October 19, 2023
Key Quote: “The concepts of Megatrends and Leadership are the two most important sources of value creation and wealth creation in financial markets”
Recently I had the opportunity to spend several days with Utpal Sheth at a small investment conference in Zermatt, Switzerland. Utpal’s presentation to our group on “Terminal Value Investing” was by far the best presentation on long-term investing that I have ever heard.
Utpal is the CEO at Rare Enterprises which is the family office of the most famous investor in India, Rakesh Jhunjhunwala.
Rakesh famously compounded ~$500,000 to ~$6 billion (USD) from 1985 to 2022 without any outside capital before passing away in 2022. Utpal worked beside Rakesh for much of that time and continues managing Rakesh’s family office today.
Rekesh and Utpal are famous for buying and holding stocks across multiple sectors that returned 100 times their money (or more) over 20 years including the Indian jewelry retailer Titan.
Of Utpal’s past presentations I found on YouTube, his 2019 talk on Megatrends and Leadership was my favorite, and I wanted to share it with you.
Summary: Utpal calls himself a “Terminal Value Investor” focused on underwriting the evolving terminal value of what he calls a “Leader-business” or “gorilla” operating within a megatrend.
Three books that have influenced Utpal thinking over the years are Megatrends (Naisbitt, 1988), Value Migration (Slywotsky, 1995) and The Gorilla Game (Moore, 1998).
Summary of my notes from the presentation:
- Megatrends and leadership are difficult concepts to appreciate in investing because they are not always obvious.
- There are sectors that have continuously outperformed for decades due to structural changes or “megatrends” (across industries).
- Even small changes in megatrends and leadership have an outsized impact on the terminal value of a business up or down.
- Megatrends are structural and have irreversible consequences for the world around us, they are not mean reverting.
- Investors need to differentiate between structural and cyclical change.
- To invest in megatrends, you need a broad perspective, and a narrow focus. You need to see the bigger picture but be able to derive a unique insight that the market is missing about an individual stock.
- Seeing the megatrend is one thing, but also picking the right leader is critical. Leadership, if sustained, will take most of the incremental market share.
- Example: top 3 players in the India cement market take the vast majority of market share, same in auto, consumer durables, etc.
- Example megatrends (India) include Urbanization, IT revolution, Demographic evolution, Consumption boom, Rising incomes, etc.
- Evolution of business models allow megatrends to be sustained and expanded across verticals (i.e., IT spend growth spread to all sectors eventually).
- For a megatrend to reach its potential a lot of economic displacement is needed, and efficiency gained as a result (value migration).
- Consistently high returns on capital and incremental capital are critical to support megatrend growth (attracting competition).
- Picking stock winners: Everyone talk about strategy, but execution is the real crux.
- Leaders/winners/gorillas demonstrate: Profitability, Durability, Scalability. Resilience and adaptability are critical.
- Leadership businesses have a strong culture around innovation, expanding their addressable market and embracing disruption.
- Economic downturns and economic cycles reinforce the leader’s position (emerges stronger).
- Very few companies are able to reinvent themselves in each economic cycle.
- Value migration accelerates shifts in power between incumbents and challengers with each cycle.
- Almost impossible to have a portfolio of all “gorillas”, need to recognize the “monkeys” as they make themselves known and evolve/sell.
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