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The Scale of Life in Business and Value Investing – Bamboo Innovator Weekly Insight

“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | September 28, 2015
Bamboo Innovator Insight (Issue 102)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.
Dear Friends,

The Scale of Life in Business and Value Investing

“Basically, when you get to my age, you’ll really measure your success in life by how many of the people you want to have love you actually do love you. I know people who have a lot of money, and they get testimonial dinners and they get hospital wings named after them. But the truth is that nobody in the world loves them. If you get to my age in life and nobody thinks well of you, I don’t care how big your bank account is, your life is a disaster. That’s the ultimate test of how you have lived your life. The trouble with love is that you can’t buy it … The only way to get love is to be lovable … The more you give love away, the more you get.”

– Warren Buffett’s address to the Georgia Tech students on his greatest success and greatest failure

“Americans love Volkswagen, and now even more,” US transportation secretary Ray LaHood enthused when he opened Volkswagen’s plant in Tennessee in May 2011, hailing the company’s efficient “clean diesel” engines as the route to long-term energy security in the US.

The simple yet profound comment – “The trouble with love is that you can’t buy it” – made by Warren Buffett when students at Georgia Tech asked him about his greatest success and greatest failure, seemed particularly apt in the wake of the emissions fraud at Volkswagen which exploded last week.

At least 11 million “clean diesel” VW vehicles were outfitted with sophisticated “defeat device” software designed to cheat strict emission tests for the past six years by cleverly putting a lid on emissions during testing in lab conditions, but spewed up to 40 times the legal limit of nitrogen oxide emissions, which creates smog and has been linked to increased asthma attacks and other respiratory illnesses, when not tested. The scandal has wiped more than €24bn ($26.8bn) off VW’s market value and VW faced a fine of up to $16bn in the US alone and a possible criminal investigation.

The fraud was first uncovered in 2014 by John German, a hardworking automotive research engineer who earns a modest salary at a small non-profit organisation dedicated to helping to reduce vehicle emissions. John German carried out a simple test with results that were handed over to the Environment Protection Agency (EPA): checking the car’s emissions on real roads rather than in lab test conditions. John German commented: “VW had a chance to fix the problem, and they continued to try and cheat and do what they had done. That’s just amazing. Companies should realise they might get away with stuff for a little while, but it will catch up with them.”

MAS Presentation

Last week, we are honoured and grateful to be able to have the opportunity to share our thoughts and to have a sincere and productive conversation with the top management team at the regulatory authority in Singapore about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community.  Accounting information can be used to inform – or to deceive. We believe strongly that this potential fintech platform that combines accounting data, especially footnotes, with a wide array of contextual information – including unusual related-party transactions; money-go-round off balance-sheet activities; governance, group structure and ownership analysis; textual and linguistic analysis; analysis of event-based “catalysts” (information-based manipulation) and sensitive market announcements (action-based manipulation in prices and volume) – will provide fresh insights and actionable, dynamic, inter-connected analytical information, as opposed to merely descriptive static data or a loose bag of disparate red flags, on Singapore and Asian companies, for the regulator and the public.

Public disclosure of the List of companies in the highest risk decile by the five fraud categories (tunneling fraud; grand capex fraud; M&A deals potion fraud; all-in-the-family expense and liability shift; consolidation craftiness fraud) on the regulatory websites to inform and educate public (Financial Literacy 2.0) can (a) prevent harm before fraud happens, and (b) spur the potentially fraudulent firms to act to improve their corporate governance, e.g. return back part of the expropriated “missing cash”, to get themselves off the List. This will also bring about greater efficiency in the overall regulatory system given the limited resources in going after so many fraudulent cases which may occur and implode systematically during poor market and economic conditions (e.g. the reverse merger fraud wave in U.S. that was concentrated in 2011).

We were recently asked a question in a light-hearted way on why does Buffett keep growing money if he “measure your success in life by how many of the people you want to have love you actually do love you”.

Essentially, when one commits to an idea larger than oneself to care for and to serve other people, “wealth creation” takes on a Purpose and meaning, as opposed to opportunistic money gathering through complex financial engineering schemes and tunneling fraud that eventually unwind to harm others. For Buffett-Munger, their idea larger than themselves is manifested in the creation of a focused vehicle Berkshire Hathaway, which compounds not only wealth for shareholders but more importantly, compounds values and virtues as an exemplary role model in the way business is conducted and how they live their life in a simple and frugal way. The Berkshire Hathaway Bus carries more passengers and supporters who get positively energized towards the right direction in the journey of Life in the increasingly harsh and pretentious world…

Interestingly, we had written a positive and uplifting story back in March 2011, the year in which accounting frauds imploded systematically, from Sino-Forest to Longtop Financial Technologies, including the reverse merger fraud wave in US, and the emergence of the likes of Muddy Waters/Carson Block and Sahm Adrangi/Kerrisdale.

A particular quote from the article has reminded once again about the importance for value investors to avoid the seemingly profitable companies who take short-cuts to buy love, those who do not care about the Process to Care and Serve others, those who engaged in complex financial engineering schemes and tunneling fraud that eventually unwind to harm others:

“Commerce is not merely about the measurement of the weight of profits collected in multiple clever transactions to build abstract personal wealth. Only in the endeavour to perform first for customers, and serve them with the highest possible integrity and character, can commerce find its foundation for durable business success and create society’s abundance. The secret at Wal-Mart, Amazon and Vanguard to gaining the “Fu, Lu, Shou” (“Good Fortune, Prosperity, Longevity”) wide-moat compounding success is that the less they take, the more the customer and fund investor make. That is why enterprises designed for the public weal are the quintessential Bamboo Innovators – the bigger it is, the easier, not harder, it gets.”

The Scale of Life in Business and Value Investing

By KEE Koon Boon on 5 March 2011

Commerce would not have progress beyond the barter system without the invention of a system of weights and measures. Before there was the traditional Chinese steelyard (“gancheng”, 杆秤), buyers and sellers eye the heap of goods to determine their weight. It is difficult to achieve a fair trade. With the “gancheng”, the object to be weighed hangs at one end of the beam, while the weights at the other end are slided left or right until a perfect balance of the beam is found. Reading of the mark where the weight-string rests is made to determine the weight of the object. There are 16 markings on the arm of a “gancheng”, such that 16 “qian” in weight is equivalent to 1 “liang” and 16 “liang” is equivalent to 1 “jin” (or 604.79 grams). The Chinese unit of measurement was based on the number 16 instead of 10.

But why 16? The wisdom behind this number will help us understand why Bamboo Innovators Sam Walton of Wal-Mart and Amazon Inc grew stronger and more resilient over time like a bamboo, why Vanguard Group is the world’s largest mutual fund manager with $1.6 trillion in assets under management.

16 is the sum of 7, 6 and 3. 7 stands for the “Beidou Seven-Star Constellation”, which symbolizes the need to have the right direction in our heart when we use the measurement tool to make money and not be too greedy. 6 stands for the directions North, South, East, West, Up, and Down, which cautions us to stay centered in our ethical principles when making money. Lastly, 3 stand for Fu (Good Fortune, 福), Lu (Prosperity, 禄), Shou (Longevity, 寿). When we make money by squeezing one “liang” improperly out of others, we lose “Fu” (损福); wrench two “liang” and we lose “Lu” (伤禄); expropriate three “liang” and we lose “Shou” (折寿). Give money back to the customers and society in a sustainable way and we gain “Fu, Lu, Shou”. Thus, the 16-unit scale is not merely a tool to measure and make money, but more importantly, it is a scale to guide and measure our values in life and in business.

The late retail giant Sam Walton, whom the world’s greatest investor Warren Buffett felt was the greatest CEO of all time, saw the anomaly of retailers overcharging the customers. Sam seeks to correct things by being a champion of the customer with Wal-Mart’s “Everyday Low Prices” by passing along cost savings back to the customers to make better things ever more affordable to people of lesser means. This resulted in Wal-Mart gaining “Fu”, “Lu”, “Shou” and its astounding wide-moat compounding success to over S$200 billion in market capitalization from its initial listing size in 1970 of S$40 million.

Jeff Bezos sacrificed the financial comfort and glamor of his investment banking job to establish Amazon in 1994 with the support of his wife and the life savings of $300,000 from his parents. Now, the internet retailer beats its brick-and-mortar giants at their own game by delivering goods cheaper to its customers. Surveys by Morgan Stanley and Wells Fargo found that Amazon sold a broad range of items 6 to 19 percent cheaper than Wal-Mart. By leveraging its scalable infrastructure and virtuosity in analytics in delivering a dependable and enjoyable customer experience, the customer-centric Amazon has grown bigger more quickly than any company in retail history. Wal-Mart took 27 years to hit $30 billion in sales while Amazon did it in 16 years and its market cap multiplied to nearly $80 billion.

Similarly, John Bogle saw the anomaly of mutual funds charging exorbitant fees to investors for professing to beat the market, when in fact most of them lagged the market benchmark. Bogle set up Vanguard in 1974 to pioneer low-cost index mutual funds for retail investors. By passing back savings to the investors from advisory fee reductions and economics of scale, its low-expense model enables Vanguard to deliver competitive returns without chasing complex risk that they did not understand or respect. Bogle estimated that the costs of securities intermediation in the funds management industry in 2007 are $528 billion. These include sales loads, management fees, operating and marketing expenses, transaction and advisory fees, hidden turnover costs, and soft dollars, and they recur year after year at around 2.5 percent of average assets. Vanguard’s Lion Infrastructure allowed it to have around a 1 percentage point savings, which, when applied to $1.6 trillion of assets, produces savings of $16 billion annually.

Commerce is not merely about the measurement of the weight of profits collected in multiple clever transactions to build abstract personal wealth. Only in the endeavour to perform first for customers, and serve them with the highest possible integrity and character, can commerce find its foundation for durable business success and create society’s abundance. The secret at Wal-Mart, Amazon and Vanguard to gaining the “Fu, Lu, Shou” (“Good Fortune, Prosperity, Longevity”) wide-moat compounding success is that the less they take, the more the customer and fund investor make. That is why enterprises designed for the public weal are the quintessential Bamboo Innovators – the bigger it is, the easier, not harder, it gets.

Bogle shared a meaningful story from Reverend Fred Craddock who was known for his conversational preaching. Craddock, when visiting in the home of his niece, strikes up a conversation with an old greyhound dog.

“I said to the dog, are you still racing?”

“No,” he replied.

“Well, what’s the matter? Did you get too old to race?”

“No, I still had some race in me.”

“Well, what then? Did you not win?”

“I won over a million dollars for my owner.”

“Well, what was it? Bad treatment?”

“Oh, no,” the dog said, “they treated us royally when we were racing.”

“Did you get crippled?”

“No.”

“Then why?” Craddock pressed, “Why?”

The dog answered, “I quit.”

“You quit?”

“Yes,” he said, “I quit.”

“Why did you quit?”

At last, the reason: “I just quit. Because after all that running and running and running, I found out that the rabbit I was chasing wasn’t even real.”

Bogle believed that the rabbit that he has been chasing in his career, which is “essentially giving investors a fair shake in their quest to accumulate assets for a secure future”, is real. It is not the illusory rabbit of success – defined by the measured wealth, fame, and power – but rather the real rabbit of meaning – defined by the immeasurable integrity and virtue.

Yet, there seems to be something missing in the long hard chase for the rabbit of meaning in the asset management industry. Stage 1 is epitomized by fairness in Vanguard’s low-cost business model. Stage 2 requires a sense of caring to inspire the extra level of intensity and dedication in performing for investors. Such performance-based caring is an exacting and demanding business that requires the ablest and most dedicated navigators who truly care.

Yes, the pursuit of a mission that honors society as a whole is painful and requires sacrifice, tough-mindedness and discipline. Then, rather than chasing after that rabbit, finding that it is fake, and quitting in dismay, like the greyhound, it is worthwhile to chase the real rabbit of life and business despite the pain and sacrifice, and then keep running, and running, and running, as hard as we possibly can.

PS: We also like to share with you an article “Scouring Accounting Footnotes to Prevent Tunneling” which we penned for our local newspaper Business Times Singapore that was published on 19 Aug 2015: PDF article link on SMU website. We are honoured to be able to have the opportunity to present to the top management of the regulatory authorities in Singapore about implementing the fact-based forward-looking fraud detection framework in a world’s first for Singapore.

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

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In the month of September, we investigate a listed Asian family business that has persevered for over fifty years since 1962 in this high-electricity-rates emerging country to sell something that seems risky – air-conditioners and refrigerators to consumers and commercial clients. Led by the capable, down-to-earth third generation leader Mr. C who believe in making available to his countrymen products and services that used to be affordable by only the rich as his family and personal SWFF, [Company’s name] is now the #1 market leader in air-conditioner (36.7% market share) and refrigeration (25.6% market share) which are under-penetrated appliances in the country, with household penetration rates at 6% and 35% respectively, amongst the lowest in Asia where its neighbours have at least twice the penetration rate, representing significant untapped market potential.

Amongst the white good appliances that are disrupted by ecommerce, the sale of aircon and refrigerator remain resilient because they require installation and aftermarket service support. [Company’s name] provides unmatched end-to-end solutions from production to distribution to aftersales services network that spreads across the logistically-challenged country. [Company’s name] has over 90% appliance store coverage nationwide and its unrivalled aftersales service business is supported by over 170 accredited installer companies; over 130 accredited service centers; over 2,000 technicians; rapid sales facilitation and service turnaround from over 1,000 merchandisers deployed at the point of sale; and 8 dedicated parts stores; and a centralized in-house call center, distribution, parts availability/support as well as regional field personnel. Its robust logistics network ensure speedy delivery and fast service response.

In terms of business nature, margins and profitability, [Company’s name] is comparable to India’s Voltas (NSI: VOLTAS), India’s #1 aircon company who is an affiliate of the Tata Group with a 20% market share. [Company’s name] has a much higher and more stable market share than Voltas and generates higher ROE at 23.1% as compared to Voltas’ 18.1%. Yet, [Company’s name] trades at a 140% valuation discount in terms of EV/EBIT and EV/EBITDA at 9x as compared with 21x for Voltas. We think [Company’s name] deserves to command a higher valuation premium for its market leadership in an under-penetrated domestic market, its strong portfolio of synergistic businesses, and its visible long run way to reinvest its profits back into the core business to extend its market leadership and widen the moat. The company has a healthy balance sheet with net cash comprising 26% of book equity due to its integrated business model that has enabled the generation of steady, resilient and growing margins, profits and cashflow and the efficient employment of capital with a 23.1% ROE.

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Uncertainty and Our Search for Meaning: Legendary Psychiatrist Irvin D. Yalom on How We Glean Our Sense of Purpose; “The search for meaning, much like the search for pleasure, must be conducted obliquely. Meaning ensues from meaningful activity: the more we deliberately pursue it, the less likely are we to find it” – Bamboo Innovator Daily: 28 Sep (Mon)

Life

  • Uncertainty and Our Search for Meaning: Legendary Psychiatrist Irvin D. Yalom on How We Glean Our Sense of Purpose; “The search for meaning, much like the search for pleasure, must be conducted obliquely. Meaning ensues from meaningful activity: the more we deliberately pursue it, the less likely are we to find it.” BP
  • The Five Life-Stages of Happiness: How Our Definition of Contentment Changes Over the Course of Our Lifetime; “Our meaning of happiness is constantly shaped and reshaped by small choices we make every day.” BP
  • 11 wildly successful people who dropped out of high school: BI
  • Inside Chipotle’s extremely intense, 39-point checklist for good management: qz
  • Decision Making on Freeways and in Parking Lots: IC
  • Finding the next Einstein: Forbes
  • A new kind of smart: It’s time to change the way we think about human potential, says Scott Barry Kaufman. APA
  • Why You Should Stop Trying to Learn From Your Mistakes; A new study shows that remembering past mistakes can impact your self-control and decision-making: FastCo
  • Pascal’s Wager 2.0: Pascal’s famous wager requires a choice between believing and not believing in God. But there’s more than one way not to believe. Opinionator
  • Ditching work-life balance can ease multitasking malaise; Strict compartmentalisation can be counter-productive: FT
  • How Humans Can Win the Race Against the Machines; American education is ripe for a technology revolution to prepare students for the 21st century: WSJ
  • Legendary Investor Richard Rainwater Dies: Master deal maker helped turn Bass brothers of Texas into billionaires: WSJ

Books

  • Kerry Stokes: the Boy from Nowhere: Amazon

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The way billionaire Warren Buffett defines success has nothing to do with money: “I measure success by how many people love me.” – Bamboo Innovator Daily: 22-27 Sep (Tues-Sun)

Life

  • The way billionaire Warren Buffett defines success has nothing to do with money:  “I measure success by how many people love me.”’: BI
  • One of America’s most beloved authors shares a simple strategy for overcoming adversity; Bravery means coming to terms with your emotional experience — even if it’s uncomfortable. BI
  • Yogi Berra, an American story; The Extraordinary Journey of Yogi Berra: In 90 years, the Yankee legend lived many lives: war veteran, humorist, manager and baseball’s greatest catcher; Yogi and the Three Bears: Applying baseball great Yogi Berra’s wit and wisdom to global markets; Yogi Berra, linguistic savant; U.S. Baseball Legend Yogi Berra Dies; Hall of Fame catcher renowned for his malapropisms dies aged 90: WaPoWSJFP, Economist, WSJ
  • ‘Phishing for Phools’: A Q&A With George Akerlof and Robert Shiller; The Nobel laureates discuss their new book and explain why tricksters are an integral part of capitalist economies: WSJ
  • Keeping Things Simple and Tuning out Folly: Farnam
  •  William McKnight: The Basic Rule of Management that Propelled 3M; “If you put fences around people, you get sheep. Give the people the room they need.”: Farnam
  • Why Good People Do Bad Things: A Conversation With My Daughter: SN
  • Is this Australia’s youngest entrepreneur? She’s barely out of primary school but Bella Tipping has come up with an ingenious idea turning travel on its head.: TheAge
  • The Four Desires Driving All Human Behavior: Bertrand Russell’s Magnificent Nobel Prize Acceptance Speech; “Nothing in the world is more exciting than a moment of sudden discovery or invention, and many more people are capable of experiencing such moments than is sometimes thought.”BP
  • Michael Faraday on Mental Discipline and How to Cure Our Propensity for Self-Deception: BP
  • Happy Birthday, William Faulkner: The Beloved Writer on Beginner’s Mind and the Mystique of the Muse; BP
  • Big Magic: Elizabeth Gilbert on Creative Courage and the Art of Living in a State of Uninterrupted Marvel: BP
  • Exceptional Leaders Create An Awareness Of Greatness In The Workplace: Forbes
  • How Frank Gehry Became Frank Gehry: Bloomberg
  • How to Get SuperBetter: longreads
  • The best entrepreneurs are like brilliant artists in these four ways: qz
  • King of Sugar shares pearls of wisdom; Malaysian entrepreneur Robert Kuok on his trading philosophy: FT
  • The striking partnership of Alex Ferguson and Michael Moritz; What makes a leader? Football legend Alex Ferguson and venture capitalist Michael Moritz share their secrets: FT
  • Barbara Walters on How to Be There for the Newly Bereaved and Heartbroken; “we are more and more driven to depend on one another’s sympathy and friendship in order to survive emotionally.”: BP
  • Tony Robbins teaches this management technique to the executives he coaches: BI
  • This is the skill that determines your child’s future employability: qz
  • 20 cognitive biases that screw up your decisions: BI
  • New Neuroscience Reveals 4 Rituals That Will Make You Happy: Barker
  • Behavioral Economics: Useful Even If Not New: Bloomberg
  • A former Simon & Schuster owner swore by this simple strategy for cutting the length of meetings by 75%: BI
  • A Conversation with Luigi Zingales: medium
  • Good managers know when to let their staff fail to ensure they succeed in long run: SCMP
  • How do academic prodigies spend their time and why does that matter?: Conversation
  • Rival Rothschilds at war over family name: Telegraph
  • The Case Against Cover Letters: Nobody reads them, and writing one can only hurt you.: Bloomberg
  • The day Steve Jobs dissed me in a keynote speech: BI
  • How to deliver economic justice to the deprived lot? BT
  • Tax Evasion’s Bite, From the Ancient World to Modern Days: WSJ
  • What to do if you forget someone’s name immediately after meeting them: BI
  • The Aesthetic Instinct: Millennia before Picasso, humans crafted spectacularly refined forms. Were they true artists, or something less? WSJ
  • The Makers of American Strategy: The ‘scientists’ find the ‘artists’ amoral and defeatist; the artists see the scientists as doctrinaire and utopian. WSJ
  •  The Middle-Class Squeeze: If Western countries want to disprove the dire forecasts of Karl Marx, we must think creatively about how to make the middle class more prosperous and secure: WSJ
  • Would Seth Klarman Buy His Own Book? A hedge fund billionaire, a $1,600 hardcover, and the cult of value investing. ai-CIO
  •  Better Living Through Social Science Research; “Friend & Foe” demonstrates the value of making technical research understandable to the uninitiated. NYT
  • Some advice from Jeff Bezos: people who were right a lot of the time were people who often changed their minds.: medium
  • The science behind why inspirational quotes motivate us: Fastco
  • A Self-Compassion Exercise: Thebookoflife
  • How A Quiet, Failed Comic Book Artist Conquered Hollywood’s Nightlife Scene; Franki Chan was once unemployed and broke. Today, his IHEARTCOMIX empire works with the likes of The Rolling Stones and Skrillex. Fastco
  • Collaborating with Creative Peers: HBR
  • 3 Things Managers Should Be Doing Every Day: HBR
  • Huawei: A Case Study of When Profit Sharing Works: HBR
  • Picasso, the sculptor: Master of surprises; Why the Spanish artist was as inspiring a sculptor as he was a painter: Economist
  • Unclouded vision: Forecasting is a talent. Luckily it can be learned: Economist
  • How chief executives deal with cancer: Goldman Sachs’s boss becomes the latest to carry on while unwell: Economist
  • The new science of happiness has its roots in an ancient art; Contentment stems not from material wealth but from relationships: FT
  • Poverty: Vulnerable to change; More than 1bn people still live on less than $1.25 a day and the drive to reduce the world’s poor looks difficult to maintain: FT
  • How Music Soothes the Troubled Soul; From the strife in Selma to the tension of the Cold War, a personal account of the power of music.: WSJ
  • How to master the fine art of the follow-up: FastCo
  • 3 Tricks to Overcoming “The Expert’s Paradox” as a Presenter: Slideshare
  • The Reclamation of Strategy: Strategy&
  • The future of language: WaPo
  • Daniel Pink’s Required Reading: Strategy&
  • Meritocracy without the Numbers: Strategy&
  • Aspire to be a technopreneur, rather than a doctor or lawyer: TODAY
  • How one woman went from making $11 an hour to building a business that earns nearly $7 million a year: BI
  • The CEO who knowingly sold tainted peanuts that killed 9 people got 28 years in prison: BI
  • Tim Cook personally called the teenager who says an Apple Watch saved his life and offered him an internship at Apple: BI
  • Tech titles dominate shortlist for FT business book of the year: FT
  • Billionaire Marc Benioff has a foolproof tip for giving great presentations: BI
  • 5 strategies for conquering fear and anxiety, from one of the most successful self-help authors in history: BI
  • Roche scion André Hoffman on benefits of family ownership: FT
  • Tod’s tycoon Diego Della Valle targets Italian philanthropy: FT
  • Observe, Question, Reinvent: Lessons For Seeing Clearly From George Carlin: FastCo
  • Spotlight shone on David Teoh, TPG’s famously private CEO; A rare look at the secretive billionaire behind the operation of one in every four Australian internet connections.  TheAge
  • Jan Singer of Spanx: Using Votes to Guide a Group;  Singer, chief executive of Spanx, says one way she gives direction to conversation about an issue is by asking a group to vote on it.: NYT
  • Corporate scandals and how (not) to handle them; After a disastrous week for VW, we look back at 30 years of business disasters and their cost in lives, money and reputations: Guardian
  • Can Entrepreneurs Succeed In Today’s On-Demand World?: Techcrunch

Books

  • Superforecasting: The Art and Science of Prediction: Amazon
  • Insight Out: Get Ideas Out of Your Head and Into the World : Amazon
  • Your Inner Will: Finding Personal Strength in Critical Times : Amazon
  • Grit to Great: How Perseverance, Passion, and Pluck Take You from Ordinary to Extraordinary: Amazon
  • Collaborative Intelligence: Thinking with People Who Think Differently: Amazon
  • Friend & Foe: When to Cooperate, When to Compete, and How to Succeed at Both: Amazon
  • What to Ask the Person in the Mirror: Critical Questions for Becoming a More Effective Leader and Reaching Your Potential: Amazon
  • What You Really Need to Lead: The Power of Thinking and Acting Like an Owner: Amazon

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Stirring the Soup: Lessons for Value Investors in the Nourishing Growth of Brittania Industries – Bamboo Innovator Weekly Insight

“Bamboo Innovators bend, not break, even in the most terrifying storm that would snap the mighty resisting oak tree. It survives, therefore it conquers.”
BAMBOO LETTER UPDATE | September 21, 2015
Bamboo Innovator Insight (Issue 101)

  • The weekly insight is a teaser into the opportunities – and pitfalls! – in the Asian capital jungles.
  • Get The Moat Report Asia – a monthly in-depth presentation report of around 30-40 pages covering the business model of the company, why it has a wide moat and why the moat may continue to widen, a special section on “Inside the Leader’s Mind” to understand their thinking process in building up the business, the context – why now (certain corporate or industry events or groundbreaking news), valuations (why it can compound 2-3x in the next 5 years), potential risks and how it is part of the systematic process in the Bamboo Innovator Index of 200+ companies out of 15,000+ in the Asia ex-Japan universe.
  • Our paid Members from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing.
Dear Friends,

Stirring the Soup: Lessons for Value Investors in the Nourishing Growth of Brittania Industries

SoupWho stirs the pot is the most important ingredient in the value creation process of a wide-moat compounder.

This is the illuminating insight in the inspiring book Soup: A Recipe to Nourish Your Team and Culture by Jon Gordon. In the business fable, Nancy, the new CEO of Soup Inc, faced declining sales and low employee morale; the company had lost both flavor and heat and nobody likes lukewarm soup. When Nancy chanced upon the little-known Grandma’s Soup House, she learnt the “stirring” lesson to create a winning culture and team. No matter how carefully different chefs follow the same recipe, the final product always varies a little bit because we can’t separate who stirs the pot from what’s in the pot. As “Grandma” says to Nancy, the one who stirs the pot is the one who impacts the flavor of the soup:

“The love and energy we invest into our life and work determines the quality of it. The love we share in raising our children or developing employees or helping a customer impacts the final product. The love, or lack of love, we give ourselves and share with others will determine whether life is sweet or sour. It determines the fabric and texture of our relationships and how others perceive and receive us. When we love our kids, they feel it. When we stir the pot at work with love, our customers and colleagues notice. Just as soup is a reflection of the soup maker, our lives, careers, and businesses are the reflection of the love and energy that we put forth. Your people are not just a creation of your culture but are creating it every day. They must be encouraged, inspired, and empowered to stir the pot as well, and they must be coached so they are good at it.. If they did it together and poured their heart and soul into making great soup, they would accomplish great things.”

Reading the Soup reminded me of the nourishing growth of Brittania Industries (NSI: BRITTANIA, MV $5.46bn), India’s leading biscuit and confectionery maker who had compounded over 400% since the “soup-stirrer” Varun Berry joined in Jan 2013 as COO and took over the CEO/MD leadership baton from veteran Vinita Bali (2006-13) in Apr 2014. Prior to joining Britannia, Berry was the CEO of Pepsico Foods for South Asia.

Britannia is one of India’s oldest FMCG companies which was set up in Kolkata in 1892 with an initial investment of Rs295. The company started its own distribution network in 1975, taking over from Parry’s. Britannia listed in 1978. After being owned by Nabisco for most of the 1980s, Britannia was acquired by Rajan Pillai towards the end of 1989. In 1921, Britannia imported machinery and becomes the first company East of the Suez to use gas ovens. In 1993, the Nusli Wadia group and Danone became joint owners of the company. After a highly acrimonious ownership tussle in the interim, Danone sold its 25.5% holding for $200m to the Nusli Wadia group in 2009 who now controlled over 51% of Britannia. Britannia also subsequently bought out Fonterra, its joint venture partner in its dairy business. Britannia’s market reach spans 3.5m outlets across India, of which 1m outlets are served directly by the company. Britannia’s major five brands are “Good Day” (premium-priced), “Nutrichoice” (premium-priced), “Marie Gold” (mid-priced), “50:50” (mid-priced), “Tiger” (low-priced) and amongst its portfolio of biscuits (74% of sales, #1 with 35% market share in volume and 28% in value terms vs 30% for Parle), bread (9%, #1 with 50% market share), cake (5%), rusk and a range of dairy products (5%) that include cheese (#2 with 20% market share behind unlisted state cooperative Amul), curd, and specially formulated functional beverage with a dairy base.

Before Britannia was a “hot soup”, it has been struggling under the shadows of unlisted leader Parle, Mondelez/ Kraft, Nestle India who have equally strong, if not better, distribution reach in India and have more iconic brands. Giant ITC had also entered the biscuit market in 2006, proving to be a formidable and serious rival in targeting premium products and eating up the market share of leader Parle, garnering a 15% market share. Britannia’s products have largely been “me-too” versions of global brands.

Britannia Industries (NSI: BRITANNIA) vs Nifty Index – Stock Price Performance, 1994-2015 (top) and Jan 2013-2015 (bottom)

Britannia

According to industry sources, Sunil Alagh was instrumental in strengthening “Brand Brittania”. An expert in marketing, Alagh was focused on investing in brand building and innovation, with his tenure witnessing the launch of Good Day, Tiger, 50:50, Little Hearts and the Treat portfolio. Most of these brands are the key pillars of Brittania’s biscuit portfolio today. Vinita Bali, according to industry sources, was more focused on building operational efficiencies within the company. Bali shifted the emphasis to cost control from building on its investments in branding and gaining in market share. In FY06, Britannia had an approximately 6% point lead over Parle in market share (in value terms). But, Parle had beaten the company in the volumes game with its mass-market glucose biscuit Parle-G. By 2010, the tables had turned with Parle establishing a 6-7% point lead over Britannia in market share in value terms. Under Bali’s tenure, Britannia lost its place as the value market leader in biscuits to Parle. Also, its EBITDA margins contracted from 11.4% in FY04 to 4.3% in FY10, before recovering to 6.8% in FY13 when Varun Berry joined. Britannia achieved 14.3% EBITDA margin in Q1FY16.

Despite its flaws, Brittania is known for its big marketing interventions and programmes. At one point, almost half the Indian cricket team’s players used bats that sported the Britannia logo. Britannia is one of the few brands that continue to have an Indian ethos and flavour.

With Varun Berry stirring the soup at Brittania, the company refocused its energy and Love back into making innovative products and operational improvements were targeted in realizing this Purpose. Brittania has rationalized nearly 100 SKUs (60 in biscuits, 40 in dairy) to drive a sharper focus on a profitable and scalable portfolio. The idea behind this move is to take a longer-term approach across cost lines with a view to making the entire operations more focused and driving manufacturing costs lower. Under Bali, Britannia had a long tail of products although five major brands drive the majority of revenue. Berry brought more focus on key brands and new innovations including premium cookies, capturing 40% of the healthy snack market with its biscuit brand Nutrichoice (with variants such as Oats & Millet based biscuits, sugar-free crackers and diet biscuits). With enhanced nut content and crunchiness in Rs5-pack, rural school kids are observed to be excited by the innovative new Good Day products that they pool money with their friends to pick up larger packs of premium cookies so they can try them. Britannia’s plan is to be present across all villages in India by 2018. Good-Day, which has a 70% share of the premium cookies market, had a new logo resembling a smile and packaging design in Aug 2015, as well as a new ad film that highlights the newness of the cookie brand and urges people to enjoy the small moments in everyday life and to spread optimism and happiness.

A key operational strategy to widen its moat is to…

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Read more at the Moat Report Asia: http://www.moatreport.com/updates/

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In the Soup, Nancy, the CEO of Soup Inc, hand out a wooden spoon to every employee and every family member, reminding everyone that to be a great company, they needed everyone in the room to stir the pot. If they did it together and poured their heart and soul into making great soup, they would accomplish amazing things:

“Who stirs the pot is the most ingredient in the soup. Just do your best and stir the pot with love!”

People are hungry for positive change and a fresh sense of purpose and passion. In the story at both the Soup and Brittania, the value investor will find themselves doing well in sensing an important observation: whether the stirrer of the soup pot is able to put the recipe together and bring together the key ingredients to unite, engage, and inspire his or her team and create a culture of engagement and greatness.

Are you able to see the empowered soup-stirrers holding their wooden spoons in Britannia and the wide-moat compounders that you wish to invest in with high conviction?

PS: We also like to share with you an article “Scouring Accounting Footnotes to Prevent Tunneling” which we penned for our local newspaper Business Times Singapore that was published on 19 Aug 2015: PDF article link on SMU website. We are honoured to be able to have the opportunity to make an upcoming presentation on 23 September to the senior management of the regulatory authorities in Singapore about the fact-based forward-looking fraud detection framework.

Warm regards,

KB

The Moat Report Asia

www.moatreport.com

A new monthly issue of The Moat Report Asia is now available!

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In the month of September, we investigate a listed Asian family business that has persevered for over fifty years since 1962 in this high-electricity-rates emerging country to sell something that seems risky – air-conditioners and refrigerators to consumers and commercial clients. Led by the capable, down-to-earth third generation leader Mr. C who believe in making available to his countrymen products and services that used to be affordable by only the rich as his family and personal SWFF, [Company’s name] is now the #1 market leader in air-conditioner (36.7% market share) and refrigeration (25.6% market share) which are under-penetrated appliances in the country, with household penetration rates at 6% and 35% respectively, amongst the lowest in Asia where its neighbours have at least twice the penetration rate, representing significant untapped market potential.

Amongst the white good appliances that are disrupted by ecommerce, the sale of aircon and refrigerator remain resilient because they require installation and aftermarket service support. [Company’s name] provides unmatched end-to-end solutions from production to distribution to aftersales services network that spreads across the logistically-challenged country. [Company’s name] has over 90% appliance store coverage nationwide and its unrivalled aftersales service business is supported by over 170 accredited installer companies; over 130 accredited service centers; over 2,000 technicians; rapid sales facilitation and service turnaround from over 1,000 merchandisers deployed at the point of sale; and 8 dedicated parts stores; and a centralized in-house call center, distribution, parts availability/support as well as regional field personnel. Its robust logistics network ensure speedy delivery and fast service response.

In terms of business nature, margins and profitability, [Company’s name] is comparable to India’s Voltas (NSI: VOLTAS), India’s #1 aircon company who is an affiliate of the Tata Group with a 20% market share. [Company’s name] has a much higher and more stable market share than Voltas and generates higher ROE at 23.1% as compared to Voltas’ 18.1%. Yet, [Company’s name] trades at a 140% valuation discount in terms of EV/EBIT and EV/EBITDA at 9x as compared with 21x for Voltas. We think [Company’s name] deserves to command a higher valuation premium for its market leadership in an under-penetrated domestic market, its strong portfolio of synergistic businesses, and its visible long run way to reinvest its profits back into the core business to extend its market leadership and widen the moat. The company has a healthy balance sheet with net cash comprising 26% of book equity due to its integrated business model that has enabled the generation of steady, resilient and growing margins, profits and cashflow and the efficient employment of capital with a 23.1% ROE.

The way Walt Disney inspired his team to make ‘Snow White’ reveals his creative genius — and insane perfectionism – Bamboo Innovator Daily: 21 Sep (Mon)

Life

  • The way Walt Disney inspired his team to make ‘Snow White’ reveals his creative genius — and insane perfectionism: BI
  • Never take things for granted: Star
  • Jonathan M. Tisch: Beware of the Thin Air at the Top: NYT
  • The quieter you become, the more you can hear; Markets don’t speak to us; they whisper.  A quiet mind makes for a keen ear. TF
  • Here’s what you can learn about leadership from ‘Everest’: Fortune
  • Lee Kuan Yew’s daughter: I’m a Martian anyway; Book by Dr Lee Wei Ling, A Hakka woman’s Singapore stories: My life as a daughter, doctor and diehard Singaporean.: AsiaOne
  • The Difference Between Good And Bad Organizations: Farnam
  • 6 Entrepreneurship Lessons From Family Businesses; Entrepreneurs who have built companies that touch multiple generations share what they have learned along the way: NYT
  • On How to Disagree: thebookoflife
  • What We Do When Someone Disagrees With Us: Farnam

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Fraud, Fools, and Financial Markets; CEO of $50 billion Salesforce shared his epic founding story to inspire a small business owner – Bamboo Innovator Daily: 20 Sep (Sun)

Life

  • Fraud, Fools, and Financial Markets: PS
  • CEO of $50 billion Salesforce shared his epic founding story to inspire a small business owner: BI

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Supersurvivors: The Surprising Link Between Suffering and Success; Redirect: Changing the Stories We Live By – Bamboo Innovator Daily: 19 Sep (Sat)

Life

  • Humanity as a Competitive Advantage; As technology advances, people will need qualities such as empathy, care, attunement, self-awareness and generosity to get ahead. NYT
  • After Trauma, New Strength as Well as New Scars; Survivors of terrible accidents and losses often find more meaningful ways to live and richer types of happiness: WSJ
  •  When C.E.O. Comebacks Fail ; Companies that hire back their old executives hope to emulate Apple. But not everyone can be Steve Jobs. : NewYorker
  • The Sum of Human Knowledge: Computers govern how long the microwave heats food or the dryer spins clothes. Can they learn to form ideas and theories about the world around them as well?: WSJ
  • Why We Can’t Get Over Ourselves: Exposing the reasons we fail to understand the minds of others. Nautil
  • Why Etsy engineers send company-wide emails confessing mistakes they made: qz
  • Why the U.S. Government Is Embracing Behavioral Science: HBR
  • This tower purifies a million cubic feet of air an hour: Wired
  • Asia fund industry veteran goes independent to promote corporate governance: SCMP
  • In warming Arctic, mosquitoes may live long and prosper: Reuters

Books

  • Supersurvivors: The Surprising Link Between Suffering and Success: Amazon
  • Upside: The New Science of Post-Traumatic Growth: Amazon
  • What Doesn’t Kill Us: The New Psychology of Posttraumatic Growth: Amazon
  • Mindwise: Why We Misunderstand What Others Think, Believe, Feel, and Want : Amazon
  • Winning Decisions: Getting It Right the First Time: Amazon
  • Redirect: Changing the Stories We Live By: Amazon
  • The Tell: The Little Clues That Reveal Big Truths about Who We Are: Amazon

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