What We’re Reading (Week Ending 23 April 2023) - 23 Apr 2023
Reading helps us learn about the world and it is a really important aspect of investing. The legendary Charlie Munger even goes so far as to say that “I don’t think you can get to be a really good investor over a broad range without doing a massive amount of reading.” We (the co-founders of Compounder Fund) read widely across a range of topics, including investing, business, technology, and the world in general. We want to regularly share the best articles we’ve come across recently. Here they are (for the week ending 23 April 2023):
1. Nassim Taleb on What Everyone Gets Wrong About Being Antifragile – Joe Weisenthal, Tracy Alloway, and Nassim Taleb
Joe: (07:19)
Well, so you mentioned it already. Let’s just start with the crypto thing. Because what’s interesting to me about your disagreements with crypto people, Bitcoin maximalists, etc., is that many of them looked up to you and read Antifragile and such. They read Antifragile, Fooled by Randomness, and The Black Swan, which informed them that it’s like, okay, we need to adapt, get into this currency that’s very hard. That is antifragile: Bitcoin, the ultimate antifragile currency. And so to their mind, they read your work and this is what they took away. And so, what did they get wrong?
Nassim: (08:02)
Okay, so the first thing is that my work is first about avoiding tail risk, right? Basically, if you want to do well, you must first survive. And it’s not a separable condition. So one has to avoid fragility. And it turns out that as much as the Federal Reserve induces fragility in the system, and as much as I dislike Bernanke, it turns out that Bitcoin is a lot worse. It is itself a very fragile commodity, and it got cornered. A very small number of people start controlling it. And it’s fragile in the sense that if one day, if the miners go to the beach for one day or for an hour, it’s gone. Whereas if you have gold, I have a gold necklace here.
If I leave it on the ground for a hundred thousand years, it’ll still be gold. It may lose its financial value, but the physical quality will not be altered. Whereas with Bitcoin, it’s just a book entry that needs to be maintained and would collapse, plus a lot of other things promised by Bitcoin that are not delivered.
Like, it was meant to be a transactional thing but turned out to be a speculative item. So I realized quickly that I made a mistake with Bitcoin, like I made a mistake by avoiding the wrong exercise. And of course, I was at some point an owner of Bitcoin and publicly said that I made a mistake and I went short Bitcoin later, but it was not good for the system. And I applied it in a paper that was published in Quantitative Finance where you look at, hey, what’s a currency? What’s an inflation hedge? What is a refuge investment? And Bitcoin satisfies none of these.
So people of course got angry because they feel like they’re going to blame you for changing your mind. They don’t realize that I’m not selling a recipe; I’m selling a process. Certainty is the way of thinking, the way of approaching things. And if you realize that something is fragile, immediately do something about it. So, remarkably, it’s the same cluster of people who read Antifragile and thought that, “Hey, you know, what doesn’t kill you makes you stronger. Let’s get infected with the vaccine, with Covid. And let’s ignore Covid; it’s going to make us stronger. It’s going to kill a few people.” So that kind of eugenics, that kind of stuff, I realized was profoundly inimical to me.
So it’s the same crowd that was denying Covid, saying, “Hey, you know, it’s just a virus that’s going to make you stronger.” They didn’t realize that. They explained Antifragile: jumping one foot will make your bones stronger, but a thousand feet will not help you too much. I mean, it may help the caretaker and people who organize funerals, but not you. So I realized very quickly there’s a cluster of people who were both into Bitcoin due to very naive reasoning, extremely naive reasoning, thinking, “Hey, you know, it’s an inflation hedge,” as we saw, it was a reverse inflation hedge. But the good thing is that I figured out quickly to pull out in time, in the sense that it lost its value when we realized there was inflation. And the same group of people were into conspiracies, all general conspiracies. And that’s not the crowd I want, and that’s not the crowd I want to be associated with.
Tracy: (11:36)
You mentioned that Bitcoin was bad for the system, and I think that’s the connective tissue that leads into some more recent events with the banking system. But can you talk a little bit more about that? How do you see Bitcoin actually?
Nassim: (11:51)
Okay, let’s look at why we have Bitcoin and why we are talking about Bitcoin. Effectively, it’s the incompetence of what I call Bernankeism. You know, because sometimes you have to put a name to a tendency. The Federal Reserve’s job is not to do structural things. The Federal Reserve’s job is to engage in monetary policies and typically short-term monetary policies to ensure the stability of the United States. So the job is to ease when economic conditions threaten inflation and to tighten during hard economic conditions. But you cannot replace a structural policy with a monetary policy. In other words, we had a problem with debt, and you can’t solve the debt problem by putting interest rates at zero for a long time.
If you put interest rates at zero, it should be for a short period of time while looking for an alternative. So when they did it for 15 years, they put interest rates at zero, and that created tumors. The first that comes to mind is Bitcoin. Ironically, it also created a Ponzi-like class of investments because there’s no time value of money anymore. Your discount rate is uncertain, and we created a generation of people who don’t know the cost of funds or the cost of money. Anyone with 15 years of experience in finance doesn’t know anything about interest rates. So interest rates at zero create tumors.
Real estate values go up dramatically because the cost of holding a mansion is close to nothing, or it was close to nothing. It also created a class of investments called VC funds. In the old days, these funds were promising you cash flow, but today, they’re promising you another funding round where you’re going to sell it to someone else. So we moved from the classical cash flow model, or even if you’re negative cash flow, the promise of future cash flow, to the promise of selling the company to someone else. We have billionaires in Silicon Valley who got rich from companies that never made a penny. So that’s the background. And of course, a story like Bitcoin takes off because it doesn’t cost much to control…
…Nassim: (15:36)
Okay. Before we start, let’s say that you cannot compare vaccines to GMOs. Vaccines are tested in individuals, and you can see the side effects in individuals. GMOs are systemic; they spread in the environment. Also, you’re not taking the vaccine because you think it tastes good or it’s going to be a pleasant experience. You’re taking the vaccine because of Covid, and Covid was not something benign. Comparing the two involves differential risk management.
Two things I’d like to mention here. The first one is that very rapidly, I waited a little bit and then saw that there were a very large number of vaccinated people with no side effects. People said we need more time, but they didn’t understand that you can replace time with sample size. In the sense that if it’s something related to genetic mistakes or something of a genetic nature, like cancer, for example, a large sample size compensates for lack of time.
We have the illusion that after Hiroshima, people got cancer about 12 and a half years later. That’s not true. Some people got cancer within a few months. But there’s a distribution because we need a certain number of mutations. Like when you go to Las Vegas, for an individual to win eight times in a row, it takes years of waiting. But if you have a billion people in a casino, you’re going to have that every hour. So this is where I realized that the vaccine did not pose a significant threat of that nature…
…Joe: (42:58)
Speaking of tail risk, this week that we’re recording, several people signed an open letter saying that we should halt development of technologies along the lines of AI and that there is an imminent risk, at least some people believe, of these computers becoming so powerful that they wipe out all living things on Earth. Sounds like the ultimate tail risk. I’m not going to ask you how you would hedge against that because I doubt that would be a scenario worth hedging for, but is that a tail risk in your view? Are we on track to develop computers that will eliminate life as we know it?
Nassim: (43:32)
I don’t think so. Number one is AI. People are worried that AI will put them out of business. That’s why they issue these calls.
Joe: (43:41)
Hmm. I’m worried about that.
Nassim: (43:43)
Yeah. Well, AI is not running red lights, traffic lights, or things that are consequential. And when AI starts running these things, then we’ll talk about it. But for the time being, we’ll talk about development, and it looks like it’s a probabilistic machine, no more or less, with the defects of probabilistic machines. And the reason I talk a little bit about AI is because, as a statistician, it’s nothing but nonlinear statistics. It’s a statistical device and it works as a statistical device, but we know the shortcomings of statistical machines, and it has all the shortcomings. So I’m not even worried. Nobody’s going to use AI for things beyond automated searches or automating a lot of things that can be automated. And unfortunately, a lot of people feel threatened because they see the discourse by AI very similar to their own. So far, I don’t see anything as far as society, I don’t see it’s not like with the pandemic where you can see something spreading.
Tracy: (44:59)
What’s the tail risk that you think investors are most underestimating nowadays?
Nassim: (45:05)
Okay. The fact that zero interest rates are very unnatural. And if you raise rates to a normal level, say between four and 6%, the Fed would like to have higher interest rates. But there are some pressures; they’d like to have a higher base because if you’re at 4% interest rate, then you can lower it. If you have a crisis, you can go down, you can go up. But if your interest rate is at zero and you have a further crisis, you don’t know what to do. Or at least you can’t play with interest rates.
We have to look for something else, suggesting that it’s dangerous. So I think that if you look at interest rates higher than 3% long term as a discount rate, then equities are in trouble because they’re not priced for that. So this is where you’re going to look at; structurally, the equities are in trouble, but I think that many things will be in trouble first.
2. AI, NIL, and Zero Trust Authenticity – Ben Thompson
The video above is both more and less amazing than it seems: the AI component is the conversion of someone’s voice to sound like Drake and The Weeknd, respectively; the music was made by a human. This isn’t pure AI generation, although services like Uberduck are working on that. That, though, is the amazing part: whoever made this video was talented enough to be able to basically create a Drake song but for the particularly sound of their voice, which happens to be exactly what current AI technology is capable of recreating.
This raises an interesting question as to where the value is coming from. We know there is no value in music simply for existing: like any piece of digital media the song is nothing more than a collection of bits, endlessly copied at zero marginal cost. This was the lesson of the shift from CDs to mp3s: it turned out record labels were not selling music, but rather plastic discs, and when the need for plastic discs went away, so did their business model…
…Of course the other factor driving artist earnings is competition: music streaming is a zero sum game — when you’re listening to one song, you can’t listen to another — which is precisely why Drake can be so successful churning out so many albums that, to this old man, seem to mostly sound the same. Not only do listeners have access to nearly all recorded music, but the barrier to entry for new music is basically non-existent, which means Spotify’s library is rapidly increasing in size; in this world of overwhelming content it’s easy to default to music from an artist you already know and have some affinity for.
This, then, answers the question of value: as talented as the maker of this song might be, the value is, without question, Drake’s voice, not for its intrinsic musical value, but because it’s Drake…
…A better solution is Zero Trust Information: as I documented in that Article young people are by-and-large appropriately skeptical of what they read online; what they need are trusted resources that do their best to get things right and, critically, take accountability and explain themselves when they change their mind. That is the only way to harvest the massive benefits of the “information superhighway” that is the Internet while avoiding roads to nowhere, or worse.
A similar principle is the way forward for content as well: one can make the case that most of the Internet, given the zero marginal cost of distribution, ought already be considered fake; once content creation itself is a zero marginal cost activity almost all of it will be. The solution isn’t to try to eliminate that content, but rather to find ways to verify that which is still authentic. As I noted above I expect Spotify to do just that with regards to music: now the value of the service won’t simply be convenience, but also the knowledge that if a song on Spotify is labeled “Drake” it will in fact be by Drake (or licensed by him!)…
…What is compelling about this model of affirmatively asserting authenticity is the room it leaves for innovation and experimentation and, should a similar attribution/licensing regime be worked out, even greater benefits to those with the name, image, and likeness capable of breaking through the noise. What would be far less lucrative — and, for society broadly, far more destructive — is believing that scrambling to stop the free creation of content by AI will somehow go better than the same failed approaches to stopping free distribution on the Internet.
3. What I learnt from three banking crises – Gillian Tett
I have watched two financial crises unfold before: once in 1997 and 1998 in Tokyo, as an FT correspondent, when Japanese banks imploded after the 1980s bubble; then in 2007 and 2008, when I was capital markets editor in London during the global financial crisis. I wrote books on both…
…Those events taught me a truth about finance that we often ignore. Even if banking appears to be about complex numbers, it rests on the slippery and all-too-human concept of “credit”, in the sense of the Latin credere, meaning “to trust” — and nowhere more than in relation to the “fractional banking” concept that emerged in medieval and early Renaissance Italy and now shapes modern finance.
The fractional banking idea posits that banks need to retain only a small proportion of the deposits they collect from customers, since depositors will very rarely try to get all their money back at the same time. That works brilliantly well in normal conditions, recycling funds into growth-boosting loans and bonds. But should anything prompt depositors to grab their money en masse, fractional banking implodes. Which is what happened in 1997 and 2007 — and what I saw unfold in the sushi restaurant last month.
However, in another respect, this latest panic was different — and more startling — than I have seen before, for reasons that matter for the future. The key issue is information. During the 1997-98 Japanese turmoil, I would meet government officials to swap notes, often over onigiri rice balls. But it was a fog: there was little hard information on the (then nascent) internet and the media community was in such an isolated bubble that the kisha (or press) club of Japanese journalists had different information from foreigners. To track the bank runs, I had to physically roam the pavements of Tokyo.
A decade later, during the global financial crisis, there was more transparency: when banks such as Northern Rock or Lehman Brothers failed, scenes of panic were seen on TV screens. But fog also lingered: if I wanted to know the price of credit default swaps (or CDS, a financial product that shows, crucially, whether investors fear a bank is about to go bust), I had to call bankers for a quote; the individual numbers did not appear on the internet.
No longer. Some aspects of March’s drama remain murky; there is no timely data on individual bank outflows, say. Yet CDS prices are now displayed online (which mattered enormously when Deutsche Bank wobbled). We can use YouTube on our phones, anywhere, to watch Jay Powell, chair of the US Federal Reserve, give a speech (which I recently did while driving through Colorado) or track fevered debates via social media about troubled lenders. Bank runs have become imbued with a tinge of reality TV.
This feels empowering for non-bankers. But it also fuels contagion risks. Take Silicon Valley Bank. One pivotal moment in its downfall occurred on Thursday 9 March when chief executive Greg Becker held a conference call with his biggest investors and depositors. “Greg told everyone we should not panic, because the bank will not fail if we all stick together,” one of SVB’s big depositors told me…
…The second lesson is that investors and regulators often miss these bigger structural flaws because they — like the proverbial generals — stay focused on the last war.
Take interest rate risks. These “flew under the supervisory system’s radar” in recent years, says Patrick Honohan, former central bank governor of Ireland; so much so that “the Fed’s recent bank stress tests used scenarios with little variation [and] none examined higher interest rates” — even amid a cycle of rising rates. Why? The events of 2008 left investors obsessively worried about credit risk, because of widespread mortgage defaults in that debacle. But interest rate risk was downplayed, probably because it had not caused problems since 1994…
…A third, associated, lesson is that items considered “safe” can be particularly dangerous because they seem easy to ignore. In the late 1990s, Japanese bankers told me that they made property loans because this seemed “safer” than corporate loans, because house prices always went up. Similarly, bankers at UBS, Citi and Merrill Lynch told me in 2008 that one reason why the dangers around repackaged subprime mortgage loans were ignored was that these instruments had supposedly safe triple-A credit ratings — so risk managers paid scant attention.
So, too, with SVB: its Achilles heel was its portfolio of long-term Treasury bonds that are supposed to be the safest asset of all; so much so that regulators have encouraged (if not forced) banks to buy them. Or as Jamie Dimon, head of JPMorgan, noted in his annual shareholders’ letter, “ironically banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements”. Rules to fix the last crisis — and create “safety” — sometimes create new risks.
4. Titan: A Golden Case in Indian Retail – Dom Cooke and Saurabh Mukherjea
Saurabh: [00:02:53] Before I get into Titan, I’ll just set the scene and talk about the gold market in India because it is an unusual market, especially for listeners in the Western Hemisphere. India has a love affair with gold, which is of epic proportions. The official gold market as per the government is around $50 billion a year, but there’s also a massive, what we call a black gold market. This is smuggled gold bought using black money. Nobody quite knows how big it is. But having lived in the country for 15 years, now spoken to hundreds of jewelers, I reckon the black gold market, the unofficial market is as big as the official market.
So if you’re looking at a country which basically spends $100 billion a year on buying jewelry, half of it formal, half of it informal. And that’s the market in which Titan operates. Gold status in India, which is underpinned by lots of things. And the first is bitcoin skepticism of the formal financial system. The second is sort of an experience born out of generations of seeing senior age basically, the government lets inflation drip, that undermines the value of currency and therefore, a lot of families prefer to save through gold rather than coming into the formal financial system.
If you look at the data published by the Indian Central Bank, they reckon that Indian family stock of gold, the balance sheet that households have a gold is almost as big as that of financial assets in India. So if you’re looking at a big market in the world’s fifth largest economy, we’re looking at a massive pool of savings and annual flow officially of $50 billion, perhaps unofficially it’s another $50 billion.
So that’s the market in which Titan operates. It’s the largest player in the market, or I should say, joint largest; there are two large players in this market, Titan and Malabar. Between them, this year, the year that’s going to end in March 2023, they’ll do around $8 billion between the two of them, $4 billion Titan, $4 billion Malabar. They’re the largest players. And then there is a sort of a distant #3 player called Kalyan Jewellers. Kalyan is 1/3 the size of the market leaders.
These large, organized jewelers account for 1/3 of the market, Dom; 2/3 of small jewelers, independent jewelers come in top chase. Titan stands head and shoulders above everybody on profitability. So Titan in the year that’s going to end in March ’23 will do around $400 million of profits. That’s 2/3 more than its nearest rival, Kalyan. And the main reason for that is at the gross margin level, Titan is twice as profitable as anybody else in this market…
…Dom: [00:06:42] You started with how important the gold market is to India, specifically Indians buying gold for savings and investment purposes or also for cosmetics wearing them because they’re excessively pleasing.
Saurabh: [00:06:53] By and large, I would still say that the bulk of the demand arises from the savings and investment angle because otherwise, the sheer quantum of spending, we’re looking at $50 billion officially, unofficially another $50 billion. I don’t think we can justify $100 billion a year on the aesthetic merits of gold. So there is a heavy savings angle embedded in it. If you ask me one of the reasons Titan has been so successful is they’ve been able to cater to that savings angle, but also focus on the fact that as Indian women become professionally active, earn money in the workplace, in the last two decades, one of the big reasons for Titan’s success has been the introduction of diamond-studded jewelry.
So this is a market they’ve created. They dominate diamond-studded jewelry, and this drives their inordinate levels of profitability. Titan does a pretax ROCE of around 35%. Nobody else in Indian retail gets remotely close to this. And big reason for that is these guys have pioneered diamond jewelry retailing in India. And that piece links into the rise of the Indian working women, well-educated, earning plenty of money and thus Titan has created a vector of growth that no other jewelers managed…
…2013, the rupee dropped from 45 to $1 to $55 in the space of four to five months. And what the government did then was the imposed an import tariff on gold, where gold tariffs went up from 2% to 10% and the government says that gold-on-lease has to be stopped. So Titan doesn’t buy the gold outright, they typically go to a bank and say, lend me the gold, and I will return it to you in due course. This is the cheapest way to finance the business. So the government ended up banning in 2013, gold-on-lease. So 2013, tough year. Firstly, flows of gold into India from abroad stopped — reduced because of the import tariff and secondly, gold-on-lease was stopped.
A year later, the government dropped another bomb. The government ended up saying, “Look, you can — Titan, you can do gold-on-lease. But hey, you’re doing this thing called Golden Harvest, we’re going to put a break on that.” So Golden Harvest, this was a Titan innovation, was brilliant. Basically, Golden Harvest, say, you’re buying jewelry worth $1200. And the way you do it is, every month, you as the customer would be tagged to $100. Over the first 11 months, you pay Titan $1,100. On the 12 month, you don’t have to pay anything. Titan would give you $1,200 worth of jewelry. Effectively, you as a customer got one month free, so to speak.
So the XIRR for the customer was 18%. Customers loved it, especially women loved it and it was super helpful for Titan because effectively, the customer was financing and giving the business. So it’s one of the cleverest things I’ve seen. You get the float and you get the customer. So the government said in 2014, “Hey, this cannot be more than 25% of your net worth.”
Dom: [00:21:10] For the customer’s net worth?
Saurabh: [00:21:12] Titans network. So from Titan’s perspective, their most effective way of financing the business with customer’s money was taken away in 2014. Thankfully, the government said, you can do gold-on-lease. So Titan remodeled the business and just imagine the amount of skill involved, you’re flying a plane, growing a business at around 20%, 25% PAT compounding and you change the engines…
…Saurabh: [00:27:52] As you rightly said, Dom, they have 400 outlets and they generally are pan-India. Most of the other jewelers tend to have a regional franchise rather than a pan-India franchise. Now as soon as you say, I want to be pan-India, you have to deal with India’s regional variations. So what gets worn in a Tamil wedding in South India is utterly different from what gets worn in a Punjabi wedding in Delhi. So the way Titan has gone about it actually is fascinating. So let me sort of break the story in three parts.
As I said till 2002-’03, the jewelry business was on fire. Nobody even knew whether it would survive. 2002 to 2010 was basically just getting the foundations built. And the first layer of foundations they built was they said that unlike other jewelers who get job work done by local artisans and they pay the artisans very little, the artisan uses old-fashioned tools, works in poor lighting and has high wastage in the process. Titan inverted that paradigm completely on its head. 2003 to 2010 was putting the artisans in nice, air-conditioned halls, modern lighting, modern machinery given by Titan.
And Titan focused on those 8 years in reducing wastage in the making of jewelry, increasing the design portion, they have 100 designers. I don’t think any other jeweler would have more than 50. These guys have 100 designers from what’s called the National Institute of Fashion Technology and the National Institute of Design. So they said, we’ll amp up the design quotient, train the — we call them karigars, the artisans are called karigars. We’ll get the modern machinery, reduce wastage and will also reduce cycle time. Most other jewelers, the artisans take 30, 35 days to get the stuff made into the store. In Titan’s case, the cycle time is six days.
So the first layer of innovating in the back office of a jewelry industry. 2010, they hired Eli Goldratt, a firm from Israel. This is the Theory of Constraints people, the famous book called, The Goal. They tell the Israelis can you help us reduce the inventory. 2010 through to 2015, they work with Goldratt and inventory rates are reduced from 125 to 75. And the last six, seven years have been about using technology to manage what goes where in a very smart way.
So I’ll try to sort of explain it as best as you understand. This is in a way the secret sauce. They don’t give it away. We’ve spent six, seven years talking to hundreds of store managers to understand this. So at any point in time, Titan has 100,000 SKUs, but a given store will only have 7,000. And a big part of management skill at the headquarters level and at the regional level is figuring out which 7,000 SKUs will go which store. As best as we can figure out, roughly 60% of the SKUs are common across stores. And this is purely by eyeballing, going to various parts of India.
And I think 60% of the SKUs seem to be common to all parts of the country. 30% of the SKUs are specific to a region and sometimes, Dom, these are specific even to a part of a city. And they seem to be using software to figure out what will sell where. So if it’s an office district with working women, a certain type of design will be made available. And if it’s say an agricultural area, a different type of design. So 60% common to all shops, the 30% specific and 10% experimental. So at any point in time, 10% of the SKUs in a shop seem to be there for experimental purposes. If they sell, they are replenished rapidly. If they don’t sell, they are taken out of circulation.
This ability to manage 400 stores, 100,000 SKUs pan-India with 7,000 at the shop level, 60% common, 30% using software specific to the store and 10% experimental, 100 designers working our way. This setup is very specific to Titan. I think the last seven, eight years, they have nailed it so thoroughly, it’s going to be difficult for other jewelers to catch up with this…
…what Titan is saying is, it is saying, I’m going to present my proposition around three pillars. First is purity. So regardless of how affluent you are, whether you want diamond-studded or gold jewelry, they innovated in 1996 something called the Karatmeter. Basically, think of it as a small X-ray machine with a blue light, which tells you whether the gold is pure or whether it’s full of gunk.
So this was a breakthrough. They pioneered it. This was, I think one of their pivotal moments in Tanishq’s evolution. So every Tanishq store has a Karatmeter. And Titan has a promise that if you come in with jewelry, which is 18 carat or better, if it turns out that if it’s not 22 carat, at Titan’s cost, they will make it 22 carat, you simply pay for the making charge.
Dom: [00:35:00] Even if it wasn’t bought from Titan in the first place. So if you bought it from a local independent, you can bring it there and then they will say, we’ll make this more pure for you but only at the incremental cost?
Saurabh: [00:35:08] That’s right, absolutely. And this was a key breakthrough in 2003. In Titan’s renaissance, this was a critical insight. They don’t just have the Karatmeter there and put people off by saying, “I’m sorry, your jewelry is impure,” give them the solution. So this is the first proposition in a way purity delivered to you, the Indian customer.
The second is around design. So much of their marketing in mass media is around affluent women, spending on jewelry as a part of sort of social stature and prestige. And this piece is heavily around diamond-studded jewelry, which is a high-margin item. We reckon on diamond-studded, they’re making 50% making charges. Because unlike gold, diamonds are not commoditized because there isn’t a standard diamond in a certain caratage.
So in diamonds, the Titan brand becomes even more powerful. And we reckon the way they monetize it by having a super high making charge on diamond jewelry and that in turn justifies this high glamor, high-profile publicity in mass media, at airports and so on…
…Dom: [01:00:04] Yes, frankly, it’s a pretty good job of telling the time these days. So we always finish these conversations with the same question, which is what have you learned as an investor of studying Titan’s business?
Saurabh: [01:00:12] Let me start with the most obvious piece of what we have discussed, right? Everybody says retail is detail in every country that I’ve lived in. And yet, when I see retailers, especially in India, they seem to try to take one solution and slam it across the country, whether it is foreign retailers who come to India or indeed domestic retailers. What Titan has done is, I think, demonstrated that if you want to succeed in large scale in India, you have to basically operate 10 different business models for the country. So the jewelry business sounds like one business, but as we discussed, it’s stratified by income group, it’s stratified by region. It’s got different COCO, FOFO business models.
So if you did a sort of matrix on it, you’re actually looking at 30, 40 different businesses being run in a fairly complex operation glued together by great people and really technology. That is tough to pull off. But unfortunately, that’s the ask, if you want to succeed in Indian retailer. And this is — for me, it’s been sort of living lesson in watching how a great retailer is built because that allows you to benchmark other retailers who aspire to succeed in India, but we won’t have anything like this quality of people or technology.
The second is the HR piece. Hire bright people, hire good people, hire them young, give them early responsibility, mentor them and they’ll basically let them become great business leaders. So 2014, from what we can gather, they did a Board meet and identified 100 leaders for the future, each of those 100 leaders were mentored by senior people in the Tata Sons Empire. The entire leadership of Titan today is part of that initiative of 2014 to groom the next-generation leaders, very difficult for other businesses to do this.
You’re investing really heavily in talent, identifying those people and mentoring them over, say, a decade period to become the leader of a business. Titan seems to have done this really well. And other Tata businesses, TCS is similar. And perhaps the biggest lesson from people like me who are building businesses in India is, when we see the house of Tata, when we see the sort of Tata Sons Empire, what they have done over, say, 100 years now, is very interesting. They seem to take initiatives again and again, which involves giving back heavily to society, even though the business might not be firing then.
And then in the decades that follow, the giving back to society yields a multi-fold return to the business. So the example for Titan would be 1988, J.R.D. Tata, the then head of Tata Sons, called in Xerxes Desai to Mumbai for a catch-up and told him that, look, you’re building a great business here. But what are you doing for the community? So Xerxes Desai said that, look, we are doing a hospital and a school, J.R.D. Tata apparently got very angry and said, you’re building this sort of five-star island of prosperity in the midst of poverty.
And on J.R.D. Tata’s order, Xerxes went off and built a township outside Bengaluru, where the artisans, both the watchmakers and the jewelry makers now sit, there’s schools, there’s free hospitals, free schooling and the core of the artisan community that fires up Titan’s business operates out of that ecosystem. Now that was the best part of 40 years ago, Dom, to this day, no other jewelry maker has been able to do anything remotely comparable.
5. How Coaching Networks Will Create the First Facebook-Scale Enterprise Business – Gordon Ritter and Jake Saper
The onset of AI in the workplace raises instead a new set of far more important questions that deal more directly with this reality: How can we use artificial intelligence to help us constantly get better at our jobs, learning necessary new skills along the way? How can AI be used to help workers rise above the mundane tasks it is automating away?
The answer is something we’ve dubbed Coaching Networks, and it forms the foundation of a major advance in how we think businesses will use software to augment the capacity for human learning. We also believe Coaching Networks will drive the creation of the next generation of iconic enterprise software companies.
Here’s why: For 40 years, business software has essentially replaced processes that previously required paper forms. At Emergence, we’ve seen the power of replacing these processes via multi-tenant web-based software from our first investment in Salesforce.com. While this shift to the cloud has been a huge breakthrough, it is largely the same forms experience for users. As AI capabilities improve, we can either treat it as a crutch that relieves us from thinking — examples include Waze and Google Maps — or as an asset that helps us use our brains more effectively and creatively…
…The key ingredient of Coaching Networks is software that gathers data from a distributed network of workers and identifies the best techniques for getting things done.
The software acts as a real-time, on-the-job coach, guiding employees to successful outcomes, and in the process gathering new data that’s then fed back into the system. Rather than dispensing “one-size fits-all” advice, it instead offers coaching that’s uniquely tailored to each worker and the task they’re doing at any given moment.
Coaching Network software gets better over time by learning the best practices that are proven effective across a variety of situations, identifying those outlier cases where a creative person finds a new, better solution, and adds those techniques to its coaching. This allows others to learn from the experience of those more creative workers. This is how humans become the “mutation engine” in this evolving process, generating new ideas which in turn benefit everyone else…
…Guru has created a clever Chrome browser extension that links workers to the institutional knowledge they need to complete certain tasks. Inside every company there are tasks that require a unique workflow.
This knowledge tends to get scattered into any one of several miscellaneous documents on a corporate intranet or file storage system, but it mostly lives in the heads of employees. When Guru notices someone doing one of these tasks in Gmail, Salesforce, Zendesk, Slack or other applications, it automatically surfaces related information, in context, and in real time.
Employees — especially those who are new on a job — like it because it saves them the time it takes to look up the information they might need, so they keep using it. The high rate of usage creates more valuable data on what works best, which helps Guru make better suggestions over time. Since deploying Guru, Shopify has seen a five times increase in knowledge base usage, speeding up critical processes. Intercom has seen a 60 percent reduction in the time it takes its support team to respond to customers.
Disclaimer: None of the information or analysis presented is intended to form the basis for any offer or recommendation. We currently have a vested interest in Alphabet (parent of Google), Meta Platforms (parent of Facebook), and Shopify. Holdings are subject to change at any time.
