Why Bertie thinks investors should be like drones
As an investor, Bertie thinks of himself as a drone. Not that he harbours any delusions of being able to fly, at least not while sober. The analogy stems from his self-image as someone who can survey the investment landscape from a few hundred feet before swooping down to examine an area of interest more closely.
Bertie's professional engagements last week reflected the wide canvas he likes to paint on. A Wall Street bank was hosting an exclusive meeting with a visiting global macro economist for a select group of high-powered chief investment officers (CIOs). The venue was the ballroom of a five-star hotel. Bertie's sharp eye, however, did not miss the contradiction between the words 'select group' and the size of the ballroom. He smirked, but then remembered the delicious pralines served by the hotel. After a quick cost-benefit analysis, the pralines won. He found himself among a hundred or so 'select CIOs', listening to a long-haired, blue-eyed global economist.
Bertie had chosen a seat close to the refreshments area, hoping to make a quiet exit as soon as he had polished off the pralines. But a passing waiter informed him that food would be served only after the talk. The Wall Street bank, which had itself been bailed out twice, was displaying uncharacteristic financial prudence, Bertie thought, by making him sit through a 56-slide presentation before he could get to his beloved pralines. He resigned himself to his fate and decided to pay only passing attention to the proceedings.
Having heard enough global economists over the years, Bertie knew that it was only a matter of time before the discussion turned to India's macroeconomic fault lines. True to form, a chart showing India's low spending on research and development (R&D) appeared on screen, accompanied by comparisons with other countries and some friendly advice: India needed to invest more in innovative research.
Low private-sector capital expenditure was flagged as another fault line. Once again, a chart comparing India with other countries made its appearance. This time, the advice was directed at private companies: they needed to spend more on building capacity.
After the presentation, Bertie chatted with a few of the select CIOs. Everyone seemed to agree that 'we' needed to spend more on R&D and capital expenditure.
Over the next few days, Bertie met the leadership of two pharmaceutical companies at the forefront of innovative research. Both had spent millions of dollars over the years funding research aimed at discovering and commercialising new medicines. Such work had traditionally been the preserve of Western pharmaceutical giants and, more recently, Chinese companies.
The CEOs had a similar story to tell. Capital markets had been deeply sceptical of their R&D ambitions, punishing the companies with poor valuations. To keep their research programmes going, they had been forced to sell the family silver — existing, profitable businesses and brands.
When one CEO said he intended to redouble the company's R&D efforts now that it had achieved some initial success, Bertie sensed a sudden heaviness descend on the room. From that point on, the questions revolved around free cash flow generation, debt ratios and return on equity. Bertie noticed that some of the select CIOs from the macroeconomic gathering were now asking these very questions.
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Towards the end of the week, Bertie met a small auto ancillary company whose products risked becoming redundant as vehicle sales shifted from internal combustion engines to electric vehicles. Until then, the company had been distributing a sizeable surplus cash balance to shareholders, earning itself an attractive dividend yield.
At the meeting, the CEO outlined a plan to enter the electric battery business. The proposed venture would require the company to invest as much over the next three years as it had over the previous fifty. Naturally, this meant that dividends would have to be cut and could even fall to zero.
Once again, the atmosphere in the room changed. Investors advised the CEO to take a 'calibrated approach' to fresh investments while ensuring that the company's fundamental attractiveness remained intact.
On his way out, Bertie overheard two investors exchanging views.“Kya zaroorat hai? Accha to chal raha hai.” (What's the need? Things are going well.)
Bertie sometimes wonders whether the select CIOs miss the fact that macroeconomic charts showing low R&D spending and weak capital expenditure do not fall from the sky. They are an aggregation of thousands of micro-level decisions made by companies, households and governments.
But then, perhaps, one has to be a drone to see the connection.
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