In Praise of Buffett

This is a small post, as the common vocabulary goes- a quickie. Quick and a climax which is seldom intellectually satisfying and for all practical purposes adding just a mere notch to my blogging bedpost.
Having said that, why not go ahead and do the deed, indeed.

At the very outset, I have never been a fanatic worshipper at the altar of Buffett. Surely, I like the man for his extreme intellectual sharpness but fanaticism he doesn’t invoke. But that should not be taken as a limitation of that man in any measure. I have just become incapable of being swayed by extreme passion these days, for goods which the vast majority swears by.

Coke? yeah okay. Pizza? yeah okay. Buffett? Yeah, okay.
But my greatest weakness has been for the wisdom and the character that Charlie Munger carries.

Tapdancing To Work300.grid-4x2

However, I have been reading Carol Loomis’s book “Tapdancing to work:Warren Buffett on practically everything“. And the more I read, the more I find myself humbled. For one, Buffett has an exemplary clarity of thought. Not that it is a surprise for Buffett observers, but the more I am reading the newspaper articles around Berkshire Hathaway’s purchases, the more I find myself in awe.

Fortune articles are sanitised version of Buffet’s ideas. It doesn’t talk about the different permutations and combinations he considers for a given matter. It doesn’t concern with the fine judgement and skill he brings to the table before pulling the trigger. It doesn’t consider with the different consequences he might be thinking of because of his actions. All we see is the final action and its post mortem by financial media (Fortune in this case). But even in such sanitised version, Buffett sets a very lofty example for people to follow.

I, for one, am particularly hamstrung by my clarity(or the lack of) in thoughts. And if I am to consider putting in Buffett’s clarity in the vast Gaussian curve of humanity’s, then Buffett will figure out somewhere far off in the horizon, sitting pretty at the mark of 6 sigma.

I will rank myself perhaps somewhere in between negative single sigma and the mean. So being humbled is being disingenuous. Ravaged is more like it.

The second quality that jumps out in case of Buffett, is the huge amount of domain knowledge he carries in his head. Stupendous is an understatement. Encyclopedic will be close. He is known to beat the professionals in their own game- and the game not being that of stock picking but that of deal making.
When Capital Cities Corp was in talks with American Broadcasting Company for a merger, Buffett pitched in along with Tom Murphy to negotiate. On the other side of the table two extremely sharp, smart veterans of deal making were present representing the interests of ABC Corp. The name of the gentlemen were Bruce Wasserstein and takeover specialist Joseph Flom.

Peter Petre (the journalist reporting it in 1986 for Fortune) writes:

“As the two sides neared an agreement, the professional dealmakers held out for more. “Buff ett is so smart,” remembers Wasserstein, “that you had to be careful to avoid being picked.” As the dealmaker tells it, he and Flom demanded that Cap Cities sweeten its cash off er for ABC with stock; but Buff ett, who was not to be pushed far, finally closed by throwing in some small change—a thin veneer of warrants that raised the deal’s value by perhaps 3%.”

Sharp as a whip.

I think another Buffett biographer wrote that Warren always pushed a super hard bargain and used the existing structure to his advantage. When the brokers were making market for illiquid pink sheet stocks, Warren would repeatedly drive the purchasing price down by first quoting a price and then withdrawing it.

In his 1986 Annual Report also where he posted the Business Wanted notice- he lays out one binding condition regarding valuations- the seller has to reveal his price. No preliminary talks will be entertained without a price tag. That’s remarkable!

Any negotiator will tell that the one who names the price first-loses.

The third aspect which comes out of all this is the picture of a man who has put multiplitudes multitudes of 10,000 hours in perfecting his trade. Concentration of his efforts, time and resources in perfecting one single idea. Thats the discipline of a samurai.

I for one, am still looking out for a job which will pay me to become wise.


The Trust Factor: The Piramal way of doing business

Ajay Piramal channels Warren Buffett. He follows him in his entirety. With all his warts and moles; idiosyncrasies and ingenuity.

A copycat? What’s wrong in it though?

But it will be an insult to Piramal to merely call him a blind follower. He is a true believer in the ethos of Buffett and Munger.
He just doesn’t limit their teachings in business, but mixes it liberally in his life and the way he conducts himself.

Take a moment to think about it. Why do we exactly adore Buffett?
We may adore Munger for his extreme wisdom, rapier wit and piercing observations.

But why Buffett?

Because he is a billionaire?
Because he is the most successful investor- a true rags to riches story?
Because he embodies self-sufficiency?

Perhaps. And perhaps not. There are umpteen other people with similar stories. We might not accept it but we adore him because he inspires trust.

He shows amazing consistency in his behavior, words and belief. He surrounds himself with people of similar impeccable integrity and prevents the use of legalese as a crutch for trust.

This is perhaps the least highlighted aspect of Buffett. He is extreme in identifying and cutting needless costs. And legal experts, consultants are nothing but that.

He rightly understands that human beings can and will game the system, and a legal document cannot protect him. What he employs is empathy, trust and marks human relationships as the bedrock of business.

He is known to acquire companies based on mere handshake. In contrast compare that with Daiichi -Ranbaxy deal. Plenty of investment consultants, plenty of legal documents and still plenty of hassles.

In economics there is a concept called signalling mechanism. Someones actions not only has a direct outcome to it, but also gives off an information.  That is every action also implies something.

Legal documents signal something as well. It implies- “I don’t trust you”. It implies- “I trust the legal guys, the investment consultants with skewed incentives far more than the person on the other end of the table.”. Humans are born with a superb skill set to game existing systems. Call it ingenuity, call it creativity. You just dont want to be on the receiving side of it.

And this signal subconsciously “inspires” unethical behaviour.  Traditional  ideas of buyers beware kicks in. The seller subconsciously understands  that trust is not expected of him. And he might as well game it.

Which brings us to two important mental models–  Expectation and Seamless web of deserved trust.

As natural beings, we are programmed to reciprocate.  And when we tell someone not only in words but also in action that we trust and thus we expect him to cooperate and trust us back- we don’t make him/her our adversary- we make that person our ally.

And what does lack of trust do?

Lack of trust led to World War I.
Lack of trust lead to arms races.
Lack of trust is costly.

Seamless web of deserved trust ought to be the bedrock of business. What does it mean? It means trust generated through one’s own action, and hence deserving. “Seamless web” means consistency. Consistency in every aspect of one’s conduct. So trust generated through consistency.

Its a tough way, especially when perverse incentives exist; but try distrust once and you will understand what I mean.

Which brings us to Ajay Piramal’s knack of doing business efficiently.

Take a look at this article:

Specifically this line:

When they met, Pirmal, who had stitched more than 20 deals without using any bankers, expressed reservations.

20 deals without using any bankers! That’s a substantial confidence, huge amount of trust and an inordinate amount of cost saving.

Cost saving not only in banker fees, but in potential headache down the line. This action signals something.
It signals- “I trust you”

The article continues:

It also marked the beginning of a personal relationship that was rooted in financial services, but routinely sidetracked into business values, classical music, maths and spirituality, among other things.

Whoa!  How many business deals take place like this? I have seen hardball i-bankers conduct negotiations with their one hand sms-ing under the table .

To do course correction on ball busting !

Swati Piramal says her husband also has a unique ability to bring a personal touch to business relationships. For instance, on the eve of the deal with Shriram Capital, the Piramals hosted Thyagarajan and his family to a meal of South Indian delicacies prepared at home in Piramal House. Many of the deals he does are based on a personal equation, she says.”

Emphasis mine. Last quote taken from here

Sustainable Value Creation- Truths and Myths

Michael Mauboussin and Dan Callahan came together sometime in 2013 under the aegis of Credit Suisse to bring out a research report named – “Measuring the Moat”. It is an excellent 70 pages report and I recommend any serious value investor (worth his salt) to read it.

Sustainable Value Creation contrary to what many people believe is not a managerial miracle. Its a near about 50-50 split between the industry dynamics and the managerial prowess. Industry dynamics, internal competition and the extent of fragmentation influence managerial decisions. The phase through which the industry is going (i.e is it consolidating or is it getting disrupted) influence a manager in favour of competition or cooperation.

Industry effects are the most important in the sustainability of high performance and a close second in the emergence of high performance.

Mauboussin highlights that Industry is not destiny, there are outliers of outperformance in every industry but the base rate of success differs. As a result it takes varying amounts of managerial skills to create value.

Value Creation across Industries

Value Creation across Industries

Interestingly out of this picture, two things jump out:

1. As one selects an industry closer to the origin i.e higher rates of internal return (CFROI-WACC), the number of companies which succeed in creating value is always higher. I.e in communication equipment industry, very few companies destroy value, while its the opposite in paper and forest products industry- very few companies create value.

2. As one selects industries with varying rates of internal return, the best company with the maximum IRR cannot be “far better” than its own peers/industry averages. i.e the best company in paper and forest products have an IRR of mere 10% whereas the best company in communication equipment industry has an IRR of 40%.

Industry might not be destiny, but surely deserves a scrutiny.

I carry with me after reading this report two major lessons- how important is an industry map and how fruitful is creating a profit pool of a sector across a time period.

Do give the report a read. Its worth its weight in gold.

A Success Template

This is an annotation and commentary of the wonderful interview that Mr Tom Murphy did with Harvard Business School talking about his early childhood and career. The idea for this post was taken by Greg Speicher’s wonderful post

Thomas ‘Tom’ Murphy was the  CEO of Capital Cities till 1996. He joined a small broadcasting company in New York in 1954 and gradually went on to build the television broadcasting empire that Capital Cities eventually became. He engineered some cannily crafted deals, acquisitions and partnerships finally to emerge as one of the most successful and legendary broadcast executive in the then USA.  In 1985 he shocked the media world by announcing the acquisition of American Broadcast Company(ABC) for $3.5bn. Incidentally it was his long association with Warren Buffet that helped him to iron it out. Finally in 1996, he sold the Capital Cities/ABC for $19bn to Disney.

He did an interview with Harvard Business School here. Whichever way you look, Thomas ‘Tom’ Murphy had some brilliant success in his life and career. Its important thus to read, understand and internalise the qualities of the man- that Tom Murphy is; for he can show us what it takes to be successful.

“I would say that the most fortunate thing that happened to me, outside of being born an American, was that my father and mother were just magnificent. They were very happily married. I would say that the single most important thing in my life is the wonderful family I came from”.

Its surprising with the way he starts narrating his story. If there is one word which describes it is gratitude. Of course one can always argue that when a man has achieved so much gratitude is the least thing he should feel. But then gratitude doesnt arise in vacuum. It arises from an acknowledgement of life blessings, and for that optimism is important.

Success Template #1: Be optimist, have a positive outlook to life.
Success Template #2: Yearn to be the best husband and you will be the best parent.

 “The three of us were always trying to get the best possible education for ourselves. My father was insistent about it—almost a nut about it. He wanted us to work hard and play hard.”

The importance of education is perhaps widely recognised and yet millions of us still fail to point it out enough. Its very easy to confuse education with mere collegial degrees. That might be education in the way society defines it, but that is not education as successful people define it. Broad, extensive and deep reading , the internalisation of such knowledge and its application is what defines education. Remember what Einstein said- “Education is what remains after one has forgotten what one has learned in school”.

Success Template #3: Educate yourself.

“One of the interesting things I’ve learned in my life is that one of the most uncommon things in life is common sense. It’s very hard to notice whether people have great common sense.”

It is of course a given that we as a civilization are progressively losing our ability to think, reason and figure out. But then we often confuse common sense with acceptance of common myths. There is no set out ideas behind this except that common sense, curiosity and learning by questioning are all connected at hip. One related and fantastic post can be found here at [ How we get duped by Common Sense ]

The second thing Harvard Business School did was it gave me associations through my classmates. We had all just come out of the service, and my classmates have become my best friends in the last fifty years.

This is one of the finest learning of mine in the last 2-1/2 years. I have learned to understand and value the power of networks. I am a slightly shy and introvert person. And keeping networks going is difficult for me. However much of the success of a lot of people I know arise from their associations. Associations and Networks are hallmarks of robust,successful systems. Ecology thrives on networks, as do democracy [Tocqueville remarked famously- Americans of all ages, all conditions, all minds constantly unite.] Much of his success in making the deal with ABC was due to his association with Warren Buffet.

Success Template #4: Form networks, nurture them and harness them

From here starts some of the golden words on businesses, investing and money making. Listen carefully, my friends for it is the sage speaking:

“There are not many great businesses that come along in a lifetime”

“Because of the limited availability of licenses, there was limited competition, and so it exploded over the next thirty or forty years”

“The business is not capital intensive, nor is it labor intensive.”

“The costs are somewhat fixed so as you had greater and greater sales, the margins would just continue to grow.”

“So just by being sensible about our business, we continued to grow the company and buy businesses from other people who didn’t see the potential profitability that we saw.”

This is absolute gold. What we have in our hands, ladies and gentlemen is the very template of very successful business. The fact that great businesses are not common is iterated and reiterated time and again by Munger, Buffet and all of the focus investors. Great Businesses are great because they have rare characteristics in them. And what are they?

Success Template #5:

  • Barriers to Entry.
  • Asset Light
  • Priceability (ability to undertake pricing hikes)
  • Buy keeping the long term vision in mind.

In the following quotes he tells about how understanding his businesses made him money. Remember Buffet and Munger repeatedly point this out that understandability is the most important quality to look for in the business. And this can also be stretched to advantages and strengths of the business model.

“…as long as I could in the businesses we understood, which were television and radio.”

“When we got as big as the FCC would allow, I went into another business that I could understand, which was the newspaper business. In a sense, it’s a monopoly business like broadcasting and it is advertiser supported.”

This is interesting enough because he is reflecting a theme which is so near and dear to Buffet’s franchise model. A monopoly business.

So we can add one more addendum to the template #5,

  • Monopolies and Oligopolies only!

One thing with Tom Murphy is, his sense of ethics and personal integrity stands out. His personal constitution becomes apparent- as one who values the old world principles. In India, decades of socialism has eroded personal principles; statism has eroded personal pride; And yet, I believe success mantras in India is not any different than it is in America.  As the legend said-

“I would also say, don’t give up on your ideas and certainly never give up on your ideals.”

The entire interview can be found here. Do give it a read.