About Business Models and the Need to Write

If you don’t grasp the underlying system of ideas,beliefs and values that led to the creation of an entity looking to serve a user base, you can’t explain a business model to a six year old.

So, I have more or less figured out what I want to write about.

First, starting with why I want to write.

Primarily, to achieve clarity of thought.

That’s it.

I read a brilliant post on Medium which was about filtering noise from signal. Another way to put it could be, do you absorb knowledge/wisdom or just information when you read something?

What the post essentially implied was that in an era of gargantuan amounts of information, identifying relevant high-quality consequential data is a task in itself.

Consumption and retention of the same, is an even bigger challenge. The incessant updates and edits do not make things any easier.

Yes, the information available online can be captivating and makes for great trivia.

But how much of it is applicable to what I do for 12 hours a day?

For example, I could tell someone about which company got acquired for how much and by whom and if they are not all that well-informed about the subject, they could be like, ‘oh wow, this guy knows so much’. But it’s still trivia at the end of the day. There definitely is a lot of layman prestige in being able to quote what I read in an article or the news and making it sound like it was an indigenous thought.

But how far will that take me?

Let me give a few “Nice To Know” vs “Need To Know” examples:

  • The company which just had a multi-billion dollar IPO vs the most important data points in an IPO prospectus?
  • The company which launched 3 new products vs the underlying variables, which if changed could impact a company’s growth?
  • The company with the highest market share in its industry vs identifying a business with strong economic moats?

These “Need To Know” questions don’t get answered everyday on a DealCurry/moneycontrol/Bloomberg or whatever you think is a great source of data/information.

Questions like that can only be answered if and only if, I stop mindlessly skimming through articles/reports and actually question what I am reading.

What I need is the intellectual honesty and curiosity to identify the things I am ignorant about in my area of interest (which I will come to later), and then I need to figure out the mechanics of the same.

The article on Medium also focused on the importance of working backwards.It mentioned how research showed that when people actively searched for something online, the information retention rate is much higher than passive browsing.

As long as you are able to set up a solid base for your research; which can only be done by asking the right questions, you are on the right track.

Think of a topic. Start treating it like a project work of sorts, that by the end of a timeline you should know ‘ABC’ about ‘XYZ’.

The objective should be to achieve independent thinking.

I don’t think I have ever read something online and tried to question it. I would have, but I don’t think I have done it enough (otherwise this would not have been my first post).

If I am embedded in a system in which I consume data, interpret it as it is presented and then form an opinion, my opinion is redundant.

The same opinion already exists in the article I just derived it from.

The more you write, the more structured your thoughts become, the more will you be able to absorb the crux of the information you are consuming.

You could then, have your own opinion.

“I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.” -Charlie Munger

This might sound a little hypocritical , because I do plan on giving my ‘opinion’ on a few things which I may not understand as well as the ‘other side’.

But yeah, this would definitely help me in developing an opinion and could also make me the stronger other side over time.

Now coming to ‘what’ I want to write about.

What excites me the most, is understanding a business model.

It could be a start-up, the restaurant down the road, a Fortune 500 company or even a ‘pan dukaan’. I truly believe that the ability to identify the growth drivers of a business and more importantly, being able to identify efficient capital allocation strategies is a great skill-set to have. To be able to differentiate between a business which is a one-time wealth creator and a business which has created a unique product/service and enduring value for all it’s stakeholders also reflects upon a person’s investing prowess.

A start-up, for example, could start off with an idea which could be turned upside down by the time the idea comes to fruition. The changes could have happened due to investor demands, the team could have changed its target market etc. Whatever it is, understanding the parameters that led to the restructurings in the business is key to understanding a business model.

A friend who happened to meet Sanjoy Bhattacharya (one of India’s most well-known and ironically, publicity-shy value investors) told me about an interesting piece of wisdom Mr.Bhattacharya had given him. He said that in order to understand ITC’s (India’s leading tobacco manufacturer and one of the fastest growing FMCG companies in the country) business model, one needs to start by understanding how a paan-waala makes money selling ITC’s cigarettes.

I’ll explain:

  • Let’s say the shopkeeper has one packet of cigarette in his inventory at the start of the day (say 8 a.m.) and its cost price is Rs.100.
  • He sells the whole pack by 11 a.m. for Rs.120. After that, the wholesaler delivers another pack for the same cost price.
  • The shop-owner has already received Rs.120 from the first pack, out of which he spends Rs.100 to buy the second pack and keeps the Rs.20 profit.
  • Again, 3 hours later, he sells off the second pack and makes a profit of Rs.20.
  • He uses Rs.100 out of the Rs.120 he earned, to pay the wholesaler the second time.
  • However, now he has a profit of Rs.20 (pack 1) +Rs.20 (pack 2)=Rs.40

And the cycle goes on.

Notice, that the initial 100 bucks was the constant capital which was reinvested, on which the shopkeeper was earning a profit of Rs. 20 for every pack he sold.

What I am trying to arrive at here is the importance of developing the ability to break down a business model into its simplest form. And for that, one needs to understand every facet of the business.

Niall Ferguson, the author of ‘Ascent Of Money’, pitches the book to prospective readers by saying that, in order to understand the financial services industry today, one needs to know how the idea of money originated in the first place.

Similarly, if you don’t grasp the underlying system of ideas, beliefs and values that led to the creation of an entity looking to serve a user base, you can’t explain a business model to a six year old. Even the most esoteric concepts can be explained to a tyro.

Warren Buffet’s letters to the shareholders of Berkshire Hathaway are a classic example of how a sound understanding of any business can translate into the development of an excellent investing acumen and also, lessons for a large audience. Mr.Buffet himself, has said that writing helps him refine his thoughts.

So, the most efficient way to achieve what I have set out to is, to write.

About any company, any strategy, any concept which I think would add value to me and anyone who reads what I write.

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