(About 18 months ago I had written about ideas from Science in Finance. This is a sequel.)

Life is multidisciplinary. That is only in school we study Physics, Chemistry, Arithmetic, Economics and other subjects separately. However real world problems don’t follow jurisdictional boundaries. And therefore we must learn to mix and match ideas from different disciplines and concepts without care. Multidisciplinary thinking was one of Charlie Munger’s greatest teachings and I am merely applying it.

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Back in high school we were taught Scalar and Vectors. Scalar has just magnitude. Vector has magnitude and direction.

For example- distance is a scalar. If you travelled 10 KMs, it tells nothing much. You may have gone from A to B and back to A. Or you may have gone in circles. Or you have may have taken a long circuitous route to go from A to B via C and D and covered the distance of 10 KMs. Measured only in distance, all of them have an equal measure of 10 KMs. There is just magnitude of 10 KMs.

There is a concept of displacement, which is a vector. If you go from A to B, the straight line distance between them is the displacement. If you go from A to B and back to A, the distance may be 10 KMs but the displacement is 0. If you go in cirlces, you may have a great deal of distance, but very little displacement. If you go from A to B, say you covered 5 KMs and if you go from A to X and also covered 5 KMs. The distance is the same, but the displacements are different. So Vector has magnitude and direction.

Similarly Speed is a Scalar. It tells you how fast a body is going. But it does not tell you anything about where the body is going. Therefore we look to Velocity which tells you how fast the body is going and where it is headed towards.

The beauty of scalar and vector hit me only recently.

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In my previous blog I talked about a finance company. Now, this company focused only on growing it’s lending book very fast. How fast? Between 2013 and 2018, they grew at a scorching pace of 70%+ year on year.

Like I said, Speed is a scalar. If you going at 100 KM per hour, it tells you just that : 100 KM per hour. There is no information about the direction. So this company was so focused on growing and growing fast and nothing else. This company, probably threw out all risk controls (direction controls) because it distracted them from speed. For example, here are some things that they did:

• Money outflows were the short term being more than the inflows. Therefore depending on the kindness of strangers to bail you out. Like depending on a friend to bail you out every single month and then repaying him of course. But the one time he does not bail you out, what happens to you? In the financial markets, you could lose your reputation forever.
• Lending too much to one borrower. When the borrower defaults, what happens to you and your projected inflows that are already precarious? ( See above)
• Lending too much to borrowers in the same industry. When the industry cycle turns bad, all of them become risky at the same time. Then what happens to your projected inflows? ( See above)

What they did for those 6 to 7 years was nothing short of driving with the eyes fixated on the speedometer and the speedometer only. Hence, this is what happened next.

Image Source: https://oneworldhouse.net/2019/05/29/the-cliff-of-climate-chaos/

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Now, I’ll give you a contrary example. At about the same time that our daredevil was driving at 74 KM per hour, there was another aspiring entrepreneur who also saw potential in the lending business. He went from town to town in Rajasthan that there were many thousands or millions of people who aspired to own a home. Most such towns only had a branch of a government owned bank and those bankers were least interested in lending. The private lenders were present only in the bigger towns and not in the smaller places. So here was the opportunity- millions of potential customers being unserved or underserved.

Next- he went and studied the mistakes made by others and went about building a business that would avoid those same pitfalls. Charlie Munger would be so proud of him for inverting and asking what can go wrong instead of just painting happy scenarios. So what all did he do?

He said I will never depend on the kindness of strangers. So my Inflows will always be more than my outflows. He also said – I have no rich parent to bail me out. Hence I must focus on not screwing up.

Next he said I will lend to the most needy but who are also creditworthy. So he created models from almost scratch that would help gauge the credit worthiness of such people. People who were shunned elsewhere were happy to be treated with respect now.

He said, I would love to have balance between work and life. And I will offer the same to my employees. The systems would shut down at 7 PM forcing people to be more efficient in what they do. Everyone achieves 25% of the their targets every week and not 75% of their targets in the last week. Such practices are stressful.

And finally he said- Vectors are more important than Scalar. I want to grow the business at only 20% every year but do that for 35 years. (If you compound at 20% for 35 years, you become 1000 times bigger.) So in simple words- he focused on direction through adequate risk measures, through sustainability, through responsible lending rather than just speed. And even till date, his company has one of the lowest bad loans in the industry.

That man is Sushil Agarwal and the business he created is Aavas Financiers.

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From one Agarwal to another.

Bhavish Agarwal is a fantastic entrepreneur. But I think his flaw is that he thinks only of speed and not direction. I remember watching an interview of his in April 2021 at the ground breaking ceremony of his 2 wheeler factor. And within about 2 years Ola scooters became the No. 1 electric scooter company in India. 0 to No.1 in 2 years! So he created it really, really fast. But, the scooters had/ have design flaws in them which are unaddressed. The service network is not adequately staffed. Like our first entrepreneur, he seems to care about only doing thing fast.

Similarly, Kishore Biyani focused solely on growing and growing fast. And he used debt to finance that growth and over time he borrowed more than he could repay. The supply chain had flaws, the business model had flaws but because he was so fixated on growth, these problems remain unaddressed. The global financial crisis happened, business slowed, funding slowed but debt obligations ballooned. And then it all came crashing down.

D Mart also started life in the same year as Kishore Biyani’s Big Bazaar. DMart first went about perfecting it’s model in a few places. it took them nearly a decade and only then did it step on the acceleration. That is like working hard to get the direction right before stepping on the gas.

Here is an excerpt from Prashant Desai’s book- “Biography of a failed venture”. (Prashant Desai worked very closely with Kishore Biyani and so he had an insider view of things at Big Bazaar.)

The Future Group versus DMart Story As I See It (The Tortoise and the Hare)

In most success stories, perhaps the most underappreciated attribute is patience. Future Group (FG) launched its first Big Bazaar in Hyderabad in 2001; Avenue Supermarkets launched its first DMart in Powai, Mumbai, in 2002. The Big Bazaar focus was fashion (food and general merchandise); D-Mart’s focus was grocery (general merchandise and not fashion). In ten years, Big Bazaar grew to 250 stores; DMart grew patiently to a mere ten stores. Big Bazaar had a lead of 200+ stores over DMart. Meanwhile, as FG used its capital in expanding a working-capital-intensive store network across all parts of India and in marketing to generate additional footfall, DMart used its capital to buy properties and set up an easy pace to store growth. DMart focused on inventory turns (food and grocery generating the highest). At FG, our inventory turns were 4x (because of fashion products that moved relatively slower); at DMart it was 16x (because food moved faster). We paid for rent; they did not. We used debt to grow; DMart had surplus capital and used equity. FG invested in its store ambience; DMart invested in no-frills stores with basic air-conditioning. Interestingly, every penny saved was offered to the customer through the lowest prices (strengthening the ‘Every Day Low Prices’ positioning). One visible reality separated the two companies. FG was in a hurry (rabbit); DMart wasn’t (tortoise). Interestingly, over the next seven years, Big Bazaar opened fifty stores; DMart launched 190 stores in the next decade. Only when the model had been perfected did DMart step on the accelerator. As on January 2021, DMart enjoyed a market capitalization of Rs 1,80,000 crore. As a result of the debt burden and trap (accelerated by COVID-19 and lower sales), Future Group lost the plot and sold out to Reliance Retail. The tortoise won. Hands down.

Desai, Prashant. The Biography of a Failed Venture: Decoding Success Secrets from the Blackbox of a Dead Start-Up .

Today- DMart is worth 31 B USD. But BigBazaar does not exist anymore.

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Our natural wiring seems to grasp scalars. After all, we can see small becoming big. We can see growth. We can see poor becoming rich. But all these are just scalars. They show magnitude but not direction.

We must instead look at the vectors. I can see small becoming big, but is it the right kind of growth? This wealth is good, but has it come through good karma or bad karma? This business growth is good, but are all the stakeholders happy? Because any unhappy stakeholder can make the business unsustainable.

Reframing from simple scalar thinking to vector thinking must happen. That is how you can tell one Agarwal from another. 🙂

-Cheers!