Warren Buffett Beware of Overconfidence

Posted on April 7, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

When we own something, we value it more preciously. If we purchase any stocks than it becomes a value for us. We value more which we are holding, which is known as an endowment bias. Due to the higher value for us, we cannot able sold out or go away from our holding.

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Mr. Buffett has always mentioned that not to become too much confidence.

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We can see that Mr. Buffett does not get overconfidence on his own holding, but especially he mentioned that he can have poor performance for his investment. And when he felt that he could not able to manage fund then he has discontinued his partnership approach.

Mr. Buffett has made much successful investment such as see’s candy, Coca-Cola, GEICO, Nebraska Furniture Mart, etc. But he has also made a mistake to make an investment to the Salomon Brothers, US Air, and Dexter Shoes, etc.

When Berkshire had purchased Dexter shoes than they have issued shares of Berkshire for acquiring a Dexter. Dexter got bought by Berkshire for the worth of $433 million which turnouts to be a ZERO a few years later. Mr. Buffett has mentioned into his letter to shareholders that one of the biggest mistakes he had made was to acquire Dexter shoes and that is by issuing a share of Berkshire. Berkshire share was quoted at $16765 at the time of Dexter acquisition which is currently quoted at $304057, which has grown by 13% CAGR for the same period and at the same time Dexter becomes zero. Mr. Buffett had bought H.H.Brown and Lowell Shoe in the year 1991 and 1992 respectively before the acquisition of Dexter.

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In the year 2000, Mr. Buffett has recognized his mistake and write of remaining accounting goodwill. The overconfidence of Mr. Buffett has hampered a huge value to the Berkshire which teaches us that we should not be overconfident for any of the trade. When we are overconfident, we cannot able to see the negative part of our trade. We have to be neutral with our holding. I always mentioned that there is not a favorite stock of mine when people asked me for my favorite holding. I would like to hold the stock until it remains within my criteria of holding. As and when it goes out of it, I put a sell order into it. If we consider any of our investment as a favorite, then we get attached towards it and we cannot able to sell it when it is going out of our criteria.

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Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

BIBLIOPHILE: WARREN BUFFETT’S LETTER 1957 – 2017

Posted on January 13, 2019 by Jimit Zaveri under Bibliophile, E-BOOK

Mr.Buffett has taught us –

Never count on making a good sale. Have a purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.

Our business is making excellent purchases – not making extraordinary sales.

Mr. Buffett believes that big money can be made by making investment decisions based on qualitative factors whereas sure money can be made by making investment decisions based on quantitative factors. And hence, on the basis of this; he considers himself as a quantitatively focused investor.

The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.

Business must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.

Many a time, management only focuses on the increasing future Earning Per Share (EPS) by sacrificing the strength of the balance sheet. But they forget that if the balance sheet does not remain strong for a longer period of time then business is going to have a tough time into the future.

Accounting numbers, of course, are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progress. Charlie and I would be lost without these numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it.

“What we learn from history is that we do not learn from history.”

Any company’s level of profitability is determined by three items: (1) what its assets earn; (2) what its liabilities cost; and (3) its utilization of “leverage” – that is, the degree to which its assets are funded by liabilities rather than by equity. Great companies = Float + Investment + Cash with higher return ratio

If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.

Buy commodity, sell brand has long been a formula for business success.

Capital-intensive business, look for PBT / interest cost rather EBITDA / interest cost.

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.

Mr.Buffett has taught us many concepts and wisdom which is essential to us while making an investment decision. I am hereby compiling all my learning from the letters of Mr.Warren Buffett. Also an evolution of Mr.Buffett from bargain to quality businesses.

For all in one learning from Mr.Warren Buffett’s Letters, Click here –> BIBLIOPHILE WARREN BUFFETT’S LETTER 1957-2017

WARREN BUFFETT’S LETTER – 2013 – 2014

Posted on December 29, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 2013

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.

Examples of Buyback – SIMPLE IS BETTER – ISSUE -13 – BUYBACK

Mr.Buffett on the Heinz investment –

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 20^th March 2018. If NTPC was purchased on 18^th 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.

Warren Buffett’s Letters

SIMPLE IS BETTER – ISSUE -13 – BUYBACK

Posted on December 15, 2018 by Jimit Zaveri under Simple is Better

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.

What is Buyback?

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -13 – BUYBACK