Tough times are actually a good time for

Thomas Schoewe loves to say the phrase, "Tough times are actually a good time for Wal-Mart". This outlandish statement is infact coming. Consumers in the United States are riddled with rising food prices and huge cost of gas. This has made it difficult for most households to run their home and a number of them are living off credit. Consequently this year, Wal-Mart slashed grocery prices by as much as 30 percent to lure customers stung by high food costs. This brilliant strategy was promoted with enticing advertisements that read (and asked consumers) - "What will you do with your savings?"

In the last six months, Wal-Mart's stock price has risen $15 a share, or about 33 percent. During that time, Macy's shares dropped by 16 percent, Target's by 6 percent and JC Penney's by 5 percent. As their CFO says, "Wal-Mart customers value our price leadership more than ever, especially as they try to stretch their money even further".

Now, this is a brilliant "economic moat". A business that has the muscle to change potential problems into opportunities. Wal-Mart used it's efficiencies to actually display an advantage to it's customers .. this not only increases sales at stores but also builds loyalty. I am assuming that the stores donot make a loss on the sale of groceries, but are at a no profit-no loss situation. An average Wal-Mart customer doesnt earn his shopping dollars just on groceries. Groceries (i presume) are only 20% of all purchases (value) made by a customer at the stores. So, my 100 dollars at the shop will be split as 80 for other goods and 20 for groceries. I am further assuming that I would make a margin of 10% on groceries (on an average; since they are perishable, everyday commodities) and 15% on other goods. So spliting the spends on an 80:20 ratio, I find -
Case 1 : (80 * 15%) + (20 * 10%) = 14.0%
Case 2 : (80 * 15%) + (20 * 0%) = 12.0% (a small increase in sale is enough to off-set this reduction in profit margin which can be easily done by innovative pricing changes)

This also takes me back to my principles of micro-economics which reads - "In case of essential commodities like food, the demand curve is inelastic such that any increase in price will only induce just a small reduction in demand". This is true from an individual's point of view. However, from a firm's poin of view (Wal-Mart) ... this principle doesn't hold good. In this case, by virtue of lowering the price of food .. Wal-Mart has been able to post very high increase in traffic at their stores which has resulted in greater sales of other goods aswell. I'm wondering how soon will be see a similar campaign from an Indian retail firm (Subhiksha, Reliance, More, EasyDay, Food Bazaar) given the increasing food prices here.

On the subject of inelastic demand ...  I'll leave you with a thought :

In March 2002, Ireland enacted a nationwide tax of nine pence (15 cents) on the use of plastic grocery bags, to be collected by retailers. Predictably, in just five months the tax cut plastic bag use by 90 percent.

What is the Price Elasticity of Demand for Plastic Grocery Bags? 

PS: If you have an interest in economic policies then read more about this tax (here). Don't miss the comments section.

If you like this content, then do check out my new blog on investing and stock markets for lots more information on the Indian equity markets

Notes from 2008 Wesco Shareholder Meeting

The complete notes are available at seekingalpha.com (here). I have picked a few interesting points delivered by Charlie Munger at the meeting. (My commentary in blue)

One of my favorite stories is boy in Texas, when the teacher asked the class the following question. There are nine sheep in pen, and one jumps out, how many are left? Everyone got it right, and said eight are left. The boy said none are left. The teacher said you don't understand arithmetic, and he said 'no you don't understand sheep'.

Charlie Munger here, refers to the domino effect where companies tend to imitate others (for quick gain) without an after-thought of the possible effects. This is especially true on account of the recent shakeout of financial companies across the world. In the US & UK, the sub-prime mortgage crisis (owing to mortgage-backed securities) have spelled down for Bear Sterns, Citigroup and Northern Rock (UK). In India, NBFCs like Citifinancial, GE Money (and banks like ICICI Bank) are facing peril at the hands of rising delinquencies in the small ticket segments.

If you are an investment bank and had to be rescued, there should be limits on leverage and the complications of your business. There should be qualitative limits too. By and large banks behaved well when it worked this way. When I was young, Bank of America – would not have done things they do now. Derivative trading, no good clearance, no rules, excess and craziness feeding on itself. The plain vanilla products got priced down to no profits. They wanted to do complicated stuff. Not sure if it cleared, or other side would be good for it. It didn't bother anyone since they wanted the profits .... People talk about marvels of system and risk transfer – but some of our troubles COME from having so much risk transfer.

Regulation has it's place in capitalism. To trust the market to correct by itself and letting ill-run companies die on their own is no longer an option (without jeopardizing the entire financial economy of the country). Munger also makes a point for simplicity and understanding of their actions. When financial corporations issued CDS, they assumed that the risk of default never existed. Firstly, their equity base was too small to bear this risk and secondly, unlike insurance, the risk of default on financial instruments is never random & can bankrupt companies in an instant. Munger also trackbacks to the art of value investing which is much more simpler than most of these alternate investments and often gives more value to the investor.

  
The only duty of corporate executives is to widen the moat. We must make it wider. Every day is to widen the moat. We gave you a competitive advantage, and you must leave us the moat. There are times when it is too tough. But duty should be to widen the moat. I can see instance after instance where that isn't what people do in business. One must keep their eye on ball of widening the moat, to be a steward of the competitive advantage that came to you. A General in England said, 'Get you the sons your fathers got, and God will save the Queen.'

Munger again captures the essence of value investing - "the art of finding an economic moat and widening it." From Berkshire's point of view, this is what their investments in Coca-Cola, Gillette, Disney, GEICO and NetJet have been - proof of which has been captured in the company's shareholder value.

How much is the Mona Lisa worth?

For a question like this (here), here are some answers that pop out -
a) It's priceless
b) It's worth $500 million
c) Prior to the 1962-63 tour, the painting was assessed for insurance purposes at $100 million. Adjusted for inflation since then -- $100 million in 1962 is approximately $645 million in 2005. So, thats the price of the painting today.

Incidentally there is one man who has "the" answer - Warren E. Buffett

In his letter dated January 18, 1964, Warren Buffett discusses "The Joys of Compounding" with the following insight :

Since the whole subject of compounding has such a crass ring to it, I will attempt to introduce a little class into this discussion by turning to the art world. Francis I of France paid 4,000 ecus in 1540 for Leonardo de Vinci's Mona Lisa. On the off chance that a few of you have not kept track of the fluctuations of the ecu, 4,000 converted out to about $20,000.

If Francis had kept his feet on the ground and he (and his trustees) had been able to find a 6% after-tax investment, the estate now would be worth something over $1,000,000,000,000,000 - That's $1 quadrillion or over 3,000 times the present national debt, all from 6%.

I trust this will end all discussion in our household about any purchase of paintings qualifying as an investment.

If you like this content, then do check out my new blog on investing and stock markets for lots more information on the Indian equity markets

Conflict of Interest & Credit Rating agencies

For people who use the services of financial advisors (also referred to as Private Banking Relationship Managers or Financial Consultants or Wealth Managers), it would seem odd that not one of them have actually advised the client to "hold on" to cash especially when there are not enough opportunities to invest in the markets or sure-shot stock picks. Often, the relationship managers find enough reasons to stash off this idle money in a single-premium insurance policy or a debt mutual fund or is an 'under-valued' sectoral mutual fund.

The only explanation I could come up for this is, conflict of interest. A relationship manager earns his fees (revenue for the bank) by getting clients invested in various financial products. He might view cash as a wasted opportunity for personal gain, although it might be in the client's best interest to show restraint in investing (esp. during tumulus times like these). Likewise, an RM will be eager to sell you an insurance policy as opposed to a mutual fund - as the former gives him a 30% commission as opposed to a meagre 2% commission for mutual fund investments.

Which makes me wonder - aren't research houses also in the same business? Isn't it in the interest of brokerage houses to inflate stock recommendations - so that investors put their money in the stock through their brokerage channel? At about 0.1% (average of delivery / intra-trade) for every rupee invested, a stock recommendation holds a lot of value. Motilal Oswal (here) has over 400,000 retail clients today and does broking revenue (FY2008) of 562 crores. Taking a ballpark of 0.1% revenue per rupee trade, they do about Rs. 562,000 crores of trades in a year (or Rs. 2,300 crores per day).

I would additionally suggest a reading of the latest Roger Lowenstein article on Moody's published in the NY Times (here).

The scribe starts off with an apt remark by Thomas Friedman in 1996 : "There were two superpowers in the world — the United States and Moody’s bond-rating service — and it was sometimes unclear which was more powerful.". (We now know who turned out the superior one !)

The article takes a hard look at how Moody's evaluated mortgages bundled as securities and assigned a rating to it. It also talks extensively of the mistakes they made in valuation of these securities and how the market crumbled due to lack of foresight, greed and trasparency (well, the lack of it). There is also a paragraph on conflict of interest - where rating industry's closeness with banks (whose securities they rate), often distorts their assessment of the instrument.

'Value Investing' by Prof. Greenwald

Professor Bakshi has uploaded Professor Bruce Greenwald's notes on his website (here). Prof. Greenwald from the Columbia Business School, was in Mumbai to deliver a talk titled, "Value Investing Frameworks and Business Analytics" (post by Prof. Bakshi)

In an article published in The Motley Fool, Prof. Greenwald shared his learning in a 5-part series. I've enclosed some parts of these in the post.

Part 1 : VALUE INVESTING 101 (here)

1. Simple stock search strategy : go for ugly, traded-down, cheap, boring -- as opposed to glamorous, respectable, lottery-ticket type and prominent stocks.

2. Develop a valuation technology : The Graham technology is starting with the most reliable information, which is asset value, then looking at the second-most reliable information, which is current earnings -- with all the appropriate adjustments and getting an earnings-power value -- and then looking at those two and see what they tell you about the extent to which you are buying a franchise, which is value in excess of assets. And then, only then, looking at the growth.

3. Patience : You have to have confidence in your valuation. If nothing has changed about the underlying value of the company, then if it's a good stock at 8, then it's a better stock at 4.


Part 2 : TO HOLD CASH OR NOT? (here)

4. Valuations may be high but in general, don't just throw away the market : If you're an equity manager - what's your risk? It's deviation from the market. So if you have nothing to do, you might as well minimize risk and buy a full market portfolio, and that's that.

5. Determine your risk tolerance : Look at it this way, if you're being given institutional funds that the institution wants to allocate to equity, you got a different risk profile on the returns on those funds than if you're managing a family's entire wealth where they care about absolute returns.


Part 3 : THE ART OF SHORTING (here)

6. One of the most restrictive clauses of the value discipline is 'no short selling' : Value investors are nervous about short selling for two reasons.
a) Tax treatment of short gains
b) As the stock goes up and the short goes against you, your risk goes up as opposed to going down. (I think the professor means that as the price of the stock goes even down, your opportunity should increase such that you can accumulate more. But you are on a long position and when the stock goes down, the shorting turns the advantage into a loss).

7. In shorts, much more than longs, you obviously want to look for a catalyst : This can be a restructuring or an earnings disappointment etc.


Part Four : IDENTIFYING FRANCHISES (here)

8. The way to think of growth in the simplest possible terms is growth requires investment : Everybody on Wall Street sort of talks about scalability and growth without investment, but if you look at the history of any growing firm, the amount of capital they put in grows with the growth in the firm. It just tends not to be scalable.

9. A franchise : is something that you can do that your competitors can't. And there are really only three possibilities.
a) It is increasingly rare in a rapidly changing world is that I've got technology that they can't match. That I can do it at a lower cost than they can. Those things go away very quickly, because people can copy technology. It's usually only in very complicated process industries that you have -- and some pharmaceuticals where you're patent protected, that you have technological advantages.
b) Customer captivity is probably going down a little. The Internet makes it very easy to compare prices. It's the enemy of profitability in that sense. But if you look at repeat purchase behavior, it probably hasn't changed all that much.
c) Can't match my cost, even though they've got the same cost structure, because I have economies of scale and they don't.


Part 5 : THE ONE INVESTOR TO BET ON (here)

10. If I were going to start off as an investor, I would start with Ben Graham's book, The Intelligent Investor. It's not because he lays out all the really good ideas that he had perfectly, but it's just a terrific introduction to the attitude it takes to be a successful investor.

Dilbert and mental models

An excellent post on the Dilbert blog. The post (here) is a message to all company Boards that they should look for a CEO every two years such that they might get someone equally qualified, but cheaper. Dont miss out some of the comments given in the link.

Some observations from a Board member's point of view -

1. Lower the cost, lower the quality
"This may not be true for lower or middle management but should be true for the top management. A person who comes cheap, shows a lower status in front of the Board."

2. CEO compensation follows the return-risk function.
"No, not the 'higher the risk, higher the return' model ... but the 'higher the return, lower the risk' paradigm (see my post here). Thus, a CEO who gets a higher compensation will ensure that business risks never exceed an acceptable range. (probably)"

3. The Board doesnt want to be the fall guy
"If an inexpensive CEO is recruited by the Board (over an expensive one) and this CEO falls to deliver .. the Board will face the music. The allegation will be that the board tried to penny-pinch, while a few more dollars wouldnt have much difference to the profits of the company."

4. The league
"The Board consists of presidents and CEOs of multi-million corporations. They would prefer candidates who earn close to their compensation irrespective of the quality."

Ah .. too much rambling .. I'm off to sleep now !

The paralysis of a market crash

I couldnt help read and re-read Rob Arnott's excellent assessment of human behaviour : When there happens a crash, you have enough uncertainty .. that it paralyses the people who might otherwise take the other side of your trade.

When the Indian stock markets came down from 21,000 to 18,000 levels (Fall 1), a number of individual investors couldnt pass for the wonderful opportunity to purchase their favourite stocks at a bargain. It's probable that you too were able to spot a stock available at much cheaper levels and would have invested a significant amount of cash. The valuations did seem very good then.

However, when the markets go down even further (from 18,000 to 15,000 (Fall 2)) - the same investors who invested in Fall 1, almost refused to invest further. A paralysis of sorts struck these investors ! They hibernate and only show some activity when the market approaches the Fall 1 levels. By this time, they lose a fantastic opportunity to buy ridiculously inexpensive value stocks.

When asked a reason for not investing at these levels, investors oft say : "I'm waiting for the market to settle down". Experts blame this behaviour on the "recency bias". The recency bias means that investors will put too much weight on recent experiences and trends to determine the future. This is what happened during Fall 2. When the stock market tanked the second time, the recency bias set with most investors and fear set in. During a period of fear, taking actions is very difficult and hence the paralysis.

Ofcourse, the lag between the great crash (Fall 2) and restoration of investor confidence (Fall 1) is often the little window of opportunity that value investors tend to capitalise on. The last three months have provided a value investing opportunity for the Indian stock market.

A way with words

On April 5, Microsoft Inc. shot a strongly worded letter to Yahoo's board of directors with a deadline to negotiate the terms of the deal (here). Industry observers are reading high into Microsoft's desperate attempts to enter the online advertising stream and additionally their disappointment at Yahoo's unconfirmed talks with Google, AOL and other internet properties.

Yahoo's response to this letter was posted on their website on April 7. (here). In that letter, Yahoo took a good shot at all Microsoft allegations surrounding their right to look for strategic alternatives to maximize shareholder value, potential upside on the business front over a 3 year period, anti-trust regulatory investigations and their stoic approach any future threats.

One of the better verbal battles, I've come across involved an American and an Indian company. The letters make for a fantastic reading.

The Indian Hotels Company in Nov 2007 had shot off a proposal to the Orient Express Hotel (where the former was the largest shareholder). This proposal was rebuffed by Orient Express twice, then followed by a acrimonious letter by Orient Express CEO, Paul White dated 10 Dec, 2007. A copy of the letter is enclosed (here).

The one line which must have erked IHCL : "We believe any association of our luxury brands and properties with your brands and properties would result in a reduction in the value of our brands and of our business and would likely lead to erosion in the RevPar premiums currently achieved by our properties."

On 19 Dec 2007, IHCL reverted with a perfect reply (here). The last paragraph of the letter should be read and re-read by every Indian.

It reads : "Taj Hotels is a proud Indian company, and it will persevere with its global expansion strategy. Indian companies will continue to play a meaningful role in the ongoing global economic integration and in that environment will take their rightful place in the international arena. Enterprises and individuals must recognize and adapt to these fundamental economic changes. We believe that those with a fossilized frame of mind risk being marginalized."

Seth Klarman

Seth A. Klarman is a low-profile value investor and portfolio manager of the investment group, The Baupost Group. The Baupost Group now manages over $7 billion and has delivered returns at over 20% since inception (1983). Seth Klarman is also the author of the book Margin of Safety : Risk-Averse Value Investing Strategies for the Thoughtful Investor, which retails at $1,195 at Amazon.com !

Klarman invests in a wide array of investments ranging from fairly traditional value stocks to more esoteric investments like distressed debt, liquidations, and foreign equities or bonds. Klarman doesn't mind "doing nothing" on occasion. In fact, in 2005 and 2006, nearly half of his portfolio was held in cash. Investing, he cautions, is more than just producing absolute returns. Too often investors focus on that one easy number "return" and ignore the risks incurred to generate that number.

Klarman gave an excellent talk at MIT (here). He talks extensively of how distress events in the financial markets make for a great opportunity to invest profitably. The talk also lays stress on the importance of risk management, use of leverage and protection of capital. Klarman wraps his talk with his understanding of value investing.

The lecture of a lifetime

Randy Pausch (born October 23, 1960) is a 47 year-old Professor of Computer Science, Human-Computer Interaction, and Design at Carnegie Mellon University (CMU) in Pittsburgh, Pennsylvania. In September 2006, he was diagnosed with metastatic pancreatic cancer was told in August 2007 to expect a remaining three to six months of good health.

Pausch delivered his "Last Public Lecture," titled "Really Achieving Your Childhood Dreams" at CMU on September 18, 2007. This talk was modeled after an ongoing series of lectures, where top academics are asked to think deeply about what matters to them, and then give a hypothetical "final talk," i.e., "what wisdom would you try to impart to the world if you knew it was your last chance?"

The complete transcript is available here (pdf, 248 Kb)

The video of the lecture can be viewed here. It's quite brilliant.

Slick math !

Call it good fortune but I have a choice of road to take, while returning home (Delhi) from office (Gurgaon). In my usual impulsion, I decided to examine these two choices and derive a financial value to it. Incidentally, I found yet another way of distinguishing the value investing and DCF methodologies of stock picking.

Enclosed are the specs :

Option 1 : NH-8
Distance to travel : 25 kms
Tollgate cost : Rs. 16
Time taken : 55 mins

Option 2 : MG Road
Distance to travel : 29 kms
Tollgate cost : Nil
Time taken : 40 mins

At 45.44 rupees per litre and excluding value of time, the math is in favour of MG Road because my Suzuki swift gives about 14 kms to the litre. Thats about rupees 3.24 per kilometer. So the additional 4 kms is justified by the saving of Rs. 3.04 I get, when I take MG Road over NH-8 (16 minus (4*3.24)). This is a bit like Graham, working the its and bits of every stock around practical and simple formulae.

The DCF methodology will drive (no pun intended) me insane. Additional elements DCF will prescribe include reduction of mileage over time, road conditions, increase in travel time, engine maintanence cost, time of travel etc. ... extrapolate it with friendly-neighborhood MS Excel over a 5 year period, calculate the PV .. and charge me a bill of a few thousand dollars for a job well-done. Phew !

Steve Jobs & Stanford University Commencement Speech

http://www.youtube.com/watch?v=D1R-jKKp3NA

The transcript:

I am honored to be with you today at your commencement from one of the finest universities in the world. I never graduated from college. Truth be told, this is the closest I've ever gotten to a college graduation. Today I want to tell you three stories from my life. That's it. No big deal. Just three stories.

The first story is about connecting the dots.

I dropped out of Reed College after the first 6 months, but then stayed around as a drop-in for another 18 months or so before I really quit. So why did I drop out?

It started before I was born. My biological mother was a young, unwed college graduate student, and she decided to put me up for adoption. She felt very strongly that I should be adopted by college graduates, so everything was all set for me to be adopted at birth by a lawyer and his wife. Except that when I popped out they decided at the last minute that they really wanted a girl. So my parents, who were on a waiting list, got a call in the middle of the night asking: "We have an unexpected baby boy; do you want him?" They said: "Of course." My biological mother later found out that my mother had never graduated from college and that my father had never graduated from high school. She refused to sign the final adoption papers. She only relented a few months later when my parents promised that I would someday go to college.

And 17 years later I did go to college. But I naively chose a college that was almost as expensive as Stanford, and all of my working-class parents' savings were being spent on my college tuition. After six months, I couldn't see the value in it. I had no idea what I wanted to do with my life and no idea how college was going to help me figure it out. And here I was spending all of the money my parents had saved their entire life. So I decided to drop out and trust that it would all work out OK. It was pretty scary at the time, but looking back it was one of the best decisions I ever made. The minute I dropped out I could stop taking the required classes that didn't interest me, and begin dropping in on the ones that looked interesting.

It wasn't all romantic. I didn't have a dorm room, so I slept on the floor in friends' rooms, I returned coke bottles for the 5¢ deposits to buy food with, and I would walk the 7 miles across town every Sunday night to get one good meal a week at the Hare Krishna temple. I loved it. And much of what I stumbled into by following my curiosity and intuition turned out to be priceless later on. Let me give you one example:
Reed College at that time offered perhaps the best calligraphy instruction in the country. Throughout the campus every poster, every label on every drawer, was beautifully hand calligraphed. Because I had dropped out and didn't have to take the normal classes, I decided to take a calligraphy class to learn how to do this. I learned about serif and san serif typefaces, about varying the amount of space between different letter combinations, about what makes great typography great. It was beautiful, historical, artistically subtle in a way that science can't capture, and I found it fascinating.

None of this had even a hope of any practical application in my life. But ten years later, when we were designing the first Macintosh computer, it all came back to me. And we designed it all into the Mac. It was the first computer with beautiful typography. If I had never dropped in on that single course in college, the Mac would have never had multiple typefaces or proportionally spaced fonts. And since Windows just copied the Mac, its likely that no personal computer would have them. If I had never dropped out, I would have never dropped in on this calligraphy class, and personal computers might not have the wonderful typography that they do. Of course it was impossible to connect the dots looking forward when I was in college. But it was very, very clear looking backwards ten years later.

Again, you can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something — your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life.

My second story is about love and loss.

I was lucky — I found what I loved to do early in life. Woz and I started Apple in my parents garage when I was 20. We worked hard, and in 10 years Apple had grown from just the two of us in a garage into a $2 billion company with over 4000 employees. We had just released our finest creation — the Macintosh — a year earlier, and I had just turned 30. And then I got fired. How can you get fired from a company you started? Well, as Apple grew we hired someone who I thought was very talented to run the company with me, and for the first year or so things went well. But then our visions of the future began to diverge and eventually we had a falling out. When we did, our Board of Directors sided with him. So at 30 I was out. And very publicly out. What had been the focus of my entire adult life was gone, and it was devastating.

I really didn't know what to do for a few months. I felt that I had let the previous generation of entrepreneurs down - that I had dropped the baton as it was being passed to me. I met with David Packard and Bob Noyce and tried to apologize for screwing up so badly. I was a very public failure, and I even thought about running away from the valley. But something slowly began to dawn on me — I still loved what I did. The turn of events at Apple had not changed that one bit. I had been rejected, but I was still in love. And so I decided to start over.

I didn't see it then, but it turned out that getting fired from Apple was the best thing that could have ever happened to me. The heaviness of being successful was replaced by the lightness of being a beginner again, less sure about everything. It freed me to enter one of the most creative periods of my life.

During the next five years, I started a company named NeXT, another company named Pixar, and fell in love with an amazing woman who would become my wife. Pixar went on to create the worlds first computer animated feature film, Toy Story, and is now the most successful animation studio in the world. In a remarkable turn of events, Apple bought NeXT, I returned to Apple, and the technology we developed at NeXT is at the heart of Apple's current renaissance. And Laurene and I have a wonderful family together.

I'm pretty sure none of this would have happened if I hadn't been fired from Apple. It was awful tasting medicine, but I guess the patient needed it. Sometimes life hits you in the head with a brick. Don't lose faith.

I'm convinced that the only thing that kept me going was that I loved what I did. You've got to find what you love. And that is as true for your work as it is for your lovers. Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven't found it yet, keep looking. Don't settle. As with all matters of the heart, you'll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don't settle.

My third story is about death.

When I was 17, I read a quote that went something like: "If you live each day as if it was your last, someday you'll most certainly be right." It made an impression on me, and since then, for the past 33 years, I have looked in the mirror every morning and asked myself: "If today were the last day of my life, would I want to do what I am about to do today?" And whenever the answer has been "No" for too many days in a row, I know I need to change something.

Remembering that I'll be dead soon is the most important tool I've ever encountered to help me make the big choices in life. Because almost everything — all external expectations, all pride, all fear of embarrassment or failure - these things just fall away in the face of death, leaving only what is truly important. Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose. You are already naked. There is no reason not to follow your heart.

About a year ago I was diagnosed with cancer. I had a scan at 7:30 in the morning, and it clearly showed a tumor on my pancreas. I didn't even know what a pancreas was. The doctors told me this was almost certainly a type of cancer that is incurable, and that I should expect to live no longer than three to six months. My doctor advised me to go home and get my affairs in order, which is doctor's code for prepare to die. It means to try to tell your kids everything you thought you'd have the next 10 years to tell them in just a few months. It means to make sure everything is buttoned up so that it will be as easy as possible for your family. It means to say your goodbyes.

I lived with that diagnosis all day. Later that evening I had a biopsy, where they stuck an endoscope down my throat, through my stomach and into my intestines, put a needle into my pancreas and got a few cells from the tumor. I was sedated, but my wife, who was there, told me that when they viewed the cells under a microscope the doctors started crying because it turned out to be a very rare form of pancreatic cancer that is curable with surgery. I had the surgery and I'm fine now.

This was the closest I've been to facing death, and I hope its the closest I get for a few more decades. Having lived through it, I can now say this to you with a bit more certainty than when death was a useful but purely intellectual concept:

No one wants to die. Even people who want to go to heaven don't want to die to get there. And yet death is the destination we all share. No one has ever escaped it. And that is as it should be, because Death is very likely the single best invention of Life. It is Life's change agent. It clears out the old to make way for the new. Right now the new is you, but someday not too long from now, you will gradually become the old and be cleared away. Sorry to be so dramatic, but it is quite true.

Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma — which is living with the results of other people's thinking. Don't let the noise of others' opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary.

When I was young, there was an amazing publication called The Whole Earth Catalog, which was one of the bibles of my generation. It was created by a fellow named Stewart Brand not far from here in Menlo Park, and he brought it to life with his poetic touch. This was in the late 1960's, before personal computers and desktop publishing, so it was all made with typewriters, scissors, and polaroid cameras. It was sort of like Google in paperback form, 35 years before Google came along: it was idealistic, and overflowing with neat tools and great notions.

Stewart and his team put out several issues of The Whole Earth Catalog, and then when it had run its course, they put out a final issue. It was the mid-1970s, and I was your age. On the back cover of their final issue was a photograph of an early morning country road, the kind you might find yourself hitchhiking on if you were so adventurous. Beneath it were the words: "Stay Hungry. Stay Foolish." It was their farewell message as they signed off. Stay Hungry. Stay Foolish. And I have always wished that for myself. And now, as you graduate to begin anew, I wish that for you.

Stay Hungry. Stay Foolish.

Thank you all very much.

Entrepreneurs

http://www.hbs.edu/entrepreneurs/ is a link which no wannabe-entrepreneur should miss. Enclosed are the memoirs of over 25 HBS alumni who have taken up entrepreneurship. I read through most of them and particularly liked the capsule on Jim Sharpe of Extrusion Technology.

Happy reading !!

It Happened In India

Kishore Biyani's beautiful book, where he traverses through his experiences in growing Pantaloons, Big Bazaar, Central etc. from his life as a trader to an industry 'maverick'. I particularly enjoyed the simplicity (or Indian--ness) of his writings .. a symbol of his own self.

I am taking one small part of this book (Pg 100-101) for all to read -

".. we were fortunate to have a group of long-term individual investors who stared believing in us. All of them had visited our stores and were prepared to focus more on the number of customers coming in, rather than the financial numbers on the balance sheet ...

One of the first was a Bengali gentleman from Kolkata who happened to visit the Pantaloons outlet in Gariahat. He saw the crowds and the merchandise we were offering and started to put in his stakes. He did not get good returns in the beginning, but his trust in us was so strong that he kept acquiring our stock as well as recommending it to his friends in the investment community ..."

Rakesh Jhunjhunwala :

The market's anxiety emerged from a lack of appreciation of retailing as a business and of Kishore as a person. He was considered over-ambitious, but they all missed the big picture as well as the bus.

Kishore was aggressive in a field that was supposed to see a lot of growth in India. The stock market was concerned about the high debt-equity ratio. But I found that it wasn't the debt that was high, it was just the equity base which was low. So we helped him raise funds through private placements.

The backed Kishore because he was very different from most entrepreneurs. First of all, he was very aggressive and secondly, he wasn't money-minded. For him achievement meant doing what he thought innovative. He understood customers well and there was a lot of clarity in his thinking. Also, he went beyond the numbers. I found this quality to be a key differentiator. ...

Why Value Value?

This was the title to Professor Sanjay Bakshi's first class in SABV at MDI Gurgaon, batch of 2000-02. The presentation had the case of EG Corporation and areas in which we could unlock value. (pls email me for the ppt)

Likewise, I had an interesting conversation with Saurabh yesterday on "value". We've, in the last many discussion on blogs, have explored value primarily from an EPS (visible) or investments (hidden) perspective. However in today's complex investing field some new areas of value have come forth. Database is one of them.

In other words, your customer records can be one of the primary value creators for companies. A number of Indian companies are exploiting their large business presence by selling a multitude of products e.g. ICICI Bank, Tata (with Trent, Tata Teleservices), Reliance (Retail, Telecom). Infact Reliance Energy's acquisition of BSES if looked just from a database viewpoint adds 25 million customers in Mumbai, Delhi, Goa and Orissa. 25 million customers - who can now be cross-sold mobile phones, credit cards, insurance, mutual funds, home loans, auto loans etc. etc.

Two thoughts came across -
a) What is the probability of a company utilising this database?
b) What is the monetary value that can be attached to this database?

a) As more companies join alliances (read: co-exist), the need for leveraging each others resources will increase. Database will be an obvious choice. And hence, cross-sell. For service companies, this "probability" will be much higher as compared to single product-institutional buyer companies. Professional managers will soon exploit this opportunity.

b) Adding a monetary value may be a bit difficult. Lets try a different tact here. The number of financial products a customer has in India averages 9 (this includes your LIC, savings a/c, credit card, car finance, home loan, NSC certificates, mutual fund, demat, PF, PPF, EPF etc.). Total middle class household in India is estimated at 180m. At an average annual income of 4000 USD (or Rs. 2 lacs) and a savings rate of 26% and an investible %age of savings at 35%, we can conculde that 1 HH in India spends just Rs. 18,200 per month on investments. While commission rate can be from 0% to 30% .. we would assume a middleman rate of 4% for ease. So, 1 Indian HH can earn Rs. 728 per month for a middleman. So the entire opportunity set for BSES (25m customers) is 11.55 billion rupees or rupees 1155 crores of income (not sales). Simple telemarketing gives a response rate of 2.5%, and assuming a 500 seater setup - the annual profits from this simple cross-sell activity should give an additional income of Rs. 32 crores for the year.

Sounds rather complicated, but an additional 32 crores based on an inexact science (with enough upside) is food for thought.

Other "value" areas will be patents, brand name and now, CEOs (imagine the distortions in stock price of a Virgin Atlantic with a Richard Branson and one without him)

Good advice

1. The recent bull run is a fantastic opportunity for you to sell-off stocks which have not given good profits (and in the future, have a greater probability of not giving you desired returns). So if you haven't done that yet, please use this to it's fullest.

2. Further investment in stocks should always be on the basis of good investment principles. Some ideas -
> Profit for the yr should be no less than 30 crs with a min of 6 crs per quarter
> Exhibit increased sales and profit growth over last three years
> Sales and profit growth for last 4 qtrs vis-a-vis LY quarters
> Price/BV less than 3
> P/E should be less than 66% of industry P/E (mostly fwdP/E < 12)

3. Always see the charting of the stock. www.bseindia.com and www.nseindia.com have the best charting features i've come across. Note, the support and resistance levels over the last one year.

4. Always have a stop loss for any stock you purchase. (and sell when the stop loss is breached; some Buffett-wanabes may think otherwise)

Property wisdom

"The whole of Delhi is into properties", said the property broker, who took me for a spin this Saturday. Clever buggers these guys ... they'll do their best to ensure that he thinks my money as his onw, he would say that he'd sell our flat to another buyer at a little higher rate (it's another story that he might do the same thing to me aswell) .... that's their way to gaining confidence. Traits of a professional salesman.

Some tips I could remember -
a) Always go in for smaller property sizes as compared to bigger property sizes. It's easier to sell and often has the best appreciation in value
b) Plots are preferable over flats if quick returns are your goal. Plots are easier to sell as compared to flats.
c) In flats, the variation in prices is not as much as compared to plots, where location and frontage is of primary significance
d) If you are searching for one (plot/flat/house), there will always a second broker who would give you a better deal. So search more, and seek more.

An excellent presentation on Value Investing by Prof. Sanjay Bakshi

Prof. Sanjay Bakshi is a visiting faculty at the Management Development Institute, Gurgaon. Enclosed is a presentation published by Capital Ideas Online where Prof. Bakshi extensively discusses the various techniques of value investing from an India perspective. He has featured a number of opportunities like Trent, Madura Coats, Zodiac Clothing etc. but none better than his acquisition of the GESCO Corp. The link is enclosed here.

Prof. Bakshi also maintains a most fabulous website in www.sanjbak.com.

Wisdom of value investors

There have been some great quotes associated with value investing and by value investors such as Graham, Buffett, Munger, Schloss etc. Enclosed is a compilation of the same -

"It's better to be approximately right than to be precisely wrong."

"What we learn from history, is that we don't learn from history."

"The more cash that builds up in the treasury, the greater the pressure to piss it away." (check ITC and it's foray in unrelated businesses)

"The smarter side to take in a bidding war is often the losing side." – Warren Buffett

"The most dangerous words in the investment business are, "this time it's different."" – John Templeton

"No matter how great the talent or effort, some things just take time: you can't produce a baby in one month by getting nine woman pregnant." – Warren Buffett

Courtesy: 1. Google.com; 2. 'My favourite quotes' by Sanjay Bakshi

My favourite is one which my first boss often recited - "With data you can prove anything ... even the truth". (one reason, why my posts look pathetic with no data)

Every investor should read this

It's called "Seven Secrets of the Investing Masters". Read, re-read the text because it gives you a wonderful glimpse of how the worlds best investors have earned their wealth from investing, from trading, getting rich overnight and other strategies/tactics.

The article features -
1. Benjamin Graham
2. Warren Buffett
3. Peter Lynch
4. Anthony Gray
5. George Soros
6. Jim Slater
7. Anthony Bolton

I am reminded of Charlie Munger, who has often related investing with psychology. It's often called the madness of the crowd. Please find enclosed a most fantastic text - Extraordinary Popular Delusions and the Madness of the Crowds by Charles Mckay which'll help you understand bubbles. Since the text is too long, sincerely request all to definitely read the chapters on the South Sea Bubble and the Tulipomania.