59

16.99

19.35

12.86

-0.80

Godrej Consumer

9.22

45.95

51.57

36.38

28.20

20.01

Britannia Industries

6.52

49.08

42.21

39.67

30.14

18.54

Marico

6.18

50.27

40.69

34.21

31.84

22.32

Pidilite Industries

5.69

43.02

27.32

29.96

30.44

24.12

MRF

4.08

17.83

24.26

25.92

8.86

40.43

Exide Industries

2.91

23.58

26.65

34.23

24.61

24.93

Page Industries

2.41

61.10

50.18

53.28

35.49

33.39

Balkrishna Industries

2.22

19.66

26.34

20.95

8.62

23.62

Amara Raja

2.19

29.80

27.84

34.42

15.46

35.28

Indraprastha Gas

2.11

25.23

26.44

36.57

12.98

15.90

CRISIL

2.05

41.53

42.31

57.80

32.59

17.23

ICRA

0.62

54.29

19.57

27.79

25.28

16.78

Source: Ace Equity; Data as on May 24, 2017; *P/B (x)

66 nut oil. As retailing concentrates in the hands of fewer players, it will put pressure on the brand guys.” Additional competitive pressure comes in the form of larger companies for whom pro�t may not be the prime objective. A classic example of the latter is GCMMF, a co-operative whose main objective is to maximise the price o�ered to members of the co-operatives i.e. its farmers. It operates under the Amul brand and its supply chain is an unbeatable moat, but it is not run for pro�t. Then there’s Ayurveda-powered Patanjali that has sprung up and is targeting doubling its sales in the next two years, through aggressive pricing. “When your competitors are not pro�t-focused, they will damage the industry. They can be disruptive,” says Soumendra Nath Lahiri, CIO, L&T Mutual Fund. “HUL took 58 years to reach a turnover of #29,000 crore but Patanjali claims to have reached #10,500 crore in �ve years,” he adds. Another global trend that threatens to alter the supply-side drivers for brand creation is the decline of television as a medium of advertising. If you wanted to build a national brand in the ‘80 s or ‘90 s, you got a bigger bang for your spend by advertising on television. Today, you can put up a YouTube video or you can buy targeted ads on Facebook. Start-ups can now build consumer awareness at vastly lower costs than 10 years ago. “Dollar Shave Club, a California-based 9 June 2017 / Outlook BUSINESS

start-up founded by Michael Dubin that sold cheap razors and blades went from zero to being bought by Unilever for $1 billion in seven years. Chobani is another billion-dollar brand that didn’t exist 10 years ago and it has taken share from Yoplait. Bu�ett calls brand companies, ‘The Inevitables’. I think that is a pretty dangerous word,” says Dorsey. For more than a 100 years Gillette (now owned by P&G) had pricing power but the entry of start-ups such as Dollar Shave and Harry’s has forced the venerable brand to play the price game. In India, too, traditional consumer brands are getting challenged because it’s become much easier and faster to build brands powered by cheap private equity money and digital marketing. Snack-maker Balaji and beverage brand Paper Boat are examples of �edgling brands that are making their presence felt. That apart, a new dimension to business risk was introduced when Nestle’s Maggi noodles was banned. The Maggi story was one of horri�c brand destruction and is estimated to have cost Nestle $500 million. “If the country is prepared to let that kind of thing go on because of improper allegations that at some level is intended to re-orient consumer preferences and availability, it’s a dangerous game. I can own Nestle, secure that we have a good business around the world, but not in India,” says Tom Russo, partner, Gardner, Russo & Gardner and for whom Nestle is his biggest hold-

| A WEEKEND IN OMAHA |

Finding a company in an industry with high returns or avoiding a company with low returns is not enough

I can own Nestle, secure that we have a good business around the world, but not in India

HUL took 58 years to reach a turnover of #29,000 crore but Patanjali claims to have reached #10,500 crore in �ve years

—MICHAEL MAUBOUSSIN

—TOM RUSSO

—SOUMENDRA NATH LAHIRI

Head, global ﬁnancial strategies, Credit Suisse

Partner, Gardner Russo & Gardner

CIO, L & T Mutual Fund

ing. Competition can test a moat from time to time but regulatory interference could destroy it. “If you spend tens of millions of dollars only to �nd your position being taken away on the basis of some report that alleges more harm than is proven, that reduces your willingness to make investments and increases the odds of local players doing better,” feels Russo. It is not only a storied foods company like Nestle that has to go through the regulatory pincer, liquor and tobacco companies are perceived as perennial sinners. But that does not prevent them from being fancied by investors. United Spirits and United Breweries are a bunch whose potential could be �nally unleashed as they pass into foreign hands. Diageo already controls United Spirits while Heineken is working on obtaining control over United Breweries. Russo holds Heineken as well as Diageo and feels that the growth runway for both is promising. But what makes earnings unpredictable is that governments have a love-hate relationship with alcohol. They love it for the taxes and hate it (or pretend to) for its ill-e�ects on society. “Cigarette and liquor companies have a good moat but the fact that we do not have a �x on taxes brings in a sense of unpredictability. Globally though, they have delivered decent returns,” says S Naren, CIO, ICICI Prudential AMC. Five states in India have prohibition and the latest Supreme Court diktat to ban selling of liquor alongside highways has been a major dampener. The complexity of the business in India is compounded by the fact that liquor companies have to individually get pricing approved by the state governments every year. “An attempt to outlaw alcohol doesn’t work. The borders are too porous and the counterfeits are lethal. Per capita consumption of beer in China has 9 June 2017 / Outlook BUSINESS

moved from 2 to 32 litres, India is at 2 and the game is too early,” claims Russo.

MR. BUFFETT, INDIA’S CALLING Apart from the multinationals, India has several companies that have built strong moats around them across segments from paints and hair oil to batteries and tyres (see: Moats of India). From Bu�ett’s perspective, while both the public and private market may be fertile hunting ground, the fact remains that in India, most promoters sell their businesses when the going gets tough, not as part of succession planning or with the intent to preserve its culture. Companies don’t last forever either and once the moat is tested and recognised, the market quickly discounts it. Yet, several companies tend to deliver a superior return for long periods as they are able to ‘rollover’ their competitive advantage period by defending their moat continuously, according to Mauboussin. That’s the reason Bu�ett believes in paying a fair price for such companies rather than wistfully waiting for them to get cheap. Seen from this prism, can India’s moat companies make the cut at their prevailing price? Pabrai thinks strong consumer brands such as Patanjali or strong capital allocators like Piramal could interest Bu�ett. Historically, Bu�ett has kept the capital allocation role for himself but Pabrai says, “At his size, Bu�ett needs to be �exible and he’s given capital allocation to 3G as well with Kra� Heinz. As for Patanjali, it is the challenger and at the core, as long as it promotes great natural/organic products at great prices, it will continue to put pressure on P&G, Unilever, etc.” The best large-sized moats available in India are family-run businesses such as Asian Paints, Marico, Godrej Consumer, Pidilite and MRF to name a few. The

| A WEEKEND IN OMAHA | beauty is that apart from a moat they also have a long runway of growth given India’s demographics. For Bu�ett to buy, the owners must be willing to sell their businesses and also run them — that’s Bu�ett’s buyout model for family-run businesses. Going by prevailing multiples, these stocks seem richly priced — most valued around 40x earnings. Is the multiple justi�ed? So if you pay 40x for a stock that is expected to compound earnings at 20 %, you’ll take a little over 20 years to recover the price paid. Simply put, if the company continues to compound earnings at 20% year-onyear for the next 10 years and you get an exit at 25x, you will make a compounded return of 14.49% on the stock; if you held it for 15 -years and sold it at a similar valuation, you would have compounded at 16.29%. However, if earnings were to compound at 15%, your returns for 10 -year and 15 -year periods would be 9.72% and 11.45% respectively, assuming exit at similar valuations. For the record, Pidilite has grown earnings at 24.11% over the past 10 years, Asian Paints at 23.32%, Marico at 22.32% and Godrej at 20% (see: India’s Eco-

Who to bank on? Some Indian banks o�er great returns, but aren’t cheap

Mcap ($ bn)

P/E (x)

P/B (x)

ROA (%)

ROE (%)

HDFC Bank

61.93

27.4

4.10

1.92

18.65

Kotak Bank

27.39

36.8

4.74

1.91

13.78

Wells Fargo

266.81

13.35

1.49

1.16

11.01

BNY Mellon

48.91

14.47

1.37

1.04

9.3

nomic Moats). “Brand companies are expensive. India is a cyclical destination at this point in time – that’s where one can �nd value today,” says Naren. Barring infrastructure which is reeling under a debt overhang and commodities that may appear cheap, high return on capital sectors such as so�ware services and pharmaceutical companies are also trading at relatively low multiples. Bu�ett has refrained from investing in pharmaceuticals perhaps because he thinks the rate of change in this industry is unfavourable for value creation. It could also be because despite the research e�orts, pro�ts of companies may be capped by public clamour/government push for a�ordable medicines. Signi�cantly, even generic players lack pricing power beyond the exclusivity period, which forces them to continuously replenish their launch pipeline, something that necessitates an outstanding manager at all times, quite contrary to Bu�ett’s liking. Again, so�ware services �rms such as Infosys and its peers have seen a dip in both growth and valuation. In9 June 2017 / Outlook BUSINESS

fosys was once perceived to have a strong moat given its large workforce and execution capability, which created client stickiness. That client equity is coming unstuck as the dynamics of the business are changing in favour of specialised, product-based solution providers. “There may be a number of large growth companies but not necessarily companies that have very deep moats like in the US; that may be one of the reasons Bu�ett may not be interested in India,” says Naren. “Mega return requires innovation; it does not look like we are going to see a Google or Tesla in India. You cannot have an $800 -billion market cap company like Apple without a moat,” he adds. As Bu�ett told Outlook Business in 2014 and also reiterated this year, size is a key constraint that has kept him from investing in the Indian market. Agrawal however says, “Our markets are not mature – America o�ers companies of all size and shapes with several di�erent business models. We have to adapt to our markets.”

HERE’S THE PITCH, MR. BUFFETT A good bet for Bu�ett in the Indian market could be the �nancial services space. He isn’t particularly fond of banks as their leverage ampli�es the downside. Still, Bu�ett did buy Wells Fargo in 1990 during the banking

India might be fertile hunting ground, but most promoters sell their businesses only when the going gets tough panic and has held it since. He only recently sold about 9 million shares to get back below the Fed’s 10% threshold. A retail bank, Wells Fargo currently trades at a pricebook of 1.5x. The moat in a bank is really about making it easy for a customer to transact and “switching costs” — it’s a hassle for customers to switch services. The Indian version of Wells Fargo could well be HDFC Bank, with low-cost deposits constituting 48%. The other bank that enjoys a strong moat here is Kotak Bank and where low-cost deposits account for 44%. Uday Kotak has been a cautious banker keeping wholesale lending to the minimum and focusing on the retail book where delinquencies tend to be low. Kotak Bank also has more room to increase foreign holding compared to HDFC Bank, where the 74% ceiling has almost been breached. The question again is how much should one pay up for quality? Ordinarily, value investors will shy away from investing in a bank that trades at 4x book value — banks are best bought at less than book value. The case for investing would be that the growth rates in

The most potent moats are the ones when you have high di�erentiation, low costs and scalability

State-owned banks still hold 60% market share, which will keep declining as they have very little by way of technology

Brand companies are expensive. India is a cyclical destination now – that’s where one can �nd value today

—RAAMDEO AGRAWAL

—SAMIR ARORA

—S NAREN

Co-founder, Motilal Oswal Financial Services

Founder, Helios Capital

CIO, ICICI Prudential AMC

India are far superior compared to growth rates in the US . Samir Arora, founder, Helios Capital maintains that state-owned banks still hold 60 % market share, and that will keep declining over time as these banks have very little by way of technology (except SBI) and if the government does not change its stance of reducing its stake, they’ll starve for capital. That means the top four private banks will gobble their market share. If one believes the economy will experience 7% real growth and 12% nominal growth, then a private sector bank like HDFC could likely grow at 1.5x. Because it’ll not only penetrate newer markets but also take market share from public sector rivals, it could grow at 18%. Assuming an annual currency depreciation of 3% (average over the past 15 years) the growth in earnings for HDFC Bank can be very conservatively around 15%. The bank earned a RoE of 18.65% in FY17 and a RoA of 1.92%. Wells Fargo earns a RoE of 11.01% and RoA of 1.16%, with negligible growth but then it hands out stable income by way of dividends. In one of the earlier interviews, Munger commented on a deal that was o�ered to Bu�ett. “There is this company in an emerging market that was presented to Warren. His response was, ‘I don’t feel more comfortable buying that than I do of adding to Wells Fargo.’” Despite its super franchise, Wells Fargo delivered a 9% annual stock return since 2000, while HDFC Bank’s stock gained 20% annually because the latter has delivered a 24.56% compounded growth in earnings over the past 10 years, and an even higher rate if you take a longer period. How much premium should one pay for this superior earnings power? That really depends on your take on growth. The fact remains that HDFC Bank has rarely traded at a price below 3.5 - 4x book. This takes us back to the point made by Mauboussin

on ‘rollover’ of competitive advantage period, which can perpetuate high returns from moat companies. The other signi�cant play for Bu�ett in the Indian market might be the National Stock Exchange (NSE), which is planning an IPO. The NSE enjoys a near monopoly in the cash and derivatives markets and it is reasonable to assume that economic growth will increasingly re�ect in trading volume. NSE’s FY17 revenue and pro�t was #2,318 crore and #1,033 crore, respectively. It also doled out #1,000 crore as dividend and is expected to list at a valuation of at least #40,000 crore. In comparison, the Bombay Stock Exchange is valued at #5,500 crore. The best value opportunities today in India come with a host of imponderables. Be it prices of global commodities or the future of India’s so�ware services companies or banks, it requires either a leap of faith or contrarian thinking to take a bet on these stocks. There are, as at all times, pockets of temporary mispricing that may o�er opportunities to make superior returns. But stocks whose fortunes seem predictable do not have any margin of safety. “The question to ask is if Bu�ett will buy anything in India at 45x. If the P/E shrinks despite the earnings coming in, he is going to lose money. Everything is opportunity cost for him. He will make 15% or the rate at which earnings compound. Bu�ett is not coming here to earn 10 or 15%,” points out Lahiri. The contrast in valuation is even more striking when you look at US stocks — Google trades at 21x, clocking revenue and earnings growth of 15% and RoE of 15% last year; Apple trades at 15x current year earnings with a revenue growth of 8% and RoE of 35% and Disney trades at 15x with an earnings growth of 15x and RoE of 21. Investing in India at the moment is far from shooting �sh in a barrel. b Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA |

ASIAN PAINTS

Moats of

Asian Paints is India’s largest decorative paints company with a 65% market share in the segment compared with 15% for its closest competitor Kansai Nerolac, HDFC Bank has an impecreflecting its unassailable position. cable record of consistent growth The 75-year-old company’s moat is in earnings – 25% over the past 10 years its strong relationship with dis– while maintaining its asset quality. Its retributors and a powerful brand tail loans constitute more than 50% of its toassociation nurtured over tal book, and even within its wholesale loans it decades. has maintained a low proportion of corporate advances, which has time and again been a source of stress for Indian banks. Low cost deposits (current and savings accounts) account for 48% which is the highest GAIL is the country’s Kotak Mahindra Bank in the industry. largest state-owned natural has all the trappings that gas processing and distribude�ne a high quality bank – a tion company; its moat is its strong management, durable fee pipeline network of business, and pristine asset quality 11,000 km owing to a well-de�ned loan-book construct. It’s a trusted conWith a portfolio comprising power brands such as Good Day, Tiger, Masumer brand with all �nanrie Gold, 50-50 and Milk Bikis, Britannia cial product o�erings. dominates the biscuits market with over 35% share. Britannia’s earnings power was unleashed a�er the new CEO beefed up distribution and frontline sales force If a mechanic were which doubled ROCE from 40% in to ask a car owner the make of his four-wheeler batFY13 to 80% by FY17. Its super brand Fevicol has tery, without even checking, 99% a strong “bond” with the trader would say it’s Exide. That’s the recommunity. Carpenters have used the call it has. Automotive batteries in brand for years and know exactly how it India is a duopoly and Exide’s moat works, how much time it takes to layer, to is being tested by rival Amara dry and so forth. And since this is usually Raja, which has caught up Eicher Motors is known for a small part of the overall cost, customers faster in the replaceits cult motorcycle brand — Roywould not like to take a chance and exment market al En�eld Bullet. Eicher sells 600,000 periment. Fevicol with a 70% market bikes a year with a realisation 44x that share is now generic for adhesives of other commuter bike companies such in India. as Hero, Honda and Bajaj. Can it be dislodged? Boys love the rev and power of the Bullet. There is a certain pride attached to owning the brand — you become a part of a cult community. It’s aspirational.

HDFC BANK

GAIL

KOTAK BANK

BRITANNIA

EXIDE

PIDILITE

EICHER

9 June 2017 / Outlook BUSINESS

India

GODREJ CONSUMER

PAGE INDUSTRIES Its Jockey brand of innerwear has a signi�cant pull, which along with its strong distribution presence creates a wide moat. Its asset-light model makes its economics compelling.

The flagship consumer products company of the 119 -year-old Godrej group is deepening its moat with dominant market share in niche, emerging product segments. It lords over the home insecticide market (50% share) with its Good Knight and HIT brands, besides owning the highest selling crème colour brand Godrej Expert Rich Crème, which constitutes 13% of revenue and two major soap brands Godrej No.1 and Cinthol. A recent addition is the premium salon hair care brand, BBlunt.

BKT

IGL & MGL MARICO It owns powerful brands such as Parachute, Saffola, Hair & Care, Nihar and a couple of other niche brands. Parachute is synonymous for coconut oil and enjoys supreme pricing power — Marico has almost always been able to pass on any input spike to consumers.

Indraprastha Gas and Mahanagar Gas are the country’s leading city gas distributors with the sole supplying rights in Delhi and Mumbai, respectively. Maa hanagar’s pipeline infrastructure is a signi�cant moat as it is irreplicable.

MRF Another great moat in the domestic tyre industry is Chennaibased MRF. It’s the kind of company Bu�ett would absolutely love — great brand of car tyres built over several years around rally sports, a low profile familyowned enterprise that never approached the market to raise funds beyond the initial public o�er. The company’s equity continues to remain static at #6 crore, and has averaged a ROCE of 24 per cent over 10 years.

Balkrishna Industries primarily exports tyres; its speciality is o�-highway tyres. The tyres, unlike regular car and truck tyres, require short-duration production runs. As the company has been focusing on this segment for many years, it has a huge library of moulds that gives it a unique advantage ensuring customers don’t look elsewhere.

AVENUE SUPERMARTS Avenue Supermarts runs a one-stop supermarket chain, D�Mart that o�ers customers a wide range of basic home and personal care products and groceries with up to a 10% discount on the MRP. Its properties are owned, which is a distinct advantage. Avenue Supermarts’ strategy of buying its inventory with cash upfront gets it best discounts, which it passes on to customers. That’s how it has been building customer loyalty. Through its careful store expansion strategy, it has grown sales four-fold over �ve years to #8,600 crore, doubling ROCE from 11% to 24%. So far in India, retailers have only bled due to the unreasonably high cost of real estate and unbridled expansion. As its chain grows, the economies of scale will be more pronounced for the country’s most pro�table retailer.

Outlook BUSINESS / 9 June 2017

�� 74

Amid rising temperatures and growing environmental concerns, brands today are launching highly energy-efﬁcient ﬁve star rated Air Conditioners that are exceptionally designed and include value-added features especially developed for Indian markets, based on health conditions, local climatic patterns and consumer requirements.

9 June 2017 / Outlook BUSINESS

here was a time when Indian summers meant gorging on ripe mangoes and sipping on nimbu sodas to keep cool, all under the whirl of that one fan, when the entire family gathered together for their afternoon siesta. Not anymore. With global warming on the rise, the hot Indian summer has only gotten hotter, coupled with increasing temperature conditions and rising humidity. With fans no longer enough to keep you cool through the hot summers, air conditioners are fast moving from the place of luxury they enjoyed at one point to an item of necessity, in average middle class homes across urban India.

Market Watch India’s air conditioner market is among one of the fastest growing markets in Asia-Pacific region. Rising middle class disposable income, increasing urban agglomeration, dwelling of new infrastructures have led to the phenomenal growth of air conditioners market in India. So much so that even Tier II and Tier III cities, where penetration level was low, is witnessing optimistic growth. Recent studies have revealed that ACs are the first appliance people want to buy when they cross a certain income threshold. And millions of Indians are expected to cross that threshold in the next 10-15 years, so analysts expect demand for room air-conditioner somewhat similar to the surge in China around the turn of the millennium. The presence of various multinational companies has increased the growth potential for the market, as these players are focusing on building capabilities in the Indian market. Currently this market is fragmented with more than 25 players vying for a share of this growing segment. The latest trend followed by these players includes the launch of low-price offerings that are being achieved through economies of scale and procurement of low cost components and materials.

have been popular across the world for several years, it is only now that it is witnessing now witnessing enthusiastic response in the Indian market. In 2006, the Bureau of Energy Efficiency introduced the star labeling programme for home appliances. Spurred by the momentum of the country’s dramatic transition to cleaner energy, the Indian government swiftly shifted gears to address this loophole in the air conditioning market as well. Last August, BEE announced a new rating system – the Indian Seasonal Energy Efficiency Ratio (ISEER), a country-specific version of the SEER, the global norm. To be mandatory for all AC companies and all AC models from January 2018, this new standard will help accurately determine the energy efficiency of ACs depending on the variations in climatic conditions across India. Brands are now launching highly energy efficient five star rated ACs that are also exceptionally designed and include value added features especially developed for Indian markets, based on health conditions, local climatic patterns and consumer requirements. Apart from being cooling devices, these new age ACs are also high on innovative features like humidity control, air purification and a newly launched feature that repels mosquitoes in a non-toxic way for you to enjoy a sound sleep, especially in a season where serious epidemics like dengue and malaria.

What’s the latest? From the time the AC was an instrument on the wall used for cooling purposes only, ACs of today have come to be sleek, intelligent and environment-friendly at the same time. Currently, the AC market size in India is pegged to around Some can respond #2 billion and is expected to increase 12-15 per cent this to a simple tap from year due to early onset of summer and lower prices. Until your smartphone, last year, around 65 per cent sales came from fixed speed cooling your split ACs, 20 per cent from window and the balance 15 room before you per cent from inverter ACs. This year, the industry believes even enter home. share of inverter air-conditioner will almost double. Simultaneously, the Mr. Anup Bhargava price drop in inverter Product Group Head The transition to energy-efﬁcient ACs ACs spells good Air Conditioner Business When compared to its overseas peers, India woke up late news for consumers Godrej & Boyce Mfg. Co.Ltd. to the reality of both the massive demand for electricity not just in terms of for AC usage, and the detrimental effects of the ozone pricing but also in depleting, greenhouse gas emitting refrigerants that are doing your bit for the environment. used in air conditioners. As a result, while inverter ACs For instance, Godrej Appliances has launched India’s

9 June 2017 / Outlook BUSINESS

most power saving green inverter air conditioner with 5.8 ISEER under its premium sub-brand NXW. Anup Bhargava, Product Group Head-Air Conditioner, Godrej Appliances said, “With a 5.8 ISEER rating, Godrej NXW Inverter AC doesn’t merely meet the 5-star requirements of the current BEE energy rating norms, it also complies with the 5-star requirements of the proposed BEE energy table of 2019. This makes Godrej NXW AC India’s most power saving AC. The AC consumes only 474 units/ year. With the ISEER (Indian Seasonal Energy Efficiency Rating) rating norm by the Government of India, the AC is tested to provide efficient cooling from 24 to 43 degree Celsius. It works on the Green Inverter Technology, which helps provide highest efficiency using world’s greenest refrigerant (R290).” The AC has a number of other value-add features such as the Eco Mode for greater power saving, Golden Fin coating – A special gold nano-coating on the condenser fins for protection against rust and the Intelligent Air Throw Mode - The AC auto-senses the room temperature and changes the air throw accordingly to provide maximum comfort. “Our Green ACs work on the Green Balance technology, which uses R290, the greenest refrigerant in the world, that not only promises maximum power saving but also has Zero Ozone depletion potential and minimum global warming potential,” says Bhargava. “This apart, we also have our all new range of 100 per cent copper ACs (Copper condenser and connecting pipe) which makes them highly durable. We also have ACs that have large indoor and outdoor units compared to competition, providing maximum cooling and robust operation. This product is backed by a solid Godrej Smartcare service promise with 625 service centres, 4500 + Smartbuddy technicians,” Bhargava adds. Elaborating further on the marketing strategy adopted by Godrej Appliances and the challenges the AC market in India continues to face, Bhargava says, “With the AC category being highly cluttered, we have doubled our marketing spends over last year. Shop floor being the 2nd biggest source of awareness for the consumer after TV, we have developed multiple point of sale material and used digital platforms to influence customer purchase at the shop floor. Digital gives us the luxury of specific targeting of different user demographics and we have used search, video and social media. The penetration for the AC category in India is still at a 4 per cent and most consumers are first-time buyers. With ACs being a high power consuming device, providing ACs with minimum power consumption becomes one of the major challenges. Hence, we have come with our Green balance range of Split ACs which saves up to #15,025 in five years on the electricity bills as per Bureau of Energy Efficiency.”

Mr. Pradeep Bakshi President, UPBG & MCED Voltas Limited

9 June 2017 / Outlook BUSINESS

On the other hand, Voltas Limited, one of India’s oldest air conditioning brand from the house of Tatas fortified its leadership position in the cooling category by crossing

1.5 million units in the year 2016-17. The company has also strengthened its market position by introducing the new range of Voltas All Star Inverter AC based on the unique customer promise of All Weather Comfort. All Year Savings. Voltas’ new range of All Star Inverter AC is powered with the unique ‘Two Stage Steady Cool Compressor’ which delivers exemplary savings across all weather conditions. Unlike other ordinary Inverter ACs, the Voltas AC runs on a unique

��

Outlook BUSINESS / 9 June 2017

Two-Stage Compressor technology, which provides two stage expansion of the refrigerant, resulting in maximum efficiency, under extreme weather conditions. The Voltas All Star Inverter AC offers a unique value proposition to the customer: � High ambient cooling – provides comfort cooling across varied Indian temperatures, even as high as 55°C. � Low ambient heating – heats at temperatures as low as -30°C. � Active Dehumidifier – provides comfort in high humidity conditions. � Super Silent operation – with Noise levels as low as 18 db(A). � Advanced Air Purifier – with Cold Plasma Ionizer, which provides clean &amp; germ - free air In addition, the unique range comes with the highest 5.3 ISEER, Stabilizer Free Operation, and a five-year warranty. Speaking on the latest development, Pradeep Bakshi, President, (UPBG &amp; M&amp; CED), Voltas Limited, said, “Being the undisputed leader in Cooling and Comfort solutions for five consecutive years, Voltas aims to provide the very best to its customers through our innovative products. The market is moving towards energy efficient Inverter ACs, and with the launch of our unique All Star Inverter AC range, we aim to further improve our value proposition to our customers, by leveraging our revolutionary Two Stage Steady Cool compressor, which provides maximum efficiency in extreme weather conditions. This new range of ACs showcase our capability to leverage consumer insights into differentiated & technologically superior products.” At the same time, the company has also launched its new range of Voltas All Star Inverter ACs with 16 variants. Moreover, close to 160 variants of Split ACs, and 40 variants of Window ACs, have also been introduced in 2017. With these introductions, the Company now offers a strong product line-up of over 240 Air Conditioners, available through a wide network of over 14,600 customer touchpoints nationwide.

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9 June 2017 / Outlook BUSINESS

Another market leader, Whirlpool, introduced the 3D Cool Inverter AC this summer. This range of ACs comes powered with world’s leading technologies like 3D Cool Technology, which means the air conditioner has 3 vents instead of one. These 3 vents ensure that hot air inside the room is removed faster, while circulating more cold air with the same amount of power consumption. This apart, Whirlpool has also come up with India’s first Humidity Sensor in the category—the 6th Sense IntelliComfort Mr. Kapil Agarwal Technology— which senses the humidity Vice President - Marketing in the room and adjusts the inverter Whirlpool of India Ltd. compressor to ensure optimal cooling at varying levels of humidity that the consumer may experience inside the room. This ensures that even at comfortable temperatures of 22-24 degrees, one doesn’t feel discomfort with uncomfortable humidity levels. This technology not only helps in cooling faster, but also ensures that electricity bills are under control. A consumer can save up to #60, 000 with Intellicomfort Technology as compared to any other AC in its class. In an attempt at repositioning its place in the Indian market, Whirlpool has also recently introduced a new logo which reinforces the idea of being intrinsically simple yet modern and elegant. “It is designed to showcase what Whirlpool delivers – appliances that boast of quality, integrity and innovation. The logo has forgone the ‘Swirl’ above Whirlpool’s ‘W’, which was originally added in 1960 and was a symbol of laundry products. Also, the ring around the middle of the logo has been modified from hook to a continuous circle to resemble a gold ring. This change focuses on the Ring of Promise, which symbolizes Whirlpool’s commitment to deliver products with quality and integrity. The ring strengthens Whirlpool’s promise to every customer, which is to provide the best branded consumer product, in every home around the world. Our brand talks to the woman of the house. I say this, as mostly, involvement of male members is to assess the value for money of the product. Besides this aspect, household appliances, more often than not, get approved by the lady of the house. We define our target group as ‘The Discerning Modernist’, who is a modern Indian woman, equal & romantic partner, balances family time with personal time & ambitions. Also, who is comfortable with technology,” says Mr. Kapil Agarwal, Vice President - Marketing, Whirlpool of India Limited.

Another leading brand in the Indian AC market is Hitachi, known for its expertise in providing innovative cooling solutions which are not only technologically superior but also energy efficient. Backed by Japanese expertise and over 30 years of industry leadership in India, Hitachi has emerged as an innovative brand which is constantly working on new cutting edge technology in its product categories. From room ACs to addressing the cooling needs of an individual, to VRF system, ductable ACs, chillers and telecom ACs for all kinds of commercial cooling needs, Hitachi has been constantly delivering products that not only fulfils every need of its consumers but also, improves their lifestyle. The VRF Systems address the Architects and HVAC Consultants. With three SET FREE ranges: FSXN K/KV/KM, it offers a

Outlook BUSINESS / 9 June 2017

wide range of cooling solution (up to 54 HP). This gives a holistic approach to air conditioning in modern offices-units that are capable of simultaneously cooling and heating, adapting to different seasons and various temperature requirements of rooms. VRF systems is one category where Hitachi has invested in terms of infrastructure and technology to get big growth. Hitachi’s Ductable ACs ‘Takumi’ are especially designed and engineered to provide intelligent features and reliable energy efficient systems that can cater to the air conditioning needs of small corporate offices, banquet halls, small hospitals etc. With R134A eco-friendly refrigerant, the Water Cooled Screw Chillers delivers impressive performance and flawless functioning. With its precise and continuous capacity control technology, user friendly LCD touch panel and high performance twin screw compressor, it provides cooling with low noise and low vibrations which is ideal for industrial and commercial purposes. Hitachi also undertakes complete air conditioning projects which enables its customers to avail Hitachi’s expert installation services even if they are not using Hitachi’s air conditioning products. Thus, with its bouquet of advanced air conditioning products and impeccable services, Hitachi’s expertise and thought leadership makes it the numero uno cooling choice for its customers who want nothing but the best. At the same time, other leading manufacturers such as LG, Daikin, Samsung, Blue Star have also come up with a host of inverter ACs powered with the latest technology, that deserves a dekko. The bottomline: with more and more air conditioning manufacturers waking up to the need of a cooler, greener India, the consumer is now spoilt for choice.

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9 June 2017 / Outlook BUSINESS

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9 June 2017 / Outlook BUSINESS

MICHAEL VAN BIEMA Founder, van Biema Value Partners

Like most things in life, you generate luck for yourself; it’s a true cliché PHOTOGRAPHS BY N MAHALAKSHMI

Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA |

From the Fi�h Avenue o�ce building of van Biema Value Partners, Central Park is within walking distance. For Michael van Biema though, his day job is hardly a walk in the park. His �rm looks for talented investment managers to deploy client capital. To do that, he travels all around the world. In fact, he has just returned from a trip to Japan. van Biema has been there and seen it all. Starting o� as a technology entrepreneur, van Biema had a notable stint as a professor of value investing from 1992 to 2004 at Columbia Business School, the very place where Warren Bu�ett graduated from, a�er chasing Ben Graham there. In 2004, he capitalised on his teaching experience and set up his own value investment advisory �rm by roping in notable investors. He has also co-authored two books, Value Investing from Graham to Bu�ett and Beyond in 2001, and Concentrated Investing just last year. In an interaction with Outlook Business, van Biema talks about why a disciplined approach is imperative in value investing and why only few make that cut.

N Mahalakshmi & Rajesh Padmashali 86 � A profound insight in one of your articles is, “Value investing divides the world into companies that you can value reasonably versus companies that are not possible to value”. Could you articulate further on this? I think it is important to point out at the beginning that what’s ‘knowable’ and ‘not knowable’ is dependent on the person who’s doing the ‘knowing’. We all have our own distinct circles of competence, which keep evolving and changing over time as one looks at di�erent businesses. But, if you look at the history of successful value investors, they always stuck to simple businesses. There wasn’t a lot of �ux in the business model or the competitive dynamics of business. So, it’s very interesting… this is sort of Bu�ett’s year of coming out, in terms of technology. But as he put it, he doesn’t see himself investing in tech companies but investing in consumer companies. There’s some degree of truth to that although one can argue as to whether both IBM and Apple were consumer businesses. Both certainly have a high component of technology. I myself started my career in technology so I might have a slightly di�erent circle of competence here. Nevertheless, there is always a huge risk in consumer tech companies as technology can change overnight. The iPhone has a terri�c franchise and presumably a long-lasting one. But there’s nothing to 9 June 2017 / Outlook BUSINESS

say some new technology won’t come along tomorrow and displace the iPhone. What Bu�ett is saying is that he sees a durable franchise in Apple but doesn’t necessarily see it in IBM, at this point. Ironically, these days IBM is probably more of a tech company than Apple is, which somebody of my generation �nds it strange to say because Apple has been always viewed as this cutting-edge tech company. IBM is going to have to do a lot more to come up with new technologies and consumerise them if it has to survive and prosper. When it comes to investing in technology, it’s like having three boxes on your desk. One box is for companies, whose business model you think you can easily �gure out. The second box is for companies that are complex and you can probably �gure out. The third box is the too-hard-to-even-try box. A lot of the younger money managers are seduced by the second and third boxes as they are intrigued by their complexity. But what one learns over time is that there is nothing wrong with making money by concentrating 90% of one’s e�orts on the simple box rather than spending a lot of time �guring out the complicated ones. � Do you view Apple as a tech company or a consumer company? Also, why did Buffett buy Apple now and not in all these years?

IBM is probably going to have to do a lot more, to come up with new technologies and consumerise them if it has to prosper Apple is a durable franchise at this point in time. But durable franchise of a tech product company has a shorter time span compared with, say, Coca-Cola. Coke has a very long window of opportunity. People are going to drink Coke unless lifestyles dramatically change in 30 years. Is Apple going to dominate cell phone technology for the next 30 years? It is very hard to say. People may be running around with cell phones embedded in their teeth or something! I think Bu�ett made the same mistake that I’ve made with companies such as Apple and Google. We were taught that technology companies were very dangerous to invest in as tech could change from under one’s feet quite rapidly. I think that was an unwritten rule for value investors and it took a long time for Bu�ett to convince himself that he was wrong in that regard because it’s been apparent for far too long that Apple and Google are becoming dominant players in their respective spaces. Probably, that’s the one thing that value investors didn’t take su�cient note of. There is a huge network e�ect today and, as a result of it, some of these companies have a very strong franchise. The reason that value investors stayed away from technology businesses is that they were viewed as companies where you had to speculate on future growth. And as we all know the value of future growth is zero unless you have a really strong franchise. It can even be negative as it was during the dotcom bubble for many companies. The faster you grow, the higher is the money you lose. I think we’ve all realised that these network e�ects generate a very strong franchise and hence, these companies are going to generate good pro�tability eventually. Pro�tability for Amazon has historically been relatively small but one can see that

they’ve built up an impenetrable network e�ect, at least, in the US. � What are some of the most common mistakes value investors make? Value investors are always attracted to cheap businesses or businesses that appear inexpensive. There is a tendency to overlook the fact that if businesses stay cheap for far too long, their value can disappear over time. The compound rate of return goes down significantly. The other shortcoming for value investors is that they are terri�ed of growth. Take the case of Amazon and Apple, both were great growing companies and continue to be so. So, the trick is to �nd companies where not all of the growth is embedded in the current valuation. In other words, �nd companies that are growing, that have a strong enough durable franchise so that the value of the growth is realised. The genius that Bu�ett is, he has a very keen understanding of how to analyse franchises. That’s really what he’s brought to the table in terms of changing the way people think about investing and value investing. That skill of analysing franchises and intuiting which franchises are going to be durable and which are not, is pretty unique. Another example is Nike, which built a durable franchise very early on. When you think about it, how could a sneaker company have a durable franchise? Turns out Phil Knight �gured out a way to make a durable franchise by doing something di�erent. � In one of your interviews you said that you don’t believe in growth at a reasonable price… To a certain extent, yes. But, I hope I am evolving over time as opposed to devolving. You have to be very careOutlook BUSINESS / 9 June 2017

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Value investors don’t do so well in markets where everything keeps going up. Only when you have some regression do we charge ahead

ful about growth at a reasonable price because the very de�nition of reasonable price can be unreasonable, and investors tend to use that as an excuse for paying up too much. The key thing that remains true about value investing is that the companies you’re investing in must have a margin of safety. If you ask me what’s the single most important concept that Ben Graham brought to the table? I’d say it’s de�nitely margin of safety. Again, it’s a simple mathematical truism — if you lose money you got to make twice as much to get back to where you started. If you can avoid or attenuate the downside in the long term you’re going to do well. That’s what the results of value investing show over time. Value investors do not do so well in markets like the one we’ve been having in the US, where everything keeps going up. But if you have some regression, a downside to the market periodically, which we really haven’t had for the past seven to eight years now, that’s where we start to charge ahead. So, this has been a di�cult period for value managers and it reminds me of the tech bubble where everybody was saying value doesn’t work anymore when in fact since the 1940s, there have been periods where value has underperformed. But it’s always been for relatively shorter periods. Since 1940, if you look at the cumulative outperformance of value, it’s been over 3,000%. But very few patient people would have captured that performance as it’s hard to be patient over a 10 -year period. � Do markets like these make value managers vulnerable to style drift? De�nitely, it does. But our managers don’t do that and if they did do that, they wouldn’t remain our 9 June 2017 / Outlook BUSINESS

managers. We’ve been in the business for 12 -odd years and less than a handful of managers have le� us because of style dri�. But it’s a brutal feeling. If you underperform for three, four or �ve years in a row, it’s hard on you psychologically and even harder to explain to your clientele that it is going to eventually work. It requires a lot of personal discipline and a lot of belief, which is why there are relatively fewer successful managers. � How do you ensure diversity or that returns keep coming in during times like these? Value investing is like a spectrum. On the one end is the traditional Ben Graham-type manager, who is looking for net-net type stocks or stocks with cashheavy or asset-heavy balance sheets. On the other end of the spectrum are Bu�ett-like managers who are looking at franchise businesses but are not paying up for growth. Some managers do purely small cap or micro-caps, while some are size agnostic. They’ll buy anything from an Apple to a $100 -million market cap. We try and diversify geographically. Unlike last year, which was much better, this year has been an unusual investing environment. With the government manipulating the markets, to a certain degree, it has changed the dynamic for valuations. Many businesses today are either highly overvalued or highly undervalued. Our goal is to bring the best small value managers to our clients. We have di�erent ways of doing and structuring that. Historically, we operated as a fund of funds, but now we’re operating as a supplier of small value managers. We also have commingled vehicles

and allow investors to invest directly with some of our managers. Most of our clients have diversi�ed portfolios and the reason they work with us is because we’re good at �nding these small under-the-radar managers and they want at least part of their portfolio to be managed by them. We’ve even had large pension funds as our clients as they know we’ve been successful in �nding managers who have become very successful over a relatively long period of time. � What are the qualities that you look for? We have on our board a bunch of well-known value investors such as Chuck Royce, Mario Gabelli and JeanMarie Eveillard. They recommend managers to us. So, we have a pre-sorted mechanism whereby the people who come to us are certi�ed for high quality. We have a de�ned process of picking up smart managers who, too, believe that we’re good long-term partners. The other thing we do is to continuously go through our managers’ portfolios and hear about the stocks they’re investing in, follow the stocks they’re investing in and do our own models of the stocks. That gives us the ability to ask them intelligent questions. Doing that not only earns us respect from them but also gives us an insight into the way they think and whether they’re dri�ing in terms of style. � Are there any speciﬁc traits that you look for because value investing, as you say, is a lot about behaviour and a little less about approach? The thing that we look for is whether the guys are really passionate about what they’re doing. I like managers who leave the o�ce on a Friday a�ernoon carrying two sacks full of annual reports and trade journals. The guys on my board have been doing just this for 30 -plus years. On weekends, they don’t play golf, they don’t play tennis and some don’t even play with their children. I’m not advocating that though. But, they would much rather spend the a�ernoon at home on Sundays, drinking a glass of wine and reading a 10 -K. This is a brutally competitive �eld. Look at all the guys who’ve

been successful over longer periods of time, they’re obsessed with doing this and it’s a passion. It also requires a lot of personal discipline as value investing is a pretty solitary profession. � Besides passion, what else do you look for? Long-term focus is another trait we look for. One of the questions we ask our managers is: how do you de�ne success for your career and business? What we want to hear the manager say is, “I’d like to look back in 20 or more years and say that I developed a great long-term track record.” We don’t want managers saying that I want to be the best performing manager in India this year or the biggest value manager in India at any point of time. What we want people to say is that over a very long period of time I want to show that I excelled at doing this. I earlier used to say �ve years is a long horizon but now I really believe it’s more a 10 -year time period to analyse performance really well. � What is your view on concentrated investing? Isn’t there a selection bias when we talk about concentrated bets? There certainly is. The guys who are successful are sort of innately applying the Kelly formula, that William Poundstone wrote about in Fortune’s Formula. What the formula does is to mathematically ensure that no single bet will put you out of business. You’ll make very large bets, but not such a large bet that it will put you out of business. All the investors mentioned in the book made bets that didn’t work but they ended up having enough capital to build their business back up. It’s de�nitely very volatile and is also one of the reasons that makes it so hard to be a real concentrated investor.

I earlier used to say ﬁve years is a long horizon but now I certainly believe it’s more a 10-year time period to analyse performance really well Outlook BUSINESS / 9 June 2017

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The guys we studied in Concentrated Investing say if it’s not a “great” investment, I’m going to save the money for something exceptional

Investors are not going to be happy when you’re down 30 - 50 % in your portfolio, based on one stock pick. It has happened with some of our managers and it’s very painful. They lose quite a lot of investors and their assets, but, hopefully, not every investor. Jean-Marie Eveillard, who is not a concentrated investor, always says that he would rather lose some of his investors than sacri�ce his principles. And that is the sort of mentality one should have. Concentrated investing can potentially be very hazardous to your investment and health. The interesting thing though is that people who do it, seem to tolerate the volatility. It’s not for everybody. There are plenty of successful investors who have been pretty diversi�ed. � What is the bedrock of portfolio construction because you say a lot of managers are stock pickers but don’t do a good job of portfolio construction? There are di�erent ways of doing portfolio construction. We know a very good manager, who has a very simple approach that I like. He has 30 stocks in his portfolio at all times and they are all equally weighted. So, that’s an example of a modern concentrated manager who doesn’t waste time trying to size his positions and he’s been very successful doing that. Typically, concentrated investors have one to three positions where they have unusual con�dence. That’s another thing I learnt from participating in the book. In life there are only three-four investments that come along when one should go “all in”. All in doesn’t mean 100%, but a chunk of your portfolio. That’s what many of the guys in the book practised. As long as you get more rights than wrongs, you are doing well. And, obviously, there are going to be some 9 June 2017 / Outlook BUSINESS

people who are not right more than they’re wrong and that’s not a good scenario. However, if they practised diversi�ed investing, it wouldn’t be a good practice either. Though not necessarily harmful but they don’t have the personality and skill set to do well in money management. But really keeping dry powder so to speak, and waiting for those exceptional opportunities is something most people don’t do enough. When you do a lot of work on a particular company and �nd that it’s not a “great” investment, but it’s a pretty “good” one, you usually convince yourself to put some money into it. The guys who we studied in the book don’t do that. They say if it’s not a “great” investment, I’m going to save the money for something that’s exceptional. So, they’re looking for exceptional risk-reward trade-o�s. � You’re of the opinion that size is the enemy of performance. Also, can a fund manager’s style evolve with size? You can’t manage a big portfolio because you will sizeably cut down on the opportunity set. On the other hand, if you’re investing across capital sizes in the US , you will manage a big portfolio but again not a huge one because you don’t want to limit all the smaller companies out of your universe as generally that’s where the best opportunity lies. However, a fund manager’s style is equally important. If a guy is micro-cap focused, he’ll be able to invest less money than the guy who invests across the spectrum. For example, we had an investment with a micro-cap manager in the US. We didn’t want him to increase his assets over $100 million as we thought he did real nano cap — $50 million m-cap companies. He ended up successfully increasing his assets but the

fund did very poorly. Luckily, we had departed by then. So, in this case it was the manager’s style that determined the amount of capital he could support. We have one manager with whom we invested very early. Earlier he had $10 million in assets, but now he has a billion. We’re now starting to get concerned because a billion even in the US across all size companies is a lot of money to bet on. It gets progressively more and more di�cult. We try and stay at the lower end of the spectrum. We believe the value-add for our clients is in �nding small managers who have the full spectrum of opportunity and stick with them. Because the bigger you get, the more you limit your opportunities. I would rather stick to the easier task of picking great smaller managers than believe that I’m so great at it that I will be able to pick the Klarmans and Einhorns of the world correctly. � Would the aversion to growth at a reasonable price also apply to India? India, traditionally, has never been a cheap market. I am willing to pay up more for a high-quality company whether it is in India, the US or Europe. But the tricky question is: will I get the growth and stock appreciation in a reasonable period of time? What a lot of people don’t think about carefully enough is what a company’s compound rate of growth will be if they’re investing at a certain price. Investing in a company at a multiple of 20x is very di�erent from investing in a company at 38x. Some people are willing to pay 38x, thinking the company is growing at 30%. But one should not only think about the company’s growth and P/E but also about how the stock price is likely to perform over a reasonable period of time. To contradict myself, there are some companies who have really strong franchises. Rather than buying a company at 38x, I’d rather buy a company at 22x and forget about it for a decade because my rate of return will be clearly much higher.

er because technology changes over a much shorter cycle than investing does. It’s interesting how tech folks such as Bill Gates have embraced value investing as a way to invest his money once he made a lot of it in technology. The other thing is to try and embrace the exceptional things about investing and spend time on them. There are easy ways to distract oneself from an unusually great investment. Life is short, the older you get the shorter it gets and the shorter you realise it is, you want to spend your time on some great and not mediocre opportunities. The other learning for me is that, as an engineer, I always had this desire to �x things. So, I would �nd things that were broken and then try to �gure a way out to �x them. I still do it, but a lot lesser now, and particularly with people. It’s arrogant to think that you’re capable of �xing things or people, that’s generally untrue. You want to start with things that are pretty much already close to being unbroken because when you try to �x them you frequently waste a lot of e�ort and time and the outcome is not so great. A lot of value investors �nd companies that are badly broken, and they think that they can �x them. But, I think, they’re frequently disappointed in their efforts. People who are good at �xing businesses are few and far between. So, if you �nd somebody who is good at doing that then follow him, it will be pro�table from an investment perspective.

A lot of value investors ﬁnd companies that are badly broken, and they think that they can ﬁx them. But, they’re frequently disappointed

� What is your learning as a value investor? There are quite a few things I’ve learnt over the course of my career and, I hope, there will be a lot more to learn as my career progresses. The issue of longer time spans is certainly something I’ve learnt. Being a technology guy, originally, my time spans were much short-

� How much of investing is about luck and how much of it is skill? Like most things in life you generate luck for yourself; it’s a true cliché… we’re all going to make mistakes. If you take that in your stride and apply the learning to the next potential mistake, that’s a positive trait and, over time, such people get better and better at what they’re doing. I had a tendency of looking back and kicking myself for making mistakes. But over the years, I’ve worked hard on not doing that because it is a negative spiral that you can fall into. You think you’re a smart guy and don’t want to feel that you’re making mistakes all the time. It takes a lot of personal discipline not to do that. My wife is far healthier in that regard. She will make a mistake and say, “Oh, well” and move on. That’s something I’ve learnt from her. It not only makes you a happier person but also a more able person, who can then create better luck for himself. b Outlook BUSINESS / 9 June 2017

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SHANE PARRISH Founder, Farnam Street Media

We are prone to overvaluing complexity. In reality, simplicity makes all the difference PHOTOGRAPHS BY N MAHALAKSHMI

9 June 2017 / Outlook BUSINESS

Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA |

Most of the time, he thinks about thinking. At other times, he reads and writes. Meet Shane Parrish whose blog Farnam Street — named in homage to where Berkshire Hathaway’s HQ is located — is known for ‘mastering the best of what other people have already �gured out’. Starting out as an investor, Parrish found his calling in curating content that is timeless. What he does for a living now is quite an interesting career turn for someone who wanted to be a spy when he was a kid. Though he is an MBA himself, Parrish feels that B-schools are largely fee-collection agencies and one does not really pick up much substance there. In this interview with Outlook Business, Ottawa-based Parrish talks about his evolution as a voracious reader and the interesting conversations that he has had over the years. By now, Parrish has gotten quite accustomed to hearing, “I just love your blog”. And at Omaha during the Berkshire Hathaway annual meeting, given the familiarity, that must have happened quite frequently as it does when our photo shoot is in progress, at the downtown Hilton.

N Mahalakshmi & Rajesh Padmashali

� Can you explain the art of reading? You call it active reading, how do you do that? Well, passive reading is when you pick up a certain kind of work and skim over it with your eyes. Active reading allows you to engage with the author. You can think about active reading as writing in the margins, folding down the page corners on pages you want to return to, or engaging intellectually with what you are reading. I think those are the keys to getting a good experience out of a book. Active reading is the �rst step towards the engagement of your whole brain. However, it has to be in harmony with not only re�ecting and thinking about it or writing about it, but also in terms of drawing abstractions and then putting them into practice. � What’s the best investment book you have ever read? While I was pursuing my MBA , people would tell me that I could get more out of Warren’s [Bu�ett] letters than out of an MBA . I’ve lived that. I think there are a lot of unusual insights in Berkshire Hathaway Letters to Shareholders and they’re presented very clearly in a way that even a layman can understand the principles. I learnt a lot, not only in terms of how to communicate but also about business, about how the world operates, incentives, people… if you read those letters, it takes a while. And if you read it once, that’s okay. The second and third time is where you really start to 9 June 2017 / Outlook BUSINESS

get some deeper insights on how Bu�ett thinks about valuing businesses, how he thinks about competitive advantage, etc. � Tell us more about that insightful Knowledge Project podcast with Alexander Shelley The Knowledge Project is the most irregular podcast in the world, which comes out once in three months. And this started as a way to introduce people to conversations I was having already. It’s been an amazing experience to record these conversations that have no constraints around what can be talked about. One of my favourite interviews was the one with Alexander Shelley, the conductor of the national orchestra in Canada. That podcast was a di�erent experience for me, especially to talk to somebody who conducts an orchestra and to learn what he thinks when he’s going onto the stage; to learn about how the di�erent parts of the instruments �t together; and how the melody is in the music; and the theory behind some of the music. It was all such an eye opener for me. I learnt things such as when you lead an orchestra, it all depends on where you stand. There is a contrast factor. If you’re playing the �ute and are in that section, most of what you hear is the �ute. Thus, you rely on the conductor to tell you when to pick up, when to slow it down because you can’t hear with the same precision as other people can. So whatever section you are in at the orchestra, makes

you feel like it is the most important one, which is why you rely on somebody outside of that to give you an objective sense of timing and sequencing. Now, Shelley did something I found fascinating — he would get everybody to stand out at the front. And that way they see how di�erent the instrument sounds in the front versus from where they are playing. That experience relates to management, where di�erent parts of an organisation need to work in harmony with one another. That way people have a di�erent aperture into what you’re trying to do. Whatever project a person works on is the most important one to him and as a manager, you have to �nd out a way to blend that into the broader picture. � Could you reconstruct mental models for us with a couple of examples? Mental models are an abstraction of reality. When you are creating a reliable model to understand how the world works, that is repeatable over time. It is fascinating because then I can explain what happened and I can also predict what happens. A very simple example of that is gravity. For instance, if I pick up your camera and drop it, then we know what is going to happen. If we see a broken camera on the ground, we can say that either somebody dropped it or it fell o� the table and we can say this with a high degree

of probability. We know a variable that will help us predict things in the future with reliability, we have the same variable that helps us explain what has happened in the past. Charlie [Munger] has taught us that there are two different types of mental models. He teaches us that �rst is the human misjudgement model, which is the way we fool ourselves and those are reliable and repeatable. Thus, they can explain, to some extent, what happened. The second model is about how the knowledge of multiple disciplines such as physics and biology can apply to solving problems in life. He’s generally applied these principles to investing. What I’ve tried to do is make them more widely known, to open them up to people outside of investing and to encourage a di�erent type of thinking.

Mental models are an abstraction of reality. When you are creating a reliable model to understand how the world works, it is repeatable over time 95

Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA |

If you sneeze in a library, people will notice as it has a huge impact but in a public place nobody will hear it. Thinking about the contrast factor aids decision-making

If you think about our education system, it’s very niche. You need to specialise in something to get a job. What do you miss when you have a highly specialised education? You miss the broader world. There is a Japanese proverb that talks about the frog in the well who thinks there is nothing in the mighty ocean and that’s what happens in America. As you start specialising in a �eld a�er high school, your focus becomes more and more narrow. That’s good for the �rst few years of your employment. You can work three or four years as an engineer and then all of a sudden you are promoted to managing people and then just a little bit of this broader world comes into play. Now you’re making decisions that impact other people. There is incentive, psychology, personal relationships in the context of the company and of how the business operates. If you don’t have that knowledge, then you’re at a disadvantage. If you do have it, then you have fewer blindspots. And that’s what you’re trying to eliminate — blindspots. Another good example is thinking of relationships. My friend Peter Kaufman has a belief that there are four types of relationships — win-win, win-lose, loselose and lose-win. But only one of these relationships is sustainable over time and that is a win-win relation. Biology tells us that if you want to survive, then you have to be sustainable over time. So now we can think about how we enter into relationships with partners — spouses, kids, colleagues, customers. We want all these relationships to be win-win, because if it is not, then they are fragile. When that happens people look for an exit. Relationships become more transactional and such relationships don’t survive over a long period of time. Another example would be the contrast factor. So Peter Atkins in his book The Fours Laws That Drive The 9 June 2017 / Outlook BUSINESS

Universe, talks about the act of sneezing. When you sneeze in a library, you send some sort of energy in the library and it has a huge impact, people will look at you. On the contrary, when you sneeze with the same vigour in a public place as you did in that library, nobody hears it. Because there is so much else going on. This relates well to how you think about business or for that matter sports. A coach, for example, has several decisions to make on the �eld — Do I match up my best player against their best player? What advantage do I get out of that? Do I get all of the energy that goes in the system? Does that become valuable to me? Or should my second best player play against their best player? I don’t know the answer to these questions but the contrast is really interesting to think about how that applies in business. There too, you ask questions such as do you want to compete with Google or do you want to compete with somebody who is easier to compete with? If you are putting the same amount of e�ort, then you probably want to go where there is a higher degree of contrast. But a lot of these are individual choices. � Is there a systematic way to develop a higher order of thinking? I try to teach this to my kids. I encourage them to ask “why” but I also ask them, “What do you think will happen if you do this?”. They are only six- and seven-years-old so encouraging a higher order of thinking at such a young age has had a good impact on changing their behaviour. This is done by getting them to think before they do things and allowing them to explain by making them curious. Asking such questions pushes people to engage their brain and think. It’s encouraging people in subtle ways, especially adults, because they don’t take too well to that.

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| A WEEKEND IN OMAHA |

Munger says that the human mind is like an egg. What gets in once, just gets sealed o�. The �rst thing that �ts our mind, that doesn’t con�ict, doesn’t mean it’s the optimal solution. But it satis�es us and that’s when we stop thinking and that is a terrible idea. So Munger has outlined a two-step framework for making decisions which are incredibly useful. He asks what are the variables that govern the situation that you’re involved in and then how might you be fooling yourself? That’s a very e�ective framework because that forces you to think through things. It forces you to acknowledge that the world needs you to re�ect on certain decisions and it gives you an opportunity to ask do I really understand this? Am I in my circle of competence? One big di�erence between investing and operating businesses is that when you’re operating a business, you can’t sit and wait for a fat pitch, I mean you can position yourself to take advantage of it when you have, but you just can’t not decide because you don’t like what’s happening. But if you are not in that circle of competence, you can take another path to decide it — you can acknowledge with humility that you lack the knowledge and experience to make the decision and reach out to a friend for advice. And then you could ask yourself — Am I fooling myself? Is my data reliable? Am I overcon�dent? Am I over valuing a small piece of information that is easily accessible to other people by thinking it’s unique? � What are the most common misconceptions about value investing? A lot of people are trying to be something they are not and a lot of them want to be Warren Bu�ett and Charlie Munger. But what Bu�et and Munger have done has worked for them as individuals. A�erall, everybody has to be their own individual and I think Guy Spier had a good book about this — The Education of A Value Investor. The book was about Spier’s journey of emulating Warren Bu�et and in the end concluding that he cannot be Bu�ett but he can be himself. Bu�ett and Munger are heroes but copying them is

A lot of investors think that the map, which is the ﬁnancial statement, represents reality. You need to understand that the terrain is not the map 9 June 2017 / Outlook BUSINESS

not going to get anybody anywhere. Their own investment process has worked at a certain period of time and in a certain context and they have shi�ed over time. They have gone from buying cigar butts to buying good businesses and to buying whole businesses now. They have an opportunity cost that allows them to deploy capital into a public market, and into a private market and into operating businesses. Most of us just focus on this public market aspect as if it’s the only thing that matters but the fact is that they have three choices. That increases the opportunity cost of capital and prevents them from doing silly things in the stock market. � What are some of your own investment-related beliefs that have changed over a period of time? I used to believe that I wanted to be this great value investor, investing only in companies that a twoyear-old could operate. But the real world is messier than that. Running a business has taught me that it is di�cult, competitive and people are malicious. Buying companies that are perfectly operated at a multiple of four or six does not exist. As a teenager and an outsider to a company, I thought companies were idiots for making some of the decisions that they took. When I began working, I realised that those were indeed great decisions given the information that they had. The problem is not the decision, it is the information �ow. Information in an organisation goes through 10 or 15 �lters. How do we acknowledge these �lters? Another mental model is called ‘Map And Territory’, where investors mistake the map, which is the balance sheet and the income statement, as the territory. We mistake this piece of paper for telling us numbers about what’s

BOOKS THAT CHANGED MY LIFE In a constantly changing world, Farnam Street strives to be that one place where you can access timeless ideas. Shane Parrish tells us about books that shaped his beliefs MAN’S SEARCH FOR MEANING: As hard as you think your life is, it pales in comparison to the experiences of Viktor Frankl. There are two big things to take away from this book: (1) The ultimate freedom is the ability to choose your attitude in the face of any circumstance (2) The more you target success, the more you will miss it.

SAM WALTON: MADE IN AMERICA: The big lesson I took away from Sam Walton is that you don’t need to come up with all the ideas yourself. Instead, you can look around and copy the best of what other people are doing. That attitude aligns with the tagline of my website: Mastering the best of what other people have already ﬁgured out.

BUFFETT: THE MAKING OF AN AMERICAN CAPITALIST: This book introduced me to the thinking of Warren Buffett and Charlie Munger. These two have inﬂuenced my thinking more than anyone else and are the reason I started the blog.

ANTIFRAGILE: THINGS THAT GAIN FROM DISORDER: This book changed how I see the world. As if that wasn’t enough, it also introduced me to iatrogenics, fragilistas, and connected inversion and via negativa (something I should have connected much sooner).

MEDITATIONS AND MONTAIGNE’S ESSAYS: Reading these guys, along with Seneca, has really helped foster my interest in philosophy and improve my life. So much of what they say speaks to me that I’m often left with entire pages underlined and margins ﬁlled with thoughts. They are not books to read once, but rather books to read and re-read over time. LETTERS TO BERKSHIRE HATHAWAY SHAREHOLDERS AND POOR CHARLIE’S ALMANACK: Since I have an MBA, people inevitably ask me if B-school is worth the money. If it’s knowledge and not credentials you’re after, save your money and read these instead. The letters are available on Berkshire’s website. If you’re scared to start with the full letters, check out the distilled version — The Essays of Warren Buffett: Lessons for Corporate America. As smart as Buffett is, he’s not as broad as his partner Charlie Munger. Poor Charlie’s Almanack could be the greatest word for word collection of wisdom I’ve ever come across.

actually happening in the business and the competitive position of the business. Enron is a clear example of this. A lot of investors get hoodwinked into thinking that the map, which is the �nancial statement, represents reality. You need to understand that the terrain is not the map and you need to know when the map and the terrain di�er and �guring that out is one of the keys to investing. � There is this one quote by Andy Benoit — “Most geniuses, especially leaders, get it right not by deconstructing intricate complexities but by exploiting unrecognised simplicities.” Are there any such counter-intuitive points that great companies or great investors have demonstrated? As individuals, we are prone to overvaluing complexity

SEEKING WISDOM Peter Bevelin is one smart dude. Inspired by Munger, he’s put together a book of the big ideas that carry a lot of weight in life. Finding this book now is difﬁcult, just buy a used copy. SAPIENS: A BRIEF HISTORY OF HUMANKIND One of the best books I’ve come across in a long time. Sapiens is a work of “Big History” — in the style of Jared Diamond’s Guns, Germs, and Steel — that seeks to understand humanity in a deep way. Many of Professor Harari’s solutions will be uncomfortable for some to read, there is no attempt at political correctness, but his diagnosis of human history is undeniably interesting and at least partially correct. He draws on many ﬁelds to arrive at his conclusions; a grand method of synthesis that will be familiar to long-time Farnam Street readers. The book is almost impossible to summarise given the multitude of ideas presented. But then again, most great books are.

because we think we are smarter and that we understand certain complex things that other people don’t. In reality, simplicity makes all the di�erence. Napoleon used simplicity when he was giving orders. That was one of the reasons he was so dominant on the battle�eld. He was giving his troops very simple orders because he knew that they will be �ltered through people and they would still be simple when they came out. Complex orders �ltered through a chain of command almost never work. Now going over to the second part of your question, when you look at a company, you want to look at whether the company can self-correct. Do they have a feedback loop where they can adapt based on the feedback that they’re getting from the market? A lot Outlook BUSINESS / 9 June 2017

| A WEEKEND IN OMAHA | of companies think that they are right and the market will adjust, but the humble ones try to create a �ywheel which is autocatalytic. I would say the same for Amazon. The outputs of Amazon are now becoming the inputs and that’s how they just keep getting better and better. They are quick to adjust and that’s part of the reason that they are so dominant. They have a ‘customer �rst’ mindset, that allows you not to have an ego. I think the feedback loop model is much better, where you remove people’s egos and focus on the customer instead.

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� Is there any other way of ﬁguring out companies that are self-correcting? Would you agree that the moat around consumer brands will be seriously threatened in the future? You have to understand the company’s value proposition, how they behave with the customers and that is part of an investor’s job. Consumer brands in North America are de�nitely in for a lot of trouble, we are just seeing the beginning of what will be a long structural decline in the power of these brands in the next few decades. Today, buying habits are changing as in people are going lesser and lesser to physical stores and are shopping more online. That gives Amazon enormous power, not only pricing power but it also gives them an additional power which they didn’t have before. You can now match households to buying patterns, to brands and target specific people and try to move them away from a brand. Wal-Mart can put a generic brand on the shelf next to Colgate but that’s not really high value. But I can send you an email saying I know you are a Colgate shopper but we’re going to give you a new sample of a toothpaste we have created; it tastes just like Colgate. Now you are doing a targeted marketing campaign to an individual with a purchasing history of years or even decades. We have seen this with Ulta, which is a cosmetics company. Amazon hasn’t really turned on that tap yet but I think when they do, the AmazonBasics brand will become incredibly valuable. For example, if you’re going to buy a 24 -pack of Duracell batteries and they’re charging $19, then as you click ‘add to cart’ you get a pop-up that shows the same product under the Amazon brand for $8.99. I think gradually these brands will erode and some will stay. Identifying the ones that will

stay and become more valuable is probably key and part of that would be aspirational brands. � Can you give a few examples of multidisciplinary thinking? It’s just how you structure your thinking. We did a case study in University. It was on an Eastern European airline and the man had 99% of his networth in it and he had to determine whether he wanted to sell his company or whether he wanted to continue operating it. The chapter we were assigned this study in was about low-cost strategy and that’s the answer the teacher wanted. That was a very linear way of thinking. Then we asked the following questions — What are the odds that he can become a low-cost operator? What do the employees think? Are they committed? Can they go up a hill? Are they ready to back this man? What can he bring in as strategic or �nancial or operating or personal knowledge? What are his contacts? What’s his life like? What does he want to do? Then we started thinking about these things in a more holistic way. We determined that he should sell because the odds of him becoming a low-cost provider were low. The employees were all ageing and over the hill. His labour costs were high. His contract renewals were coming up, we thought about it from different perspectives. That was my �rst personal insight into multidisciplinary thinking. And I walked away from that experience wondering who is Charlie Munger and where can I �nd more about him. I think an incredibly disciplined way to think about things is to force yourself into not only the domain that you specialise in, but also to look at a problem through di�erent lenses. And a lot of times, it could mean looking at it through your counter party’s eyes. Even that alone can add a dimension of multidisciplinary thinking. It’s really about relativity. It all comes down to the guy on the train with the ball. So if you’re standing on a train with a ball, it doesn’t look like the ball is moving. If you’re standing outside of that frame, the ball is moving as fast as the train. Let’s take another, if I asked you how fast we are moving right now, you would say that we are just sitting at a table but the earth is spinning around the sun, thousands of miles an hour and so how you look at a situation or problem determines what you see. b

A disciplined way to think about things is to force yourself into not only the domain you specialise in, but also to look at a problem through different lenses

9 June 2017 / Outlook BUSINESS

c’est la vie GOOD LIFE Why settle for a smartphone camera when there are high-end cameras THE PURSUIT OF HAPPINESS Anil Nair of L&K Saatchi & Saatchi rides his bike for a cause HIGH FIVE Reliance MF’s Sunil Singhania shares his ﬁve must-reads

| MY FAVOURITE | KENICHIRO HIBI, �� , ��Y ��

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VISHAL KOUL (LOCATION COURTESY: MAHABELLY)

The Age of Unreason by Charles Handy focuses on the interesting concept of ‘discontinuous change.’ It provokes the reader to embrace personal and professional changes. Handy’s ideas seamlessly ﬁt in while forming business strategies.

The Shawshank Redemption directed by Frank Darabont made me reﬂect upon my life. It got me thinking about how privileged we are in our lives and how happiness can be found in the most unexpected of ways, if one keeps an open mind.

I like golf because it helps me increase my focus, agility and precision. I also like karate. I relish Indian food a lot because every dish has so many local variants. My personal favourite, though, is the

masala dosa. It has a distinct taste. Among global destinations, I ﬁnd New Zealand’s Maori culture appealing. My visit to Rotorua was surreal thanks to its natural geysers, mud baths and sulphur springs. b Outlook BUSINESS / 9 June 2017

c’est la vie | THE PURSUIT OF HAPPINESS |

Riding for a cause LAW & KENNETH SAATCHI & SAATCHI’S ANIL NAIR HAS A PASSION FOR BIKING – WITH A GREATER PURPOSE THOUGH Madhuri Rao

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he chilly weather in Spiti Valley in Himachal Pradesh makes you shiver even in the noon as you ride your bike over the uneven, rocky terrain. The narrow roads, steep curves and not a single soul in sight make it a solitary a�air, in some sense. While oxygen masks help you breathe easy as the climb gets steep, the endless stretch of mountains along the path o�ers a sense of accomplishment as you make your way through one of the world’s most treacherous places. Unforeseen landslides, especially during rains, are o�en looked upon as a challenge by the riders, not as a deterrent, even if it leads to road closures, sometimes. The highest point of the terrain is Kunzum Pass, which is at an elevation of 15,060 feet above sea level. The valley has been a source of delight for adventure bikers like Anil Nair, the CEO of Law & Kenneth Saatchi & Saatchi. But Nair’s passion has a purpose that led him to start Goodwind Riding in 2016. The initiative was for bikers who, along with pursuing their passion for riding, wanted to create awareness for underprivileged children su�ering from cancer in orphanages and cancer care centres in Mumbai. The funds raised during the trips are donated for the treatment of these children. Being a passionate rider, Nair chose the toughest 9 June 2017 / Outlook BUSINESS

path in India – Spiti Valley – to raise money for the cause. Although he has previously biked along Kalpa Valley and Kinnaur district in Himachal Pradesh, Spiti Valley, he says, “is a totally di�erent ball game.” He began riding from Chandigarh in October last year. He would commence his journey at 8.30 in the morning on his Triumph Tiger XRX . “The path was truly a test of one’s physical and emotional readiness,” he says. Due to the narrow roads and sudden landslides, it took longer to cover short distances. On the second day, a sudden landslide made him skid at a steep curve and he had just enough time

to jump o� his bike. “From then on, each bump made me realise how resilient I needed to be when I am on this track,” he says. He also reminisces about various fellow biking enthusiasts he met along the way. “I met an Australian rider at a tea stall. Talking with him was really inspiring. He had been riding since the past 20 years and I felt like a school kid in

Goodwind Riding was founded for passionate bikers to create awareness for underprivileged children su�ering from cancer in Mumbai

bike from a Parsi because of the folklore that they value their bikes more than anything else in the world. He cites an o�en-repeated, rather stereotypical phrase: “Parsis love their bikes more than their wives”. So when Nair received his �rst pay cheque, he found one such Parsi gentleman in Mumbai and bought a Yezdi. When he is not driving down treacherous terrains on his Triumph, Nair makes sure that every Sunday he drives down at least

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front of him. He was surprised that I was doing this alone for the �rst time,” he says. Describing the most de�ning journey he’s undertaken thus far, Nair says, “There were times I thought I lost my balance. You cannot a�ord to lose your concentration even for a second. If you do, you will land thousands of feet below.” It took Nair eight days to complete the ride along the Valley. “It was a humbling experience,” he admits. Among

the things he couldn’t cover in this trip, Nair mentions having missed going to Chandra Taal. “But I was thrilled to be on the world’s highest village connected by a road, called Komic village,” he says. Fascination for bikes and adventure rides began quite early for Nair, whose father was also a rider. His father had fuelled his desire by gi�ing him a Suzuki when he was eligible to apply for a licence. But Nair always wanted to buy a

150 km to keep the adrenaline �owing; a ritual that has stuck for good. Cruising along the Gujarat-Maharashtra border or the Lonavala-Pune stretch on a holiday is something that Nair loves. But now Nair has set his sights on a longer route – Nagaland to Gujarat. But that trek is purely altruistic. “I want Goodwind Riding to end up as a global initiative, one that has the potential to change as many lives as possible,” sums up Nair. b Outlook BUSINESS / 9 June 2017

c’est la vie | HARDBOUND |

AMBI PARAMESWARAN, FOUNDER, BRAND-BUILDING

Unearthing The Genesis

uval Noah Harari’s book Sapiens appeared in his mother tongue Hebrew in 2011 and was published in English ish almost �ve years later. It is a fascinating read aboutt the evolution of homo sapiens and their dominance over earth. As I was reading it, I was reminded of a client of mine who, when n he spotted that I was carrying a popular �ction novel, questioned mee on why I read �ction. I explained that �ction o�en packaged factual data in a more understandable manner, once you removed all the other character details. To which he replied that he never read

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�ction because he felt non-�ction was o�en stranger and more entertaining than �ction. It was only later that I discovered how many so-called �ction classics were conceived as non-�ction and started out as such, including Leo Tolstoy’s War and Peace. So beware! Some of the facts presented by Harari are stranger than �ction, while others are fascinating and many more are indeed paradoxical. Sapiens is not a heavy history book, and is so much easier to read than a typical history book.

Harari is reported to have mentioned that he took inspiration from Jared ed Diamond’s book Guns Germs, ms, and Steel. The reference beecomes quite evident as you u wade through 500 pages of Sapiens. ens. The book traces the origin in of human species and the rise se of homo sapiens, who may have ave in fact pushed other species es like the Neanderthals towards wards extinction by their ability to collaborate and build commmunities. Harari explains,,

Insights IN GOOD FAITH The proliferation of online marketplaces such as eBay and Amazon has made trust, given the nature of the Internet, an otherwise unlikely requisite. The websphere has enabled the creation of a marketplace with reduced transaction costs that could not have taken place in its absence. However, it is through this very trust and reputation system that this marketplace thrives. But in this scheme of things, how does one reduce discrimination occurring – as it does ofﬂine – in the online world? Researcher Michael Luca has studied the design choices and mechanisms utilised by online marketplaces to build trust and help with transactions. In this paper, he also provides a toolkit for helping reduce discrimination in the digital age. Title: Designing Online Marketplaces: Trust and Reputation Mechanisms Source: SSRN

9 June 2017 / Outlook BUSINESS

SOUMIK KAR

SAPIENS: A BRIEF HISTORY OF HUMANKIND AUTHOR: YUVAL NOAH HARARI PUBLISHER: HARVILL SECKER PAGES: 456 | PRICE: #271

“We study history not to know the future but to widen our horizons, to understand that our present situation is neither natural nor inevitable, and that we consequently have many more possibilities before us than we imagine.” The book is presented in four sections. In the �rst section, called “The Cognitive Revolution”, Harari looks at the evolution of the �rst known human-like species. Harari presents his theory on how homo sapiens developed a way of commu-

nicating, sharing ideas and building groups, which set them apart from other human-like species. The third section, “The Uni�cation of Humankind” looks at how humans developed ways of behaviour and standards, so that strangers could collaborate more e�ectively. This network of arti�cial instincts, the author calls ‘culture.’ This section is particularly fascinating because the author looks at the evolution of religion from the earliest to the newest. Harari explains that given that all religions today have a combination of rituals and practices borrowed from various sources, they could all be called ‘syncretic’ and so syncretism may in fact be the world’s biggest religion. Harari also explores new areas of development – including genetics – to present some theories on how we will evolve as a species. As we read the book, the author manages to mix facts with his own interpretations and theories, which, however, have been criticised by reputed journals. But for someone who wants to dip into some human history, Sapiens is a good read. It may want you to go back to writers such as Jared Diamond or Bill Bryson, and that is not necessarily a bad thing. b

WHEN WORKING FLEXIBLY PAYS How far does offering flexibility in contract work go into ensuring better results? In the wake of the increase in the enrolment with flexible contract work, researchers have studied the work arrangement of the ride-sharing company, Uber. Uber lets its drivers organise a customised work schedule for themselves, as well as adjust it throughout their day. Among other things, the researchers studied the ways in which drivers used real-time flexibility and calculated the driver surplus generated by this flexibility. Results showed that Uber drivers did gain from real-time flexibility, earning more than double the surplus they would in work arrangements that were not as flexible. Title: The Value Of Flexible Work: Evidence From Uber Drivers Source: NBER

HAVE YOU READ...

OPTION B AUTHOR: SHERYL SANDBERG AND ADAM GRANT PUBLISHED: 2017

WHAT IS IT ABOUT? How do you cope with grief and loss? How do you ﬁnd resilience and strength to get on with the dry mundaneness of life? Option B is Sandberg’s journey of emerging from adversity and grief to ﬁnd hope and joy in life. KEY TAKEAWAYS While it is Sandberg’s memoir chronicling her journey from loss to resilience and strength, the book goes beyond it to look at overcoming other kinds of adversities such as illness, unemployment and sexual assault. WHY READ IT NOW? Backed by Grant’s research in psychology, Option B is Sandberg’s insightful handbook for those going through adversities. It shines a spotlight on how it is possible to bounce back from devastating events – be they in our personal life, or professional. QUOTABLE QUOTES “Resilience comes from deep within us and from support outside us. It comes from gratitude for what’s good in our lives and from leaning in to the suck. It comes from analysing how we process grief and from simply accepting that grief.” Outlook BUSINESS / 9 June 2017

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c’est la vie | GOOD LIFE |

Sel�e is passé WHY SETTLE FOR A SMARTPHONE WHEN YOU CAN DO SO MUCH MORE WITH A SOPHISTICATED CAMERA Siddhi Nayak

ife is nothing but a beautiful compilation of memories. Every memory takes you on a joyride of emotions and �lls you up with nostalgia. But most of the times, it so happens that we fail to capture our perfect moments. Now, for those of you who �nd your high-end smartphone limiting, you can choose from a range of the most innovative and technologically advanced cameras.

106 The world of DSLR cameras is incomplete without Canon. The Japanese imaging company’s innovative technology coupled with the best of style makes it an ideal craving for photography fanatics. In its latest o�ering, Canon’s EOS -1D X Mark II represents the brand’s most coveted camera with the fastest autofocus and a continuous shooting speed. Priced at #455,995, this camera is suited to shoot under low light, at high ISO speeds in the range of 100 -51,200 to give out the best of image quality. At 14 frames per second (fps), it has a 61-point autofocus system and an advanced subject-tracking technology to help you capture every single picture perfect moment, without missing out on a shot. Moreover, the camera has an in-built video recording capacity of 4K at up to 60 fps. Speaking of its exclusivity, Eddie Udagawa, vice-president, Canon India says, “The combination of speed, focus9 June 2017 / Outlook BUSINESS

ing accuracy, image quality and ruggedness make it highly suitable for high-end professional photographers. At the top level, photographers demand the best results and the EOS -1D X Mark II is designed to exceed their expectations.” Not too far on the list is Nikon’s latest o�ering for budding photographers. The Nikon D5 is a fullframe DSLR meticulously designed with the perfect autofocus, metering and image processing. If you ever had to compromise on capturing your pictures due to poor light, this camera helps address all your lighting woes. It allows for shooting in low light all the way till ISO 102 ,400, expandable to an ISO 3,280,000 that is unheard of. It also has a precise auto-focus, regardless of your subject’s speed or direction. Priced at #445,950, the camera features an exceptionally sharp view�nder image, stable even during 12 frames per second high-speed continuous shooting. Sajjan Kumar,

Priced at #445,950, the Nikon D5 allows shooting in low light and features a precise autofocus and an exceptionally sharp view�nder image

senior vice-president, corporate sales and strategy, Nikon India, says that the camera is for adventure-lovers, who won’t take no for answer to anything. But won’t that be a risky proposition then for adventurists to carry around such an expensive gadget? “The camera is built to take a knock, a drop or a �ying rock kicked up from a dirtbike, thus ensuring that it stays intact and the user doesn’t have to worry about it,” he explains. Another Japanese brand, Sony’s A99 II from its Alpha series has been at the helm of its innovation phase. The camera bears a newly designed grip, a magnesium alloy body equipped with a dual SD card slot and other upgrades that improve both hold and its operation quality. It is both dust and moisture resistant and can be used in the toughest and most challenging shooting conditions. Priced at #249,990, it allows for high-speed shooting up to 12 fps and an internal video recording of 4K for ultimate high resolution video and is capable of recording high quality footage at 100Mbps so that your memories are retained at the best probable quality. So, what makes this particular o�ering by Sony better than the other DSLR s in the market? “The camera has a newly developed ‘Phase Detection’ autofocus system with a 4D focus,” says Hiroyuki Tokuno, business head, digital imaging, Sony India. Still feeling nostalgic about those special memories? It’s time you re-create them with a high-end, sophisticated DSLR camera. b Outlook BUSINESS / 9 June 2017

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c’est la vie | HIGH FIVE |

“A Zebra in Lion Country o�ers a fresh perspective on investing bias” SUNIL SINGHANIA, CIO (EQUITY) OF RELIANCE MUTUAL FUND, SHARES HIS FIVE MUST-READ BOOKS FOR INVESTORS

FORTUNE’S FORMULA: William Poundstone’s book

REMINISCENCES OF A STOCK OPERATOR:

A ZEBRA IN LION COUNTRY: This book by Ralph

GOOD TO GREAT: What di�erentiates a great

ANATOMY OF THE BEAR: Though slightly dense to

is about systematic and math-based pro�teering. In 1956, mathematician Claude Shannon and John L Kelly, a physicist, discovered a formula which prescribes what a wager should be for a given outcome, so as to maximise one’s gains. MIT mathematician Edward Thorp used the formula in stocks with his hedge fund averaging 20% annual return over 30 years. The book is not just about the formula but o�ers insights into business and management as well.

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Though it’s about the life and times of America’s most prominent market operator, the book is rich with investing insights. It tells the story of Jesse Livermore during his era on Wall Street, but his observations and anecdotes are as relevant as they were back then.

Wanger is based on risk aversion. The concept is simple: zebras move in a herd and most of them huddle in the centre, assuming that they will be saved in the event of a lion attack. As a result there is very little grass to eat in the middle. A corollary to that is that there is very little return in large caps. Zebras at the side, where the perception of risk is higher, eat the best grass and when the time comes are also the fastest to run. The lucidly written book o�ers a fresh perspective on investing bias.

company from a mediocre company? Jim Collins, the author, and his research team identi�ed a set of elite companies that made the leap to great and sustained it for 15 years. Their stock returns beat the market by an average of seven times in 15 years. The book is a revelation as it decodes the DNA of great companies.

read, this book by Russell Napier makes us aware that there can be and will be bear markets. It also reveals what history can teach us about forecasting future bear markets. b 31June 9 March 2017 2017 / Outlook / Outlook BUSINESS BUSINESS

SOUMIK KAR