WARREN BUFFETT’S LETTER – 2013 – 2014

Warren Buffett’s Letter 2013

Mr.Buffett has mentioned that they have made a repurchase of Berkshire shares during the year 2012 which enhance intrinsic value per share and that provides a benefit to the shareholders who are continuing with the company.

Examples of Buyback – SIMPLE IS BETTER – ISSUE -13 – BUYBACK

Mr.Buffett on the Heinz investment –

I learn investment to fixed income instrument from my Guru. ZEE Entertainment has issued preference shares to the equity shareholder of the company with the condition to pay 6% interest payment and redemption of principle starts from FY18.

Preference share was available at Re.0.80 and face value of that is Re.1.00. If we consider total cash inflow to us in form of interest payment + principle repayment then we can able to earn ~10.75% IRR for the FY14-22. Here, the present value of all future cash inflow @ 10.75% is Re.0.80 which is also higher than our purchase price which indicates safety also.

NTPC has issued debenture to the equity shareholder of the company as a bonus with the condition to pay 8.49% interest payment and redemption of principle starts from FY23.

Debenture was given as a bonus and ex-date of debenture was 20^th March 2018. If NTPC was purchased on 18^th March 2015 then price of NTPC was ~Rs.153.74 (with brokerage + other charges) and if we sell NTPC on Ex-date then price of NTPC was ~Rs.144.70 (with brokerage + other charges) so that cost for getting bonus was Rs.9.05 and the face value of that is Rs.12.50. If we consider total cash inflow to us in form of interest payment + principle repayment then we can able to earn ~14.02% IRR for the FY15-25. Here, the present value of all future cash inflow @ 10.75% is Rs.10.90 which is also higher than our purchase price which indicates safety also.

In both the cases, the interest rate on risk-free investment was ~8-9% and we are getting higher return compared to it.

Mr. Buffett on investing –

During, the year 1973 to 1981, farm prices had a bubble situation. When the bubble burst, then leverage farmer and lender both had a troublesome time. And after that Mr. Buffett had made an investment into the farm.

Mr. Buffett also made an investment into the other commercial property.

Mr. Buffett has explained investing lessons –

In our investment to stocks, we are get affected with the stock price fluctuation and listen to the pundits for their comments. Due to such habits, we cannot sit quietly with our investment and we end up with little or no return. Mr. Charlie and Mr. Buffett always made an investment as they are buying an entire business. They check whether they can estimate future five years of earnings or not. If they can estimate earnings then check whether available at a reasonable price or not. If either of the condition does not match then they move on to the other prospects.

For non-professional investors, they can make an investment into the index fund and accumulate it over a period of time.

Warren Buffett’s Letter 2014

Mr. Buffett mentioned Investors behavior which affects the investment return –

Unexpected behavior from Stanton in the year 1964 –

Why Mr. Buffett has bought Berkshire Hathway at the year 1962 –

Example of Indian companies

One of the air-cooler manufacturing company of India was available below the book in the year 2009

One of the two-wheelers and commercial vehicle manufacturing company was available below book value in the year 2008 and below cash in the year 2008 and 2009

Charlie Straightens Me Out

The initial period of years, Mr. Buffett engage in the buying bargains (cigar-butt) strategy which he learns from Mr. Graham. The major weakness of the concept mentioned by Mr. Buffett is “Cigar-butt investing was scalable only to a point. With large sums, it would never work well.”

Here, I have also made a blunder but luck by chance got saved.

Mr.Munger has an impact on Mr. Buffett which has helped to Mr. Buffett to evolve cigar butt strategy to wonderful businesses at favorable prices. Many times, Mr. Buffett and Mr.Munger do not get agree but they never ever have made any arguments. When such scenario arises then Mr. Charlie end up a conversation with saying “Warren, think it over and you’ll agree with me because you’re smart and I’m right.” Mr. Buffett has accepted that transformation was not easy but he has done it.

Warren Buffett’s Letters

WARREN BUFFETT’S LETTER – 2011 – 2012

Warren Buffett’s Letter 2011

Mr.Warren Buffett has explained on the commodity to brand-

One of the plastic product manufacturing company which use crude oil & it’s derivatives as a raw material but due to selling a brand company can increase a profit higher than growth to the sales

One of the footwear manufacturing company which use rubber, plastic I.e. crude oil derivatives as a raw material but due to selling a brand company can increase a profit higher than growth to the sales

Mr.Buffett on investing-

When we make a compromise with our need and make an investment of those savings to the proper assets, we can able to receive more purchasing power in the future. We need to majorly focus on the beating inflation for the longer period of time which will provide us a more purchasing power in the future. Our minimum target to earn a return from our investment should be inflation rate + GDP growth rate. This is an appropriate return which will provide us a more purchasing power in future and also build us wealthier. During the current scenario in India, inflation rate 3.77% + GDP growth rate 8.20% = 11.97%, it should be a minimum threshold return from the investment we make.

If we look at the 10 years average inflation rate and GDP growth rate in India then it is 7.71% and 7.17% respectively. So that if we have made an investment in the year 2007-2008 than we should have minimum threshold return of 14.88%. and for the last 20 years is 14.60%.

Warren Buffett’s Letter 2012

Mr.Buffett on intrinsic value creation –

Mr.Buffett on capital-intensive business –

We can use a similar parameter for analyzing a capital-intensive business. Here, we can check that whether the company has higher interest coverage after paying current year interest cost or not. This parameter indicates that the company can pay comfortably interest cost on additional borrowing or not. Such quality will not easily available with all the capital-intensive companies so that we can able to filter out good company from the capital-intensive business segment.

One of the FMCG Company which is the manufacturing and marketing of household products and personal care products

One of the laboratory business company of India

Warren Buffett’s Letters 1957 – 2012

SIMPLE IS BETTER – ISSUE -13 – BUYBACK

I have mentioned during the series of Warren Buffett’s letter that buyback done by the company considers good. Also when the market value of the company is available at discount from intrinsic value and company does not have a better opportunity to make an investment then company has to repurchase own shares. We have heard that the company having good management then they come up with a buyback and others will come up with a dilution of capital. The buyback is one of the criteria for judging a capital allocation decision of management that whether good or not.

What is Buyback?

For Detail Issue, Click here —> SIMPLE IS BETTER – ISSUE -13 – BUYBACK

WARREN BUFFETT’S LETTER – 2008 – 2010

Warren Buffett’s Letter 2008

When there is a pessimism into the market then we get an opportunity to buy a good business at a discounted value. But during a euphoric time period, good businesses are available at a sky-high value.

Indian companies examples

One of the wealth creator IT Company during an IT bubble

One of the wealth creator IT Company during an IT bubble

One of the two-wheelers and commercial vehicle manufacturing company was available at a discounted value during pessimism of the year 2008

Warren Buffett’s Letter 2009

What is avoided by Mr. Buffett and Mr.Munger —

Mr. Buffett on derivatives –

Warren Buffett’s Letter 2010

One of the infrastructure company

One of the electric motors, generators, transformers manufacturing company

Mr. Buffett on debt-

Example – SIMPLE IS BETTER – ISSUE -4 – Mr. EMI V/S Mr. SIP

Mr. Buffett on crowd mentality-

Mr. Buffett on Repurchase of shares –

One of the Pharma Company of India which has sold one of the business segment into the FY2011 and company becomes a Cash bargain. The company has done a buyback at that time.

The company has a total Cash balance of Rs.1770.28 crore + Upcoming cash due to the sale of the business worth of Rs.7136.00 crore = Rs.8906.28 crore. And the company was available at MCap of ~Rs.7830 crore. Entire continuing business was not given valued by the market.

One of the two-wheelers and commercial vehicle manufacturing company has done a buyback in the year 2009

The company has a total Cash balance of Rs.1260.05 crore. And the company was available at MCap of ~Rs.608 crore. Entire continuing business was not given valued by the market.

One of the metal company in the year 2016 has come up with the buyback. In the year 2016, the price of iron ore was traded lower.

Company had a cash balance of Rs.14806 crore in FY16 and PAT of Rs.2517 crore. Company was available at MCap of ~Rs.28440 crore. Entire continuing business ex-cash was available at 5.94x of PAT (MCap Rs.28440 crore – Cash Rs.14806 crore + debt Rs.1497 crore = Rs.15130.86 crore; EV Rs.15130.86 crore / PAT Rs.2517 crore = 5.94x).

Warren Buffett’s Letters 1957 – 2012

WARREN BUFFETT’S LETTER – 2007

Warren Buffett’s Letter 2007

Businesses – The Great, the Good and the Gruesome

One of the concepts which are essential to understanding making an investment and value to the business.

Many of us focus on the story builds for a particular business and make a hope investing rather than focusing on the actual reality. I always quote- “Stories are for kids, not for investors.” We need to focus on the ability of the company for creating access return on invested capital (Access return means higher than the cost of capital) and that should be sustainable for a longer period of time.

Mr.Buffett has always put a huge emphasis on the business which has a moat and earns consistently higher return compared to the cost of capital.

See’s Candy as an example of Great business –

Indian Companies example for Great business

One of the two-wheeler and commercial vehicle manufacturing company

One of the FMCG Company

One of the Assets Management Company

Here, the company does not require to make a huge investment to earn more money. Float itself take care of the major requirement of the invested capital. Many a time float covers working capital as well as fixed assets requirement. Due to such nature, Profit earns from operation majorly gets to the investment and cash so that investment and cash to the company is compound which also provides benefits to the business.

Good Business –

Good business which does not have float available with the business or least float available with business, company has to invest money which they earn from profit, and sometimes little external funding also requires.

Indian Companies example for Good business

One of the company from tableware industry

One of the pharma company

One of the Tea manufacturing company

Gruesome Business –

A gruesome business which does not have float available with the business, company has to invest money which they earn from profit, and also external funding requires to earn little profitability, sustaining the business or further growth. Here, huge capital is required to run a business.

Mr.Buffett has quoted an example of U.S. Air, He acquired a preference share of the company in the year 1989 and sold at the year 1998 with a huge gain. After that company gone for bankruptcy for the twice. The airline business is a cyclical business, huge dependence on the prices of crude oil and during the year 1998-99, crude oil prices were at the bottom (near to the price at the year 1988). So that profitability gets improved for the year 1998-99 and after that crude has never come back to those price level, which has affected to the profitability of the company.

Indian Companies example for gruesome business    

One of the telecom company of India

One of the logistics company

One of the steel manufacturing company

We have to use a different valuation matrix for each category of the businesses and cannot provide a similar valuation to each category of businesses. We cannot give the same value to pour water and to dirty water. Yes, it is true that we can make process and pour dirty water but for that, we need to bring more capital and many a times, few qualities of water will be lost during the process of dirty water to pour water.

We have to sell out our position into the cyclical business at the proper time or else we stuck with the business.

Indian company’s example

For how to enter to the cyclical businesses, kindly visit – WARREN BUFFETT’S LETTER – 1987

Now, for taking an exit from cyclical businesses – When margin approaching towards a previous high margin, we should start to exit from a cyclical business. We need to track the price of the commodities as well as quarterly operating margins.

Sugar companies

Cement Company

Warren Buffett’s Letters 1957 – 2012