Intelligent Fanatics Leverage Antifragility

perseverance

#1

Nassim Taleb, in his book ‘Antifragile’ categorizes things/phenomena broadly into three broad areas – fragile, robust and antifragile. While the fragile is harmed by volatility, the robust remains the same under random events, and the antifragile actually becomes stronger under stress and volatility.

While reading the book what struck me most was the applicability of this idea on the subject of intelligent fanatics. All fanatics tend to become stronger in periods of adversity. In periods of stress (in their own company or in the industry), fanatics have a way of coming out stronger than others - in fact many come out stronger than they were before the stress. This increased strength can be observed in many forms – either in a strengthening in the business model, or a change in strategic direction to something better, or an increase in market share at a time when the industry is going through stress.

Andy Grove, the former CEO of Intel said it well - ‘Bad companies are destroyed by crisis, good companies survive them, great companies are improved by them.’

Consider V-Guard, a company valued at more than $1.4 billion today. This is how Kochouseph Chittilappily, the dyslexic entrepreneur who promoted the business describes its business model-

‘Our real innovation has been in our asset-light operations. We are a products company, and we stick to what we do best or where our best efforts should be – R&D, innovation, quality-control, branding, distribution, marketing etc. We outsource all other tasks, including production, packaging etc. In fact, as soon as we are sure that we have developed a viable product, we outsource it. Because of this, 80% of our workforce is made up of indirect employees through Self Help Groups‘

But what is not commonly known is that this business model was not achieved by intent.

V-Guard was just a fledgling business trying to make it in the state of Kerala, the state known sometimes as the graveyard of industries due to the notoriety of its trade unions. In mid-1980s, the company was in trouble due to trade unionism. The workers were protesting the modernization and professionalism that Mr Chittilappilly was implementing to scale up his business. It was in this difficult context that he hit upon the idea of a win-win model of outsourcing to self-help groups run by certain charitable institutions. The factory was eventually shut down due to the workers’ strike. The benefits were mutual, the employment generated helped the charitable organizations provide livelihood for the poor, while V-Guard was able to reduce its production costs (as Kerala wages are artificially high) and solved the issue of trade unions.

Thus, strangely, Mr Chittilappilly was lucky to have had a strike in his factory, for it pushed him to develop a far more scalable business model.

Consider the business model of Southwest Airlines, which is covered in Intelligent Fanatics Project. A big source of its competitive advantage is that it sweats its assets much, much better than its competitors. A major way this was achieved was through 10 minute turns introduced in early 1970s, right at the time it started operations. This meant passengers and baggage were unloaded, the plane was cleaned and restocked, and the new passengers got on, all in 10 minutes, as against an hour taken by the peers. Though the turns are longer today due to regulatory and security reasons, they continue to remain considerably better than peers. This strategy of quick turn at gates to keep planes in the air, was born out of desperation.

After years of legal battles with the then Goliaths like Braniff (which wanted to crush Southwest even before it began operations), Southwest finally began operations in 1971. And pretty soon, due to the brutal nature of the industry, the company began running short of funds to operate. And to survive, it had to sell one of its four planes to run its operations. Rather than reduce service, the management decided to continue to offer the same number of flights as before, but with lesser number of planes. And they calculated that the only way this was possible if they reduce the turnaround time to 10 minutes. Thus it was desperation to save the company and their jobs that this strategy was developed, a strategy which was pivotal to Southwest’s success as an airline.

Kelleher’s position since the beginning has always been to manage in good times so that the company can do well in difficult times. He jokingly admits, ‘Our pilots have accused me of predicting eleven of the last three recessions.’ The approach paid off for Southwest. It was the only U.S. airline to make a profit through the Gulf War and the 1990-1994 recession.

Consider Warren Buffett, who made the following purchases in the aftermath of the subprime crisis:

  • Bank of America - invested $5 billion in preferred shares (6% annual interest), which then was struggling with large legal bills caused by the subprime lending crisis. Profit on the shares are roughly $15.5 billion as of the end of 2017.
  • Goldman Sachs - invested $5 billion in Goldman Sachs and made roughly $3.1 billion by the time he converted the warrants. Berkshire’s GS stock has gone up since.
  • GE - Invested $3 billion and made roughly $1.2 billion by 2011.
  • Mars/Wrigley - Made about $1.5 billion from that transaction.

Consider Sabu Jacob of Kitex Garments. It was in the midst of the 2001 recession that he discovered the beauty of the infantwear business. Consider Ajay Piramal, it was in a time of deep personal and business uncertainty that he took the decision to enter pharmaceutical business.

As Taleb would put it, such people experience post-traumatic stress driven growth.

Alfred Hirschman, a brilliant economist from the previous century reached broadly the same conclusion. He theorized that sometimes, the shortest path between two points is often a dead end. Consider this example from a wonderful article by Malcolm Gladwell.

Karnaphuli Paper Mills, an enormous factory, was built in the then East Pakistan to exploit the vast bamboo forests there. But not long after the mill came online the bamboo unexpectedly flowered and then died, a phenomenon now known to recur every fifty years or so. Dead bamboo was useless for pulping; it fell apart as it was floated down the river. Because of ignorance and bad planning, a new, multimillion-dollar industrial plant was suddenly without the raw material it needed to function.

But what impressed Hirschman was the response to the crisis. The mill’s operators quickly found ways to bring in bamboo from villages throughout East Pakistan, building a new supply chain using the country’s many waterways. They started a research program to find faster-growing species of bamboo to replace the dead forests, and planted an experimental tract. They found other kinds of lumber that worked just as well. The result was that the plant was blessed with a far more diversified base of raw materials than had ever been imagined. If bad planning hadn’t led to the crisis at the Karnaphuli plant, the mill’s operators would never have been forced to be creative. And the plant would not have been nearly as valuable as it became.’

While the example is quite instructive in many ways, Hirschman was fascinated by all the ways in which projects managed to succeed, both in spite of and because of difficulties. Hirschman articulated it thus –

‘Instead of asking: what benefits this project yielded, it would almost be more pertinent to ask: how many conflicts has it brought in its wake? How many crises has it occasioned and passed through? And these conflicts and crises should appear both on the benefit and the cost side, or sometimes on one—sometimes on the other, depending on the outcome (which cannot be known with precision for a long time, if ever).’

The above questions are fascinating and can be adapted into an important component of our investment process. While working on an investment, in addition to looking at the business model, the financials, etc, it might well be equally important to ask – ‘How many crises have the company and management gone through? How were the crises dealt with? What was the outcome (if there is one that can be determined)?’

Intelligent fanatics are ordinary people who do not so ordinary things. Consider all the examples above. All entrepreneurs / businesses described were ordinary individuals at the time of the crisis. They were not famous or proven fanatics then (except Buffett). They were people who went through the same pain and uncertainties that all of us go through when we struggle. The difference was how they dealt with it. While there are many characteristics that can be ascribed to their ability to deal with obstacles, the most pivotal attribute is perhaps the attitude of acceptance.

Acceptance!? Really!?

To understand this better, let’s consider this excerpt from a beautiful article written by Graham Duncan:

One great portfolio manager I know told the story of being driven somewhere by an analyst on a rainy night when a truck swerved and almost ran them off the road. “Why is stuff like this always happening to me?” the analyst instinctually responded. But to the portfolio manager, that response reflected a terrible mindset, whether on the road or in the market: a sense that the world is acting on you as opposed to your acting on the world. It is a mindset that is hard to change.

When tragedy occurs in our lives, the common refrain in most cases is: ‘Why me?’. Most people tend to consider the good things that happen to us as part of life, as something we deserve; while the tragedies and struggles we face are instinctively seen as something that interrupts life. A quote from Carl Sagan helped me overcome this flaw in my approach to viewing the world:

‘We live on a hunk of rock and metal that circles a humdrum star that is one of 400 billion other stars that make up the Milky Way Galaxy, which is one of billions of other galaxies which make up a universe which may be one of a very large number, perhaps an infinite number, of other universes. That is a perspective on human life and our culture that is well worth pondering.

While it is difficult to fully fathom the depth of this statement, it does help in realizing the silliness of thinking – ‘Why does this stuff keep happening to me?’. We are part of something immense and extremely complex, and to think that tragedies occur with us due to some specific ill-will of an unknown force against us seems quite foolish.

And it is this understanding of the fact - this acceptance that there are factors that can be controlled and factors that cannot be controlled - which is the first and the most important step to success and joy in life.

Acceptance is not a passive strategy. It is in fact the aggressive strategy. Successful people become so because of their ability to understand and accept factors that they can control and that they cannot. It is with this attitude of acceptance that the question they ask changes from - ‘Why is this happening to me?’ to ‘Sh@t happens! How do I deal with this?’ They understand that you don’t have to like what is happening to work with it – to even use it for your advantage. They intuitively practise Amor Fati –a Latin phrase which translates to ‘a love for one’s own fate’ – because that is the only option.

As Cheryl Strayed put it– ‘You can’t cry it away or eat it away or starve it away or walk it away or punch it away or even therapy it away. It’s just there, and you have to survive it. You have to endure it. You have to live through it and love it and move on and be better for it.’

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Disclaimer- We may/may not have positions in the companies mentioned in the blog. This case study/article is not a stock recommendation. We are not SEBI registered investment advisors. Our Intelligent Fanatics Case Studies and Articles are meant to retell the stories and strategies used to create exceptional businesses so that we can learn from them.

Sources:

https://dailystoic.com/amor-fati-love-everything-that-happens/

https://www.newyorker.com/magazine/2013/06/24/the-gift-of-doubt

Intelligent Fanatics Project; Nuts!;

Image sources: Ireland INC, KSIDC, Penguin

 


William Wrigley's Aggressive Conservatism
#2

Yes, Biggest failures produces the greatest of results.

Michael Jordan, arguably the greatest basket ball player has a quote,

"I have missed more than 9000 shots in my career. I have lost almost 300 games. On 26 occasions I have been entrusted to take the game winning shot, and I missed. I have failed over and over and over again in my life. And that is why I succeed."
Consider Abraham Lincoln, his failure stories far exceed his successes. Yet, it was antifragility that made him persist to become the historic figure that he is now.

Amitabh Bachan, the bollywood star, was rejected multiple times from All India Radio because he had a harsh voice, and a lean figure. Now, most Indians would recognise his voice as the most booming, powerful voice of Indian cinema.

But the trophy for persistency should go to Thomas Edison, who was fired from his regular job by Western Union because he spilled acid on floor. Then he went on to create more than 9900 protoypes for incandescent bulbs which did not work. Yet he persisted strongly for 13 years before he came up with the prize winner.