Mr Narayana Murthy or Nestle. Who to trust more? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Mr Narayana Murthy or Nestle. Who to trust more? 

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In this issue:
» The truth behind rising bank lending in the US
» The fiscal cliff issue is being blown out of proportion, feels James Grant
» The global war that no one is talking about
» Finally, there is an admission that 2G spectrum pricing was a mistake
» ....and more!

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Dr Vijay Mallya is clearly a disturbed man these days. A reputation that he had built over the years of being an astute businessman has come crashing down. Do what he may; he's just not been able to salvage his airlines business. Thus, the question that begs itself is how an otherwise crafty business man could get it so horribly wrong?

Or is it that we've got our understanding of cause and effect completely in reverse? In other words, could it be that the economics of his earlier ventures made him look like a suave businessman? And once he put his hands into a notoriously difficult industry like an airline, his business acumen or the lack of it came out in the open.

This is not the first time that such a conundrum has presented itself. Investors are seen grappling with it all the time. When making an investment, what is it that they should put more emphasis on? The quality and pedigree of the management? Or the economics and the business model of the company under consideration? Put differently, should they look for the next Narayanamurthy, one of India's best CEOs or the next Nestle, an owner of extremely strong brands.

And there is no shortage of opinion on either side of this equation. There are books galore on how extraordinary management separate the men from the boys. Besides, we routinely read in magazines about how a few men possess the Midas touch or how a group of people script turnaround stories that in retrospect looked impossible to achieve.

Similarly, on the other side, there are studies done about how venture capitalists should spend more time on the study of the business instead of the management in order to improve their odds of success.

We do not intend to take sides here. But common sense says that investors should look to emulate those people who have put their money where their mouth was and have generated attractive returns year after year. And this is where we believe people like Warren Buffett and Peter Lynch score over book writers and trade magazines that tom-tom turnaround stories. Because unlike them, investors like Buffett have made billions by sticking to companies with strong competitive advantages , without focusing too much on management. Infact, Peter Lynch even goes to the extent of saying that one should invest in a business that any fool can run. This is because some day one will.

Thus, it appears to us that one's chances of success in stock market increases manifold if one focuses on selecting the right businesses and not extraordinary management. For, even an average management can successfully run a business, which has strong competitive advantages.

What about you? What do you prefer more? The management or the business? Share your views with us or you can also comment on our Facebook page / Google+ page

01:23  Chart of the day
What do you think India's GDP per capita would look like in the year 2060? This is certainly an extremely long term projection but the one that is majorly driven by demographic and economic factors we believe and not influenced that much by debt concerns plaguing most of the developed world. Thus, as today's chart of the day highlights, while aggregate GDP in Asian nations of China and India will increase a great deal, India will still have GDP per capita that is one fourth that of the US in 2060. The study has been done by OECD and it has inferred that India's economy will become a bit bigger than America's by 2060 and China's a lot. But due to India's huge population, the per capita number may not look that large.

Source: The Economist

Is the US fiscal cliff really worth worrying about so much? Or is it the case of 'barking dogs seldom bite'? A certain gentleman by the name of James Grant would agree with the 'barking dogs' theory. It must be noted that Mr Grant is a noted US Fed critic, and founder & editor of Grant's Interest Rate Observer bi-monthly journal. For him, the fiscal cliff is just like the Y2K problem. There was so much tension and debate about the problem. Yet the year 2000 came and the Y2K problem passed away very quietly. Mr Grant opines that when there is a lot of public debate about an issue, the market tends to discount it. And as such, the problem does not cause any major trouble.

According to Mr Grant, the fiscal cliff is the present value of the immense unfunded liabilities. And these unfunded liabilities are a big problem. He further notes that globally major institutional investors are moving away from equities to the so-called safe assets such as bonds. But are these bonds really safe? Mr Grant believes that bonds are in bubble area, thanks to the reckless stimulus programmes announced by major central banks across the world. His advice for investors is to stick to security analysis and to remain invested in equities.

Finally, Mr Montek Singh Ahluwalia has spoken out that the 2G auction's failure was actually due to the high reserve price. It must be remembered that Mr Ahluwalia was a part of the same EgoM which set the reserve price at what it was set. Nevertheless, he states now that he had opposed setting the reserve price so high. He has further stated that the government plans to have another spectrum auction soon.

It is heartening to see him finally admitting to the mispricing. Hopefully for the next auction, the government would price the spectrum in a better way. After all, the fortunes of an entire industry depend on it. For the auction will not just decide the price of new spectrum for operators. But will also decide the price at which existing spectrum will be refarmed and also the onetime fee that they need to pay to the government. These developments are equally important for the consumers as well. For if the operators end up paying too high an amount, this would lead to higher tariff which none of us would really want. Hopefully the government would get its act right this time. It is better late than never.

Post the 2008 financial crisis in the US banks either ceased to exist or they were forced to take bailout money from the government. Now bank lending is back up and so are other monetary aggregates. This is typically a reliable indicator of improvement in the economy. And it shows that the US is on stronger footing compared to its Europe or Japan.

But Societe General's Albert Edwards has revealed a disturbing trend behind these rosy numbers. Much of the increased lending in the US has been going toward leveraging up corporate balance sheets. Companies are effectively swapping equity for debt. History suggests that this situation always ends up badly, with stakeholders being the biggest losers. The four expensive words for any economy are "This time it's different".

A combination of higher wages and lower rise in prices of consumer durables is spurring demand for white goods. As highlighted in a Crisil report, discretionary spending grew to Rs 24,000 in 2009-10 from Rs 14,000 in 2004-05. This is a growth of over 11% per year, and higher than inflation which rose about 6% per year over the same period. So clearly higher affordability has fuelled more spending.

But is rise in wages the only factor that can be relied upon for higher growth in these regions? Indeed, not. While it is certainly an important factor, over a period of time adequacy of infrastructure will be the key point that will drive the growth of such goods. Take power for instance. Many states in the country are deprived of power and lack of electricity is not going to create demand for white goods even if incomes of people in rural areas of those states are higher. Similar is the case for automobiles. While tremendous growth potential exists, unless focus is laid on developing road network in rural regions, demand for vehicles will remain lukewarm at best. So we are back to square one. This means that ramping up infrastructure will have to be the government's key priority if India's growth has to reach the next level.

Garnering and harnessing talent has always been a major issue for corporates. But now it seems that labor imbalance is likely to further exacerbate this situation. By labor imbalance we mean differences in the ratio of skilled and non-skilled labourers. In early 80s when industrialization erupted, many unskilled nonfarm jobs were created. Along with that many high wage jobs were also created. True that the ratio of skilled to unskilled workers was not in unison then. But it provided enough opportunities for both sets of workers.

However, as per the new study of Mckinsey Global Institute (MGI), the world might witness a huge labor imbalance in the future. It says that by 2020, developing economies will face shortfall of 45 m workers with secondary school educations. On the other hand, in developed economies about 95 m people will lack the necessary skills for employment.

As far as India is concerned, it is believed that it will have very limited opportunities for low skilled workers. While labor markets may adjust to these gaps it could have serious repercussions in the near term. It could lead to higher levels of unemployment. Income inequality could also gain prominence. Perhaps the policy makers should provide a framework to avert such talent tensions in future.

Meanwhile, indices in the Indian equity markets have been trading above the breakeven since the start of the session with the Sensex higher by around 50 points at the time of writing. Banking and IT stocks have been amongst the major gainers. Other Asian indices also closed higher today with Europe too trading in the positive currently.

04:54  Today's Investing Mantra
"Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks" - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Mr Narayana Murthy or Nestle. Who to trust more?". Click here!

    11 Responses to "Mr Narayana Murthy or Nestle. Who to trust more?"


    Dec 5, 2012

    Why "or"? You can trust both NarayanaMurthy and Nestle.



    Nov 23, 2012

    A good business model is essential for success, however more important is good management team as managers can change the business model to suit the changing business environment. The problem is in deciding whether the existing management is good for the business before the results are out.



    Nov 22, 2012




    Nov 22, 2012

    I believe the priority is very clear and ALWAYS so! Its first the business and then the management. It like this: Once I like the business economics and the possible associated moats/competitive advantages, I freeze in on the sector. Now within that sector (business), I look for good management. And I don't have to choose between the two! I would never go ahead with a good business run by 'shady' management. When I look at management, ethics/Corporate Governance is extremely crucial. As mentioned in the article, Peter Lynch says go for a business that any fool can run. But I would surely want to make sure that the 'fool' is clean and ethical!
    It's just a 'AND' logic applied to selection of Companies. I would look for a Nestle run by Narayana Murthy and I don't think it's impossible to find such combinations. Its surely tough but then it is that much fun as well! :)



    Nov 22, 2012

    Its like choosing to bet in a formula 1 race. The car (aka business) is as important as the driver (aka management) if not more. Can Vettel win in a Force India car? Can really good management turn around a print newspaper company in the era of technology!?! Obviously not. Strong business model is always more important but strength of management is important as well.



    Nov 22, 2012

    Like a good investment is tested best in downturns, lets see how under Emeritus leadership of NRN, Infosys weathers the current fiasco it is going through...



    Nov 22, 2012

    mallaya lost because he entered an industry in which he had no core competence...!



    Nov 22, 2012

    The Business model is more reliable to choose, provided it is managed by a trusted captain and crew. However, whatever be the trust levels of the captain and crew, if the business model is fraught with more of downside risks, then success can not be assured. Therefore, a bright business model need not go underground due to the presence of untrustworthy captains mainly on account of inherent positive aspects; but not the vice versa where the business would see doom by unreliable captains.



    Nov 22, 2012

    you may need both;It all depends one can not generalise;
    There have been instances wheree bad mangement hhas killed good businessesand similarly Good management could turn around bad businesses.So one has to monitor the Business one invested in;If one is lazy and can not do that he has no business to be in vesting!!!


    Arvind Kumar

    Nov 22, 2012

    Narain Murthy is more trustful than others

    Equitymaster requests your view! Post a comment on "Mr Narayana Murthy or Nestle. Who to trust more?". Click here!


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