"Compounding of Knowledge" For Investing Success

This is a true story, and one that I find inspiring. Here it is (author not known):

"It was the year 1946. Germany stood devastated by the Second World War. The Allies had won, and many German cities, including Munich, had been severely damaged.

Munich, the picturesque capital of the Bavarian region of Germany, and centre of the country’s diesel engine production had suffered as many as 74 air-raids. More than half the city had been damaged or destroyed.

On one gloomy morning that year, at the Munich Railway station, stood the directors of Krauss-Maffei, the reputed German engineering company. They were waiting for the arrival of their guests from India.

Founded in 1838, Krauss-Maffei was a leading maker of locomotives of various types, and an engineering company with a formidable reputation. Unfortunately, the company now stood devastated by the war, since their factories had been destroyed by the Allied Forces.

The guests from India got down from their train. They were directors from the Tata Group in India. If you had been there, you would have seen JRD Tata, the young, tall, lanky Chairman of the group, get off the train. And accompanying him was a forty year old engineer, Sumant Moolgaonkar, representing TELCO (now Tata Motors). They had come to Munich for discussions with Krauss-Maffei regarding the manufacture of locomotives in India. What they found, instead, were scenes of destruction and ruin.

The Germans requested the Indians to take some of their unemployed engineers to India, along with their families, and provide them jobs and shelter. The directors of Krauss-Maffei are reported to have told the Tata directors – "They are very skilled people. They will do whatever you ask them if you take care of them. They can also teach your people."

This would have to be done without a formal contract, because the British, who were still ruling India, had forbidden Indian companies from having any contracts with German corporations during the war. But this request was urgent and compelling. Because in that year, with factories lying destroyed, unemployment in Germany was rampant, and the then German currency, the Reichsmark, had become almost worthless.

The Tata directors agreed to this request and assured the Germans that their people would be well looked after. The German engineers from Krauss-Maffei then came to India, and they were provided good jobs and housing by the Tata Group. They were well taken care of, and they also rendered great service to Tata Motors. In 1945, Tata Motors had signed an agreement with Indian Railways for the manufacture of steam locomotives, and this is where the German engineers provided valuable technical expertise. They helped the company manufacture locomotives, which were amongst the company’s first products.

In 1947, India became independent. In the 1950s, Tata Motors moved on to manufacture trucks in collaboration with Daimler-Benz. Many years had now passed since that fateful meeting at the Munich railway station. Germany had substantially recovered from the ravages of war, and the reconstruction effort had borne fruit. In one of these happier years, the board of Krauss-Maffei was surprised to suddenly receive a letter from India.

This letter was from the Tata Group. It offered grateful thanks for the services of the German engineers, and it contained an offer of compensation to Krauss-Maffei for the skills which had been transferred by the Germans to Tata Motors. Krauss-Maffei was surprised, even taken aback at this offer. There was no legal contract, and therefore no obligation for the Tata Group to pay any compensation. I think, neither did this expectation exist, because Tata had helped by providing jobs and shelter to the otherwise unemployed German engineers during those dark days. So, the Germans were astonished as they read the Tata letter.

This story was narrated many years later, in the 1970s, by directors of Krauss-Maffei to Arun Maira, then a senior director of Tata Motors. In a thoughtful article that he wrote for The Economic Times in 2005, Maira recollects how two elderly German gentlemen met him at a business dinner in Malaysia, enthusiastically shook his hands, and wanted to express their deepest gratitude to him. They then narrated to him this fascinating story, which, they said, is now part of their company’s folklore.

One unexpected sidelight of this story occurred when Tata Motors was asked to provide a legally binding financial guarantee in the 1970s, but this was rendered very difficult because of the Indian government’s regulations at that time. This matter was referred to Deutsche Bank, who said that a guarantee on a Tata letterhead, signed by the Chairman, was more valuable than any banker’s guarantee.

I do not know what exact thoughts ran through the minds of Tata directors in the 1950s before they sent that letter to Krauss-Maffei, offering compensation where none was agreed upon or expected. But I think the Tata Group did this because it was the right thing to do.

The right thing to do is never defined by formal agreements or legal contracts alone. Neither is it defined by the expectations that others have of us. What is right is defined by our high expectations of ourselves, by the culture of fairness and trust that we wish to establish. Are we being truly fair to the people and the companies we work with? We always know, if we listen deeply enough to our inner voice, whether we are being fair and right. The Krauss-Maffei story holds such a beautiful lesson for all of us."

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JRD Tata was a remarkable man. Persian by ancestry, born into an industrial family in India, French-educated, and he grew Tata Group into one of the largest conglomerates in the world. Today, the Tata Group owns Jaguar Land Rover, Corus Steel, Tetley Tea, Tata Consultancy Services (better known as TCS), and many Fortune 500 sized businesses all over the world.

Krauss-Maffei is a precision engineering leader and was acquired by ChemChina in 2016.

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Tangentially, this story is also a reminder of how success in investing is a result of the "compounding of knowledge".

I remember reading JRD Tata's biography titled "Beyond The Last Blue Mountain", published in 1992. I also read "Jeh, A Life of JRD Tata" over a decade later. I have read biographies of Sam Walton (Walmart), Siegmund Warburg (now UBS), Lee Iacocca (Chrysler), Konosuke Matsushita (Panasonic), Kim Woo Choong (Daewoo), Jorge Paulo Lemann (3G Capital, AB InBev), Bob Iger (Disney) and many others over the years.

At the time, I had no real idea how these books would directly help me.

Then, as I became a full-time investment manager, I realized that my reading habit had given me an invaluable toolkit.

For example, I developed a perspective of how and why conglomerates flourished in places like Japan, India, and South America. Or, in earlier times when things were less developed. A perspective on many things that are good inside a conglomerate and many that are bad.

When I was recently investigating the memory chips business as an investment manager, this background on conglomerates gave me a nuanced view of Samsung, SK Hynix, and Micron (the former two are conglomerates). The three companies together control close to 100% market share in DRAM and NAND memory, a crucial ingredient in the booming cloud computing phenomenon.

I could see why it is natural for Samsung to deploy valuable growth capital away from a successful memory and display business and divert it to say a nascent biopharmaceutical business, and why Micron would be a better investment from my perspective as an outside shareholder, even though Micron is the smallest of the three in this economy of scale business. One example.

I could also see why it was going to be heavily against the odds for an activist investor to succeed in a recent campaign on Sony and push the Japanese group to divest an unrelated insurance business (Sony Financial) or shrink a low growth business (Sony Electronics), focus resources on its flourishing entertainment business (movies, music, gaming), and adopt a "shareholder value comes first" motto that the activist was demanding. We stayed away and avoided a non-wealth generating and eventually unsuccessful investment thesis.

Many times in investing, it is what you can read between the lines that can be more important than what you can read on the lines. Micron and Sony are just two examples of how a "compounding of knowledge" helps us gain a strong edge as professional investors.

Disclaimer:?This article is not investment advice. It is a biased opinion and may be wrong. Do not rely on the information here for any investment decision that you may make. The?author?or his?investment firm?may be long, short, or uninvested at any time in the securities discussed in this article and such positions may change without notice. Click?here?for other details.?