The Hindu Business Line : Study management quality

Do you feel that books about investing in securities are getting to be like television commercials and crime comics? But that’s just what Philip A. Fisher feared in 1959, when introducing ‘Paths to Wealth through Common Stocks’. He tentatively wondered if his new book was “like adding one more brand of soap when there might be twenty already on the market”.

With a dedicatory message addressed “to all investors, large and small, who do not adhere to the philosophy: ‘Everyone seems to believe it, so it must be so’,” the book attempted to do two things: First, show how the investor (or his adviser) can determine the occasional company with outstanding management that is likely to provide the vehicle for tremendous increases in market value over a long period of years. And second, indicate when the shares in such unusual companies may best be bought and “the much rarer situation when a stock has been well selected in the first place should be sold.”

The foreword by his son Ken Fisher, in the 2007 ‘classics’ edition ( www.wiley.com ), highlights an inherent risk in picking the wrong stocks by not seeing the management correctly thus: “Not just that you might presume a superior management where it doesn’t exist, but also that you might see the management correctly when you buy it, but fail to notice that succession management is not as good.”

A tested path.

The 70% rule

Like most people over busy at the desk, you are perhaps mining and massaging more and more data, in pursuit of perfect knowledge, and thus perfect certainty. Watch out, you may be edging towards decidophobia, warns Michael Useem in ‘The Go Point’ ( www.crosswordbookstores.com ). The Marine Corps battles this syndrome with the ‘70 per cent solution’, he informs. “If you have 70 per cent of the information, have done 70 per cent of the analysis, and feel 70 per cent confident, then move.” The logic is simple, says Useem: “A less than ideal action, swiftly executed, stands a chance of success, whereas no action stands no chance. The worst decision is no decision at all.”

A book to go for, especially if you are phobic to taking decisions.

Market rent

In the current Sensex rise, who is winning, and who losing? While clear answers may be hard to come by, it should help to know that trading rules and institutions that comprise a market microstructure create rents when they benefit particular market participants, as John Echeverri-Gent writes in an essay on equity market reform, included in ‘India’s Economic Transition’ edited by Rahul Mukherji ( www.oup.com ). The author cites James Buchanan’s definition of rent as ‘that part of the payment to an owner of resources over and above that which those resources could command in any alternative use,’ or simply, ‘receipt in excess of opportunity cost’. In contrast to ‘intervention rents’ produced by state interventions that restrict competition, ‘market microstructure rents’ are created by market rules that shape competition in the absence of state intervention, he explains. While ‘innovation rents’ can be dissipated by competition, “market microstructure rents are reinforced by competition because the winners use their rewards to perpetuate existing institutions through new rounds of competition.”

Eerie.

Problem of largeness

Behind many of the most spectacular corporate failures in modern times, Paul Seabright sees great creative individuals who overreached themselves, in part because the normal restraining mechanism of the modern firm failed to work. He compares big corporation to large mammal, whose sensory capacities ‘enable it to see, or hear, or scent danger before the danger arrives, and thereby check the urge to act on the impulses of hunger or libido’. When a corporation 217;s internal checks begin to fail, its days are surely numbered as those of a large hunting mammal whose scent or hearing fades, writes Seabright in ‘The Company of Strangers’ ( www.landmarkonthenet.com ). “And the larger it is, the faster it will run out of fuel for its daily metabolic needs.”

Precious insights.

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