Power, Responsibility & Filters

Last week, as the drama of ex-CEOs of one of the largest private sector banks played out, it became visible that “with great power, comes greater responsibility” got missed somewhere and that the fiduciary responsibility of a leader is extremely vulnerable.

While law will take it own course in the captioned case, as the Russian writer Fyodor Dostoevsky had remarked “Everything seems stupid when it fails.” In hindsight, everything seems obvious. We obviously don’t know what the circumstances were for the decision-maker back then.

Good decision-making often leads to bad outcomes and vice-versa.

This also means that in order to make good decisions, one needs to make certain rules and filters, which in turn increases the probability of favourable outcomes. After all, rules are for the obedience of fools and the guidance of wise men – David Ogilvy

Warren Buffett (‘WB’) provides certain filters on how they their insurance operations has generated underwriting profit on a continuous basis. Below are certain tenets WB’s insurance firms have lived by:

  1. They accept only those risks they can properly evaluate, i.e. staying within their circle of competence. Their performance is not tied to market share and they are okay to lose business to competitors who offer foolish prices or policy conditions. I truly wish the Indian insurance industry adheres to the same; more of this behaviour referred in Insurance – Underwriting at what cost?
  • They always cap their losses, i.e. their total loss arising out of one event of a series of events are always capped and their solvency never gets threatened. They search for all possible correlation among seemingly unrelated risks to ensure that their losses are mutually exclusive, i.e. independent to a large degree.
  • They avoid business involving moral risk, i.e. they never conduct business with people having questionable character, no matter how good the premium rate is.

The above has helped them in preventing foolish losses, which is also one of the basic tenets of sound investing.

After all, with great power comes greater fiduciary responsibilities towards stakeholders.

Disclaimer: Please note that these are my personal views. While, I am NOT 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. 

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