VP CHITAN BAITHAK 2017 GOA- Mental models and pattern recognition

My presentation was on mental models and repeatable pattern recognition.

The key points were that patterns can take the shape of:

• Same sector (Different geography)
One can see this in these sectors…
– Banks, FMCG, Consumer Brands, Diagnostic industry, Mobile towers, Gaming, Alcohol beverages, Airlines, Cable TV, Digital advertisement, Financial services, Insurance, Commodity Exchange, Rating agencies

• Adaptation Time lag (Adaptation in China/emerging market)
What happens in one country may happened in another country but with a time lag
– Automotive, Mobile, commerce

• Emerging Industry dynamics
One can try and see a pattern emerging and either be careful to sidestep the problem or be alert to grab the opportunity
– Enzymes, Pharma sector, IT sector

The other key idea was that one never knows when and from where the dots connect. It could be from an article from a magazine, a talk given by a investor, a newspaper article, a book one has read years back, a case study in business school…if one keeps an open mind the dots may connect to give an attractive investment opportunity …

The counter point was that things don’t always repeat in the same way because of many variances like local competitive intensity, local regulations, different management teams, consumer behaviour etc. As an example, the airline industry in India is far more price sensitive and all airlines behave like low cost airlines. While in the west, there used to be incumbents that behaved in one way and the low cost airlines behaved in a distinct way. Trying to directly extrapolate the thesis may not work out well…

Education of a fellow investor version1.pdf (381.2 KB)

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http://archive.fortune.com/magazines/fortune/fortune_archive/1997/11/10/233789/

One of the articles referenced in the presentation worth reading…

GE CAPITAL: JACK WELCH’S SECRET WEAPON GE CAPITAL SERVICES POWERS GE’S EARNINGS, DRIVES GE’S STOCK, AND SCARES THE HELL OUT OF GE’S COMPETITORS. HERE’S THE INSIDE STORY OF HOW CAPITAL DOES IT.

(FORTUNE Magazine)
By JOHN CURRAN REPORTER ASSOCIATES BETHANY MCLEAN, LIXANDRA URRESTA
November 10, 1997

(FORTUNE Magazine) – For most investors, there’s just General Electric, arguably the world’s most successful company–a maker of refrigerators, light bulbs, and more sophisticated industrial equipment. At another level, a small crowd of professional GE watchers know that CEO Jack Welch owes a surprising amount of his success to a profit dynamo called GE Capital Services. What only a handful of people understand–given GE Capital’s reclusive nature–is how important this secret weapon has become to GE’s continued prosperity, and what a model it is for managers trying to grow in any business.

Read more at the link above…

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Some of the points which were very illuminating…

"The model is complex, but what makes it succeed is not: a cultlike obsession with growth, groundbreaking ways to control risk, and market intelligence the CIA would kill for. "

“Welch sees GE Capital: opportunistic, entrepreneurial, fast growing.”

“Wendt runs a $33 billion empire as a string of niche businesses.”

"The business leaders stay close to their markets and concentrate only on what they know. When a new opportunity arises, Capital launches a new business, which grows to become a “bubble” once earnings reach $25 million. Thus, retailer financial services, which provides revolving credit for 75 million cardholders, begets a bubble, consumer financial services, a stand-alone venture offering GE’s own cards.

This narrow focus enables Capital’s components to operate with a clear idea of profit and loss. That may sound basic, but countless companies can’t create true income statements for their different lines of business."

“the small management crew adds its potent ingredients to Capital’s mix: funding (at GE’s low borrowing rates) and frequent performance reviews (at GE’s high intensity). There’s something else, too, that’s harder to measure: a careful blend of personalities and talents. Wendt provides broad direction and stays atop Capital’s dealmaking.”

“If an idea has the potential to generate $50 million in profits within five years, then funding becomes a possibility, and the “tight” phase begins.”

“Advance intelligence on a new market isn’t an advantage for Capital, it’s a requirement.”

“Competitors have a hard time understanding Capital’s unusual approach to business risk. Put simply, Capital seeks to eliminate–or at least reduce–all risks that do not carry a big potential payoff (like insuring utility bonds) and to save its risk-taking for the few that do. It also minimizes the risks posed by any one venture by owning a broad mix of businesses. That strategy is not unlike the way savvy investors manage their portfolios.”

“It’s impossible to wring all the risk out of anything, of course. But Capital takes extra steps with a proprietary software tool called Globalnet, which keeps worldwide track of GE’s exposure to every client across all lines of business. The potency of that cross- checking is hard to appreciate, so imagine American Express doing a similar thing with you. It would calculate what you had recently charged to your Amex card, then add on any fees you might owe to Amex’s financial planners, as well as the outstanding balance with American Express Travel for your last holiday. Before you could spend beyond a preset credit limit, a team of analysts would review your financial health, your career path, maybe even the state of your marriage. GE Capital takes the same sort of financial X-ray, not of people, but of every company with which it has business.”

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