Rakesh Wadhwa

Kathmandu:

If you have a chance to invest in a business, which one would you prefer; the one with excellent management but poor pros-pects and severe competitive pressures, or, the one with excellent prospects and low competition but poor management? In other words would you invest in the 5-star Hyatt hotel in Kathmandu with superb management, or the Coca Cola company in Nepal with (hypothetically) poor management?

Most people do not answer correctly and end up making investments which damage their capital and wealth. If you invested in the Hyatt hotel, you would have made a big mistake. Those who did regret it; its shares trade below issue price. Hyatt has been a poor investment so far, and this situation is unlikely to change anytime soon. Even if tourism turns around and Nepal booms, Hyatt would first have to repay its massive loans and would therefore be unlikely to generate significant dividends for its share owners. Contrast this with Coke; with poor management it might break even, with indifferent management it could earn a great return, while with good management its returns and thus share price would virtually zoom into the stratosphere. Not only that, Coke does not require any significant expenditure on R&D or on upgrading its production facilities. Hyatt would every five years or so need huge amounts for refurbishment and renovation to keep itself competitive. Coke thus generates a higher cash flow for its investors than all the star class hotels of Nepal put together. Even if the Coke company was beset with labour strife, managed by third rate executives, and reporting losses, I would still go with Coke and regard its temporarily low share price as a buying opportunity. This is a part of Warren Buffett’s – the world’s second richest man after Bill Gates and the world’s best investor – wisdom. He learned it the hard way. His initial investments – when he relied on good managers in businesses with poor economics – were bad.

Warren gives us the example of Burlington Industries which manufactured textiles. In 21 years of business operations between 1964 and 1985, this company needed $3 billion for improvements and capital investments for its plant and machinery and inspite of these expenditures it only gave a very modest return to its shareholders. It share price went up from $30 to $34 – a 13 per cent return in 21 years!

Was poor management to blame? No. Burlington had some of most able managers in America’s textile industry. It was just that the entire industry was bad and the rest of the textile manufacturers did even worse – many were bankrupted by competition, overcapacity, and cheaper imports. Incidentally Buffett did invest in Coke and saw his one billion dollar investment in 1989 go to over five billion dollars by 1994 – ie a return of 400 per cent in five years. Mary Buffet, who was Buffett’s daughter-in-law for 12 years, wrote, “Warren is fond of saying that when management with an excellent reputation meets a business with a poor reputation, it is usually the business’s reputation that remains intact”.

So where does this leave those who have nothing to invest and are merely figuring out what to do with themselves? The answer is: Go abroad. Just as for an investor it is the business you invest in which matters most, for you where you work matters most. The desire for going abroad is so strong in our part of the world that my book ‘Going Abroad’ was an instant bestseller in India and continues to be one even after 16 years of its first publication. Leaving Nepal will make you richer; there is enough evidence of it. You drive a taxi in Kathmandu, and you can barely make ends meet. You do the same in New York city and you can send money home to develop your village. Shalini and I met a cabbie in New York who has made a name for himself in India by sending money for opening of a girl’s school in his village. It matters little what you do, it does matter a great deal where you do it. If you have a choice, go to a country which is economically free and perhaps one day you too will be sending money home for a school or a hospital.

(The writer can be contacted at: everest@mos.com.np)