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Have You Got the Capacity to Suffer?

Nov 2, 2016

In this issue:
» Mutual Funds have a rollicking time
» Home Buyers get legal protection
» ...and more!
00:00
Rohan Pinto, Research analyst

Picture this. Scorching heat in the month of May. A five-day test cricket match.

Rahul Dravid, epitome of concentration. Sweating and fighting it out on the field.

The picture of grit, focus, and determination. Even when his timing would have deserted him.

It is his ability to suffer that makes him successful.

...

That's what I look for in a business. Whether they have what it takes to ride out a business cycle. To emerge unharmed or even stronger than before.

Renowned value investor Thomas Russo also looks for companies that have the capacity to reinvest and managements that have the capacity to suffer.

Managements that have the ability to take painful short-term decisions for long-term value creation.

Nestle's Maggi episode is a great example...

In June 2015, the Food Safety and Standards Authority of India (FSSAI) banned Maggi noodles in India with the courts declaring them hazardous.

Maggi was Nestle's leading brand at the time, contributing around 30% of sales.

The noodle maker had a market share of more than 50%.

This business segment was spewing cash all over.

Indeed, like 'Xerox' for 'photocopying', most of India used the brand name 'Maggi' interchangeably with 'noodles'.

Thus, when FSSAI banned Maggi noodles, it almost crippled Nestle.

The following quarter saw Nestle report its first quarterly loss in three decades.

This was a time of trial for the management. They handled the recall professionally. They were quick to address all the problems FSSAI had raised.

Remember, all this cost Nestle big time. Meanwhile their competitors were busy writing Maggi obituaries and promoting themselves.

But the management did the right thing. They recalled and destroyed all existing Maggi samples.

They reviewed their entire process of making noodles. And even got their samples tested from independent labs before going back to the market with their goods.

In November 2015, the company relaunched Maggi instant noodles.

In August 2016, within nine months of the re-launch, Nestle reported that Maggi noodles had regained market leadership with more than 57% of the market share.

The management not only endured the pain. They displayed their capacity to suffer. And to do the right thing. And the suffering bore sweet fruit.

...

In 2007-08, Warren Buffett was unable to find profitable investment opportunities. He was reportedly sitting on cash pile of billions of dollars waiting to be put to use.

The cash pile earned next to nothing and was a drag on earnings. Had Buffett invested in a long-term fixed instrument, it would have earned him a higher return in the short run.

But rather that boost his short-term profitability, Buffett suffered through and waited for the right pitch.

The crash in the following year saw Buffett profit enormously and was also handsomely rewarded for his patience.

...

At StockSelect, we look to recommend blue chips that have made it through many peaks and troughs.

One such recommendation operates in a very complex business environment. Indeed, the business currently faces macro headwinds.

Yet, the management has displayed an immense ability to suffer. The discipline and focus of the management is evident from the fact that the company has not reported a single year of losses in the past 22 years.

It was also on display in their recently presentation on capital allocation:

  • Buying in very poor markets also requires a lot of courage - since assets will give a negative current yield. Don't focus on quarterly P&L, only long term value.

Sticking to your process amid short-term suffering will get you long-term success. Join us to find such all-weather wealth creators.

03:45 Chart of the Day

The Mutual Funds industry is on a roll. For the first time, the industry overtook state-run Life Insurance Corporation of India (LIC) to emerge as the largest owner of domestic equities. As per Prime Database, the value of mutual fund equity portfolio in listed firms reached Rs 4.9 trillion at the end of September 2016. The comparative holdings by LIC stood at Rs 4.7 trillion. The mutual fund holdings were spread across 1,088 companies where shareholding stood at least 1% whereas LIC's investment portfolio spanned 310 firms.

Mutual Funds race ahead in equity markets


With markets on a strong uptrend, Mutual Funds have been attracting a lot of investor interest. As per Association of Mutual Funds of India, fund houses recorded net inflows of Rs 198.3 billion in pure equity schemes, Rs 118.3 billion in balanced schemes and Rs 24 billion in equity-linked saving schemes for the April-September 2016 period. On the other hand, LIC has been shifting its focus towards fixed-income investments as part of its strategy to move towards pension and annuity products.

The mutual funds industry is required to follow regulatory disclosures. So its higher participation results in greater rationalism driving the equity markets translating into improved efficiencies. This also bodes well for widening the mutual fund penetration in the country.

04:20

Buying a house can turn out to be a harrowing experience. While investing in an on-going project, home buyers are left at the mercy of unscrupulous developers with no legal recourse in the event of default. But with the Real Estate (Regulation and Development) Act being implemented from November onwards, home buyers can heave a sigh of relief.

The Act lays down a number of important regulations that seek to protect buyer's interest in case of on-going projects that have not received completion certificate. As per the Act, developers will have to keep aside 70% of the unused amount collected from ongoing projects in a separate bank account. This will prevent diversion and misuse of the home buyer's funds. Moreover, the developer needs to declare original sanctioned plans, any changes made later and new timeline for project completion to bring in greater transparency. In order to provide a level playing field, the penal interest in case of delayed payment by either the buyer or developer will be pegged at 2% above the SBI marginal cost of lending rate. Additionally, all information pertaining to the project will have to be kept in the public domain with a quarterly progress report.

04:45

After opening the day on a weak note, the Indian stock markets fell below the dotted line. At the time of writing the BSE-Sensex was trading lower by about 275 points (down 1.0%), while the NSE Nifty was trading lower by 90 points (down 1.0%). Sectoral indices are trading on a negative note with stocks from the energy sector and the realty sector witnessing maximum selling pressure.

04:55 Today's Investing Mantra

"The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst) and Madhu Gupta (Research Analyst).

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Equitymaster requests your view! Post a comment on "Have You Got the Capacity to Suffer?". Click here!

1 Responses to "Have You Got the Capacity to Suffer?"

Damodar Vinayak Bale

Nov 2, 2016

"Sufferance" comes after "Lie" so speak the "Truth" and there is no need to suffer.

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Equitymaster requests your view! Post a comment on "Have You Got the Capacity to Suffer?". Click here!
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