X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Jockey or the Horse?... - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • May 8, 2008

    Jockey or the Horse?...

    No, this isn't a primer on how to make your next million from betting successfully on the Mahalakshmi Race Course. As proponents of sensible, long-term investing, this is the last thing we would ask investors to do. Instead, this is an attempt to shed light on a long-standing and a very worthwhile debate. When analyzing companies for attractive long-term investments, which of the two is more necessary, the presence of an excellent CEO/management or the strength of the business itself? In other words, should we bet on the jockey or the Horse?

    Pick up any business magazine and 6 times out of 10, one is likely to come across a full sized image of an impeccably dressed individual with something equally impressive written at the bottom of the cover page, 'The Man with the Midas Touch' or 'To Hell and Back' or 'Find out the inside story of one of the most successful turnarounds in Indian Corporate History'. Wow! The expression lights up our face and we feel sad that we lost our chance on cashing in on the latest multibagger!

    A study and its findings
    It must be an event similar to this that must have prompted Steven N Kaplan, a University of Chicago professor and his associates to conduct a study on whether investors should place more weight on investing in a strong business ("the horse") than on a strong management team ("the Jockey").

    Laid out below are the findings of the study in their own words.

    "In this paper, we have studied the evolution of firm characteristics from early business plan to initial public offering to public company for 50 VC (Venture Capital) financed companies."

    They further go on to add, "Our results inform the VC debate about the relative importance of the business / horse and the management team / jockey. The results call into question the claim that "a great management team can find a good opportunity even if they have to make a huge leap from the market they currently occupy." The results for the main sample and the 2004 IPO sample indicate that firms that go public rarely change or make a huge leap from their initial business idea or line of business. An initial strong business, therefore, may not be sufficient, but appears to be almost necessary for a company to succeed. On the other hand, it is common for firms to replace their founders and initial managers with new ones and still be able to go public, suggesting that VCs are regularly able to find management replacements or improvements for good businesses. We interpret our results as indicating that on the margin, VCs should spend more time on due diligence of the business rather than management."

    Indeed, not many people outside the University of Chicago precincts might know Steve Kaplan, the originator of the study and hence might raise doubts over the veracity of the report. But not a lot of people can doubt the investing genius of Warren Buffett. One of the world's most successful investor is believed to have once said that 'if a management of an excellent reputation tackles a bad business, it is the reputation of the business that remains intact'. Peter Lynch, another of the great investors that the modern world has seen also seems to concur with this theory as he has once said that 'one should invest in a business that any fool can run because eventually one will'.

  • Read our discussions on Warren Buffett's letter to shareholders

    What managements can't do, brands can!
    Richard Branson, the possessor of one of the shrewdest marketing brains, once came out with a product called 'Virgin Cola' and took upon the might of 'Coca Cola' and 'Pepsi'. The result! The much publicised failure of the product. And it was not the extraordinary management at 'Coca Cola' and 'Pepsi' that thwarted Branson's attempt but the sheer power of these two brands.

    It is not as if there are no followers of the other theory. Jim Collins, widely known for his bestseller books 'Built to Last' and 'Good to Great' has built a whole cult around the fact that extraordinary management can indeed separate the men from the boys. Back home, one of India's most successful money managers in recent times has often been heard quoting that for successful investing, one has to identify the jockey and once that's done, the jockey will ride the horse.

    So, jockey or the horse?
    While we do not intend to take sides here, but logic 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 that have strong competitive advantages, without focusing too much on management. No doubt, the Indian money manager has made a success out of selecting smart jockeys, but he is yet to test out his theory over a much larger period of time, something Warren Buffett has done so successfully.

  • Read how to form an investing framework

    Thus, by whatever one has seen so far, it has become clear 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. Lastly, we would like to point out that it is very important that one buys such businesses at attractive valuations. For, even the best businesses might not provide good returns if bought at stretched valuations.

     

     

    Equitymaster requests your view! Post a comment on "Jockey or the Horse?...". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why Hasn't Warren Buffett Rung the Bell Yet? (The 5 Minute Wrapup)

    Aug 22, 2017

    It's surprising Warren Buffett hasn't warned investors about the expensive stock market? Let us know why.

    Think Twice Before You Keep Money In A Savings Bank Account (Outside View)

    Aug 22, 2017

    Post demonetisation, a cut in bank savings deposits rates was in the offing.

    A Darkness Is Spreading Across the US (Vivek Kaul's Diary)

    Aug 22, 2017

    Today, we are attacked by one preposterous thing after another, each of them even more absurd than the last.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Important Innovation in Finance Since Gold Coins(Vivek Kaul's Diary)

    Aug 10, 2017

    Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    5 Steps To Become Financially Independent(Outside View)

    Aug 16, 2017

    Ensure your financial Independence, and pledge to start the journey towards financial freedom today!

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
  •  

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 22, 2017 (Close)

    MARKET STATS