Sunday, April 15, 2007
Investing psychology
For the last few days, I've been pondering a new way of thinking about investing. The world's best investors say that they invest in people not in companies. But no one seems to know a easy consistent way of identifying these winning people. I think I do now. However, the only thing to note is that people are just one part of the equation. The company culture is another. It is only when these two are consistent will you have a winner in hand. So a complete profile subjective profile of a company, as well as the people who manage these companies should yield the winners that should be easily verifiable with the reported numbers. What is more, one should be able to even predict which of the events will be sustainable and which ones will fail. The noise in this analysis is the unpredictible nature of some events that may result in success even when one is incompetent. I'll have more to say on this later..
Saturday, August 05, 2006
Emerging Mirage - India?
Most Western businesses have been scrambling to invest in India in the recent past. The large English speaking population, the presence low-cost pool of skilled labor and its democratic traditions are India's oft-repeated strengths. However, I believe India is overhyped, at least as far as it is an investment destination for Western businesses.
A large English speaking population is only good for businesses that seek to outsource services, and not for any other kind of investment. Those that seek to tap into the large market will quickly find that English is not as widespread. India only manages to educate a small fraction of its population, and a still smaller fraction of them can actually speak English. Most of this labor resides in the big cities where the young Indian go through the anglicized schools left behind by the British. Its skilled labor is part of this small sliver, and competition for this talent is fierce.
The one thing one can say about India's democratic institutions is that they are painfully slow and are effectively manipulated by the local businesses. Further, I'm not convinced that capitalist systmes require a certain form of government to thrive. It only requires a well-functioning law and order machinery to enforce contracts, and some semblance of a capital market. So its no surprise that a non-democratic China or even an authoritarian Singapore have done well in adopting capitalist ideas. The Indian law and order system, however, is woefully inadequate and inept. Even most Indians do not trust it to deliver.
Given this, the only attractive reason for investing in India is the opportunity to participate in a vast market with a pent-up demand for many goods and services. Seen from this point, it becomes obvious that most Western companies are ill-equipped to succeed in India. Most successful business models of the West are likely to lose to local competitors. Western business process consume large quantities of power, and achieve productivity gains through smart automation. Both these requirements will effectively price out the Western companies from the Indian market. The only succesful companies would be ones that effectively "harness the lack of infrastructure and resources" in India. Some likely Western business winners in India would include - Preventive healthcare cos, alternative energy cos (like biofuel, solar) , small vehicle manufacturers, branded apparels and cosmetics, water and waste management firms, mining and oil exploration companies. Most other sectors will be dominated by local Indian companies, and businesses in the US would do well to co-invest with an Indian partner for now
A large English speaking population is only good for businesses that seek to outsource services, and not for any other kind of investment. Those that seek to tap into the large market will quickly find that English is not as widespread. India only manages to educate a small fraction of its population, and a still smaller fraction of them can actually speak English. Most of this labor resides in the big cities where the young Indian go through the anglicized schools left behind by the British. Its skilled labor is part of this small sliver, and competition for this talent is fierce.
The one thing one can say about India's democratic institutions is that they are painfully slow and are effectively manipulated by the local businesses. Further, I'm not convinced that capitalist systmes require a certain form of government to thrive. It only requires a well-functioning law and order machinery to enforce contracts, and some semblance of a capital market. So its no surprise that a non-democratic China or even an authoritarian Singapore have done well in adopting capitalist ideas. The Indian law and order system, however, is woefully inadequate and inept. Even most Indians do not trust it to deliver.
Given this, the only attractive reason for investing in India is the opportunity to participate in a vast market with a pent-up demand for many goods and services. Seen from this point, it becomes obvious that most Western companies are ill-equipped to succeed in India. Most successful business models of the West are likely to lose to local competitors. Western business process consume large quantities of power, and achieve productivity gains through smart automation. Both these requirements will effectively price out the Western companies from the Indian market. The only succesful companies would be ones that effectively "harness the lack of infrastructure and resources" in India. Some likely Western business winners in India would include - Preventive healthcare cos, alternative energy cos (like biofuel, solar) , small vehicle manufacturers, branded apparels and cosmetics, water and waste management firms, mining and oil exploration companies. Most other sectors will be dominated by local Indian companies, and businesses in the US would do well to co-invest with an Indian partner for now
