I am really grateful to Riddhi for helping me with editing work.
WB Letter 1962
Mr.Buffett has a target to an approximately 0.5% decline for each 1% decline in the market. He has always made an emphasis on the falling less compared to the market. Also, he has never tried to predict the market direction.
WB Letter 1963
Mr. Buffett has mentioned few points which we require to keep in mind –
Mr. Buffett puts emphasis on benefits of compounding and mentions that if we want to enjoy the benefits of compounding then either we have to live long (which is impossible to assume) or compound our money at a higher rate (practical to focus on).
Dempster Mill Manufacturing Company
Mr. Buffett had acquired 73% ownership of the Dempster Mill by August 1961 at an average price of $28.
Mr. Buffett had valued Dempster by providing an appropriate discount to various assets and he concluded the value of those assets at $35 on the Fiscal year ending 30th November 1961.
Mr. Buffett has provided a different discount on various assets. The discount applied on various assets is mentioned in the 3rd column and discount adjusted in the value of assets is shown in the 4th column. The total value of assets after discount was $4438000 and total liabilities of the company was $2318000. If he liquidates all the assets after applying discount then he will receive $4438000. Now, if he repays all the outstanding liabilities from adjusted value then the remaining balance with the company would be $2120000 ($4438 – $2318). Per share value of Dempster was $35.25 ($2120/60146 (no. of outstanding shares)).
On 17th April 1962, Mr. Buffett met Mr. Harry Bottle and appointed him as the president on 23rd April 1962 for the better utilization of capital and reduction of overheads. Mr. Harry had achieved all goals set by Mr. Buffett and the result achieved is shown below in the form of balance sheet –
They had to sell off the non-productive assets to reduce the liabilities of the company. Also, Mr. Buffett had started investing the excess cash into the marketable securities in which he is an expert. Once again, he gave an appropriate discount to various assets & after deducting the liabilities and adding fund (which he got through shares) and resulted at the value of $3185000 (3471000 – 346000 + 60000). We can see that value of the company had been increased from $2120000 in the year 1961 to $3185000 in the year 1962. Mr. Buffett’s and Mr. Harry’s decision of capital allocation resulted in the enhancement of the value of the Dempster. And the value of the company grew in the year 1963 as compared to in 1962.
Making a controlling stake becomes difficult for us as retail investors. So that we should try identifying companies which are involved in the restructuring decision and also correcting their capital allocation decisions. There is an Indian listed company which has gone through the process of restructuring in the year 2007-08. The company has been experiencing a tough time due to some inappropriate capital allocation decision and hence the management decided to correct their mistakes.
Price of the company was Rs.4.28 in Sept’08 and the current price (as on 5th February 2018) of the company is Rs.1775. We can see in the financial highlights that the company has sold off nonproductive assets and paid off liabilities which enhances the value of the company.
Mr. Buffett’s investment philosophy says –
In the above example of the Indian company, sales growth has contributed multifold returns, but even if their sales did not show growth then their investors won’t lose their capital.