Since I am a fan of Mr. Warren Buffett and he was highly influenced by Mr. Charlie Munger in his life; so has my life been influenced by both the entities. Hence, today (1st January) on the birthdate of Mr. Charlie, I would like to pay a tribute to both the entities by extracting the core content from Mr. Buffett’s letters.
Warren Buffett’s Letter – 1957
In 1957, As per Mr. Buffett, the market was above intrinsic value. Even during optimistic situations, Mr.Buffett tried to focus on investing into the work-out situations rather than making an investment decision on general issues. If the market status seemed undervalued; Mr.Buffett would build a portfolio of general issues and make use of borrowed money in operations.
Mr.Buffett has explained work-out situations as an investment which is dependent on the specific corporate actions such as divestment, mergers, liquidation, demerger, tenders, etc. In such cases, risk depends on planned actions and not on the economic scenario or the general market.
Mr.Buffett has given weightage on “the better performance in the bear market than in the bull market.” During general or bull market, he was satisfied by matching his average returns.
We were able to see that everyone has generated good returns during the period of 2013-2017 by investing in the random stocks portfolio. But, we need to sustain our returns over a longer period of time with the risk under control. Doubled your Money in Last 3 Years ? Skill or Luck ?
Warren Buffett’s Letter – 1958
Mr. Buffett emphasizes on better performance in the bear market as compared to the bull market and matching the average returns during the bull market scenario.
In 1958, Mr.Buffett had made an investment into the stock name “Commonwealth Trust Co. of Union City, New Jersey”. The company earned $10 of EPS but did not pay any dividends. As a result of a dividend being unpaid; the stock price was depressed and was traded at $50 per share while the company held assets worth $50 million. 25.5% of the stock was held by the larger banks.
The stock was traded at 20% of earning yield ($10/$50*100). During 1958, US interest rate was 3.50% and Mr.Buffett counted intrinsic value of $125 in a conservative manner. Mr. Buffett had discounted EPS by 8% and made the intrinsic value of $125, while interest rate of US in year 1958 was 3.50%.
If the merger of Commonwealth got approved with larger banks, than, Mr.Buffett had estimated $250 per share value (i.e. discounted EPS by 4%). Mr.Buffett held 12% of the bank. Mr.Buffett got an opportunity to tender his holding at $80 which was higher by 20% of traded price of stock. Mr.Buffett was able to identify another attractive opportunity where he employed nearly 25% of the assets of his partnership.
He bought a higher stake in the Sanborn Map Co. and created his own work-out situations due to lack of availability of opportunities.
In Indian Market, We can also capture such situations for creating our wealth. End of FY13, one of the textile company was at an enterprise value of Rs.210 crore, whose price was Rs.207 and PBT Rs.40.66 crore. So, this stock was traded at 19.36% of earning yield (40.66/210*100). Currently this stock is traded at the price of Rs.1320. (8% Interest rate in India and stock was at 2.42x of AAA Bond rate)
Warren Buffett’s Letter – 1959
Mr.Buffett analyzed the availability of a speculative component with the risk of loss into the blue-chip security prices. This situation occurred due to an evolution of new standard of valuation and people believed that new valuation standards will be able to replace the old standards.
Mr.Buffett increased the weightage from 25% to 35% in Sanborn Map Co. and the remaining 65% was employed in undervalued and work-out operations.
I am grateful to Mr. Vishal Khandelwal sir for the compilation of all letters for us.
I am really grateful to my friend who has helped me with the editing work.