Do you have this power?

[MRAMDAS]

Dear friends,

An article I read in the Equtiy Master today caught my attention. This is
one universal criterion that lets you know where you stand in your business
today. Do YOU have it? Can you rate yourself based on this? Read on and
come back with your comments.

----------------------------------------------------------------------------
-----------------------------

There's a restaurant right below our Mumbai office building. And its quite a
hit with a lot of our office staff. In fact, why just us. The wide variety
of Indian cuisines it serves attracts many office goers in our vicinity. As
far as I am concerned, I also love to tuck into their South Indian fare
every once in a while.

Last Saturday evening was one such occasion. Except this time I learnt a big
investing lesson. Or let me put it this way; a big investing lesson was
reinforced.

So as I was half way into polishing off a delectable dosa, there was a
mini-commotion of sorts near where I was eating. Turned out, it was the
restaurant staff. They were busy bringing down this gigantic menu board. The
board, as you would have guessed by now, is something that displays all the
items on offer and also their rates.

At first, I thought the lighting that gives the board visibility at night
might have become faulty. And therefore the board has been removed in order
to do the repairs. However, to my surprise, off went the staff, carrying the
entire menu board with it, only to return few minutes later with the exact
same replica.

I didn't quite get it. If the wiring wasn't a problem, why was the board
removed and whisked away? And far as I can tell, it didn't require a
painting or a cleaning job either as everything on it was quite legible.
Then as I was glancing through this newly laid board, my eyes stopped at the
item I had just ordered. The memory of the money I just spent was still
fresh. Consequently, I could immediately sense that the next time I order
the same dosa, I will have to shell a few extra rupees more! It all finally
started to make sense. The reason the menu board was changed was because the
hotel had decided to revise upwards the prices of all of its offerings.

This was of course not the first time I had seen the restaurant revise its
prices. During the few years we have been operating out of this building, I
have seen prices of most things in the restaurant go up a minimum of 2-3
times. However, what surprises me is the nonchalance with which this
revision is carried out. And why not. For the customers hardly seem to
complain about the price rise. On the contrary, the serpentine queues at the
food ordering counter just keep getting longer with each passing year.

What the restaurant owners perhaps don't realise is the fact that they are
pulling off a miracle even the mightiest companies on this planet find hard
to conjure up. As this event was unfolding before my eyes, my mind was
taking me to a Warren Buffett quote from a few years ago. The quote was
effectively an insight he shared about the kind of business he looks to
invest into.

And what was this insight? Well, it was his observation that the single most
important decision in evaluating a business is pricing power. So, if you've
got the power to raise prices without losing business to a competitor,
you've got a fantastic business. But if you have to have a prayer session
before raising prices by 10%, then you've got a terrible business.

Indeed. There will be very few statements that can sum up the hallmark of a
great business as succinctly as this I believe. You see, every business
faces risks of one kind or another. However, if there's one common enemy or
one villain for all the businesses put together, it is the demon of
inflation according to me. And the most effective way to slay this is to be
in charge of a business where there's some sort of pricing power available.

As I shared this finding with Radhika Pandit, the editor of ValuePro, our
service that specialises in selecting stocks as per the Warren Buffett
philosophy, her eyes lit right up.

She could instantly draw the parallels between some of the biggest
recommendations she has made over the years and the central role that
pricing power had played in most of those recommendations being successful.

As a matter of fact, few of her recommendations that have not done well have
mostly been companies where pricing power got eroded over time or was just
not there to begin with.

Therefore, the next time you are trying to identify good, solid stocks for
the long term, ask yourself whether the management can change the menu board
with the nonchalance that I witnessed. In other words, whether the
management has to have a prayer session before raising prices by 10%? If the
answer is yes, then you are better off avoiding the business according to
me.