How to Follow the World’s Best Manager into This Market

Today, almost no one thinks steel, oil and railroads are sexy.

But in the 1800s, these were emerging industries, where many a fortune was built.

The former helped Andrew Carnegie, a dirt poor immigrant, build an empire.

In the 1870s, Carnegie co-founded his first steel company. Over the next few years, he would grow his operation into one of the largest ever.

The latter set Cornelius Vanderbilt on his path to riches. In the 1820s, Vanderbilt used all the money he had to buy a tiny little boat.

Over time, he used savings and loans to buy more boats. But as soon as he saw what railroads would do for America, he sold his fleet and poured all he had into rail investments.

Both Carnegie and Vanderbilt are the model for business savvy.

But once up and running, decisions were pretty obvious. Any spare cash would go towards scaling the business.

Carnegie would buy yet another steel mill. Vanderbilt did the same and built out the rail.

Many of the biggest companies today don’t have the same luxury. And it’s important you know why.

 

Great management or a great company?

What’s more important, great management or a great company?

Warren Buffett would say the former is far better. While he’d like both, Warren has learnt tough lessons about trying to buy and turn around terrible businesses.

When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact,’ Buffett says.

Put in fewer words, the captain of a sinking ship really can’t really do much. But in rare occasions managers can sometimes prevail.

The obvious example is Mr Buffett himself.

One of the worst purchases he made is the company he now controls — Berkshire Hathaway Inc. [NYSE:BRK].

Originally a textile mill, Warren bought Berkshire because it was trading at a significant discount to assets on the books. If he could just get the right management to turn the ship around, he’d make a tidy profit.

But try as he might, Warren couldn’t plug the holes. So he decided to jump to a different ship. He sold most of the assets on Berkshire’s books and bought businesses instead.

Over time, Buffett transformed Berkshire into a holding company of wonderful businesses.

And today, Buffett is still an important part of Berkshire. He no longer needs to save a sinking ship. He has to decide where to steer the billions Berkshire generates each year.

Managers of today’s largest companies face the same dilemma. Their businesses generate billions in cash and they need to decide where to put it.

 

 

Jeff flies to India

Jeff Bezos of Amazon.com, Inc. [NASDAQ:AMZN] is one such wonderful business. While earnings are lumpy, the Everything Store has billions to put to work.

So far, Jeff and his management have done a terrific job. Books have led to selling almost everything else online.

All of Jeff’s pursuits are not pipe dreams. At some point, many of these investments could yield massive returns for shareholders.

The same is true for companies like Alphabet Inc. [NASDAQ:GOOG] and REA Group Ltd [ASX:REA].

All three businesses produce far more cash than they need. They’re buying new businesses, making abroad investments and paying dividends to increase shareholder value.

Unlike Carnegie and Vanderbilt, it’s not obvious what Amazon, Google and realestate.com.au should do with their left over cash.

Amazon, for example, cannot create another ecommerce giant. Google cannot build another search engine. REA Group cannot create another classified platform that will generate massive returns.

So, managers need to make careful and deliberate investments with shareholders’ cash.

If you turn your eye back to Amazon, for a long time they’ve bought companies and made investments.

Recently, they added an Indian-based start-up, Acko to their list. Tech Crunch writes:

Amazon appears to be restarting its funding efforts in India after Acko, the digital insurance start-up in India, confirmed that the U.S. retail giant led a new round of funding for its business..

Amazon — which has been linked with an Acko investment since the start of this year — backed lending start-up Capital Float last month, and now it has led a $12 million funding round for Acko alongside Ashish Dhawan, the founder of PE firm ChrysCapital, and existing backer Catamaran Ventures. The deal takes Acko to $42 million raised to date.

Acko was founded in late 2016 by Varun Dua, one of the co-founders of insurance comparison site Coverfox. With Acko, Dua is taking a deeper step into insurance with a digital-only business aimed at disrupting the $10 billion industry in India by leveraging the growth of internet access in India to democratize coverage and develop more relevant products.

But Jeff isn’t the only one pouring money into Asia.

 

Following the best and brightest

When a prominent investor with an amazing track record speaks, it’s helpful to pay attention.

You can find great ideas simply by scrolling through the portfolios of the world’s best stock pickers. So why not follow the world’s best managers?

Along with Jeff, some of the largest companies in the world are funnelling money into Asia. You’ll remember in yesterday’s Money Morning I wrote about two Chinese tech companies pouring billions into countries surrounding China.

I believe Asia will be the region of growth in the next few years. It’s why I’ve recently launched a brand new advisory service, Wealth Eruption.

We look for undiscovered small-caps that have the potential to erupt on the back of Asian growth. I’m not taking about 20%, 50%, or even a 100% return.

I’m specifically looking for returns that could literally change your wealth. Already I’ve recommended six ASX-listed stocks that could rise significantly higher.

If you want to find out more about my service, click here.

Your friend,

Harje Ronngard,
Editor, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read. Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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