Imagine yourself sitting under the Bodhi Tree at Bodh Gaya - the place where Gautama Buddha attained enlightenment after 49 days of meditation. Following the rigorous ordeal, Gautama Buddha thanked the tree for giving him resilience and support during his struggle for enlightenment. This was in the 3rd century BC.
Since then, the Bodhi Tree has stood the test of time, through stories of people trying to cut it down and some even trying to poison it. Legends also have it that it was King Ashoka’s daughter who had planted the original shoot in Sri Lanka and the tree still flourishes with no signs of ageing - a symbol of history blending into oneness, where time loses its identity and transcends into permanence in contrast to this dynamic and disruptive world.
It is worthwhile to understand what makes something survive and thrive for so long. And if we can try and use a similar concept to identify companies while investing, one can probably attain true enlightenment as an investor - the path to permanence, resilience and endurance.
Last year, I came across an interview of Anthony Deden - Chairman of Edelweiss Holdings who focused on scarcity, permanence and independence as core pillars in his investment portfolio. The thoughts further inspired me to read through his letters to shareholders and they were an eye-opener.
Below is the video interview which I would highly recommend to watch.
Why is this important? Why should capital preservation come first?
Capital represents a lifetime of work and savings. Saving requires time, effort and sacrifice. One should therefore have utmost respect for its irreplaceability. This triggers the quest to find a stake in partnering companies and owners which have a trait of permanence, endurance and independence.
Below are some of the qualities we should be looking for while identifying great businesses for investing:
Customer-Orientation and Adaptive to Change
The primary focus of a company should be on building great products and customer orientation, not just profits. Walter Isaacson's biography on Steve Jobs clearly demonstrates this trait:
"My passion has been to build an enduring company where people were motivated to make great products. Everything else was secondary. Sure, it was great to make a profit, because that was what allowed you to make great products. But the products, not the profits, were the motivation […] it’s a subtle difference, but it ends up meaning everything: the people you hire, who gets promoted, what you discuss in meetings."
This trait of “revolutionary” companies is what make them scarce in a world where others are constantly chasing profits. He understood that value is not merely in things that one can measure. As such, money should be a byproduct of doing something rather well - not the objective in the first place.
He was successful in identifying what customers would need in the future – evolutionary thinking and a vision.
This is beautifully explained by Walter in the same book through an anecdote.
"Some people say, “Give the customers what they want.” But that’s not my approach. Our job is to figure out what they are going to want before they do. I think Henry Ford once said, “If I’d asked customers what they wanted, they would have told me, ‘A faster horse!’” People don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page."
Understanding Earnings Power and Thinking About What Can Go Wrong
In the letter published in July 2012, Tony Deden refered to a speech given by Sir Mark Webster Jenkinson on the Earning Power of Business:
"To gauge the earning power of the business, it is essential to ascertain how the profits have been earned, where the profits have been earned and why the profits have been earned."
The emphasis is his and the statement is profound in that it pushes us deliberate whether a business is desirable or not before we set out to see what it is worth.
Notice that the how, where and why demand non-quantitative reflection. The task propels us to come to a judgment about all the things that can go wrong before we make assumptions about the future or attempt to assign a value to such holding. It prompts us to make a judgment about the certainty of a stream of income and the permanence of its undertaking.
Avoiding Risks and Fragility, Particularly from Debt
A key to avoiding fragility in order to achieve endurance comes from assuming a conservative approach towards debt. Capital strength is one of the key ingredient of enduring businesses - granting the business independence of action and ability to bear pain in difficult times.
"Enduring businesses are customer-oriented and adaptive to change; have strong cohesion and sense of identity; display a powerful drive for progress; consider themselves stewards of a long standing enterprise—each generation being only a link in a long chain; are conservative in financing and frugal; they do not risk capital gratuitously; they associate debt with fragility and risk. Indeed, capital strength gives one options, flexibility and independence of action—not at the mercy of bankers and financiers. They believe that profitability is a mere symptom of health and not the cause; they have a low priority in maximizing shareholder wealth and they focus on capabilities, not mere competencies."
- Edelweiss Holdings, Speech to Shareholders, London (October 2015)
Financial activity and a world obsessed with using future earnings for short term benefit by taking debt has created an illusion of profit which is not sustainable most of the times. Even worse, it takes away independence of the company during bad times, often even leading to insolvency.
"Distinguishing between the productive and unproductive has become difficult since financial activity, often for its own sake, dominates the business landscape and has deluded folks into believing that debt creation is wealth creation and that the ultimate end is money in itself. To make matters worse, much of what passes for prices on a day to day basis is the product of untold and often covert suppression, manipulation and distortion. Meaningless prices beget meaningless conclusions."
- Edelweiss Holdings, Letter to Shareholders (January 2011)
Long Term Thinking of Owner-Operators and Extreme Focus
It is important to have the mindset of an owner for those who are running the business, and the same goes with an investor. People tend do things better when they are the owners and when they love their business more than they love the pursuit of money.
By striving for permanence, owners can avoid large errors in judgment. Such companies eschew short-term results for the purpose of sowing seeds for another generation. Some other characteristics of these owners include frugality in good or bad times, distaste for growth through acquisitions, aversion to debt, rates of reinvestment and ability to attract as well as retain talent.
They respect their minority shareholders and have better and more meaningful relationships with their employees, suppliers and customers. They are focused on what they do. And they do it well.
Again, these are very rare characteristics - making such businesses scarce.
Similarly, investors when they think like owners, give due importance to aspects like survival and ability to endure. The time preference automatically changes. One is then able to differentiate between value of the business and price of the business - the transition to permanence from what is momentary.
An exerpt from an interview with Lane Wallace, “Original Sin on Wall Street,” The Atlantic, 19 Feb 2010:
"The price of the stock is a momentary, transitory thing that can be reversed in a moment, or washed away or greatly enhanced over the course of years and decades"
In this chaotic and disruptive world - one obsessed with short term results, an investor having long term view about the investment process and seeking capital protection should think back and identify companies and owners with a mindset as well as character of permanence, scarcity and independence. The key then is to shift the focus from quantitative aspects to qualitative aspects. And when one is able to do that, one attains enlightenment. Just like Gautama Buddha did under the Bodhi Tree!
Disclaimer: The article is for knowledge sharing purpose. This should not be considered as an investment advice in any manner. Please consult your financial adviser for any investing decisions.
Originally Published in TECHNO FUNDA
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