One of the most brilliant lectures covering nuances of the process of managing and investing money in listed businesses.
Please read below our summary of the lecture
Rules of operating a successful Business: Trust is the most important facet of any relationship whether personal or professional. If there is no trust, there is no scope of any further talks.
There should be no hierarchy in decision making. If we want to make better decisions beware of the entitlement to your views. It doesn’t matter where the idea comes from if the idea is great.
You work with people you care about and you care about people you work with, very simple and straightforward way to look at life. Life is very short to work with people you don’t like.
You will make mistakes; that is a fact of life. But grow from that mistakes; repeating the same mistake over and over again won’t result into anything. It’s like what Einstein says, doing the same thing over and over again and expecting different outcome is dumb.
Hindsight is a gift. But don’t let hindsight act into your decision making too much.
One of the mistakes that the speaker talks about is the error of omission. He says he has committed error of omission more than the error of commission. It means that after going through the rigorous process of analysis one is not able to keep the conviction to bet big. It is what he calls “Analysis Paralysis”.
He says to develop more conviction in investing it is essential to do field research. You can do all the work on the screen but that is not sufficient to make a decision. It is evident to talk to competitors, suppliers, customers to go a fair idea of what numbers really speak.
We can form the narrative based on the analysis performed on the screen but we need to have the info from the real people who have the stake in the company, so that the narrative is believable.
He says they do field research in order to avoid making errors. It helps in avoiding the situation of permanent loss of capital. The second one involves getting a good conviction.
He talks about a company named United health, for which he says he was lucky to have used the method of field research instead of just looking at the screen and calculating. The field research enabled him to understand the vision of Bill Mcguire and helped him to have faith on the company.
He says due to Obama-care people were very scared and the stock price of united health was quoting around 52$. So due to that the three companies which were a part of united Health can essentially be bought for free because the speaker thinks the companies individually would have accounted for the valuation of around 50 billion dollars.
He says Bill Mcguire thought very differently than his competitors. He understood the problem that the healthcare was facing and started the data analytics company (optim insight) to help the miserable. After 25 years almost all of the company’s competitors started expanding more on the idea.
They divested most of their holdings in the company (United Health) because of the factor of government. The government is involved a lot in the healthcare segment and the speaker thinks it is too risky to be associated with the company where the government influence is large.
He talks about the second company which deals with Animal pharmaceuticals. He discusses that the company was spun off from Pfizer and they didn’t really know how the company would behave if they don’t have Pfizer’s plants, no network, etc.
But one thing that was in their favour was really great research and development capabilities. The other key advantage he talks about is management competence.
He says the biggest advantage that animal pharmaceuticals have is that generics don’t really take away the margins from the original drug. The original drug would still be quoting at the same price even after the patent period has expired.
Except the US no other country really has animal FDA, which means if you are approved in the US, you are basically approved everywhere, it saves a lot on the costs.
So basically the buying decision got more conviction because Pfizer divested the shares and the stock was quoting at a reasonable valuation. The second thing that influenced the buying decision was they kept on talking with the stakeholders to improve their understanding of the business.
After buying the company they got a lot luckier because the company exceeded their expectations by a mile. They were able to cut the costs on a huge basis which was not considered probable after the Pfizer spun-off and were able to clock the margins of around 40%.
He talks about one of the rules of capital allocation. In capital allocation, two things matter the most, one is the size of the portfolio; second one is returns. The reason behind not accepting lower amounts of money for management is that you cannot really grow money well if the corpus is small.
That’s why they have set up the minimum requirement because it allows the fund to bet big on investments.
He talks about a person who was selling billboards since 1952 and gave him 60 years worth of insight. The insights were not possible if they didn’t do field research. He says the person knew everyone in the billboard business and gave them the insight they needed; they ended up buying one of those companies.
He gives good tips with respect to networking. He says he always kept the note of the people he liked and always made a conscious decision to write emails and cold call people to strengthen the relationship.
He talks about two golden rules of a good management.
The Management should have a good track record in operations of a business. The Management should be good in capital allocation. It is rare to find a management that is good in both operations and capital allocation.
He talks about a female CEO who was very good at operating a business but failed miserably when she was asked to allocate capital. She ended up acquiring a company by paying four times the revenue of that company.
He also favours businesses which are owner operated. He says that people like Bezos, Musk, Warren Buffet were owner operators and they were naturally more committed to make their business successful.
He gives the example of a company wherein a person from the outside is asked to come in and rule the company; he says would he be more invested than the owner operator?
He gives examples of the companies which have owner operators. One of the companies that he mentions didn’t do a single acquisition and hired an MBA only after 40 years of business.
He says the owner operators have the patience to grow the business organically but the companies which do not have owner operators managing normally don’t have the tendency to grow organically rather they are dependent on the consultants and acquisitions.
Owner operators don’t really focus on the pay scale, rather they are focused on building a business and have an ownership.
On the other hand the hired Management may have the tendency to just focus on a lot of incentives. They actually focus a lot on pay-scales. We have seen the case of Enron where the Managing director and CEO was not a owner operator and he was focused a lot on his personal benefits.
He talks about the concept of risk tolerance. Risk tolerance involves the ability and willingness to take the risk. He was very adamant that they won’t accept the portfolio if they don’t they have the requisite amount to invest. He talks about a woman whose amount they rejected because the amount was simply not enough to generate good amount of returns.