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Equitymaster's Lollapalooza Effect in a Book

Apr 30, 2016

In this issue:
» Why even brick and mortar retailers need to cut costs?
» Where will the engineers find jobs?
» Berkshire's AGM LIVE
» ....and more!
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Tanushree Banerjee, Co-Head of Research
  • Why did Berkshire under Buffett do so well?

    Only four large factors occur to me:
    (1) The constructive peculiarities of Buffett,
    (2) The constructive peculiarities of the Berkshire system,
    (3) Good luck, and
    (4) The weirdly intense, contagious devotion of some shareholders and other admirers, including some in the press.

    I believe all four factors were present and helpful. But the heavy freight was carried by the constructive peculiarities, the weird devotion, and their interactions. In particular, Buffett's decision to limit his activities to a few kinds and to maximize his attention to them, and to keep doing so for 50 years, was a lollapalooza.

    Buffett succeeded for the same reason Roger Federer became good at tennis. Buffett was, in effect, using the winning method of the famous basketball coach, John Wooden, who won most regularly after he had learned to assign virtually all playing time to his seven best players. That way, opponents always faced his best players, instead of his second best. And, with the extra playing time, the best players improved more than was normal.

That was from a letter by Charlie Munger, Buffett's partner. It was this letter that reminded me of Munger's idea of the 'Lollapalooza effect' which I got acquainted with years ago.

What does that mean? And why is it important for investors to understand?

Humans have many inherent biases and tendencies that can sway our behavior one way or another. When several of them act in concert to drive us toward a particular action, you have a Lollapalooza effect.

Thinking of it now, Equitymaster's journey of winning investors' trust over the last 20 years is a good example of the Lollapalooza effect.

It started with our resolve to help individual investors cut through the maze of financial jargon and complex numbers. The Equitymaster Yearbook made it easy to compare the financials of listed entities without scouting for annual reports.

But when you have the financials of Arvind and Nestle next to each other, which one do you buy? And why? So we began to explain the importance of economic moats and sustainable profits.

Asking investors to look beyond the numbers was not enough. There were times when we'd recommend investors buy HDFC Bank when ICICI Bank was trading at half its value. The parameters we use to screen the management quality of a business needed explanation. Our reports became less numbers and more logic. They were less about the urgency to buy and more about understanding the risks.

Bull and bear markets came and went. But our key principles of stock analysis did not change. Instead, we pursued them again and again to ensure that our views were objective and unbiased.

Subscribers began to appreciate the key metrics we used to evaluate businesses. They saw how our reports helped them separate the wheat from the chaff. They found it logical to not buy stocks when we warned them the valuations contained no margin of safety.

Equitymaster's system has been vindicated by the track record of StockSelect - eight out of every ten buy recommendations over 12 years has been successful.

And trust in the Equitymaster system has only multiplied as we've grown our reader and subscriber base. Twenty years later, our 1,764,790 valued readers are a testament to the Equitymaster Way.

But how best to acquaint our new readers with the Equitymaster system? How do we share with them the secret sauce of our success?

Well, we have decided to reveal it all in Equitymaster's first and ONLY published book on smart investing.

The lessons that you learn in this book are far from the theory taught in classrooms.

They were developed through market experience...through years of tracking the market...through the ups and the downs of nearly 20 years now.

I'm confident these lessons will guide you well in your future stock investments. This book is filled with real life examples and gives a step-by-step guide on how you could zero in on a good business. For example...

  1. On page 51 you will find out what we love about one PSU company that holds a solid 75% market share in its domain. And you'll be surprised when you find out that they enjoy this position...with very low debt in their books.
  2. On page 53 we have explained how a company that meets more than 80% of the market demand for its goods. In fact, it is one of the biggest players, in its industry, worldwide.
  3. Then, on page 54, we reveal how a business sets itself apart from its peers just by being highly cost-efficient. And it hasn't just stopped there... This business continues to implement breakthrough ideas to ensure that it retains that position.
  4. So, as you can see, this book is not about scholarly theory... It's about taking the real steps in your journey of smart investing.

    3.25 Chart of the day

    In an earlier edition of The 5 Minute WrapUp, we had talked about how robotics and automation are posing a threat to Modi's 'Make in India' campaign. Of course, that is on the manufacturing side. But automation is a trend that is gaining ground in the services sector too. Most notably in IT. For any IT company, employees are its major resource and thus employee salaries account for the largest chunk of its total costs. So one way for IT companies to remain profitable is to increase employee productivity. This is nothing but the revenue per employee or the business per employee.

    And the Indian IT industry seems to be well on track on this front. Indeed, as reported in the Economic Times, the industry is estimated to have required 16,055 engineers to generate every additional US$1 billion of export revenue in 2015-16. In 2009-10, the number had stood at 31,846 engineers, according to Nasscom data. In short, there has been a near doubling of the efficiency with which labour is employed. In IT parlance, it means that companies are succeeding in achieving non-linear growth.

    From a company point of view, this is clearly a very good development. From a macro viewpoint, there are concerns over the future of hiring and the availability of engineering jobs. As automation gains ground, companies will focus more on hiring people with specialised skills. So in that sense the education sector will need to adapt to these changes and provide the required training that will align with job requirements. This to ensure that unemployment in the sector does not become a glaring problem.

    In fact with most large IT companies cutting down their hiring plans thanks to automation, one wonders whether the 1.5 million engineers graduating every year will find jobs.

    Where will these 1.5 million engineers find jobs?
    Where will these 1.5 million engineers find jobs?

    4.05

    A lot has happened in the retail space over last few years. E-tailing companies have gone bust due to unviable cost structure. The conventional brick and mortar companies are also facing structural challenges. The e-commerce companies themselves are hanging by a thread with no profits to show and regulations coming in way to impact sales.

    Long term sustenance of e com companies is a big question. That said, they will indeed do their bit to keep conventional retail companies on their toes in the bid to survive amidst heated competition. The latter cannot compete discounts beyond a point. Hence, are seriously considering ways to cut down costs. Titan, for instance, has rolled out a voluntary retirement scheme (VRS) to reduce employee costs. Bata India too is focusing on reducing its rental costs. Only time will tell if these measures will make any difference. But the conventional players that do not plan their counter attack right away and count just on government to intervene, are quite likely to be left behind in the race.

    4.30

    The day has finally arrived! Today, thousands of value investors all across the globe will descend onto Omaha. As you can guess they will attend the annual shareholders' meeting of Berkshire Hathaway and hear their heroes Warren Buffett and Charlie Munger, dish out investment maxims.

    My colleague Radhika, the Managing Editor of ValuePro, and who's modeled the service around Buffett's investing principles, is very happy. That's because this time she won't have to rely on anybody else for updates on the meeting. For the first time this year, she can hear Buffett and Munger speak right from the comfort of her home.

    In fact, so can you.

    This year, the AGM is going to be webcast live on Yahoo. And therefore, those who can't make the trip all the way to Omaha, could still hear the Oracle of Omaha speak today at 8.30 pm India time.

    4.45

    The US Federal Reserve kept its benchmark interest rate unchanged in its meeting on Wednesday. The prime reason for maintaining a status quo was the slow growth in the US economy. Benchmark indices in US ended the week lower by 1.3%.

    Asian markets too ended the week on a disappointing note. Benchmark indices in Japan and Singapore ended the week lower by 5.2% and 3.5% respectively. Bank of Japan declined to boost its stimulus measures. This came in as a surprise to the market, which reacted negatively to the news. For the month of April, the dollar dropped 5.1%, while its year-to-date decline stretched to 11.5%. This may prove to be a concern for the Japanese exports.

    Back home, the S&P BSE Sensex index ended the week lower by 0.9%. Corporate earnings will act as a key trigger for the markets going forward.

    Performance During the Week Ended 30th April, 2016
    Performance During the Week Ended 30th April, 2016

    4.50Investing mantra

    "The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored." - Benjamin Graham

    This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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