The Star Principle & the Coffee Can Portfolio -looking at the same picture from different angles

Financial Independence, Uncategorized

I was re-reading the book – The Start Principle: How it can make you rich by Richard Koch.  If you have been following my posts you will know that I am quite a fan of his writings and have almost all the books that he has written.  Each time I re-read them, I identify something which I had not noticed earlier.

For all those of you who haven’t heard of Richard Koch, he was the first one to write a book on the 80/20 principle, also known as the Pareto principle.  He has written a lot of books related to the application of the 80/20 rule but in addition to that his basic slant has always been on strategy and has a lot of wonderful books written with strategy as the back drop.

If you want to read an author who simplifies strategy, not only for corporates but in real life, then he is one author you should read.

This time while I was reading the Star Principle once again, one aspect which leaped out of the book was that the Star Principle is so very similar to the Coffee Can portfolio which is covered by Saurabh Maukherjea in his book – Coffee Can Investing.

As per Richard if you invest in a company which is a leader in the market place and the market itself is growing at more than 10% compounded, then you will make money hand-over-fist if you can see that the market itself has longevity.  His logic is- if you invest in such a company in its early stages, then the possibility of making massive returns is even higher.  These companies are very few and far between and hence are STARS.

The concept of Stars, Cash Cows, Dogs and Question Marks was first propagated by the consulting company BCG (Boston Consulting Group) where Richard had his first job.

The concept of the Coffee Can portfolio was first espoused by Robert Kirby in 1984.   It was serendipity because Kirby had recommended a certain portfolio to a friend’s husband who did not sell any shares in the portfolio over a period of 10 years while Kirby did.  The amount of wealth that the portfolio created was way higher than what Kirby created in his portfolio.  This is the central concept of compounding which I keep harping about in each of my posts.  If you let something compound over long periods the amount created is enormous.

Saurabh takes the concept further and shows us examples with research, done over multiple blocks of 10 year periods, on companies which grew every year at a minimum of 15%.  If you had bought shares in those companies and then forgotten all about them for the next 10 years you would have got a very large return on your investment.  The number of such companies would be quite small.  If you extend the research to 15 year periods then the number of companies which had such consistent growth would be even smaller, but the certainty of returns would be much higher.

At the end of the day if there are only a few companies which can grow consistently year on year over such long periods of time then thats only possible if they are market leaders in the niche they occupy.  They also cannot continue to keep growing over long periods of time at such high rates, if the market itself is not growing fast enough.  Which then end up being STARS by the definition given by Richard.

The one difference which I perceive is that the Coffee Can portfolio does take into account the fact that some of the companies may close down  or lose market leadership by emphasising that you need to have a “portfolio of companies” with these characteristics.

So its not only about compounding but about creating a sensibly constructed portfolio of STARS which can create enormous wealth.

Wealth generation is not complex if you follow some simple rules….its not easy either though.

Till next time.

Carpe Diem

Compounding & successful organisations

Financial Independence, Uncategorized

Recently Tim Ferris had a podcast with Jill Collins.  If you have not heard of Jim Collins, he is the author of a lot of books which study how businesses succeed and fail.  One of his most famous books is Good to Great.  If you have not read it then its a must read for anyone who is even remotely interested in the corporate world.

If you haven’t heard of Tim Ferris or read any of his books the I highly recommend that you read his book The four hour work week and others.  The advantage of the podcasts is that you get to hear real life people and Tim goes into the interviews with a very detailed structure so that you can get maximum benefit

Coming back to the podcast with Jim Collins(if interested you can listen to the podcast  here). It’s a fabulous talk spread over about 2 hours but covers a very wide range of topics from “writing’ to Peter Drucker and to the Flywheel concept.  Jim had first introduced this concept in the book Good to Great.  But there it was more a chapter on how successful companies built systems to ensure each step helped them grow to the next and kept feeding.

However this flywheel concept was not elaborated further for a long time.  In the podcast Jim spoke about how he’s done more research on the Flywheel concept and written a monograph.  For me a monograph was a new concept. It’s a detailed study of a given topic. It’s less than a book but more than a whitepaper.

Since I was very interested in the flywheel concept from the time I had read the book, I immediately bought to read.  The big concept which stands out int he flywheel is the positive feedback loop.

Most of you would know of the negative feedback loop.  It helps control a process near a defined setpoint.  For example if you put car in cruise control, then if due to a gradient the speed starts going up then automatically the pressure on the acceleration pedal is reduced.  Another example of a negative feedback in your everyday life is the temperature control in the water heaters.  If the temperature reaches the set-point then the heating is stopped.  Negative feedback loops ensure control.

Positive feedback on the other hand is compounding at its core.  One good thing leads to another and another.  So Jim Collins gives multiple examples of companies like Amazon, Intel, Vanguard have used positive feedback to grow exponentially over a consistent period of time.

Which brings me to another book which looks at this same concept from a different angle.  Its a book by Perry Marshall called 80/20 Sales and Marketing.  Perry was influenced by Richard Koch who wrote the famous book on 80/20 many many years back.  Perry has taken the concept of 80/20 and explained the fractal nature of this law.  If you are in anyway related to sales or marketing you will find enormous nuggets for helping you in your sales or marketing career.

When I read “Turning the Flywheel” it reminded me of a similar concept in nature which Perry shows on how the Grand Canyon was formed and how the same positive feedback loops can be used to dominate Google Adwords.

More and more as I come across successes I am convinced of the fact that positive feedback (or compounding) changes everything in nature, businesses and financial life of people.

Would love to hear from you’ll if you’ll have seen any place else the impact of positive feedbacks.

Till next time.

Carpe Diem!!!

grand canyon during sunset

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Books that have helped me with my financial education- Part 3

Financial Independence, Uncategorized

Its been almost 2 months since my last post.  During this time I went on vacation with my family.  I will list those exploits in a separate post.

Before I left for my vacation, I was writing a series of posts on the books that have influenced me.  Hope after reading the blog posts you got a chance to read those books.  I would love to hear your comments on how you found the books.

For the moment this will be my last post on the books I have read till I get to my next lot.

The first book this time is the STAR Principle by Richard Koch.  I have been a fan of Richard Koch for a long time and try to read through all his books. In the STAR principle Richard talks about identifying companies which have higher than 10% growth rates and how they can end up creating almost monopolistic situations.  For developed economies like the US and UK I think this logic of identifying at 10% growth rates is a good number because the overall economy is growing at just about 2% average.

However if we were to look at it from the Indian context where India is growing at about 13-14% (6-7% growth + 7% inflation) then the number in his logic dosen’t hold.  However rest of the logic that he espouses in the book should hold.  I have myself not been able to identify an Indian company which is growing at 5 times the overall economy( 10% when economy is growing at 2%) on a consistent basis in the public domain.

The next book I read and would recommend Finding the Next Starbucks by Michael Moe.  Like the above book by Richard Koch, this one is also more focused on identifying high growth companies before the world comes to know about them.  Again since I don’t have knowledge of the private investment space in India, I have not been able to verify the logic and rules that the author gives.  However its a good read and a different way of identifying high growth companies.

I have been a big fan of the Little Book series.  In one of my earlier posts I wrote about the The Little Book That Beats the market by Joel Greenblatt.  There are a whole lot of other Little Books by different authors which explain difficult concepts of the financial markets in easy to read language.

One book which is worth a mention once again is Common Stocks Uncommon Profits by Phil Fisher.  This is a little serious read but is a timeless classic on equity investing.  Even Warren Buffet recommends Phil Fisher.

accounting administration books business

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While exploring investing, I did a lot of research on people who do trading – stocks, commodities etc. One author who I found has done a lot of work on understanding traders and writing about them is Micheal Covel.  I was introduced to him via the Little Book on Trading.  I then went on to read a couple of other books Trend Following and Turtle Traders.

If you have seen the movie Trading Places then you will find the Turtle Trader especially fascinating.  I did use the rules of the turtle traders for a short while and found them very valid for the Indian market as well.

However I left the trading space because I realised I did not have the speed with which to give directions to my broker to release positions when the trend reverses.  There are a lot of platforms available which allow you to set the rules for trading where based on your rules the platform can sell your holding.  Since I was only experimenting, I did not subscribe to any of these platforms.

In my next post I will share with you some other classic interviews and reports which explain the concepts of investing and financial planning.

Till then ….let me know your comments

Carpe Diem!!!

There is nothing sexy in achieving financial freedom – part 2

Financial Independence, Uncategorized

Yesterday I wrote about how most of these Ultra rich people – Warren Buffet, Tony Robbins, Richard Koch, Robert Kiyosaki – actually followed a system rigorously even when there were roadblocks around the way

The systems required that they had to do some amount of sacrifices. Maybe they did not go out for a date when they were young because they had to ensure that they were closing something as part of their system.

I also realised when I started a bank mandate initially with just a 1000 rupees. Initially it did matter that even before I could utilise the money, the money went out from the bank. But slowly I got used to it and I went on increasing my commitments to the money getting directly debited from the bank into some Investments.

In 3 years I did not realise what a difference that had made to my financial stability. Based on the possibilities that my investments could do, I actually sat down to figure out a date by which if my assets reached a given value I could leave my job and start doing what I want.

While God has been kind in a lot of these endeavours it is also a matter of the systems working and the investments compounding in the background.

For all those young guys if they read this, just a very small portion of their income if they can directly give a bank mandate, for money to be deducted to go into an investment, without they realising, they can all become millionaires.

If you leave it to your discretion that every month you will invest based on what you save…. You will never be able to invest.

The human brain was designed to ensure that it survived and immediate gratification was more important than long term safety. Hence the brain does not allow you to take a chance with your safety of money and wants you to have it till the last moment. But when you have a system to automatically reduce the money from your bank for an investment the brain gets used to the lesser amount of money and you are able to live a similar Lifestyle even with that less money.

Today there are possibilities of various kinds depending on your appetite and the goals that you have to invest in mutual funds in SAP or in a recurring deposit whichever way you want.

Whatever you do and whatever your risk appetite, put a system in place so that it works in the background and gets you to your goal

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