Sunday, July 29, 2012

Desire, Deserve, Dream, Destiny

I was speaking to an investor who described investing success as a meeting point of skill or competence with opportunity. As with everything in life success is the confluence / conference of a destined event upon a person who has the wisdom to make good of it. Imagine what would have happened if Sachin was born on a non cricket playing country like France. Or what could have happened to the talented Baichung Bhutia if he was born in Europe. He exemplifies great skill but certainly not the right place. So also in business and investing the talented one should have recognized a great opportunity or a destiny event should have smiled on him. A great investment opportunity that appeals to us as an investor would click when we have the sets of competence to recognize and exploit it.

Sunder "Ashok" Genomal of Page industry is bestowed with ability to nurture brands that entice the aspirers and affluent. He can keep a brand young and new. He struck the right opportunity when he signed as the licensee for jockey in India. Page has been going at a scorching pace which registered net profit growth of 54% in FY12. His family was associated with page in other parts of the world and he was introduced to the opportunity. Dr Desh Bandhu Gupta had great execution skills. He struck the right opportunity to make most affordable medicines and targeted for the most prevailing diseases such as tuberculosis. His company Lupin has delivered a CAGR of 31% in Net Profits for the last 7 years. Of course they were lucky as they worked hard for their Nobel cause.

Ross Brawn was a super mechanic with Ferrari working in R&D department and an aerodynamicist. He was their F1 race strategist. When the loss making Honda was withdrawing its F1 team in 2008, Brawn bought them out and turned it around. Brawn GP won the 2009 Formula One Championships. Brawn then sold the team to by Mercedes-Benz in November 2009 raking in profits. He worked his circle of competence to his advantage by being aware and grabbing an opportunity.

As investors too, opportunities should complement our skills. A successful medical practitioner trying his hands in stock investing, or an illustrious techie farming organic vegetables is fraught with danger. A retail investor who has limited understanding of investing should not complain of losing money because his skills are misplaced. Prof Narasimhan who teaches corporate finance at IIM Bangalore says reading financial statements is very complex and there are too many nuances for a small investor to comprehend. A small investor, he reckons, should be investing in Benchmark ETF, Mutual fund or privately managed funds and he will stand a reasonable chance of making money. For those investors who are keen to do it themselves, he suggests a 3 step check to weed out the bad as he has no skill to understand financials himself. Look at the dividend track record, its place in the industry and governance. He insists that the company should have been paying dividends for past 10 years and should be the within 3rd largest in its business as size matters when other parameters of financial understanding is limited. Good governance is the only key measure he possesses to trust the management that runs it. Good governance can be screened by looking at the institutional holding in such stocks.

Lastly to succeed one must intensely desire, deserve, dream and be destined. We see that in entrepreneurs and it explains why companies like Nirma, Biyani, Vedanta or Mittal have grown at scorching pace while those like HUL run by Ivy League managers have seen tepid growth. Relatively their market caps have not greatly expanded in the last decade; obviously their managers have not missed paying their EMI or had to move their children out of international school. As opposed the unquenched fire in entrepreneurs were driven by the 4Ds. As investors we must put our money where our mouth is.