The market at 7200 ! so what ??

Look at any financial website / papers and there is euphoria all around ...

Cant figure out a rational reason other than that it is good to excite people, get more hits or sell copies.

what's the big deal about 7200 !! or any other number .

The market is selling at 14.3 times backward pe . If the economy does fairly ok , and the corporate profits continue to grow at 10-15 % , then some time in the future we could have the sensex touching 8000 and then maybe 8900 ...provided there is no major shock to the world economy / indian economy ... anyway how does it matter

well if the market was selling at say 20 times pe , then it would matter as i would start selling ..or if it was selling at say 10-11 times pe (like 2003 ) then it would matter ...as one can buy some very good companies at good prices ...but now we have pockets of overvaluation and to be fair pockets of undervaluation ...so it means more work ..

so i guess if the markets shoots to 8000 + soon or drops to 6000 types , then it is action time ...otherwise it is back to reading annual reports and better off watching the discovery channel

seems like a lot of noise ..but then what can once expect from the most of the financial media !!

The market at 7200 ! so what ??

Look at any financial website / papers and there is euphoria all around ...

Cant figure out a rational reason other than that it is good to excite people, get more hits or sell copies.

what's the big deal about 7200 !! or any other number .

The market is selling at 14.3 times backward pe . If the economy does fairly ok , and the corporate profits continue to grow at 10-15 % , then some time in the future we could have the sensex touching 8000 and then maybe 8900 ...provided there is no major shock to the world economy / indian economy ... anyway how does it matter

well if the market was selling at say 20 times pe , then it would matter as i would start selling ..or if it was selling at say 10-11 times pe (like 2003 ) then it would matter ...as one can buy some very good companies at good prices ...but now we have pockets of overvaluation and to be fair pockets of undervaluation ...so it means more work ..

so i guess if the markets shoots to 8000 + soon or drops to 6000 types , then it is action time ...otherwise it is back to reading annual reports and better off watching the discovery channel

seems like a lot of noise ..but then what can once expect from the most of the financial media !!

Porter's discussion of strategy

Read the next chapter of the book - 'on competiton' . This chapter talks about strategy. Porter has detailed the difference between operational excellence and strategy.

Operational excellence to put it simplistically is doing the various operationally activities as efficiently as possible. For example , a company like Gujarat ambuja uses sea transport to move raw material and finished good and has thus reduced its transportation cost. This is operational excellence.

Strategy, according to porter is the specific choice of activities which a firm decides to perform to create a distinctive position or enduring low cost position and thus achieve competitive advantage. for example , blue star has chosen to focus on the commercial airconditioning market and has built its value chain accordingly (although they are still trying to tap the home a/c market)

In addition, by choosing specific activities and performing them differently and ensuring a fit between them, a firm is able to derive a distinct position and a competitive advantage. Such a position is difficult to replicate as a competitor can duplicate some or all the activities but may not be able to manage the fit between the activities and the tradeoffs between the activities (like blue star may focus more R&D v/s carrier would have to focus on a dealer network )

This book is good to get a deep understanding of strategy and how it can create a sustainable competitive advantage

Porter's discussion of strategy

Read the next chapter of the book - 'on competiton' . This chapter talks about strategy. Porter has detailed the difference between operational excellence and strategy.

Operational excellence to put it simplistically is doing the various operationally activities as efficiently as possible. For example , a company like Gujarat ambuja uses sea transport to move raw material and finished good and has thus reduced its transportation cost. This is operational excellence.

Strategy, according to porter is the specific choice of activities which a firm decides to perform to create a distinctive position or enduring low cost position and thus achieve competitive advantage. for example , blue star has chosen to focus on the commercial airconditioning market and has built its value chain accordingly (although they are still trying to tap the home a/c market)

In addition, by choosing specific activities and performing them differently and ensuring a fit between them, a firm is able to derive a distinct position and a competitive advantage. Such a position is difficult to replicate as a competitor can duplicate some or all the activities but may not be able to manage the fit between the activities and the tradeoffs between the activities (like blue star may focus more R&D v/s carrier would have to focus on a dealer network )

This book is good to get a deep understanding of strategy and how it can create a sustainable competitive advantage

Porter's five forces model and buffet's concept of moat

Buffet refers to the concept of moat or sustainable competitive advantage as one of the most critical factor in determining the returns for a long term investor (in addition to other criteria)

I have been reading porter's book 'on competition' and trying to get a better understanding of how to evaluate a company's competitive advantage for a long term investment.

The five forces model is very helpful in understanding the industry structure and kind of long term returns to expect in an industry. What i was able to 'understand' this time (have read the topic several times ) is that not all the factors are equally important and for an investor it is critical to asses which factors impact the industry and the company more and would influence the long term returns.

More important for a long term investor is to understand, how the five factors of competition will change and determine the future returns.

I am now trying the above exercise for some industries like FMCG/IT services / Banking etc . A good evaluation and insight into the trends would be far more useful that chasing some price targets or trying to predict the next quarter which in munger's words would be 'twaddle'

Porter's five forces model and buffet's concept of moat

Buffet refers to the concept of moat or sustainable competitive advantage as one of the most critical factor in determining the returns for a long term investor (in addition to other criteria)

I have been reading porter's book 'on competition' and trying to get a better understanding of how to evaluate a company's competitive advantage for a long term investment.

The five forces model is very helpful in understanding the industry structure and kind of long term returns to expect in an industry. What i was able to 'understand' this time (have read the topic several times ) is that not all the factors are equally important and for an investor it is critical to asses which factors impact the industry and the company more and would influence the long term returns.

More important for a long term investor is to understand, how the five factors of competition will change and determine the future returns.

I am now trying the above exercise for some industries like FMCG/IT services / Banking etc . A good evaluation and insight into the trends would be far more useful that chasing some price targets or trying to predict the next quarter which in munger's words would be 'twaddle'

Checking on britannia industries - further update

After the last post, i started analysing britannia further. Liked the following in the company then
- An ROE of 25 %
- almost zero debt
- growth in upper single digits
- A p/e of around 13
- Cash / investment on balance sheet of around Rs 100 / share
In addition the company has good brands, good marketing and distribution infrastructure and reasonable economies of scale.

However on doing a bit of detailed check , i realised that almost 40-50 % of the NP is other income from investment activities which makes the operating pe of almost 20-22 ( after

So the company no longer looks very cheap. in addition i cant get my hands around how the management proposes to use the cash flows. Its core business needs very little cash. They are doing buybacks ...but not much ( share count has come down by some 5 - 10 % ). So the company seems to be piling cash and putting it into various investment.

now the above situation although not worrying , does not excite me into putting my money into the company. Most likely i will watch the company for some more time, before doing something

so i guess its time to move the next company !!!

Checking on britannia industries - further update

After the last post, i started analysing britannia further. Liked the following in the company then
- An ROE of 25 %
- almost zero debt
- growth in upper single digits
- A p/e of around 13
- Cash / investment on balance sheet of around Rs 100 / share
In addition the company has good brands, good marketing and distribution infrastructure and reasonable economies of scale.

However on doing a bit of detailed check , i realised that almost 40-50 % of the NP is other income from investment activities which makes the operating pe of almost 20-22 ( after

So the company no longer looks very cheap. in addition i cant get my hands around how the management proposes to use the cash flows. Its core business needs very little cash. They are doing buybacks ...but not much ( share count has come down by some 5 - 10 % ). So the company seems to be piling cash and putting it into various investment.

now the above situation although not worrying , does not excite me into putting my money into the company. Most likely i will watch the company for some more time, before doing something

so i guess its time to move the next company !!!

Analysing Goldiam industries

Heard of this company some time back. I have started looking at it. This company is into Diamond and gold jewelry exports. It's main market is US . It is into designing jewelry, managing the logisitics etc . Some positives

- Good ROE
- Very low fixed assets
- moderate WCAP requirement. Mainly in the Raw material inventory
- 10 % plus Net margins
- No debt
- 40 Rs / share of cash on the balance sheet

Some points which i need to figure
- what is the nature of the 'investments' in the balance sheet.
- what are the long term plans of the company
- nature of competition ?
- How good is the management. The company seems to have good Fresh cash flow. Other than some captial required for WCAP , the FA requirements are very low. So most of the Net profit is free cash for the company. Need to figure out what the company would be doing with the cash.

The biggest pain however is that the company's website does not have their annual report or detail financial results. That is could be real dampener !!

Analysing Goldiam industries

Heard of this company some time back. I have started looking at it. This company is into Diamond and gold jewelry exports. It's main market is US . It is into designing jewelry, managing the logisitics etc . Some positives

- Good ROE
- Very low fixed assets
- moderate WCAP requirement. Mainly in the Raw material inventory
- 10 % plus Net margins
- No debt
- 40 Rs / share of cash on the balance sheet

Some points which i need to figure
- what is the nature of the 'investments' in the balance sheet.
- what are the long term plans of the company
- nature of competition ?
- How good is the management. The company seems to have good Fresh cash flow. Other than some captial required for WCAP , the FA requirements are very low. So most of the Net profit is free cash for the company. Need to figure out what the company would be doing with the cash.

The biggest pain however is that the company's website does not have their annual report or detail financial results. That is could be real dampener !!

Evaluating asian paints

asian paints has been the no.1 paints company for the last 20+ years. This company has returned almost 24% p.a returns since its IPO. Are these returns sustainable ?

Even if the level of returns may not be , i have always felt the company has strong and sustainable competitive advantages like

- A strong distribution network with lockin at key retail dealers through their color world package
- Strong brands in the paints industry like apcolite, apex, gattu etc
- economies of scale in manufacturing, adverstising distribution due to the high market shares (40 %+ )
- good pricing power as the company has been able to sustain margins inspite of raw material price increases
- good management - evident through the track record of managing low WCAP, low debt, sensible accquisitions and good brands and products

In the medium to long term the company should continue to do well in india. The challenge for the company is to port these strengths to their internation operations. That seems to be happening for the time being

Evaluating asian paints

asian paints has been the no.1 paints company for the last 20+ years. This company has returned almost 24% p.a returns since its IPO. Are these returns sustainable ?

Even if the level of returns may not be , i have always felt the company has strong and sustainable competitive advantages like

- A strong distribution network with lockin at key retail dealers through their color world package
- Strong brands in the paints industry like apcolite, apex, gattu etc
- economies of scale in manufacturing, adverstising distribution due to the high market shares (40 %+ )
- good pricing power as the company has been able to sustain margins inspite of raw material price increases
- good management - evident through the track record of managing low WCAP, low debt, sensible accquisitions and good brands and products

In the medium to long term the company should continue to do well in india. The challenge for the company is to port these strengths to their internation operations. That seems to be happening for the time being

Buffet's talk at Notre Dame

I recently came across the transcript of a talk which buffet gave at Notre dame. A few gems from the talk (paraphrased )

'You don't want to buy a dollar bill that's sitting for 50 cents, and it demands positive
capital, and its going to be a dollar bill ten years from now. You want a dollar bill that's
going to compound at 12%'

'A couple of fast tests about how good a business is. First question is "how long does the
management have to think before they decide to raise prices?" You're looking at
marvelous business when you look in the mirror and say "mirror mirror on the wall, how
much should I charge for Coke this fall?" That's a great business. When you say, like we
used to in the textile business, when you get down on your knees, you know you call in
all the priests, rabbis, and everyone else, "just another half cent a yard". Then you get up
and they say "We won't pay it". Its just night and day. You KNOW those businesses. I
mean, if you walk into a drugstore, and you say "I'd like a Hershey bar" and the man says
"I don't' have any Hershey bars, but I've got this unmarked chocolate bar, and its a nickel
cheaper than a Hershey bar" you just go across the street and buy a Hershey bar. THAT is
a good business.'

The ability to raise prices; the ability to differentiate yourself in a REAL way, and a REAL way means you can charge a different price, that makes a great business.

I'd like to talk to you for just a few minutes about what I regard as the most important
thing in investments and also in terms of your career. Because in your career what train
you get on makes a lot of difference. Because frequently, perhaps generally, when people
get out of business school, they don't give enough thought to exactly what sort of train
they're going to get on. And it makes a tremendous difference whether you get involved
in a prosperous company; one that's going to really do well. On balance, you want to go
with a company whose stock is going to be a good investment over the years because
there's going to be much more opportunity; there's going to be more money made, you're
going to (garbled). And if you get involved with some of the businesses I've been
involved with like trading stamps

One is a marvelous, absolutely sensational business, the other one is a terrible business. If
you have a choice between going to work for a wonderful business that is not capital
intensive, and one that is capital intensive, I suggest that you look at the one that is not
capital intensive.

I read all kinds of business publications. I read a lot of industry publications. Coming in
today on the plane (garbled). I'll grab whatever comes in the morning. American Banker
comes every day, so I'll read that. I'll read the Wall Street Journal. Obviously. I'll read
Editor and Publisher, I'll read Broadcasting, I'll read Property Casualty Review, I'll read
Jeffrey Meyer's Beverage Digest. I'll read everything. And I own 100 shares of almost
every stock I can think of just so I know I'll get all the reports. And I carry around
prospectuses and proxy material. Don't read broker's reports. You should be very careful
with those.

- In addition buffet goes the economics of various businesses such as coke, gillette, textile and other commodity business

A must read for an investor.

Buffet's talk at Notre Dame

I recently came across the transcript of a talk which buffet gave at Notre dame. A few gems from the talk (paraphrased )

'You don't want to buy a dollar bill that's sitting for 50 cents, and it demands positive
capital, and its going to be a dollar bill ten years from now. You want a dollar bill that's
going to compound at 12%'

'A couple of fast tests about how good a business is. First question is "how long does the
management have to think before they decide to raise prices?" You're looking at
marvelous business when you look in the mirror and say "mirror mirror on the wall, how
much should I charge for Coke this fall?" That's a great business. When you say, like we
used to in the textile business, when you get down on your knees, you know you call in
all the priests, rabbis, and everyone else, "just another half cent a yard". Then you get up
and they say "We won't pay it". Its just night and day. You KNOW those businesses. I
mean, if you walk into a drugstore, and you say "I'd like a Hershey bar" and the man says
"I don't' have any Hershey bars, but I've got this unmarked chocolate bar, and its a nickel
cheaper than a Hershey bar" you just go across the street and buy a Hershey bar. THAT is
a good business.'

The ability to raise prices; the ability to differentiate yourself in a REAL way, and a REAL way means you can charge a different price, that makes a great business.

I'd like to talk to you for just a few minutes about what I regard as the most important
thing in investments and also in terms of your career. Because in your career what train
you get on makes a lot of difference. Because frequently, perhaps generally, when people
get out of business school, they don't give enough thought to exactly what sort of train
they're going to get on. And it makes a tremendous difference whether you get involved
in a prosperous company; one that's going to really do well. On balance, you want to go
with a company whose stock is going to be a good investment over the years because
there's going to be much more opportunity; there's going to be more money made, you're
going to (garbled). And if you get involved with some of the businesses I've been
involved with like trading stamps

One is a marvelous, absolutely sensational business, the other one is a terrible business. If
you have a choice between going to work for a wonderful business that is not capital
intensive, and one that is capital intensive, I suggest that you look at the one that is not
capital intensive.

I read all kinds of business publications. I read a lot of industry publications. Coming in
today on the plane (garbled). I'll grab whatever comes in the morning. American Banker
comes every day, so I'll read that. I'll read the Wall Street Journal. Obviously. I'll read
Editor and Publisher, I'll read Broadcasting, I'll read Property Casualty Review, I'll read
Jeffrey Meyer's Beverage Digest. I'll read everything. And I own 100 shares of almost
every stock I can think of just so I know I'll get all the reports. And I carry around
prospectuses and proxy material. Don't read broker's reports. You should be very careful
with those.

- In addition buffet goes the economics of various businesses such as coke, gillette, textile and other commodity business

A must read for an investor.

Checking on Britannia industries

Started looking at britannia industries. It is selling for around 14 times FY05 earnings. The bottom line seems to be growing in low teens. There is very low debt on the balance sheet. In addition found the following interesting
- 30 % ROE
- almost 100 Rs / per investment - need to figure out what is this investment ( net of debt )
- Very high asset TO ratios.
- good free cash flow
- slight improvement in the margin (which seem adequate for an FMCG company )
- strong brands , extensive distribution network, good history of new products

What i still need to figure out
- The NP growth is almost to the tune of 30 % for the year. How sustainable is it ?
- Competitive scenario - ITC / HLL entry into brakery business, how will it impact britannia
- How will the management handle the free cash flows ? will they continue share buybacks or make some bad accquisitions or investments ( need to figure out these investments)

One the strangest points is that britannia does not have a website. How can a 1000 crore + company not have a website ? So it is diffcult to get their annual report

Checking on Britannia industries

Started looking at britannia industries. It is selling for around 14 times FY05 earnings. The bottom line seems to be growing in low teens. There is very low debt on the balance sheet. In addition found the following interesting
- 30 % ROE
- almost 100 Rs / per investment - need to figure out what is this investment ( net of debt )
- Very high asset TO ratios.
- good free cash flow
- slight improvement in the margin (which seem adequate for an FMCG company )
- strong brands , extensive distribution network, good history of new products

What i still need to figure out
- The NP growth is almost to the tune of 30 % for the year. How sustainable is it ?
- Competitive scenario - ITC / HLL entry into brakery business, how will it impact britannia
- How will the management handle the free cash flows ? will they continue share buybacks or make some bad accquisitions or investments ( need to figure out these investments)

One the strangest points is that britannia does not have a website. How can a 1000 crore + company not have a website ? So it is diffcult to get their annual report

Business mirage

A few years back i became interested in moser baer. This company seemed (on the face of it ) to be doing very well. It was getting into a product (CD) which was growing fast. The margins were great. The return on capital was high. The valuation looked great.

But then digging deeper, there were a few things which troubled

- was the depreciation enough to take care of the rate of obselence of the Fixed assets in the fast changing memory business
- how would the margins behave when 1) growth slowed down 2) the price deflation continued and accelerated ( memory prices have dropped by factor of 10 in the last 3-4 years )
- the business seems to be needing regular equity infusion for growth (maybe not important if the business is in high growth phase )

I was looking at the latest results and inspite of the topline growth the margins seem to be dropping. In addittion CD/DVD are getting cheaper by the month. so there is going to a constant pressure on margins. End of the day, it is a commodity business where the price of the product just keeps dropping. In addition , any new memory would require new captial equipment and hence more capital ( especially if it is a new technology )

So the business looks profitable , but if one looks closely ,the money coming out has a mirage like feel ...you can see it , but never touch it

Business mirage

A few years back i became interested in moser baer. This company seemed (on the face of it ) to be doing very well. It was getting into a product (CD) which was growing fast. The margins were great. The return on capital was high. The valuation looked great.

But then digging deeper, there were a few things which troubled

- was the depreciation enough to take care of the rate of obselence of the Fixed assets in the fast changing memory business
- how would the margins behave when 1) growth slowed down 2) the price deflation continued and accelerated ( memory prices have dropped by factor of 10 in the last 3-4 years )
- the business seems to be needing regular equity infusion for growth (maybe not important if the business is in high growth phase )

I was looking at the latest results and inspite of the topline growth the margins seem to be dropping. In addittion CD/DVD are getting cheaper by the month. so there is going to a constant pressure on margins. End of the day, it is a commodity business where the price of the product just keeps dropping. In addition , any new memory would require new captial equipment and hence more capital ( especially if it is a new technology )

So the business looks profitable , but if one looks closely ,the money coming out has a mirage like feel ...you can see it , but never touch it

Charlie munger - Wesco meeting 2005

I was reading the transcipts of the meeting on fool.com . There were several comments from munger which really impressed me.

- He referred to a “seamless web of deserved trust” which is necessary to run any large coporation. This is a profound idea. how companies in india work this way ?
- he talked out currency trading being a zero sum game. he would prefer equity where it is not a zero sum game
- he talked about lowering return expectations in the current environment. Annhieser busch could that example. A certain investment with lower return. This is important. Better to be sure of lower returns that optimisitic of fantastic results

Found the Q&A really fantastic.

Charlie munger - Wesco meeting 2005

I was reading the transcipts of the meeting on fool.com . There were several comments from munger which really impressed me.

- He referred to a “seamless web of deserved trust” which is necessary to run any large coporation. This is a profound idea. how companies in india work this way ?
- he talked out currency trading being a zero sum game. he would prefer equity where it is not a zero sum game
- he talked about lowering return expectations in the current environment. Annhieser busch could that example. A certain investment with lower return. This is important. Better to be sure of lower returns that optimisitic of fantastic results

Found the Q&A really fantastic.

Warren Buffett's talk with students at Tuck school of business

I came across a transcript buffett's talk with the students at Tuck school of business. I have pasted the link below. What i found intersting (actually the entire talk was very interesting) were the replies to the following two questions

Q: I have worked in various technologies businesses, but I understand that you do not typically invest in the technology sector. Why is that? How do you view technology as an individual and as an investor?
A: Technology is clearly a boost to business productivity and a driver of better consumer products and the like, so as an individual I have a high appreciation for the power of technology. I have avoided technology sectors as an investor because in general I don't have a solid grasp of what differentiates many technology companies. I don't know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don't overpay for them. Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles.

Q: I worked in the paper and packaging business this past summer and really enjoyed my experience. None of my classmates are interested in the paper business and the company I worked for has not had MBA interns in years. Clearly the paper business has its challenges, but do you see this as an opportunity or a roadblock?
A: Well, you've got it right that the paper business is challenged. High capital intensity, low margins, cyclical. It is a brutal business; no one cares who made the box their Dell computer came shipped in. In general, commodity businesses, even you're the low-cost producer, are difficult. There are generally two recommendations I offer to college and business school graduates. The most important thing about where you work is that you admire/love it. So it sounds like you liked your experience, and that's great. But we come to my second recommendation, which is to get on the right train; that is, moving in the right direction. There's no course in business school called "Getting on the Right Train", but it's really important. You can be an average passenger but if you get on the right train it will carry you a long way. You want to learn from experience, but you want to learn from other people's experience when you can. Managing your career is like investing - the degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.

So makes one think, how will some of the current 'performers' like maruti, tisco, telco and others will perform in the long run. Some of these have high return on equity, but is it sustainable over a complete business cycle

here's the link :http://mba.tuck.dartmouth.edu/pages/clubs/investment/WarrenBuffet.html

Warren Buffett's talk with students at Tuck school of business

I came across a transcript buffett's talk with the students at Tuck school of business. I have pasted the link below. What i found intersting (actually the entire talk was very interesting) were the replies to the following two questions

Q: I have worked in various technologies businesses, but I understand that you do not typically invest in the technology sector. Why is that? How do you view technology as an individual and as an investor?
A: Technology is clearly a boost to business productivity and a driver of better consumer products and the like, so as an individual I have a high appreciation for the power of technology. I have avoided technology sectors as an investor because in general I don't have a solid grasp of what differentiates many technology companies. I don't know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don't overpay for them. Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles.

Q: I worked in the paper and packaging business this past summer and really enjoyed my experience. None of my classmates are interested in the paper business and the company I worked for has not had MBA interns in years. Clearly the paper business has its challenges, but do you see this as an opportunity or a roadblock?
A: Well, you've got it right that the paper business is challenged. High capital intensity, low margins, cyclical. It is a brutal business; no one cares who made the box their Dell computer came shipped in. In general, commodity businesses, even you're the low-cost producer, are difficult. There are generally two recommendations I offer to college and business school graduates. The most important thing about where you work is that you admire/love it. So it sounds like you liked your experience, and that's great. But we come to my second recommendation, which is to get on the right train; that is, moving in the right direction. There's no course in business school called "Getting on the Right Train", but it's really important. You can be an average passenger but if you get on the right train it will carry you a long way. You want to learn from experience, but you want to learn from other people's experience when you can. Managing your career is like investing - the degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.

So makes one think, how will some of the current 'performers' like maruti, tisco, telco and others will perform in the long run. Some of these have high return on equity, but is it sustainable over a complete business cycle

here's the link :http://mba.tuck.dartmouth.edu/pages/clubs/investment/WarrenBuffet.html

BRK buys Annhieser Busch (BUD)

Looks like a typical buffett move. A company with strong brands such as Budwieser, oligopolistic industry , very high Return on equity for the company, strong distribution, a product / business model which will not change (who is going to stop drinking beer ??) and hence predicable.

seems the only disadvantage is the mcap of the company is small so BRK cannot take a very big position

BRK buys Annhieser Busch (BUD)

Looks like a typical buffett move. A company with strong brands such as Budwieser, oligopolistic industry , very high Return on equity for the company, strong distribution, a product / business model which will not change (who is going to stop drinking beer ??) and hence predicable.

seems the only disadvantage is the mcap of the company is small so BRK cannot take a very big position

buffet partnership letter - 1969

just read the 1969 partnership letter. This was the year when buffet shocked his partners by deciding to close his partnership. That was highly unusual for a money manager , especially if the preceeding year had been as good as it had been for buffet and on top of that if the market was in a bull phase. But buffet rationally decided that there were no bargains to be found and it was better to quit the game than set yourself up for failure.
what struck me in the letter were two points
a) buffet in 1969 clears says that considering the situation then, the conventional wisdom that stocks are a better investment than bonds did not hold true and an investor could expect the same level of return from both. As a result an investor would be better off holding bonds instead of stocks. now this is important as most of the people equate buffet with 'buy and hold' which has now become buy and hold ( irrespective of the valuations). This letter clearly shows buffet's thinking in this matter. Hold you stock till one has rational and well thought out reasons that the stock is not grossly overvalued
b) the second point is mainly buffet's recommendation of bill ruane to his investor and his very rational and sound assesment of bill ruane's past performance and ethics. He logically explains and sets the right expectations for his investor and also gives some pointers of how to evaluate a money manager. i found this very enlighting

buffet partnership letter - 1969

just read the 1969 partnership letter. This was the year when buffet shocked his partners by deciding to close his partnership. That was highly unusual for a money manager , especially if the preceeding year had been as good as it had been for buffet and on top of that if the market was in a bull phase. But buffet rationally decided that there were no bargains to be found and it was better to quit the game than set yourself up for failure.
what struck me in the letter were two points
a) buffet in 1969 clears says that considering the situation then, the conventional wisdom that stocks are a better investment than bonds did not hold true and an investor could expect the same level of return from both. As a result an investor would be better off holding bonds instead of stocks. now this is important as most of the people equate buffet with 'buy and hold' which has now become buy and hold ( irrespective of the valuations). This letter clearly shows buffet's thinking in this matter. Hold you stock till one has rational and well thought out reasons that the stock is not grossly overvalued
b) the second point is mainly buffet's recommendation of bill ruane to his investor and his very rational and sound assesment of bill ruane's past performance and ethics. He logically explains and sets the right expectations for his investor and also gives some pointers of how to evaluate a money manager. i found this very enlighting

Blog on creative destruction

came across a new blog on creative destruction . It is about new technology changes happening. will be interesting to follow this blog as technology has a major impact on industries and hence is critical for an investor to understand what changes are happening and how will it impact his investment.

Blog on creative destruction

came across a new blog on creative destruction . It is about new technology changes happening. will be interesting to follow this blog as technology has a major impact on industries and hence is critical for an investor to understand what changes are happening and how will it impact his investment.

Charlie Munger's Biography - 3

I have been reading the biography and found the following thoughts from charlie worth noting

- Adopt a multidisciplinary approach to investing. One should know the major ideas across varied disciplines such as physics, economics, mathematics etc.
- One should read with a purpose in mind and should array the fact with the major models from various disciplines. One should not just gather facts , but these facts should be used to prove or disprove the various mental models
- To be successful in investing and to constantly improve , one should always ask 'why' why' why'
- one should adopt the approach of analyzing a problem for its most fundamental cause ( derived from physics ) which many times is the most simplest reason for the problem. As applied to investing this would mean that one should be able to zero down to the key factors in analyzing a business and focus on them

There is a good anecdote of charlie's discussion with a professor on the dividend policy for companies. It is a fairly long one, but essentially it demonstrates the depth of his thinking and a commonsensical approach to complex issues. Charlie munger's approach to dividend policy is that a company should retain earnings only if it can create more than a dollar of value for every dollar retained. In the discussion charlie also notes that cost of capital should not be a mathematical construct only...rather it should be looked at from opportunity cost point of view.

This is a very simple but powerful idea. for example if i am a very risk averse investor and my opportunity cost is say 6 % ( Bank FD ? ) , then i should discount a stock say by 6 % and to be safe ask for a high margin of safety.
compare this with an investor whose opportunity cost is 15 % ( current return on his portfolio maybe ). Then the investor should discount the stock with 15 % because if this stock cannot cross the 15 % hurdle , then the investor should not invest in the stock

This book contains a lot of gem of ideas

Charlie Munger's Biography - 3

I have been reading the biography and found the following thoughts from charlie worth noting

- Adopt a multidisciplinary approach to investing. One should know the major ideas across varied disciplines such as physics, economics, mathematics etc.
- One should read with a purpose in mind and should array the fact with the major models from various disciplines. One should not just gather facts , but these facts should be used to prove or disprove the various mental models
- To be successful in investing and to constantly improve , one should always ask 'why' why' why'
- one should adopt the approach of analyzing a problem for its most fundamental cause ( derived from physics ) which many times is the most simplest reason for the problem. As applied to investing this would mean that one should be able to zero down to the key factors in analyzing a business and focus on them

There is a good anecdote of charlie's discussion with a professor on the dividend policy for companies. It is a fairly long one, but essentially it demonstrates the depth of his thinking and a commonsensical approach to complex issues. Charlie munger's approach to dividend policy is that a company should retain earnings only if it can create more than a dollar of value for every dollar retained. In the discussion charlie also notes that cost of capital should not be a mathematical construct only...rather it should be looked at from opportunity cost point of view.

This is a very simple but powerful idea. for example if i am a very risk averse investor and my opportunity cost is say 6 % ( Bank FD ? ) , then i should discount a stock say by 6 % and to be safe ask for a high margin of safety.
compare this with an investor whose opportunity cost is 15 % ( current return on his portfolio maybe ). Then the investor should discount the stock with 15 % because if this stock cannot cross the 15 % hurdle , then the investor should not invest in the stock

This book contains a lot of gem of ideas

Buffet : Follow Retained earnings

I read the article below and found it to be very interesting. Makes you think on the importance of free cash flow v/s earnings (on which analysts are fixated).
If free cash flow is important, then what should be the value of companies like - moser baer, some of the cement companies, steel companies which make a lot of money (at least in the upcycle ) , but need buckets of cash to invest in new plant, R&D , working capital etc.
One would see analyst getting excited with the huge earnings growth and the low PE. I would temper my expectations because
a) earnings are high as demand and pricing is strong
b) PE are low in a cyclical stock during an upcycle
c) earnings are ignoring the impact of Capex ( which is high in these companies)

article taken from wallstraits.com
BUFFETT: FOLLOW RETAINED EARNINGS
In the 1934 edition of Security Analysis, Ben Graham introduces his readers to Edgar Lawrence Smith, who in 1924 wrote a book on investing entitled Common Stocks As Long-Term Investments (Macmillan, 1924). Smith put forth the idea that common stocks should in theory grow in value as long as they earn more than they pay out in dividends, with the retained earnings adding to the company's net worth. In a representative case, a business would earn a 12% return on equity, pay out 8% in dividends, and retain 4% to surplus. If it did this every year, the stock value should increase with its book value, at a rate of 4% compounded annually.
With this in mind, Smith explains the growth of asset values through the reinvestment of a corporation's surplus earnings in the expansion of its operations. Graham, however, warns us that not all companies can reinvest their surplus earnings in expansion of their business enterprise. Most, in fact, must spend their retained earnings on simply maintaining the status quo through the replenishment of expiring plants and equipment. Predicting future earnings of any enterprise can be very difficult and given to great variance. This means that making a future prediction of earnings can be fraught with potential disaster.
Warren Buffett concluded that Graham's assessment of Smith's analysis was correct for a great majority of businesses. However, he found that under close analysis some companies were an exception to the rule. Buffett found that these exceptions over a long period of time were able to profitably employ retained earnings at rates of return considerably above the average. In short, Buffett found a few businesses that didn't need to spend their retained earnings upgrading plant and equipment or on new-product development, but could spend their earnings on acquiring new businesses or expanding the operations of their already profitable core enterprises.
We want to invest in businesses that can retain their earnings and haven't committed themselves to paying out a high percentage of their profits as dividends. This way the shareholders can benefit from the full effects of compounding, which is the secret to getting really rich.
Capital Spending for Maintenance vs Growth
One of our key stock screens for our WS8 Portfolio, as our Intelli-Vest members are well aware, is to think carefully about how management allocates capital. How much is paid as cash dividends? How much is required to be invested in maintaining or replacing plants and equipment just to maintain current levels of sales and profits? How much is spent on expanding production to create new business, new sales and new profits? To understand the investment merit of any business, we must be able to answer these capital allocation questions.
Making money is one thing, retaining it is another, and not having to spend it on maintaining current operations is still another. Buffett found that in order for Smith's theory to work he had to invest in companies that (1) made money, (2) could retain it, and (3) didn't have to spend those retained earnings on maintaining current operations.
Buffett discovered that the capital requirements of a business may be so demanding that the company ends up having little or no money left to increase the fortunes of its shareholders.
Let me give you an example. If a business makes $1 million a year, and retains every cent, but every other year it has to spend $2 million replacing plant and equipment that were expended in production, the company really isn't making any money at all; the business is only breaking even. The perfect business to Buffett would be one that earns $2 million and spends zero on replacing plant and equipment.
Buffett used to teach this lesson when he conducted a night class on investing at the University of Nebraska at Omaha Business School (image enrollment demand if he still taught such a class today!). He would lecture on the capital requirements of a company and the effect that it had on shareholder fortunes. He would do this by showing his students the past operating records of AT&T and of Thomson Publishing.
Buffett would demonstrate that AT&T, before it was broken up, was a poor investment for shareholders, because though it made lots of money, it had to plow even more money than it made into capital requirements -- research and development and infrastructure. The way that AT&T financed the expansion was to issue more shares and to sell lots of debt.
But a company like Thomson Publishing, which owned a bunch of newspapers in one-newspaper towns, made lots of money for its shareholders. This was because once a newspaper had built its printinig infrastructure it had little in the way of capital needs to such away the shareholders' money. This meant that there was lots of cash to spend on buying more newspapers to make its shareholders richer.
The lesson is that one business grew in value without requiring more infusions of capital and the other business grew only because of the additional capital that was invested in it.
Warren Buffett decided he wanted to search for a few businesses businesses that seldom required replacement of plant and equipment and didn't require ongoing expensive research and development. He wanted a few companies that produced a product that never became obsolete and was simple to produce and had little competition: the only newspaper in town, a candy bar manufacturer, a chewing gum company, a razor blade producer, a soda pop business, a brewery -- basic businesses with products that people never want to see essentially change. Predictable product, predictable profit. And he found a few, and he became the richest man on the planet!

Buffet : Follow Retained earnings

I read the article below and found it to be very interesting. Makes you think on the importance of free cash flow v/s earnings (on which analysts are fixated).
If free cash flow is important, then what should be the value of companies like - moser baer, some of the cement companies, steel companies which make a lot of money (at least in the upcycle ) , but need buckets of cash to invest in new plant, R&D , working capital etc.
One would see analyst getting excited with the huge earnings growth and the low PE. I would temper my expectations because
a) earnings are high as demand and pricing is strong
b) PE are low in a cyclical stock during an upcycle
c) earnings are ignoring the impact of Capex ( which is high in these companies)

article taken from wallstraits.com
BUFFETT: FOLLOW RETAINED EARNINGS
In the 1934 edition of Security Analysis, Ben Graham introduces his readers to Edgar Lawrence Smith, who in 1924 wrote a book on investing entitled Common Stocks As Long-Term Investments (Macmillan, 1924). Smith put forth the idea that common stocks should in theory grow in value as long as they earn more than they pay out in dividends, with the retained earnings adding to the company's net worth. In a representative case, a business would earn a 12% return on equity, pay out 8% in dividends, and retain 4% to surplus. If it did this every year, the stock value should increase with its book value, at a rate of 4% compounded annually.
With this in mind, Smith explains the growth of asset values through the reinvestment of a corporation's surplus earnings in the expansion of its operations. Graham, however, warns us that not all companies can reinvest their surplus earnings in expansion of their business enterprise. Most, in fact, must spend their retained earnings on simply maintaining the status quo through the replenishment of expiring plants and equipment. Predicting future earnings of any enterprise can be very difficult and given to great variance. This means that making a future prediction of earnings can be fraught with potential disaster.
Warren Buffett concluded that Graham's assessment of Smith's analysis was correct for a great majority of businesses. However, he found that under close analysis some companies were an exception to the rule. Buffett found that these exceptions over a long period of time were able to profitably employ retained earnings at rates of return considerably above the average. In short, Buffett found a few businesses that didn't need to spend their retained earnings upgrading plant and equipment or on new-product development, but could spend their earnings on acquiring new businesses or expanding the operations of their already profitable core enterprises.
We want to invest in businesses that can retain their earnings and haven't committed themselves to paying out a high percentage of their profits as dividends. This way the shareholders can benefit from the full effects of compounding, which is the secret to getting really rich.
Capital Spending for Maintenance vs Growth
One of our key stock screens for our WS8 Portfolio, as our Intelli-Vest members are well aware, is to think carefully about how management allocates capital. How much is paid as cash dividends? How much is required to be invested in maintaining or replacing plants and equipment just to maintain current levels of sales and profits? How much is spent on expanding production to create new business, new sales and new profits? To understand the investment merit of any business, we must be able to answer these capital allocation questions.
Making money is one thing, retaining it is another, and not having to spend it on maintaining current operations is still another. Buffett found that in order for Smith's theory to work he had to invest in companies that (1) made money, (2) could retain it, and (3) didn't have to spend those retained earnings on maintaining current operations.
Buffett discovered that the capital requirements of a business may be so demanding that the company ends up having little or no money left to increase the fortunes of its shareholders.
Let me give you an example. If a business makes $1 million a year, and retains every cent, but every other year it has to spend $2 million replacing plant and equipment that were expended in production, the company really isn't making any money at all; the business is only breaking even. The perfect business to Buffett would be one that earns $2 million and spends zero on replacing plant and equipment.
Buffett used to teach this lesson when he conducted a night class on investing at the University of Nebraska at Omaha Business School (image enrollment demand if he still taught such a class today!). He would lecture on the capital requirements of a company and the effect that it had on shareholder fortunes. He would do this by showing his students the past operating records of AT&T and of Thomson Publishing.
Buffett would demonstrate that AT&T, before it was broken up, was a poor investment for shareholders, because though it made lots of money, it had to plow even more money than it made into capital requirements -- research and development and infrastructure. The way that AT&T financed the expansion was to issue more shares and to sell lots of debt.
But a company like Thomson Publishing, which owned a bunch of newspapers in one-newspaper towns, made lots of money for its shareholders. This was because once a newspaper had built its printinig infrastructure it had little in the way of capital needs to such away the shareholders' money. This meant that there was lots of cash to spend on buying more newspapers to make its shareholders richer.
The lesson is that one business grew in value without requiring more infusions of capital and the other business grew only because of the additional capital that was invested in it.
Warren Buffett decided he wanted to search for a few businesses businesses that seldom required replacement of plant and equipment and didn't require ongoing expensive research and development. He wanted a few companies that produced a product that never became obsolete and was simple to produce and had little competition: the only newspaper in town, a candy bar manufacturer, a chewing gum company, a razor blade producer, a soda pop business, a brewery -- basic businesses with products that people never want to see essentially change. Predictable product, predictable profit. And he found a few, and he became the richest man on the planet!

Dollar depreciation will stress test the Indian offshore model

Most of the Indian IT/ ITES companies have good margins and high return on capital. They quote a fairly high PE's.
If the reports are to be believed, a dollar depreciation is a high probability event. When will it happen and whether it would be rapid or slow and measured is the question. Most of the economist / financial commentators agree that dollar has only one direction to go in the long run and that is down. Now even the asian central bankers who are biggest buyers of US treasury seem to be acting on that.

Estimates show that a +1% appreciation of dollar would cause the margins to drop by 0.5 % ( or more ...i don't have the exact number ).

So hypothetically speaking if the appreciation is 10 % ( a probable outcome ) , then margins could drop by 5 - 10 %. Add to that wage inflation in india and increased competition , the Offshore business would come under severe stress.

This is not to say that the offshore trend will stop or the companies will go bankrupt or something, rather indian companies will have to learn to live with lower margins

This could see some weak companies getting washed out and the current darling could see their high multiples which the stock market gives them, being reduced.

So add a reduction in margins and drop in multiples and that gives you a picture of what could happen to the stock price.

Dollar depreciation will stress test the Indian offshore model

Most of the Indian IT/ ITES companies have good margins and high return on capital. They quote a fairly high PE's.
If the reports are to be believed, a dollar depreciation is a high probability event. When will it happen and whether it would be rapid or slow and measured is the question. Most of the economist / financial commentators agree that dollar has only one direction to go in the long run and that is down. Now even the asian central bankers who are biggest buyers of US treasury seem to be acting on that.

Estimates show that a +1% appreciation of dollar would cause the margins to drop by 0.5 % ( or more ...i don't have the exact number ).

So hypothetically speaking if the appreciation is 10 % ( a probable outcome ) , then margins could drop by 5 - 10 %. Add to that wage inflation in india and increased competition , the Offshore business would come under severe stress.

This is not to say that the offshore trend will stop or the companies will go bankrupt or something, rather indian companies will have to learn to live with lower margins

This could see some weak companies getting washed out and the current darling could see their high multiples which the stock market gives them, being reduced.

So add a reduction in margins and drop in multiples and that gives you a picture of what could happen to the stock price.

Charlie Munger's biograhy - 2

I have completed almost 100 pages of the biography. Several nuggets of wisdom and learnings come through. One thing which strikes is the honesty and fairness with which charlie has always conducted his affairs.

There is an incident in the book. Guerin ( if i have not got his name wrong ) joined charlie as a partner in the munger , wheeler and Co. ( which was an investment partneship modelled after the buffet partnership ). To start with guerin was not too rich when he joined munger in this partnership.
During the course of their dealing , they accquired a chemical company ( as an aside that too is an intersting tale of how they accquired it ). some time later , guerin wanted to cash out his portion of the deal. He valued it as 200000 usd and would have been happy with it. Munger remarked that he was wrong and it was closer to 300000 usd. His remark was to the effect 'if you think hard about it , you will agree with me because you are smart and i am right'

As you go through the book, you realise that munger has always been fair and honest in all his dealing and has never tried to cut corners. This is admirable because there are enough examples of rich people who have cut corners. But buffet and munger are people who have achieved their success with out cutting corners. To use a quote from the book , which munger uses 'To avoid envy from other , you should deserve your success'

Charlie Munger's biograhy - 2

I have completed almost 100 pages of the biography. Several nuggets of wisdom and learnings come through. One thing which strikes is the honesty and fairness with which charlie has always conducted his affairs.

There is an incident in the book. Guerin ( if i have not got his name wrong ) joined charlie as a partner in the munger , wheeler and Co. ( which was an investment partneship modelled after the buffet partnership ). To start with guerin was not too rich when he joined munger in this partnership.
During the course of their dealing , they accquired a chemical company ( as an aside that too is an intersting tale of how they accquired it ). some time later , guerin wanted to cash out his portion of the deal. He valued it as 200000 usd and would have been happy with it. Munger remarked that he was wrong and it was closer to 300000 usd. His remark was to the effect 'if you think hard about it , you will agree with me because you are smart and i am right'

As you go through the book, you realise that munger has always been fair and honest in all his dealing and has never tried to cut corners. This is admirable because there are enough examples of rich people who have cut corners. But buffet and munger are people who have achieved their success with out cutting corners. To use a quote from the book , which munger uses 'To avoid envy from other , you should deserve your success'

Charlie munger's biography

i have been reading this biography for the last few days. Doing it for the second time. I have always admired charlie munger for his wisdom and the perspective he brings to investing, business and life in general.

i have read and re-read his talks on - mental models : multipdiscplinary approach to investing, his talk on 24 type of human misjudgement and several others. These talks are phenomenal and has opened an entirely new way of thinking for me .

I can say that along with warren buffet, charlie munger has influenced me a lot.

A few learnings from charlie biography for me have been
- act honorably / honestly . Treat people fairly. You never know when you will meet them again
- money is means to an end. It helps you to achieve financial freedom so that you can do what you love. money should not be an end in itself
- be rational. Rationality is more important than IQ
- keep an open mind . Always be inquisite . learning is a life long process
- learn from as many disciplines as possible. As charlie say - To a man with a hammer , every problem is like a nail. Learn the key models , and try to use them to solve problems
- reading should be with a purpose in mind. It should help one in building one's knowledge

i could go on and on. frankly enjoying myself reading this biography for the second. i am also looking forward to charlie's new book which is coming out in may.

if anyone is interested in his speeches , let me know. would be glad to share it. not sure if i can post them here .

Charlie munger's biography

i have been reading this biography for the last few days. Doing it for the second time. I have always admired charlie munger for his wisdom and the perspective he brings to investing, business and life in general.

i have read and re-read his talks on - mental models : multipdiscplinary approach to investing, his talk on 24 type of human misjudgement and several others. These talks are phenomenal and has opened an entirely new way of thinking for me .

I can say that along with warren buffet, charlie munger has influenced me a lot.

A few learnings from charlie biography for me have been
- act honorably / honestly . Treat people fairly. You never know when you will meet them again
- money is means to an end. It helps you to achieve financial freedom so that you can do what you love. money should not be an end in itself
- be rational. Rationality is more important than IQ
- keep an open mind . Always be inquisite . learning is a life long process
- learn from as many disciplines as possible. As charlie say - To a man with a hammer , every problem is like a nail. Learn the key models , and try to use them to solve problems
- reading should be with a purpose in mind. It should help one in building one's knowledge

i could go on and on. frankly enjoying myself reading this biography for the second. i am also looking forward to charlie's new book which is coming out in may.

if anyone is interested in his speeches , let me know. would be glad to share it. not sure if i can post them here .

The rise of LN Mittal - lessons for investors

LN mittal has been in limelight for quite some. He is now in limelight for being the third richest person in the world. everyone seems to be focussing on his networth. I am more interested in how he got there

i have read about him in the past and read about him in an article in the economic times. His key skill is in identifying bankrupt , beaten down steel plants / companies . He is able to value this company correctly and acquire it at that price ( in may cases the owner or goverment is desperate to offload it ). He then proceeds to turn it around and make it profitable.

By applying this strategy across the globe in various situations, LN mittal has been able to build an empire , cut cost and initiate consolidation in this industry.

The following comes to mind on seeing this happen

- A company in the commodity industry can have a sustainable competetive advantages from two sources - superior management and enduring low cost position ( which is also dependent on a superior management )

- Consolidation in a commodity industry improves the profitability of the top firms as it gives them better pricing power.

- mittal steel it seems also is vertically integrated in ore and coke ( two key raw materials ). So with horizontal consolidation, he is also vertically consolidating. This gives him better pricing power.

- He is expanding into new geography and trying to closer to demand ( China / India etc ). This will give him flexibility in the future to manage demand fluctuations. Other companies across the world are restricted to some geography and so if the demand drops in that region , they are in deep trouble.

What is happening also highlights another point of the importance of a good management for commodity industry. Bad managements in the steel industry have run their companies aground and have been in red for quite some time. Recent demand surge and firm prices have given them a lease of life ( and they are promptly started increasing capacity ). Lets see how they manage the next downturn.

LN mittal's story has been a live case study for me see how a superior management can make a difference even in a commodity industry ( and that too as bad as steel ). vice versa a commodity industry cannot tolerate bad management ( a franchise company like FMCG can for some time )

That he is an indian is beside the point. The sad part is we are happy that an 'indian' has made it !! sad because , he could not have achieved it in india ...he had to leave the country to achieve his ambitions. Hopefully in the future we will not force such people to look outside the country and would provide the atmosphere within the country

The rise of LN Mittal - lessons for investors

LN mittal has been in limelight for quite some. He is now in limelight for being the third richest person in the world. everyone seems to be focussing on his networth. I am more interested in how he got there

i have read about him in the past and read about him in an article in the economic times. His key skill is in identifying bankrupt , beaten down steel plants / companies . He is able to value this company correctly and acquire it at that price ( in may cases the owner or goverment is desperate to offload it ). He then proceeds to turn it around and make it profitable.

By applying this strategy across the globe in various situations, LN mittal has been able to build an empire , cut cost and initiate consolidation in this industry.

The following comes to mind on seeing this happen

- A company in the commodity industry can have a sustainable competetive advantages from two sources - superior management and enduring low cost position ( which is also dependent on a superior management )

- Consolidation in a commodity industry improves the profitability of the top firms as it gives them better pricing power.

- mittal steel it seems also is vertically integrated in ore and coke ( two key raw materials ). So with horizontal consolidation, he is also vertically consolidating. This gives him better pricing power.

- He is expanding into new geography and trying to closer to demand ( China / India etc ). This will give him flexibility in the future to manage demand fluctuations. Other companies across the world are restricted to some geography and so if the demand drops in that region , they are in deep trouble.

What is happening also highlights another point of the importance of a good management for commodity industry. Bad managements in the steel industry have run their companies aground and have been in red for quite some time. Recent demand surge and firm prices have given them a lease of life ( and they are promptly started increasing capacity ). Lets see how they manage the next downturn.

LN mittal's story has been a live case study for me see how a superior management can make a difference even in a commodity industry ( and that too as bad as steel ). vice versa a commodity industry cannot tolerate bad management ( a franchise company like FMCG can for some time )

That he is an indian is beside the point. The sad part is we are happy that an 'indian' has made it !! sad because , he could not have achieved it in india ...he had to leave the country to achieve his ambitions. Hopefully in the future we will not force such people to look outside the country and would provide the atmosphere within the country

The Warren buffet partnership letters - Protecting the down side

One of the things warren buffet repeats across his letter is his focus on limiting the downside to his portfolio. He considers a performance of -10% v/s -20 % of Dow better than a +20% v/s +10% of the dow. This clearly demonstrates the fact (which he has pointed out too ) that the portfolio was unconventional but also had a lower risk.
Warren buffet had put this approach in the inital letters and made it one of the key objectives in managing the portfolio.
The above approach bring to mind the quote from buffet -
rule 1 - Dont lose money
Rule 2 - dont forget rule 1

This is a very powerful approach to manage a portfolio. If one is convinced that the stock market would do well over the long term , and can limit the downside of the portfolio during bear markets , then as even buffet acknowldeged ,even if one cannot match the market on the upside , one should come out fine.

The Warren buffet partnership letters - Protecting the down side

One of the things warren buffet repeats across his letter is his focus on limiting the downside to his portfolio. He considers a performance of -10% v/s -20 % of Dow better than a +20% v/s +10% of the dow. This clearly demonstrates the fact (which he has pointed out too ) that the portfolio was unconventional but also had a lower risk.
Warren buffet had put this approach in the inital letters and made it one of the key objectives in managing the portfolio.
The above approach bring to mind the quote from buffet -
rule 1 - Dont lose money
Rule 2 - dont forget rule 1

This is a very powerful approach to manage a portfolio. If one is convinced that the stock market would do well over the long term , and can limit the downside of the portfolio during bear markets , then as even buffet acknowldeged ,even if one cannot match the market on the upside , one should come out fine.

The Warren buffet partnership letters - part II

I have been reading the letters further and have read till the 1965 letter. After initial formal / fact driven style of letters, the latter ones are more informative and one can see the buffet humor in those letter coming through. These letters are closer to the BRK letter from the chairman and i was quite surprised to find example, quotes which buffet has repeated later through his BRK letters.



He discusses the 'joys of compounding' in the latter letters and stresses on the importance of compounding at a higher than average rate and the impact on one's terminal networth.



There is a section on taxes (which has appeared later in the BRK letters) which discusses the importance of focussing on the post tax returns and focussing on investing based on this measure. Buffet points out to the folly of trying to minimise taxes at the cost of the post tax returns. He stresses on focussing on post tax returns and if the course of action enables the investor to save taxes , then thats added benefit. however the 'means' should not be confused with the 'end'.



In addition buffet discusses about a workout (arbitrage) situation as an example. These workout enable buffet to post a great performance during the down markets. The second category is 'generals' which is mainly the undervalued stocks and this was the highest proportion of the partnership most of the times.



The third portion is the control situation and buffet has discussed about dempster mills in detail and how he was able to extract value out of it . The point he makes several times is the focus on buying at a such a good price that a mediocore sale is good enough. He even states that buying is 90 % of the task and selling the balance 10%. This is illuminating !!!



i am enjoying reading the letters

The Warren buffet partnership letters - part II

I have been reading the letters further and have read till the 1965 letter. After initial formal / fact driven style of letters, the latter ones are more informative and one can see the buffet humor in those letter coming through. These letters are closer to the BRK letter from the chairman and i was quite surprised to find example, quotes which buffet has repeated later through his BRK letters.



He discusses the 'joys of compounding' in the latter letters and stresses on the importance of compounding at a higher than average rate and the impact on one's terminal networth.



There is a section on taxes (which has appeared later in the BRK letters) which discusses the importance of focussing on the post tax returns and focussing on investing based on this measure. Buffet points out to the folly of trying to minimise taxes at the cost of the post tax returns. He stresses on focussing on post tax returns and if the course of action enables the investor to save taxes , then thats added benefit. however the 'means' should not be confused with the 'end'.



In addition buffet discusses about a workout (arbitrage) situation as an example. These workout enable buffet to post a great performance during the down markets. The second category is 'generals' which is mainly the undervalued stocks and this was the highest proportion of the partnership most of the times.



The third portion is the control situation and buffet has discussed about dempster mills in detail and how he was able to extract value out of it . The point he makes several times is the focus on buying at a such a good price that a mediocore sale is good enough. He even states that buying is 90 % of the task and selling the balance 10%. This is illuminating !!!



i am enjoying reading the letters

Evolution of a Genius - The Warren buffet partnership letters

I have been reading the buffet partnership letters. One of the board members from the MSN - BRK boards emailed the letters to me. I had been looking out for these letters as they cannot be downloaded directly.



I knew of the superb performance of the partnership and was keen on going through these letters as they would give me an idea of how warren buffet has evolved into the greatest investors of all time



What struck me was the clarity of thought, a regular and clear communication of the partnership's mode of operation and clear setting of expectations from the partnership .



There are a few things which struck me as warren buffet's core operating belief which one can see in the later years in his BRK letters



- Warren buffet stresses repeatedly on the long term performance (and long term focus) v/s a short term focus

- circle of competence : focussed on investing in undervalued stocks , workouts - arbitrage , and control situation. These themes evolved into Berkshire hathaway ( control ) and the equity portfolio ( undervalued stocks )

- refusal to predict the stock market and trying to profit from it - warren buffet talks about it right from the time he started the partnership.



As i read the letters from 1957 onwards , i could see the letters increase in length (maybe warren buffet wanted to share his mode of working with the partners as the partnership grew), more discussion on his thought process ( and thenbuffet jokes / wit appearing more often )



i am still halfway through the letters and finding them very interesting

Evolution of a Genius - The Warren buffet partnership letters

I have been reading the buffet partnership letters. One of the board members from the MSN - BRK boards emailed the letters to me. I had been looking out for these letters as they cannot be downloaded directly.



I knew of the superb performance of the partnership and was keen on going through these letters as they would give me an idea of how warren buffet has evolved into the greatest investors of all time



What struck me was the clarity of thought, a regular and clear communication of the partnership's mode of operation and clear setting of expectations from the partnership .



There are a few things which struck me as warren buffet's core operating belief which one can see in the later years in his BRK letters



- Warren buffet stresses repeatedly on the long term performance (and long term focus) v/s a short term focus

- circle of competence : focussed on investing in undervalued stocks , workouts - arbitrage , and control situation. These themes evolved into Berkshire hathaway ( control ) and the equity portfolio ( undervalued stocks )

- refusal to predict the stock market and trying to profit from it - warren buffet talks about it right from the time he started the partnership.



As i read the letters from 1957 onwards , i could see the letters increase in length (maybe warren buffet wanted to share his mode of working with the partners as the partnership grew), more discussion on his thought process ( and thenbuffet jokes / wit appearing more often )



i am still halfway through the letters and finding them very interesting

Quarterly results season is upon us

Initial analysis shows good performance from major companies. Major companies continue to do well. The profit growth is good. Return on capital is good. This is inspite of supply side inflation due to rising oil and commodity prices, high competition.



The market at 6500 does not look too expensive , provided corporate india is able maintain its return on capital (read efficiency), inflation remains moderate and the goverment doesnt do something stupid.



Most of the news channel / website are talking of record highs in the stock market. This is clearly rear mirror view. The absolute level of the stock market does not matter. The current levels should be analysed keeping in mind the following factors



1) return on capital for corporate india - currently 20% plus

2) inflation - moderate inspite of oil prices

3) robust demand



All in all the overall corporate performance gives me confidence to hold on to my positions , maybe add to a few too

Quarterly results season is upon us

Initial analysis shows good performance from major companies. Major companies continue to do well. The profit growth is good. Return on capital is good. This is inspite of supply side inflation due to rising oil and commodity prices, high competition.



The market at 6500 does not look too expensive , provided corporate india is able maintain its return on capital (read efficiency), inflation remains moderate and the goverment doesnt do something stupid.



Most of the news channel / website are talking of record highs in the stock market. This is clearly rear mirror view. The absolute level of the stock market does not matter. The current levels should be analysed keeping in mind the following factors



1) return on capital for corporate india - currently 20% plus

2) inflation - moderate inspite of oil prices

3) robust demand



All in all the overall corporate performance gives me confidence to hold on to my positions , maybe add to a few too