Management Quality: Refining our thinking on "Great Managements"


(Donald Francis) #1

Hi Guys,

Long time! been busy with this n that :slight_smile:

Attaching a presentation made to a small private investors club in Bangalore. Most of them are senior investors and prefer not to meet Management; they wanted to hear the other side of the story, knowing I belong to the other camp!

Happy to say - all of them are Converts! They say they do see the merit in what we are doing at VP & how. Thought this should be useful for passionate Learners at ValuePickr as also for senior practitioners, and the larger investment community

Management Quality coverage requires a vast canvas. This presentation may seem more inward-looking as only a few familiar names are discussed. We also may seem to giving a standing ovation to a few names. It’s intentional!

A. It has been painful for us to see most VP members - not being able to keep faith and HOLD on to some of the excellent businesses in VP Portfolio

B. The Stock Story/Management Q&A and discussions at ValuePickr have all been hailed - yet they have probably failed to deliver -**probably couldn’t clearly bring out the “Insights”**that we had developed over years of hard work & involvement with the Business/Management -that enable us to keep FAITH :slight_smile:

C. This is our attempt to pay it back to the VP community. It’s our fond HOPE that this presentation will bring in more refinement in our ability to think more clearly on - “What makes a Great Management”.

Look forward to your feedback.

Look forward to more refined discussions on Management Quality. Look forward to each new passionate young Turk at ValuePickr becoming emboldened to using these “Mental Models” to dissect any fresh new opportunity.

VP-Capital-Allocation-II-MQ.pdf (753 KB)


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(Sunray) #2

Thanks, Great to see a post from you.

Sanjay


(Swapnil) #3

Great work Donald…Good insights into qualitative factors which I believe are equally important as quantitative factors…

Swapnil


(Dhinakaran AK) #4

Great work, Donald. Very usefull.

Thanks.

Dhinakar


Investing Basics - Feel free to ask the most basic questions
(TCX) #5

Enjoyed looking at the companies from fresh perspectives. Getting a sense of why this is so important. e.g. I have always wondered what makes Ajanta Pharma special. How is it that they continue to grow the way they have been growing - surprising everyone!

Especially liked the way the Insights are built up. Unique Edge >>Standing-out>>Execution Ability>>Durability>>Next Level>>Compounding or Growth Mindset business.

Ramdeo Agarwal has mentioned Growth-Mindset businesses as the businesses to be in for the long term. He never tires of giving the Hero Honda example.

Wish this was easy. Hope we can go on to discuss a few companies and dissect them threadbare on a a couple of Insights or say compare one with another. What’s the best way to go about this - so it becomes more easy for us to follow and start using?


(Atul Garg) #6

Donald,

Thanks and congratulations for this crisp and power packed ppt. It delivers a lot of punch.

Can you help me(us) better organise my (our) thoughts around which trait can be used to understand the management VISION and managements ability to keep off COMPETITION and handle threats in business. I do understand “Growth Mindset” captures VISION to some extent and “Why can’t reliance dislodge” trait covers ability to keep competiton at bay. But somehow feels there should be more to VISION and competivie ability. Appreciate your thoughts on this.

Thanks,

Atul


(Vidur Chhabra) #7

Great effort as usual Donald, you have this innate ability to probe just the right points, and then put your thoughts through so well. Haven’t seen the senior members lately such as yourself, ayush, Hitesh, Tony etc. participate as extensively as you usually do, please do be a bit more active, as this wonderful forum doesn’t seem the same without this participation from its senior members!


(Utkarsh Patel) #8

Excellent Presentation about Qualitative Aspects.

Proxy for check list :slight_smile:


(Vinod MS) #9

Hi,

I think this is much more than checklist. This offers models to have in our head while reading AR, management discussions, while watching interviews and definitely while meeting the management and hearing them during AGMs.

Slotting management based on this will contribute to overall conviction in the investment and thereby the allocation as-well. This is very critical especially for small companies as irrespective of the business attractiveness the future largely depends on the leadership.

Cheers

Vinod MS


(Donald Francis) #10

Good to see many of you perking up to put forward your thoughts. Management Quality is a huge canvas …and there are many nuances. There is much to explore. And we learn from each interaction.

For me it has always been amazing …that I do some work of my own…put forward my thoughts …and every interaction I learn something incremental …and we build further from there.Yes, it requires lot of effort and hardwork before some clarity emerges and our own comments develop…but from there we keep refining.

I have received several more comments over email. I am taking the liberty of sharing them here in subsequent posts, on an anon basis …because I believe they have important things to add to this discussion, and all of us will have something to derive from them and take our discussion forward.


(Donald Francis) #11

…from a pro veteran investor …

MQ is a large canvas. Youâve nicely covered most points, though appears a little inward-looking to me as focused on few names. And you seem to be giving a standing ovation to all of them.____


I like the series Unique Edge>> Stand-out>>Execution Ability>>Durability>>Ability to go to next level.____


Traits Iâd like to emphasize in MQ from equity investing standpoint are below 5:

  1. Integrity**& Fairness**: Non-negotiable. Related party Transactions. Corporate actions. Reason why Cairn is suffering under Vedanta group.____
  2. Talent: Competence, Distinctive ability, Unique edge, Orientation to innovate. Most critical attribute to look for is how did the management respond when going through last adverse phase of slowdown or turbulence.____
  3. Execution skills:Capital allocation record.In life of any business, execution skills of management often separate the ordinary from the great. Long term track-record in building scale & proportion. Mallya group shining example how not to do.____
  4. Passion: Growth Mindset, Ability to take the business to next level. Caution: Passion should not be mistaken for mindless one-upmanship that every other company is getting into M&A game, so why should I lag behind aka Novelis by Hindalco.____
  5. Transparency: Disclosures, Investor relations, Quality of information, Compensation structure. Whether companyâs communication highlight only the âgoodânews.

(Donald Francis) #12

…from a very promising learner…

This ppt is absolutely superb.

But, would’nt it be good if you start with business quality discussion and then with Management quality discussion ? I;am sure you would have a reason for taking management quality first.

For a new-bee (like me), this ppt is like stage 2 of the journey. I would look at BQ first and then stage 1 of MQ which will be filtering out the negatives etc. You have covered it well here though (http://www.valuepickr.com/basics/stock-analysis-valuation-frameworks/stock-analysis-framework)-- The management ) which is the pre-requisite.

This is at the next level.

Based on this, I’am trying to understand what kind of questions can be asked ( or have been asked in previous Q&A like kitex or Shilpa).


(Donald Francis) #13

…from a senior value investor …

I had a look at the presentation and I should say its excellent work - the proof of the pudding is in the eating in terms of companies.

I typically look for management in two key tracks

)- capital allocation

)- integrity

I would split capital allocation into two - operational allocation and excess capital allocation. In the example you have presented, excess capital is a non issue as these are rapidly growing companies and can re-invest almost all of their free cash. So companies like Polymedicure, PI industry, Mayur Uniquoters are great operators. they found a niche and have focused on it and built on it.

A nuance to this analysis is - has the management developed a new business model or have they picked an existing one and been a very good executor. A company like Shriram or PI are innovators in that extent and i would say their management has built a more durable biz than say a Mayur or Shilpa which are good in execution. So I would have a tendency to hold on to such companies longer.

One more point to analyse is how long has the management in the business and how have they handled adversity. For example an Asian Paints has seen multiple biz cycle and is more robust. a Symphony went through a near death experience and its management realises the importance of focus. A management with such experience will be able to handle tough conditions better.

One more suggestion - how about inverting the problem - look at companies which appeared promising and never work out. It very easy to avoid the likes of kingfisher, but how about companies which had a few of these characteristics and never worked out ?


(Donald Francis) #14

…follow up from same senior value investor …

in a lot of cases, it is difficult to separate the BQ from the MQ. Is the management lucky and smart to realise that they been lucky ? for example - a managament may catch the right wave in a business and just ride it. they are smart to recognize that and not ruin it - look at bharti airtel. however once the trend ended, they could go beyond that.

the above seems to be case for a lot of companies and management - the company is at the right place at right time and they are able to use it for some time. in such cases, the question then becomes how long will the wave last.

on the other hand, in some case such as kaveri (as least as it seems to me) or mayur, the management has not caught a wave, but have created one for themselves.


(Donald Francis) #15

…from a reasonably competent investor …

Great work, once again! I feel that you have addressed a very important and quite often, under recognized aspect of “management quality”. In my opinion, many a times, our investment analysis does not give due attention to “Management Quality” as driving force behind value creation of business. Our analysis efforts primarily revolves around business quality and management quality is treated as “check list item”. This presentation should prod us to think more about the role “management quality” as a key driver of long term wealth creation for investors.

Points covered in the presentation aptly reflects the learning VP team have had through various management interactions. As usual, the most striking feature is the crispness with which the “key ideas” have been covered.

Thanks once again for sharing the distilled wisdom.


(Hitesh Patel) #16

Thanks Donald for your efforts at refinements in our investment process.

Management quality is most of the times easily differentiated from Business quality.

Just to give an example: the moment I heard and interacted with GRP management, I felt this is a great management. But what about the business? It definitely is a poor quality business (with too many variables difficult to understand) which is likely to tarnish the reputation of the management. So no matter how good the management was, for me it was an avoid.

A great business is one which as Lynch says “any idiot can run” successfully. (this is a simple definition of a great business)

But when you have a great management running a high quality business, its a potent winning combination. There are some examples you have enumerated.

For me management quality means people with unimpeachable integrity with high quality of

)- Vision

)- Execution

)- Allocation

(Even if the articulation is poor or sounding arrogant. :slight_smile: a la Hawkins – It qualifies as the business any idiot can run — Even with a mediocre management, Hawkins investors have ended up making good money — why mediocre – bcos they first missed the demand scenario by not being able to supply when demand was there and now when they are ready with supply, they have to wait for demand :slight_smile: And as I said before investors still have made great returns --inspite of management)


(Donald Francis) #17

…from our pro veteran investor …

MQ is at the heart of equity investing. Had a quick look at comments on VP, and I donât understand how some fellow investors say MQ is one of the points in checklist and BQ is most important.____


In my view MQ is as important as BQ if not more important.

__

Let me quote Philip FischerfromâPaths to Wealth through Common Stocksâ (emphasis mine):____


Of all the reasons found in a typical sample of Wall Street comments about why this or that stock should be bought, it is surprising how very rare is the appearance of the most important of all:____

âHere is a management starting to prove itself capable of developing the type of growth enterprise that will eventually win institutional acceptance, yet so far the price-earnings ratio fails to indicate financial community awareness of the quality of the management.â If the facts behind such a statement are accurate, such a management will in time unlock the basic formula for the greatest of investment successâ…____

A low price-earnings ratio, unaccompanied bya corporate management capable of bringing about a high price-earnings ratio, is usually an investment trap, not an investment bonanza. Management must actually be outstanding. Just to be called outstanding is not enough. As certain high officials of a great Boston trust company have statedâ____

**in evaluating a common stock, the management is90%, the industry is9%and all other factors are1%.**While this statement is not and was not intended to be mathematically provable to the fraction of a per cent, it summarizes the approach that, capitalizing on matters discussed in this section, provides the key.

Please note Philâs assertion in gauging the management quality - â_a corporate management capable of bringing about a high price-earnings ratio_â. Now this take is very different, the legendary investor is inferring that high PE companies are mostly led by great managements, indeed youâll find few exceptions to that.

PE that HDFC twins command is about management quality, amidst plethora of finance companies and banks. Though a common stock holder, Phil almost sounds like a PE fund investor looking for certain distinctive capability in the management team of his investee company.


(Raj) #18

@Donald, agree with you to a great extent that MQ should be the first criterion. After all execution is done by management only.

“Bet on Jockey, not on horse” …is gradually becoming my motto.


(Utkarsh Patel) #19

“Management starting to prove itself capable of developing the type of growth enterprise that will eventually win institutional acceptance, yet so far the price-earnings ratio fails to indicate financial community awareness of the quality of the management”

Captures the essence of Management Quality and Valuation stages for a Quality Emerging Business from an investors perspective.


(Donald Francis) #20

I am not so definitive (yet) on relative importance of Management Quality and Business Quality. What I do know is that they are joined at the hip - both are very important - and sometimes you have the liberty of choosing the best of BQ with best of MQ and at cheap Valuations too!

From then on, its a simple job of Holding On!

Remember the motivation for this MQ & BQ (planned) presentation series is only one thing. All the data was there for everyone. The Business & Management Insights were available from the Stock Stories and Management Q&A - for everyone. There are at least some 20-25 folks who work very hard and closely with each other, and discuss things threadbare in their own ways. Yet most folks, including VP Core Team folks had (even now have) differing opinions on respective business - BQ & MQ!!

Obviously that is going to be there - that is what makes a Market :). But, as someone said before, the proof of the pudding is in the eating!! There is a 40x bagger, a 25x bagger and several 10x-15x baggers in VP Portfolio over 4 years. Most of the businesses are growing strongly, and have many years of growth before them, some of them huge runways in front - with few variables in the Business, and very competent Jockeys at the helm. Yet, only 2-3 folks can be counted among these folks above, who have had the sense and the discipline, to stay the course, stick to a defined process, not jump off the winning horse - so to say. Almost none of the horses actually showed any signs of slowing down, so where was the need to jump off?

The super returns from these businesses only means one thing to me - Over 4-5 years****the financial community awareness of the “Quality of Business and the Management” - has emerged, right? So THERE IS actually a method to the madness.

Those who haven’t been able to stay the course - I dare say (excusing personal needs) did so because they did not share the same superior Insights into Business & Management Quality, and therefore lacked the CONVICTION necessary - to reason that even after the 4-5x in pocket - the value of the business is growing stronger by the day - as is the financial communities awareness of the same.

If some have been able to stay the course, they must have had some strong patterns or impressions in their head that allowed them to play contrarian - that allowed them to keep the FAITH - based on relative superiority of their Insights (over others’) -but derived from essentially the same data-sets )- the ART side of Investing :slight_smile:.

Request everyone to keep an open mind and appreciate the differing viewpoints that are emerging - but FOCUS on how to sharpen the Insights )- by harnessing the collective experience of so many smart investors around us. I am sure by continuing to add to this discussion we will unearth a few more patterns that should be part of our essential mental models - while looking at Management Quality.

Will devote some Energy now to thinking and presenting on Business Quality BQ - a much harder ask e.g. How do we definitively show that Astral is a superior business than Mayur :)? Some VP Core Team members may be disagreeing straight away - but if we put all the cards on the table, it’s a simple ask - explainable in 2 paras - even my Wife and Ramdeo Agarwal would agree instantly!

That’s the beauty of abstracted Insights or Mental Models. I hope we can again stick our necks out and deliver on the promise of elucidating a very promising thing - Business Quality Insights :slight_smile:

Cheers.