Escaping the corporate world and becoming an entrepreneur is certainly an attractive proposition for anyone who relishes the idea of being their own boss, but before taking this plunge, it's important to acknowledge just how hard it can be to launch a successful startup.
Running your own business today is so difficult, in fact, that some have compared it to managing one of the top firms on Wall Street.
"I tell anyone who asks that being an entrepreneur is tougher than running Merrill Lynch," Sallie Krawcheck, owner of professional women's network Ellevate, wrote in a recent article posted on LinkedIn.
Krawcheck would know. In addition to having held the title of CEO of Sanford Bernstein and Smith Barney, she also ran Merrill Lynch Wealth Management for more than two years.
The first practical advice she gives to anyone even considering pursuing a career as an entrepreneur is to take a long, hard look at your finances to see whether you can afford to invest heavily in your business while earning little or no income.
"As the founder of a start-up, it’s not about how much cash you can make, but how little you can make and for how long. Firstly, that cash can help the business to be successful; and, secondly, if you are going to be successful, the value of that dollar working in the start-up is worth massively more than in your bank account. So before you make the switch, do the math and shore up the bank account."
Another consideration Krawcheck highlights involves doing some introspective research. Before jumping headfirst into entrepreneurship, she writes, it's important to question your true motivations for doing so. Is it your passion for creating something out of nothing that's driving you, or the "idealized portrait" of life as an entrepreneur?
Even if you are financially prepared to start your company, and you feel you're doing it for all the right reasons, it's safe to assume that, to some degree, you will fail. The silver lining, according to Krawcheck, is that all entrepreneurs fail at one point or another.
"It's just a matter of what you fail at and how quickly you recover," she writes. "And you will be rejected; it's just a matter of getting past the rejections."
“Naalai namathe,” she had said when arrested in 1996, ‘Tomorrow is ours.’ This time, she had no words of solace for her followers
J Jayalalithaa with MG Ramachandran in a film (Photo: KAPOOR BALDEV/SYGMA/CORBIS)
When the crisp verdict was pronounced on 27 September before a select few in a special court in Bangalore, it came as a thunderbolt that numbed her senses. It was a return of the fear of the wages of sin that had haunted her for nearly two decades, the fear that she had managed to dodge for 18 years playing hide-and-seek in the labyrinths of the Indian legal system. She now stood convicted, sentenced to four years and fined Rs 100 crore. Four of her associates— devotees who dragged her to the abyss—stood convicted too, though with lower fines. It was a moment of irony in a political life fraught with jealousy, humiliation, malice and cruelty that she had fought alone with courage and determination. It was a moment that shattered the image of her invincibility. Amma, the redeemer. Amma, the universal. Amma, the one who looks at you with a benevolent smile, like a goddess, at every street corner of Tamil Nadu. Now she is damned.
The conviction of J Jayalalithaa, Chief Minister of Tamil Nadu until the verdict forced her resignation and barred her from contesting elections for the next 10 years, is a dramatic twist in her colourful life, and it comes at a time when she had emerged as the most powerful leader in south India.
For a woman with the baggage of being a former film star, single and a Brahmin, to gain acceptance in the theatre of Dravidian politics was surely tough. What makes Jayalalithaa such a fascinating figure is the fact that she relentlessly challenged the male-dominated politics of Tamil Nadu that had tried to block her at every step of her journey. Remarkably, she rose to the top of the AIADMK, a party that was rudderless after the death of its founder MG Ramachandran. He was looked upon by his followers as a demigod, and it would not have been easy to step into his shoes, but she did, fighting single-handedly against the machinations of her enemies within and without the party. More recently, when the rival DMK—which was wracked by a power struggle between party patriarch M Karunanidhi’s sons—was routed in the 2011 Assembly polls, she dared to go for the moon, aiming to win enough parliamentary seats to have a say at the Centre, even claim Prime Ministership if possible.
Her life, she once said, was an ‘open book’, but she remains unapproachable. An enigma. Her fits of rage, tantrums and arrogance are legendary. So are the stories of a troubled childhood, her brilliant school record in Chennai’s Church Park Convent, her love of books, her erudition and impeccable English, her intelligence, her relationship with MG Ramachandran, her sense of loss after his death, and her relationship with her aide, Sasikala.
It is her hatred of Karunanidhi, however, that colours her political reactions. The past shapes her present. Her loneliness, her anger, the battering of court cases against her, with her wealth frozen, properties sealed and jewels seized and taken into legal custody—she was imprisoned for 28 days earlier— have all contributed to her formidable personality.
The villain of the drama has always been Karunanidhi. Her waking hours are consumed by devising plans to undo him and his progeny. Her sleeping hours are tormented by the recurring dream of a horror three decades ago. She can’t forget the humiliation that she experienced as a young entrant to the state’s Legislative Assembly at the hands of her political enemies. That day, enraged and humiliated, Jayalalithaa left, swearing like the infuriated Panchali that she would never step foot inside the House “until conditions are created under which a woman may attend the Assembly safely”. Jayalalithaa became a symbol of Draupadi. Karunanidhi did not realise that symbols could prove politically disastrous.
Jayalalithaa’s previous stints in power taught her that impulsive acts of anger and vengeance would only harm her. She learnt to wear masks. As a former actor, this came easily to her. It is amazing how she strengthened her grip over the party in spite of its humiliating defeat in 1996 and again in 2006. She returned with a stunning majority in 2001 and again in 2011. In her third term as Chief Minister, she appeared to have consolidated and understood the art of wielding power.
In her first term from 1991 to 1996, corruption had been the main political issue; in her second term from 2001 to 2006, she baffled observers with her autocratic measures, which went unquestioned except by the media, with which her relations had anyway soured. Her whims assumed stunning proportions. One of her first moves after assuming power was to arrest the 79-year-old Karunanidhi in the middle of the night, an act that shocked the nation. She made a suo moto statement in the Assembly ruling out any discussion of the proposed demolition of the nearly-100-year-old Queen Mary’s College building to be replaced by a new secretariat. She had an ordinance issued against ‘forced conversion’. She banned animal sacrifice. The MDMK leader Vaiko, who was an ally of the ruling BJP, was arrested under POTA for speaking in favour of the LTTE, a banned outfit, and put behind bars. Both those laws have since been repealed and the anti-LTTE tag now lies buried.
She has been ruthless and unforgiving in other ways too. Over the past two years, she removed 17 cabinet ministers. She brooks no opposition and her word on any subject is law. She is her own master. Her own advisor. She has survived three years without any major scandal or corruption case. She has proven a shrewd populist as well. The man in the street gets all that he needs in the name of Amma’s welfare schemes. If there is any discontent, it is offset by her largesse—20 kg of rice free for each below-poverty-line family, mixie-grinders and fans, never mind if there is no power, and bicycles for school kids. There are Amma canteens that sell idlis at one rupee apiece and curd rice at Rs 3 a plate. She knows the Tamil psyche, the belief in that old adage: ‘Be grateful as long as you live to the person who fed you.’ And in Tamil Nadu, it has been Amma, the universal mother.
In an extraordinary life, she has had many defining moments, but perhaps the most politically significant was her massive victory in the 2011 elections, proving all poll predictions wrong. It was a victory that relieved her of the burden of her fear of the future, of the need to challenge the might of Karunanidhi. Her entire second term had been consumed by the politics of vendetta. Now there was no need. The DMK was already a finished story.
She has always managed to live in the present, preferring to cross every bridge as it comes, with no time to look back. It has been a life of turmoil. She once described it thus during an election campaign: “I stand before you, having come [to this point] swimming in the river of fire.” It was a journey that hardened the once innocent and lonely child. It turned her cynical and arrogant. Cynicism and arrogance became her masks. Every fall was a challenge, every victory intoxicating.
Ah, she had almost forgotten about the sword hanging above her head. Or perhaps she thought she would be forgiven her lapses because of her popularity among the Tamil masses and her political power. During her first tenure, her rule became a byword for corruption at all levels, and she was naïve enough to flaunt her wealth. It shocked the people of Tamil Nadu, and she was duly punished by her constituency, which handed her a crushing defeat. Though she was imprisoned by the Karunanidhi government, she was acquitted in almost all the cases filed against her. It won her sympathy. She hoped that she would be acquitted in the disproportionate wealth case as well. Her party men had thronged the streets outside the court in Bangalore, waiting to burst crackers to celebrate yet another victory.
When Amma emerged briefly to have a word with her trusted aide and now Chief Minister, O Panneerselvam, she showed little of the emotion that had appeared on her face in 1996 on the day she was taken to prison from her Poes Garden house. Then, she had looked at those who stood before her gates and said, “Naalai namathe!” ‘Tomorrow is ours.’ And her followers knew she would be back to lead them again. This time, Amma had no word of solace for them. “You cannot write her off,” many had said then, and some still say it, though far less convincingly.
Hers has been an extraordinary life. With her gone, Tamil Nadu politics will lose its colour and verve.
Forty-seven percent of the time, the average mind is wandering. It wanders about a third of the time while a person is reading, talking with other people, or taking care of children. It wanders 10 percent of the time, even, during sex. And that wandering, according to psychologist Matthew Killingsworth, is not good for well-being. A mind belongs in one place. During his training at Harvard, Killingsworth compiled those numbers and built a scientific case for every cliché about living in the moment. In a 2010 Science paper co-authored with psychology professor Daniel Gilbert, the two wrote that "a wandering mind is an unhappy mind."
For Killingsworth, happiness is in the content of moment-to-moment experiences. Nothing material is intrinsically valuable, except in whatever promise of happiness it carries. Satisfaction in owning a thing does not have to come during the moment it's acquired, of course. It can come as anticipation or nostalgic longing. Overall, though, the achievement of the human brain to contemplate events past and future at great, tedious length has, these psychologists believe, come at the expense of happiness. Minds tend to wander to dark, not whimsical, places. Unless that mind has something exciting to anticipate or sweet to remember.
Over the past decade, an abundance of psychology research has shown that experiences bring people more happiness than do possessions. The idea that experiential purchases are more satisfying than material purchases has long been the domain of Cornell psychology professor Thomas Gilovich. Since 2003, he has been trying to figure out exactly how and why experiential purchases are so much better than material purchases. In the journal Psychological Sciencelast month, Gilovich and Killingsworth, along with Cornell doctoral candidateAmit Kumar, expanded on the current understanding that spending money on experiences "provide[s] more enduring happiness." They looked specifically at anticipation as a driver of that happiness; whether the benefit of spending money on an experience accrues before the purchase has been made, in addition to after. And, yes, it does.
Essentially, when you can't live in a moment, they say, it's best to live in anticipation of an experience. Experiential purchases like trips, concerts, movies, et cetera, tend to trump material purchases because the utility of buying anything really starts accruing before you buy it.
Mean self-reported ratings (Kumar et al, Psychological Science/The Atlantic)
Waiting for an experience apparently elicits more happiness and excitement than waiting for a material good (and more "pleasantness" too—an eerie metric). By contrast, waiting for a possession is more likely fraught with impatience than anticipation."You can think about waiting for a delicious meal at a nice restaurant or looking forward to a vacation," Kumar told me, "and how different that feels from waiting for, say, your pre-ordered iPhone to arrive. Or when the two-day shipping on Amazon Prime doesn’t seem fast enough."
Gilovich's prior work has shown that experiences tend to make people happier because they are less likely to measure the value of their experiences by comparing them to those of others. For example, Gilbert and company note in their new paper, many people are unsure if they would rather have a high salary that is lower than that of their peers, or a lower salary that is higher than that of their peers. With an experiential good like vacation, that dilemma doesn't hold. Would you rather have two weeks of vacation when your peers only get one? Or four weeks when your peers get eight? People choose four weeks with little hesitation.
Experiential purchases are also more associated with identity, connection, and social behavior. Looking back on purchases made, experiences make people happier than do possessions. It's kind of counter to the logic that if you pay for an experience, like a vacation, it will be over and gone; but if you buy a tangible thing, a couch, at least you'll have it for a long time. Actually most of us have a pretty intense capacity for tolerance, or hedonic adaptation, where we stop appreciating things to which we're constantly exposed. iPhones, clothes, couches, et cetera, just become background. They deteriorate or become obsolete. It's the fleetingness of experiential purchases that endears us to them. Either they're not around long enough to become imperfect, or they are imperfect, but our memories and stories of them get sweet with time. Even a bad experience becomes a good story.
When it rains through a beach vacation, as Kumar put it, "People will say, well, you know, we stayed in and we played board games and it was a great family bonding experience or something." Even if it was negative in the moment, it becomes positive after the fact. That's a lot harder to do with material purchases because they're right there in front of you. "When my Macbook has the colorful pinwheel show up," he said, "I can't say, well, at least my computer is malfunctioning!"
"At least my computer and I get to spend more time together because it's working so slowly," I offered.
"Yes, exactly."
"Maybe we should destroy our material possessions at their peak, so they will live on in an idealized state in our memories?"
"I don't know if I'd go that far," he said. "The possibility of making material purchases more experiential is sort of interesting."
That means making purchasing an experience, which is terrible marketing-speak, but in practical terms might mean buying something on a special occasion or on vacation or while wearing a truly unique hat. Or tying that purchase to subsequent social interaction. Buy this and you can talk about buying it, and people will talk about you because you have it.
"Turns out people don't like hearing about other people's possessions very much," Kumar said, "but they do like hearing about that time you saw Vampire Weekend."
I can't imagine ever wanting to hear about someone seeing Vampire Weekend, but I get the point. Reasonable people are just more likely to talk about their experiential purchases than their material purchases. It's a nidus for social connection. ("What did you do this weekend?" "Well! I'm so glad you asked ... ")
The most interesting part of the new research, to Kumar, was the part that "implies that there might be notable real-world consequences to this study." It involved analysis of news stories about people waiting in long lines to make a consumer transaction. Those waiting for experiences were in better moods than those waiting for material goods. "You read these stories about people rioting, pepper-spraying, treating each other badly when they have to wait," he said. It turns out, those sorts of stories are much more likely to occur when people are waiting to acquire a possession than an experience. When people are waiting to get concert tickets or in line at a new food truck, their moods tend to be much more positive.
"There are actually instances of positivity when people are waiting for experiences," Kumar said, like talking to other people in the concert line about what songs Vampire Weekend might play. So there is opportunity to connect with other people. "We know that social interaction is one of the most important determinants of human happiness, so if people are talking with each other, being nice to one another in the line, it's going to be a lot more pleasant experience than if they're being mean to each other which is what's (more) likely to happen when people are waiting for material goods."
Research has also found that people tend to be more generous to others when they've just thought about an experiential purchase as opposed to a material purchase. They're also more likely to pursue social activities. So, buying those plane tickets is good for society. (Of course, maximal good to society and personal happiness comes from pursuing not happiness but meaning. All of this behavioral economics-happiness research probably assumes you've already given away 99 percent of your income to things bigger than yourself, and there's just a very modest amount left to maximally utilize.)
What is it about the nature of imagining experiential purchases that's different from thinking about future material purchases? The most interesting hypothesis is that you can imagine all sort of possibilities for what an experience is going to be. "That's what's fun," Kumar said. "It could turn out a whole host of ways." With a material possession, you kind of know what you're going to get. Instead of whetting your appetite by imagining various outcomes, Kumar put it, people sort of think, Just give it to me now.
It could turn out that to get the maximum utility out of an experiential purchase, it's really best to plan far in advance. Savoring future consumption for days, weeks, years only makes the experience more valuable. It definitely trumps impulse buying, where that anticipation is completely squandered. (Never impulse-buy anything ever.)
That sort of benefit would likely be a lot stronger in an optimistic person as opposed to a pessimistic person. Some people hate surprises. Some people don't anticipate experiences because they dwell on what could—no, will—go wrong. But we needn't dwell in their heads. Everyone can decide on the right mix of material and experiential consumption to maximize their well-being. The broader implications, according to Gilovich in a press statement, are that "well-being can be advanced by providing infrastructure that affords experiences, such as parks, trails, and beaches, as much as it does material consumption." Or at least the promise of that infrastructure, so we can all look forward to using it. And when our minds wander, that's where they'll go.
The festival season started with Navratri, followed by Dussehra. Few days later, there will be Diwali—one of the brightest festivals in India. Many legends are associated with this festival. It marks the victory of Rama over Ravana; and symbolically good over evil.
This festival of lights also gets people to spend crores of rupees on people they may see once a year, or on things that they don’t really need. It is also a period of irrationality. If one is looking for an example of behavioural economics, look no further than the ongoing festival season.
Diwali itself may be around four days long, but people’s irrationality starts at least a month before. The rituals of consumerism associated with Diwali and other festivals during the period influence us to do things that make no rational economic sense.
We buy more food than we can possibly consume. It’s not surprising to see many of us go berserk at grocery stores. We delight in showcasing our generosity by laying the table with various types of sweets, dry fruits and other food items to avoid feeling guilty about not doing enough for Diwali.
We consume more harmful food than usual, knowing fully well that they are a potential health hazard. And we justify the indulgence in the name of Diwali. We buy new clothes, jewellery and household items, even if we do not need them. The frequency of shopping increases, undeterred by the hardships associated with heavy traffic and crowd and long queues at shops. During this period, we throw all caution to the wind and forget about the environment, pollution and climate change. We become irresponsible and spend money on firecrackers, even as hungry eyes witness money being metaphorically burnt through a creative display of firecrackers. Where does our compassion go?
Closer home, we worry about the stigma of giving cash or gift vouchers instead of a gift, even though the voucher may be worth more. In this way, we help retailers extract disproportionate value, which should ideally go to the recipient. The wasteful tendencies extend even to investors, who flock to their brokers on the mahurat trading day and buy stocks even if they are expensive and do not merit investments. Thanks to mahurat trading, brokers happily earn even at the cost of making a wrong investment.
Businessmen worship their accounting books on particular days during the festival season. But they merely pander to custom, and have no firm resolve to follow ethical practices in day-to-day business dealings. In fact, the festival season is the perfect opportunity to give bribes in the form of expensive gifts and jewellery. The recipients, too, happily avoid feeling guilty about accepting such gifts, in the name of Diwali. Even the profession of begging becomes lucrative. Asking for alms in the name of Diwali, they rake in a greater collection as donors also become liberal. Setting the scene Marketing has a lot to do with how we behave during Diwali. Special Diwali deals create the anchoring and the scarcity effect.
Consumers, being in a festive mood, are more likely to make lax purchase decisions rather than calculated ones. Special advertisements like “gift your dad a TV” use the reciprocity bias to encourage buying in the hope of receiving. The popular carrot, “exchange old for new”, exploits the loss aversion bias, especially when buying expensive gifts. Social norms, too, play a huge role in the mad rush of spending—“everyone is doing it, so let’s follow the herd”. Envy and comparison also add fuel to the fire of irrational spending.
We are strongly influenced by how others act and the values and behaviour displayed by our peers. Surprisingly, no asset management company has launched a mutual fund scheme capitalizing on the irrationality of investors during the festival period. If such a scheme were to originate, I guess it would be called “Diwali consumer goods scheme”. And soon the market would be flooded with Diwali-themed schemes. But the great thing about the festival period is a tacit agreement across the country to make the season all about spending time with loved ones, exchanging gifts as a means to display our affection.
Rationality makes people boring. It wouldn’t do to have every person using their minds to take decisions. It is a welcome change to sometimes use the heart and not the mind, even if the resultant actions are not in our best financial interest. Who cares? We are human beings, and we possess a mind as well as a heart. I am going to be irrational, and I am going to enjoy it!
6am and your hand can't make it to the alarm clock before the voices in your head start telling you that it's too early, too dark, and too cold to get out of a bed.
Aching muscles lie still in rebellion, pretending not to hear your brain commanding them to move.
A legion of voices are shouting their unanimous permission for you to hit the snooze button and go back to dreamland, but you didn't ask their opinion.
The voice you've chosen to listen to is one of defiance.
A voice that's says there was a reason you set that alarm in the first place. So sit up, put your feet on the floor, and don't look back because we've got work to do.
Welcome to The Grind.
For what is each day but a series of conflicts between the right way and the easy way, 10,000 streams fan out like a river delta before you, Each one promising the path of least resistance.
Thing is, you're headed upstream. And when you make that choice, when you decide to turn your back on what's comfortable and what's safe and what some would call "common sense", well that's day 1. From there it only gets tougher.
So just make sure this is something you want. Because the easy way out will always be there, ready to wash you away, all you have to do is pick up your feet.
But you aren't going to are you?
With each step comes the decision to take another.
You're on your way now.
But this is no time to dwell on how far you've come. You're in a fight against an opponent you can't see.
Oh but you can feel him on your heels can't you?
Feel him breathing down your neck.
You know what that is? That's you...Your fears, your doubts and insecurities all lined up like a firing squad ready to shoot you out of the sky.
But don't lose heart
While they aren't easily defeated, they are far from invincible.
Remember this is The Grind.
The Battle Royale between you and your mind, your body and the devil on your shoulder who's telling you that this is just a game, this is just a waste of time, your opponents are stronger than you.
Drown out the voice of uncertainty with the sound of your own heartbeat.
Burn away your self doubt with the fire that's beneath you.
Remember what you're fighting for.
And never forget that momentum is a cruel mistress, She can turn on a dime with the smallest mistake.
She is ever searching for that weak place in your armor, that one tiny thing you forgot to prepare for.
So as long as the devil is hiding the details, the question remains,"is that all you got?", "are you sure?"
And when the answer is "yes". That you've done all you can to prepare yourself for battle THEN it's time to go forth and boldly face your enemy, the enemy within.
Only now you must take that fight into the open, into hostile territory.
You're a lion in a field of lions…
All hunting the same elusive prey with a desperate starvation that says VICTORY is the only thing that can keep you alive.
So believe that voice that says " you CAN run a little faster " and that " you CAN throw a little harder " and that " you CAN dive a little deeper" and that, for you, the laws of physics are merely a suggestion.
Luck is the last dying wish of those who wanna believe that winning can happen by accident, sweat on the other hand is for those who know it's a choice, so decide now because destiny waits for no man. And when your time comes and a thousand different voices are trying to tell you you're not ready for it, listen instead for that lone voice in decent the one that says you are ready, you are prepared, it's all up to you now.
1. “Rule No. 1: Never lose money. Rule No.2: Never forget rule No. 1.”
2. “Shares are not mere pieces of paper. They represent part ownership of a business. So, when contemplating an investment, think like a prospective owner.”
3. “An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.”
4. “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”
5. “Buy companies with strong histories of profitability and with a dominant business franchise.”
6. “The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.”
7. “The investor of today does not profit from yesterday’s growth.”
8. “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market”
9. “Focus on return on equity, not earnings per share.”
10. “Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.”
11. “The ability to say “no” is a tremendous advantage for an investor.”
12. “Wide diversification is only required when investors do not understand what they are doing.”
13. “You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.”
14. “Wild swings in share prices have more to do with the “lemming- like” behaviour of institutional investors than with the aggregate returns of the company they own.”
15. “When Berkshire buys common stock, we approach the transaction as if we were buying into a private business.”
16. “Why not invest your assets in companies you really like? As Mae West said, “Too much of a good thing can be wonderful”
17. “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
18. “Does management resist the institutional imperative?”
19. “We do not view the company itself as the ultimate owner of our business assets but instead view the company as a conduit through which our shareholders own assets.”
20. “Growth and value investing are joined at the hip.”
21. “Wall Street is the only pace that people ride to in a Rolls Royce to get advice from those who take the subway.”
22. “What it is, it’s a gathering of owners and these people feel like owners, we treat them like owners and we try to have them have a good time while their here. But these are people who are real shareholder owners, as opposed to somebody who owns a ticker symbol and is thinking about next quarters earnings or something of the sort. So it’s a different breed of shareholder”
23. “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”
24. “Do not take yearly results too seriously. Instead, focus on four or five-year averages.”
25. “Calculate “owner earnings” to get a true reflection of value.”
26. “The advice “you never go broke taking a profit” is foolish.”
27. “Lethargy, bordering on sloth should remain the cornerstone of an investment style.”
28. “Be fearful when others are greedy and greedy only when others are fearful.”
29. “As far as you are concerned, the stock market does not exist. Ignore it.”
30. “Look for companies with high profit margins.”
31. “Remember that the stock market is manic-depressive.”
32. “Risk can be greatly reduced by concentrating on only a few holdings.”
33. “Risk comes from not knowing what you’re doing.”
34. “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.”
35. “Never invest in a business you cannot understand.”
36. “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
37. “Our favorite holding period is forever.”
38. “Price is what you pay. Value is what you get.”
39. “Many stock options in the corporate world have worked in exactly that fashion: they have gained in value simply because management retained earnings, not because it did well with the capital in its hands.”
40. “An investor should act as though he had a lifetime decision card with just twenty punches on it.”
41. “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”
42. “By definition if you’ve got a million and a half shares roughly, you know you’ve only got so many seats, and you want people in those seats that are as in sync with you, and your objectives, and your time horizons, and all of that as you can. I mean that’s how you have happy church, a happy home, a happy school or what ever it may be, is to have people there that are more or less are on the same wave length.”
43. “Turn-arounds” seldom turn.”
44. “Always invest for the long term.”
45. “Look at market fluctuations as your friend rather than your enemy. Profit from folly rather than participate in it.”
46. “Accounting consequences do not influence our operating or capital-allocation decisions. When acquisition costs are similar, we much prefer to purchase $2 of earnings that is not reportable by us under standard accounting principles than to purchase $1 of earnings that is reportable.”
47. “An investor needs to do very few things right as long as he or she avoids big mistakes.”
48. “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”
49. “If past history was all there was to the game, the richest people would be librarians.”
50. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
51. “If, when making a stock investment, you’re not considering holding it at least ten years, don’t waste more than ten minutes considering it.”
1. Believe in history: “history repeats and repeats, and forget it at your peril. All bubbles break, all investment frenzies pass away.”
2. Neither a lender nor a borrower be: “Unleveraged portfolios cannot be stopped out, leveraged portfolios can. Leverage reduces the investor’s critical asset: patience.”
3. Don’t put all your treasure in one boat: “This is about as obvious as any investment advice could be … Several different investments, the more the merrier, will give your portfolio resilience, the ability to withstand shocks.”
4. Be patient and focus on the long term: Wait for the good cards. If you’ve waited and waited some more until finally a very cheap market appears, this will be your margin of safety.”
5. Recognize your advantages over the professionals: “The individual is far better-positioned to wait patiently for the right pitch while paying no regard to what others are doing, which is almost impossible for professionals.”
6. Try to contain natural optimism: “optimism comes with a downside, especially for investors: optimists don’t like to hear bad news.”
7. But on rare occasions, try hard to be brave: “You can make bigger bets than professionals can when extreme opportunities present themselves because, for them, the biggest risk that comes from temporary setbacks – extreme loss of clients and business – does not exist for you.”
8. Resist the crowd, cherish numbers only: “this is the hardest advice to take: the enthusiasm of a crowd is hard to resist. The best way to resist is to do your own simple measurements of value, or find a reliable source (and check their calculations from time to time) … and try to ignore everything else.”
9. In the end it’s quite simple, really: “GMO predicts asset class returns in a simple and apparently robust way: we assume profit margins and price earnings ratios will move back to long-term average in 7 years from whatever level they are today. We have done this since 1994 and have completed 40 quarterly forecasts … Well, we have won all 40.”
10. This above all, to thine own self be true: “To be at all effective investing as an individual, it is utterly imperative that you know your limitations as well as your strengths and weaknesses … you must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely must not manage your own money.”
"In the short run, it's more fun to be a consumer. It sure seems like consumers have power. The customer is always right, of course. The consumer can walk away and shop somewhere else.
In the long run, though, the smart producer wins, because the consumer comes to forget how to produce. As producers consolidate (and they often do) they are the ones who ultimately set the agenda.
Producers do best when they serve the market, but they also have the power to lead the market.
The more you produce and the more needs you meet, the more freedom you earn." - Seth Godin
Love this perspective by Seth. It seems relevant to the case of Apple as a producer. Isnt it?
If you could only pick only one of the following, which would you choose?
1. Would you like more people to know about you, your product or service?
OR
2. Would you like your existing customers to be blown away by you, your product or service?
Awareness doesn’t always scale. But creating difference for your customers—enabling and mattering to people can’t help but lead to growth in the long run.
What are you committing your resources and energy to?
Compassion and Contrition "We're sorry that your flight was cancelled. This must have truly messed up your day, sir."
That's a statement of compassion.
"Cancelling a flight that a valued customer trusted us to fly is not the way we like to do business. We messed up, it was an error in judgment for us to underinvest in pilot allocation. Even worse, we didn't do everything we could to get you on a flight that would have helped your schedule. We'll do better next time."
That's what contrition sounds like. We were wrong and we learned from it.
The disappointing thing is that most people and organizations that take the time to apologize intentionally express neither compassion nor contrition.
If you can't do this, hardly worth bothering.
-Seth Godin
But it is worth bothering, because you're a human. And because customers who feel listened to help you improve (and come back to give you another chance.)
Cant agree more with Seth Godin on this one. A lot of times brands are compassionate but what about contrition?
Some people want safety and respect. They want to know what the work rules are, they want a guarantee that the effort required is both predictable and rewarded. They seek an environment where they won't feel pushed around, surprised or taken advantage of.
Other people want challenge and autonomy. They want the opportunity to grow and to delight or inspire the people around them. They seek both organizational and personal challenges, and they like to solve interesting problems.
Without a doubt, there's an overlap here, but if you find that your approach to the people around you isn't resonating, it might because you're giving your people precisely what they don't want.
Industrial and automotive battery maker Amara RajaBatteries is seeking shareholder approval for a Rs 40.3 crore related-party transaction, one which governance experts fear unduly favours an entity owned by its promoters.
Amara Raja is seeking approval through a postal ballot, that ends on Friday, for entering into a lease agreement withAmara Raja Infra Pvt Ltd (ARIPL) to “take on lease land measuring 62 acres for a period of 99 years for total consideration of Rs 40.30 crore with effect from October 1”. The land is in Andhra Pradesh’s Rayalaseema region. The new lease is in the vicinity of Amara Raja’s existing premises, part of the proposed 482 acres of an industrial park being developed by ARIPL. The company has undertaken expansion for enhancing the capacity in both industrial and automotive batteries at Nunegundlapalle village, Bangarupalyam mandal, in Chittoor district.
CONTENTIOUS MOVE
Amara Raja’s promoter entity, ARIPL, promoting an industrial park in Chittoor, Andhra Pradesh Amara Raja wants to lease out 62 acres on a 99-year lease for Rs 40.3 cr Wants to pay entire amount upfront Has already leased 112 acres in two tranches SES says company paying 33 per cent more than price paid only a month earlier Also, finds other contract terms are loaded against the company
These facilities have already been put up on 100 acres of land taken on a 99-year leases from ARIPL. The listed firm’s promoters, Ramachandra Galla and Jayadev Galla, are directors of ARIPL and with their relatives own all the paid-up capital.
In addition to these 100 acres, the company took another 12 acres on a long-term lease in August. The third lease, now up for approval, will take the total lease holding of Amara Raja to 174 acres or a little more than a third (36 per cent) of the total area of the industrial park. According to the terms of the latest transaction, lease consideration for the land comes to Rs 65 lakh an acre. This is 33 per cent higher than the price paid for the 12-acre parcel leased out earlier. In August, the company had sought approval for the lease deal with ARIPL at Rs 47.5 lakh an acre.
Apart from the rate, another key departure from the August deal is that in the latest proposal, the entire consideration of Rs 40.3 crore is proposed to be paid upfront to the promoter-owned private entity. In August, Amara Raja agreed to pay Rs 5.7 crore, including the cost for development of infrastructure and common facilities by ARIPL. “The cost of the land is Rs 2.10 crore payable upfront and the balance Rs 3.6 crore is towards developmental/user fee payable by the company to ARIPL in a phased manner, depending on completion of infrastructure/developmental works,” according to the notice issued then at the annual general meeting.
An email to the company from Business Standard seeking comments, sent on Tuesday to spokespersons and a subsequent reminder on Thursday, did not elicit any response.
‘Turn it down’ Proxy advisory entity Stakeholders Empowerment Services (SES ) has recommended shareholders vote against the resolution. In a detailed report, it has said: “SES finds that within a month, the rate of land has gone up from Rs 47.5 lakh/acre to Rs 65 lakh/acre, an increase of more than 33 per cent. Further payment terms have also undergone changes at the detriment of the company.”
Also noting the listed company had already taken up considerable space in the industrial park, SES questioned whether it was a case where the promoters were not finding buyers and were “making the company take the park area making upfront payments. The entire development money is also being paid up front”.
SES says it finds the terms of contract are loaded against the company and it appears the promoters are using their dominant position to push the contract through. The Amara Raja brand, says SES, is owned by the company but the promoters are using it for their own benefit.
Contrary to popular belief, providing "more information" to a customer tends to slow down the buying process.
As I pointed out in the post "10 Things Every Customer Wants," customers can be incredibly demanding. However, there is one thing that customers definitely don't want: more information.
For the past 40 years, every sales trainer and guru in the world has been teaching some variation on "solution selling."
As you're probably already aware, solution selling consists of solving a customer's problem rather than selling the customer a product. You ask questions to find out what's really needed and then propose a solution to satisfy those needs.
The opposite of solution selling is "spray-and-pray" selling, which consists of dumping information on the customer and expecting the customer to figure out what's useful or important.
Given that solution selling has been around so long, you'd think that spray-and-pray selling would be a thing of the past. You'd think wrong, though. Spray-and-pray is alive and well inside many companies.
For example, I recently called an online conferencing vendor and asked a simple question: "How can I give a webinar where attendees pay to attend?"
What I wanted to hear was: "Here's how simple it is (demo), and here's how much it costs (price quote)." Instead, I was asked to provide my phone number so a salesperson could call me back. Then, when he did call me later that day, he:
Raised some issues that hadn't occurred to me.
Explained some capabilities that I didn't care about.
Insisted upon sending me a written quote.
In the written quote, pitched a trial usage.
Under the written quote, pointed me at a page with 12 training videos on it.
Asked for another telephone meeting.
Sent a reminder email about the telephone meeting he'd proposed.
I responded as follows:
Just a quick sales pointer... Like most customers, I usually feel overwhelmed with too much information. Directing me to a page with a dozen videos has the opposite effect that you want. It makes me think that the application is complex and will take a long time to learn and use.
If possible I need you to focus on what *I* need specifically, not everything I could ever possibly need. I want to give a webinar and charge for it, with the absolute minimum of hassle.
I have enough on my hands thinking about the content; I don't want to think about the mechanics, except the barest minimum. Can you help me visualize how easy this is going to be? Because right now we're headed in the opposite direction.
That was two days ago and I haven't heard back from the guy. Maybe he was offended. Who knows? Was I asking too much? I think not.
If the salesman had proposed a solution to my problem that was simple and straightforward, the next sentence out of my mouth would have been: "How soon can we get started?" Instead, I'm checking out other vendors. (Suggestions welcome!)
I'd guess that from a quarter to a half of all B2B sales engagements are delayed or prevented by vendor-inflicted information overload. What's ironic is that there are two well-known sales rules that, when followed, eliminate spray-and-pray selling:
Never answer a question that the customer hasn't asked.
Never provide information that the customer hasn't requested.
In other words--and I think I speak for most customers here--don't make things more complicated. Just help me solve my problem.
From the book: The Little Book that builds wealth by Pat Dorsey
Chapter 1: Economic Moats
Buying a share of stock means that you own a tiny—okay, really tiny—piece of the business.
The value of a business is equal to all the cash it will generate in the future.
A business that can profitably generate cash for a long time is worth more today than a business that may be profitable only for a short time.
Return on capital is the best way to judge a company’s profitability. It measures how good a company is at taking investors’ money and gen- erating a return on it.
Economic moats can protect companies from competition, helping them earn more money for a long time, and therefore making them more valuable to an investor.
Chapter 2: Mistaken Moats
Moats are structural characteristics inherent to a business, and the cold hard truth is that some businesses are simply better than others.
Great products, great size, great execution, and great management do not create long-term com- petitive advantages. They’re nice to have, but they’re not enough.
The four sources of structural competitive advan- tage are intangible assets, customer switching costs, the network effect, and cost advantages. If you can find a company with solid returns on capital and one of these characteristics, you’ve likely found a company with a moat.
Chapter 3: Intangible Assets
Popular brands aren’t always profitable brands. If a brand doesn’t entice consumers to pay more, it may not create a competitive advantage.
Patents are wonderful to have, but patent lawyers are not poor. Legal challenges are the biggest risk to a patent moat.
Regulations can limit competition—isn’t it great when the government does something nice for you? The best kind of regulatory moat is one created by a number of small-scale rules, rather than one big rule that could be changed.
Chapter 4: Switching Costs
Companies that make it tough for customers to use a competitors’ product or service create switching costs. If customers are less likely to switch, a company can charge more, which helps maintain high returns on capital.
Switching costs come in many flavors—tight integration with a customer’s business, monetary costs, and retraining costs, to name just a few.
Your bank makes a lot of money from switching costs.
Chapter 5: The Network Effect
A company benefits from the network effect when the value of its product or service increases with the number of users. Credit cards, online auctions, and some financial exchanges are good examples.
The network effect is an extremely powerful type of competitive advantage, and it is most often found in businesses based on sharing information or connecting users together. You don’t see it much in businesses that deal in physical goods.
Chapter 6: Cost Advantages
Cost advantages matter most in industries where price is a big part of the customer’s purchase decision. Thinking about whether a product or service has an easily available substitute will steer you to industries in which cost advantages can create moats.
Cheaper processes, better locations, and unique resources can all create cost advantages—but keep a close eye on process-based advantages. What one company can invent, another can copy.
Chapter 7: The Size Advantage
Being a big fish in a small pond is much better than being a bigger fish in a bigger pond. Focus on the fish-to-pond ratio, not the absolute size of the fish.
Delivering fish more cheaply than anyone else can be pretty profitable. So can delivering other stuff.
Scale economies have nothing to do with the skin on a fish, but they can create durable competitive advantages.
Chapter 8: Eroding Moats
Technological change can destroy competitive advantages, but this is a bigger worry for com- panies that are enabled by technology than it is for companies that sell technology, because the effects can be more unexpected.
If a company’s customer base becomes more con- centrated, or if a competitor has goals other than making money, the moat may be in danger.
Growth is not always good. It’s better for a com- pany to make lots of money doing what it is good at, and give the excess back to shareholders, than it is to throw the excess profits at a questionable line of business with no moat. Microsoft could get away with it, but most companies can’t.
Chapter 9: Finding Moats
It’s easier to create a competitive advantage in some industries than it is in others. Life is not fair.
Moats are absolute, not relative. The fourth-best company in a structurally attractive industry may very well have a wider moat than the best com- pany in a brutally competitive industry.
Chapter 10: The Big Boss
Bet on the horse, not the jockey. Management matters, but far less than moats.
Investing is all about odds, and a wide-moat company managed by an average CEO will give you better odds of long-run success than a no-moat company managed by a superstar.
Chapter 11: Where the Rubber Meets the Road
To see if a company has an economic moat, first check its historical track record of generating returns on capital. Strong returns indicate that the company may have a moat, while poor returns point to a lack of competitive advantage—unless the company’s business has changed substantially.
If historical returns on capital are strong, ask yourself how the company will maintain them. Apply the tools of competitive analysis from Chapters 3 to 7, and try to identify a moat. If you can’t identify a specific reason why returns on capital will stay strong, the company likely does not have a moat.
If you can identify a moat, think about how strong it is and how long it will last. Some moats last for decades, while others are less durable.
Chapter 12: What’s a Moat Worth?
A company’s value is equal to all the cash it will generate in the future. That’s it.
The four most important factors that affect the valuation of any company are how much cash it will generate (growth), the certainty attached to those estimated cash flows (risk), the amount of investment needed to run the business (return on capital), and the amount of time the company can keep competitors at bay (economic moat).
Buying stocks with low valuations helps insulate you from the market’s whims, because it ties your future investment returns more tightly to the financial performance of the company.
Chapter 13: Tools for Valuation
The price-to-sales ratio is most useful for com- panies that are temporarily unprofitable or are posting lower profit margins than they could. If a company with the potential for better margins has a very low price-to-sales ratio, you might have a cheap stock in your sights.
The price-to-book ratio is most useful for finan- cial services firms, because the book value of these companies more closely reflects the actual tangible value of their business. Be wary of extremely low price-to-book ratios, because they can indicate that the book value may be questionable.
Always be aware of which “E” is being used for a P/E ratio, because forecasts don’t always come true. The best “E” to use is your own: Look at how the company has performed in good times and bad, think about whether the future will be a lot better or worse than the past, and come up with your own estimate of how much the company could earn in an average year.
Ratios of price to cash flow can help you spot companies that spit out lots of cash relative to earnings. It is best for companies that get cash up front, but it can overstate profitability for compa- nies with lots of hard assets that depreciate and will need to be replaced someday.
Yield-based valuations are useful because you can compare the results directly with alternative investments, like bonds.
Chapter 14: When to sell
If you have made a mistake analyzing the company, and your original reason for buying is no longer valid, selling is likely to be your best option.
It would be great if solid companies never changed, but that’s rarely the case. If the fundamentals of a company change permanently—not temporarily—for the worse, you may want to sell.
The best investors are always looking for the best places for their money. Selling a modestly under- valued stock to fund the purchase of a supercheap stock is a smart strategy. So is selling an overvalued stock and parking the proceeds in cash if there aren’t any attractively priced stocks at the time.
Selling a stock when it becomes a huge part of your portfolio can make sense, depending on your risk tolerance.
Among investors and admirers of Berkshire Hathaway Inc., Charles T. Munger is famous as the laconic foil to the company’s chairman, the voluble Warren Buffett. At the annual shareholders’ meeting in Omaha each spring, Mr. Buffett speaks in long paragraphs; Mr. Munger speaks in zingers and, most often, simply says: “I have nothing to add.”
Berkshire Vice Chairman Charles Munger
Bloomberg News
But, without the need to play straight man to Mr. Buffett, Mr. Munger likes nothing better than to hold listeners rapt in attention. At the annual meeting in Los Angeles this Wednesday of Daily Journal Corp., the small publishing and software company that he chairs, the 90-year-old Mr. Munger spoke to investors for more than two hours over an open mike.
He rarely paused for breath and never took so much as a sip of water.
Then Mr. Munger went straight into presiding over the company’s board meeting, which lasted over three hours. After that, he still wasn’t talked out. Mr. Munger had an associate invite a waiting Wall Street Journal reporter into the boardroom, where he spoke for another hour or so.
Tall and trim with a handshake like a warm vise, Mr. Munger shows his age only in the slight quaver that has crept into his baritone voice. A reporter’s notes can only approximate the subtlety and complexity of Mr. Munger’s conversation, but here is an edited summary of what he had to say.
Warren talked me into leaving the law business, and that was a very significant influence on me. I was already thinking about becoming a full-time investor, and Warren told me I was far better suited to that. He was right. I would probably have done it myself, but he pushed me to it. I have to say, it isn’t an easy thing to work very hard for many years to build up a significant career, as I had done, and then to destroy that career on purpose. [Mr. Munger left the law firm he founded, Munger, Tolles & Olson LLP, in 1965 to serve as Mr. Buffett’s right-hand man at Berkshire and to run a private investment partnership.] That would have been a lot harder to do if not for Warren’s influence on me.
It wasn’t a mistake. [Laughter.] It worked out remarkably well for both of us and for a lot of other people as well [the investors in Berkshire].
On Benjamin Graham, the great investor who was Warren Buffett’s revered mentor:
I don’t love Ben Graham and his ideas the way Warren does. You have to understand, to Warren — who discovered him at such a young age and then went to work for him — Ben Graham’s insights changed his whole life, and he spent much of his early years worshiping the master at close range. But I have to say, Ben Graham had a lot to learn as an investor. His ideas of how to value companies were all shaped by how the Great Crash and the Depression almost destroyed him, and he was always a little afraid of what the market can do. It left him with an aftermath of fear for the rest of his life, and all his methods were designed to keep that at bay.
I think Ben Graham wasn’t nearly as good an investor as Warren Buffett is or even as good as I am. Buying those cheap, cigar-butt stocks [companies with limited potential growth selling at a fraction of what they would be worth in a takeover or liquidation] was a snare and a delusion, and it would never work with the kinds of sums of money we have. You can’t do it with billions of dollars or even many millions of dollars. But he was a very good writer and a very good teacher and a brilliant man, one of the only intellectuals – probably the only intellectual — in the investing business at the time.
On firms like Berkshire partner 3G Capital, which takes big companies and streamlines them:
I’m sensitive to the issue of cutting costs, which usually means a lot of people losing jobs. Rich people end up getting richer and a lot of people get fired. But ultimately, I think we don’t do the world a favor by employing more people than we need for companies to run efficiently. On the whole we advance civilization when companies run better.
On what he and Mr. Buffett call “the circle of your competence”:
Confucius said that real knowledge is knowing the extent of one’s ignorance. Aristotle and Socrates said the same thing. Is it a skill that can be taught or learned? It probably can, if you have enough of a stake riding on the outcome. Some people are extraordinarily good at knowing the limits of their knowledge, because they have to be. Think of somebody who’s been a professional tightrope walker for 20 years – and has survived. He couldn’t survive as a tightrope walker for 20 years unless he knows exactly what he knows and what he doesn’t know. He’s worked so hard at it, because he knows if he gets it wrong he won’t survive. The survivors know.
Knowing what you don’t know is more useful than being brilliant.
On how innovative Berkshire Hathaway has been:
There isn’t one novel thought in all of how Berkshire is run. It’s all about what [Mr. Munger’s friend] Peter [Kaufman] calls ‘exploiting unrecognized simplicities.’ We [Messrs. Buffett and Munger, their shareholders and the companies they have acquired] have selected one another. It’s a community of like-minded people, and that makes most decisions into no-brainers. Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperamental advantage that more than compensates for a lack of IQ points.
Nobody has a zero incidence of bad news coming to them too late, but that’s really low at Berkshire. Warren likes to say, ‘Just tell us the bad news, the good news can wait.’ So people trust us in that, and that helps prevent mistakes from escalating into disasters. When you’re not managing for quarterly earnings and you’re managing only for the long pull, you don’t give a damn what the next quarter’s earnings look like.
On how he sank tens of millions of dollars into bank stocks in March 2009:
We just put the money in. It didn’t take any novel thought. It was a once-in-40-year opportunity. You have to strike the right balance between competency or knowledge on the one hand and gumption on the other. Too much competency and no gumption is no good. And if you don’t know your circle of competence, then too much gumption will get you killed. But the more you know the limits to your knowledge, the more valuable gumption is. For most professional money managers, if you’ve got four children to put through college and you’re earning $400,000 or $1 million or whatever, the last thing in the world you would want to be worried about is having gumption. You care about survival, and the way you survive is just not doing anything that might make you stand out.
On accounting:
Accounting firms now [in the wake of regulatory requirements under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010] have had to hire so many people that they have had to go way down in the bucket to get all these new employees. The government is asking accountants to be policemen, but the number of people smart enough to be qualified for policing is too low. We shouldn’t be expecting accountants to do the policing. Firms should have the ethical gumption to police themselves: Every company ought to have a long list of things that are beneath it even though they are perfectly legal. Every time you increase the antagonism of the audit by making the auditors the policemen, you increase the tension between the accountants and the clients. More things end up getting hidden, costs go up, everyone ends up worse off.
On the decline of newspapers:
The role that newspapers played in this country has been absolutely remarkable. The Fourth Estate functioned for decades like another, almost better form of government in which many newspapers were run by people of the highest ethical standards and a genuine sense of the public interest. With newspapers dying, I worry about the future of the republic. We don’t know yet what’s going to replace them, but we do already know it’s going to be bad.
On the absurdity of much of the money-management industry:
Back in 2000, venture-capital funds raised $100 billion and put it into Internet startups — $100 billion! They would have been better off taking at least $50 billion of it, putting it into bushel baskets and lighting it on fire with an acetylene torch. That’s the kind of madness you get with fee-driven investment management. Everyone wants to be an investment manager, raise the maximum amount of money, trade like mad with one another, and then just scrape the fees off the top. I know one guy, he’s extremely smart and a very capable investor. I asked him, ‘What returns do you tell your institutional clients you will earn for them?’ He said, ‘20%.’ I couldn’t believe it, because he knows that’s impossible. But he said, ‘Charlie, if I gave them a lower number, they wouldn’t give me any money to invest!’ The investment-management business is insane.
On rapid trading of derivatives and stocks by institutions and individuals:
It’s like the slaughter of the innocents. It makes the people who run Las Vegas seem like good people
The Reserve Bank of India's (RBI's) decision to allow banks to tar entire business groups as "wilful" defaulters in case even one firm in the group defaults on loans is a game-changer for Indian capitalism. Apart from putting the fear of god in recalcitrant promoters, government, bankers and India Inc will be forced to rethink the way they chummed up in the past.
New laws, on bankruptcy and recovery of debts, will have to be enacted. Bankers will find that they can no longer hide behind their public sector façade to do deals on behalf of the powerful. Politicians who think they can swing loans to their pals will find it tougher to do so.
The central bank’s decision, seen in the context of the broader moves towards greater transparency in public action that results in significant - and often unwarranted - private benefits to the rich and powerful, will over the next few years lead to a cleaner, meaner and more robust capitalism where merit, not connections, will be rewarded by the markets.
RBI Governor Raghuram Rajan is thus about to end the free lunch offered to crony capitalists under the garb of socialist principles.
To be sure, the RBI’s move to extend the ambit of the term "wilful" default – possibly prompted by Vijay Mallya’s Kingfisher default – is draconian. The new norms say that guarantors of loans can also be declared wilful defaulters, and individuals on boards of companies declared defaulters will find their sins following them to other boards where there may be no defaults. These boards will thus have to send such directors packing to protect themselves. Group companies that offer guarantees that they do not honour will also be called defaulters.
However, as is always the case, draconian measures are necessitated whenever ordinary measures don't work and when other institutions - like bank boards, the executive, the legislature, and the courts - fail to do their jobs.
Under a proactive Governor, the RBI has had to step in to protect the banking system and depositors' money because there is no sensible bankruptcy law, because the courts give endless stays on debt recovery processes, because public sector bank boards are not asserting themselves enough and questioning loans to dubious parties, and because government is mucking around with bank autonomy and top level appointments.
The new wilful defaulter guidelines, which will apply only prospectively, are thus a useful antidote to the problem of crony promoters treating public money as their own. In essence, the RBI is striking at the root of crony capitalism.
The four pillars on which Indian capitalism has been built are the following:
#1: The business group. Unlike the west, where conglomerates are dying, India Inc has built itself around large business groups - Tatas, Birlas, Mafatlals, Ambanis, and so on. The concept of group provides banks with a false sense of security on the assumption - flawed, no doubt - that a large group is somehow more bankable than a single company.
The RBI has undercut this comfort factor by putting groups at the centre of the firing line on loan guarantees. In future, group companies will think thrice before guaranteeing the loans of fellow groupies, and independent directors will start acting "independent" for fear of attracting the defaulter tag which could dog them everywhere.
Indian conglomerate thinking will undergo a transformation as groups are forced to choose between genuinely profitable business plans and marginal or dubious ones. In the coming years we will see India Inc divesting businesses and sharpening focus to be on the right side of lenders.
#2: Very little skin in the game. India Inc has had a cavalier attitude towards loan repayment because it has very little of its own capital at stake in almost any business. Thanks to political connections and plain corruption, most Indian capitalists have built empires out of thin air with minimal equity contributions. They did this in several ways: one was by inflating capital costs so that their share of equity is actually funded through the excess loans given by banks for projects. This excess is then siphoned off (through contracts for plant and machinery) and comes back as their share of equity – or even used for personal purposes.
If a project succeeds, promoter wealth grows. They can then either take it out for personal use or float another company using primary capital from the successful company and then generating the balance by skimming money from overinvoicing imports or underinvoicing exports. Or other such ruses. If the project fails, they don't lose any of their own money. They are happy to let banks carry the can.
The RBI has now ensured that banks will not lend to multiple projects with little promoter contribution, and promoters themselves will find their ability to let a small amount of capital go a long way circumscribed.
#3: Private losses, public rescue. The fact that nationalised banks funded most of Indian private businesses in the past ensured that India Inc got away scot-free even when they failed to pay up and landed banks in a mess. In the sixties and seventies, entire industries in textiles and jute went sick and got taken over by public sector corporations which racked up losses paid for by taxpayers. Banks which funded the losses were also recapitalised by the government in order to keep up the good work. This system of endlessly bankrolling bad investments meant that the tab for bad (or malafide) business decisions was picked up by the taxpayer – and businessmen faced no social or economic consequences of business failure.
The RBI norms on defaulters will come to haunt promoters who left their old companies sick and think they can start new ones without guilt.
#4: Weak regulation. When the stock markets were opened up after 1991, thousands of promoters raised money from investors for industries that were the flavour of the season: plantation companies, leasing companies, etc. Many of these promoters just raised money and vanished – as the market regulator, Sebi, was too weak to keep track. Now the regulator is stronger, but determined promoters have found ways to cock a snook at the regulator. A case in point: Subrata Roy evaded Sebi for years, and even the Supreme Court humoured him for 18 months before sending him to prison in March 2014. Now he has to sell parts of his businesses to get out. Many Ponzi schemes – PACL and Saradha being only the latest – emerged in the interstices between two regulators and made hay.
The RBI norms will dent this kind of crookery too for the definition of defaulter has been extended to borrowers who use bank money for purposes they were not intended. Many fly-by-night operators used money siphoned off from regular enterprises to start dubious companies from where money can end up in promoters’ pockets. Now, companies will be wary about lending money to sister companies from which they ultimately plan to vanish.
The above four legs on which Indian capitalism was built is being dealt a body blow – both by recent court action (cancellation of 2G and coal allocations, etc) and the RBI’s own new rules of willful default.
Indian capitalists will henceforth have to stick to the straight-and-narrow. And yes, they will have to bring more of their own money to start a legitimate business. The free lunch is over.
