The Shoe Button Complex
Back in 1997, an Indian entrepreneur drew inspiration from Sam Walton's retail giant Wal-Mart and went on to build India's largest retail empire. Who is this man who laid the genesis of the retail revolution in India?
It is none other than Mr Kishore Biyani, the Founder and Group CEO of Future Group.
In fact, investors who were able to recognise the potential and invested early in the stock of Pantaloon Retail (India) Ltd saw their fortunes multiply several times.
The prospects of the retail chain seemed quite bright until Mr Biyani decided to plunge into several other businesses. Those ranging from launching an insurance company to selling mobile phone connections. As it turned out, not everything that he touched turned into gold. Moreover, in its haste to grow fast, Future Group accumulated a huge quantum of debt that became a drag on the core business.
So much so that Mr Biyani recently agreed to sell out a controlling stake in his highly lucrative clothing business, Pantaloons, to the Aditya Birla Group. There are also rumours doing the rounds that he might even sell stake in Big Bazaar and another listed subsidiary Future Capital Holdings.
Whether that happens or not is a different matter altogether. But the way things have unfolded certainly cannot be ignored. What is the root cause behind all this mess?
The answer to this is perhaps the 'Shoe Button Complex' coined by Munger and Buffet.
In simple terms, the 'Shoe Button Complex' means that success in one area can give a person an illusion that he can be successful in other fields as well. Businesses often fall prey to this complex and end up burning their fingers.
Do you now understand why Warren Buffett lays so much emphasis on staying within one's circle of competence?
It is worth recalling that while the world rode the tech bubble of the 1990s with stocks soaring to incredible heights, Buffett stuck to his discipline. He did not invest a single penny into tech stocks.
The result is that while he missed some big investment opportunities, he saved himself from the extreme losses that many suffered when the bubble burst.
Even Wal-Mart, whom Mr Biyani mimicked so well always stuck to its core competency and did not enter unrelated businesses.
Investors have a very crucial lesson to take home. For one, stick to investing in businesses that you know and understand best. If you're putting your hard-earned money into something that you do not understand, you're simply speculating. Relying on chance and luck isnt a good investment strategy. Secondly, invest in companies that operate within their circle of competence.
If you sense that the management is pursuing diverse businesses purely for the sake of growth, be wary of such stocks.
Vijay Mallya of Kingfisher Airlines is a classic example of recent times for investors who want to know what not to invest in.