WARREN BUFFETT’S LETTER – 1960 – 1961

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

WB Letter 1960

In 1959 letter, Mr. Buffett had made an investment of 35% of net assets in the company named Sanborn Map Co.

Maps are immensely useful to the fire insurance companies. Business is operated in a monopolistic manner and without the need for strong sales efforts. Earlier, the insurance companies had feared for the profit of Sanborn Map and hence they placed a number of prominent insurance men to Sanborn’s Board Of Directors to act as a watch-dog.

In 1959, the ratio of PAT reduced to $100000 as compared to $500000 as in the year 1930. The company began to make investment portfolios since they did not need any further capital to run the business. Over a period of time, their investment was accumulated to $2.5 million; of which roughly half was in bond and half in stocks. These investment portfolios worked well but the map business lost its shine.

In the year 1938, the stock was traded at $110 but the value reduced to $45 in the year 1958; whereas their investment per share value increased from $20 to $65. Hence, their stock is available for negative $20 against the investment portfolio.

The company had sales volume of $2 million per year and they owned $7 million worth of marketable securities. Their income from investment portfolio was substantial enough to take care of their company’s finance. Regular dividends were paid to all the stockholders but there was a decrease seen in the dividend payout for a constant of 5 times in a period of 8 years. As against this; there was no reduction in the salary of the directors.

Board of directors held a minimal position in the Sanborn shares. Buffett proposed to separate the investment portfolio business from the map business. Hence, after the death of the president of Sanborn; his part of shares (around 15000) were bought by Warren Buffett and another 24000 from the open market. Apart from this; there were 2 large stockholders who held 10000 and 8000 shares respectively. They were unhappy with the current situation of the company and they desired to accept the proposed idea of Buffett of separating the business.

Mr. Buffett wanted to work on re-establishment of earning power of the map business. In the same instance, they got an opportunity of converting their physical goods to electronic goods which will multiply their profit for the map business.

Indian company example – Before 2006, the company was involved in the manufacturing of scooters. But the company discontinued to manufacture in 2006 and became an investment company with the profit that they had made from the sales. At the end of FY2013, the market value of investment portfolio of the company was worth Rs.2034 crore; whereas stock was traded at the market capitalization of Rs.440 crore (stock price of Rs382). Currently, the company is trading at the market capitalization of Rs.3172 crore (stock price of Rs.2775). The company is also paying out healthy dividends.

Mr.Buffett also mentioned that no one should jump to conclusions by reviewing one-year performance. One needs to at least measure five years of performance in both strong and weak markets.

WB Letter 1961

Mr. Buffett had identified few mutual funds and done a comparative performance of mutual funds with the market and with his partnership.

We can see that Mr. Buffett has outperformed in mutual funds with a heavy margin.

Mr. Buffett used 3 methods of operations as below –

1) Generals

The general situation works with the market situation. The investment outperforms in the bull phase and declines sharply in the bear phase. These investments work well in a longer period of time.

2) Work-outs

The work-out situation provides stable and safer earnings and due to that Mr.Buffett use borrowed money to take an advantage of work-out situations. In the bear phase; we get better results and in the bullish phase; we get bad performance.

3) Control

During 1961, Mr. Buffett owned around 70% stake of the Dempster Mill, which was a fall into a control situation category. Initially, Dempster Mill was started as a value investment (General) category but as time passed, this investment came under control situation when an additional stake was purchased by Mr. Buffett.

The detailed discussion of Dempster Mill investment will be done in the later series of Warren Buffett’s letter.

Few people who want to invest conservatively, have bought government bonds and few others bought blue-chip securities regardless of Price to Earning ratio, dividend yield, etc. with a belief of getting benefits by investing in the bonds.

Mr. Buffett has always emphasized on better performance during a bear market and getting the similar return in a bull market.

Warren Buffett’s Letters 1957 – 2012

Learning Investment Lessons from movie Chal Man Jeetva Jaiye

Jainam Share Consultants had organized a movie day on 6th January 2018 and the name of the movie was “Chal Man Jeetva Jaiye”. I am really thankful to Jainam Family for giving me the chance to watch a worthy movie. I am grateful to the entire cast & crew of the movie for the wonderful performance and script.

I am really grateful to Riddhi who helped me with editing and very effective ideas.

I always believe that we can learn many concepts from our surrounding environment. Similarly, this movie has some of the amazing concepts that I have learned and you can also which can be beneficial to our investment journey and as well as to our life.

• Decide our process to get success in our life

Extract from the movie – The movie began where it was shown that a father is pressurizing his son, Dev, a lot for achieving victory. Dev, unknowingly started following his father’s dreams but he did not know how to get a victory.

Co-relation in real life – A similar situation happens with all of us when it comes to our investments. Investors’ starts investing in multi-bagger stocks whereas they don’t even have enough knowledge about the company. We need to gather knowledge first and then decide whether the company is worth investing. If we don’t do a thorough study about the company, then there are chances that we might lose our capital rather than achieving reasonable returns.

• Pressure and stress can affect our decision-making ability

Extract from the movie – Dev was pressurized by his father to achieve victory and as a result, he lost his focus from all aspects and started losing in all the fields. He was often scolded and tortured by his father for not being able to earn medals and certificates.  Dev had always been forced upon the dreams that his father had for him. Dev was never given a chance to explore about his interests and that affected his decision making power.

Dev’s uncle, Vasant, had incurred a major loss in the family business and was highly stressed about it. He got pressurized by thinking about the materialistic and luxurious life of the family that he wanted to maintain and that led him in making a wrong decision. He chooses an unethical way: of leaving the country and doing fraud with the lives of the people by taking away all their money that they had invested in their company. He thinks of this way as ethical because Mr. Ajay Walia (whose company got bankrupt and he lost everything) had also done the same. Looking at someone else do it; made him think of the wrong way as the right way and he forgets about the moral values and ethics that he had learnt from his parents of not doing fraud or cheat with the lives of the people.

Co-relation in real life – Likewise, while there is a mad bull run in the market, when we see our fellow investors making money, we feel stressed and that pressure leads us to unethical thinking. We lose the capability of spotting the good investment companies; thus leading us to losses. Sometimes, such situations encourage us to compromise with our ethics & values for making an investment decision; hence forcing us to make faulty decisions. Rather than getting jealous of others making money, if we focus on our decisions and stick to our ethics; then there will be ample of opportunities coming up within our competence area that will lead us to good returns.

• Remaining emotionally stable also during the worst period of our life

Extract from the movie – Viren, who is playing a character of Vasant’s son, saw his father being stressed and hence taking wrong decisions. So he keeps himself calm and stays emotionally stable and decides that he won’t let his father take the wrong decision. Vasant asks his family to support him and the whole family does that except Viren and Dev. Although knowing that this is the crucial time for the entire family and they will have to face the whole family; both the brothers decide to stick to the ethical and the correct path. The family often scolded them, tried to emotionally break them and also tried to prove them wrong but these brothers keeps fighting for what’s right and not bothering that it was their family on the other end.

Co-relation in real life – Market often shows us a challenging period during our investment journey but we need to remain emotionally stable and keep ourselves away from emotional diseases such as ego, envy, greed, fear etc. All such emotions influence our decision and lead us to get deviate from our process. Please refer to the article for further details of how does our emotion influence our investment decision BIBLIOPHILE: THE MOST IMPORTANT THING BY HOWARD MARKS “COMBATING NEGATIVE INFLUENCES”

• Importance of different viewpoints

Extract from the movie – Vasant and Viren both have different perceptions of the same situation. Viren was enforcing for a different viewpoint which led the entire family re-think about their decision and yes they finally accepted the viewpoint that Viren and Dev has been explaining since the beginning, as it was a better and an ethical way of dealing with the problems. We should accept the viewpoint of the other and try to empathize from their angle. There is a possibility that we might get a new perspective to see a problem and that can be more useful to our decision making.

Co-relation in real life – When it comes to our investment journey; we face the same situation. There are ample of people who will give you too many companies to make investments in, as per their knowledge and their research. But it’s up to us whether to believe all of them or to believe some of them. People have different mindsets and there will be a situation where 1 person days good about the company whereas the other says bad. In such a situation; we get to know a different viewpoint and a different perspective from various people we trust on. But we should at times believe on people and re-think couple of times before investing as it is a matter of our earned money through hard work.

• Acceptance of our mistake

Extract from the movie – Vasant accepted his mistake of taking a wrong decision due to stress and ego and he decides to change his decision. If he wouldn’t have accepted the viewpoint and changed his decision in time; then that would have led him to lose his brand value, his goodwill, his happiness, his inner peace, the trust that others had in him, his relationships, etc.

Co-relation in real life – We often make mistakes during our investment journey but we need to realize it at the earliest and accept our wrong decision by not getting influenced of other factors. We should think of recovering our losses and increasing our profits rather than feeling guilty on our wrong decision.

• Have faith in yourself

Extract from the movie – Vasant in his past had grown the business and created a brand value. He had never lost his money. But when he faced such a situation; he had lost faith in his own self and he thought that he doesn’t have the courage to rebuild the empire. But Viren always showed trust in his father’s ability and he kept on saying that he knows that his father has the ability to build an empire again.

Co-relation in real life – During a sluggish market scenario, there are times that even our best investment cannot generate good money for us. But we have to have patience and trust on our decisions that sooner or later we will earn and gain good returns.

• We are losers just because of ourselves and not because of others

Extract from the movie – Dev was unable to express his thoughts in front of his own family. His continuous failure due to his father pressure had restricted him to open up and talk about what he wanted to. When he was asked to faced his complexions and his fear; only then he fought with his own self and was able to realize that he failed because he had created a belief in his mind that he is unable to do anything in his life.He only can able to create an impression in front of his family after getting the realization of his weaknesses. It was then that he realized that it wasn’t his father that was the cause of his failure but it was his inner self that didn’t let him take a leap. But when he overcame his weaknesses; he achieved success.

Co-relation in real life – We also face similar situations during our investment journey. We might have made losses couple of times. But we should face those failures and try learning of overcoming them rather than withdrawing the money. One should think of recovering the losses and switching from the negative balance (loss) to the positive balance (profits). Because if we don’t think positive then those failures might affect our future decision for making an investment.

As it is rightly said “YOU MAY FIND THE WORST ENEMY OR BEST FRIEND IN YOURSELF”

• Building brand value takes efforts for years but just a few minutes to ruin it

Extract from the movie – Vasant and his brothers had worked really hard for years to create a brand value for their company. But if he would have decided to take a wrong decision of declaring bankruptcy; then that would have ruined the brand image that they had build in for years. People would have cursed them for their decision as they would have cheated them. And this would have created a negative impact for the company and its image.

Co-relation in real life – Similarly, we should always be careful while taking a decision in life and not make any blunders. We should think with a peaceful mind and not atleast when we are stressed. If done so in stress; we can lose the trust that people have in us and we can harm our reputation which we have built with our hard work over the years. Remember, “DON’T LET ONE MISTAKE RUIN A BEAUTIFUL THING”.

Kindly watch movie for more insights.

Dev (Krishna Bhardwaj) & Me

Viren (Hemen Chauhan) & Me

 

 

Warren Buffett’s Letter – 1957 – 1959

Since I am a fan of Mr. Warren Buffett and he was highly influenced by Mr. Charlie Munger in his life; so has my life been influenced by both the entities. Hence, today (1^st January) on the birthdate of Mr. Charlie, I would like to pay a tribute to both the entities by extracting the core content from Mr. Buffett’s letters.

Warren Buffett’s Letter – 1957

In 1957, As per Mr. Buffett, the market was above intrinsic value. Even during optimistic situations, Mr.Buffett tried to focus on investing into the work-out situations rather than making an investment decision on general issues. If the market status seemed undervalued; Mr.Buffett would build a portfolio of general issues and make use of borrowed money in operations.

Mr.Buffett has explained work-out situations as an investment which is dependent on the specific corporate actions such as divestment, mergers, liquidation, demerger, tenders, etc. In such cases, risk depends on planned actions and not on the economic scenario or the general market.

Mr.Buffett has given weightage on “the better performance in the bear market than in the bull market.” During general or bull market, he was satisfied by matching his average returns.

We were able to see that everyone has generated good returns during the period of 2013-2017 by investing in the random stocks portfolio. But, we need to sustain our returns over a longer period of time with the risk under control. Doubled your Money in Last 3 Years ? Skill or Luck ?

Warren Buffett’s Letter – 1958

Mr. Buffett emphasizes on better performance in the bear market as compared to the bull market and matching the average returns during the bull market scenario.

In 1958, Mr.Buffett had made an investment into the stock name “Commonwealth Trust Co. of Union City, New Jersey”. The company earned $10 of EPS but did not pay any dividends. As a result of a dividend being unpaid; the stock price was depressed and was traded at $50 per share while the company held assets worth $50 million. 25.5% of the stock was held by the larger banks.

The stock was traded at 20% of earning yield ($10/$50*100). During 1958, US interest rate was 3.50% and Mr.Buffett counted intrinsic value of $125 in a conservative manner. Mr. Buffett had discounted EPS by 8% and made the intrinsic value of $125, while interest rate of US in year 1958 was 3.50%.

If the merger of Commonwealth got approved with larger banks, than, Mr.Buffett had estimated $250 per share value (i.e. discounted EPS by 4%). Mr.Buffett held 12% of the bank. Mr.Buffett got an opportunity to tender his holding at $80 which was higher by 20% of traded price of stock. Mr.Buffett was able to identify another attractive opportunity where he employed nearly 25% of the assets of his partnership.

He bought a higher stake in the Sanborn Map Co. and created his own work-out situations due to lack of availability of opportunities.

In Indian Market, We can also capture such situations for creating our wealth. End of FY13, one of the textile company was at an enterprise value of Rs.210 crore, whose price was Rs.207 and PBT Rs.40.66 crore. So, this stock was traded at 19.36% of earning yield (40.66/210*100). Currently this stock is traded at the price of Rs.1320. (8% Interest rate in India and stock was at 2.42x of AAA Bond rate)

Warren Buffett’s Letter – 1959

Mr.Buffett analyzed the availability of a speculative component with the risk of loss into the blue-chip security prices. This situation occurred due to an evolution of new standard of valuation and people believed that new valuation standards will be able to replace the old standards.

Mr.Buffett increased the weightage from 25% to 35% in Sanborn Map Co. and the remaining 65% was employed in undervalued and work-out operations.

Warren Buffett’s Letters 1957 – 2012

I am grateful to Mr. Vishal Khandelwal sir for the compilation of all letters for us.

I am really grateful to my friend who has helped me with the editing work.