Dividend – Page 2 – LUCKY IDIOT

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.

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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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Control on our temptation, control on our emotion towards our investment is essential to survive and create wealth from our investment.

Warren Buffett’s Letters 1957 – 2012

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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