Book Recommendation: King of Capital

King of Capital by David Carey and John Morris details the story of Steve Schwarzman and his private equity power-house The Blackstone Group.

This book is a great history lesson in modern finance. It does an amazing job covering major events in the past thee decades and how private equity and capital markets in general has evolved over the years. It highlights deals by Blackstone that were highly successfully and but also deals that turned out to be a complete disaster. One of my favourite parts of the book is where the author dispels many of the stereotypes and criticisms about private equity using research/data that was collected on over thousands of deals.

Overall it is a great read and I would highly recommend it to anyone interested in private equity or finance in general.

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Winning in a Commodity Industry

Competing in a commodity industry can be a tough battle. Margins are often quite thin and it’s very difficult to differentiate the product/service from competitors. Loyalty is minimal and competing on price is a commonalty.

There 2 ways a business can strive in selling a commodity product; 1) having a sustainable cost advantage and or 2) having effective marketing. This post will focus on the latter.

So how does a company achieve effective marketing? It starts with the 4 P’s of marketing:

Product - Considering a commodity product/service is undifferntiable, a company does not have much room to maneuver here.

Price - Again, as a commodity product/service prices are largely determined by external forces of supply/demand.

Promotion – This is awareness of the company and it’s brand, including advertising, public relations and experiential marketing . The goal of promotion is to make your customers remember your company/brand product for when it’s time to make a buying decision.

Place - This is where or how a company’s product/service can be purchased, including it’s distribution channels, availability and accessibility. The goal of place is to make your product or service very convenient for your consumer to access and purchase.

So of the 4 P’s, there are 2 that are within a company’s control when selling a commodity product/service. In order to win, a company needs to focus on Promotion and Place. This means their marketing must make it easy for consumers to remember their product and convenient to access and purchase.

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High Frequency Trading: The Unnecessary Middleman

High frequency trading has been a hot topic of discussion over the past few years in the investor community. In his book, Flash Boys, Michael Lewis claims that the “market is rigged” because of high frequency traders. As well, Mark Cuban, Owner of the Dallas Mavericks, has publicly spoken out against high frequency trading in his post here, and to quote Mark:

If you know that by getting to the front of the line  you are able to see or anticipate some material number of  the trades that are about to happen, you are GUARANTEED to make a profit.  What is the definition of a rigged market ? When you are guaranteed to make a profit.

If you look at high frequency trading firm Virtu Financial, set to go public in 2014, they have only had 1 day of trading losses since 2009. There are many other firms out there in similar situations. So what is going on at these high frequency trading firms and how are they consistently being able to profit on trades?

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Book Recommendation: Swim with the Sharks

Swim With The Sharks Without Being Eaten Alive by Harvey Mackay is similar to Winning by Jack Welch in that both Harvey Mackay and Jack Welch go through several different areas of business and articulate their own opinion on how it should be done. I found that Mackay’s book had a bit more of an “entrepreneurial/small business” flavour to it compared to Welch’s book which had a bit more of a “corporate” flavour. This makes sense as Mackay started his own business, Mackay Envelopes, where as Welch started as an employee at GE and worked his way up the corporate ladder.

This book, as you might suspect, is a quite anecdotal with little references to any research or analysis but extremely useful nonetheless. Mackay does a fantastic job articulating concepts through his stories and experiences from his successful business career. Mackay is also very practical in his approach, avoids using buzzwords and buzzconcepts. Rather than giving you obscure theories and typical “fluff” that business books give you, Mackay delivers direct answers for realistic situations.  Very easy to read and comprehend overall.

Mackay presents several useful and practical tools that he himself utilizes, including the “Mackay 66″, which is a customer relationship tool based on 66 different questions about your customer that, over time, should be completely answered. Even though this book was published in the late 80s, it did not feel dated at all and is still very relevant to this day.

Overall, highly recommended for anyone in business, small or large, old or new and simple or complex.

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Financial Statement Producers, Users and Auditors

Financial statements are one of the most relied-upon sets of documents that investors utilize in order to make investment decisions. There is an entire industry dedicated to providing assurance on financial statements produced by a companies’ management. When auditors are working closely with several tiers of management to provide assurance on information that is used by widely dispersed, almost anonymous, shareholders represented by a mostly absent board of directors…who should the auditors consider their client? And why does it even matter?

Warren Buffett once brought up the issue in one of his letters to his shareholders. The following is an excerpt from the book “The Essays of Warren Buffett: Lessons for Corporate America“, which is a compilation of Warren Buffett’s letters to his shareholders.

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The DNA of the MLM Business Model

Herbalife has been making headlines frequently over the past year now, ever since last December when Bill Ackman publicly announced that the California-based multi-level marketing company was a pyramid scheme and unveiled that his hedge fund, Pershing Square Capital Management LP, had taken a large short position. Since then numerous important events have happened including Billionaires Carl Icahn, George Soros and Daniel Loeb taking long positions, Herbalife’s auditor caught with insider trading and subsequently resigning and the Herbalife stock price soaring over 200%.

Herbalife Stock

Source: Bloomberg

There are many multi-level marketing companies out there and they often receive accusations of harboring a pyramid scheme.

So what is really going on at Herbalife and other multi-level marketing companies? If you examine the DNA of multi-level marketing companies, you can see that most are inherently designed to (whether intentionally or not) evolve into a pyramid scheme. Let’s take a closer look…

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Posted in Business Theories, Case Studies | 7 Comments

Back

I have decided to blog again, with a different approach this time.

With my previous blog, I often wrote about my personal experiences (travelling, conferences, projects, etc.). I will likely continue to write about my personal experiences, but on a different blog. This blog will be dedicated towards my opinions and analysis on topics surrounding my interests and expertise. I want to use this blog as a medium to organize my thoughts. Posts will likely be regarding business theories, investment philosophies and political analysis. In addition I will be writing up book reviews periodically, nothing extremely detailed, just my quick thoughts and reflections.

I would like to obtain responses and criticism from colleagues/friends and will try to encourage discussion here. Suggestions are always welcome.

Jathu Vasantharajah

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