"Indian successor at Berkshire?" screamed the headlines of almost all Indian newspapers (at least English). Now what is the problem with us Indians and the Indian media that we need to find an Indian angle to every story and once we find it, expand the same and make it an issue for India. The annual letter is a watershed event where investors across the world eagerly wait to see what Warren Buffett has to comment. And this letter was no different. There was a hell lot of things to follow, learn and understand.
Instead of reporting all this in detail, even the financial dailies succumbed to the above headline. Much as this is like herd mentality, at least it would been okay of there was actually some reference to the fact in the letter. Warren Buffett has been praising Ajit Jain for quite some time now in all his letters. Insurance is the biggest operation at Berkshire and Ajit Jain is considered to be one of the smartest guys in Insurance. There was nothing new this time as well. There was absolutely no hint of anointing him as a successor (Believe me, I went through the letter thrice and that is three times more than most media people seem to have done) and it is highly unlikely that Warren Buffett would have deliberately hinted anything.
This shows that none of the journalists who reported the story knows anything about Warren Buffett or Berkshire and for sure, they haven' read the previous letters. Not necessarily expected from them but shouldn't we stop doing this India thingy in the media. Or is it just to attract eyeballs and advertisements.
Monday, March 2, 2009
Sunday, February 8, 2009
Quarterly Guidance in India - A relook?
I am not very sure when Quarterly reporting of earnings started in India. I think it was sometime around 1999 - 2000 (please correct me if am wrong - I am unable to prove it on google or SEBI website). It coincided with the IT boom in India and while IT boom is very well known, there was another boom as well - Equity Research (ER).
Seriously, till about 2000 or so (again am not fully convinced of the year; all I remember is that it was this time ET started carrying news on such stuff), ER was crude and only a few broking houses did it. Most importantly, the smart tribe (MBAs and CAs) were not too attracted to the sector. But the effects of liberalisation (1991-92), the IT boom post 1995 and Wall street firms going gung-ho on India changed all that. India always had a decent accounting system and time was ripe to create wall street type ER reports.
So it began, companies started issuing quarterly earnings and someone had to read them and put it into a report which could be then, presumably, be the basis to advice your client to trade on. And along with popularisation of many terms (even ones like EBITDA, IPO; seriously) came the mighty guidance. Companies began issuing guidance for the coming quarters and years.
In a bull market, guidance act like a shot of tequila on an already drunk person. And companies began to calibrate their guidance or earnings to meet their guidance. Now I am not telling that guidance is solely responsible for financial crimes or behaviour of companies. But they surely add fuel to the fire. Guidance becomes the only metric that ER analysts and fund managers focus on and companies try their best to meet them. Of course, if the "best efforts" in meeting the guidance was true and actual operational performance, then one could say that guidance really and truly served the purpose. But as everybody know, this is not the case.
A quarter has 90 days out of which one can report reasonably for about 70 to 75 days. And how is it possible in an uncertain business world that companies can keep up their promises up all the time. Companies also became smart on their type of guidance - Infosys for example, always (mostly) beats guidance. That is they give a low conservative number which is topped by the actuals (very similar to a 5th standard kid telling mom that he got 90 in history only to show 95 in his actual report card). The risk is that now Infosys always has to top it's guidance. If it meets them, then it is like not having met the guidance. Some companies always top the consensus guidance and some companies have such stable Q-o-Q growth that one can just gape at the sheer smoothness. Of course many companies have resisted from giving guidances. TCS is a famous example. I recall having read a few years ago in Business India that an ER analyst or a fund manager actually had the balls to tell Mr. Ramadorai that TCS should try and smoothen the earnings !
And one another aspect, the quality of ER analysts. After the 2001 bust, the ER boom slowed down. So when the 2003-2008 boom started, there were hardly any experienced analysts around. And this boom, unlike the 2001 boom, was broad based on all sectors in India and not just on IT. So, you needed analysts across sectors, across companies. This was a golden chance for people to become industry experts. And you had people which 6 month experience writing reports on companies. All you needed to be an industry expert was to read a few other ER reports on that indsutry!
Ideally speaking, either the ER analyst should have worked for some time in that particular industry to cover it or at least have a few solid years of talking to people in the industry and knowing companies in and out before writing reports about them. Many analysts were only 6 months into the job and that too covering multiple sectors. Wow, some experience that. Today the situation is slightly better because of a few years of ER experience, but only slightly. So, an inexperienced, gullible or plain lazy (or smart enough to be lazy) ER analyst concentrates on that single figure - guidance - to decide what he writes on reports and the CFOs and investor relations PR person gives him exactly that.
The current trend in US is, correctly, against guidance and so should it be in India. Even if is banned outright, a few companies will still covertly give them but that's for later; at least companies can officially stop giving guidance and take a longer term view of their business.
On a closing thought, let me make it very clear- our quarterly reporting needs to be much better, we need our companies to give not only the P&L but also balance sheets and other operational data. Funny, we didn't borrow this detailing level from the 10-Q quarterly US filings. But along with the reporting, there is no need of guidance to the exact decimal. A broad based business outlook is what companies should do on an annual basis and then see what the ER analysts do without their crutches.
Seriously, till about 2000 or so (again am not fully convinced of the year; all I remember is that it was this time ET started carrying news on such stuff), ER was crude and only a few broking houses did it. Most importantly, the smart tribe (MBAs and CAs) were not too attracted to the sector. But the effects of liberalisation (1991-92), the IT boom post 1995 and Wall street firms going gung-ho on India changed all that. India always had a decent accounting system and time was ripe to create wall street type ER reports.
So it began, companies started issuing quarterly earnings and someone had to read them and put it into a report which could be then, presumably, be the basis to advice your client to trade on. And along with popularisation of many terms (even ones like EBITDA, IPO; seriously) came the mighty guidance. Companies began issuing guidance for the coming quarters and years.
In a bull market, guidance act like a shot of tequila on an already drunk person. And companies began to calibrate their guidance or earnings to meet their guidance. Now I am not telling that guidance is solely responsible for financial crimes or behaviour of companies. But they surely add fuel to the fire. Guidance becomes the only metric that ER analysts and fund managers focus on and companies try their best to meet them. Of course, if the "best efforts" in meeting the guidance was true and actual operational performance, then one could say that guidance really and truly served the purpose. But as everybody know, this is not the case.
A quarter has 90 days out of which one can report reasonably for about 70 to 75 days. And how is it possible in an uncertain business world that companies can keep up their promises up all the time. Companies also became smart on their type of guidance - Infosys for example, always (mostly) beats guidance. That is they give a low conservative number which is topped by the actuals (very similar to a 5th standard kid telling mom that he got 90 in history only to show 95 in his actual report card). The risk is that now Infosys always has to top it's guidance. If it meets them, then it is like not having met the guidance. Some companies always top the consensus guidance and some companies have such stable Q-o-Q growth that one can just gape at the sheer smoothness. Of course many companies have resisted from giving guidances. TCS is a famous example. I recall having read a few years ago in Business India that an ER analyst or a fund manager actually had the balls to tell Mr. Ramadorai that TCS should try and smoothen the earnings !
And one another aspect, the quality of ER analysts. After the 2001 bust, the ER boom slowed down. So when the 2003-2008 boom started, there were hardly any experienced analysts around. And this boom, unlike the 2001 boom, was broad based on all sectors in India and not just on IT. So, you needed analysts across sectors, across companies. This was a golden chance for people to become industry experts. And you had people which 6 month experience writing reports on companies. All you needed to be an industry expert was to read a few other ER reports on that indsutry!
Ideally speaking, either the ER analyst should have worked for some time in that particular industry to cover it or at least have a few solid years of talking to people in the industry and knowing companies in and out before writing reports about them. Many analysts were only 6 months into the job and that too covering multiple sectors. Wow, some experience that. Today the situation is slightly better because of a few years of ER experience, but only slightly. So, an inexperienced, gullible or plain lazy (or smart enough to be lazy) ER analyst concentrates on that single figure - guidance - to decide what he writes on reports and the CFOs and investor relations PR person gives him exactly that.
The current trend in US is, correctly, against guidance and so should it be in India. Even if is banned outright, a few companies will still covertly give them but that's for later; at least companies can officially stop giving guidance and take a longer term view of their business.
On a closing thought, let me make it very clear- our quarterly reporting needs to be much better, we need our companies to give not only the P&L but also balance sheets and other operational data. Funny, we didn't borrow this detailing level from the 10-Q quarterly US filings. But along with the reporting, there is no need of guidance to the exact decimal. A broad based business outlook is what companies should do on an annual basis and then see what the ER analysts do without their crutches.
Outliers by Malcolm Gladwell
Well, Malcolm Gladwell, after his "Tipping point" and "Blink" has reached a certain stage from where one can't ignore his books. And so definitely one picks up "Outliers" to see what is new this time.
His subject is that of "successful people" and how a host of environmental factors have had a great role to play in the success and not individualism per se. In other words "right time and right place" are almost as crucial as talent in separating the successful from the not so successful.
Outliers starts with the Canadian hockey team and shows how the date of birth affects selection and consequent chances of being picked for the highest versions of the game. Then for sheer talent, he supports the "10,000 hour" rule which is quite popular these days in telling that 10,000 hours of practise of any skill makes you talented in it. What the book says is that because of the environmental factors (family, Geo-political conditions, Technological changes) successful people got to practise these 10,000 hours in their skill while the others where not so lucky.
To support this, he goes to on to explain the early lives of Bill Gates, Steve Jobs, Bill Joy and the Beatles were subject to this 10,000 hour rule. And he continues with the detailed analysis of the life of Joe Flom, a successful lawyer.
After this, the book takes a slight detour to example how conditions affected the life of immigrants in early US and how despite the early struggles, the period really set in a base for the fortune of the coming generations. From the US immigrants, the book proceeds to the rice fields of China to explain how rice cultivation helps Chinese in mathematics. Good stuff, especially the rice cultivation stuff. Towards the end is the explanation of the success of a popular "Jamaican" author !!
All in all, the book surely makes you think about how important are the external factors in shaping a person. Sure enough the book states that people had innate talent and skills; but it is the environment that enabled the talent to shine. The example of Chris Langan vs. Einstein tries to show that after a point IQ stops mattering and it is circumstances and choices that determine the outcome. Of course, many things in the books may sound controversial to people who believe in the self-made person theory. Nevertheless, the book is a good starting point even for those people to think in broader terms. As for the writing, of course the book is a breezy quick read and never gets boring.
To just bring in the connection to investing, doesn't this book explain what the great Warren Buffett has been talking about these days. He says he was lucky to be born to a good family, started reading early, practising his stuff, rejecting what he did not work for him, was taught investing by Benjamin Graham and so on. No one doubts his "internal wiring" for investing but after that wasn't it the environment that played a great role ? Warren himself thinks so and accepts that (so does Bill Gates in this book).
Of course questions remain? Why did all the people born in the same era as Bill Gates not succeed? What explains the sheer talent of so many people who did not have formal training in subjects (The great mathematician S. Ramanujan, for example). Anyways, Go ahead and pick this one. It is a good starting point of thinking about success from a a broader point of view.
Monday, January 12, 2009
Book Review: "The Ten commandments of Business Failure" by Donald Keough
I normally don't read much stuff on management and general leadership per se. I just happened to come across this title on Amazon while generally browsing. The fact that the foreword is by Warren Buffett and Donald Keough was the president of the Coca-Cola company made me go through some reviews and so I picked this book up.
To start with, this is actually a pretty slim volume of around 200 pages and the author who has had a long illustrious career with 'The Coca-Cola company' gives us 11, yes not 10, commandments of business failure. He then proceeds to take each in a separate chapter to explain what executives must do to fail in businesses. Needless to say, each of the 11 chapters is peppered with business examples based on Coke and other businesses.
The plus points of this book is that fact that its size and scope implies simplicity. Simplicity of a very pleasant kind where the reader can go through the book pretty quickly and have a good time reading the book. It's like your old uncle who has just retired from work explaining to you what good businesses are all about !
The average business school student or manager who has tracked world business events will, probably, have already heard about half of the anecdotes with the most famous examples being that of the New Coke fiasco (obviously), IBM's failure to figure out PCs, Xerox not capitalising on its R&D etc. But as a part of this book, they don't come across as jarring or repetitive. For the New Coke fiasco, for example, the author gives some good examples of customer feedback.
On the flip side, all the commandments come across as simple management platitudes which one has read across in almost every leadership article or book (of course, leadership books will all have the same reasons - there is no secret sauce).
To just sum up, this is a nice little breezy book on business and gives a wide range of business commandments to follow (actually). Plus the simplicity and the examples mean that while this is not a great book, it definitely is a good one.
My grouse with Warren Buffett
I have a serious issue with what Warren Buffett seems to teach people about investing and what people understand. You see Warren Buffett is everybody's famous investment idol. And people want to emulate him in his successful way of investing. So far so good.
Now the issue I am talking about is how simple he makes out investing to be. He has laid down his four characteristics of a good investment and people seem to think that's all there to his success.
I have read all the Berkshire letters, the earlier Buffett partnership letters and finished 'Snowball' in the first week of its release. I am not trying to show off my reading list. All I want to convey is that I am reasonably better informed than people who just look upto WB from the popular media or general books on him. Well all I can say is that he is a genius; a freak even; somebody like Newton or Einstein who comes once in a generation and one needs to keep that in mind.
So why do people think WB is an easy act to follow? Because of the way WB tells them; his letters are full of sensible humour and he conveniently guides the reader to omit certain sections which are slightly difficult to understand. Now compare this to say, Michael Phelps. Supposing if one were to ask him his secrets of success and he replied: " Oh, work hard, work out regularly, concentrate and practice a lot". Will anyone just take this for an answer. Our minds will probably tell us 'Working hard means more than 6 hours a day plus he started practicing long ago plus he has a unique physique suited for swimming' and other factors. Added to the fact is that, not everyone wants to be a champion swimmer.
But when it comes to investing, almost everyone wants to be a champion investor. My sincere suggestion to anybody who even remotely thinks he can be the next WB is to try and follow the same reasoning as above for Michael Phelps. WB has a unique set of brain wired for investing plus he started really young, reads and knows stuff like mad and he selects a few good business not only by their positive characteristics but also by rejecting a whole lot of bad businesses which also he knows in and out.
Of course, I don't mean to convey that listening to WB is useless. Far from it. Just listening to WB will, I am sure for many, improve our results (I recall a study done about six months back which said that if people bought stocks upto 45 days after WB announced, they still trounced the markets 2 to 1). We must do what he says, improve our results while at the same time not think that WB's long record will be easy to emulate. Doing so will only increase our own sense of despair and frustration.
We must keep in mind the following quote from WB's guru, Ben Graham: "To achieve satisfactory investment results is easier than most people realize ; to achieve superior results is harder than it looks" and use WB's guidance in ensuring our satisfactory results.
Now the issue I am talking about is how simple he makes out investing to be. He has laid down his four characteristics of a good investment and people seem to think that's all there to his success.
I have read all the Berkshire letters, the earlier Buffett partnership letters and finished 'Snowball' in the first week of its release. I am not trying to show off my reading list. All I want to convey is that I am reasonably better informed than people who just look upto WB from the popular media or general books on him. Well all I can say is that he is a genius; a freak even; somebody like Newton or Einstein who comes once in a generation and one needs to keep that in mind.
So why do people think WB is an easy act to follow? Because of the way WB tells them; his letters are full of sensible humour and he conveniently guides the reader to omit certain sections which are slightly difficult to understand. Now compare this to say, Michael Phelps. Supposing if one were to ask him his secrets of success and he replied: " Oh, work hard, work out regularly, concentrate and practice a lot". Will anyone just take this for an answer. Our minds will probably tell us 'Working hard means more than 6 hours a day plus he started practicing long ago plus he has a unique physique suited for swimming' and other factors. Added to the fact is that, not everyone wants to be a champion swimmer.
But when it comes to investing, almost everyone wants to be a champion investor. My sincere suggestion to anybody who even remotely thinks he can be the next WB is to try and follow the same reasoning as above for Michael Phelps. WB has a unique set of brain wired for investing plus he started really young, reads and knows stuff like mad and he selects a few good business not only by their positive characteristics but also by rejecting a whole lot of bad businesses which also he knows in and out.
Of course, I don't mean to convey that listening to WB is useless. Far from it. Just listening to WB will, I am sure for many, improve our results (I recall a study done about six months back which said that if people bought stocks upto 45 days after WB announced, they still trounced the markets 2 to 1). We must do what he says, improve our results while at the same time not think that WB's long record will be easy to emulate. Doing so will only increase our own sense of despair and frustration.
We must keep in mind the following quote from WB's guru, Ben Graham: "To achieve satisfactory investment results is easier than most people realize ; to achieve superior results is harder than it looks" and use WB's guidance in ensuring our satisfactory results.
Sunday, January 11, 2009
Book Review: Predictably Irrational by Dan Ariely
I'm hooked to books on Behavioural Economics and any book that comes out (at a reasonable price in India !!) is a buy for me even if reasonably good. Dan Ariely's "Predictably Irrational" was a similar decision. And a wise one, I should add. The book starts on a premise that not only people are irrational but also predictably irrational, that is they are irrational all the time. And by basing decision choices on that premise, people can improve their decisions in all walks of life. It is the "all walks of life" that makes this book enjoyable and pertinent to almost everybody.
The book covers a wide range of decisions such as why FREE is an important decision making tool , why people can do inexplicable things when they are in a feeling of passion, why relativity is everything etc. This is only a small example list. There are many more in the book. Even those who are aware of their Behavioural Economics stuff will find this book very interesting. Some of the results of experiments are counter-intuitive and they will surprise the reader.
The only area of the book where I found myself trying to skip a few lines is the description of the experimental set ups. After a few descriptions, one may try to skip but don't as reading this is important to understand the outcome.
In all, I can say that this is a must-read book for anybody interested in behavioural economics, decision sciences or just plain economics. This book is on the lines of Robert Cialdini's 'Influence' and 'Stumbling on happiness' by Daniel Gilbert (Both are must reads especially 'Influence') . Let me also add that all self-help book readers should compulsorily read this. This is one of the most logical self-help book out there (of course don't tell this to the author. He might be aghast at the reference of this book as self-help!)
Satyam saga continues...
Well, when I first scribbled a few lines in the original post, little did it strike me that the entire company could be a sham. And now, with all the details coming out, I hardly have anything to write about that has not already been written about. Couple of points I want to make, still:
- Describing it as India's Enron: The moment the news came out, I instantly remember thinking that all sorts of media will call it India's Enron. And I was correct, mostly. Even the venerable Economist magazine did not escape this. And while expected, this shows how people like to quickly compare situations even though the underlying situation at ground could be completely different. Maybe Satyam actually has an impressive set of operational ability and only the finances were fudged. If true, then it is very different from Enron, isn't it?
- Now that Satyam-Maytas link is out in the open, there have been hypothesis about the links. Earlier, it was "Satyam bailing out Maytas" then to "Actually Maytas was bailing out Satyam" and again back to "Maytas was feeding on Satyam, the merger was only a sham because murk is easier in Real Estate than software business" (Yeah, I believe that !!!). The thing is it is all out in the open and people can make their own judgements
- And finally, given the various conspiracy theories floating about Satyam and its corporate governance right from the beginning, some of them are really interesting. Just google them and you'll get the links. It goes as far to stating that the whole Sify-Rajesh Jain deal that sparked off crazy Internet valuations in India was a sham. Really now all I can say that anything could be right. Only Raju knows !!!
Let us wait and watch the response of the Indian biz community to this saga. Markets have responded in an interesting way. Check out the companies that rose and fell on the day Satyam news came out. Was corporate governance the dividing factor? (I refer to the Sensex/Nifty stocks only)
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