Lorimer,MCX,Buffett and China

Of late, I have been caught up with certain things and posting frequency has dropped accordingly. However I started reading this book called “Letters from a Self Made Merchant to his Son” by one pig meat trader named George Horace Lorimer. Its comes widely recommended by Shane Parrish of Farnam Street blog and the partner of the most famous business of Farnam Street- Charlie Munger.

It is a a highly enjoyable book and I find it far better than all those books on aphorisms. It is almost a modern day “Letters from a Stoic” ( I highly recommend that one as well). And at times I felt that Lorimer is rebuking me for the countless mistakes I have done in my past just like his son Pierrepoint.

Sample this:

“You’ll find that education’s about the only thing lying around loose in this world, and that it’s about the only thing a fellow can have as much of as he’s willing to haul away. Everything else is screwed down tight and the screw-driver lost.”

Or the idea that the essence of capitalism is postponement of self-gratification.

It’s the man who keeps saving up and expenses down that buys an interest in the concern.

Or the most important mental model to success in the public markets:

If you find your crowd following him, keep away from it. There are times when it’s safest to be lonesome. Use a little common-sense, caution and conscience. You can stock a store with those three commodities, when you get enough of them. But you’ve got to begin getting them young. They ain’t catching after you toughen up a bit.

Please do buy and read it. It sits on my bookshelf between Letters from a Stoic by Seneca and the Autobiography of Benjamin Franklin.

They say that never push a good thing too far (and never get pushed by a bad thing in the tiniest). FTIL the erstwhile anchor entity of MCX, India’s largest commodity bourse and once of the world’s biggest had been taking the goodwill of authorities a tad too easily.
It adopted worlds oldest tactic for avoiding a decision.
Procrastination.
Delay.

While as early as September it lost the status of fit and proper entity it kept dragging its feet on the stake sale. [For those who are not very much familiar with it these links will get you upto speed-

1. Deepak Shenoy on Original Fallout of NSEL.

2. As early as July 30th market bloodhounds sniff problems in FT & MCX

A side note- whenever the CEO comes on record blaming bear cartels short the stock. Lehmann, Bears and Stern and even Satyam at one point of time blamed the infamous bear cartels.

3. And the whammy of CTT also strikes MCX killing the volumes off and attracting a Morgan Stanley downgrade

4. MCX hits an all time low of 212

5. FTIL gets “fit and proper” notice and Shah and Massey step down.

For valuations this will help, for my thesis this set of posts will help.

1. A tale of two kids- Part 1,  2, 3, 4 ]

So post two management changes , the new management has decided to take a very radical step. It has decided to keep the stake of 24% in an escrow account for MCX to sell it all by itself.

Now will the money go to MCX? No.
It will be just like the auctioning of a collateral by a lender. Over and above the amount liable i.e the sum of principal and interest, a lender returns the entire surplus to the original owner.
In this case FTIL doesn’t owe anything to MCX. Hence MCX will return the entire money to FTIL. Which is a good thing for MCX!

Why? Well simply because even the remotest association with a scrupulous man is costly. Hence that FTIL and MCX will go its own way is a very positive step.

For this to happen- MCX has to seek a shareholder nod for the change in its article of association. I am in favour of it and will vote my yes. However, is there a guarantee that this will not be used against anyone else?

I recommend to the directors to have a sunset clause associated with this proposal, where after a stated date without the shareholder’s nod the article association will revert to the present form.

On other ideas I am reading these days is 25iq.com where Tren Griffin echoes Buffett’s idea of mispriced optionality and his idea of portfolio of such bets-

“you may consciously purchase a risky investment – one that indeed has a significant possibility of causing loss or injury – if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities.”

This is at the core of probabilistic thinking. To weigh the final material gains and losses by their respective probabilities makes many decisions easier to make.

A higher application of such a mental model is a decision tree, where diverse alternatives are presented in an intuitive way. This kind of mental model is highly beneficial to assess special situation opportunities.

Which brings me to the special situation building up in the China seas. I am no Foreign Policy expert but the recent muscle flexing of China in the East and South China Sea is a cause of concern for India. It has huge conflicting claims with Japan, with South Korea (East China Sea – Diayou/Senkaku Islands and Goguryeo, Gojoseon problem).

Parallely it has problems with Vietnam and Phillipines in contradictory claims on Paracel Islands and Scarborough Shoal. If that was not enough, China went ahead and claimed one of Vietnam’s island (which is incidentally a very good fishing ground) as its own. In April this year, a Chinese fishing vessel uncermoniously crushed a Vietnamese counterpart. And it dragged a deep sea drilling platform into Vietnamese claimed waters.

In this light, what is India to do? Of note is in 2013 India unceremoniously dumped a joint sea exploration project with Vietnam, for fears of ruffling Chinese feathers. So what is India to do?

Or rather what is the cost of inaction?