WARREN BUFFETT’S LETTER – 2008 – 2010

Posted on December 8, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 2008

WB 2008 02

When there is a pessimism into the market then we get an opportunity to buy a good business at a discounted value. But during a euphoric time period, good businesses are available at a sky-high value.

Indian companies examples

One of the wealth creator IT Company during an IT bubble

Infy INFY Chart

One of the wealth creator IT Company during an IT bubble

Wipro

One of the two-wheelers and commercial vehicle manufacturing company was available at a discounted value during pessimism of the year 2008

Eicher Eicher Chart

Warren Buffett’s Letter 2009

What is avoided by Mr. Buffett and Mr.Munger —

WB 2009 01 WB 2009 02 WB 2009 03 WB 2009 04

Mr. Buffett on derivatives –

WB 2009 05

Warren Buffett’s Letter 2010

WB 2010 01

One of the infrastructure company

RInf

One of the electric motors, generators, transformers manufacturing company

Siemens 01 Siemens 02

Mr. Buffett on debt-

WB 2010 02

Example – SIMPLE IS BETTER – ISSUE -4 – Mr. EMI V/S Mr. SIP

Mr. Buffett on crowd mentality-

WB 2010 03

Mr. Buffett on Repurchase of shares –

WB 2010 04

One of the Pharma Company of India which has sold one of the business segment into the FY2011 and company becomes a Cash bargain. The company has done a buyback at that time.

PEL 01 PEL 02

The company has a total Cash balance of Rs.1770.28 crore + Upcoming cash due to the sale of the business worth of Rs.7136.00 crore = Rs.8906.28 crore. And the company was available at MCap of ~Rs.7830 crore. Entire continuing business was not given valued by the market.

One of the two-wheelers and commercial vehicle manufacturing company has done a buyback in the year 2009

EM 01

The company has a total Cash balance of Rs.1260.05 crore. And the company was available at MCap of ~Rs.608 crore. Entire continuing business was not given valued by the market.

One of the metal company in the year 2016 has come up with the buyback. In the year 2016, the price of iron ore was traded lower.

Iron ore NMDC 01 NMDC 02

Company had a cash balance of Rs.14806 crore in FY16 and PAT of Rs.2517 crore. Company was available at MCap of ~Rs.28440 crore. Entire continuing business ex-cash was available at 5.94x of PAT (MCap Rs.28440 crore – Cash Rs.14806 crore + debt Rs.1497 crore = Rs.15130.86 crore; EV Rs.15130.86 crore / PAT Rs.2517 crore = 5.94x).

Warren Buffett’s Letters 1957 – 2012

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 –

WB 09

WB 10

WB 11

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.

WB 08

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.

WB 12

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.

WB 14

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.

S 01

S 02

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 –

WB 15

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

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “THE RELATIONSHIP BETWEEN PRICE AND VALUE”

Posted on April 23, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

As we have discussed regarding value in the previous article of a Bibliophile. Now, I am going to talk about the 4th Chapter of The Most Important Thing – The relationship between price and value.

01 P&V

There is not an availability of any asset class which having a birthright for providing a higher return. If we bought a particular asset class at an appropriate price, then that provides us a higher return to safety.

02 P&V

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 grew at 30% CAGR, Operating profit grown at 27% CAGR and Net profit also grown at 27% CAGR during the same period with supported by the good management team.

If we buy such a good thing at a too high price, then we have to wait for the very long time for getting fair returns rather getting superior returns. But if we have bought junk asset class or good asset class at an appropriate value, then we can able to create a superior return.

We should focus on correctly buying an asset at a cheaper price so that we need not keep focusing on the selling decisions. Because our buying decision provides us a huge safety. Whenever we buy any stock at a cheaper price and all our calculations of intrinsic value are correct, then over a period of time, the stock price should reach its intrinsic value.

So, that One of a good idea of making an investment is to buy whenever the pessimistic situations around us which provide us a good return with proper safety. But such scenario not always comes. This means we construct our portfolio at the time of crisis, but every time, we cannot stay only dependent on the crisis for making our buying decisions.

03 P&V

Thus, most important are to understand the relationship of price & value. By knowing the relationship between price and value, we can able to take an advantage of mispriced valued stock and consistently create a wealth for the longer period of time. We also need to understand the Psychology of investors along with the understanding the price – value relationship because the psychology of investors can drive stock prices in the short run. But at a longer period, the price should reach its intrinsic value. So, that it is an essential for us to buy an asset at a discount from its intrinsic value.

IT Bubble

04 P&V

Investors Psychology is also one of the important factors along with the Fundamental value of the security which can drive stock prices to an extreme side and that provide us an opportunity for our entry/exit. We should avoid falling into the trap with short term price fluctuation due to the psychology of investors but should take an advantage from it.

05 P&V

06 P&V

RKD BUY

People never focus on the price at clever people make an investment. But they start herding towards the news of such deals. So, that more and more people start buying the same stock and due to the flow of buying, the stock starts rising and again more investor start buying into it and stock start rising again. Thus, psychology drives a price much more rather than its fundamental in the shorter period of time. Everyone starts creating stories after the clever people make an investment, those stories drive the price of the asset class at extreme direction.

As per the Howard Marks, there are few ways by which we can earn a profit on the investment:

Benefiting from rising in the asset’s intrinsic value.

In this method, an investor has to predict accurately to the improvement in the intrinsic value of the assets in the future. But this task is not as easy as it seems. We even don’t know our future and we are going to predict the future of the intrinsic value which is very uncertain in nature.

Applying leverage

Leverage means investing using borrowed money. Leverage always works as a double edged sword. It can either make you or will break you. It magnifies both gains as well as losses. So, leverage might provide us a higher return, but it can also create a threat to our own capital. Selling for more than your asset’s worth

Selling for more than your asset’s worth

Here, we need to hope for the buyer who is ready to buy an asset at a higher price. If we are holding an asset which is overpriced or fairly priced than we need a greater fool to buy an asset from us at a higher price.

Buying something for less than its value

In this option, we are buying an asset at the discount, from its intrinsic value. It’s just required for the proper functioning of the market and that brings an asset to its intrinsic value. This can be one of the most useful ways to make a consistent return with a safety of our capital.

Sultan Mirza

Click for Video — Sultan Mirza

As we have seen in the video that Ajay Devgan has bought Guava at a very high price compared to the real value of the Guava. We have many a time experienced such kind of the irrationality among the investors who focus on story prevailing at market space rather than focus on the real value of the particular stock. We will not always able to meet Sultan Mirza (Ajay Devgan) / Irrational investor who buy an asset from us at a very irrational price. So, that we always need to focus on the buying an asset at a discount from the real value for getting a consistent return to safety.

Read for more detail: The Most Important Thing Illuminated by Howard Marks

BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “VALUE”

Posted on March 18, 2017 by Jimit Zaveri under BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS

In the 3rd chapter of the book “The Most Important Thing”, Mr. Howard Marks has discussed regarding different ways to identify the value of any business.

Hope

We always make an investment at a lower price with the intention to sell it at a higher price. Means that we buy something at less price than we can able to sell.

But what is high, price and what is a low price? How to identify it? That is the main confusion for all of us.

For taking it at a simplify manner, we can say that we buy at below the intrinsic value of any assets for selling that asset at a higher price.

“Intrinsic value is the value (i.e. what the company is really worth). Different investors use different techniques to calculate intrinsic value.” – InvestorWords

Now the question is how to identify an intrinsic value? As we all know that there is a major 2 discipline to identify an intrinsic value of the company’s securities.

1) Fundamental Analysis and,

2) Technical Analysis

Technical Analysis basically studies past behavior of price and from that past behavior, person predicts future price behavior.

I am not going to discuss this study in details because it’s not suitable to me and I am not able to make decisions based on past price behavior.

Move forward to the Fundamental Analysis, which is suitable for me and am comfortable with it. But again, a Fundamental Analysis also having two approaches to making a decision for an intrinsic value.

1) Value Investing and

2) Growth Investing

We need to Valuing a company by depending on a finance resource, management, business, plants & machines, factories, intellectual properties, human resources, brand name, etc.; which all having a potential to grow earnings of the particular company. And that is what we study into the fundamental analysis.

Then what is the main difference between value investing and growth investing?

Now, let me talk about the concept of valuing the company through value investing approach.

Value Investing generally focuses on tangible assets, current earnings, cash flow for valuing a company. This concept gives less weight to the intangible assets such as human resources with talents, future growth prospects, etc.

Value Investing focus on buying a company at a cheaper value based on its financial metrics such as current earnings, cash flow, dividends, tangible assets and enterprise value. Value Investors qualify the current value of the company and buy it when the current value is much higher than trading price.

Value Investing is also known as “net-net investing” approach, where investors try to identify the company which is available at below its current asset value.

Whereas growth investing focuses on to identifying companies which having a very bright future growth prospects. Here, no focus on the current value of the company and also given more weight to the intangible assets.

Difference GI VI

The Happy

Still having a confusion for selecting an approach for determining a value of the company.

If we have bought a security of a company which is available at cheaper than the current price, but at the operational level, the company is not able to do well enough, then that value cannot able to remain sustainable for the longer period of time. The value will get decompound rather than be getting compounded in the future. And that increases our probability of incurring the loss.

I read one wonderful article about the value trap company.

MTNL

The company looks very cheap on the basis of the financial metrics, but if someone who do not have paid attention to the business of the company then—

MTNL Chart

An investor has lost his capital also. So, that in value investing also, we cannot escape from the future. (For detail article, Kindly visit – http://neerajmarathe.blogspot.in/2010/04/mtnl-value-trap.html)

For the growth investing

But is it such easier to perform?

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 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 good management team. During March-2000, the company was traded at 64x P/E at low price of Rs.275 and this multiple are common now-a-days.

There is a very thin line difference between Growth investing and value investing.

Value investing is more consistent in nature, but it’s not easy to find it out. It is not an easy task to valuing a company through value investing approach. I also learn this valuable learning after made the such mistake. If we don’t able to make our estimate appropriately than we might overpay or underpay to that particular security. If we overpay for some security, then we have to take support of good luck for getting some greater fool who buys securities from us at a higher price.

Also, the most important thing is not to just valuing security appropriately, but also, we need to hold it. Stock will not start moving up after we make our purchase. Stock does not know that we are holding it.

After our purchasing, many a time price will start to fall further. But we should hold to it firmly. If something good at price X then it will be more good at price X-1.

Fig3-1

This law of demand is not really put by investors into practice in the stock market. We tend to buy more stock when the price starts moving up. But if we have done all our work properly, then decline in the price of security should not make us uncomfortable and we should also need to add more at a lower level.

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