Security Analysis - Timeless pearls of Wisdom!

A 800 page timeless masterpiece that is the Vol II of another 800 page classic ‘The Intelligent Investor’ by Benjamin Graham & David Dodd (Warren Buffett’s Gurus). To be honest, reading them both cover to cover can be quite a task in itself. But the fundamentals laid out in this have stayed true through the test of time. I may not have done complete justice to this book but have tried to cover major concepts of investing. Below is my interpretation of the book –

PS : I have to breach the 25 point rule for this one!

1. DEFINITION: An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative
2. Market is not a ‘Weighing Machine’ but a ‘Voting Machine’
   
   
   
   
3. The ‘Speculator’ admittedly risks his money upon his guess or judgment as to the general market or the action of a particular stock or possibly on some future development in the company’s affairs
4. 4 problems that an investor must look to attend –
1. General future of corporation profits
2. Differential in Quality between one type of company and other
3. Influence of interest rates on dividend on earnings
4. Extent to which your sales or purchases must be governed by factor of timing as distinct from the price
5. 3 functions of analysis –
1. Descriptive (all facts relevant are out across and compared with similar issues)
2. Selective (specific judgement on an issue to buy, sell, retain)
3. Critical (specific review on an issue) 
   
6. To buy an Attractive enterprise at Unattractive terms vs an Unattractive enterprise at Attractive terms - the untrained investor must not venture into unattractive enterprises as historically lesser money has been lost by investing in sound businesses
7. Quantitative factors to be considered –
1. Capitalisation
2. Earnings and dividends
3. Assets and liabilities
4. Operating statistics
8. Qualitative factors to be considered –
1. Nature of business
2. Relative position in the industry
3. Management character
4. Operating characteristics
5. Outlook for the industry
9. For bonds, 3 aspects pose a dilemma –
1. security of principal and interest
2. future of bond yield and prices
3. future value of dollar
10. Bond selection is based on ‘Minimizing Loss’ whereas stock selection is based on ‘Maximizing Profit’
11. Guarantees and Rentals must be included in the calculation of fixed cost and evaluating coverage ratios
12. There are no permanent holdings. Have periodic reviews
13. Bull markets are ‘Born in Pessimism’, ‘Grow in Scepticism’, ‘Mature on Optimism’ and ‘Die on Euphoria’
14. This is the nature of financial services: you see a steady decline, and then you fall off a cliff – Never hold on to any stock (whose fundamentals are not in place) in hope – you know what I mean ;)
15. The convertible stock is not bought for conversion but must be either held or sold. They are bought for long term with the hope of realising gains fairly soon
16. It is desired to buy the ‘Right Company’ than at the ‘Right Terms’
17. Invest in Common Stocks because of –
1. Suitable and established dividend return (now just a slight bearing)
2. Stable and adequate earning record (only to estimate future earnings)
3. Backing of tangible assets (now entirely devoid of importance)
18. Check for ‘Earnings Average’ vs ‘Earning Trend’ in common stock investment. The shift is due to instability in businesses
19. The income statement and cash flow must converge. 3 factors for common stock –
1. Dividend record
2. Earning power
3. Asset value
20. Value of a business = EPS * quality factor is the P&L way. But we must also consider balance sheets as solely this is misleading. Important to take into account the non-recurrent profits and losses, operations of subsidiaries, reserves etc
21. Watch out for –
1. idle property depreciation
2. deferred payment
3. loss/profit from sale of asset
4. cost stricken off against surplus
5. valuations of goodwill and trademark should not be changed frequently,
22. Analysis of the future must be penetrating rather than prophetic
23. People who habitually purchase common stock at more than 20 times the average earning are more likely to lose considerable money in the long run
24. Earnings power unsupported by asset values—measured as reproduction values—will, absent special circumstances, always be at risk from erosion due to competition
25. Learning from balance sheet –
1. It shows how much capital is invested in the business
2. It reveals the ease or stringency of the company’s financial condition, i.e. the working-capital position
3. It contains the details of the capitalization structure
4. It provides an important check upon the validity of the reported earnings
5. It supplies the basis for analyzing the sources of income
26. Book value = (all tangible assets - all liabilities)/total shares
27. The Current Asset value of a stock consists of the current assets alone, minus all liabilities and claims ahead of the issue. It excludes not only the intangible assets but the fixed and miscellaneous assets as well
28. The Cash Asset value of a stock consists of the cash assets alone, minus all liabilities and claims ahead of the issue. Cash assets, other than cash itself, are defined as those directly equivalent to and held in place of cash. They include certificates of deposit, call loans, marketable securities at market value and cash-surrender value of insurance policies
29. Basic rules on working capital – Ratio of 2 (current assets to current liabilities) was standard for industry
30. Raising large debt frequently a sign of weakness - industry may be stressed if it is not for trade. Eg Telecom in current state
31. This important part of security analysis may be considered under three aspects, viz.:
1. As a check-up on the reported earnings per share
2. To determine the effect of losses (or profits) on the financial position of the company
3. To trace the relationship between the company’s resources and its earning power over a long period
32. On Selling – sell targets must be revised regularly to reflect all current available information. Tax consequences must be considered

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Measure what Matters - In God we trust, all others must bring data!

This book, written by John Doerr, is a management Bible that talks about nothing but common sense. Simplicity, when communicated effectively, is infectious! The fundamental premise of this book lies in the fact that Ideas are easy, Execution is everything. John Doerr having worked at Intel imbibed this philosophy from Andy Grove (Intel) & then went on to become early investor in Google. He then helped successfully implement OKRs in multiple organisations ranging from Google to Zume Pizza to Bill & Melinda Gates Foundation to Adobe and many more! Below is my interpretation of the book –

OKR (Objective & Key Result) – a collaborative goal setting protocol for companies, teams and individuals. They cannot substitute for sound judgement, strong leadership, or a creative workplace culture. But if those fundamentals are in place, OKRs can guide you to mountaintop

1. Definition
1. Objective – simply WHAT is to be achieved, no more and no less
2. Key Results – benchmark and monitor HOW we get to the objective. Effective KRs are specific and time bound, aggressive yet realistic. Most of all, they are measurable and verifiable
3. Eg: Intel in 1971 - O: “we want to dominate the mid range microcomputer business”. KR: “win 10 new designs for 8085” (easily measurable)

2. On assembly line it is easy enough to distinguish output from activity. It gets trickier when employees are paid to think
3. It was liberating too (pasting your OKRs on your desk). When people came to me mid quarter with requests to draft new data sheets, I felt I could say no without fear of repercussion
4. OKR superpowers (that it brings to the table)
1. Focus
2. Alignment
3. Tracking
4. Stretching
5. Andy Grove said, “if the vectors point in different directions, they all add up to zero. But if you get everybody pointing in the same direction, you maximise the results”
6. I can’t tell you how many times I’ve seen people walk out of meetings saying, “ I’m going to conquer the world”... and 3 months later, nothing has happened. You get people whipped up with enthusiasm, but they don’t know what to do with it
7. Jeff Weiner: “When you’re tired of saying it, people are starting to hear it”. It just can’t stop with unveiling top line OKRs at a quarterly all hands meeting
8. The more over ambitious the OKR, the greater the risk of overlooking a vital criterion. To safeguard quality while pushing for quantitative deliverables, one solution is to pair key results – Measure both Effects and Counter-effects
9. You need to build your goal muscle gradually, incrementally. Doing too much too soon will definitely end in pain
   
10. The more challenging an objective, the more tempting it may be to abandon it. Commit!
11. At any given time, some significant % of people are working on the wrong things. The challenge is knowing which ones. Research shows public goals are more likely to be attained than privately held ones. Transparency seeds collaboration
12. Ill effects of a pure Top Down approach: When all objectives are cascaded, process degraded into a mechanical exercise with 4 adverse effects –
1. loss of agility
2. lack of flexibility
3. marginalised contributors
4. one dimensional linkages
13. Even a 100% Bottoms up approach isn’t ideal. A healthy OKR environment strikes a balance between alignment and autonomy, common purpose and creative latitude. Mix of bottom up and top down remains half and half
14. OKRs are not islands. To the contrary, they create networks - vertical, horizontal, diagonal - to connect an organisation’s most vital network
15. One underrated virtue of OKRs is that they can be tracked, revised or adapted as circumstances dictate unlike traditional frozen “set them and forget them” business goals. OKRs are living, breathing organisms with phases –
1. the setup
2. OKR Shepherd(someone to drive universal adoption)
3. midlife tracking (single greatest motivator is making progress in one’s work)
4. wrap up: rinse and repeat (score, assessment and reflection)
16. A mission is directional. An objective has a set of concrete steps that you’re engaged in and actually trying to go for. Don’t confuse the two
17. Without frequent status updates, goals slide into irrelevance; the gap between plan and reality widens by the day
18. We do not learn from experience, we learn from reflecting on experience
19. If companies don’t continue to innovate (not iterate), they’ll die (Stretch OKRs are a must)
20. Stretch goals cannot seem like a long march to nowhere. Stretch your team too fast and too far, and it may snap. Leaders must convey two things - importance of the outcome and the belief that it’s attainable
21. The annual appraisal cycle is mostly futile due to recency bias, bell curve and rankings. Quarterly review of OKRs makes this redundant. New process of continuous performance management is achieved by - C (conversations), F (feedback) and R (recognition)
22. The key part to implementing OKRs and CFRs is decoupling compensation (both raise and bonus) from OKRs. This system has 3 key requirements –
1. executive support
2. clarity on company objectives and how they align with individual priorities (OKRs)
3. investment in training to equip managers and leaders to be more effective
23. Culture, as the saying goes, eats strategy for breakfast. Companies that out behave their competition will also outperform them

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I Am Zlatan - Listen; Don't Listen!

Immigrant family, watch out for your own kind of neighbourhood, divorced parents, a drunk father, a poor Mom working to make ends meet, a drug abusive half-sister, and a dramatic family to say things like ‘I never want to see you again' – A perfect Bollywood movie plot, isn’t it? That was the life of Zlatan Ibrahimovic!

What is fear? I have always believed there is no fear that leaves a bigger imprint on one’s life than the ones we live (not perceive but Live!) in our childhood in – A dark tunnel where his dad was mugged and beaten always surfaced in his memories and he would run between the lamp posts on either side of the tunnel thinking, “If I just run fast enough, it’ll all be all right”. Below is my interpretation of the book –

1. Ali, what a legend! He did things in his own way, no matter what people said. I imitated some of his things, like, I am the greatest! My thing was that I had to both talk the talk and walk the walk. Not just saying I’m great but being great with some swagger!
2. What would I have done if I hadn’t become a footballer? Maybe a criminal. There was a lot of crime those days. I’ve done a lot of things from nicking bikes to shoplifting. But no drugs! I didn’t just pour out dad’s beer but also chucked out mom’s cigarettes.
3. I saw the guys from the council estates on the edge of the city like mine who would try to pretend to be posh. It never worked. I thought I’ll do the opposite, I’ll do my own thing that much more
4. I was a bit rowdy. Sure, maybe I wasn’t an angel. But a special teacher just for me? You can’t single out kids like that. While playing, I lined up a world class shot and hit her square in the head
5. There’s one game on the pitch. There’s another one in the transfer market, and I like them both, and I know quite a few tricks. I’ve learnt the hard way
6. No farewell in front of 30k people at Malmo FF, they just called me to Hasse’s office and gave me a crystal ball momento to thank for the 85 million (his first transfer fees). What were they thinking? I’ll take it back to Amsterdam and weep when I looked at it? I kept it on the table and left. That feeling was not just joy. It was revenge! Revenge is my fuel & I work that much harder to prove myself
7. I tried doing the feint with one foot, a cool thing Ronaldo did a lot, which was one of the moves I’d watched on the computer when I was a junior and had practiced for hours for hours and hours until I could do it in my sleep and didn’t even need to think in order to pull it out of the bag –This is the power of dedicated training & practice!
8. A football season is long, and you can’t put everything on show in a single match. As soon as I arrived I wanted to do my whole repertoire all at once, and that’s why I got stuck, I think – As people say, life is a marathon, not a 100 metre sprint!
9. That’s how I function. If nothing’s going on with football, I’ve got to get my kicks somewhere else
10. After being made a fool during the first record transfer to Ajax - I’m in complete control. I refuse to be cheated and taken advantage of again, and I always try to be one step ahead in negotiations. I take back from all my matches and training sessions, watching others too. Learn all the time!
11. Van Basten (One of the footballing greats) said, “Don’t listen to the coaches. Don’t waste your energy defending. You’ve got to use your strength in attacking. You’ll serve your team best by attacking and scoring goals, not by wearing yourself out defending” – It is a critical management lesson on trying to focus on your team’s strength rather than asking everyone to do everything
12. I said stars in Italy don’t jump just because the coach says so. That doesn’t apply with (Fabio) Capello. Every single player ties to the line when he shows up. “You don’t get respect. You take it”
13. It was all the ‘wow! And check that out’ that got me going. Under Capello I transformed from an artiste to a bruiser who wanted to win at any price. Nobody’s going to thank you for your artistry and your back heels if your team loses. Nobody cares if you’ve scored a dream goal if you don’t win – This one just steals it J
14. The Ferrari Enzo (only 399 of it were ever produced) and Zlatan got the same at Juventus. The Enzo gives me a feeling that I’ve to work harder in order to deserve it. It prevents me becoming complacent, and I can look at it and think: if I don’t make the grade, it’ll be taken away from me. That car became a driving force, a trigger – In my opinion, it is OK to have materialistic goals to use purely as a driving force to make yourself a better version of yourself
15. His tattoos (just try and imagine this personality… I’m impressed J) –
1. ‘Only god can judge me’
2. a dragon – as a symbol of warrior
3. a carp – a fish that swims against the current
4. a Buddha – symbol to protect against suffering
5. five elements : water, earth, fire, air and wood
6. family (men on the right for strength and women closer to heart on the left)
16. I have dirty looks in training sessions. I had my winner’s mind-set, all that wild attitude and willpower. I was worse than ever. I went mental if people didn’t give a 100% on the pitch. You can’t train soft and play aggressive. Training sessions are just as important as the matches
17. I’d seen it clearly in football, both at Juventus and at Ajax: every team performs better when the players are united. At inter Milan it was the opposite. The Brazilians sat in one corner, the Argentinians in another, and then the rest of us in the middle. Some might say what does it matter who we eat lunch with? Believe me, it matters. If you don’t stick together off the pitch, it shows in your game
18. On the red feature wall in the foyer (in his house), I hung a big picture of two dirty feet. My mates asked how can you have this shit on your wall? ‘You idiots, those feet have paid for all this’
19. A footballer at my level is a bit like orange. The club squeezes it until there’s no juice left, and then it’s time to sell the guy on. It’s part of the game. That’s the game. They build you up. They knock you down. I was used to it! – The same stands true for your corporate journey as well. Be cognizant of this always!
20. I knew all about Ronaldo. I studied his feints and acceleration. A lot of us did, like I said. But nobody took it as far as I did. I didn’t miss a single detail.
21. Now though he’d won the league trophy, and the players went up, one by one, kind of formal, shook his hands and said, ‘Thank you so much, you did it for us’. Then Mancini came up to me, completely filled with victory and congratulations. The only thing was, he didn’t get a thank you from me. I said, ‘you’re welcome’ – Classis Zlatan!
22. On Mourinho – he created personal ties with the players with his text messages and his emails and his involvement and his knowledge of all our situations with wives and children, and he didn’t shout. This guy does his homework. He works hard to get us ready. He built us up before matches. It was like theatre, a psychological game
23. On Sir Alex Ferguson – no player was bigger than the club. He’s like god in England. He never wears out his stars, he rotates them
24. On Pep Guardiola – it was no accident that he’d had problems with guys like Ronaldinho, Deco, Eto’o, Henry and me. We’re no ‘ordinary guys’. Maybe it’s something as simple as losing his authority. Pep said to him “here at barca, we keep our feet on the ground, no one drives to training in flashy Ferrari’s or Porsche’s”. Messi, Xavi and iniesta stood like school boys. I didn’t fit in

This one is for all those who fill themselves with an aspiration to grow but do not think they have the adequate resources given on a platter. For anyone who is confident on hardwork, this one shows the way on 'How?'!

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Blitzscaling - Speed Over Efficiency!

Blitzscaling – A fascinating concept that is bound to transcend every aspiring entrepreneur to a fairy-tale finish. There’s a BUT (there always is!) to this path to easy success. As Reid puts, start-up is like jumping off a cliff and trying to make a plane on your way down!

To be honest, I didn’t really understand quite a few businesses in India and thought there’s so much wrong with their product/distribution/revenue model, yet some of those businesses doubled their size in a time span that surprised (shocked!) me. Little did I realize it was a feature, not a bug. This book, written by Reid Hoffman & Chris Yeh, explains it all with multiple examples of companies like Facebook, Amazon, Netflix, LinkedIn, Airbnb to name a few. Below is my interpretation of the book –

What is Blitzscaling?

1. Derived from the World War 2 technique used by German General Heinz Guderian - ‘Blitzkreig’. The pace of attack along with the element of surprise overwhelms the opposition. Counter-intuitive to the traditional approach of measuring risks and taking decisions. Eg in corporate - Amazon increased the workforce by 50 times and grew revenues by 322 times in just 3 years (pre to post IPO)
2. Predictability and efficiency is very important in the context of a stable, established market but when the market is up for grabs - if you win, efficiency isn’t that important; if you lose, efficiency is completely irrelevant. Prioritising speed over efficiency in the face of uncertainty
3. But it is more than ‘get big fast’ to win the market. You need to be able to focus on the downsides of the risks by making small number of hypothesis about how the business will develop so that success can be understood and monitored with a constant course correction
4. Blitzscaling occurs in an uncertain environment which leads to success or death in a really short time. Unless you’re like Microsoft or Google and can finance your growth from an exponentially growing revenue stream, you’ll need to try extremely hard to convince investors to give you their money on this gamble. Generally the sequence is : Classic Startup Growth (product market fit) -> Blitzscaling (gain critical mass) -> Fast Scaling (business maturity and certainty) -> Classic Scale up Growth (when you become industry leader)
5. Uncontrolled growth is clearly undesirable. There is a scientific term for out of control growth: Cancer. This means you need to have just enough control that you can fix bugs while maintaining the speed

3 techniques of Blitzscaling - Business Model Innovation (not just technical model), Strategy Innovation & Management Innovation  

Business Model Innovation

6. Dropping below 40% annual growth is a warning sign for investors. Why should I risk it all and potentially blow up a successful business? The answer is that Blitzscaling businesses tend to play in winner takes most/all markets
7. Business model innovation has 4 growth factors –
1. Market size (investors want the Bs baby! So the scale has to be in Billions & not Millions)
2. Distribution (a good product with a great execution will always beat a great product with a poor distribution)
3. High Gross Margins (higher gross margins mean more cash to fund growth and expansion)
4. Network Effects (for sustaining growth)
8. The downside of network effects is that you can’t start small and hope for growth. Until your product is widely adopted in a particular market, it offers little value to potential users. You’ve to reach the tipping point fast
9. Growth limiters –
1. Lack of product/market fit (Make sure the product/service is relevant & desired by customers & constantly upgrade)
2. Operational scalability (human and infrastructure)
10. Underlying principles of Blitzscaling –
1. Moore’s law (Netflix waited for a decade to get the internet infrastructure in place for it to realise its vision)
2. Automation (growth of tech is way faster than humans; Netflix can produce more relevant content than any production house based on data of viewing habits)
3. Adaptation and not optimisation (Adapt first to ensure you are the market leader; then optimise to retain your spot)
4. The contrarian principle (As peter Thiel puts it - what important truth do very few people agree with you on? Read more on this here)

Strategy Innovation

11. The only time it makes sense to blitzscale is when you have determined that speed into the market is the critical strategy to achieve massive outcomes
12. Premature blitzscaling is fatal for the company and the market as well. Few factors to determine if the time is right –
1. A big new opportunity (in terms of market size as well as gross margin)
2. The first scaler advantage (we must not confuse critical mass with first mover advantage)
3. Learning curve (Netflix moved from DVD renting to video streaming to producing content)
4. Competition (the more intense the competition, the faster you should try to move)
5. Good times and bad times (of the market)
6. Going faster (by doing things that you won’t conventionally do)
13. When to stop blitzscaling?
1. Declining rate of growth (relative to market and competition)
2. Worsening unit economics
3. Decreasing per employee productivity
4. Increasing management overhead
14. Blitzscaling is iterative. It is an exercise in serial problem solving. Through the 5 stages –
1. Do things that don’t scale (Airbnb had sent door-to-door photographers for hosts initially. Highly unscalable!)
2. Reach the next stage of blitzscaling (Hire multiple photographers; train hosts on good quality pics; make the process intuitive for hosts)
3. Figure out how to do one set of things that scale while also finding out ways to do a completely different set of things that don’t scale
4. Reach the next stage of blitzscaling
5. Repeat until you reach market dominance
15. The role of founders also shifts from pulling the levers directly to taking strategic calls as the organisation moves from a family to a nation (A successful startup has a journey from Family -> Tribe -> City ->Nation as it grows in size)

Management Innovation

16. 8 key transitions:
1. Small teams to Large teams (marines are the start up people, army is the scale up people and police is the stability people; accordingly your approach/structure/processes shift)
2. Generalists to Specialists (This doesn’t mean you have only specialists as your functions become larger; keep generalists as they can be redeployed much easily)
3. Contributors to Managers to Executives (Contributor to Manager is a relatively easy transition; finding executives is the real challenge as not everyone can have the grand vision, strategic insight to drive business success. Loads of founders remain managers (Steve Wozniak) & businesses hire executives from outside (Sheryl Sandberg))
4. Dialogue to Broadcasting (regular emails to employees are a common best practice)
5. Inspiration to Data (Jeff Bezos is a Prime [pun intended] example of this – “If it comes to opinion, my opinion will always win over yours. Back your opinion with data”)
6. Single focus to Multithreading (treat each thread as an individual non competing company)
7. Pirate to Navy (from offence to offence and defence)
8. Scaling yourself from founder to Leader (delegation, amplification, making yourself better)
17. 9 counterintuitive rules :
1. Embrace Chaos (accept uncertainty and take steps to manage)
2. Hire Ms. Right Now not Ms. Right (hire who is just right for your current phase quickly)
3. Tolerate “bad” management (transformation is the name of the game)
4. Launch a product that embarrasses you (prevent analysis paralysis; walk a fine line between fixable and fatal flaws)
5. Let fires burn (choose your urgent battles ; Maslovian hierarchy of fires – Distribution > Product > Revenue model > Operations > Competition > what’s next?)
6. Do things that don’t scale (do throwaway work; just for survival)
7. Ignore your customers (temporary solution until you fix the product/distribution; but don’t ignore their feedback while ignoring them)
8. Raise too much money (for the unforeseeable; a lot of people do not raise more than required in order to prevent dilution)
9. Evolve your culture (from organic to deliberate transmission of culture & values; this is required as every person cannot meet the core team)
18. Avoid the pitfalls of Diversity Debt by hiring that leads to Homogeneity
19. Scale companies can blitzscale too. The advantages an established organisation has –
1. Scale (Scale provides the critical mass for exponential Blitzscaling)
2. Iteration (you can finance multiple shots on goal)
3. Longevity (patience for results to come out)
4. M&A (simply buy any blitzscaling competition/supplementary business)
20. Disadvantages of an established business to blitzscale –
1. Incentives (favour cautious expansion than aggressive blitzscaling; penalty for a failure is much higher than incentive for success)
2. Unstaged commitment (to prevent failure a manager will put all resources on a committed project)
3. Public market pressure (Public markets are monitoring bottom-lines much more ruthlessly than VC markets – their focus is Top Line exponential growth)
21. Silicon Valley’s 9 to 5 vs China’s 996 – China has Blitzscaled massively & is becoming the next Silicon Valley. This has been possible because of the work culture of 996 (work 9 am to 9 pm 6 days a week). This kind of dedication might be required in the initial stages Steve Jobs’ iconic ‘90 hrs/Wk & loving it’ T-shirt for the Macintosh team) but definitely not sustainable & this has to be normalized if the business aims for longevity (which, of course, Apple did too)
22. What if your competition starts to Blitzscale? You have only 3 options for defending against blitzscaling - Beat them OR Join them OR Avoid them!
23. Best and the worst part of pace of today’s change - there are no experts with 10+ years of experience in any domain!

Blitzscaling seems to be the answer for any Start-up but all credits to the author to caution the reader to make sure that Blitzcale only when you meet all the above criteria. If done wrong, Blitzscaling will lead to a fast & painful death that might have a lasting impact on your industry!

Do share your views/feedback in the comments section