Tag Archives: management

SIMPLE IS BETTER – ISSUE -16 – NUMBERS TELLS YOU EVERYTHING

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We have seen that equity investment has provided decent returns to those who have made an investment into a decent business with having decent management. I have also explained a similar concept to my articles of Pat Dorsey and Kite Flying regarding business + management combination.

Accounting is a language of business, we need to understand it well so that we can make communication with numbers.

I will try to explain all manipulation in a simple manner into the upcoming issues of the same series.

Entire series of “Numbers tells you everything” is based on the books –

I have tried to cover up concepts available with the above books.

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -16 – NUMBERS TELLS YOU EVERYTHING

WARREN BUFFETT’S LETTER – 1999 – 2000

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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

RFL.jpg

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 –

WB 1999 03

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

WB 2000 02

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

WB 2000 03

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.

WB 2000 04

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1993

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WB Letter 1993

Dexter Shoe

H.H.Brown shoes (Purchased by Berkshire) has made an acquisition of Dexter Shoe in the year 1993, which is in the business of manufacturing of popular-priced men’s and women’s shoes. Buffett & Charlie admire Dexter as a business. Dexter’s has a 77 retail outlets and company is a leading manufacturer of golf shoes which is producing 15% of U.S. output.

WB 1993 01

Example – Good player into the worst industry matrix

BS01

BS02

BS03

We can see in above example of three real estate companies where Company – 1 having a good matrix compared to the other two companies. Also equity dilution into the company – 1 is increased by 1% CAGR in last 10 years compared to 12% CAGR and 5% CAGR in last 10 years respectively for the company – 2 and company – 3. We can see that debt and equity both has increased into the second and third company whereas company – 1 has maintained balance sheet strength. During a good period, the company – 1 has the least inventories as a % of sales and other 2 companies has higher inventory as a % of sales. Sales of a company – 1 has increased by 10% CAGR in last 10 years compared to -7% CAGR and -6% CAGR in last 10 years respectively for the company – 2 and company – 3. We can see stock performance then company – 1 has given 53% CAGR in last 17 years compared to -9% CAGR and 15% CAGR in last 11 & 17 years respectively for the company – 2 and company – 3.

Chart01

Chart02

Chart03

We need to focus on the good player into the worst industry matrix for making an investment. Generally, the good player will gain the market share compared with the worst players in the industry and able to survive for the longer period of time. Also our invested capital get protection with the creation of wealth. The similar pattern we can able to find at infra, telecom, power sectors, etc.

Many of us misunderstood that insurance business of Berkshire get float as a free of cost but it is not true. When insurance business incurring underwriting losses then such losses need to take for consideration as a cost of float.

WB 1993 02

Mr. Buffett and Mr.Munger believe that they are not smart enough to make many right decisions. But they like to hold good business forever and avoid to make many decisions. We should consider “Risk” as a loss, not the academic definition of “Beta” as a volatility of the portfolio.

WB 1993 03

We should focus on what the company produces, what competitors are doing, how much borrowing company has taken rather than focusing on the price history of the company and the daily price movement of the stocks.

Criteria for focusing during investment evaluation –

WB 1993 04

Mr. Buffett has explained three scenarios of management and owners of the company which impacts to the performance and corporate governance of the company.

First scenario where no controlling authority and company managed by directors

WB 1993 05

The second scenario where controlling owner also work as a manager

WB 1993 06

The third scenario where controlling owner who is not involved in the management

WB 1993 07

WB 1993 08

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1985 – 86

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WB Letter 1985

Mr.Buffett indicate that Berkshire Hathway has a capability to earn superior return generally earn by corporate America.

WB 1985 01

We need to focus on the mistakes which we have made and try to learn from our mistakes.

WB 1985 02

Berkshire liquidates its textile business in the year 1985. Cyclical nature of the business and huge competition makes them helpless which resulted in the shutdown of the textile business.

WB 1985 03

If management having good managerial skills then company able to produce the good economic return.

WB 1985 04

Commodity business only able to produce profit while prices of the product are fixed or capacity is shorted. And managers can enhance capacity with the availability of capital when things look good in future.

Acquisition of Scott & Fetzer

WB 1985 05

CEO of the Scott & Fetzer – Ralph Schey is capable enough. When he took charge of the company, at that Time, Company had 31 businesses. Ralph had disposed of many of the businesses which have limited profitability and result of that company left with 17 businesses. Capital allocation decision of the Ralph is good enough which Mr.Buffett admired.

After the purchase by Berkshire, Schey spent two years revising World Book segment by selling off the Japanese division and trimming domestic operations in much the same way as he had tightened Scott Fetzer.

WB Letter 1986

Mr.Buffett mentioned that he and Mr.Charlie only having a major two job to perform – one is to retain and attract a good manager to manage a business and other is to allocate capital of Berkshire Hathway in a way which helps to earn more money than average.

Acquisition of the Fechheimer Bros. Co.

WB 1986 01

Mr.Buffett mentioned that he only acquire a company when economic characteristics of the business are favorable, and connected with the right people who can handle position with integrity.

Mr.Buffett on Accounting numbers –

WB 1986 02

Warren Buffett’s Letters 1957 – 2012