Tag Archives: Warren Buffett and Berkshire Hathway

WARREN BUFFETT’S LETTER – 2007

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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.

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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

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Eicher 02Eicher 03Eicher 04

One of the FMCG Company

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One of the Assets Management Company

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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 01La Opala 02La Opala 03La Opala 04

One of the pharma company

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

One of the Tea manufacturing company

Goodricke 01Goodricke 02Goodricke 03Goodricke 04

Gruesome Business –

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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 01Idea 02Idea 03

One of the logistics company

Snowman 01Snowman 02Snowman 03

One of the steel manufacturing company

Jindal Steel 01Jindal Steel 02Jindal 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 ExitBalram Exit 01

EID Exit 01EID Exit 02

Cement Company

JK Cement Exit 01JK Cement Exit 02

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 2004 – 2006

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Warren Buffett’s Letter 2004

Mr.Buffett has explained why many of the investors do not able to create wealth by investing into the equities.

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When we trade extensively then we incurred an additional cost which reduces our return. Also, many of us follow tips of others and rely on others which also reduces investment return. Many of people start investing when market continuously moving into upward direction with the fear of losing an opportunity to earn and get exit from the market when the market starts moving downward with the fear of losing investment. Rather we should increase our investment when the market is continuously moving downward.

Mr.Buffett has been explained that one of the ways to survive into the commodity-like business is to become a low-cost producer. Commodity business generally does not have pricing power and prices of a particular commodity are decided based on the demand & supply of a particular commodity so that they have to focus on the costs.

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Warren Buffett’s Letter 2005

Investment + Cash per share at Berkshire Hathaway –

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Per share value of non-insurance business –

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During January – 2006, the price of a share of Berkshire Hathway – A was traded at $90,000.

Mr.Buffett’s thought on Moat –

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The strong moat can result in a strong flow of float. If the company having a moat then the company has the ability to raise prices, getting the float, higher return ratios, raising market shares, etc.

Indian Companies Examples

One of the two-wheelers and commercial vehicle manufacturing company of India

EIM

One of the four-wheeler manufacturing company of India

Maruti

We can see that float is also getting compound over a period of time which benefits to the company to survive for the long-term and to create wealth.

Why investors are not able to make money through the company can earn well –

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Warren Buffett’s Letter 2006

Warren Buffett answer for his currency derivatives position –

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We need to focus on avoiding mistakes which can spoil out our wealth. If we focus on avoiding mistakes then half of the battle, we won.

Mr.Buffett on Walter Schloss –

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Mr.Buffett on people who clone others’ portfolio –

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Mr.Walter Schloss is one of the investors who have an influence on my investment decisions. I keep his advice always with me. (Published at Safal Niveshak –

https://1icz9g2sdfe31jz0lglwdu48-wpengine.netdna-ssl.com/wp-content/uploads/2015/01/Walter-Schloss-16-Rules-to-Make-Money-in-Stock-Market.pdf )

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 2001 – 2003

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Warren Buffett’s Letter 2001

We need to analyze financial statements and notes to accounts with huge care so that we can identify flaws which management wants to hide.

Indian companies Examples – Companies having growing sales but the majority of sales from related parties.

The company engaged in manufactures pumps, motors, valves, and custom-built power systems/manifold blocks.

The company is a travel management company.

Warren Buffett’s Letter 2002

Acquisitions

Berkshire has made a five investments in the year 2002 which are Albecca (U.S. leader in custom-made picture Frames), Fruit of the Loom (the producer of about 33.3% of the men’s and boy’s underwear sold in the U.S. and of other apparel as well),CTB (a worldwide leader in equipment for the poultry, hog, egg production and grain industries), Garan (a manufacturer of children’s apparel, whose largest and best-known line is Garanimals) and The Pampered Chef – Founder Doris Christopher (in a business of manufacturing kitchen tools, food products, and cookbooks for preparing food in the home).

John Holland who is managing Fruit has Rescue Company from the disastrous path. We can see that if the management of the company is capable enough then he can run the business in a good manner rather than spoil it.

Two company from the same segment one has survived under the worst period and other has made a disaster.

The company has a sales growth, growth in cash balance, free cash flow for the cumulative period, a major portion of the assets side of the balance sheet is Net Block as a company is into the capital-intensive industry but investors of the company do not lose money.

Second company which has made a disaster 

Another company from the same segment where the company has does not have a sales growth, reduced cash balance, no free cash flow for the cumulative period, a major portion of the assets side of the balance sheet is other assets and investors of the company has lost money.

We can see that the management of the company plays an important role in making a company successful and survive during the worst period also.

Berkshire has made an investment into MidAmerican Energy Holdings in the year 1999 for $35.05/per share and per-share earnings of MidAmerican Energy Holdings in the year 1998 was $2.01 (P/E 17.44x, Earning yield of 5.73% – US interest rates during the year 1999 was similar to earning yield).

View on Derivatives

We should wait for the opportunity which is falling under our criteria and till that time we should be inactive. We should work for staying into the game rather than try to hit on each and every ball thrown to us.

I will be going to make a detail explanation regarding weak earning quality later on. But I learn from my Guru that we need to start analyzing every company by considering it as a “Chor” so that we will not be biased about the company. If our process proves that the company has not a weak quality of financial then only need to consider the company as a clean company.

Warren Buffett’s Letter 2003

Mr. Buffett has again mentioned waiting for an opportunity which matches our criterion.

Director of the company should have the freedom to make an independent decision and they also should be an owner of the company so that their interest and interest of shareholders will not have any kind of conflict.

One of the lesson if there is a bubble scenario and we know that the price at the business traded is much higher than what actually an intrinsic value of the business then we need to sell out our position.

Indian example

One of the wealth creator from IT segment. If we have sold out shares during an IT bubble period year 2000 at half price Rs.140 from the high price Rs.279. then we have lost return of 9% CAGR since the year 2000 (current price Rs.650). Now, we have bought Nifty Bees from those sold amounts then we have earned 13% CAGR till now.

Warren Buffett’s Letters 1957 – 2012

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

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Example of Indian Companies

One of the footwear company in India

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One of the diagnostic chain company of India

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Mr. Buffett has given his view on Tech Companies –

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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 –

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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.”

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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

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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