January 2016

Why every aspect of business is about to change ? ~ Article from Fortune

Investment Planning, Identifying multibaggers, Stocks , INvesting for 2016 Ideas

What better way to start new year than analyzing the past ? A Brilliant Summary of changes that is going to hit us one way or other sourced from www.fortune.com

Why every aspect of your business is about to change

Geoff Colvin

Imagine an economy without friction-a new world in which labor, information, and money move easily, cheaply, and almost instantly. Psst-it’s here. Is your company ready?

Cars bursting into flames are never a good thing. So when a Tesla Model S ran over a metal object in Kent, Wash., in October 2013 and burst into flames, owners, potential customers, investors, and company executives got worried. When the same thing happened a few weeks later in Smyrna, Tenn., federal regulators opened an investigation. We all know what happens next: a massive recall, costly repairs at dealerships nationwide, and a painful financial hit to the carmaker. Yet none of that occurred. The problem was that the Model S could lower its chassis at highway speed to be more aerodynamic, and if debris hit the car’s battery pack in just the wrong way, it could catch fire. So Tesla  beamed a software update to the affected cars, raising ground clearance at highway speed by one inch. The problem went away. Just four months after opening their investigation, the regulators closed it.

Using software and the mobile-phone network, Tesla avoided any need for a recall. It doesn’t have any dealerships; customers can configure and order a car online, and they can test-drive cars at company-owned showrooms. Tesla’s advanced electric technology is simpler than gas or diesel technology, so cars can be built with fewer employees and less capital. Combine those factors and here’s what happens: General Motors  creates about $1.85 of market value per dollar of physical assets, while Tesla creates about $11. GM creates $240,000 of market value per employee, while Tesla creates $2.9 million. You don’t get differences like that just by being more efficient. Tesla, though in the same business as GM, is a fundamentally different idea

 

GM is changing, but for now it’s still a 20th-century corporation. Tesla is a 21st-century corporation, built for sweeping new realities that change the rules of success. The big theme is the arrival of the long-heralded friction-free economy, a new world in which labor, information, and money move easily, cheaply, and almost instantly. Companies are forming starkly new, more fluid relationships with customers, workers, and owners; are rethinking the role of capital (as traditionally defined), finding they can thrive while owning less and less of it; are creating value in new ways as they reinvent R&D and marketing; and are measuring their performance by new metrics because traditional gauges no longer capture what counts. (more…)

December 2012

Who Pays for your coffee ~ Bargaining Power ~ Ricardian Model ~ Economics

Ricardian Model , Undercover Economist, Who pays for your coffee, Economics & Value Investing, Bargaining Power, Scarcity, Premiums, Marketing , Branding

I was reading the article  Who Pays for Your Coffee? the other day, an interesting take on the concepts of scarcity and bargaining power.

We learn the reasons behind why people pay premium price for the coffee in the morning trip (American Morning’s …that is…)… Interesting .. Ricardian Model of rents, scarcity, bargaining power and pricing… Read on..

A resource (which could be land, brand , car..or for that matter stocks etc..)  which is in demand and which is also scarce will have the bargaining power and get a high premium.

The author uses the example of coffee bars located at stations having huge volume of commuters to drive home the point of the power and the strength of scarcity of resources and the bargaining power of the resource owners.

The exclusive coffee bar at the station is scarce. And so is the station location. The coffee bar has bargaining power over customers for high coffee prices. The station owners have bargaining power over coffee bars for high rent. 

However, the Bargaining Power does not come by just owning the resource. It comes because of scarcity. This viewpoint forms the crux of the article. If the scarcity shifts so does the bargaining power.

Businesses which hold the bargaining power today due to a combination of owning resources, demand and scarcity may go out of favor in future if there is a shift in scarcity which could be because of changing economic environments, changing customer tastes, rapid technological shifts or competition. An important factor to consider in investing, is to not only keep an eye on the past performance of a business / sector but to have vision to sense the future direction as well.

However, in real life the shifts in bargaining power and relative scarcity are often very slow. These shifts also have profound impact on lives of people. And most of the analysts miss this completely.

 In economics, Basic principles and patterns that operate behind seemingly complex subjects can be used as models. These models have been used to explain other complex phenomena in real life.

The article goes on the explain Ricardo’s model of meadowland which expounds on the concepts of scarcity of resource, bargaining power and shifts in bargaining power. It also explains the concept of relative value pricing and marginal land.

For example, although common sense says that the high rent causes the high prices coffee, the application of Ricardo’s model reveals that It is actually the willingness of customers to pay high prices for coffee which sets up the high rent and not the other way round.

The economists try to focus on underlying process, understand the patterns of scarcity in order to unearth developing shifts of bargaining power.

Would be interesting to look at investing in stocks from this angle as well

October 2012

How to deal with value traps ~ Graham Logic

How to deal with value traps , Benjamin Graham Logic, Value Investing, Margin of safety, Investing Principles

Value Investors look out for good/great companies trading at low multiples (be it earnings/book or cash flow). Investors looking for bargain may get attracted to stocks trading at low multiples for a considerable period of time. 

Value trap occurs when the investors lock into the stock at low multiples and the price discovery never happens and the stock price does not budge.

This may happen for any reason such as the whole sector being looked down, or the company / sector in trouble or truly the market not discovering the potential of the stock, inability of the company to withstand competition/technological changes, inability to generate consistent profits etc. There could be many reasons for a value trap happening.

Question is , how should the investor proactively manage the positions in such a situation. 

Benjamin Graham has Stock selection criteria & avoiding value traps

According to Benjamin Graham ~ If the stock does not give you 50% in 3 years, sell it – its most likely a value trap. Nice rule to deal with uncertainty 

As with any investment decision, thorough evaluation and research is required to avoid value traps

Value Investing