WARREN BUFFETT’S LETTER – 1962 – 1963

Posted on February 5, 2018 by Jimit Zaveri under Bibliophile

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 –

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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.

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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.

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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.

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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.

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Symphony

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 –

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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.

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1960 – 1961

Posted on January 18, 2018 by Jimit Zaveri under Bibliophile

I am really grateful to Riddhi for helping me with editing work.

WB Letter 1960

In 1959 letter, Mr. Buffett had made an investment of 35% of net assets in the company named Sanborn Map Co.

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Maps are immensely useful to the fire insurance companies. Business is operated in a monopolistic manner and without the need for strong sales efforts. Earlier, the insurance companies had feared for the profit of Sanborn Map and hence they placed a number of prominent insurance men to Sanborn’s Board Of Directors to act as a watch-dog.

In 1959, the ratio of PAT reduced to $100000 as compared to $500000 as in the year 1930. The company began to make investment portfolios since they did not need any further capital to run the business. Over a period of time, their investment was accumulated to $2.5 million; of which roughly half was in bond and half in stocks. These investment portfolios worked well but the map business lost its shine.

In the year 1938, the stock was traded at $110 but the value reduced to $45 in the year 1958; whereas their investment per share value increased from $20 to $65. Hence, their stock is available for negative $20 against the investment portfolio.

The company had sales volume of $2 million per year and they owned $7 million worth of marketable securities. Their income from investment portfolio was substantial enough to take care of their company’s finance. Regular dividends were paid to all the stockholders but there was a decrease seen in the dividend payout for a constant of 5 times in a period of 8 years. As against this; there was no reduction in the salary of the directors.

Board of directors held a minimal position in the Sanborn shares. Buffett proposed to separate the investment portfolio business from the map business. Hence, after the death of the president of Sanborn; his part of shares (around 15000) were bought by Warren Buffett and another 24000 from the open market. Apart from this; there were 2 large stockholders who held 10000 and 8000 shares respectively. They were unhappy with the current situation of the company and they desired to accept the proposed idea of Buffett of separating the business.

Mr. Buffett wanted to work on re-establishment of earning power of the map business. In the same instance, they got an opportunity of converting their physical goods to electronic goods which will multiply their profit for the map business.

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Indian company example – Before 2006, the company was involved in the manufacturing of scooters. But the company discontinued to manufacture in 2006 and became an investment company with the profit that they had made from the sales. At the end of FY2013, the market value of investment portfolio of the company was worth Rs.2034 crore; whereas stock was traded at the market capitalization of Rs.440 crore (stock price of Rs382). Currently, the company is trading at the market capitalization of Rs.3172 crore (stock price of Rs.2775). The company is also paying out healthy dividends.

MScooter

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Mr.Buffett also mentioned that no one should jump to conclusions by reviewing one-year performance. One needs to at least measure five years of performance in both strong and weak markets.

WB Letter 1961

Mr. Buffett had identified few mutual funds and done a comparative performance of mutual funds with the market and with his partnership.

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We can see that Mr. Buffett has outperformed in mutual funds with a heavy margin.

Mr. Buffett used 3 methods of operations as below –

1) Generals

The general situation works with the market situation. The investment outperforms in the bull phase and declines sharply in the bear phase. These investments work well in a longer period of time.

2) Work-outs

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The work-out situation provides stable and safer earnings and due to that Mr.Buffett use borrowed money to take an advantage of work-out situations. In the bear phase; we get better results and in the bullish phase; we get bad performance.

3) Control

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During 1961, Mr. Buffett owned around 70% stake of the Dempster Mill, which was a fall into a control situation category. Initially, Dempster Mill was started as a value investment (General) category but as time passed, this investment came under control situation when an additional stake was purchased by Mr. Buffett.

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The detailed discussion of Dempster Mill investment will be done in the later series of Warren Buffett’s letter.

Few people who want to invest conservatively, have bought government bonds and few others bought blue-chip securities regardless of Price to Earning ratio, dividend yield, etc. with a belief of getting benefits by investing in the bonds.

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Mr. Buffett has always emphasized on better performance during a bear market and getting the similar return in a bull market.

Warren Buffett’s Letters 1957 – 2012

Learning Investment Lessons from movie Chal Man Jeetva Jaiye

Posted on January 9, 2018 by Jimit Zaveri under Investment Philosophy

Jainam Share Consultants had organized a movie day on 6th January 2018 and the name of the movie was “Chal Man Jeetva Jaiye”. I am really thankful to Jainam Family for giving me the chance to watch a worthy movie. I am grateful to the entire cast & crew of the movie for the wonderful performance and script.

I am really grateful to Riddhi who helped me with editing and very effective ideas.

I always believe that we can learn many concepts from our surrounding environment. Similarly, this movie has some of the amazing concepts that I have learned and you can also which can be beneficial to our investment journey and as well as to our life.

Decide our process to get success in our life

Extract from the movie – The movie began where it was shown that a father is pressurizing his son, Dev, a lot for achieving victory. Dev, unknowingly started following his father’s dreams but he did not know how to get a victory.

Co-relation in real life – A similar situation happens with all of us when it comes to our investments. Investors’ starts investing in multi-bagger stocks whereas they don’t even have enough knowledge about the company. We need to gather knowledge first and then decide whether the company is worth investing. If we don’t do a thorough study about the company, then there are chances that we might lose our capital rather than achieving reasonable returns.

Pressure and stress can affect our decision-making ability

Extract from the movie – Dev was pressurized by his father to achieve victory and as a result, he lost his focus from all aspects and started losing in all the fields. He was often scolded and tortured by his father for not being able to earn medals and certificates. Dev had always been forced upon the dreams that his father had for him. Dev was never given a chance to explore about his interests and that affected his decision making power.

Dev’s uncle, Vasant, had incurred a major loss in the family business and was highly stressed about it. He got pressurized by thinking about the materialistic and luxurious life of the family that he wanted to maintain and that led him in making a wrong decision. He chooses an unethical way: of leaving the country and doing fraud with the lives of the people by taking away all their money that they had invested in their company. He thinks of this way as ethical because Mr. Ajay Walia (whose company got bankrupt and he lost everything) had also done the same. Looking at someone else do it; made him think of the wrong way as the right way and he forgets about the moral values and ethics that he had learnt from his parents of not doing fraud or cheat with the lives of the people.

Co-relation in real life – Likewise, while there is a mad bull run in the market, when we see our fellow investors making money, we feel stressed and that pressure leads us to unethical thinking. We lose the capability of spotting the good investment companies; thus leading us to losses. Sometimes, such situations encourage us to compromise with our ethics & values for making an investment decision; hence forcing us to make faulty decisions. Rather than getting jealous of others making money, if we focus on our decisions and stick to our ethics; then there will be ample of opportunities coming up within our competence area that will lead us to good returns.

Remaining emotionally stable also during the worst period of our life

Extract from the movie – Viren, who is playing a character of Vasant’s son, saw his father being stressed and hence taking wrong decisions. So he keeps himself calm and stays emotionally stable and decides that he won’t let his father take the wrong decision. Vasant asks his family to support him and the whole family does that except Viren and Dev. Although knowing that this is the crucial time for the entire family and they will have to face the whole family; both the brothers decide to stick to the ethical and the correct path. The family often scolded them, tried to emotionally break them and also tried to prove them wrong but these brothers keeps fighting for what’s right and not bothering that it was their family on the other end.

Co-relation in real life – Market often shows us a challenging period during our investment journey but we need to remain emotionally stable and keep ourselves away from emotional diseases such as ego, envy, greed, fear etc. All such emotions influence our decision and lead us to get deviate from our process. Please refer to the article for further details of how does our emotion influence our investment decision BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

Importance of different viewpoints

Extract from the movie – Vasant and Viren both have different perceptions of the same situation. Viren was enforcing for a different viewpoint which led the entire family re-think about their decision and yes they finally accepted the viewpoint that Viren and Dev has been explaining since the beginning, as it was a better and an ethical way of dealing with the problems. We should accept the viewpoint of the other and try to empathize from their angle. There is a possibility that we might get a new perspective to see a problem and that can be more useful to our decision making.

Co-relation in real life – When it comes to our investment journey; we face the same situation. There are ample of people who will give you too many companies to make investments in, as per their knowledge and their research. But it’s up to us whether to believe all of them or to believe some of them. People have different mindsets and there will be a situation where 1 person days good about the company whereas the other says bad. In such a situation; we get to know a different viewpoint and a different perspective from various people we trust on. But we should at times believe on people and re-think couple of times before investing as it is a matter of our earned money through hard work.

Acceptance of our mistake

Extract from the movie – Vasant accepted his mistake of taking a wrong decision due to stress and ego and he decides to change his decision. If he wouldn’t have accepted the viewpoint and changed his decision in time; then that would have led him to lose his brand value, his goodwill, his happiness, his inner peace, the trust that others had in him, his relationships, etc.

Co-relation in real life – We often make mistakes during our investment journey but we need to realize it at the earliest and accept our wrong decision by not getting influenced of other factors. We should think of recovering our losses and increasing our profits rather than feeling guilty on our wrong decision.

Have faith in yourself

Extract from the movie – Vasant in his past had grown the business and created a brand value. He had never lost his money. But when he faced such a situation; he had lost faith in his own self and he thought that he doesn’t have the courage to rebuild the empire. But Viren always showed trust in his father’s ability and he kept on saying that he knows that his father has the ability to build an empire again.

Co-relation in real life – During a sluggish market scenario, there are times that even our best investment cannot generate good money for us. But we have to have patience and trust on our decisions that sooner or later we will earn and gain good returns.

We are losers just because of ourselves and not because of others

Extract from the movie – Dev was unable to express his thoughts in front of his own family. His continuous failure due to his father pressure had restricted him to open up and talk about what he wanted to. When he was asked to faced his complexions and his fear; only then he fought with his own self and was able to realize that he failed because he had created a belief in his mind that he is unable to do anything in his life.He only can able to create an impression in front of his family after getting the realization of his weaknesses. It was then that he realized that it wasn’t his father that was the cause of his failure but it was his inner self that didn’t let him take a leap. But when he overcame his weaknesses; he achieved success.

Co-relation in real life – We also face similar situations during our investment journey. We might have made losses couple of times. But we should face those failures and try learning of overcoming them rather than withdrawing the money. One should think of recovering the losses and switching from the negative balance (loss) to the positive balance (profits). Because if we don’t think positive then those failures might affect our future decision for making an investment.

As it is rightly said “YOU MAY FIND THE WORST ENEMY OR BEST FRIEND IN YOURSELF”

Building brand value takes efforts for years but just a few minutes to ruin it

Extract from the movie – Vasant and his brothers had worked really hard for years to create a brand value for their company. But if he would have decided to take a wrong decision of declaring bankruptcy; then that would have ruined the brand image that they had build in for years. People would have cursed them for their decision as they would have cheated them. And this would have created a negative impact for the company and its image.

Co-relation in real life – Similarly, we should always be careful while taking a decision in life and not make any blunders. We should think with a peaceful mind and not atleast when we are stressed. If done so in stress; we can lose the trust that people have in us and we can harm our reputation which we have built with our hard work over the years. Remember, “DON’T LET ONE MISTAKE RUIN A BEAUTIFUL THING”.

Kindly watch movie for more insights.

Dev (Krishna Bhardwaj) & Me

Viren (Hemen Chauhan) & Me

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “AVOIDING PITFALLS”

Posted on December 19, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

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We have seen in all article series of “The Most Important Thing” that Mr. Howard Marks is always keeping focusing on the avoiding losses. If we can able to avoid losses then our investment success will come to us.

When we are going to focus on the risk and avoidance of risk then there is a chance of under-performance of our investment portfolio during the bull phase of the market. But also we can able to get protected from the worst situations coming into the future. We can able to get survived into the market for a longer period of time.

For avoiding losses, we need to avoid the pitfalls which invite the losses. And sources of pitfalls can be analytical/intellectual or psychological/emotional.

Looking at the analytical/intellectual error – such error occurs while we collect too less information, uses wrong analytical methods, wrong approach, computational error, etc. Such errors wrongly direct the result and tend us to make a wrong decision.

One type of analytical error which is called by Mr. Howard Marks is “Failure of imagination”. This error means we cannot able to imagine or little in imagine full range of outcomes or not understanding consequences of occurrence of the extreme events.

“Failure of imagination” is the inability to understand the different range of outcomes in advance. In investing, we need to be dealing with the future and many a time, we try to assume that future will be similar to the recent past.

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Most of the time future looks like the past so assuming it does not harmful to us. But what happens while future will not repeat the scenario as similar as happens in the past, either we have to lose huge money or no money made by us.

Events might occur or might not occur or it take times to occur compared to what we have assumed.

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While we largely depend on the certain outcomes to happen in our investment then not occurrence of those events can kill our investment. So that we should always try to focus that if certain events do not occur then also we should not lose our huge money. We should focus on controlling our risk.

During sub-prime crisis also things do not work as it should work which resulted in a global meltdown. During sub-prime also investors believe that risky situations do not go to happens and securities are backed by assets based mortgage which encourages the risky behavior of investors. Majority of the investors did not expect that value of backed assets also can befall.

We should make an investment which can protect us against deflation and hyperinflation situations. We should not always a stick to the cash, treasury or gold to avoid pitfalls. But as a when requires, we should shift from defensive to offensive and offensive to defensive.

It is important to avoid pitfalls but there must be a limit which differs from each and every investor.

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Psychological factors are most interesting sources of investment error. These factors tend to extremely high or low prices of an asset, sometimes very irrational. (My Article on Psychological errors – BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”)

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One of the psychological factors is GREED. Excess of greed tends to be higher security prices. We want to make a more money and for that, we keep on buying an asset though it’s price trading at a higher range. We believe that assets will keep on appreciating into the future.

The second psychological error can be an error of not noticing. Sometimes we have a plan to steadily invest in the stock market. And we ignore the undisciplined buying by others has created a boom.

The third error can be not consistent with doing a wrong thing but failing to do a right thing. Average investors just being a fortunate enough by avoiding pitfalls. While superior investors avoid it and also take an advantage of it.

Our psychology resists us from accepting novel rationale and keep believing that “It’s different this time.”

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The way pendulum swings, people forget to be skeptical every time rather believe that things keep on doing well.

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The combination of Greed and optimism lead us towards the adoption of strategies which provides a higher returns without taking a higher risk. Pay higher prices for the securities with the hope of still left with an appreciation.

Just knowing about the pitfalls provide helps to us to some extent but the implementation of it leads towards success.

We should always learn the lesson and remember it throughout our journey. Mr. Howard Marks pointed out eleven lessons such as –

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We should always be focusing on the things surrounding us. Excess supply of investment funds will lead to the situation called – “too much money chasing too few ideas”. Such situations can be dangerous for our financial health and we need to be careful during such situations.

When people become careless, investors not worried or skeptical about events, everyone becoming more bullish, increasing leverage. But we have to always keep in mind that such scenario will be going to reverse, it will never remain forever of the same magnitude.

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It is near to impossible to avoid downfall but we can able to reduce our pain.

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When we loss less than others then it provides a benefit to us such as we can able to maintain equanimity with others, able to avoid a psychological pressure and can able to generate higher profit by buying at a lower price.

Surviving during the declines provides us an opportunity to buying an asset at the low price. But for achieving success through this formula, we need to avoid pitfalls.

The way errors can appear to us is infinite but some of them are quoted by Mr. Howard Marks. Such as data or calculation error in the analytical process, ignoring the full range of outcomes or probability of occurrence of events, psychological factors (I.e. greed, fear, envy, ego, etc.), extreme risk-taking or risk avoidance behavior, etc. The second level thinkers can able to understand errors and also can able to detect over or underpriced assets. They can take a proper benefit of it and also take benefits of errors from others.

Errors are moves around us, sometimes assets prices reach a higher level or reach the lower level, sometimes such extreme scenario happens with entire market, sometimes to individual securities. Sometimes an error occurs while we do something and sometimes doing nothing leads to an error. So that error is around us and without any errors, there will be no occurrence of any events.

All above-discussed points don’t indicate rules for avoiding pitfalls but it provides us an awareness, flexibility, adaptability, and mindset to take the cue from our surrounding environment. There are times where few of our acts resulted in errors.

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