It goes without saying that capital allocation is a CEO’s most important job. How he allocates capital over the long run is what determines the value he creates for the business and its shareholders. But the reason many CEOs fail in profitably allocating capital is their incentives, which are aligned to what they can do in the next 1-2 years than what they must do in the next 7-10 years.

This is also how most investors and money managers work – especially after a period of good performance, they would rather go for the kill in the next few months or maybe 1-2 years, than build portfolios that would do well over a 10+ year period.

“Who wants to get rich in old age?” goes the thought process. “Why not gun for a 30-40% return and retire rich in the next 10 years?”

After all, this is what simple math suggests. If you can invest Rs 5,000 per month and do that every month for 25 straight years, and at an annual rate of return of 30%, you will have almost Rs 34 crore after 25 year.

On the other hand, if you earn just 20% annually, and everything else remains same, the amount in your bank after 25 years would be just Rs 4 crore. That’s a difference of a huge Rs 30 crore.

[Read more…] about An Extraordinary Edge You Have as a Small Investor

What’s interesting about moat is that if a moat needs to be continuously built, it isn’t a moat at all. How do you know if you’re paying up or overpaying for the moat? This time we invert the conundrum of moat to explore the symptoms of false-moat trap.

Over the past few months, I have spent considerable time studying about business, their longevities, moats, what helps them sustain, and what dilutes them over time.

As an investor in stocks, studying what makes a few businesses really great and their moats sustain over a long period of time, and on the other hand, what makes a majority of businesses bad and their moats, if any, fleeting has been an interesting aspect of my work.

So, while I have not yet arrived at any Eureka moment on how and why some moats sustain over a long period of time, and how can one identify in advance when a moat is shrinking, there have been some thoughts that I have formed through such reading.

I had shared some of those thoughts in my last post in the June 2015 Special Report. This post is a continuation of what else I have learned about moats, and especially about the dark side of investing in either emerging moats or ones that have already had a proven past.

I’m sure you may be wondering, “What could be the dark side of moats?”

Well, without trying to lay down any clear theories on the same, what I will be sharing below are just a few thoughts on the risks of investing in moats that you must keep in mind when you are buying such businesses that seem to be in their full glory and not destined to failure in the future.

But then, like s**t happens in real life, it often happens when it comes to investing…and that’s what makes it such an interesting game where you must keep learning…and evolving.

Let’s Start with…Destruction

When changes in the natural environment accelerate, so do the extinction rates of the Earth’s creatures. It happened to the dinosaurs and again to many species during the Ice Age. Many scientists believe we may be entering another such period.
[Read more…] about Moats: Some More Thoughts

When was the last time you did something for the first time?

It’s an ordinary looking question but it has the power to create magic in our lives. How? Please allow me to digress a bit for a while and I’ll circle back to this line of thought little later in the post.

It’s common knowledge that every action produces an equal and opposite reaction. That’s Newton’s Law. Simply put, every cause has an effect. What’s noteworthy about this phenomenon is that some actions produce immediate effect, for example if you put your hand in fire you get burnt. Some other actions have delayed effect like you overeat unhealthy food and it makes you fat but the result isn’t immediate.

The above two cause-effect relationships are well known to everybody but there are some actions which may not seem to produce any recognizable effects, immediately or even in perceivable near future, but they end up creating significant unintended consequences.

Notice the term ‘unintended’ which means you could never have known in advance about the kind of consequences or results that will eventually be produced by your actions. Let me tell you a story.

This is a story of a guy with an uninteresting and dead end corporate job. There was no hope for him to become wealthy in his career. However in his spare time, i.e., weekends and evenings, he was always involved in some hobby projects or activities.

He learnt computer programming and developed few computer games which nobody bought. He came up with few business plans but could never convince any investors for his ideas. He attended business writing classes. He used to draw cartoons and send them for publication. He did public speaking courses. He learnt about human psychology.
[Read more…] about Life 2.0: Serendipity