Have you worked in an organization wherein you came across someone in the senior management and asked yourself how the hell he got promoted?
This has been aptly explained by cartoonist Scott Adams in The Dilbert principle – companies tend to systematically promote their least-competent employees to management, in order to limit the amount of damage they are capable of doing.
Probably, this is one of the reasons why one of the greatest investors, Warren Buffett wants to invest in businesses which can be run even by a fool, because some day, a fool will.
This simply implies that it is better to invest in companies wherein the underlying economics of the business is robust, and it is not dependent upon the management.
Strong franchises or businesses can tolerate mismanagement for a while. If a business however, requires a rock-star to produce great results, the business itself cannot be deemed great.
You would be amazed to know that at some point in time, Eicher Group had about 15 businesses including tractors,trucks, motorcycles, components, footwear and garments, but none was a market leader. Management focused on 2 promising businesses -Motorcycles and tractors and sold the remaining 13 businesses. Since,Motorcycles and tractors businesses have had average industry ROCEs of 40% and 16% respectively, which were better than their remaining 13 businesses, they were obvious choices. After all, the underlying economics of these businesses were strong – High cash flow generators, low capital expenditure requirement, in a high demand and a lowly penetrated segment.
No wonder, the choice rewarded the shareholders handsomely. Had someone spent INR 55,000 to buy a Royal Enfield motorcycle in 2001, he would now have an old, rugged bike by now. However, had someone invested the same amount in buying company’s stock, he would have been richer by INR 9.2 crs today.
Disclaimer: Please note that these are my personal views. While, I am a registered Research Analyst as per SEBI (Research Analyst) Regulations, 2014, all investors are advised to conduct their own independent research into individual stocks or industries before making any decision. In addition, investors are advised that past stock performance is not indicative of future price action.