In an economic environment which is fast losing momentum, the desperation of various players in the market is palpable. The news flow since the November attacks on Mumbai have gone from the ‘worst’, to, looking for new words to describe the gloom & doom.
The wave of diplomatic claptrap has led to a situation where we are resigned to meandering from one sub-issue to another. The ‘puppet’ leaders of the enemy have assumed a halo of ‘cool’ of mega-proportions. This has left our leaders shivering at the prospect of having to counter the economic downturn as the only panacea for a disillusioned populace which is bracing up for the polls.
I recently met (informally) a reputed fund manager, who took ‘polite interest’ in what we were recommending to our clients. I told him about our negative outlook on equities because nothing really seems to be working. That generally we were asking people to park money in short term debt. He expressed his concern and surprise at investors becoming so completely risk-averse. To his mind, investments in govt. debt of longer duration made absolute sense. He felt that the govt. had no choice but to reduce interest rates to stimulate demand. My supposition to that was what can happen if demand did not respond to such stimuli? His answer was much on expected lines….in which case, things could get worse before they got better.
The various mis-deeds of the Satyam management keeps tumbling out with unfailing regularity. The CID has claimed that Satyam had an inflated headcount, this to my mind, is a rare silver-lining to the dark clouds floating over the Satyam skyline. Let me explain, in my interaction with clients for financial planning, we have seen that over the last 2-3 years, i.e. from 2006 to 2008, salaries of executives have gone through the roof! Now when the economy is slowing down, businesses in addition to fighting the downturn in sales have also got to right-size the salary bill. When it happens eventually, it will result in a lot of pain. Satyam may find this easier to do, as ‘rightsizing’ for it is going to result in little or no pain….now you see, why Mr. Raju could still keep his missed date with the WEF at Davos in a few years time!
At a second follow-up meeting for offering financial planning services to a prospective client, I realized that I was running into a dead wall. His resistance to paying fees for services was understandable. A first generation entrepreneur who has just woken up to the reality of the effects of an economic slowdown - a straight 40% fall in top line would blank the daylights out of anybody.
However what was puzzling was his efforts at trying to prove a point by ‘transparently rationalizing’ the pros and cons of the benefits of hiring a financial planner. His reasons were many – this year he would not have profits, to invest; he did not want to disturb his existing portfolio even though they were down significantly; given the state of business financials whether he should hire the services of an advisor etc. etc. He also actually ended up saying that if he were to focus for 2 entire days without any distraction, he would be able to research the market and his portfolio to come to the same conclusions which an external advisor can provide!
In his efforts at ‘trying to be fair’ (in his own judgement) he then put this query to me to answer – Do you think I can manage my finances?
My reply was direct and no-nonsense (when reality dawns, it hits you somewhere between the eyes!) – I asked him whether he wanted to hear a ‘palliative-Yes’ or a ‘discovery-of-truth-No’? By the high standards of fairness that he had set for himself, he wanted the truth. I told him that he was in the same business for the last 15 years and yet could not foresee (by his own admission) the coming downturn. In comparison, given the relative newness of his familiarity with personal finances, where did he think he would stand in navigating through the future? His reaction was fair to us both – he needed more time to think it over.
Now let me mention about an unfolding event, and invite the reader to think and reflect – L&T, an Indian corporate icon, is in ‘hot pursuit’ of Satyam Computers, which it feels has a ‘strategic fit’ to its own InfoTech subsidiary – in terms of its significant strengths (experienced team, numerous Fortune 500 clients etc.). It thinks if Satyam is allowed to die & dis-integrate the ‘natural way’, it will be a big loss of ‘opportunity’. Hence L&T has decided to use its considerable cash reserves in hiking its stake in Satyam, from 4% to more than 10% to wrest a seat on the board of the company. Why on earth, should a company (which is a leader in diversified engineering and related businesses with more opportunities awaiting it in the nuclear area, in addition to its existing portfolio of core businesses), choose to throw its money for another company, working in a sector, where its own subsidiary (more than a decade old) has managed only an ‘average’ existence?
The fund manager referred to here-in earlier, alluded to his personal experience of interacting with the ‘thought leader’ at L&T and summed up his feelings in one word – ‘difficult’!…to fathom, I presumed.
First generation entrepreneurs or technocrats with decades of experience (obviously, in their own field) will always have a high probability of making mistakes when taking on challenges outside their area of core competence. As a consequence a financial planner and a management guru (who helps companies focus on their core competence), may both, have new prospective clients to look forward to.
The last year’s events – both economic & political, has left us in a significant state of dis-array, it has left us much humbled and wiser. When you look back at such periods, later in the future, you are able to take stock about the mistakes made and of course the significant learning that one carried forward from the experience – in fact it is this that will differentiate the future actions, as well as outcomes, for all, who experience the turmoil and live to tell the tale, another day!
The wave of diplomatic claptrap has led to a situation where we are resigned to meandering from one sub-issue to another. The ‘puppet’ leaders of the enemy have assumed a halo of ‘cool’ of mega-proportions. This has left our leaders shivering at the prospect of having to counter the economic downturn as the only panacea for a disillusioned populace which is bracing up for the polls.
I recently met (informally) a reputed fund manager, who took ‘polite interest’ in what we were recommending to our clients. I told him about our negative outlook on equities because nothing really seems to be working. That generally we were asking people to park money in short term debt. He expressed his concern and surprise at investors becoming so completely risk-averse. To his mind, investments in govt. debt of longer duration made absolute sense. He felt that the govt. had no choice but to reduce interest rates to stimulate demand. My supposition to that was what can happen if demand did not respond to such stimuli? His answer was much on expected lines….in which case, things could get worse before they got better.
The various mis-deeds of the Satyam management keeps tumbling out with unfailing regularity. The CID has claimed that Satyam had an inflated headcount, this to my mind, is a rare silver-lining to the dark clouds floating over the Satyam skyline. Let me explain, in my interaction with clients for financial planning, we have seen that over the last 2-3 years, i.e. from 2006 to 2008, salaries of executives have gone through the roof! Now when the economy is slowing down, businesses in addition to fighting the downturn in sales have also got to right-size the salary bill. When it happens eventually, it will result in a lot of pain. Satyam may find this easier to do, as ‘rightsizing’ for it is going to result in little or no pain….now you see, why Mr. Raju could still keep his missed date with the WEF at Davos in a few years time!
At a second follow-up meeting for offering financial planning services to a prospective client, I realized that I was running into a dead wall. His resistance to paying fees for services was understandable. A first generation entrepreneur who has just woken up to the reality of the effects of an economic slowdown - a straight 40% fall in top line would blank the daylights out of anybody.
However what was puzzling was his efforts at trying to prove a point by ‘transparently rationalizing’ the pros and cons of the benefits of hiring a financial planner. His reasons were many – this year he would not have profits, to invest; he did not want to disturb his existing portfolio even though they were down significantly; given the state of business financials whether he should hire the services of an advisor etc. etc. He also actually ended up saying that if he were to focus for 2 entire days without any distraction, he would be able to research the market and his portfolio to come to the same conclusions which an external advisor can provide!
In his efforts at ‘trying to be fair’ (in his own judgement) he then put this query to me to answer – Do you think I can manage my finances?
My reply was direct and no-nonsense (when reality dawns, it hits you somewhere between the eyes!) – I asked him whether he wanted to hear a ‘palliative-Yes’ or a ‘discovery-of-truth-No’? By the high standards of fairness that he had set for himself, he wanted the truth. I told him that he was in the same business for the last 15 years and yet could not foresee (by his own admission) the coming downturn. In comparison, given the relative newness of his familiarity with personal finances, where did he think he would stand in navigating through the future? His reaction was fair to us both – he needed more time to think it over.
Now let me mention about an unfolding event, and invite the reader to think and reflect – L&T, an Indian corporate icon, is in ‘hot pursuit’ of Satyam Computers, which it feels has a ‘strategic fit’ to its own InfoTech subsidiary – in terms of its significant strengths (experienced team, numerous Fortune 500 clients etc.). It thinks if Satyam is allowed to die & dis-integrate the ‘natural way’, it will be a big loss of ‘opportunity’. Hence L&T has decided to use its considerable cash reserves in hiking its stake in Satyam, from 4% to more than 10% to wrest a seat on the board of the company. Why on earth, should a company (which is a leader in diversified engineering and related businesses with more opportunities awaiting it in the nuclear area, in addition to its existing portfolio of core businesses), choose to throw its money for another company, working in a sector, where its own subsidiary (more than a decade old) has managed only an ‘average’ existence?
The fund manager referred to here-in earlier, alluded to his personal experience of interacting with the ‘thought leader’ at L&T and summed up his feelings in one word – ‘difficult’!…to fathom, I presumed.
First generation entrepreneurs or technocrats with decades of experience (obviously, in their own field) will always have a high probability of making mistakes when taking on challenges outside their area of core competence. As a consequence a financial planner and a management guru (who helps companies focus on their core competence), may both, have new prospective clients to look forward to.
The last year’s events – both economic & political, has left us in a significant state of dis-array, it has left us much humbled and wiser. When you look back at such periods, later in the future, you are able to take stock about the mistakes made and of course the significant learning that one carried forward from the experience – in fact it is this that will differentiate the future actions, as well as outcomes, for all, who experience the turmoil and live to tell the tale, another day!
Nice piece, Aniruddha.
ReplyDeleteBeing in a business - key operative being "a" - for long gives rise to hubris. And this is no different in managing personal finances as well. I remember the guy who sat next to me in the Dealing Room. Unsatisfied with his bonus one year he finally shook it all off by saying he would make it good by simply doing what he does best - day trade. I watched his trades for the next few months as he accumulated small profits. His rich "business" acumen soon germinated the inevitable hubris and he took a large bet - I remember even after 9 years - on Videocon. The Black Swan hit and I never saw my co-trader again indulge in such bonus-substitution acts.
Being in a business for long also creates an avid aversion to failure - however benign. Dick Fuld and John Thain looked all around and saw their compatriots making money hand over fist by expanding their balance sheets and bringing on more and more dubious assets. I do not subscribe to the argument that experienced bankers like them did not know what was going on. They damn well did but that sense was overwhelmed by the more dominating - "we are toast if we don't get in ballpark straightaway". They damn well did and faced the consequences.
I still don't understand L&T though. Like I still don't understand Vijay Mallya. I wholeheartedly subscribe to your argument about L&T's inability to scale up L&T Infotech (like ITC's inability to bolster up theirs) and this foolhardy decision to get Satyam. Perhaps Naik is displaying a mixture of both hubris and that aversion to failure.
It is a brutal world out there and the best we can do right now is to become good Monday morning quarterbacks. Maybe I will also re-read Michael Porter!