Leveraging “HIL” model for investing…

Leveraging “HIL” model for investing…

Three friends Hardeep, Inder, and Laxman after graduation decided to start grocery shops in their respective towns. Hardeep was hard working and meticulous and was running a good business. Inder was not only hardworking & meticulous but also had a lot of initiative. He started offering home delivery, collecting mail etc as ancillary services to his customers and was doing very well. Laxman was doing all Inder was doing, but also had an MNC start a factory in his town and the population grew multifold thus expanding his business opportunity. He was doing extremely well.

Hardeep is hardworking and can be expected to reasonably well in most scenarios – he can expect to make 0.8 to 2 times the money “an average” grocery shop owner makes. Inder with his hard work and initiative can expect to make 1.5 to 20 times the money “an average” grocery shop owner makes.  Laxman with his hard work, initiative, and good luck  (of having a MNC factory start in his town) can make 5 to 100 times the money “an average” grocery shop  owner makes.

So the 3 key ingredients for a business to do well are Hard work (H), Initiative (I) and Good luck (L). In a real world each business or individual will represent a mix of H,I,&L. This unique mix determines how well does the business or the individual will do.  How do we translate this into investing decisions?

HIL model

Businesses that exemplify “H” are providing a professional service and are meeting customer expectations on a regular basis. Businesses that exemplify “I” are constantly innovating and looking to delight the customer.

Well spotting business that are having “H” & “I” is in itself very difficult. How do we spot the business with “L”? We are afraid that this does not have a definitive answer. One could at best take bets on a lot of businesses with “H” and “I” and “HOPE” that a few of them get “Lucky” and do extremely well.

Hard work (H) will mostly land an entity in the top half of the group. Initiative (I) can land an entity in the top 10%. Luck (L) can land an entity in the top 1%.

An entity with L alone may fritter away the initial advantage if there is no “I” and “H”.  An entity with initiative needs to constantly keep moving forward as the initiatives are quickly copied and become the norm. One needs H & I to do well and with a bit of L will thrive.

Apple & its employees were working as hard before Steve Jobs, but his initiative helped create customer delight. Even Steve Jobs got it wrong with the “organizer” while I pod was a big hit. Both were good products but one clicked while the other did not. L is a big factor but L without H & has its limitations.

We hope “HIL” framework helps evaluate your investment opportunities.


Happy investing..

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