Why do some great ideas flop along the way?
You must have heard that all great investments must be backed by a great idea. That is true. When Buffett saw the demand for Coke 50 years back, he scripted a long-term investment story. John Templeton saw the potential of emerging markets much before others did. But all great ideas do not eventually turn into great investments. Look at the Indian context.
Back in the late 1980s, Hero Honda was redefining two-wheelers by bringing in snazzy and fuel-efficient bikes to appeal to young people. The staid Bajaj scooters were no match and Hero Honda became a super wealth creator. When the same star investor applied the logic to Dish TV, it just did not work. Similarly, the network effect logic worked for Bharti and Jio but not for RCOM, Tata Tele and Vodafone Idea. Why do some great ideas flop along the way?
Tipping points make great ideas into great investments
Take the case of Apple, It had been in existence for 30 years when it launched Apple iPhone in June 2007. The tipping point came from the shift to smartphones, better bandwidth, the rise of social media and the arrogance of Nokia. The combination was the perfect tipping point for Apple. The rest is history. In India, Bajaj Finance got its tipping point when old-style NBFCs were vanishing and banks were not keen on consumer finance. Bharti Airtel had its tipping point when the network effect started making connectivity more valuable.
Great ideas need scale and execution to become great investments
When Bharti Airtel was listed in 2002, it struggled for some time. It is only when it built to scale that the network effect began to kick in. In most industries, either the costs are too high or margins are too low. Such stocks can only create value if they achieve scale. Same was the case with Infosys. The stock was around since 1981 but was noticed when the technology boom happened 18 years later. Y2K and the opening of the Indian IT sector gave them the scale. From there, the stock became a multi-bagger.
Some companies execute plans better than others. The NBFC game plan was executed much more efficiently by Bajaj Finance than by DHFL or IL&FS. On the realty front, companies like DLF, Macrotech and Godrej Properties did a much better job of execution compared to Unitech or Ansal. The results are there for all to see.
Be wary of businesses with too much leverage
Even a fantastic idea with a good execution can go awry if debt is too steep. Indian infra companies like GVK, GMR, LANCO and Jaypee went on a borrowing spree between 2005 and 2008 and ended up with too much leverage. In steel, the likes of Essar and Bhushan crumbled under leverage but Tata Steel and JSW Streel managed debt better. The moral of the story is be wary of too much debt, which invariably backfires.
Companies that adapt best are the finest multi-baggers
According to Darwin, the species that survives is not the strongest but most adaptable. That applies to businesses also. Wealth creators like Eicher, Havells, Infosys have all shown tremendous adaptability to change. At a time when NBFCs were going extinct in the late 1990s, Kotak Bank reinvented itself as a bank to lead the market cap sweepstakes. Similarly, Eicher adapted to focus on high-end motorcycles and became a mega-value creator.
The crux of the matter is that not all good ideas become good investments. Scale, leverage and adaptability go a long way in making a good idea into a good investment.