Buffett’s Worst Investment; Musk Rolls the Dice; India: the Country of the Future?

KP & Genentech; “Jiro Dreams of Sushi”

Today at a Glance:

·       One Bad Call: Buffett Buys Berkshire

·       One Roll of the Dice: Tesla’s Tumbling Margins & Price

·       One Country of the Future: And Always Will Be

·       One Episode of Financial History: KP and Genentech

·       One Documentary: “Jiro Loves Sushi”

One Bad Call

Buffett Buys Berkshire

Warren Buffett, the Oracle of Omaha, is one of the greatest investors ever.

However, even the best investors make mistakes.

Buffett is no exception.

No mistake was more significant than Buffett's investment in Berkshire Hathaway's textile business.

Buffett initially invested in Berkshire Hathaway in 1962, when it was a struggling textile company.

When he invested, Buffett was attracted by two things.

First, Berkshire was cheap.

Second, he believed he could turn it around.

However, despite his best efforts, the textile business continued to struggle. Buffett closed it down in 1985.

Buffett failed to understand one fundamental point: Berkshire was in a declining industry. As a result, its competitive advantage was eroding. Its long-term prospects were dim.

Buffett's mistake forced him to revisit the investment philosophy his mentor Benjamin Graham preached.

Instead of focusing on cheap “cigarette butt” companies, Buffett would now invest in high-quality companies with substantial competitive advantages and long-term growth prospects.

Buffett's single most significant and most profitable investment-Apple (AAPL), perfectly fits this bill.

So yes, Warren Buffett's investment in Berkshire Hathaway's textile business was his biggest mistake.

But Buffett learned and recovered.

And he transformed his biggest mistake-investing in Berkshire- into the single most valuable investment holding company of all time.

One Gamble

Musk Rolls the Dice

Shares in electric-car maker Tesla slumped by over 25% since they peaked at 207 on March 30^th.

The reason?

The asking price for Teslas has tumbled. Elon Musk has dropped the cost of the Model Y by 29% in three months.

The result? Tesla’s margins and profitability are getting crushed.

Nor is there any end in sight.

The price cuts have had three impacts on Tesla- none good.

First, Tesla’s operating margin is now at a two-year low of 11.4%.

That’s lower than both Ford and Toyota.

And that's a problem for a company valued based on 20% margins.

Second, price cuts have not caused demand to explode.

Last quarter, the number of vehicles sold rose by only 4%

That's hardly a game-changer. However, it also hints that demand for Tesla is topping out.

Finally, the slowing economy and increasing strain on household budgets have dampened demand.

You might be wondering what Musk is thinking.

Musk has said he’s comfortable making less money on each car sold.

He believes pushing for higher volumes and a larger fleet is better than lower volumes and a higher margin.

That’s because Musk believes Tesla could sell its cars for zero profit and make money from self-driving software.

The car is the razor. Software is the blade.

Here’s the rub.

For Tesla, automated driving has always been more sizzle than steak.

Musk has been promising that Teslas will drive themselves next year — every year since 2014. 

With Tesla, it’s ‘fool me once, shame on you. Fool me twice, shame on me.’

Don’t expect Tesla- or Musk- to change.

A Country of the Future

That Always Will Be

India just surpassed China as the most populous country in the world, with a staggering 1.4 billion people.

Does this watershed moment in the global demographic Olympics change the global investing game for investors?

I don’t think so.

And here’s why.

India has always had potential on paper.

Yet it has never lived up to its neighbor China's – let alone Japan’s – promise.

Optimists point out several reasons why “this time it’s different.”

Here are a handful.

·      Urbanization and a burgeoning middle class mean that disposable incomes in India are growing. Tim Cook, CEO of Apple, recently opened its first store in Mumbai.

·      More than half India's population is under 30, a demographic thrust driving growth and setting it apart from China.

· India's infrastructure has also improved, with its remodeled airport in Mumbai as a shiny symbol of progress.

·      India is the world's largest democracy. In theory, this means less state interference than in other emerging markets. Moreover, a sympathetic political system makes it more attractive to Western countries looking to shift supply chains away from China.

However, India's track record is far from stellar.

Yes, Tim Cook opened the Apple Store in April. But Apple first applied to do so in 2016. Such is the quagmire of Indian bureaucracy.

While it has plenty of talented individuals, few seem to trickle into political leadership.

Successful members of the Indian diaspora, such as Google CEO Sundar Pichai and Microsoft CEO Satya Nadella, lead American tech giants rather than return to their homeland.

When idealists like Raghuram Rajan, a respected University of Chicago professor, do return, they often falter.

Rajan left the International Monetary Fund to head India's central bank and was vilified for his criticism of crony capitalism and ideological extremism.

He eventually threw in the towel, and now he’s back in the comfortable confines of Chicago’s business school.

The bottom line?

For investors, India is much like Brazil and Turkey- a country of the future, and it always will be.

One Episode of Financial History

Kleiner Perkins and Genentech

Silicon Valley's success is due to the intricate dance between entrepreneurs and venture capitalists.

Kleiner Perkins and Genentech's story exemplify this relationship.

Kleiner Perkins was founded in 1972 by Eugene Kleiner and Tom Perkins. The pair saw a need for early-stage funding in the tech industry.

Genentech was a start-up that used genetic engineering to produce human insulin and other therapies.

Kleiner Perkins invested $200,000 for a third of Genentech, with the condition that it produces the hormone somatostatin.

Genentech quickly produced somatostatin within a year, leading to a partnership with Eli Lilly.

By 1978, Genentech had made headlines for producing synthetic human insulin. By 1980, it went public, listing on the stock market. Kleiner Perkins' stake rose to $32.5 million. By 1986, it had increased to $160 million.

The Genentech story highlights three lessons.

First, funding big ideas by start-ups matters. Insulin seems obvious in hindsight. But  Ely Lilly could not do it. A start-up with $200,000 could.

Second, Genentech was a case of a start-up funding a start-up. And that could only happen in the entrepreneurial culture of the Bay Area. To think that the Soviet Union could develop insulin during the cold war is laughable.

Third, Kleiner Perkins's success confirms the dynamic of 1 or 2 investments driving all the returns for venture capital.

Along with Tandem Computers, Genentech was the main driver behind Kleiner Perkins’ first fund growing from $7.5m to $346m in just 13 years.

A whopping 95% of this value came from investments in Genentech and Tandem Computers alone.

One Documentary

“Jiro Dreams of Sushi”

"Jiro Dreams of Sushi" (2011) is not about investing.

Still, it offers a unique perspective on the importance of dedication and expertise in any field, including investing.

The film follows Jiro Ono, an 85-year-old sushi master in Tokyo, who has spent his entire life perfecting his craft.

Even though his restaurant only seats ten people and reservations must be made months in advance, Jiro has become internationally renowned for his culinary artistry.

The film highlights the value of focusing on a particular area of expertise and dedicating oneself fully to achieving mastery in that field.

The same applies to investors who want long-term success in the stock market.

Jiri is still alive and kicking at 97. You can watch the preview here.

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