»5 Minute Wrap Up by Equitymaster

On This Day - 7 JULY 2016
A One-Item Investing To-Do List

In this issue:
» The vast difference in growth forecasts of online retail
» India is the fastest growing domestic air travel market
» ...and more
00:00
Rahul Shah, Co-Head of Research

I love theories that hold conventional wisdom by the scruff of its neck and turn it on their head.

In the time management and personal betterment industry, nothing is more conventional than the to-do list. Our work lives are impossible to imagine without them.

Striking off as many items from your to-do list as possible does look like a day well spent. However, most of these lists are built without regard for the relative importance of each activity.

If you see each day as a stepping stone to a successful life, I don't see how such a list would help. Most of the time, these lists end up as survival lists. They surely keep you busy and get you through the day. But we are not sure they make you more productive or successful.

If you want to be successful, you need something else...perhaps a list that's populated differently.

Look at the achievers around you. These people have an eye for the essential. They don't fill up their lists with everything that comes to mind. They spend some time identifying their priorities and put the most important right up at the top of the list. Only when they have finished the most important activity will they take up something else. They don't mind deferring, indefinitely, all other activities.

Extraordinary results come from lists built around activities that are likely to make the maximum difference. And smaller the list, the better. How about a list of one?

Forget work-life productivity. How about a list for picking great stocks? What would such a list look like? What would be at the top? What if it were a list of one?

This has all the makings of a great exercise. Many factors appear responsible for a stock's long-term success. Whittling down the list to just one could lead to some interesting insights...

Now, to help you narrow down the list, here's a real life conversation between a superinvestor and a top government official that took place some years ago. The official can be seen probing the investor on a stock where the latter is a major shareholder.

  • Government Official: What due diligence did you and your staff do when you first purchased Dun and Bradstreet in 1999 and then again in 2000?

    Superinvestor: There is no staff. I make all the investment decisions, and I do all my own analysis. And it was an evaluation of both Dun and Bradstreet and Moody's, but of the economics of their business. And I never met with anybody.

    Dun and Bradstreet had a very good business, and Moody's had an even better business. The single-most important decision in evaluating a business is pricing power. If you've got the power to raise prices without losing business to a competitor, you've got a very good business. And if you have to have a prayer session before raising the price by a tenth of a cent, then you've got a terrible business. I've been in both, and I know the difference.


    Government official: Now, you've described the importance of quality management in your investing decisions, and I know your mentor, Benjamin Graham - I happen to have read his book as well - has described the importance of management. What attracted you to the management of Moody's when you made your initial investments?

    Superinvestor: I knew nothing about the management of Moody's. I've also said many times in reports and elsewhere that when a management with a reputation for brilliance gets hooked up with a business with a reputation for bad economics, it's the reputation of the business that remains intact. If you've got a good enough business, if you have a monopoly newspaper, if you have a network television station (I'm talking of the past) you know, your idiot nephew could run it. And if you've got a really good business, it doesn't make any difference.

    I mean, it makes some difference maybe in capital allocation or something of the sort, but the extraordinary business does not require good management.

    I'm not making any reference to Moody's management. I don't really know them. But if you own the only newspaper in town, up until the last five years or so, you have pricing power and you didn't have to go to the office.

If you haven't guessed by now, the superinvestor is Warren Buffett. And clearly, if he were asked to complete the exercise above, his one-item investing to-do list would be long-term pricing power.

Indeed, over the years, better than any other investor on the planet, Buffett has been able to identify businesses with great pricing power. And then, if the price was right, he'd back up the truck and buy.

Of course, this is not to say that considerations like management and capital allocation don't matter. But if the list must be singular, it is pricing power over everything else.

It is this extreme to-do list that has helped Warren Buffett become so successful. And there's no reason why the results should be any different for anyone who tries to follow it.

If you want a hint on where to focus your time and attention, try to understand the different between a business with a pricing power and one without it. You will be on your way to great investment success.

What does your investing to-do list look like? Let us know your comments or share your views in the Equitymaster Club?

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02:52

The frailties of forecasting are enough to be wary of. And then when you do the same in an environment in a state of flux, you're treading on even thinner ice.

Check out today's chart of the day for example. It pegs the estimates of India's e-commerce market size by consultancy and financial firms. The difference - US$ 70 billion - startling to say the least. Funnily, all the brokerages have cited mostly the same factors that will drive the sector's growth - growth in mobile Internet, rising incomes etc. Despite this, there's a vast difference in final estimate.

Such a wide difference between the lower end of the estimate and the higher one is - or rather should be - worrying. That's because many have been falling head over heels in put money in this sector. In the process, valuations of companies in the sector have been rich, to say the least. But when such kind of valuations are based on such shaky ground in terms of the variability of the future, it is usually a recipe for disaster.

The vast difference in estimates of Indian e-commerce's growth


04:22

Talking of fast growing sectors, Indian aviation is another one that has been making waves on this front. As per reports in Business Standard, India is the fast growing domestic air travel market in the world. It grew 18.8% YoY last year. This compares to 11.9% for Russia, 9.7% for China and 5.4% for US. Further, strong growth has continued this year, growing 22.9% YoY during the January-May period this year.

But that's not all. Despite this, its size in absolute terms is miniscule. It is one fifth of the size of China and about 10% of the US in market size.

The fast growing market coupled with its small size indicate that this sector might have a runway of brisk expansion ahead of it. No wonder the high level of interest by various businessmen and companies in this industry. However, this is a good time to remember the maxim that obvious prospects for growth of an industry do not always translate into growth in wealth of the investors in it. We believe this is especially true of the aviation industry.

04:52

Indian markets were trading on a buoyant note at the time of writing, with the BSE Sensex up by 76 points. Realty and metal stocks were leading the gains while IT and telecom stocks the declines.

04:56 Investment mantra of the day

"Brilliance is the ability to simplify a mass of information into a simple yes-no decision" - Warren Buffett

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