Areas where values can be hidden.

1. A gradual transformation of a B2B business with much lower profit margins into a B2C business with much higher margins if it becomes successful.

2. How operating cash flows in some businesses are far in excess of reported earnings thanks to over-conservative depreciation policy and how, over time, the reported earnings will catch up with operating cash flows simply because of passage of time.

3. How the true earning power of some growing businesses can become visible just by mentally stopping the growth capex. Charlie Munger once said: “You should seek businesses that just drown in money if they just pause for breath.” Well, then why not mentally make them pause some businesses to catch their breath and visualize the results?

4. How in a highly leveraged firm, debt reduction from sustainable operating cash flow will increase value over time. So might debt reduction from sale of some operating Visual Thinking 2 assets under some circumstances.

5. How a firm’s true earning power is camouflaged because the earnings of a great business are subsidising the losses of some miserable ones and there is a credible plan in place to stop the haemorrhage. Or maybe the camouflage is there because some businesses which have great potential are still in growth phase and have not yet started recovering their costs which were incurred for a certain scale yet to be achieved by them.

6. How an asset-heavy business that’s into manufacturing transforms itself into an asset light business by outsourcing production or generally speaking, how tradeoffs between margins and capital turns can change the value of a firm over time.

7. How the fundamentals of a business deteriorate over time thanks to increase in the intensity of competition in its industry (how the P&L will change, and how the balance sheet quality will change).

Taken from Sanjay Bakshi notes.

Key Takeways from Zero to One

Biggest mistake of a start up is to describe your market so narrowly so that you dominate by definition.  Every startup should start with a very small market. It's easier to dominate a small market than a large one. It's much easier to reach a few thousand people who really  need our product than to try to compete for the attention of millions of scattered individuals.

Characteristics of a Monopoly Proprietary technology - A rule of thumb - The technology must be at least 10x better than its closest substitute. The clearest way to make a 10x improvement is to invent something completely new or radically improve an existing solution.

Network effects - Network effects business must start with especially small market.

Economic of scale - Many business gain only limited advantages as they grow to large scale. Service business are especially difficult to make monopolies. A good startup should have the potential for great scale built into its first design.

Branding - No tech company can be built base on branding alone.



Difference between a biotech start up and software startup.




The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined. Only invest in companies that have the potential to return the value of the entire fund.

When considering investing in a startup, study the founding team. Technical abilities and complementary skills set matters, but how well the founders know each other and how well they work together matter just as well. Founders should share a prehistory before starting a company.

How much does the CEO intends to pay himself. A company does better the lesser it pays the CEO.

These are the 7 questions every business should ought to be able to answer. 

Key takeways for Getting to Yes Negotiations

1)Separate the people from the problem
=>Give them a stake in the outcome by making sure they participate in the process
=>Change from a face to face orientation to side by side, jointly solve a common problem.
=>Listen actively, pay attention to core concern and acknowledge what is being said
=>Put yourself in their shoes

2)Focus on interests, not positions
=>Realise that each side has multiple interests
=>Seek out the shared and compatible interest.
=>Be specific on your interest, the wisest solutions are those that produce the maximum benefit to you, at the lowest cost to the others.
=>Examine their position, and ask why?

3)Invent options for mutual gain
=>Brainstorming for more options. Separate the act of inventing options from the act of judging them.
=>Broaden the options on the table rather than look for a single answer.
=>Search for mutual gain by dovetail differing interest. Any different beliefs, and different interest, difference in risk attitude or different values placed on time and structure options based on these.
=>Provide a few equally acceptable options and ask for their preferences to seek you their interests and belief. One fair solution might be..
=>Invent ways of making their decisions easy

4)Insist on using objective criteria.
=>Frame each issue as a joint search for objective criteria such as asking "What is your theory"
=>Reason and be open to reason as to which standards are most appropriate 
=>If the other side is powerful, the more you benefit by negotiating on merits.

5)Know your best alternative to a negotiated agreement (BATNA). 
=>The better your BATNA, the greater your power hence develop your BATNA
=>Consider the other side's BATNA. The more you can learn of their alternatives, the better prepared you are for negotiation. If they appear to overestimate their BATNA, you will want to help them think whether their expectations are realistic

6)Negotiation jutsu
=>Dont attack their position, look behind it. Look for the interests behind it and seek out the principles that it reflects. Seek out and discuss the principles underlying the other side's position.
=>Dont defend your ideas, invite criticism and advice. Ask them what's wrong with it.
=>Channel criticism in a constructive direction is to turn around and ask for advice. Ask them what they would do in your position.
=>Recast an attack on you as an attack on the problem.
=> Ask Questions and pause. Use questions instead of statements. Questions allow the other side to get their points across and let you understand them. Questions do not criticise, they educate.
Silence is one of your best weapons. If they make an unreasonable offer, best thing to do is just not say a word.

7)One-text procedure. 
=>Simply prepare a draft and ask for criticism and improve the draft, and than get the party to agree with a simple yes

Why did Long Term Capital Management fail?

LTCM treated volatility as risk.  LTCM relied heavily on these elegant models to compute risks. Using models to calculate risk only provide a greater sense of security than warranted. The real world is uncertain. Dice is predictable while Russia is not. Some things cannot be simply plug be into a mathematical model. Uncertainty is an abstract concept, one that does not conform to arithmetic. The belief that future risk can be calculated from yesterday prices or past volatility is asinine. Not all that matters can be calculated, while not all that can be calculated matters.

You could be highly leveraged but liquid, or you could be liquid with moderate leverage. LTCM  was highly leveraged yet their trades were illiquid. This not only requires them to be correct merely at the end but it requires them to be correct every single day until the day of maturity. That is akin to playing Russian roulette. Although eventually their trades do converge, they didn't manage to keep their head above water till then. Like how John Maynard Keynes put it, the market could stay irrational longer then you could stay solvent.

They ventured out of bond arbitrage which was their circle of competence, into other unfamiliar areas such as equity volatility.

After a winning streak, hubris sets in. LTCM partners felt like they could do no wrong.

One thing that completely baffled me was that LTCM partners were willing to leverage up and bet heavily for dollars they want but don't need(They were already super rich), in the meantime risking everything they need.

Key takeaways : How google works

Key takeaways from the book : How google works. 

Bet on technical insights 
-There are now almost perfect market information and broad availability of capital, hence you need to win on product and platform. They need to solve a problem in a novel way, used that solution to grow and spread quickly. 
-The best products at Google had achieved their success based on technical factors, not business ones, whereas the less stellar ones lacked technical distinction. 

Optimize for growth 
-Scaling the platform needs to be a core part of your foundation. 
-A successful foundation must provide a good basis for sustainable revenue generation 
-Patiently focus on growth rather on monetization. (You could add ads volume to make more revenue, however this will end up hurting your user experience, which eventually impact traffic) 

On open or closed architecture 
Default to open , not closed 
-Open drives innovation into the ecosystem (new features, applications, lower cost of complementary components), this leads to more value and growth for the new ecosystem 
-Allows you to harness the talents of thousands of people, focus on pushing the entire system forward with new inventions. 
Except when: 
-Exception to the open architecture, is when you have a product that is demonstrably better (based on strong technical insight) and you are competing in a new, rapidly growing market. (Apple's success with the iPhone, just like Google's with search, was based on an unusual set of technical insights that yield an obviously superior product in a rapidly growing space. If you can achieve that sort of extreme impact with a closed system,then give it a shot. Otherwise, default to open. 


How to look for the next technology success story: Bet on technical insights that help solve a big problem in a novel way,optimize for scale, not for revenue, and let great products grow the market for everyone.

Random Rambling on Oil

Academic economics textbooks  always preach on the law of supply and demand.

When demand falls, prices will drop and production level will fallaccordingly until equilibrium is met.With the recent oil supply glut and tumbling oil prices, one wouldreasonably expect a corresponding cut in oil companies' production.However, the truth could not have been further. The oil market did not correctin such a manner.
The recent quarterly results of shale oil producers show a y-o-y increasein oil production. How is this even possible in the face of declining oilprices?Firstly, shale oil producers had invested heavily during the shale boom inthe previous decade. The cash outlay had already been spent. A measly returnon investment is better than no return on investment. Secondly, theseinvestments were carried out using a huge burden of debt and other huge fixedcost. Production of oil at a low price would still at least enable them toservice their interest cost.
As an individual company, the action to increase oil production appearsrational and makes perfect sense. Collectively, as an industry, it seemsasinine. More oil production would certainly lead to oil prices spirallingdownwards, exacerbating the problem even further, with each producer soldering onto postpone bankruptcy by increasing output with the unintended consequence of dragging prices tounprofitable levels for everybody.As how the oil titan, John D. Rockefeller phrases it in his biography, "Eachproducer, while pursuing self-interest, generates collective misery. Everyman assumed to struggle hard to get all the business, even though in doingso, he brought upon himself and his competitors nothing but disaster."
On a side note, it is worthwhile to note that while John D. Rockefeller hadlived more than a century ago, his lessons on the oil industry are stillapplicable. Human nature does not change and the world very much still runs onoil.

Investment Mistakes(Thankfully by others)

Prabai's Mistake

Ok. Some might disagree that the outcome of Horsehead investment is still uncertain and should not be consider a mistake. However, falling from a price point of 9 bucks to 2 bucks would at least warrant a good re look. I will try to reverse engineer his investment idea at that point in time and what has changed.

Firstly, Prabai started out buying this coy as a net net during the 2008/10 period Nothing very wrong with that approach. Subsequently, the company move on to try and develop a new plant which will allow it to be the low cost producer, ( Steel coys paying them fee to provide them with waste product that can be use as valuable input for making Zinc). Buying Horsehead now while the plant is developing its moat is like getting in on the ground floor. (The numbers are not reflected in the financials). I can understand where is he coming from. Paying an attractive price with a huge potential upside.

What when wrong?

The plant failed to ramp up, encountering difficulties after difficulties, consuming loads of cash. With negative operating cashflow, the company is force to take on huge debt, taking on balance sheet risk and huge issuance of equity, diluting current shareholder interest. Adding on to it's woes, most of the debts are due in 2017, hence a potential liquidty crunch ahead if production still fails to ramp up by then,facing bankruptcy or another massive share issuance. Both does not bore well for the current shareholder. Lastly, falling zinc price is not going to help a Zinc producer very much. The movie is still currently being played out.

What can we learnt from this?

New plant production is never a dream fairytale, unlike the projection by managements, whose rosy production forecasts can only go one way, UP. Be wary when management says the problem is being resolved. Even when one problem seems to be resolved, another will surface to take it's place (There is never only one cockroach in the kitchen).

Secondly, beware of debt laden, high operating leverage companies operating in an economic sensitive industry. There is little room for errors.

Hence because of the above, there should be sufficient cashflow from other sources to cover the funding needs of the new plant. With a huge debt and negative cash flow, for Zinc, it seems to be a make or break situation.