tag:blogger.com,1999:blog-78518892024-03-05T02:05:40.221-08:00Intelligent InvestorI try to write here about some of my investing experiences in India and abroad. I also review a few investment related books I read along the way and comment on news items that catch my eye. The title of the blog is not intended as a boast, but borrowed from the title of a famous book on investing written more than 50 years ago by Benjamin Graham.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.comBlogger68125tag:blogger.com,1999:blog-7851889.post-29555134452770328532013-10-01T23:52:00.000-07:002013-10-01T23:52:42.568-07:00FY 2013<div dir="ltr" style="text-align: left;" trbidi="on">
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I noticed this bank in India early 2012 - it was trading at around 5-6% dividend yield and decent asset quality trading at about a third below FY11 book value. It had a decent ROA of over 1%, ok with provisioning. So that's where the proceeds from the Vikas WSP sale went last year - I ended up selling when it approached FY13 book value early 2013 because I didn't like where the industry was overall. It seems like a good call - not just that the realized return was over 13% including dividends; it is now trading at around half the book value - thereby avoiding a close to 50% notional loss. Ever since I started investing in 1991 (which was in a bank), I have looked at banks in general as a reflection of the Indian economy - this hypothesis has proven right time and again. As long as the banking culture doesn't change drastically, the stocks in this industry seem like good picks at times of economic troubles. It helps to have a conservative regulator.</div>
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Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-92164500056638530412012-09-16T05:35:00.000-07:002012-09-16T05:35:46.785-07:00Earlier this year..<div dir="ltr" style="text-align: left;" trbidi="on">
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Foraging in the food and processed food industry brought me to Vikas WSP earlier in 2010. By my metrics, it was undervalued to begin with back then. The company was netting about a billion and trading at around two times that. I started buying at around 25, with fair value assessment of over 50. By December 2011, it dropped to 9.36 and I kept buying averaging at 13. By March 2012, it had moved to over 60 and it was time to close out the position.</div>
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The thesis was food to begin with - Vikas is into guar gum products - interestingly, the products are sold also to oil drillers. The gum is used to ease drilling process and prevent fluid loss. The market for product was good and kept getting better with more exploration activities.</div>
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The supply for the industry is almost limitless. The company is based in Rajasthan which has abundant guar - you see trees with guar on the road-sides. The manufacturing process was refined over the years. There is an active futures/forwards market as well for both guar and gum. The by products are also saleable.</div>
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The company was planning for organic guar production to reinvest the gains from the new business line. The strategy is brilliant in the long-term - Vikas bought land which wasn't returning anything during the organic conversion process. My thesis didn't hinge on it - but explained the low capital efficiency. The land was the downside protection for my investment. There were also some governance issues of the past that was mostly done away with.</div>
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Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1tag:blogger.com,1999:blog-7851889.post-91144479502629411632011-10-03T11:05:00.000-07:002011-10-04T04:59:24.875-07:00Berkshire D(St)eal with Bank of America & Buyback<div dir="ltr" style="text-align: left;" trbidi="on"><span class="ccbnTxt"><b>Bank of America Deal</b> </span><br />
<span class="ccbnTxt">"Bank of America Corporation announced today that it reached an agreement to sell 50,000 shares of Cumulative Perpetual Preferred Stock with a liquidation value of $100,000 per share to Berkshire Hathaway, Inc. in a private offering. The preferred stock has a dividend of 6 percent per annum, payable in equal quarterly installments, and is redeemable by the company at any time at a 5 percent premium. <br />
In conjunction with this agreement, Berkshire Hathaway will also receive warrants to purchase 700,000,000 shares of Bank of America common stock at an exercise price of $7.142857 per share. The warrants may be exercised in whole or in part at any time, and from time to time, during the 10-year period following the closing date of the transaction. The aggregate purchase price to be received by Bank of America for the preferred stock and warrants is $5 billion in cash."<br />
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If you want to replicate the deal on Sep 30, you could buy 214.13 million preferred in the market with a coupon of 8.125% and trading at 23.35. You would get a higher dividend than Berkshire - about 135 Million higher. Hypothetically, you could buy the BAC-WTA at 2.71 per warrant to be exercised at $13.3 with this excess. You can buy about 50 Million warrants in a year.<br />
<br />
To match, you will buy for 14 years to reach the 700 Million assuming the price remains the same throughout. <br />
And, your break-even point is about $9 higher than Berkshire's - a difference of $6.3 Billion.</span><br />
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</span><br />
<span class="ccbnTxt"></span><br />
<span class="ccbnTxt">Now that's what I call a d(st)eal.</span><br />
<br />
<b><span class="ccbnTxt">Buy Back of Shares </span></b><br />
<span class="ccbnTxt">Long-time shareholders of Berkshire had to rub their eyes twice to convince themselves that they were not dreaming/in a nightmare when this news hit the wires. <a href="http://www.berkshirehathaway.com/news/sep2611.pdf">(http://www.berkshirehathaway.com/news/sep2611.pdf).</a></span><br />
<span class="ccbnTxt">The two key criteria is:-</span><br />
<span class="ccbnTxt">1.at prices no higher than a 10% premium over the then-current book value of the shares; and</span><br />
<span class="ccbnTxt">2. repurchases will not be made if they would reduce Berkshire’s consolidated cash equivalent holdings below $20 billion</span><br />
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</span><br />
<span class="ccbnTxt">Buffett's position outlined in the 1999 letter offers amazing clarity on the subject.</span><br />
<span class="ccbnTxt"><a href="http://www.berkshirehathaway.com/letters/1999htm.html">http://www.berkshirehathaway.com/letters/1999htm.html</a> </span><br />
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</span><br />
<strong>"Share Repurchases</strong> <br />
<br />
<br />
<i> Recently, a number of shareholders have suggested to us that Berkshire repurchase its shares. Usually the requests were rationally based, but a few leaned on spurious logic. </i><br />
<i> There is only one combination of facts that makes it advisable for a company to repurchase its shares: First, the company has available funds -- cash plus sensible borrowing capacity -- beyond the near-term needs of the business and, second, finds its stock selling in the market below its intrinsic value, conservatively-calculated. To this we add a caveat: Shareholders should have been supplied all the information they need for estimating that value. Otherwise, insiders could take advantage of their uninformed partners and buy out their interests at a fraction of true worth. We have, on rare occasions, seen that happen. Usually, of course, chicanery is employed to drive stock prices up, not down. </i><br />
<i> The business "needs" that I speak of are of two kinds: First, expenditures that a company must make to maintain its competitive position (e.g., the remodeling of stores at Helzberg's) and, second, optional outlays, aimed at business growth, that management expects will produce more than a dollar of value for each dollar spent (R. C. Willey's expansion into Idaho). </i><br />
<i> When available funds exceed needs of those kinds, a company with a growth-oriented shareholder population can buy new businesses or repurchase shares. If a company's stock is selling well below intrinsic value, repurchases usually make the most sense. In the mid-1970s, the wisdom of making these was virtually screaming at managements, but few responded. In most cases, those that did made their owners much wealthier than if alternative courses of action had been pursued. Indeed, during the 1970s (and, spasmodically, for some years thereafter) we searched for companies that were large repurchasers of their shares. This often was a tipoff that the company was both undervalued and run by a shareholder-oriented management. </i><br />
<i> That day is past. Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price. The shareholder who chooses to sell today, of course, is benefitted by any buyer, whatever his origin or motives. But the <em>continuing</em> shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around. </i><br />
<i> Charlie and I admit that we feel confident in estimating intrinsic value for only a portion of traded equities and then only when we employ a range of values, rather than some pseudo-precise figure. Nevertheless, it appears to us that many companies now making repurchases are overpaying departing shareholders at the expense of those who stay. In defense of those companies, I would say that it is natural for CEOs to be optimistic about their own businesses. They also know a whole lot more about them than I do. However, I can't help but feel that too often today's repurchases are dictated by management's desire to "show confidence" or be in fashion rather than by a desire to enhance per-share value. </i><br />
<i> Sometimes, too, companies say they are repurchasing shares to offset the shares issued when stock options granted at much lower prices are exercised. This "buy high, sell low" strategy is one many unfortunate investors have employed -- but never intentionally! Managements, however, seem to follow this perverse activity very cheerfully. </i><br />
<i> Of course, both option grants and repurchases may make sense -- but if that's the case, it's not because the two activities are logically related. Rationally, a company's decision to repurchase shares or to issue them should stand on its own feet. Just because stock has been issued to satisfy options -- or for any other reason -- does not mean that stock should be repurchased at a price above intrinsic value. Correspondingly, a stock that sells well below intrinsic value should be repurchased whether or not stock has previously been issued (or may be because of outstanding options). </i><br />
<i> You should be aware that, at certain times in the past, I have erred in <em>not</em> making repurchases. My appraisal of Berkshire's value was then too conservative or I was too enthused about some alternative use of funds. We have therefore missed some opportunities -- though Berkshire's trading volume at these points was too light for us to have done much buying, which means that the gain in our per-share value would have been minimal. (A repurchase of, say, 2% of a company's shares at a 25% discount from per-share intrinsic value produces only a ½% gain in that value at most -- and even less if the funds could alternatively have been deployed in value-building moves.) </i><br />
<i> Some of the letters we've received clearly imply that the writer is unconcerned about intrinsic value considerations but instead wants us to trumpet an intention to repurchase so that the stock will rise (or quit going down). If the writer wants to sell tomorrow, his thinking makes sense -- for him! -- but if he intends to hold, he should instead hope the stock falls and trades in enough volume for us to buy a lot of it. That's the only way a repurchase program can have any real benefit for a continuing shareholder. </i><br />
<i> We will not repurchase shares unless we believe Berkshire stock is selling well below intrinsic value, conservatively calculated. Nor will we attempt to talk the stock up or down. (Neither publicly or privately have I ever told anyone to buy or sell Berkshire shares.) Instead we will give all shareholders -- and potential shareholders -- the same valuation-related information we would wish to have if our positions were reversed. </i><br />
<i> Recently, when the A shares fell below $45,000, we considered making repurchases. We decided, however, to delay buying, if indeed we elect to do <em>any</em>, until shareholders have had the chance to review this report. If we do find that repurchases make sense, we will only rarely place bids on the New York Stock Exchange ("NYSE"). Instead, we will respond to offers made directly to us at or below the NYSE bid. If you wish to offer stock, have your broker call Mark Millard at 402-346-1400. When a trade occurs, the broker can either record it in the "third market" or on the NYSE. We will favor purchase of the B shares if they are selling at more than a 2% discount to the A. We will not engage in transactions involving fewer than 10 shares of A or 50 shares of B. </i><br />
<i> Please be clear about one point: We will <em>never</em> make purchases with the intention of stemming a decline in Berkshire's price. Rather we will make them if and when we believe that they represent an attractive use of the Company's money. At best, repurchases are likely to have only a very minor effect on the future rate of gain in our stock's intrinsic value."</i><br />
<span class="ccbnTxt"></span></div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1tag:blogger.com,1999:blog-7851889.post-75945694469894122552011-08-13T12:46:00.000-07:002011-08-17T01:00:23.504-07:00Great Analysis<div dir="ltr" style="text-align: left;" trbidi="on">I read a couple of great works of analysis the last month. <br />
<br />
1. Alex Dalmady's writings on Allen Stanford's bank from 2009. Here are a few links:-<br />
<a href="http://dalmady.blogspot.com/2009/02/get-your-fresh-duck-here-el-pato.html">Alex Dalmady's Blog </a><br />
<a href="http://www.laht.com/article.asp?CategoryId=12396&ArticleId=328278%20">Latin American Herald Tribune reproducing the write-up </a><br />
<a href="http://blogs.salon.com/0001330/2009/02/09.html">The Devil's Excrement summarizing the writing </a><br />
<a href="http://www.scribd.com/doc/12737973/0901Duck-Tales">Scribd Download of Veneconomy Article</a>. (Link is down-loadable and very moody)<br />
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2. Prof. Sanjay Bakshi's detailed write-up on how to analyse an investment. <br />
<h1 class="title" style="font-family: inherit;"><span style="font-size: small;"><a href="http://fundooprofessor.wordpress.com/2011/04/24/vantage_point/">8 Points of View For Evaluating a Stock</a></span></h1><h1 class="title" style="font-family: inherit;"><span style="font-size: small;"> </span></h1><br />
</div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com2tag:blogger.com,1999:blog-7851889.post-18047762262996437192011-07-19T04:27:00.000-07:002011-10-04T05:12:43.519-07:00The Abominable No Man bows out<div dir="ltr" style="text-align: left;" trbidi="on">Alongside the Berkshire meeting, Wesco Financials' meetings are a treat for the hardcore addicts. This year was the last of the Wesco meetings where you can see the Abominable No Man Charlie Munger dishing it out for the value investors without abandon. Due to the pending merger between Berkshire and Wesco, this year was the last such meeting. Though, Mr. Munger continues to be the Vice Chairman of Berkshire Hathaway - it will not be the same.<br />
I didn't make it to the meeting. However, there was good coverage - paid and unpaid.<br />
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<a href="http://www.scribd.com/doc/59308172/Conversation-With-Charlie-Munger">Notes from Innoculated Investor</a><br />
<a href="http://www.sancaptrustco.com/documents/7.19.11NotestoMunger.pdf">Pat Dorsey's Notes</a><br />
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</div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1tag:blogger.com,1999:blog-7851889.post-37460129629573450752011-04-09T23:08:00.000-07:002011-04-10T01:03:44.878-07:00US Dollar, Indian Rupee and Gold<div dir="ltr" style="text-align: left;" trbidi="on">You would have come across an article or two saying everything is wrong with US Dollars, unless you were hiding in a cave. I am trying to look at what could be wrong, fundamentally.<br />
<b> </b><br />
<b>Indian Rupee</b> <br />
<div style="text-align: justify;">Reserve Bank of India has in circulation Rs.8,420,409,791,000 worth of notes (8.420 trillion or 8.420 Lakh Crores). There is Rs. 485,772,152,000 (0.485 Trillion or 485 Thousand Crore) worth of gold against it. That is about 5% of Rupee in circulation is backed by gold and all of the gold is held in India. </div><div style="text-align: justify;">1. It means that about 95% of the currency backing is foreign securities. So, if you are holding a Rs. 1000 note in your hand - Rs.50 worth of that is in gold and Rs.950 is in foreign securities. </div><div style="text-align: justify;">2. It also means that notes in circulation is about Rs.8,000 per Indian vs. per capita income of about Rs. 44,000. Considering that Rupee doesn't move much outside the border, it gives you a rough idea of how fast the currency changes hands.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Now let us talk about the 950 of the 1000. RBI is permitted to hold such securities in the currency of any IMF member country or in securities issued by IMF, World Bank or BIS. Here's the key condition - the maturity of these cannot be beyond a period of 10 years. Also, the Gold in the 50 of the 1000 - 85% of that should be held in India.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Now, here's another factoid. About 60+% of world currency reserves are held in USD. So if we assume that 2/3rds of the Rupee is USD since it is backed by foreign securities, we have about Rs. 670 of that Rs. 1,000 is USD. So, when you are holding that Rs.1,000 note, you are actually holding about USD 15 plus about 1/40th of a gram of Gold and the rest in others. (That should be enough to pause before you spend, to think of what you are exchanging really.)</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">I admit that the reserves are actively managed by RBI by people who think about this risk and nothing else. Still, if want to achieve just a 50% cover in Gold, it would mean about 10,000 years of 200 tonne lot of Gold buying or Gold price appreciating that many times. Both look like wishful thinking. US Dollar, therefore, is a cause for concern to us even if we are earning and investing in India. So, if USD is worthless, around 70% of INR is worthless.</div><div style="text-align: justify;"></div><div style="text-align: justify;"><i>(Source for data: Reserve Bank of India)</i></div><div style="text-align: justify;"><i> </i></div><div style="text-align: justify;"><b>US Dollars</b></div><div style="text-align: justify;">Compare this scenario against US Dollars (Feb 2011) - </div><div style="text-align: justify;">Currency - 928.7 Billion</div><div style="text-align: justify;">Reserve Assets - 134.7 Billion.</div><div style="text-align: justify;">Value of reserve Assets hide a very important picture - Gold stock valued at 11 Billion is valued at $42.22 per Troy Ounce. The value of gold in the market per troy ounce in Feb. was between $1,340 and $1,440. Revaluing gold would add another 350 Billion to the reserves. Still we have 485 Billion Vs 929 Billion of currency issued. To achieve parity, Gold would have to go up double from this (no, I am not making a prediction).</div><div style="text-align: justify;"><i>(Source for data: Federal Reserve and Kitco for gold prices)</i></div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;">Look at it this way, every time USD loses value, INR loses about 70% of that in relation. Now, this is only a comparison of two currencies - against their reserves. Now, if you take into account interest rate parity adjusted for inflation, growth trajectory of two economies and keeping in mind everything in the forex market moves relative to one another, you can draw your own conclusions on where we are headed.</div><div style="text-align: justify;"><br />
</div><div style="text-align: justify;"></div><div style="text-align: justify;">How is it all relevant? At the end of the day, when you invest in India everything is denominated in Rupees and settled in Rupees. This is an attempt to get to the bottom of that Rupee.</div></div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com13tag:blogger.com,1999:blog-7851889.post-50119139922223862392010-11-23T23:12:00.001-08:002010-12-05T20:38:53.891-08:00Efficient Markets?!!!!Company A: -<br />
Prior Year Net Rs.3.5 Billion.<br />
Current 9 Months Net: Rs. 0.5 Billion.<br />
Networth - Rs. 24 Billion <br />
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Market Cap at BSE: Rs. 206 Billion.<br />
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Are markets efficient? You tell me.<br />
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In this context, I think two quotes are appropriate:-<br />
"Price is what you pay, value is what you get" - Buffett<br />
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"The lin I draw in the sand is that if an asset has cashflow or the likelihood of cashflow in the near term and is not purely dependent on what a future buyer might pay, then it's an investment. If an asset's value is totally dependent on the amount a future buyer might pay, then its purchase is speculation." - Seth Klarman at the CFA Institute Annual Conference 2010.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1tag:blogger.com,1999:blog-7851889.post-4335711532327815922010-10-15T23:42:00.000-07:002010-12-05T20:37:58.265-08:00Power of IncentivesWe got a call from a banker who works for one of the "Supermarket" banks. The point of his call was to find out if we needed any "products" they could offer. We talked about our needs - pension for old age being one of them. I told him we planned to settle in India for our retirement and asked him to quote something appropriate to cover our baseline expenses then. He said we would need to start a relationship with him by opening an offshore account (forget that the reason for his call was that we HAD a relationship onshore, if you can call India that) before he can talk further about his products. It was a fair request - considering the account was a no minimum balance dollar account. So far good.<br />
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This all happened middle of June, we opened the account and the bank mailed us their paperwork. We were scheduled to go on a long planned travel the last week of June and had started our leave of absence. Now, we started getting more frequent calls to update the form, follow-up and what not. Fine, we have a wonderful banker who cares for our needs and wants to close fast or so we thought. Then he started insisting that we start the pension plan relationship right away, send the forms. He was very forthcoming about it - it would be counted towards his June quarter's quota. We got repeated calls right till the afternoon of the day we were leaving even after telling him that we don't want to rush to the product and would take our time deciding.<br />
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A couple of weeks later, after returning from the trip, I studied the proposal at my leisure. Here were a few things that stood out:-<br />
1. The bank had nothing to do with the product. It was just a middle man. The application said it was from an insurer we were talking to for other products. Since I am in the habit of reading smallest print first, it said that the Supermarket bank was only a distributor for the product.<br />
2. The product was in US Dollars. My future requirement is in Indian Rupees. In addition to the credit risk of the underwriter, I am being asked to take on a currency risk here for a product that is supposed to protect me at a time of my need.<br />
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Now, the banker I met is a fine person. The Supermarket bank is an excellent bank and has one of the best customer service in India. What is wrong with the above story?<br />
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Look at it from the banker's point of view - admittedly he was chasing his quarterly quota. He probably has higher incentive for making a number or disincentive for not making it. This incentive turns a Relationship Manager to a pesky Telemarketer. Even if you put a very intelligent person at this job, his incentives put him in a difficult spot.<br />
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The Bank - Its traditional business of borrowing deposits and lending it out has lost its strategic reasone de etre. It became a supermarket offering its "space" selling wares of others. Nothing wrong with it - just that managing a banking relationship and retailing business are two different ball games. I am wondering about how banks measure the impact of chasing fees on their ability to operate as traditional banks. Does anyone do that?<br />
Besides, here's something unique about the financial product retailing - when a retail product turns out to be poorly manufactured or just plain poor fit, you can return it and get 100% of your money back. Not so for most of your insurance policies, pension plans or mutual fund products. The other distinction is akin to buying a voltage stabilizer. When there's a power surge or a voltage drop, it is there to protect your precious TV and refrigerator from long term damage. If a voltage stabilizer doesn't work, you lost two products at one go and you may have a claim on the stabilizer manufacturer for the two.<br />
Look at it from the management of a the bank - you keep on piling up commissions and fees from cross selling the product until something goes wrong. Either the management may have retired or fled the ship, or then blame the underwriter or asset management company for the defective product and rinse and repeat.<br />
This sets up incentives for the Supermarket bank to sell potentially defective products. In my view, the bank is lending out its good name (whatever is left of it, that is) at a very cheap price for some short term profit boost.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-19503589829673070262010-08-28T22:22:00.000-07:002010-09-06T22:23:25.390-07:00Where are the customers' yachts?Have you had a book with you that you meant to read for quite sometime and never managed to get around to it, but it still came back to haunt you every once in a while? "Where Are the Customers' Yachts? or A Good Hard Look at Wall Street" by Fred Schwed Jr. was one of them. If you asked Fred who?, you especially should continue reading.<br />
I came across this book some years ago, around the same time I read about Ben Graham and Warren Buffett and didn't think much about it. Later this book popped up in a Buffett recommendation. On autopilot, it went to my Amazon wishlist and ended up being bought with a few others when the opportunity arose. And it sat on my bookshelf for sometime.<br />
Recently, I was going to travel and wasn't really looking forward to it due to the connections and the quality of the immigration/customs service and the airport. I wanted a read that would keep me sane during those 12 odd hours. "Where Are the Customers' Yachts?" was staring right at me. Oh!! what an interesting plane ride it was? (If you saw a passenger in a Jet Airways flight chuckling to himself reading a book, you now have the mystery unraveled.) The book provokes thought at the same time it makes you smile. After reading this, I walked away with a much better understanding of the French expression, <i><b style="font-weight: normal;">Plus ça change, plus c'est la même chose </b></i><b style="font-weight: normal;">(the more things change, the more they remain the same). (Next time you meet me, don't ask me to pronounce the expression unless you have come with low expectations; I mean lower than the real low.)</b><br />
The title of the book comes from an almost apocryphal sounding story of <a href="http://en.wikipedia.org/wiki/William_R._Travers" linkindex="18">William R. Travers</a> who after admiring the rows of beautiful boats owned by the rich brokers by the shores of Newport, Rhode Island is reported to have asked wryly "Where are the customers' yachts?"<br />
Now to the Fred who?. Fred Schwed Jr. was a professional trader who after having lost a bundle in the 1929 crash quit the Street for good. He is also the author of "Wacky, the Small Boy" a children's book. (After meeting some of the characters in the Street, I should probably say that Fred wrote about his audience in 1940 after writing the children's book in 1939).<br />
After reading the chapter on Short Selling, you would think that the book was written just recently and not 70 years ago. <br />
<br />
If you thought Ben Graham has the best distinction between speculation and investment - read this <i>"Speculation is an effort, probably unsuccessful, to turn a little money into a lot.</i><br />
<i>Investing is an effort, which should be successful, to prevent a lot of money from becoming a little."</i><br />
<br />
If you are the kind that invests in mutual funds or takes the help of an investment adviser, read this:-<br />
"<i>Some of these other gentry allocate the funds between themselves and their clients in the ancient classic manner, i.e. at the close of the day's business they take all the money and throw it up in the air. Everything that sticks to the ceiling belongs to the clients."</i> <br />
(Reminds me of how <a href="http://en.wikipedia.org/wiki/Lucy_Ricardo" linkindex="19">Lucy</a> decides which bills to pay.) <br />
<br />
Here's another mystery solved regarding pay in Wall Street:-<br />
"<i>...how much do they pay these fellows? Since this subject is nobody's business, everybody is interested. As the man said after he had had the subject of relativity explained to him in a few unsuccinct phrases: "And from this Mr.Einstein makes a living?"</i><br />
<br />
On forecasts:-<br />
"<i>Concerning these predictions, we are about to ask:</i><br />
<i>1. Are they pretty good? </i><br />
<i>2. Are they slightly good?</i><br />
<i>3. Are they any damn good at all?</i><br />
<i>4. How do they compare with tomorrow's weather prediction you read in the paper?</i><br />
<i>5. How do they compare with the tipster horse race services?"</i><br />
<br />
Quoting Major Lawrence Lee Bazley (L.L.B.) Angas on Charting:-<br />
"<i>All of these theories are true part of the time; none of the all the time. They are, therefore, dangerous, though sometimes useful."</i><br />
<br />
On margin trading:-<br />
<i>"Like all of life's rich emotional experiences, the full flavor of losing important money cannot be conveyed through literature. Art cannot convey to an inexperienced girl what it is truly like to be a wife and mother. There are certain things that cannot be adequately explained to a virgin either by words or pictures."</i> (Mind you, this was written way before internet and the smut that gets offered through it)<i> </i><br />
<br />
Further about the customer who is in for the ride on margin:-<br />
<i>"I have heard an old-line broker describe this common occurrence. He explained, "They got on the Twentieth Century Limited at Grand Central Station. They only intended to ride as far as 125th Street, where they would get off and visit Grandma. But the first thing they knew they were making seventy miles an hour through Fort Wayne, Indiana.""</i><br />
<br />
Quoting <a href="http://dailyreckoning.com/the-magical-investment-corporation/" linkindex="20">John W.Pope</a>'s letter to his investors:-<br />
"<i>His statement of condition as of Dec 31, 1930 was extremely simple. All the money was in cash and call loans, which, strangely enough, was precisely where it should have been. This statement also contained an incredible sentiment (I quote from memory), to this effect:</i><br />
<i>"It is the belief of the management of this corporation that a diversified list of carefully selected securities, held over a period of time, will </i><b>not</b><i> increase in value." </i>"<br />
<br />
Here's an aptitude test from the book:-<br />
<i>"1. Do you perceive quite clearly what is the objection to playing a roulette wheel that has two zeros on it? (If not, don't bother to be a financier; be a roulette player.) </i><br />
<i>2. If a man has tossed a coin "heads" four times in succession, which do you think he is more likely to toss the fifth time, heads or tails? (If you think he is more likely to toss either heads or tails, look into the interior-decorating game. You have that instinctive type of mentality which might do very well at that.) </i><br />
<i>3. When do you consider that it is a good purchase to draw one card to an insight straight? (Answer - when you are playing for soybeans.) </i><br />
<i>4. If you have answered #3 correctly, do you find that when you are actually playing poker for money, you can always resist making that draw? (If not, stay home with your money and start practicing being a miser.) </i><br />
<i>5. If a stock which is not paying any dividend is split two for one, how much good does that do the stockholder? (If you think it does him any real good, come down and join our sales department but steer clear of our trading department.) </i><br />
<i>6. What is the primary purpose of a business enterprise? This questions is specifically for young men considering entering the banking field, where they will have a constant parade of business propositions passing before them, and they will be required to plump for a few of them and say "no" to the others. The answer is elementary and obvious: the primary purpose of a business is to make money. Almost anyone knows this with the top part of his brain. But there are only a few valuable young men who also know this all up and down their spinal column. </i><br />
<i>Most businessmen imagine that they are in business to make money, and that this is their chief reason for being in business, but more often than not they are gently kidding themselves. There are so many other things which are actually more attractive. Some of them are: to make a fine product or to render a remarkable service, to give employment to revolutionize an industry, to make oneself famous, or at least to supply oneself with material for conversation in the evening. I have observed businessmen whose chief pre-occupation was to try to prove conclusively to their competitors that they themselves were smart and that their competitors were damn fools - an effort which gives a certain amount of mental satisfaction but no money at all. I have even seen some whose chief interest lay in proving this point to their partners. </i><br />
<i>So give yourself a real good mark if you know that a business should make money, but only if you really know it."</i> <br />
<br />
<i> </i>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1tag:blogger.com,1999:blog-7851889.post-62144474312130987012010-05-20T22:11:00.000-07:002010-05-20T22:11:05.068-07:002010 Berkshire MeetingGoing to Omaha and Pasadena every May had become a fixture in my life for the past few years. I decided to break with this little tradition starting this year. Initial thoughts were driven by the difficulty of managing two mostly personal trips to the other side of the world in a gap of one month (the second for other unavoidable reasons). Then, came the news that Berkshire was splitting the B shares and the final nail in the coffin was that the canceled international shareholders meet and greet. The last one is where people from outside North America got to meet the man himself. Besides, over the years the quality of the crowd has been deteriorating, that is, in their seriousness towards Berkshire business. Now, it has ceased to be less of a convention and more of a vacation spot.<br />
<br />
My decision cannot be equated with a full blown-out divorce, it is more like a couple deciding that they need to spend time apart. And, the big significant difference is this relationship is one sided commitment from my side.<br />
<br />
Twitter and live coverage by <a href="http://www.omaha.com/article/20100501/MONEY/100509986#more-live-coverage-from-saturday" linkindex="237">Omaha World Herald</a> and <a href="http://news.morningstar.com/articlenet/article.aspx?id=335481" linkindex="238">Morningstar</a> made up for the physical distance. Other bloggers have done an excellent job of note taking and posting them. I am posting some links at the end here.<br />
<br />
First some excerpts from the annual report for 2009 and the letter to shareholders:-<br />
<b> </b><br />
<b>Dividends</b><br />
Following a question in 2009 meeting, he added an explanation to the Principle 9 of the Owner's Manual. (For the uninitiated, Berkshire codified its Owner-related principles in 1996 and it addresses the agency problems inherent in a corporate form of organisation where the manager's interests and the owner-shareholder's interests are not aligned. It is a must read for any management/finance professional).<br />
<br />
"We feel noble intentions should be checked periodically against results. We test the wisdom of retaining earnings by assessing whether retention, over time, delivers shareholders at least $1 of market value for each $1 retained. To date, this test has been met. We will continue to apply it on a five-year rolling basis. As our net worth grows, it is more difficult to use retained earnings wisely.<br />
I should have written the “five-year rolling basis” sentence differently, an error I didn’t realize until I received a question about this subject at the 2009 annual meeting.<br />
When the stock market has declined sharply over a five-year stretch, our market-price premium to book value has sometimes shrunk. And when that happens, we fail the test as I improperly formulated it. In fact, we fell far short as early as 1971-75, well before I wrote this principle in 1983.<br />
The five-year test should be: (1) during the period did our book-value gain exceed the performance of the S&P; and (2) did our stock consistently sell at a premium to book, meaning that every $1 of retained earnings was always worth more than $1? If these tests are met, retaining earnings has made sense."<br />
<br />
Earlier it said:<br />
"We continue to pass the test, but the challenges of doing so have grown more difficult. If we reach the point that we can’t create extra value by retaining earnings, we will pay them out and let our shareholders deploy the funds." And, the question last year was, since you failed this test, will you pay a dividend?<br />
<br />
From this year's meeting - "Buffett is asked about whether Berskshire would issue a dividend. Buffett says every dollar left in the business has produced something over a $1.30. Buffett says Berkshire has met the test of finding profitability. Berkshire has made every $1 of retained earnings make more than $1. Buffett says if the company does that over time, it will continue to retain earnings. "<br />
<br />
<b>Investment Strategy</b><br />
<br />
"In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite willing to enter businesses that regularly require large capital expenditures. We expect only that these businesses have reasonable expectations of earning decent returns on the incremental sums they invest. If our expectations are met – and we believe that they will be – Berkshire’s ever-growing collection of good to great businesses should produce above-average, though certainly not spectacular, returns in the decades ahead."<br />
<br />
<b>Tweets:-</b><br />
<i>when premiums are wrong, go play golf. (too many ppl confuse action w progress/value)</i><br />
<i>Buffett: events around world of last few years makes me more bearish on all currencies than before<br />
We have always had the same potential, it's our perception of what is possible that changes.<br />
Buffett: lending money (buying bonds) boils down to "are they going to broke or not", equity q is much more complicated <br />
Buffett: I knew enough to lend them money, but didn't have enough info to buy the equity [in Harley]<br />
LOL! Buffett: I kinda like a business where guys tattoo your name on their chest [re: Harley]<br />
"If you wanted to bet on higher or lower inflation, you'd want to vote on higher. Maybe a lot higher."<br />
Buffett: your money can be inflated away, but your talent can't be inflated away--regardless of the currency<br />
Buffett: if inflation gets going, it will be hard to stop; trend is not destiny, we have power to control our future <br />
"Talent is the perfect asset to deal with any monetary condition (inflation/deflation). Charlie and I will have to rely on money."</i><br />
<i>When it comes to managing money, Charlie Munger just said: "Take the high road. It's far less crowded."<br />
"I think we're in for a long period for where the ordinary result is not going to be very exciting." -- Munger. <br />
Charlie: equities are the best of a bad lot of available opportunities. In for a long period where ordinary result not exciting <br />
Charlie: fundamental theory is pragmatism because it suits our natures and because it seems to work better <br />
"It's not about how big your circle of competence is but rather on knowing where the perimeter is" -Buffett<br />
Buffett says the pressure of extraordinarily low interest rates on asset prices is hard to overestimate<br />
Buffet on 0.10% interest rates: If you invested at 0.10% when Columbus landed...you would have almost doubled your money by now! <br />
Speculators do no harm if they are bubbles on a steady stream of enterprise - WB quoting Keynes <br />
...but it will be ill-done if enterprise becomes a bubble on a whirlpool of speculation - Buffett quoting Keynes <br />
Munger says stats on gov't debt are misleading because only includes bonds outstanding and not unfunded obligations<br />
"if you want to give away all of your money to charity, it's a great tax dodge." - Warren Buffet<br />
Munger: If BRK would create make-work jobs to increase human hope, the effect over time would be to reduce human hope<br />
"If you believe in creative destruction...as we do in this country..you better also have a social safety net" -Buffett<br />
Munger: The politicians are not behaving better now that the newspapers are weakening. We're going to miss the newspapers.<br />
Munger: It can be hard in India because of gov't regulations. This could lead to faster growth in other emerging markets like China </i><br />
<br />
<b>On buying a rail road:-</b><br />
<br />
"Our BNSF operation, it should be noted, has certain important economic characteristics that resemble those of our electric utilities. In both cases we provide fundamental services that are, and will remain, essential to the economic well-being of our customers, the communities we serve, and indeed the nation. Both will require heavy investment that greatly exceeds depreciation allowances for decades to come. Both must also plan far ahead to satisfy demand that is expected to outstrip the needs of the past. Finally, both require wise regulators who will provide certainty about allowable returns so that we can confidently make the huge investments required to maintain, replace and expand the plant.<br />
We see a “social compact” existing between the public and our railroad business, just as is the case with our utilities. If either side shirks its obligations, both sides will inevitably suffer. Therefore, both parties to the compact should – and we believe will – understand the benefit of behaving in a way that encourages good behavior by the other. It is inconceivable that our country will realize anything close to its full economic potential without its possessing first-class electricity and railroad systems. We will do our part to see that they exist.<br />
In the future, BNSF results will be included in this “regulated utility” section. Aside from the two businesses having similar underlying economic characteristics, both are logical users of substantial amounts of debt that is not guaranteed by Berkshire. Both will retain most of their earnings. Both will earn and invest large sums in good times or bad, though the railroad will display the greater cyclicality. Overall, we expect this regulated sector to deliver significantly increased earnings over time, albeit at the cost of our investing many tens – yes, tens – of billions of dollars of incremental equity capital."<br />
<b> </b><br />
<b>Managing and Evaluating Managerial Performance</b><br />
<br />
Buffett clarifies Berkshire's measurement metrics for evaluating managerial performance. "From the start, Charlie and I have believed in having a rational and unbending standard for measuring what we have – or have not – accomplished. That keeps us from the temptation of seeing where the arrow of performance lands and then painting the bull’s eye around it."<br />
Then he guides you through the maze of seemingly complex thought process to arrive at a simple solution that is typical of Buffett. S&P 500 is the benchmark; Berkshire's share price can be influenced by market forces that are beyond the control of the management; intrinsic value of Berkshire is hard to calculate; so we use book value though it understates. Then he goes to show you what if they had calculated performance using market value. And the conclusion, "..our defense has been better than our offense, and that’s likely to continue." and that "our performance advantage has shrunk dramatically as our size has grown, an unpleasant trend that is certain to continue." and promises better-than-average results due to the outstanding businesses and truly great managers.<br />
<br />
Reiterating the managerial excellence is a little movie that is played with music to <a href="http://en.wikipedia.org/wiki/My_Favorite_Things_%28song%29" linkindex="239">"My Favorite Things" from The Sound of Music</a>. And comments like "If Charlie, I and Ajit are ever in a sinking boat – and you can only save one of us – swim to Ajit." (talking about Ajit Jain of National Indemnity)<br />
<br />
From the meeting (courtesy Omaha World Herald's Joe Ruff)- "Buffett is asked about compensation of its managers. Buffett says Berkshire never uses a compensation consultation. Buffett says it is hard to determine one standard for Berkshire's diverse companies. Buffett says some businesses are easier to manage than others, some use more capital expenses than others. Buffett says he tries to figure out how best to pay people based on the economic characteristics of their industries. Buffett says it does not take that much time and it is not rocket science. But he says it does take some understanding of the characteristics of the different companies. And he says it requires some interaction with the managers, with them and Buffett sharing ideas about what they really are contributing to the company. Buffett says Berkshire pays some big money, with manager making 10s of millions annually. And we have managers if we suffer they suffer. But Buffett says everyone wants to be treated fairly. Buffett says the important thing is to have the salaries reached understood by the managers. Buffett says managers really need to widen their moats compared with other companies in their industries. Munger says it is amazing how simple it has been, how little time it has taken and how well it has worked."<br />
<br />
"Buffett is asked about having managers who misbehave ethically or legally. Would Berkshire intervene then? Buffett says yes, sure. Buffett says he wants to hear about problems. Buffett says there is an internal function in Berkshire that anything that comes in relating to alleged bad behavior it will be investigated by Berkshire. Everyone once in awhile there have been important transgressions that have come to me. We encourage that. Buffett says a letter goes out every two years, a page and half long. Buffett says in the letter it talks about having more money than it needs, but reputation is important. Buffett says a new line says if reason you are doing something because the next guy is doing it, that is not good enough. Buffett says there has to be a reason better than that. Buffett says Berkshire will have more trouble than it has in the past because it is so much bigger than it used to be. But Buffett says he and Munger want to hear about it fast if there is trouble."<br />
<br />
<b>Tweets:-</b><br />
<i>Buffett on compensation: It's not rocket science but requires an interaction w/ managers: what do they actually add 2 the company?</i><br />
<i>Buffett: what I pay managers for is to widen the moat<br />
Buffett on compensation: You still have to treat people fair, even if they don't need the money. </i><br />
<i>"Lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless."<br />
"When something is found or alleged: Get it right, get it fast, get it out, get it over. But get it right is number one".WB</i><br />
<i>There are many CEOs in america I would like to see gone and Loyd Blankfein is not one of them, says Charlie</i><br />
<b> </b><br />
<b>All I want to know is where I’m going to die, so I’ll never go there</b><br />
<br />
I would love to see another annual report with the following appropriate counsel on avoiding trouble - "Long ago, Charlie laid out his strongest ambition: “All I want to know is where I’m going to die, so I’ll never go there.” That bit of wisdom was inspired by Jacobi, the great Prussian mathematician, who counseled “Invert, always invert” as an aid to solving difficult problems. (I can report as well that this inversion approach works on a less lofty level: Sing a country song in reverse, and you will quickly recover your car, house and wife.)" <br />
<br />
What won't Berkshire do?<br />
- avoid businesses whose future they cannot evaluate;<br />
- never be dependent on the kindness of strangers;<br />
- subsidiaries operate on their own - "would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly – or not at all – because of a stifling bureaucracy."...."Charlie and I will limit ourselves to allocating capital, controlling enterprise risk, choosing managers and setting their compensation."<br />
- make no attempt to woo Wall Street. "want partners who join us at Berkshire because they wish to make a long-term investment in a business they themselves understand and because it’s one that follows policies with which they concur."<br />
<br />
Tweets:- <br />
<i>""Success is avoiding stupidity" Charlie Munger ;) "</i><br />
<i>"You give human beings the flexibility to do absolutely anything they damn well please, they will go plum crazy" - CM </i><br />
<i>"You want to create a structure that minimizes the weaknesses of human behavior" -Buffett</i><br />
<br />
<b>Taking responsibility:</b><br />
<br />
"Last year your chairman closed the book on a very expensive business fiasco entirely of his own making." and goes on to talk about the credit cards to GEICO customers (I was one of them, who closed the card when they decided to charge the fees.)<br />
"GEICO’s managers, it should be emphasized, were never enthusiastic about my idea. They warned me that instead of getting the cream of GEICO’s customers we would get the – – – – – well, let’s call it the non-cream. I subtly indicated that I was older and wiser.<br />
I was just older."<br />
<br />
"The major problem for Berkshire last year was NetJets, an aviation operation that offers fractional ownership of jets. Over the years, it has been enormously successful in establishing itself as the premier company in its industry, with the value of its fleet far exceeding that of its three major competitors combined. Overall, our dominance in the field remains unchallenged."<br />
"NetJets’ business operation, however, has been another story. In the eleven years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million. It’s clear that I failed you in letting NetJets descend into this condition. But, luckily, I have been bailed out. Dave Sokol, the enormously talented builder and operator of MidAmerican Energy, became CEO of NetJets in August. His leadership has been transforming"<br />
"Most important, none of the changes wrought by Dave have in any way undercut the top-of-the-line standards for safety and service that Rich Santulli, NetJets’ previous CEO and the father of the fractionalownership industry, insisted upon. Dave and I have the strongest possible personal interest in maintaining these standards because we and our families use NetJets for almost all of our flying, as do many of our directors and managers. None of us are assigned special planes nor crews. We receive exactly the same treatment as any other owner, meaning we pay the same prices as everyone else does when we are using our personal contracts. In short, we eat our own cooking. In the aviation business, no other testimonial means more."<br />
<br />
"It’s my job to keep Berkshire far away from such problems. Charlie and I believe that a CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries, such as MidAmerican, and the minor runoff contracts at General Re. If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer."<br />
<br />
"In my view a board of directors of a huge financial institution is derelict if it does not insist that its CEO bear full responsibility for risk control. If he’s incapable of handling that job, he should look for other employment. And if he fails at it – with the government thereupon required to step in with funds or guarantees – the financial consequences for him and his board should be severe. It has not been shareholders who have botched the operations of some of our country’s largest financial institutions. Yet they have borne the burden, with 90% or more of the value of their holdings wiped out in most cases of failure. Collectively, they have lost more than $500 billion in just the four largest financial fiascos of the last two years. To say these owners have been “bailed-out” is to make a mockery of the term. The CEOs and directors of the failed companies, however, have largely gone unscathed. Their fortunes may have been diminished by the disasters they oversaw, but they still live in grand style. It is the behavior of these CEOs and directors that needs to be changed: If their institutions and the country are harmed by their recklessness, they should pay a heavy price – one not reimbursable by the companies they’ve damaged nor by insurance. CEOs and, in many cases, directors have long benefitted from oversized financial carrots; some meaningful sticks now need to be part of their employment picture as well."<br />
<br />
<b>On derivative contracts:-</b><br />
<br />
- Though it’s no sure thing, I expect our contracts in aggregate to deliver us a profit over their lifetime.<br />
- Only a handful of our contracts require us to post collateral under any circumstances.<br />
- you should expect large swings in the carrying value of these contracts. "..these wild swings neither cheer nor bother Charlie and me"<br />
"To date we have significantly profited from the float they provide. We expect also to earn<br />
further investment income over the life of our contracts."<br />
"The dangers that derivatives pose for both participants and society – dangers of which we’ve long warned, and that can be dynamite – arise when these contracts lead to leverage and/or counterparty risk that is extreme. At Berkshire nothing like that has occurred – nor will it. <br />
"Buffett is asked what useful function do derivatives serve? The questioner says we have done well without them for years. Buffett turns the question to Munger. Munger says derivatives on things like grain or other commodities are fine, but if all other derivatives vanished he would be fine with that. Buffett quotes John Maynard Keynes as saying speculators do no harm if they are bubbles on a steady stream of enterprise. But it will be ill-done if enterprise becomes a bubble on a whirlpool of speculation. Munger says if a small group with a lot of money and influence are very interested in something, they will win out. He says that is just the way it is." <br />
<br />
<b>Tweets:-</b><br />
<i>Warren: different prices for collateralized vs uncollateralized derivative contracts akin to renting furnished or unfurnished apt.</i><br />
<i>Munger: If all derivatives vanished, the world would be a better place</i><br />
<b>Issuing Shares for shares</b><br />
<b> </b><br />
"Our subsidiaries made a few small “bolt-on” acquisitions last year for cash, but our blockbuster deal with BNSF required us to issue about 95,000 Berkshire shares that amounted to 6.1% of those previously outstanding. Charlie and I enjoy issuing Berkshire stock about as much as we relish prepping for a colonoscopy. <br />
The reason for our distaste is simple. If we wouldn’t dream of selling Berkshire in its entirety at the current market price, why in the world should we “sell” a significant part of the company at that same inadequate price by issuing our stock in a merger?<br />
In evaluating a stock-for-stock offer, shareholders of the target company quite understandably focus on the market price of the acquirer’s shares that are to be given them. But they also expect the transaction to deliver them the intrinsic value of their own shares – the ones they are giving up. If shares of a prospective acquirer are selling below their intrinsic value, it’s impossible for that buyer to make a sensible deal in an all-stock deal. You simply can’t exchange an undervalued stock for a fully-valued one without hurting your shareholders.<br />
Imagine, if you will, Company A and Company B, of equal size and both with businesses intrinsically worth $100 per share. Both of their stocks, however, sell for $80 per share. The CEO of A, long on confidence and short on smarts, offers 11⁄4 shares of A for each share of B, correctly telling his directors that B is worth $100 per share. He will neglect to explain, though, that what he is giving will cost his shareholders $125 in intrinsic value. If the directors are mathematically challenged as well, and a deal is therefore completed, the shareholders of B will end up owning 55.6% of A & B’s combined assets and A’s shareholders will own 44.4%. Not everyone at A, it should be noted, is a loser from this nonsensical transaction. Its CEO now runs a company twice as large as his original domain, in a world where size tends to correlate with both prestige and compensation.<br />
If an acquirer’s stock is overvalued, it’s a different story: Using it as a currency works to the acquirer’s advantage. That’s why bubbles in various areas of the stock market have invariably led to serial issuances of stock by sly promoters. Going by the market value of their stock, they can afford to overpay because they are, in effect, using counterfeit money. Periodically, many air-for-assets acquisitions have taken place, the late 1960s having been a particularly obscene period for such chicanery. Indeed, certain large companies were built in this way. (No one involved, of course, ever publicly acknowledges the reality of what is going on, though there is plenty of private snickering.) <br />
In our BNSF acquisition, the selling shareholders quite properly evaluated our offer at $100 per share. The cost to us, however, was somewhat higher since 40% of the $100 was delivered in our shares, which Charlie and I believed to be worth more than their market value. Fortunately, we had long owned a substantial amount of BNSF stock that we purchased in the market for cash. All told, therefore, only about 30% of our cost overall was paid with Berkshire shares.<br />
In the end, Charlie and I decided that the disadvantage of paying 30% of the price through stock was offset by the opportunity the acquisition gave us to deploy $22 billion of cash in a business we understood and liked for the long term. It has the additional virtue of being run by Matt Rose, whom we trust and admire. We also like the prospect of investing additional billions over the years at reasonable rates of return. But the final decision was a close one. If we had needed to use more stock to make the acquisition, it would in fact have made no sense. We would have then been giving up more than we were getting.<br />
<br />
I have been in dozens of board meetings in which acquisitions have been deliberated, often with the directors being instructed by high-priced investment bankers (are there any other kind?). Invariably, the bankers give the board a detailed assessment of the value of the company being purchased, with emphasis on why it is worth far more than its market price. In more than fifty years of board memberships, however, never have I heard the investment bankers (or management!) discuss the true value of what is being given. When a deal involved the issuance of the acquirer’s stock, they simply used market value to measure the cost. They did this even though they would have argued that the acquirer’s stock price was woefully inadequate – absolutely no indicator of its real value – had a takeover bid for the acquirer instead been the subject up for discussion.<br />
When stock is the currency being contemplated in an acquisition and when directors are hearing from an advisor, it appears to me that there is only one way to get a rational and balanced discussion. Directors should hire a second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through. Absent this drastic remedy, our recommendation in respect to the use of advisors remains: “Don’t ask the barber whether you need a haircut.”<br />
<br />
"our fellows caved in and agreed to this value-destroying deal. “We need to show that we are in the hunt. Besides, it’s only a small deal,” they said, as if only major harm to shareholders would have been a legitimate reason for holding back. Charlie’s reaction at the time: “Are we supposed to applaud because the dog that fouls our lawn is a Chihuahua rather than a Saint Bernard?”<br />
<br />
<b>Media over-exposure</b><br />
<i>Tweet : "buffett is appearing in Wall Street 2 w/ michael Douglas? Who knew?"</i><br />
From the meeting "Buffett is asked if his increased media exposure is good for Berkshire shareholders. Buffett says probably not. Buffett says he has seen over the years the development of broadcast television over print. He says if you want a record of what you actually said, instead of a reporter's and editors' interpretations, it is great to have the broadcast version. I like the idea, whether it is charlie rose or CNBC, a record of my own words, instead of someone's interpretation of it."<br />
<br />
<b>Ethics:-</b><br />
<i>Charlie: Every business should decline a lot of business that it doesn't. Just because it's legal, doesn't make it right <br />
"The ideal is that we celebrate wealth only when it has been fairly won and wisely used." -Charlie Munger<br />
Charlie: we get offered things that people won't sell to anyone else. We have our own ethics-based screening device <br />
WB if reason you are doing something because the next guy is doing it, that is not good enough</i><br />
<b> </b><br />
<b>Learning:-</b><br />
<i>"The old men (Warren & Charlie) always continue to learn which is essential!" -Charlie Munger<br />
If you keep asking questions at a young age like that, gradually you learn. Love when Munger ruminates on his childhood.<br />
Charlie: if you're scared to do something, maybe you should get your feet wet with a little more failure.<br />
Charlie: go to bed each night a little wiser than you were when you got up. People who do that almost never utterly fail </i><br />
<br />
<a href="http://twitter.com/seshnath" linkindex="240"></a><br />
<br />
<i>Buffett says in a country where the undisciplined are unpunished it brings people to wonder why they should behave properly<br />
"When you picked your wife, you picked the best who would take you. We should live the rest of our lives like that." Charlie Munger</i><br />
<br />
I am a twit <a href="http://twitter.com/seshnath" linkindex="241">@seshnath</a><i> </i><br />
<i> </i><br />
Links to Notes:-<br />
http://inoculatedinvestor.blogspot.com/2010/05/2010-berkshire-hathaway-annual-meeting.html<br />
http://www.scribd.com/doc/30895400/Annual-Meeting-2010-Final-2-0<br />
<input id="gwProxy" type="hidden" /><!--Session data--><input id="jsProxy" onclick="jsCall();" type="hidden" /><div id="refHTML"></div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-74049681317790941802010-05-19T02:00:00.000-07:002010-05-19T02:00:06.256-07:00Gazing into the Crystal BallNow that everyone is talking of an economic recovery, here is a thought experiment on how the future might look like. Let us look at some indications:-<br />
1. Ballooning of central bank balance sheets; <br />
2. Price fixers have decided that cash is cheap (Read, Central Banks are keeping the interest rates low);<br />
3. Governments have found themselves overstretched on their budget - be it municipalities or the PIGS (no, I am not calling the Europeans swines - look it up)of Europe. <br />
<br />
There are two paths that seem likely out of this situation. One seems to be what everyone is fearing - inflation. And it seems to be the easiest way out of the situation. Looking at the lack of political will and the bickering, it seems to be the likely course of action to most people around. The interpretations seem to be muddied by further assuming that tail is wagging the dog and mixing correlations.<br />
<br />
Let us diverge a bit; <br />
Think of Gold-Oil ratio - Oil is fast consumed, people can't wait to dig enough out to finish it. Gold mining adds about 1% to the overall gold stock each year and it is a metal that is hard to be destroyed. Most Gold demand is from the craze for the glitter and an automatic response to go back to the good ol' days. Jewelery demand is lower compared to the investment demand. (Even people who buy jewelery in India think of it as an investment, more so these days). Part of it is the belief that the central banks will have to return to gold and the other part is that gold is a hedge against inflation. Now, in investments, unexamined beliefs are a road to disaster. Believing that the central banks world over are going to gold backed currencies is to believe that people will stop using automobiles and start to use horse buggies or bullock carts, just because they pollute. The more likely course of action is that everyone will learn to live with fiat currencies just like we learned to live with higher emissions. And expect an outcry against pollution, every time there is a smog. (Note to Gold Bugs, Romans also used salt (the word salary comes from it)as currency, should I start buying up Salt as well?)<br />
<br />
Coming back to Oil, it is scarce in supply and expected to get scarce by most accounts. Varying accounts put the peak oil production in different years of the first half of the last decade. The solutions to this are complicated - yes, there is wind, solar etc etc. Think of various uses of petroleum products; it is in food, water, air (conditioned or polluted, that is) and all the infrastructure that we have now is built on it as the primary source of energy - think of the engineering problems of running an airplane on coal or for that matter, a car using hydrogen. When the change away from oil happens, it is going to be disruptive - systemically and financially. Being someone who doesn't like to bet, I would neither try to invest on that thesis; nor do I have the necessary expertise to do so. I would keep my eyes open though.<br />
<br />
<br />
Getting back to our thought experiment, and path number one, which is inflation. Inflation is essentially an invisible robbery of the saver, the creditor and the pensioner. When you have so much of future obligations, without matching income in sight; it is a tempting situation to inflate, especially if you are the debtor and have pension obligations. But once you go down that path, it is difficult to regain the credibility for another generation or more. Think Germany in the 20s. <br />
<br />
What will happen if inflation rears its head - the central banks have to raise interest rates, impact will be a lot of unwinding of the carry trade (short/borrow dollar, long/buy you name it). Asset classes other than dollar will get a mark down. And, because of the higher opportunity costs they will stay marked down for sometime, until the expectations change.<br />
<br />
Independence of Central Banks also are called into question these days. This time around, will there be enough political will/backing to go through this pain since it implies lower asset values? The proportion of voters depending on asset values is higher than before since current yields are paltry everywhere. <br />
<br />
Second path is deflation of balance sheets, the central banks somehow get a backbone to stand up to their political masters, get the prudence to deflate and keep deflating their oversized balance sheets. It will mean money will be sucked out of the system. Less credit, means longer term projects with returns much later in their life cycle will be the first to get knocked out. Think infrastructure projects which have a long gestation period or projects which are end-loaded - where the majority of cash flows is at later stages.<br />
<br />
Let us assume, that demand doesn't pick up in Euro land and Uncle Sam's households and it starts to look like low level of aggregate demand for a longer duration, it will also imply the creation of a long-term bubble elsewhere in the world where demand has picked up. Essentially, automatic savings like 401ks and pensions will flow like water from higher-priced (low-yielding) assets to lower-priced assets and this will distort riskiness of those assets again. It will imply deja vu all over again. Think of other secondary impacts, foreign ownership of assets in regions where savings levels are high. It will start to look like colonialism in a new form.<br />
<br />
Personally, I prefer the second path to the first, since deflation means lower prices and better value for the money. Inflation is an all right situation as long as you keep reinvesting in yourself and keep updating your skill sets. It is an ugly scenario for a saver or a pensioner, especially given the trend in economic measurement under estimating inflation. Either way, stocks as an asset class are going to suffer. Does that mean I am going to not invest? Hell no!! Just that I will be very cautious until I see clear trend. Until then watch out for the PE re-rating in your stock returns.<br />
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<div id="refHTML"></div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-60160097085201157502010-03-31T08:27:00.000-07:002010-04-05T06:30:42.652-07:00Banking DemystifiedThe annual letter to shareholders from Jamie Dimon of Chase is a fascinating read this year as well. <a href="http://files.shareholder.com/downloads/ONE/681794420x0x362440/1ce6e503-25c6-4b7b-8c2e-8cb1df167411/2009AR_Letter_to_shareholders.pdf" linkindex="14">Here's the link to the pdf</a>.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-79991643961309861962010-02-23T01:19:00.000-08:002010-02-23T01:19:07.433-08:00I have nothing to addHere's an <a href="http://www.slate.com/id/2245328/pagenum/all/">article</a> titled "Basically, it's over" in Slate by Charlie Munger in Slate.com. Enjoy!!!<br />
<input id="gwProxy" type="hidden" /><!--Session data--><input id="jsProxy" onclick="jsCall();" type="hidden" /><div id="refHTML"></div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com3tag:blogger.com,1999:blog-7851889.post-91321827472143937212009-12-31T02:00:00.000-08:002009-12-31T04:20:34.322-08:002008 and 2009As I had posted <a href="http://seshnath.blogspot.com/2009/01/year-that-was.html">before</a>, I had gone substantially into cash and was making selective investments. I used this last year to re-organize my investment structure with a view to expand in the years to come. As a result, I am starting a new performance series with 15-Jan-2008 as my new start date. Initially, during the transitional period, the series is a combination of multiple portfolios which get December 2009. This transitional period was very convenient due to the portfolio weighing requiring mostly transfer of cash, rather than securities across portfolios.<br />
<br />
During the 11.5 months till end of Dec 08, Nifty went from 6206.8 to 3033.45 losing more than 51%. Then for the next 12 months, it went to 5201.05 gaining 71%. Overall, it went down 16%. (Percentage returns are not additive - they are multiplicative; so it is (1+-.51) = 0.49 x (1+.71) = 1.71). <br />
<br />
It had been a great two years instructive of lessons in <a href="http://seshnath.blogspot.com/2008/10/what-next.html">weighing your portfolio</a>, giving it the right preference between cash and stocks. As a result, the difference in return has been a whopping 185% for a period of 23.5 months, essentially meaning that if you had passively invested in an index fund on Jan 15, 2008, you would be sitting on a loss of about 16%, while my portfolio would have returned 185%. This is more true if you include dividends, the over performance actually becomes 191%.<br />
<br />
Here's the interesting factoid about that 185% over-performance, half of that gap was made in May 09, when the market jumped and almost all the stocks hit the upper filter after the results of the elections came out. Now that is a lesson, against trying to time the market.<br />
In absolute terms, I fully invested by March 2009 and stayed that way till May 2009 when I went to 80% invested and again to 95% invested till October 2009. End of December, I am about 2/3 invested. The 2/3 may be overstating it, since I am expecting to receive some additional funds into the portfolio by the last week of January, which would bring it down to 40%. So effectively, I am 60% in cash.<br />
<br />
My process has been pretty simple so far - I <a href="http://seshnath.blogspot.com/2009/01/year-that-was.html">time entry and exit based on individual stock valuation</a>; disregarding the overall market sentiments. A few cases attesting to the point , which I had written about <a href="http://seshnath.blogspot.com/2009/09/few-steals-this-year.html">earlier</a>.<br />
<br />
Patience has been a true virtue in this rough and tumble road, since I show a quotational loss of upto a third during some months. This drop came to my attention just now, when I was collecting the data to post. I usually disregard short-term quotational losses and am focused on entry to exit returns, rather than period to period returns. After-all, longer the period of measuring, less volatile the returns will look.<br />
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<div id="refHTML"></div><input id="gwProxy" type="hidden" /><!--Session data--><input id="jsProxy" onclick="jsCall();" type="hidden" /><div id="refHTML"></div>Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1tag:blogger.com,1999:blog-7851889.post-90321581599126353422009-10-24T10:24:00.000-07:002009-10-24T10:24:42.587-07:00Two Companies in TransportationCompany 1:<br />
Average of last six years' Return on Networth is around 31%<br />
<br />
Book Value: 7,764 Million<br />
Last Fiscal PAT: 2,267<br />
Last Traded Market Cap: 8,546 (High)<br />
<br />
P/BV ~ 1.1<br />
P/E ~ 4 <br />
which means your real return is around 28%, if you invest at this price.<br />
<br />
Company 2:<br />
Average of last six years' Return on Networth is around 23%<br />
Book Value Per Share: 37,317 Million<br />
Last Fiscal PAT: 7,791 <br />
Last Traded Market Cap: 148,850 (High)<br />
<br />
P/BV ~ 4<br />
P/E ~ 19 <br />
which means real return is around 6%, if you invest at this price<br />
<br />
Both are in very predictable industries, which can be seen from their gross and operating profit margin trends and the future outlook is not so similar. The company 1 has been growing their volumes at around 30% in the last 10 years and company 2 at lower double digits, posting the first drop in volumes in the last year.<br />
<br />
Trying to guess which these two are? It is <a href="http://finance.yahoo.com/q?s=CONCOR.BO">Concor</a> - company 1 is Concor in Oct 2001 and company 2 is the same Concor in Oct 2009.<br />
<br />
The outcomes are definitely going to be contrary on investing on these two dates.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com2tag:blogger.com,1999:blog-7851889.post-38960935107128994632009-09-10T05:03:00.000-07:002009-09-10T05:03:03.740-07:00A few steals this yearI was on the look-out for a boring business this March. That's how I found <a href="http://in.finance.yahoo.com/q?s=TODAYS.NS">Today's Writing Products Ltd</a>. Their main product is Today's pens. In this internet age, pens are highly unglamorous products. Back when I was still writing most of the time with a pen (and occasionally with a pencil), Today's and Reynolds were the big names. It was a pure book value play trading well below book, when I looked at it in March 09. I closed this fast trade in May for a 70% profit.<br />
<br />
They say, lightning never strikes twice. Fortunately, it did with GIPCL. I posted about it earlier in <a href="http://seshnath.blogspot.com/2007/10/gujarat-industries-power-company.html">2007</a>. It happened again in 2009, this time a 60% return in 4-5 months. Same conditions held as in the 2007 posting, when I bought it.<br />
<br />
Then there was <a href="http://in.finance.yahoo.com/q?s=TATASTEEL.NS">Tata Steel</a> - it was just there for the taking. Even if the company performs as well as it did in 2003 without any contribution from Corus, it would have given a sweet dividend yield. I booked (a little early, as is the case with almost every other investment) the gain at 50-60% gain in two months. The 2% CCPS would have given a better return - my broker didn't have permission for trade in that instrument.<br />
<br />
And <a href="http://in.finance.yahoo.com/q?s=CORPBANK.NS">Corporation Bank</a>, one of the best capitalised and performing banks was beaten down so hard that it gave a good return as well.<br />
<br />
There are two more that are still playing out.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-82085076814258985362009-08-22T00:33:00.000-07:002009-08-22T00:51:16.126-07:00Structural Developments in IndiaWhile the financial world has been going crazy in the past couple of years, India has been taking steps further develop the country's economy.<br /><br />The New Pension Scheme which was applicable to Government employees starting 2004 is now <a href="http://www.pfrda.org.in/writereaddata/linkimages/Press%20release%2030_04_09815593664.pdf">open to public</a>. The unique feature of this scheme is it allows investment into equity indices. It also has life cycle type investing plans as the default option. (inspired by Thaler and Sunstein's <a href="http://www.nudges.org/">Nudge</a> - may be?). And it is open to Non-residents as well, as long as they are citizens.<br /><br />The other has been the recently proposed new <a href="http://www.icai.org/resource_file/16890DirectTaxes_CodeBill2009.pdf">Tax Code</a> with a <a href="http://www.icai.org/resource_file/16891Discussion_Paper.pdf">discussion paper</a>. The current Income Tax Act, 1961 structurally looks like the apocryphal camel creation story. It is a mish-mash of various amendments, political concessions and such. The new code de-jargonises the Act and rationalises the structure. There is also an attempt to move towards a EET (Exempt-Exempt-Taxed) concept for savings. The concept is that contributions and earnings on the contributions are exempt and the withdrawals are taxed - very similar to the Traditional IRA in the US. This has been a step-by-step progress made since 2006 and the New Pension scheme becomes part of this step. There is also an attempt to bring stability to taxation rates. According to the current practice, a tax rate has to be notified every year in the Finance Bill during the Budget Speech which become the Finance Act. The tax rates become part of the new Tax Code. Changes to rates will presumably become a legislative amendment. These are just a couple of structural changes.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-30223668366581958032009-06-26T03:16:00.000-07:002009-06-29T01:31:01.358-07:00Where are we now?It has been an interesting time to live as an investment professional since July 2007. "Unprecedented" is an adjective/adverb that was thrown about most of the last year or so - whether it was referring to the market seize-up or to responses to the seizures.<br /><br />First, a quick recap of the events. Debt fueled growth; asset values stop growing; debt becomes a real "liability"; asset values drop from forced sales and fear of forced sales; Superman (read, government) stops this train-wreck from happening. The last part of this comic book is yet to play-out completely - will the villain (inflation, to name one) come back stronger than before from under the debris or is it a new-new-new world (new world was post industrial revolution, new-new world was after Netscape went public like <a href="http://www.amazon.com/New-Thing-Silicon-Valley-ebook/dp/B000RH0CA4/ref=sr_1_9?ie=UTF8&s=books&qid=1245841974&sr=8-9">Michael Lewis</a> says)? My sense is that we are in the eye of the storm. There may be more to come; it is too hard to say. I'll leave predictions about the future events to astrologers and followers of Nostradamus.<br /><br />Whichever way you look at the recent past, the times have been exciting. It is somewhat like being a student of geopolitics in 1989-92. Poland's independence, consequential effect on the map of the Baltics and the nearby region, Fall of Berlin wall, End of cold war, First Persian Gulf War (remember those greenish night vision images from CNN). Similarly, there are a lot of changes in the financial cartography - no Investment Banks today - one under receivership, two forced to be merged and two converted to banks. Policies are taking a U-turn - earlier everyone wanted to privatize every business in every country; now it is about government taking equity stake in auto, banks, insurance companies. Mostly self-governance vs. government intervention. Read this <a href="http://www.nytimes.com/2009/03/25/opinion/25desantis.html?_r=2&ref=opinion">letter of resignation</a><br /><br />Where do we stand in India? There have not been any major mess-ups. I am not forgetting Satyam fiasco - that is part of any downturn. Like Buffett wrote<span style="font-style: italic;"> "It's only when the tide goes out that you know who is swimming naked"</span>. Every downturn in the stock market of the past had its casualties - caused by fraud or otherwise - be it Global Trust Bank from the fall out of IT crash or Ketan Parekh or Harshad Mehta. Here's an extract from <a href="http://www.amazon.com/Great-Crash-1929-Kenneth-Galbraith/dp/0395859999/ref=sr_1_1?ie=UTF8&s=books&qid=1246254128&sr=8-1">The Great Crash (1929)</a> by J.K.Galbraith and decide for yourself how different things are:-<br /><br /><span style="font-style: italic;">"Weeks, months or years may elapse between the commission of the crime "</span>(of embezzlement) <span style="font-style: italic;">"and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in - or more precisely not in - the country's businesses and banks. This inventory - it should perhaps be called the bezzle - amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances, the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks."</span><br /><br />Systemically, India is in a great shape. The government didn't have to bail out anybody, yet. Domestic demand is much better and there are more opportunities for an individual than there ever was before in India.<br /><br />The other fallout of this downtrend will be a reduction in the number of people watching the stock markets - the engineer can focus on building and innovating, rather than watching the ticker move up and down on a screen; the doctor can provide more attention to his patients' charts and not be perturbed about what Infy or Sify's chart was doing and the surgeon can watch the life line of his patient on the OR table without wondering about where the Sensex or Nifty's line is. The problem with boom times is everyone regardless of whether they know about markets or not and regardless of whether they know or do not know that they don't know is an expert about stocks. As an adviser on money matters, I am no longer (at least not anytime soon) going to face a rhetorical question of "<span style="font-style: italic;">if the market is overvalued, why is </span>(fill in the name of the stock) <span style="font-style: italic;">rising?</span>". It is hard for reason to penetrate our thick skulls, when the near term experience is to the contrary. As every Grahamite knows, it is a fact of the markets that it is there to serve you and not to instruct you about valuations.<br /><br />Where do we go from here? Over the long term (long-term is not 1-2 years for me),<br /><br />1. India is in a great shape. There is no dearth of great companies to invest in.<br />2. Stocks are still the best investment for the long term and<br />3. Compounding of returns still does its magic.<br /><br />Investing consistently is the mantra. And, watch out for those once in a life-time (based on past few years life-time should be in mouse years) opportunity that occurs every once in a while to buy those great companies at a bargain price.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-9643758882607589302009-06-06T06:55:00.000-07:002009-06-08T07:10:10.157-07:00Wesco Financial Corp - 2009 Meeting NotesI am posting my<a href="http://openquiver.com/Documents/WESCO%202009.pdf"> notes</a> (in pdf) from Charlie Munger's Wesco (WSC) meeting last month. Good reading.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-83612311712670194242009-05-23T03:17:00.000-07:002009-05-28T03:26:36.211-07:00Berkshire Hathaway Shareholder Meeting NotesI attended the Berkshire Hathaway Meeting this year as well. Here is a link to <a href="http://openquiver.com/Documents/Berkshire%202009.pdf">my quick notes from the meeting</a> (pdf) grouped by topic and with some background reference to the questions<br />I have also included notes from others and other coverage at the end. Feel free to distribute it.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-57573097757560537422009-03-01T06:08:00.000-08:002009-03-01T06:36:32.525-08:00Berkshire Letter 2008The Berkshire Hathaway Inc.'s <a href="http://www.berkshirehathaway.com/letters/2008ltr.pdf">2008 letter</a> (pdf) is out. The unusual point is that Buffett posted a decline in book value for the second time in the last 40+ years and still out-performed the S&P by 27 percent. <br /><br />On the face of it, things look bad for Berkshire. However, reading through the letter and report I am happy to note the swing in book value comes mostly from derivative losses which can go either way in a given year. Buffett's discussion on the state of Manufactured Homes market and Black-Scholes Formula are a must-read.<br /><br />Will this present a buying opportunity for BRK? Here are some quick excerpts from the letter:-<br /><span style="font-weight: bold;">_______________________________________________________________<br />On Derivatives and Mutual Dependence in Markets</span><br />"Derivatives contracts, in contrast, often go unsettled for years, or even decades, with counterparties building up huge claims against each other. “Paper” assets and liabilities – often hard to quantify – become important parts of financial statements though these items will not be validated for many years. Additionally, a frightening web of mutual dependence develops among huge financial institutions. Receivables and payables by the billions become concentrated in the hands of a few large dealers who are apt to be highly-leveraged in other ways as well. Participants seeking to dodge troubles face the same problem as someone seeking to avoid venereal disease: It’s not just whom you sleep with, but also whom they are sleeping with."<br /><span style="font-weight: bold;">Pricing Risk</span><br />"The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms. When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost<br />equally extraordinary."<br /><span style="font-weight: bold;">Inflation</span><br />"...even though that wonderful cash is earning close to nothing and will surely find its purchasing power eroded over time."<br />"This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political<br />challenge. They won’t leave willingly."<br /><span style="font-weight: bold;">On Investing</span><br />" Approval, though, is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns. "<br />"Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas."<br /><span style="font-weight: bold;"><br />On Housing Crisis</span><br />"Indeed, the stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesmen, rating agencies and investors. These parties looked at loss experience over periods when home prices rose only moderately and speculation in houses was negligible. They then made this experience a yardstick for evaluating future losses. They blissfully ignored the fact that house prices had recently skyrocketed, loan practices had deteriorated and many buyers had opted for houses they couldn’t afford.<br />In short, universe “past” and universe “current” had very different characteristics. But lenders, government and media largely failed to recognize this all-important fact."<br /><br />"Commentary about the current housing crisis often ignores the crucial fact that most foreclosures do not occur because a house is worth less than its mortgage (so-called “upside-down” loans). Rather, foreclosures take place because borrowers can’t pay the monthly payment that they agreed to pay. Homeowners who have made a meaningful down-payment – derived from savings and not from other borrowing – seldom walk away from a primary residence simply because its value today is less than the mortgage. Instead, they walk when they can’t make the monthly payments.<br />Home ownership is a wonderful thing. My family and I have enjoyed my present home for 50 years, with more to come. But enjoyment and utility should be the primary motives for purchase, not profit or refi possibilities. And the home purchased ought to fit the income of the purchaser.<br />The present housing debacle should teach home buyers, lenders, brokers and government some simple lessons that will ensure stability in the future. Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.<br />Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective.<br />Keeping them in their homes should be the ambition."<br />____________________________________________________________________<br /><br />I am also glad to see the format change for asking questions. Last year was one of the worst meetings regarding the quality of questions asked by shareholders.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-41989342997799418302009-01-16T03:25:00.000-08:002009-02-04T06:23:46.403-08:00The Year that was!!!!!For most people I know, 2008 would be the year when reality (not the sector) bit and chewed off most of their savings.<br /><br />As I look back on my investment activities, I had started to take a closer look at valuations as early as Mar 2007, when I started the sells on most of my investments. I re-invested in July 07 and was almost completely back in cash by Jan 2008.<br />Here's a short-recount of my investing history. I started investing this portfolio in April 2001, with my peak capital outlay being in May 2003. After that month, I have not invested any funds from outside the portfolio - all new purchases were funded by either sales or dividends. If you had invested in Nifty, during that time and till Dec 08, you would have made an annual return of 12%. My portfolio, not including dividends, made 24% for me. Over this period, I have over-performed by 130%.<br /><br />After Jan 2008, I have made some very selective underpriced investments for short-term and made some quick money. In the periods from Oct-Dec, I have bought some very under-priced securities - one of which is a typical Graham play, trading at less than its net-net. You could buy this particular security at a value at a discount to its Net Current Asset less Long term liabilities per share. This means that you are getting the Fixed Assets free of cost.<br /><br />These type of short-term opportunities are worth looking for only if you have the patience and the capital for it. Other than these purchases and some special situations from late 2007 that are still developing, I am entirely out of the market in India as of December.<br /><br />So much for status updates.<br /><br />I think of this situation as an opportunity, following the maxim to be greedy, when others are fearful. <br /><br />Assuming someone invested Dec 31 of every year since 1991, here's how the return would look like. If you invest for a period longer than three years, unless you are investing right at the height of the market, you will make decent returns.<a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgy3JztcQnz-4P9HfwFv9S4XmQr6-J8C6rhyphenhyphenPTcwW2ZIiEgAH-HK1J4zNGoLarDFu7HRpCoJkHQtpXSZxCLXkSwadhqF7mOkPFWmfGW5lR3pKcBmbyC646pRSy6GulXlhzZ-hLHtA/s1600-h/Nifty+annual.JPG"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 400px; height: 209px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgy3JztcQnz-4P9HfwFv9S4XmQr6-J8C6rhyphenhyphenPTcwW2ZIiEgAH-HK1J4zNGoLarDFu7HRpCoJkHQtpXSZxCLXkSwadhqF7mOkPFWmfGW5lR3pKcBmbyC646pRSy6GulXlhzZ-hLHtA/s400/Nifty+annual.JPG" alt="" id="BLOGGER_PHOTO_ID_5298817372378007810" border="0" /></a><br /><br />It is like Overs 16-35 in a One-day cricket match. These middle overs are for patient batsmen. Runs flow in ones and twos and occasional fours and sixes. The main goal is to to avoid errors of commission and lose wicket during these times. Likewise, my main goal for these middle overs (not talking of my age - but market conditions in general) is to patiently invest with the aim of not losing capital. I would look for Ones and Twos in the form of dividend yields with an occasional Four or a Six when Mr.Market throws me that sweet loose ball. Oh and be sure, they will come.<br /><br />As someone who is looking to buy securities in the next few years, I want the market to remain under-priced for as long as it can. I am not looking towards market prices for affirmation that I have made right investments. It would be like asking your barber whether you need a haircut.<br /><br />My approach doesn't change overall. I will be looking for under-priced securities in businesses that I can understand and that are not vulnerable to change, run by good management team. I would be perfectly satisfied if I managed to earn about 4-5% above the return of G-Secs such as the National Savings Certificate (8% plus 4-5%).<br /><br />Besides, long-term prospects for India are only starting to get better. A look at some of the mass market products is enough to give you an indication. Movies, for instance. Slumdog Millionaire winning Golden Globe for AR Rahman is a portend for things to come in the next 20 years or so. Short-term political and geo-political uncertainity is throwing up a lot of investing opportunities.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-43585592383702897762008-10-28T02:52:00.000-07:002009-01-15T03:25:29.767-08:00What Next?What should you do next?<br /><br />If you were fully dependent on the market and lost most of your savings/capital, find a job. Try to survive until you save enough to meet other immediate needs.<br /><br />If you saved part or whole of your capital from the avalanche, re-examine your situation:-<br />1. Make sure you have enough liquidity to meet your immediate needs. I would recommend 6-12 months of expenses in cash (under the mattress/in a safe/in a protected or insured savings account in the currency that you are going to spend). If you have a safe job, you can even consider your source of income towards this.<br />2. Look at your assets outside of this reserve, re-balance it. I would recommend going 80:20 into stocks:gold over the next 6 months. And, if you are young like me, a 5% on longer-term index calls in underpriced markets. Look for high-yielding stocks - either earnings yield or dividend and earnings yield. It means look for non-dividend paying stocks with high RONW and low PE or dividend-paying stocks at reasonable PE.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com0tag:blogger.com,1999:blog-7851889.post-30744434701756529772008-09-20T08:55:00.000-07:002008-09-21T02:02:40.245-07:00Maximum Pessimism yet?It's interesting that every news report is talking gloom and doom. This would be a time to start looking for bargain buys. I'll be looking for:-<br />1. Stocks with businesses that are not affected by the current crises, but are treated guilty by association in the sector/name;<br />2. Undervalued businesses in other sectors that are getting even more beaten up; and<br />3. Businesses that will perform irregardless of the trend available at fair value.<br /><br />I'll be looking in India, US and UK, primarily.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1tag:blogger.com,1999:blog-7851889.post-48818428079272387102008-07-24T07:54:00.000-07:002008-07-24T01:22:25.932-07:00Sir John's Principle of Maximum Pessimism“The right question is: Where is the outlook most miserable?” Templeton calls this<br />approach to investing “the principle of maximum pessimism.” Others might call it contrarianism. He explains it this way: “In almost every activity of normal life people try to go where the<br />outlook is best. You look for a job in an industry with a good future, or build a factory where the prospects are best. But my contention is if you’re selecting publicly traded investment, you<br />have to do the opposite.You’re trying to buy a share at the lowest possible price in relation to what that corporation is worth. And there’s only one reason a share goes to a bargain price: Because other people are selling. There is no other reason. To get a bargain price, you’ve got to look for where the public is most frightened and pessimistic.” - Sir John Templeton to FORBES.Anonymoushttp://www.blogger.com/profile/03967889849931684921noreply@blogger.com1