WARREN BUFFETT’S LETTER – 1987

Posted on July 22, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1987

Mr.Buffett indicates the behavior of most of the investors and which should be avoided.

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Companies which can perform well and earned 20% above return on equity, all those companies have also performed well into stock-market in terms of stock prices. But such companies are few and we need to identify those and sit tight with holding those companies. Companies which have a good earning power then those companies do not require the debt.

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Mr.Buffett indicated that they do not cut down budget as the profit of the company falls. He has always focused on the employees and their welfare. We have seen that the Textile division of the company remains to continue for the longer period only due to largest employees’ works at the company.

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Whenever the shortage of a particular commodity arises then prices of particular commodity start rising and commodity companies start getting benefits of price raised.

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We should enter into the commodity companies when there is an excess supply and price of the particular commodity is traded lower which having a lower profitability, lower return ratio, such lower prices bring bankruptcy to weak companies etc. and should try to exit when shortage of supply and price of the particular commodity is traded on a higher side. But generally, we forget it and enter while the financial matrix of the commodity companies already improved which creates wealth destruction.

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Major mistakes made by an investor in the cyclical company is that they choose to invest when commodity prices are at higher level, return ratio improves well, profitability margin improves, etc. We should try to avoid such mistake.

Additionally, Mr.Buffett explained the philosophy of Ben Graham to see a market. Ben Graham quote market as Mr.Market and price moment as the mood of Mr.Market.

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Mr.Buffett has made a point regarding when he will ready to sell his existing security in which he has made an investment. These points can be used as a checklist for selling decision of our investment.

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People have misunderstood saying of Mr.Buffett and they keep on believing that Mr.Buffett never sell his investment and keep on holding it forever. But in reality, it is fact. He is also ready to sell securities when the above-mentioned criterion matched with his investment and he holds till the above-mentioned criterion does not match.

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 1983 – 84

Posted on June 3, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1983

Berkshire Hathway made an acquisition of majority stake into Nebraska Furniture Mart. Mrs.Blumkin leave Russia for America when she was the age of 23. She had no formal education, no knowledge of English.

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Many retailers had pressurized to the furniture and carpet manufacturers to not to sell products to Mrs.B but Mrs.B has managed to run her business and also able to cut prices. She has to face many cases but she won all and received huge publicity.

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Mr.Buffett has explained the concept of intrinsic value in a very well manner.

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Mr.Buffett has explained how to look at the economic Goodwill with the example of the See’s Candy. He has an emphasis more on economic Goodwill rather than accounting Goodwill. Company’s ability to produce a higher return on assets compared to market then that excess return is economic Goodwill.

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Also mentioned that assets heavy businesses require additional capital for the further growth.

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Great business creates a fortune during an inflationary year where the company requires less tangible assets. And also companies having availability of the fund for acquisition of the new business. They do not have to depend on the bringing additional fund by either debt or issuing new share capital.

I have quoted example of 2 two companies into the automobile business and one company is in the paint business.

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Example 1 – 3 which are asset heavy businesses, where we can see that borrowing is compounding, non-availability of free cash flow and wealth of shareholders does not created or get erode, whereas in example 4 – 6 which are asset light or least asset businesses, we can see that borrowing reduced or increased at a lower rate and investments into the books has compound well, availability of free cash flow which resulted into the wealth creation for the shareholders.

But the management who is not disciplined then they will do a silly things such as –

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WB Letter 1984

Mr.Buffett has mentioned benefits of repurchase of shares.

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Warren Buffett’s Letters 1957 – 2012

Disclaimer: Businesses discuss in this article is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered research analyst.

WARREN BUFFETT’S LETTER – 1982

Posted on May 27, 2018 by Jimit Zaveri under Bibliophile

WB Letter 1982

Mr.Buffett has mentioned characteristics of cyclical industries-

The product which can be differentiated and sell it by the branding of it then the company can able to earn extra from it. But the product where no chance to differentiate product then profitability is the major factor of market forces.

We cannot predict that when the cycle will going to turn, we cannot predict that when demand will overtake supply and prices of the commodity will start improving or supply increases much compared to demand and prices starts falling.

We should focus when any company is engaged in the corporate acquisition. If any company is issuing shares for the acquiring a company which having lesser intrinsic value then we should keep cautious. Such decision of the management provides us a clue regarding the perspective of the management and weather company is intended to create the wealth of the owners or not.

While management makes an acquisition at the expensive valuation by issuing their shares than some of the rationale given by management which we should check by putting highest cautions.

Mr.Buffett had provided a solution by which management can avoid value destruction for the existing owners of the company.

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.

The criterion which Mr.Buffett focuses while making an investment decision –

Warren Buffett’s Letters 1957 – 2012

Disclaimer: Businesses discuss in this article is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered research analyst.

WARREN BUFFETT’S LETTER – 1980 – 1981

Posted on April 26, 2018 by Jimit Zaveri under Bibliophile

I am really grateful to Riddhi for helping me with editing work.

WB Letter 1980

Mr.Buffett gave his opinion about the repurchase of outstanding shares of the company.

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He had discussed the effect of inflation to his shareholders in a very well manner.

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Buffett focuses on businesses that can enhance the Return on Equity with the rising inflation and without the need of additional capital requirement.

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When there is a temporary trouble to the business; and if the managers have an ability to cure that temporary problem and the business itself can generate good cash; then

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Buffett mentions that we should focus on strong business so that it does not depend on the good management.

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WB Letter 1981

Mr.Buffett has given his view on maximizing economic benefits rather than accounting appearance. And also stated some of the mistakes which the management is making.

Rather than buying companies which have the management with above-mentioned characteristics, he suggests buying a company which has the following characteristics.

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Few companies are able to enhance their margins though their sales which are not growing at a very high rate and are still sustaining their market share.

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In India, there is an air cooler manufacturing company which grew well without major additional capital.

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In the above table; we can see that Sales and Net profit has grown by 30% and 48% CAGR respectively. And if we see cumulative capital expenditure made by the company; then it is just 10% of the cumulative net profit. The company has grown its sales and profitability without the requirement of major additional capital.

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Mr.Buffett gives a good logical perspective that when the company can earn higher Return on equity; then they should invest their earnings into the business itself. And if the company is unable to earn higher Return on equity; then they should distribute earnings to the owners so that the owners can deploy capital in a better way. But we should be aware of companies that are raising capital for the dividend payout.

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