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
One of the wealth creator IT Company during an IT bubble
One of the two-wheelers and commercial vehicle manufacturing company was available at a discounted value during pessimism of the year 2008
Warren Buffett’s Letter 2009
What is avoided by Mr. Buffett and Mr.Munger —
Mr. Buffett on derivatives –
Warren Buffett’s Letter 2010
One of the infrastructure company
One of the electric motors, generators, transformers manufacturing company
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.
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
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.
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).
I am really grateful to Riddhi for helping me with editing work.
WB Letter 1971
Mr.Buffett’s objective is the growth of the business by improvising returns on total capital and returns on equity of the business.
Textile Operation
Berkshire’s textile business was facing recession and that dropped the performance of the business. To sustain profitability of the business; management is even trying to reduce costs as well as control inventories.
Insurance Operation
Berkshire started with reinsurance operation and home-state insurance operation, by acquiring home & automobile insurance company.
WB Letter 1972
Berkshire did not issue additional share capital to run the business. Instead, he repurchased his own company’s shares from the public during the recession.
WB Letter 1973
Mr.Buffett believes that premium rate will drop in future due to increasing competition in the Insurance business.
The merger of Diversified Retailing Company into Berkshire got approved pertaining to the terms and conditions of issuing shares of Berkshire. Berkshire and Diversified Retailing Company both had shares of Blue Chip Stamps and after the merger of Diversified Retailing Company into Berkshire, the holding of shares of Blue Chip into Berkshire increased.
WB Letter 1974
Textile operation
Berkshire, in order to avoid the buffer inventory, started its operations at 1/3rd of its installed capacity.
Insurance operation
Unusual profitability into insurance business increased the competition level into the industry. On account of this competition; the profit level of various companies decreased and the underwriting losses increased on a larger scale. But above all of this, the insurance business kept on growing and earned higher returns on capital employed.
The merger of Diversified Retailing Company into Berkshire was terminated by Board of Directors but Mr.Buffett planned to reopen possibilities of the merger in the future.
WB Letter 1975
Textile operation
During 1975, the textile industry again faced recession and that resulted in the operation losses and reduction of employment by ~53%. Most of the textile producers decreased their production and this resulted into business rebound in the fourth quarter of 1975.
We can able to see that we should buy cyclical companies during the worst time in the industry as Mr.Buffett has done.
From the above, we can analyze that investors who had purchased shares of metal companies which dealt in iron ore during December 2015 where the prices were the lowest in the period of 10 years; have received decent returns.
Insurance operation of the company showed underwriting losses which in turn reduced the fund available to make an investment into the stocks and as a result of this; the investment portfolio reported an unrealized loss.
Mr.Buffett says that short-term market price fluctuation is not important; only business performance counts and hence he explains the criteria for the selection of stocks for holding the businesses for a longer period of time.
One of the books which has influenced me and my investment journey is “The Most Important Thing by Howard Marks”. This book teaches us the most important thing which we need to develop for becoming a wise investor. In this article, I include my learning from the 1st chapter of the book – “Second Level Thinking”.
This chapter talks about in-depth thinking for each and every opportunity and even before making any decisions. As the name suggests, we need to enhance our thinking level for making a decision. I found this concept similarly useful in my life also as it’s useful to the investment world. So, I am starting my learning from the 1st chapter of the book.
If we want to get a return as similar as market returns, then we do not need to enhance our level of thinking. We can just make an investment into the index fund, ETF etc., which are listed on exchanges. But what if we want to earn an above average return, we need to make a different decision and need to think differently.
We should need to come out of the crowd and take our stand. We might get right or might get wrong, but should not stop our thinking and decision making. We should keep in mind that even successful investors do not prove right all the time. Even Warren Buffett has made an investment mistake such as Salomon Brothers Inc., Tesco, a Dexter shoe company. We should not fear from making a mistake but should learn from it and should not make the same mistake again and again.
Mr. Howard Marks has discussed that how we can think differently about making a good return on investment. And he gave the name of the concept “Second Level Thinking”.
Source: The Most Important Thing by Howards Mark
There are many incidents which I personally have experienced in my investment journey where I found real effects of this concept.
Let me explain the 2nd level thinking with an example.
One good company which treated as a great company by the market.
The company has a good network effect, reliable brand name and also many news making a tie-up with e-commerce enterprises. Also, got hurt due to changes in the traditional tax structure. Once in a while, the company traded at a valuation of ~140x P/E, ~58x P/BV, ~7x Market cap/Sales, ~76x EV/EBITDA etc.
The company has a good track record and a good brand name but the market has treated it as the great and current valuation of the company is ~64x P/E, ~20x P/BV, ~4x Market cap/Sales and ~44% fall in price from its high price.
This suggests that if any opportunity is much discussed at market space, then we should be more cautious regarding that opportunity and if possible need to stay away from it.
Same with the reverse scenario. Making an investment in metals, sugar sector when everyone fearing from these sectors. When sugar and metal prices were on the lower side, then that was the best time to make an investment in these sectors.
We can see that all sugar stocks have started performing after August-2015 from where also prices of sugar started increasing.
There are many examples where we have experienced this situation. We can able to create huge wealth when we have made an investment in the adverse scenario.
The scenario of the year 2008 subprime crisis, 2013 or 2016 demonetization situation. If we have made an investment at such panic situations, we can able to create a huge wealth.
Same with the reverse situation. When there are a high growth and happy scenario starts, we should keep cautious with our investment. We cannot able to catch the bottom and the high of the market, but we can able to stay with cautious with the surrounding scenario.
When news of falls in corporate earnings at everywhere and everyone dumps stocks, then it’s a good buying opportunity. If earnings fall less compared to expectations, then we can see a huge shock. And if everyone is expecting to fall in earnings then only we can able to get the good opportunity to enter into a particular business.
Second level thinking is different, difficult and more detailed compared to the first level of thinking. When the 1st thought comes in our mind, we always need to think deeply about it before making any decision.
First level thinking is very easy and many are following it but for getting a different result from the crowd, we need to think differently. As Mr. Howard Marks has quoted results matrix for the second level thinking.
Our unconventional behavior can help us to achieve unconventional results. Thus, for getting a superior return we need to adopt the second level thinking. And for developing a second level thinking, we need to work hard. We need a huge courage for going against the crowd and it’s not an easy task to perform.
