When we have decided to make an investment then we need to perform an analysis work so that we do not be stuck with the wrong investment avenues or at the wrong time. For making an analysis, we must need to focus on a few points.
Profitability – how the company performs? Return on invested capital, margins, growth in sales-profits, earning per book value, etc. If the profitability of the company gets hampered then we need to check whether it is permanent or temporary.
Stability – earning of the company decline in any of the years from the past ten years? Do the earnings of the company get fluctuations? Does a company involve in a seasonal or cyclical business?
Growth – companies with higher growth command for the high multiples and lower growth with low multiples. The growth of the company can help us to grow our wealth also. The growth provides an opportunity for the company to use capital appropriately.
Financial position – liquidity ratio, the position of a balance sheet, debt, preference share, etc. Tree does not grow in the sky. If financials are not strong then the business will not be surviving for a longer period. So that we need to put emphasis on the financial. How does a company utilizing assets? Company is capital intensive or asset-light? Working capital intensive or negative cash conversion cycle?
Also, we need to check what the company is doing with the capital generated. What is the capital allocation decisions of the management? Long dividend track record, increment into the dividend, buyback, buyback at higher than intrinsic value or lower than intrinsic value and if a company requires fund for growth then reinvest profits for growth rather pay dividend or buyback.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
Similarly, India has a GDP growth rate of 7.20% and population growth of 1.10% which increase to the per capita growth by 6.10%. if we consider average per capita growth rate of around 5% for coming 20 years then it will reach the gain of 100%+. So that per capita will increase to $3927+ from $1963.55 currently, which will enhance the standard of living of our future generation.
Warren Buffett’s Letter 2016
Mr. Buffett has explained mistakes of acquiring businesses –
Mr. Buffett on assets funding through debt-
Mr. Buffett on fear –
When we are fearful with our investment decisions then we focus on the each and every aspects which can result in the erosion of the capital. When I make an investment, I assume that from the next day of my investment; 1929 great depression will hit so whether I survive or not? Survival should be much more important to build a wealth which is not focused if we do not remain fearful with our investment.
Mr. Buffett on the repurchase of shares –
Many companies are coming up with the repurchase of shares, we should consider that whether repurchase did at a discount to the intrinsic value or at a premium. If a company is paying a premium to repurchase shares then it will not benefits much to the shareholders. If any company make a decision to repurchase shares at a discount to the intrinsic value then we should look for the company. Many companies which are into commodity business or into the cyclical nature of the business also make a repurchase share during the worst time.
If our investment does not provide us with protection against the inflation then we should not stay for a long term with a particular investment. Our first motive for making an investment should be protected against inflation and then create wealth for the long-term horizon.
Mr.Buffett has mentioned that they have made a repurchase of Berkshire shares during the year 2012 which enhance intrinsic value per share and that provides a benefit to the shareholders who are continuing with the company.
I learn investment to fixed income instrument from my Guru. ZEE Entertainment has issued preference shares to the equity shareholder of the company with the condition to pay 6% interest payment and redemption of principle starts from FY18.
Preference share was available at Re.0.80 and face value of that is Re.1.00. If we consider total cash inflow to us in form of interest payment + principle repayment then we can able to earn ~10.75% IRR for the FY14-22. Here, the present value of all future cash inflow @ 10.75% is Re.0.80 which is also higher than our purchase price which indicates safety also.
NTPC has issued debenture to the equity shareholder of the company as a bonus with the condition to pay 8.49% interest payment and redemption of principle starts from FY23.
Debenture was given as a bonus and ex-date of debenture was 20th March 2018. If NTPC was purchased on 18th March 2015 then price of NTPC was ~Rs.153.74 (with brokerage + other charges) and if we sell NTPC on Ex-date then price of NTPC was ~Rs.144.70 (with brokerage + other charges) so that cost for getting bonus was Rs.9.05 and the face value of that is Rs.12.50. If we consider total cash inflow to us in form of interest payment + principle repayment then we can able to earn ~14.02% IRR for the FY15-25. Here, the present value of all future cash inflow @ 10.75% is Rs.10.90 which is also higher than our purchase price which indicates safety also.
In both the cases, the interest rate on risk-free investment was ~8-9% and we are getting higher return compared to it.
Mr. Buffett on investing –
During, the year 1973 to 1981, farm prices had a bubble situation. When the bubble burst, then leverage farmer and lender both had a troublesome time. And after that Mr. Buffett had made an investment into the farm.
Mr. Buffett also made an investment into the other commercial property.
Mr. Buffett has explained investing lessons –
In our investment to stocks, we are get affected with the stock price fluctuation and listen to the pundits for their comments. Due to such habits, we cannot sit quietly with our investment and we end up with little or no return. Mr. Charlie and Mr. Buffett always made an investment as they are buying an entire business. They check whether they can estimate future five years of earnings or not. If they can estimate earnings then check whether available at a reasonable price or not. If either of the condition does not match then they move on to the other prospects.
For non-professional investors, they can make an investment into the index fund and accumulate it over a period of time.
Warren Buffett’s Letter 2014
Mr. Buffett mentioned Investors behavior which affects the investment return –
Unexpected behavior from Stanton in the year 1964 –
Why Mr. Buffett has bought Berkshire Hathway at the year 1962 –
Example of Indian companies
One of the air-cooler manufacturing company of India was available below the book in the year 2009
One of the two-wheelers and commercial vehicle manufacturing company was available below book value in the year 2008 and below cash in the year 2008 and 2009
Charlie Straightens Me Out
The initial period of years, Mr. Buffett engage in the buying bargains (cigar-butt) strategy which he learns from Mr. Graham. The major weakness of the concept mentioned by Mr. Buffett is “Cigar-butt investing was scalable only to a point. With large sums, it would never work well.”
Here, I have also made a blunder but luck by chance got saved.
Mr.Munger has an impact on Mr. Buffett which has helped to Mr. Buffett to evolve cigar butt strategy to wonderful businesses at favorable prices. Many times, Mr. Buffett and Mr.Munger do not get agree but they never ever have made any arguments. When such scenario arises then Mr. Charlie end up a conversation with saying “Warren, think it over and you’ll agree with me because you’re smart and I’m right.” Mr. Buffett has accepted that transformation was not easy but he has done it.
I have mentioned during the series of Warren Buffett’s letter that buyback done by the company considers good. Also when the market value of the company is available at discount from intrinsic value and company does not have a better opportunity to make an investment then company has to repurchase own shares. We have heard that the company having good management then they come up with a buyback and others will come up with a dilution of capital. The buyback is one of the criteria for judging a capital allocation decision of management that whether good or not.