(Pictured above: The Panchachuli peaks photographed from Saurabh’s decrepit phone)
Published on:23 July, 2019
As investment managers, can we morally justify earning healthy returns year after year from investing in companies which generate supernormal returns from monopolising the sale of essential products to millions of Indians? The Mahabharata provides guidance on this troublesome ethical question.
“What is here is found elsewhere.
What is not here is nowhere.”
– The Mahabharata 1.56.34-45
Voices from the past & present raise difficult questions
Exactly 20 years ago, my then fiancé (now wife) and I went to seek the blessings of an aunt who passed away shortly thereafter. Her parting instruction to us was, “You can choose which country you want to live in but once you have chosen that country, stay put and make that country your karma bhoomi.” (Crudely translated, karma bhoomi means “the land where one works”.)
It was difficult for us to forget what my late aunt said not least because the transformational impact her family has had on pre & post-Independence India. And so when our son was born in late 2007 we decided to migrate from the UK, a country where I had lived most of my life, to build a life in India.
In India, largely by design and partly by luck, I find myself working in Marcellus with a group of people who want to be a force for good by managing money for HNW investors in a transparent, cost-efficient structure which delivers consistent returns with volatility akin to a Government of India ten year bond.
However, since our central mode of investing entails making money year after year from investing in Indian companies who dominate the sale of essential products to Indians behind monopolistic barriers to entry (which ensure very high Returns on Capital), a few perceptive clients have raised tricky moral issues for us. [See our 1st June piece http://marcellus.in/blogs/marcellus-unusual-billionaires-flip-the-competitive-paradigm/ for more details on how we identify investments.]
A senior fund manager outside India for whom we manage money has ethical issues with us investing in a cigarette manufacturer. A legendary business strategy guru in the UK has raised an even broader issue regarding the ethics of investing in monopoly-like companies. His point is that the era where business & ethics were seen as being divorced from each other has come to an end. Therefore, consumers/voters are not going to tolerate companies generating extraordinary Returns on Capital whilst selling essential products to the public.
In this piece we delve into each of these issues using the Mahabharata as an analogy for as the quote at the beginning of the note says, the Mahabharata is a microcosm of the world at large.
The Mahabharata – the world in one epic
We will draw upon the two central moral quandries which are elaborated upon in the great epic. The first is Arjuna’s famous dilemma as the Pandava and the Kaurava armies line up against each other in Kurukshetra. Upon seeing his kinsmen on the other side of the battlefield, Arjuna lays down his famous bow – the Gandiva – and refuses to engage in battle. Krishna, his charioteer, first tries to reason with Arjuna. When that does not work, Krishna resorts to his authority as God and impresses upon Arjuna that his Dharma is to be a warrior whether he likes it or not. He cannot escape his Dharma and he must fulfill it. Arjuna has to be a warrior for what is right and just.
Following this line of thought, our job as fund managers is to be stewards of our clients’ monies. We first need to protect the corpus we are given and then we need to grow the corpus without putting the monies as risk. We believe that this job can be best done by investing in companies who meet three criteria: their books are not cooked, they sell essential products and they do so behind the shelter of monopolistic barriers to entry. Yes, it is likely that the flipside of the enormous profits generated by these companies is that Indian consumers pay over the odds for these products but that is the equivalent of Arjuna having to go to war against his kinsmen.
The second moral quandry in the Mahabharata is more prolonged and even more troubling. As the battle wears on, Krishna uses underhand tactics to help the Pandavas kill the key Kaurava warriors one by one. For example, when Bhima and Duryodhana face off, Krishna doubts that Bhima will be able to prevail upon a warrior as mighty as Duryodhana; hence Bhima will need some sort of dodge. Krishna indicates as much to Arjuna who slaps his left thigh. Bhima gets the hint and smashes his mace into Duryodhana’s left thigh thus pulverizing it. Is this foul move justified? Is Krishna’s repeated trickery justified?
As Gurcharan Das explains in his lucidly written book ‘The Difficulty of Being Good: The Subtle Art of Dharma’ (2009): “Krishna firmly believes that once you make the fateful decision to go to war then you must win at any cost. As he sees it, the Pandavas’ cause is just, and once the war begins the only thing that matters is victory…
The game of dice, which led to the exile of the Pandavas and the Kurukshetra War, reflects the decline of dharma. The Kurukshetra War was thus inevitable. It was meant to lead to pralaya, ‘end of the world’, after which would emerge a golden age, the Krita Yuga, another throw of the dice, under the rule of the good king, Yudhishthira. Krishna, too defends, his questionable acts of this basis.”
In 21st century India, we and our clients find ourselves living in a country where the benchmark’s decadal earnings CAGR has been barely 8%, where the capex cycle has been muted for 8 years and where the lending, auditing and credit rating ecosystem has been steadily corrupted. Therefore, to generate healthy returns for our clients – many of whom are relying upon us to finance major life events such as retirement – without taking high levels of risk, we have to invest in well managed highly cash generative monopolies.
If these monopolies sell addictive products then so be it. The Government, not we, has to make a call on whether these products pose a danger to public health. If these addictive products are being sold legally then we believe it is appropriate for us to invest in such stocks. Of course, if a specific client does NOT want us to have such stocks in his portfolio, we have to honour that request for his/her specific portfolio.
So what is the risk that we are running?
The great epic can also be used to understand the key risk that we are running with our style of investing. After the 18-day war in Kurukshetra is over, “A sense of horror and melancholy dominates the victors’ mood. Almost everyone is dead and there is no joy in ruling over an empty kingdom. Yudhishthira, in particular, is incosolable…The end of the epic is a time of twilight. After ruling for thirty-six years, the Pandavas feel weary and disillusioned. Krishna dies a banal death. As he is resting on the bank of a river, a hunter mistakes his foot for a bird, killing him with an arrow. After that the Pandavas decide that it is time to leave the world…The five brothers, along with Draupadi, set out for the ‘city of the gods’ in the Himalayas. On the way, they fall one by one, except Yudhisthira who alone reaches heaven.” [Source: Gurcharan Das’ ‘The Difficulty of Being Good’ (2009)]
Whilst we hope that our end will not be as melancholic, we realise that one day India too will get a premiere like Theodore Roosevolt who will use his/her pulpit to expound against unethical causes. As the outstanding writer, Doris Kearns Goodwin, explains in her book ‘The Bully Pulpit’ (2013), at the beginning of the 20th century, industrial barons monopolised entire industries in America. “There are but a handful of times in the history of our country,” Goodwin writes in her introduction, “when there occurs a transformation so remarkable that a molt seems to take place, and an altered country begins to emerge.” As and when an altered India emerges, we will have to revisit our investment strategy. For now, we continue to consistently compound for our clients courtesy monopolists selling essential products.
Incidentally, the people of Garhwal in Uttarakhand believe that the Pandavas & Draupadi continue to live forever as the five Himalayan peaks called the Panchachuli – see the photo at the beginning of the note and https://en.wikipedia.org/wiki/Panchchuli
To read our other published material, please visit http://marcellus.in/resources/
Saurabh Mukherjea is the author of “The Unusual Billionaires” and “Coffee Can Investing: the Low Risk Route to Stupendous Wealth”.
Note: the above material is neither investment research, nor investment advice. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services and as an Investment Advisor.
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