WARREN BUFFETT’S LETTER – 2001 – 2003

Posted on November 18, 2018 by Jimit Zaveri under Bibliophile

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

Posted on November 4, 2018 by Jimit Zaveri under Bibliophile

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

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 –

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

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 – 1997 – 1998

Posted on October 28, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter 1997

We need to wait for the opportunity which falls under our Circle of Competence and we are comfortable with it, rather catch each opportunity.

WB 1997 01

We do not have to try to capture each and every single opportunity available rather we should focus on the opportunity which falls under our Circle of Competence and our philosophy. Till the time, we need to wait for the appropriate opportunity. Those who try to capture every opportunity, they do not get a better investment result.

As we have discussed investment into the cyclical industries in one of the articles of the same series (WARREN BUFFETT’S LETTER – 1987), we further get insights from Mr. Buffett –

WB 1997 02

When higher the supply of a particular commodity then prices of that particular commodity starts falling and vice-versa with the lower supply of the commodity. We should build a position into commodity companies during an excess supply of a particular commodity and we get insights for dry out excess supply.

Repurchase of Shares

WB 1997 03

WB 1997 04

We have seen in the current market fall that many people lose their investment, many have made an investment by bringing borrowing. But those who are careful and defensive investors, those get an opportunity to acquire position into the businesses at an attractive valuation. Many of the investors, I know who was holding a good liquidity position in their portfolio. They got saved from market fall. I also have experienced similar because of having good liquidity positions into my portfolio.

Acquisitions

Berkshire has made an acquisition into Star Furniture and International Dairy Queen (Company has a 5792 dairy stores in 23 countries)

Warren Buffett’s Letter 1998

When the company spends any money than Mr. Buffett always analyze that whether company able to create more than one dollar for anyone dollar spend or not. If the company can able to create more than one dollar for every dollar spend then they are happy to spend money. If the company is incurring a capital expenditure and consistently company is not able to earn higher returns than the company is facing capital allocation problem. We do not have to check it for 1, 2 or 3 years but we need to check it for a longer horizon.

Indian Company examples –

One of the textile machinery manufacturing company –

One of the tyres manufacturing company –

One of the largest IT Company –

TCS

Berkshire help to the CEOs of companies in which they have made an investment –

WB 1998 01

They also focus on the long-term benefits from the business rather focus on the shorter term perspective. Additionally, Mr. Buffett and Mr. Charlie provide an environment to the CEOs where CEOs can show their talent.

WB 1998 02

When CEOs does not have such kind of pressure and time freedom then they can able to perform well with the value creation among the business. Unnecessary and excess of meetings also reduces the performance. Also, those who do not have a pressure, get the freedom to work then they will produce a better result.

General Re

Berkshire has made a 100% ownership acquisition of General Re which is operated into the reinsurance business. The company is the largest U.S. property-casualty reinsurer, the company also owns 82% of the oldest reinsurance company in the world, Cologne Re. The two companies together reinsure all lines of insurance and operate in 124 countries.

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1996

Posted on October 20, 2018 by Jimit Zaveri under Bibliophile

Warren Buffett’s Letter – 1996

Acquisitions

Kansas Bankers Surety (KBS)

The company is an operating into the business of insurance which has a presence in 22 states, decent underwriting record with Don Towle as a manager. They made a deal to acquire a company at $75 million.

FlightSafety International

The company is the world’s leader in the training of pilots. The company operates in 41 locations, outfitted with 175 simulators of planes ranging from the very small, such as Cessna 210s, to Boeing 747s. About half of the company’s revenues are derived from the training of corporate pilots, with most of the balance coming from airlines and the military. They made an acquisition at $1.5 billion.

WB 1996 01

We need to prepare a list of the errors which can be dangerous for the health of our investment and work to avoid those errors. If we work on the avoiding mistakes then we can win 50% of the battle.

List of mistakes which I have experienced during my investment journey –

Never ignore the true value of the company—Every business has some value and that we should not have to ignore. If we commit such a mistake then the market will defiantly punish us. Be careful with the true worth of the company and only buy it when it falls below its true worth. And if business not available below its true worth then ready to missed that opportunity. Loss of opportunity is better than the loss of capital.
Don’t buy HOT —-If we buy the hot business such as recent trend, new IPOs, business on which everyone is bullish etc., then we must have to exit it at the proper time. So if we aren’t able to exit at the proper time then it’s better to let it go such opportunities. If we buy HOT then that HOT will BURN our portfolio.
Buying a high leverage business — We need to avoid a business which has a huge borrowings, such borrowings can kill the business and also kill our investment journey.
Using the wrong valuation method — Every business will not get valued with a similar valuation matrix. We need to identify the nature of the business and then value a particular business. Such as we should not use the valuation matrix of growing non-cyclical business for cyclical business, should not use the valuation matrix of assets light business for assets heavy business and vice-versa. If we made such a mistake then whether we might miss a decent investment opportunity or we might lose our capital.
A mistake of buying a story, not a fundamental — I have never ever made such a mistake because I am a hard-core lover of numbers. But I have seen many of the people who always focus on the story and also which is very trending to the market. I believe that without the support of numbers, no story can survive for long. In the year 2014-15, Logistics stocks due to GST gets a trending story but due to lack of good numbers, the story gets failed. People generally avoid numbers due to lack of understanding of it. I firmly believe that “Stories are for kids, not for investors.”
Investing without a process and philosophy — I can overcome this mistake at the initial period of my investment journey and that is only because of my guru – Neeraj Marathe Sir (who always believe on having a process and philosophy for making an investment). I have seen many people who spent lots of time into the market but they do not have any process or philosophy. They change their philosophy as they meet various people. If we do not have our own process and philosophy for making an investment then we will not able to create a successful investment journey. I also learn from my guru that we must have our philosophy in a written format so that we can refer it over a period of time and stop ourselves from occurring a mistake.
Not using a checklist — We should have a checklist for a business, industry, financial, management etc. so that we can focus on the points to study and also not forget any point to study. I am using a checklist for the last 3 years and I can say that having a checklist helps me a lot. My checklist keeps on improving as my experience grows.
Making an investment decision with disturb mind — We should avoid making an investment decision while our mind is disturbed. Disturbance in mind will end up with the faulty investment decision and which can be harmful to our wealth.
Cloning a well-known investors/fund managers — Again I can overcome this mistake at the initial period of my investment journey and again credit goes to my guru. If we have our process and philosophy then we will not try to clone others. I have seen many people who have spent 10-15-20 years to the stock market then also not having any process and philosophy & they clone others. Many of the people have cloning as their investment philosophy because they love to use shortcuts. I always remember the quote of my guru –

WB 1996 02

When Company does not have an opportunity to reinvest earnings at a higher rate than the company should distribute those earnings to the shareholders so that they can use it somewhere for getting a higher return. If the company does not have a good opportunity to reinvest earnings and then also company does not distribute earnings as a dividend then we need to be careful with a company (Question on the capital allocation decision of a management or earnings can be manipulated or business always needs a huge capital to sustain only).

Examples – No/Low growth high dividend payout

Examples – No/Low growth low dividend payout

WB 1996 03

We need to check the above-mentioned factors in the company where we have made an investment and where we want to make an investment. Most important is to gain a market share. The company cannot able to gain market share, though the company has a competitive advantage then that competitive advantage not useful for us. We should not focus on the leadership position of the company rather need to focus on the companies which focus on the manufacturing, distribution, packaging and product innovation. Market leadership can be changed if the company does not focus on the mentioned points.

WB 1996 04

According to Mr.Buffett, paying a higher price does not risk for the good companies compared to paying higher prices for the bad companies.

WB 1996 05

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

When management of a good business diverts their focus into the business which is not performing well then such decision of the management affect the performance of the business.

WB 1996 06

Example – We have seen examples such as liquor manufacturer enter into the airlines business, airport contraction business has diversified into the power business.

Mr.Buffett has also mentioned the Circle of Competence concept –

WB 1996 07