Readers of this blog may be wondering why a business and investment blog run by a Brazilian citizen doesn’t publish stories on our (many) corruption scandals, related arrests – now including the CEO of Brazil’s most famous investment bank, a listed company – and investigations.
It is quite an easy answer for me: this is a story of a just a few Brazilians, however powerful and influential they are. It is a story that has been around for many, many years, yet I prefer to tell global stories and, when I talk about Brazil, I always try to honor the hundreds of millions of us who don’t condone all this, loathe it and stay miles away from it in their personal and professional lives.
There is ALWAYS a choice. Mine is to keep away from this, and that includes not emphasizing it. I prefer to highlight people, companies and institutions that choose to BE different on a daily basis. They are more numerous, and MUCH more relevant, than these powerful, dirty few.
Very, very interesting article highlighted by a friend on LinkedIn: The Overvaluation Trap, published in the December issue of the Harvard Business Review. The authors highlight a 2005 paper by HBS professor Michael Jensen on the issue, and one quote from the paper perfectly summarizes the problem: “When a company’s stock is overvalued, by definition managers cannot, in the absence of amazingly good luck, reliably and legally deliver performance that will justify its price. The market is setting a bar that firms cannot realistically meet.”
Such pressure leads to trouble, as the authors argue: “(…) a behavioral trap lies in wait for leaders of all successful firms, one they will struggle to avoid even when (…) they’re aware of it.”
The resulting decisions could range from hubris-induced waste to mediocre (or worse) capital allocation and, ultimately, fraudulent behavior. As the article reminds us, and as long-time investors will certainly have discovered, such issues and related behavioral traps are not seen only in times of market bubbles: it is a “permanent” risk for any overvalued company.
I won’t offer any more spoilers because both the article and the paper are well worth the effort.
That was the title of an e-mail I got from an old friend, who was actually the first person ever to dream about Buysiders.com – back in 2006!! – and make it real (I believed in it and ran with it, but the idea was never mine). It’s very encouraging to think that Buysiders is gaining traction once again, and that it will lead to more stories from reader suggestions! Remaking connections and starting new ones makes the effort to write this blog even more rewarding.
Back to the title of the e-mail and subject of today’s post: my friend sent me this Financial Times story on Reed Elsevier’s (RELX Group nowadays – I’m getting nostalgic, a.k.a. “old”) scientific journal publishing unit, calling it “the business the Internet couldn’t kill”. I recalled writing about this very company in 2013 (although not at Buysiders.com), and I could summarize my 2013 comments as follows:
“I’ve been hearing for 12 years that Elsevier’s scientific journals business will end ‘soon’, but so far neither e-books, the web, P2P, open-sourced journals nor whatever else have done it. I would always weigh this fact with the notion that ‘if something can’t go on forever, it won’t’.”
There are a lot of reasons – incentives, always incentives! – that explain the business’ resilience, many of which are explored in the article, but at some point a sufficient number of universities and/or professors could become sufficiently organized and try to create even more open-sourced alternatives – or just pressure for no, or lower, price increases. The article also highlights how many such efforts have not really dented the business. I studied the sector from 2001 to at least 2007 – I have kept track of it ever since, albeit from a distance – and as far back as 2002 there was talk of “disruption” (with a different name, since the term wasn’t popular back then).
So yes, some moats are harder to cross. Doesn’t mean it will never happen, but one shouldn’t bank on fast changes in some businesses.
“What Is It Like to Be Owned by Warren Buffett?” That is the title of a very interesting post at Insights by Stanford Business, a Stanford GSB site, which links to the original 5-page article (in PDF) by Stanford professors David F. Larcker and Brian Tayan. For someone who hasn’t yet read the 2003 book The Warren Buffett CEO – Secrets From the Berskhire Hathaway Managers, this is an up-to-date look into what Berskhire managers think about their parent company – and the way their “oversight” works.
The authors surveyed 80 managers of Berkshire Hathaway subsidiaries and the consistency in their answers is astounding. As is the consistency of Buffett and Munger’s message as attested by the survey. It also speaks a lot to the merits of conscious selection: “We try and buy companies so permeated with a good ethos that they don’t need a lot of direction and checking and so forth from headquarters. … What we’re trying to live in is a seamless web of deserved trust.” (Charlie Munger).
From the article, it seems that the web is still strong. Less certain, however, is the conclusion that the culture won’t change after Mr. Buffett is gone. While everything I read on the company makes me reasonably comfortable that the culture is very highly permeated into the Berkshire subsidiaries and, most importantly, into the Berkshire Hathaway board of directors, this would be the number one issue in my monitoring efforts.
All in all a very worthwhile and light reading for the weekend. Also read: “Walking the Talk“, our 2009 post on Berkshire and consistency.
As an aside, we’ve discussed articles in this series by Stanford called “Closer Look” before. In fact, we wrote extensively on the proxy advisory industry: here’s the 2015 post, here’s the 2013 post that eventually led to the 2015 one.
I wouldn’t call this a book review, this post is derived from my annotations on OneNote from a few months ago. I initially shared this with my partners but the book seems to have gotten some traction again – Vitaliy Katsenelson of the Contrarian Edge blog just recently wrote his own book review (at his Institutional Investor blog).
The book is much better for beginners, but there are very interesting tidbits for experienced investors. Some of what he shared about productivity and about finding a group of people you both admire and trust so you can debate ideas with them resonated a lot with things I had been thinking about, or doing, without necessarily having an idea of where it could lead to.
Mr. Spier will have you believe that the book’s central message is that you should surround yourself with excellent people – in fact, he says “relationships are the killer app”. It is a very powerful message and yes, it does work. However, I believe that the most important message, lesson and advice in his book – without which you cannot do the relationships bit FOR REAL – is the journey of self-discovery and self-awareness he needed to take, and took, to get to the point where he could look for the people he found excellent, for the right reasons, and doing what he then knew he wanted to do – in the right way, or at least having set foot in the right path. Indeed, it seems Mr. Spier’s book has caused some people to change, and that is very nice.
I didn’t quite like his Google Talks appearance, but it’s here for the sake of completeness. Mr. Spier’s good friend Mohnish Pabrai did a more interesting talk. Since the two are very close and Mr. Pabrai is a big character in Guy Spier’s book, here is the link for his talk at Google as well.
The notes are inside/below in PDF format (and highly informal language).
The story comes from Valor Econômico’s English-language beta website, Valor International – it requires registration, but it’s free for now. Bovespa’s Corporate Sustainability Index (“ISE” in the Portuguese acronym) is about to turn 10 in November and it has outperformed the flagship Bovespa Index. There is an event going on today (in Portuguese) that kicks off celebrations.
Even though the Valor story mentions the returns for its first 9 years (159% for the ISE vs 74% for the Ibovespa in nominal terms), a quick look at the current numbers show that, as of the close of October 19th and since its first quoted value on December 15th, 2005, the ISE has returned 128.6% versus 42.9% of the Ibovespa (and 88.4% of the IBrX-100 index). Read more »
Does it have to be “vs”? New York Times’ David Brooks wonders exactly that after watching a documentary exploring different models of K-12 Education. I haven’t seen the film (see the trailer below) and know nothing about the High Tech High system, so I’ll pass no judgement on the initiative. I’ll just let Mr. Brooks “speak” using select excerpts from his op-ed piece.
By now anyone on Earth minimally interested in business and finance has heard about the Heinz + Kraft deal.
Buffett went on CNBC to speak briefly about the deal and said especifically about Berkshire and 3G (actual quote): “We look at everything. There is no finish line in either Berkshire’s investments or 3G’s investments.”
Another analysis here, but I’m not sure I agree with the inflation-hedge theme (at least not as a “boon from heaven” truth) – and the rest of it reminds me of a post I wrote in 2013, about how foreigners still didn’t “get” 3G. They’re catching on as 3G becomes an inevitable “case study”…
Finally, if you haven’t ever watched the Carlos Brito talks at Stanford, my 2010 post is a good starting point to understand 3G’s culture.
My friend and PLD classmate Zia Patel of Wolff Olins just published an interesting interview with Dr. Reddy’s Chairman and CEO, GV Prasad. It begins with a lovely quote: “Management is doing work through people, whereas leadership is developing people through work.”
There’s more, of course, but more importantly the story leads to a report called “Impossible and Now” that is extremely interesting and really worth the time. It condenses insights on leadership from 43 interviews with CEOs and surveys of over 400 employees at those companies.
I also liked the format – you can comment on any section, answer questions and see other comments. It seems like a conversation, which this topic invites and about which we all should discuss more – especially here in Brazil, nowadays.