Introduction to January Issue

“I don’t think that all of that [the image of the Indian IT industry] will be
destroyed because there is one bad apple, just because there is one Satyam.”

Narayana Murthy, (On Satyam)

“There's never just one cockroach in the kitchen.”
Warren Buffett, 2007 (On Freddie Mac’s accounting manipulations).

Buffett and Murthy, two accomplished individuals who have a carved a place of their own on the minds of billions of people. When they speak something, we know “this guy is not cheating us”.

But today, when I put their statements – made at different times – about corporate scandals, I am forced to pick just one as correct one. I can be accused of my partiality to my role model but I believe Warren Buffett has hit the bull’s eye. He is talking from the perspective of investors whereas Mr. Murthy is talking as a promoter and it is quite natural for him to wish that the Satyam scandal won’t affect his company. I wish he were right but he has no way of knowing how many cockroaches are crawling in the neighboring kitchens.

This issue of Unfair Value is hitting the cyberspace at a tumultuous time. There are cockroaches everywhere. The 7 billion dollar fraud involving Societe Generale, a string of subprime related bankruptcies and multi-billion write offs amounting to trillions of dollars, the 50 billion dollar lost to the ponzi scheme of Bernard Madoff, we have had enough last year. Then suddenly we saw a roach in our midst.

Why shouldn’t the investors be jittery? It’s true that if the business is down or the economy is down, there are always few smart individuals who make bold investment decisions and go on to make big money. Yet, the crisis of confidence affects the most resilient among us. Investing in stocks is becoming like gambling in a casino which is rigged. There is not a name big enough to be trusted. We have seen them all – City, HSBC, Merrill Lynch, Lehman Brothers (since 1850), Bear Sterns (since 1923)…There is an endless list of big names that we have seen falling to dust or being sold off in a fire sale.

Indian IT industry is not and has never been a gold standard of integrity or excellence which many people think. In my Investing career, I’ve rarely invested in Indian IT companies and that too in small quantities and for short periods. Warren Buffett hasn’t invested in IT because he says he doesn’t understand the business but for me, the reason is different - I know many uncomfortable facts about the business because I work in this industry.

Why should the people in IT Industry be surprised by over-stated cash in Satyam’s account? The career of more than half of the tech employees starts with a fake resume which claim the skills or experience they don’t have or overstate it. Even after scanning and filtering one out of twenty resumes, you, as hirer, are faced with an interview that makes you scream within the confines of your skull.
If you ask a history graduate in an interview “Did Napoleon win the battle of Austerlitz against Hitler?” and he says “I guess Hitler won that”. You probe him “Are you sure?” and he nods his head while saying “No, no, now I remember, it was Napoleon”. You smile and say. “Thanks a lot. Nice meeting you”.
Anyone who has hired ‘talent’ in any IT company will know that what is written above is a funny but accurate description of typical interviews.(another variation is that the interviewer himself doesn’t know and he hires the history graduate based on his ‘it was Napoleon’ answer. The question paper was made by doing google search)

When a prospective customer asks these companies if they have an expertise in a XYZ technology, they tell them “Yes, we have a Center of Excellence in XYZ technology and more than 100 resources with expertise in it”. When the customer asks about “How much time it will take to get the Visa”, they are told “X number of resources already have a Visa”. Right after the call with the customer, the employees are told to “Google search on XYZ technology, read the tutorials and I want you to attend the next call….and yes, bring your passport tomorrow, we have to apply for L1 Visa”. In the next call the poor techie is introduced as an expert. He is a small guy. He does small scandal. Raju was chairman. He did a big scandal. If you hold shares of Indian IT companies, you won’t like the sound of these words but there is more truth in them than the glossy annual reports of these companies. My personal interests are aligned to success of Indian IT industry and I want it to avoid charting the course of its own downfall.

I’m hearing shoddy analysis that other IT companies will get more business when clients run away from Satyam to Infy, Wipro and TCS. They are wrong. Skeletons have just started peeking out of closet. They will be out fully, sooner than later.

The investors will be better of believing Buffett because in the worst case you will be less aggressive in your investments and in the best case you can sit in your living room and watch the news of another corporate scandal while popping popcorn.

Happy New Year to all readers. May you stay miles away from all scandals.