WARREN BUFFETT’S LETTER – 2007

Posted on December 1, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 2007

Businesses – The Great, the Good and the Gruesome

One of the concepts which are essential to understanding making an investment and value to the business.

WB 2007 01

Many of us focus on the story builds for a particular business and make a hope investing rather than focusing on the actual reality. I always quote- “Stories are for kids, not for investors.” We need to focus on the ability of the company for creating access return on invested capital (Access return means higher than the cost of capital) and that should be sustainable for a longer period of time.

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Mr.Buffett has always put a huge emphasis on the business which has a moat and earns consistently higher return compared to the cost of capital.

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See’s Candy as an example of Great business –

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Indian Companies example for Great business

One of the two-wheeler and commercial vehicle manufacturing company

Eicher 01

One of the FMCG Company

HUL 01 HUL 02 HUL 03 HUL 04

One of the Assets Management Company

HDFC AMC 01 HDFC AMC 02 HDFC AMC 03 HDFC AMC 04

Here, the company does not require to make a huge investment to earn more money. Float itself take care of the major requirement of the invested capital. Many a time float covers working capital as well as fixed assets requirement. Due to such nature, Profit earns from operation majorly gets to the investment and cash so that investment and cash to the company is compound which also provides benefits to the business.

Good Business –

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Good business which does not have float available with the business or least float available with business, company has to invest money which they earn from profit, and sometimes little external funding also requires.

Indian Companies example for Good business

One of the company from tableware industry

La Opala 01 La Opala 02 La Opala 03 La Opala 04

One of the pharma company

Ajanta Pharma 01 Ajanta Pharma 02 Ajanta Pharma 03 Ajanta Pharma 04

One of the Tea manufacturing company

Goodricke 01 Goodricke 02 Goodricke 03 Goodricke 04

Gruesome Business –

A gruesome business which does not have float available with the business, company has to invest money which they earn from profit, and also external funding requires to earn little profitability, sustaining the business or further growth. Here, huge capital is required to run a business.

Mr.Buffett has quoted an example of U.S. Air, He acquired a preference share of the company in the year 1989 and sold at the year 1998 with a huge gain. After that company gone for bankruptcy for the twice. The airline business is a cyclical business, huge dependence on the prices of crude oil and during the year 1998-99, crude oil prices were at the bottom (near to the price at the year 1988). So that profitability gets improved for the year 1998-99 and after that crude has never come back to those price level, which has affected to the profitability of the company.

Indian Companies example for gruesome business

One of the telecom company of India

Idea 01 Idea 02 Idea 03

One of the logistics company

Snowman 01 Snowman 02 Snowman 03

One of the steel manufacturing company

Jindal Steel 01 Jindal Steel 02 Jindal Steel 03

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We have to use a different valuation matrix for each category of the businesses and cannot provide a similar valuation to each category of businesses. We cannot give the same value to pour water and to dirty water. Yes, it is true that we can make process and pour dirty water but for that, we need to bring more capital and many a times, few qualities of water will be lost during the process of dirty water to pour water.

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We have to sell out our position into the cyclical business at the proper time or else we stuck with the business.

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Indian company’s example

For how to enter to the cyclical businesses, kindly visit – WARREN BUFFETT’S LETTER – 1987

Now, for taking an exit from cyclical businesses – When margin approaching towards a previous high margin, we should start to exit from a cyclical business. We need to track the price of the commodities as well as quarterly operating margins.

Sugar companies

Balram Exit Balram Exit 01

EID Exit 01 EID Exit 02

Cement Company

JK Cement Exit 01 JK Cement Exit 02

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1999 – 2000

Posted on November 4, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 1999

Accepting mistakes – Mr. Buffett has accepted mistake of poor equity performance during the year 1999. Though they have a wonderful track record, they do not get trapped with the overconfidence, does not show any excuses, stay down to earth and stick with the reality.

Example of Management Quality

WB 1999 01

Example of Indian Companies

One of the footwear company in India

One of the diagnostic chain company of India

TTL 01

TTL 02

Mr. Buffett has given his view on Tech Companies –

WB 1999 02

We should have to define and written own investment philosophy and need to follow it strictly. If some of the investment opportunity does not fall under our investment philosophy then we should avoid it, though everyone else wants to capture a particular investment opportunity.

Business with a valuation –

Warren Buffett’s Letter 2000

Mr. Buffet has mentioned that line between speculation and investment is not clear and blur so we have to identify the investment process according to our course of action. The definition given by Mr. Benjamin Graham can be useful to us for identifying investment process – “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operation not meeting these requirements are speculative.”

WB 2000 01

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Example of the Indian companies which have a higher related party transaction

One of the Cable manufacturing company

SCL

One of the spirit company of India

USL 01

USL 02

We have seen into the current scenario that when people have started believing that investing/speculating to the equities provides them a higher return (no one remembers what Ben Graham said for return – should expect reasonable return) then only bubble started to build up.

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Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1997 – 1998

Posted on October 28, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 1997

We need to wait for the opportunity which falls under our Circle of Competence and we are comfortable with it, rather catch each opportunity.

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We do not have to try to capture each and every single opportunity available rather we should focus on the opportunity which falls under our Circle of Competence and our philosophy. Till the time, we need to wait for the appropriate opportunity. Those who try to capture every opportunity, they do not get a better investment result.

As we have discussed investment into the cyclical industries in one of the articles of the same series (WARREN BUFFETT’S LETTER – 1987), we further get insights from Mr. Buffett –

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When higher the supply of a particular commodity then prices of that particular commodity starts falling and vice-versa with the lower supply of the commodity. We should build a position into commodity companies during an excess supply of a particular commodity and we get insights for dry out excess supply.

Repurchase of Shares

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We have seen in the current market fall that many people lose their investment, many have made an investment by bringing borrowing. But those who are careful and defensive investors, those get an opportunity to acquire position into the businesses at an attractive valuation. Many of the investors, I know who was holding a good liquidity position in their portfolio. They got saved from market fall. I also have experienced similar because of having good liquidity positions into my portfolio.

Acquisitions

Berkshire has made an acquisition into Star Furniture and International Dairy Queen (Company has a 5792 dairy stores in 23 countries)

Warren Buffett’s Letter 1998

When the company spends any money than Mr. Buffett always analyze that whether company able to create more than one dollar for anyone dollar spend or not. If the company can able to create more than one dollar for every dollar spend then they are happy to spend money. If the company is incurring a capital expenditure and consistently company is not able to earn higher returns than the company is facing capital allocation problem. We do not have to check it for 1, 2 or 3 years but we need to check it for a longer horizon.

Indian Company examples –

One of the textile machinery manufacturing company –

One of the tyres manufacturing company –

One of the largest IT Company –

TCS

Berkshire help to the CEOs of companies in which they have made an investment –

WB 1998 01

They also focus on the long-term benefits from the business rather focus on the shorter term perspective. Additionally, Mr. Buffett and Mr. Charlie provide an environment to the CEOs where CEOs can show their talent.

WB 1998 02

When CEOs does not have such kind of pressure and time freedom then they can able to perform well with the value creation among the business. Unnecessary and excess of meetings also reduces the performance. Also, those who do not have a pressure, get the freedom to work then they will produce a better result.

General Re

Berkshire has made a 100% ownership acquisition of General Re which is operated into the reinsurance business. The company is the largest U.S. property-casualty reinsurer, the company also owns 82% of the oldest reinsurance company in the world, Cologne Re. The two companies together reinsure all lines of insurance and operate in 124 countries.

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1996

Posted on October 20, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter – 1996

Acquisitions

Kansas Bankers Surety (KBS)

The company is an operating into the business of insurance which has a presence in 22 states, decent underwriting record with Don Towle as a manager. They made a deal to acquire a company at $75 million.

FlightSafety International

The company is the world’s leader in the training of pilots. The company operates in 41 locations, outfitted with 175 simulators of planes ranging from the very small, such as Cessna 210s, to Boeing 747s. About half of the company’s revenues are derived from the training of corporate pilots, with most of the balance coming from airlines and the military. They made an acquisition at $1.5 billion.

WB 1996 01

We need to prepare a list of the errors which can be dangerous for the health of our investment and work to avoid those errors. If we work on the avoiding mistakes then we can win 50% of the battle.

List of mistakes which I have experienced during my investment journey –

Never ignore the true value of the company—Every business has some value and that we should not have to ignore. If we commit such a mistake then the market will defiantly punish us. Be careful with the true worth of the company and only buy it when it falls below its true worth. And if business not available below its true worth then ready to missed that opportunity. Loss of opportunity is better than the loss of capital.
Don’t buy HOT —-If we buy the hot business such as recent trend, new IPOs, business on which everyone is bullish etc., then we must have to exit it at the proper time. So if we aren’t able to exit at the proper time then it’s better to let it go such opportunities. If we buy HOT then that HOT will BURN our portfolio.
Buying a high leverage business — We need to avoid a business which has a huge borrowings, such borrowings can kill the business and also kill our investment journey.
Using the wrong valuation method — Every business will not get valued with a similar valuation matrix. We need to identify the nature of the business and then value a particular business. Such as we should not use the valuation matrix of growing non-cyclical business for cyclical business, should not use the valuation matrix of assets light business for assets heavy business and vice-versa. If we made such a mistake then whether we might miss a decent investment opportunity or we might lose our capital.
A mistake of buying a story, not a fundamental — I have never ever made such a mistake because I am a hard-core lover of numbers. But I have seen many of the people who always focus on the story and also which is very trending to the market. I believe that without the support of numbers, no story can survive for long. In the year 2014-15, Logistics stocks due to GST gets a trending story but due to lack of good numbers, the story gets failed. People generally avoid numbers due to lack of understanding of it. I firmly believe that “Stories are for kids, not for investors.”
Investing without a process and philosophy — I can overcome this mistake at the initial period of my investment journey and that is only because of my guru – Neeraj Marathe Sir (who always believe on having a process and philosophy for making an investment). I have seen many people who spent lots of time into the market but they do not have any process or philosophy. They change their philosophy as they meet various people. If we do not have our own process and philosophy for making an investment then we will not able to create a successful investment journey. I also learn from my guru that we must have our philosophy in a written format so that we can refer it over a period of time and stop ourselves from occurring a mistake.
Not using a checklist — We should have a checklist for a business, industry, financial, management etc. so that we can focus on the points to study and also not forget any point to study. I am using a checklist for the last 3 years and I can say that having a checklist helps me a lot. My checklist keeps on improving as my experience grows.
Making an investment decision with disturb mind — We should avoid making an investment decision while our mind is disturbed. Disturbance in mind will end up with the faulty investment decision and which can be harmful to our wealth.
Cloning a well-known investors/fund managers — Again I can overcome this mistake at the initial period of my investment journey and again credit goes to my guru. If we have our process and philosophy then we will not try to clone others. I have seen many people who have spent 10-15-20 years to the stock market then also not having any process and philosophy & they clone others. Many of the people have cloning as their investment philosophy because they love to use shortcuts. I always remember the quote of my guru –

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When Company does not have an opportunity to reinvest earnings at a higher rate than the company should distribute those earnings to the shareholders so that they can use it somewhere for getting a higher return. If the company does not have a good opportunity to reinvest earnings and then also company does not distribute earnings as a dividend then we need to be careful with a company (Question on the capital allocation decision of a management or earnings can be manipulated or business always needs a huge capital to sustain only).

Examples – No/Low growth high dividend payout

Examples – No/Low growth low dividend payout

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We need to check the above-mentioned factors in the company where we have made an investment and where we want to make an investment. Most important is to gain a market share. The company cannot able to gain market share, though the company has a competitive advantage then that competitive advantage not useful for us. We should not focus on the leadership position of the company rather need to focus on the companies which focus on the manufacturing, distribution, packaging and product innovation. Market leadership can be changed if the company does not focus on the mentioned points.

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According to Mr.Buffett, paying a higher price does not risk for the good companies compared to paying higher prices for the bad companies.

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Let me take an example of one the biggest wealth creator company of the Indian stock market—

INFY Chart

If someone has bought this company during the March-2000, at the high price of around Rs.431 then after the 16 years of the period, he gets returned at 7% CAGR. And if enter to the similar company at the low price of around Rs.275 during the March-2000 then after the 16 years of the period, he gets a returned of 10% CAGR (*Considering all-time high price for calculating returns). Though revenue has grown at 30% CAGR, Operating profit grown at 27% CAGR and Net profit also grown at 27% CAGR during the same period with supported by a good management team. During March-2000, the company was traded at 64x P/E at the low price of Rs.275 and this multiple is common nowadays.

When management of a good business diverts their focus into the business which is not performing well then such decision of the management affect the performance of the business.

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Example – We have seen examples such as liquor manufacturer enter into the airlines business, airport contraction business has diversified into the power business.

Mr.Buffett has also mentioned the Circle of Competence concept –

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