Charlie Munger Handling Big Losses

Posted on June 10, 2019 by Jimit Zaveri under Bibliophile, Bibliophile: Big Mistakes

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Majority of the big winners’ companies have also seen the worst period during their journey. It is not necessary that if the company has delivered a 25%+ CAGR then it will get into the smooth way. There always be a huge up and downs to it. Many storms such companies have experience but as investors, we need to stay during those storms if we have made an investment into the great companies then only we can able to earn good returns from it.

Mr. Munger has established a hedge fund company, Wheeler, Munger & Company in the year 1962 which has a pre-fees return of 37.10% during the year 1962 to 1969. And 14-years of partnership, Mr. Munger has delivered around 19.82% CAGR compared to 5.20% CAGR with the dividend of S&P500.

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If we love when stocks moving into the upward direction then we must have to be ready to accept its downward journey also. It is a part of the game and without accepting the losses, we cannot become a seasoned investor. Even Mr. Sachin Tendulkar cannot hit a century into the each of the match, some of the match having a ZERO score also. If he only focuses on the century then it might be possible that he cannot able to play well. Similarly, if we keep focussing on the scoreboard then we may not able to create a good investment fortune.

Mr. Munger has an investment of 61% of his portfolio to the Bluechip stamp and original business of the bluechip stamps has started getting deteriorate from the peak revenue of $12.42 crore in 1982. Bluechip has made an investment into the See’s Candies, the Buffalo Evening News, and Wesco Financial before getting merged into the Berkshire Hathway in the year 1983.

The firm of Mr. Munger has lost 31.90% in the year 1973 and 31.50% in the year 1974 v/s 13.10% and 23.10% decline of Dow Jones respectively. And he bounces back by 73.20% of the gain to the year 1975 but few of the large investors have left him which break him mentally and emotionally. He decided to liquidate the partnership. But after the worst performance during the year 1973-1974, Mr. Munger has delivered a 24.30% CAGR before fees.

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We need to be mentally ready for the big losses during our investment journey if we want to earn a decent return for the long term. If we are not mentally and emotionally ready we will not able to survive to the investment journey.

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We should not sell stocks just due to a fall in the price of the stocks. If we keep on doing such practices then we will not survive for the long term to the stock market. If we know that stock can fall by 50% after we bought it, then we will make a position which is comfortable for us during the decline.

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We need to make a balance between equity and debt as per own comfort. So that we can able to play an investment game in a good manner. Also, get the strength of absorbing such shock.

Read for more detail: Big Mistakes: The Best Investors and Their Worst Investments by Michael Batnick

BIBLIOPHILE: WARREN BUFFETT’S LETTER 1957 – 2017

Posted on January 13, 2019 by Jimit Zaveri under Bibliophile, E-BOOK

Mr.Buffett has taught us –

Never count on making a good sale. Have a purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake.

Our business is making excellent purchases – not making extraordinary sales.

Mr. Buffett believes that big money can be made by making investment decisions based on qualitative factors whereas sure money can be made by making investment decisions based on quantitative factors. And hence, on the basis of this; he considers himself as a quantitatively focused investor.

The primary test of managerial economic performance is the achievement of a high earnings rate on equity capital employed (without undue leverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share.

Business must have two characteristics: (1) an ability to increase prices rather easily (even when product demand is flat and capacity is not fully utilized) without fear of significant loss of either market share or unit volume, and (2) an ability to accommodate large dollar volume increases in business (often produced more by inflation than by real growth) with only minor additional investment of capital.

Many a time, management only focuses on the increasing future Earning Per Share (EPS) by sacrificing the strength of the balance sheet. But they forget that if the balance sheet does not remain strong for a longer period of time then business is going to have a tough time into the future.

Accounting numbers, of course, are the language of business and as such are of enormous help to anyone evaluating the worth of a business and tracking its progress. Charlie and I would be lost without these numbers: they invariably are the starting point for us in evaluating our own businesses and those of others. Managers and owners need to remember, however, that accounting is but an aid to business thinking, never a substitute for it.

“What we learn from history is that we do not learn from history.”

Any company’s level of profitability is determined by three items: (1) what its assets earn; (2) what its liabilities cost; and (3) its utilization of “leverage” – that is, the degree to which its assets are funded by liabilities rather than by equity. Great companies = Float + Investment + Cash with higher return ratio

If the choice is between a questionable business at a comfortable price or a comfortable business at a questionable price, we much prefer the latter. What really gets our attention, however, is a comfortable business at a comfortable price.

Buy commodity, sell brand has long been a formula for business success.

Capital-intensive business, look for PBT / interest cost rather EBITDA / interest cost.

When we are fearful with our investment decisions then we focus on the each and every aspects which can result in the erosion of the capital.

Mr.Buffett has taught us many concepts and wisdom which is essential to us while making an investment decision. I am hereby compiling all my learning from the letters of Mr.Warren Buffett. Also an evolution of Mr.Buffett from bargain to quality businesses.

For all in one learning from Mr.Warren Buffett’s Letters, Click here –> BIBLIOPHILE WARREN BUFFETT’S LETTER 1957-2017

WARREN BUFFETT’S LETTER – 2015 – 2017

Posted on January 7, 2019 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 2015

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Similarly, India has a GDP growth rate of 7.20% and population growth of 1.10% which increase to the per capita growth by 6.10%. if we consider average per capita growth rate of around 5% for coming 20 years then it will reach the gain of 100%+. So that per capita will increase to $3927+ from $1963.55 currently, which will enhance the standard of living of our future generation.

Warren Buffett’s Letter 2016

Mr. Buffett has explained mistakes of acquiring businesses –

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Mr. Buffett on assets funding through debt-

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Mr. Buffett on fear –

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When we are fearful with our investment decisions then we focus on the each and every aspects which can result in the erosion of the capital. When I make an investment, I assume that from the next day of my investment; 1929 great depression will hit so whether I survive or not? Survival should be much more important to build a wealth which is not focused if we do not remain fearful with our investment.

Mr. Buffett on the repurchase of shares –

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Many companies are coming up with the repurchase of shares, we should consider that whether repurchase did at a discount to the intrinsic value or at a premium. If a company is paying a premium to repurchase shares then it will not benefits much to the shareholders. If any company make a decision to repurchase shares at a discount to the intrinsic value then we should look for the company. Many companies which are into commodity business or into the cyclical nature of the business also make a repurchase share during the worst time.

Examples of Buyback at discount to intrinsic value, cyclical companies buyback, companies which have done a buyback rather repay debt – SIMPLE IS BETTER – ISSUE -13 – BUYBACK

Warren Buffett’s Letter 2017

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If our investment does not provide us with protection against the inflation then we should not stay for a long term with a particular investment. Our first motive for making an investment should be protected against inflation and then create wealth for the long-term horizon.

Warren Buffett’s Letters

WARREN BUFFETT’S LETTER – 2013 – 2014

Posted on December 29, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 2013

Mr.Buffett has mentioned that they have made a repurchase of Berkshire shares during the year 2012 which enhance intrinsic value per share and that provides a benefit to the shareholders who are continuing with the company.

Examples of Buyback – SIMPLE IS BETTER – ISSUE -13 – BUYBACK

Mr.Buffett on the Heinz investment –

I learn investment to fixed income instrument from my Guru. ZEE Entertainment has issued preference shares to the equity shareholder of the company with the condition to pay 6% interest payment and redemption of principle starts from FY18.

Preference share was available at Re.0.80 and face value of that is Re.1.00. If we consider total cash inflow to us in form of interest payment + principle repayment then we can able to earn ~10.75% IRR for the FY14-22. Here, the present value of all future cash inflow @ 10.75% is Re.0.80 which is also higher than our purchase price which indicates safety also.

NTPC has issued debenture to the equity shareholder of the company as a bonus with the condition to pay 8.49% interest payment and redemption of principle starts from FY23.

Debenture was given as a bonus and ex-date of debenture was 20^th March 2018. If NTPC was purchased on 18^th March 2015 then price of NTPC was ~Rs.153.74 (with brokerage + other charges) and if we sell NTPC on Ex-date then price of NTPC was ~Rs.144.70 (with brokerage + other charges) so that cost for getting bonus was Rs.9.05 and the face value of that is Rs.12.50. If we consider total cash inflow to us in form of interest payment + principle repayment then we can able to earn ~14.02% IRR for the FY15-25. Here, the present value of all future cash inflow @ 10.75% is Rs.10.90 which is also higher than our purchase price which indicates safety also.

In both the cases, the interest rate on risk-free investment was ~8-9% and we are getting higher return compared to it.

Mr. Buffett on investing –

During, the year 1973 to 1981, farm prices had a bubble situation. When the bubble burst, then leverage farmer and lender both had a troublesome time. And after that Mr. Buffett had made an investment into the farm.

Mr. Buffett also made an investment into the other commercial property.

Mr. Buffett has explained investing lessons –

In our investment to stocks, we are get affected with the stock price fluctuation and listen to the pundits for their comments. Due to such habits, we cannot sit quietly with our investment and we end up with little or no return. Mr. Charlie and Mr. Buffett always made an investment as they are buying an entire business. They check whether they can estimate future five years of earnings or not. If they can estimate earnings then check whether available at a reasonable price or not. If either of the condition does not match then they move on to the other prospects.

For non-professional investors, they can make an investment into the index fund and accumulate it over a period of time.

Warren Buffett’s Letter 2014

Mr. Buffett mentioned Investors behavior which affects the investment return –

Unexpected behavior from Stanton in the year 1964 –

Why Mr. Buffett has bought Berkshire Hathway at the year 1962 –

Example of Indian companies

One of the air-cooler manufacturing company of India was available below the book in the year 2009

One of the two-wheelers and commercial vehicle manufacturing company was available below book value in the year 2008 and below cash in the year 2008 and 2009

Charlie Straightens Me Out

The initial period of years, Mr. Buffett engage in the buying bargains (cigar-butt) strategy which he learns from Mr. Graham. The major weakness of the concept mentioned by Mr. Buffett is “Cigar-butt investing was scalable only to a point. With large sums, it would never work well.”

Here, I have also made a blunder but luck by chance got saved.

Mr.Munger has an impact on Mr. Buffett which has helped to Mr. Buffett to evolve cigar butt strategy to wonderful businesses at favorable prices. Many times, Mr. Buffett and Mr.Munger do not get agree but they never ever have made any arguments. When such scenario arises then Mr. Charlie end up a conversation with saying “Warren, think it over and you’ll agree with me because you’re smart and I’m right.” Mr. Buffett has accepted that transformation was not easy but he has done it.

Warren Buffett’s Letters