Importance of Investing ONLY in good Business - Warren Buffet Video

Warren Buffett discuss about importance of investing in only good businesses. Discussion based on his own investment decisions and the valuable Lesson he learned. - Interview with Becky Quick, CNBC.



Interview Transcript: Click Here

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Corporate Actions Opportunity - Murudeshwar Ceramics Ltd Rights issue

I have been looking for opportunities based on corporate actions and this one seems to be worth mentioning.

Murudeshwar Ceramics Ltd rights issue offer.
Ratio: 1:1
Current Price: Rs. 39.35/-
Offer Price: Rs. 20.00/- (Including face value of Rs. 10/-)
Record Date: Oct/20/2010

Normally, the price is expected to fall to account for the new shares, but looking at the history and my earlier experience with rights issue, that's not the case always. So if the current price maintains after the new shares are allocated, the profit potential of is ~50%. And since the potential is high, it offers a buffer in case price falls. There is no guarantee that price will remain at Rs. 40/- level (or even near that level).

Based on IndexoMeter, I have been converting from securities to liquid assets and currently hold around 25% in cash and this might provide an opportunity to deploy some of the cash for a short period. I am planning to invest in this opportunity. Will keep you posted on how it works out.

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Corporate action opportunities - Update

This is an update to my previous post on corporation action opportunities

Following were the corporate action (Bonus shares issue) opportunities

Sterlite Technologies (Holding)

 Initial bonus plan announcement: Jan/11/2010

 Shareholders Vote: Feb/25/2010

 Bonus ratio: 1:1 & Split: Rs 5 to Rs 2.
 Record Date: Mar/10/2010
 
 Purchase price: Rs. 414.10/-
 Purchase dates: Jan/14 to Feb/5
  Current Price: Rs. 104.70/-
  Avg holding period: 210 days  Avg Absolute Profit/share (as of now): 26.42%
  Average Annualized profit: 46%


Poly Medicure (Small cap- Sold)

 Initial bonus plan announcement: Feb/8/2010

 Shareholders Vote: Mar/17/2010
 Bonus ratio: 1:1

 Record Date: Mar/29/2010
 Purchase price: Rs. 193.96/-
 Purchase dates: Feb/26/2010
 Sell Price: Rs. 118.5*2 = 237/-
 Sell Date: Apr/8/2010 (41 days)
 Absolute Profit/share: 22.19%
 Annualized profit: 194.84%
 Index Return during same period: 9.38%
 Index Return (Annualized): 82.36%


IVRCL (Sold)
 Initial bonus plan announcement: Jan/27/2010

 Shareholders Vote: Mar/8/2010
 Bonus ratio: 1:1
 Record Date: Mar/19/2010 Purchase price: Rs. 312.78/-

 Purchase dates: Feb/8/2010
 Sell Price: Rs.175.40*2 = 350.8/-
 Sell Date: Apr/8/2010 (59 days)
 Absolute Profit/share: 12.16% 
 Annualized profit: 74.17%
 Index Return during same period: 0.78%
 Index Return (Annualized): 4.73%

This was an interesting experiment and I am glad that the investments generated decent positive returns. But I don't think I will do it again. I am currently looking into some other opportunities which seems to have better prospects. Will post the details once I have more information.

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Portfolio Update - Parsvnath Developers

  Its been a while since I posted any messages.. Work, School & Family are keeping me really busy!!

  Since the start of this year, I have not made many transactions in my portfolio. But something about Parsvnath Developers (company was part of my portfolio) caught my attention. The company promoters are currently holding 63.60% shares of the company and promoter 'bodies corporate' are holding 11.11% as per latest (June, 2010) update. And promoters and promoter companies have pledged 77% & 98.46% of their respective holdings in the company. In other words, majority of the shares of the company are now pledged!!! Could be because of many reasons including promoters in financial trouble and gambling with the company.

  I didn't think it was a responsible action from promoters, so sold all my shares in the company. Again, the pledge could be because of many reason but I didn't want to find out the reason and future results with my money!!

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Why do I admire Warren Buffet?

Lot of people recognize or use Warren Buffet's name, majority knows him as one of the wealthiest man alive. I thought i will add why I personally admire him.

To start, it's not because he is one of the wealthiest man in world, there are plently of other super wealthy whom I don't admire or I don't care. In case of Warren Buffet, it adds credibility and shows that what he does works (really well)!!

I admire Warren Buffet because ...
  - His records are proven over a long period of time (50+ years) and not a one time 'lucky' phonomemon.
  - His principles are simple to understand (didnt say easy to follow :-) ). You don't have to be a genius to understand it.
  - He is open in sharing his investment principles and what worked for him. There is no secret trading platform or investment armies with complex trading algorithms.
  - He admits his mistakes!! Refer to his annual shareholders letter, latest available here
  - His principles are rational and makes sense!! E.g: "Be greedy when others are fearful and be fearful when others are gready", "The more number of decisions you make, the more chances of mistakes", "Price is what you pay. Value is what you get", and many more... 
  - Does not prefer loosing sleep (risk) for few extra $$.
  - Very modest salary of $100,000 for a corporation with its size and profit. And unlike Wall Street CEOs who earns 1$ salary and multi millions in stock option and other benifits, he does not have a stock options.
  - He treats his shareholders are partners, and candidly discuss his objectives and why he does certain things in certain ways. His shareholder's handbook is a great read.
  - His way of managing his companies (80+) is different. He Identifies/acquires talent/companies and give them freedom to do what they are good at and continue to grow business. Does not interfere in day to day activities of his CEOs. Does praise his managers indivudiually, openly often in his meetings and letters.So, most of the owners/CEOs continue to work for him after Bershire buys the business from them.
  - Allocates capital the most efficient ways.
  - Manages Risk better than pretty much anybody!! Read last year's shareholder letter where he states that risk management is CEO's responsibility and not that of a Risk Manager's or that of a committee's job.
  - He does not claim that he knows the future in short term. Unlike many others, who claims that they can predict S&P accurately for next week and month, he says he CAN'T predict future in short term.
  - Lives a modest life inspite and extreme wealth and success.
  - Donated most of his wealth to charity. That too, he didnt set up a new charity in his name, instead found the best available (Bill Gates) and allocated his wealth to their charity.
  - He made his wealth by investing in capital markets, which is an area of interest to me.

Above all, I personally find that his principles makes sense to me and that is something I can follow. And it worked for me in past and continue to works for me!!! Inspite of all these, I am not saying he is perfect and not human!!

My earlier posts about Buffet can be viewed here

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Book Review: You Can Be a Stock Market Genius

I recently purchased 3 books after taking inputs from couple of people and looking through the list of best books listed by the investors I follow.
 1. You Can Be A Stock Market Genius By Joel GreenBlatt
 2. Quality Of Earnings - The Investor's Guide to How Much Money A Company Is Really Making By Thornton L. O'Glove
 3. Analysis of Financial Statements By Leopold A Bernsterin & John J Wild

Title: You Can Be a Stock Market Genius - Uncover the secret hiding places of stock market profits.

Author: Joel GreenBlatt

First Edition: 1999

Publisher: Simon & Schuster New York

Now, don't be misled by the title. It is in fact a good book. It's not a 'hot' book which just came out now, it was published first edition on 1999.

This is not a book for everyone; it is focused on different types of corporate actions and opportunities for profits arising due to it. In the book, author goes over multiple topics were market can be inefficient (at least for short durations). It covers topics including Spin-offs, Mergers, Restructurings, Bankruptcies, Rights Offerings, Risk Arbitrage, Merger Securities, Recapitalizations.

Good think about it is that the author provided one or more case studies (from his own experience) along with discussion of each type of opportunities. Also a pretty comprehensive list of resources where we can look for new opportunities and how to pursue are given in last chapter. As the author says multiple times on the book, this book servers as a guide and makes the readers aware that these types of opportunities exists, so the read have an idea about what to look for. It's a light read, no formulas or complex equations. All the case studies discussed (one case come close to a blowup, but ended well) in the book are success, it would have be interesting read about few cases where it was disaster (because it happens!!).

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Warren Buffet's Lehman Analysis

My second post related to Buffet, this one looked interesting. During height if panic, Lehman team approached Buffet requesting investment in their company. Buffet asked Lehman's management team to invest in Lehman along side with him (or should I say, asked to eat their own cooking?).

Lehman CEO Richard Fuld called Buffett on March 28, 2008 to discuss the possibility of Buffett "investing at least $2 billion in Lehman."

"Two items immediately concerned Buffett during his (March 28) conversation with Fuld."

First, "Buffett took it as a negative that Fuld suggested that Lehman executives were not willing to participate in a significant way" by investing in the firm under the same term.

Second, Buffett thought Fuld's complaints about short sellers indicated a "failure to admit one's own problems."

Complete news and actual report from court-appointed Lehman bankruptcy examiner Mr. Anton Valukas is available here.

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Warren Buffet's Annual Report & Shareholders Letter - 2009

Berkshire Hathaway Annual Report & Warren Buffet's Annual Shareholders Letter - 2009 : PDF Report
Individual year's performance is available in the annual report.

Following chart shows Berkshire Hathaway performance along with S&P 500 from Year 1965 to 2009.

Following chart shows Berkshire's relative performance compared to S&P 500. E.g, in 1965, Berkshire gained 23.8% while S&P gained 10%, which gives the relative performance of +13.8% for Berkshire.

Few highlights from the report:

What We Don’t Do
Few examples of how we apply Charlie's thinking at Berkshire:

• Charlie and I avoid businesses whose futures we can’t evaluate, no matter how exciting their products may be.
• We will never become dependent on the kindness of strangers. Too-big-to-fail is not a fallback position at Berkshire.
• We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree.
• We make no attempt to woo Wall Street. Investors who buy and sell based upon media or analyst commentary are not for us. Instead we 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.

Berkshire has around 80 fully owned companies and its broadly classified into four.
Major operating sectors: major companies

Insurance: GEICO, National Indemnity, General RE

Regulated Utility Business: MidAmerican Energy Holdings, Burlington Northern Santa Fe Railway (BNSF),

Manufacturing, Service & Retailing Operations: Benjamin Moore, Borsheims, Dairy Queen, Nebraska Furniture Mart, See's Candy, Net Jets
Finance & Financial Products: Clayton Homes, CORT & XTRA leasing, Berkadia Commercial Mortgage

Investments:
Portfolio contains 13 companies with more than 1$ market value. All well known companies including Amex, P&G, Coca-Cola, Wal-Mart, Wells Fargo etc. Total investment portfolio market value is currently $59 Billion. And a $26.0 B position on non-traded securities including Dow Chemical, GE, Goldman Sachs, Swiss Re & Wrigley added for a total cost of $21.1 B.

On Stock-for-stock offer: 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.

Quotes:
   "If Charlie, I and Ajith are ever in a sinking boat - and you can only save one of us - swing to Ajith" ( referring to Ajith Jain of National Indemnity)
   "Don't ask a barber whether you need a haircut" - referring to use of investment bankers to evaluate an acquisition.
   "I subtly indicated that I was older and wiser, I was just older" referring to manager's reservation on GEICO's failed credit card offering idea.

Mistakes:
   For many years I had struggled to think of side products that we could offer our millions of loyal GEICO customers. Unfortunately, I finally succeeded, coming up with a brilliant insight that we should market our own credit card. I reasoned that GEICO policyholders were likely to be good credit risks and, assuming we offered an attractive card, would likely favor us with their business. We got business all right – but of the wrong type.
  Our pre-tax losses from credit-card operations came to about $6.3 million before I finally woke up. We then sold our $98 million portfolio of troubled receivables for 55¢ on the dollar, losing an additional $44 million. 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. I was just older.

On investing in capital intensive business:
   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.

Derivatives and Risk Management:
   We have long invested in derivatives contracts that Charlie and I think are mispriced, just as we try to invest in mispriced stocks and bonds. Indeed, we first reported to you that we held such contracts in early 1998. 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.
    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.
 
Berkshire's ACQUISITION CRITERIA:
We are eager to hear from principals or their representatives about businesses that meet all of the following criteria:
(1) Large purchases (at least $75M of pre-tax earnings unless the business fit into one of our existing units)

(2) Demonstrated consistent earning power (future projections are of no interest to us, nor are “turnaround” situations)

(3) Businesses earning good returns on equity while employing little or no debt

(4) Management in place (we can’t supply it)

(5) Simple businesses (if there’s lots of technology, we won’t understand it)

(6) An offering price (we don’t want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown).

2010 Annual Meeting
   Details of next annual meeting are also provided. It was interesting to read this section, since I already attended earlier shareholder's meeting. Program structure is pretty much same, with few minor changes.

The OWNER-RELATED BUSINESS PRINCIPLES section on pages 89 - 94 is a must read!!

Some additional comparisons on performance: (Courtesy: WSJ)
Berkshire Class A stock returned over 22% average in last 45 years, while the book value seen an annualized gain of 20%. Closest in mutual fund were Fidelity Magellan Fund which returned 16.3% and Templeton Growth Fund which returned 13.4%. All compared to S&P' annualized around 9.3% during same period. What does that mean in terms of $$? (I think this is the most used about way of comparing!!)
$10,000 invested in each of these will be worth now:
Berkshire: $80 Million
Fidelity: $9.1 Million
Templeton: $2.9 Million
S&P: $560,000

A few percentage points can make that kind of difference?? :-) One noticeable similarity between these two funds and Berkshire is that they all have very low turn over ratio. I have to also add that comparing Berkshire to mutual funds is not exactly fair, since mutual funds managers have restrictions on what they can invest in and have mostly a short team focus to please investors. While as a majority owner in his Berkshire, Buffet does not face those pressures, also he is a proponent of shareholders acting as long term owners.

I just completed my Spreadsheet based Modeling (Linear Programming) course by Prof. Amit Basu, and it was interesting enough for me to try using Berkshire's performance data. Here I am not using any models, but using some of the tools available to interpret the data. I have uploaded it here.

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Portfolio Asset Allocation

A critical part of investment decision is asset allocation, how you allocate the asset across different asset classes. It plays an extremely important role in your chances of succeeding in long term. In other words, it provides the the flexibility to act when market offers good opportunities to buy or sell investments.

If one had a significant % of his portfolio allocated in liquid assets including cash during the last crash, he would have had an opportunity to reallocate the portfolio to stock and other riskier asset at very attractive prices and there by higher the chance of appreciation of portfolio as a whole. Same way, if you had moved from riskier asset to safe assets before the crash, once would have saved lot of heart burn. On the other side, if you have significant % of your portfolio allocated in safe asset when market goes up, it limits your chances of gain. In other words, a good asset allocation is as important as picking the right stocks. Having all right stocks and a wrong asset allocation does not do much good.

As a side note, Buffet went into recession with $40+B in cash. He utilized significant portion of it in investments like Goldman Sachs, Wrigley, Burlington Northern along with other investments over last 2 years. This cash position was definitely an advantage for Buffet and he utilized the cash position during downfall to his advantage. Another reason for Buffet''s general high cash holding is Berkshire's huge insurance operations.

Having a right asset allocation strategy is easier said than done.

I am trying to improve in this area, and still looking at many options, one of the things I am trying is to develop an asset allocation correlated to index P/E (aka. Indexometer). While not a fool proof method, what it means is to allocate more towards liquid assets as the index PE goes up and move towards more riskier assets when P/E is low. Again, this is not an automated process or a rule, but more of a guide (among other things) for asset allocation. Also, I don't plan to sell all of my stocks as index PE goes up, rather try to adjust exposure accordingly. I must add that the strategy helped in the recent fall (at least, to till this moment). I had high cash component going into last month's fall compared to previous times. One time is not enough to call it a rule, but planning to track it closely to see if it really works over time.

In order to add more visibility to the process, as a Beta (trial) version, I am adding a new chart (on page top, click on the link "[+-] Asset Allocation Chart") which displays the percentage of liquid asset in my total portfolio at a given time. In the graph, this % is compared to corresponding index PE along with index and fund performance. So, over time I am hoping to see a positive corelation between cash/liquid asset and index PE (As index pe goes up, cash component in portfolio also should go up, and vice versa)). I am still working on the best way to display it, but going to start it to see how it works out. If you have any suggestions about how to display this information in a better way, please let me know. My objective is to display the allocation of liquid asset in the portfolio and compare it to index.

Note: I have scaled the index and fund numbers proportionately to cash position range, so that graph looks more meaningful. In this particular graph, I am not comparing the performance of the index or my fund (we already have a graph for it). Key elements in the graph are the cash and liquid asset % (which is approximately 100% - stocks allocation).

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Corporate action opportunities

I added following companies in last two weeks to my portfolio as part of corporate action opportunities. Both companies have not announced record dates. As discussed in earlier posts, I have allocated a small portion of my portfolio for arbitrage/corporate action opportunities. There are no guaranteed returns on these types of opportunities.

After the bonus and splits, the prices are suppose adjust exactly to reflect the added shares. But in reality, there are chances of that not happening and price will get adjusted, but not to exact same value as it should be. And sure, there are chances that this does not happen in which case this could transaction could generate 0 profit or even loss. I discussed few opportunities which worked out well in the past includng Federal Bank, Adlabs, TRF etc.

E.g:
Current Price: Rs. 400/-
After 1:1 split, it should quote at Rs. 200/
But there are chances price will be quote at Rs. 220/
which provides a gain of Rs. 20/share and since the share number doubled, that is a return of Rs. 40/ (10%) per original shares purchased.

Basically, we are trying to make use of any inefficiencies which may exists in the market.

I don't invest in all the corporate actions announced, rather only in companies which i feel comfortable enough holding a longer if the opportunity didn't work out as expected. I am looking at Sterlite Technologies in detail to see if I can add it for long term.

1. Sterlite Technologies "Sterlite Technologies Limited has informed the Exchange that the Board of Directors of the Company at its meeting held on January 18, 2010 approved, subject to the approval of shareholders : (1) Stock spilt by way of sub-division of the Equity Shares of the Company of the face value of Rs.5/- (Rupees Five) each to the face value of Rs.2/- (Rupees Two) each. (2) Issue of Bonus Shares in the ratio of 1:1 to the shareholders of the Company and to the existing warrant holders (subject to conversion of Warrants in fully paid equity shares)"
Board of Directors: Approved
Shareholders: Feb/25/2010
Record Date: Mar/10/2010

2. IVRCL. "IVRCL which came out with results on January 28th 2010 has also approved the Bonus issue it has planned, they have announces Bonus Issue in the rate of 1 stock for every stock held on the record date, the record date for the same will be announced later"
Board of Directors: Approved
Shareholder: Mar/8/2010
Record Date: NA

I will try to post updates as transaction progresses and also once the transaction completes with details on how it worked out.

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Risk Intelligence Quotient

50 questions in the Risk Intelligence Test, the importance is on self knowledge.

From Projection Point:

Risk Intelligence Quotient (RQ) is a measure of a person's ability to estimate probabilities accurately. People with high risk intelligence tend to make better predictions than those with low RQ.

This test is rather unusual in that you can score very highly even if you don’t know much. That’s because this test measures self-knowledge rather than factual knowledge. It rewards you for gauging your own level of uncertainty accurately, rather than for knowing a bunch of facts.

By http://www.projectionpoint.com
Projection Point is a private, independent, non-profitmaking project set up by Dylan Evans and Benjamin Jakobus with their own money to satisfy their own curiosity.

Found at: http://www.simoleonsense.com

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Intrinsic Value as described in Security Analysis

Video explaining Intrinsic value found at http://indiainvestor.wordpress.com/2009/11/25/intrinsic-value-as-described-in-security-analysis-using-concept-visuals/

Not in detail, but a brief overview.

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Shaffi Mather: A new way to fight corruption

This is a different post compared to our normal topics discussed here. Video is from www.ted.com (Thank you Paul Varghese for forwarding this video!!), Shaffi Mather (Social Entrepreneur) is discussing about his latest venture focusing on fighting corruption.

From Ted.com:

About Shaffi Mather:
Shaffi Mather is the founder of 1298 for Ambulance, Education Access for All, and co-promoter of Moksha-Yug Access.

Shaffi Mather was a successful young entrepreneur, who brought a family-run real estate business to the forefront of the local market before moving on to take major positions at two of India’s largest communication corporations -- Essel Group and Reliance Industries. However, after a perilous ride to the hospital with his mother he was forced to confront India’s need for a dependable ambulance service. He left his career at Reliance and founded 1298 for Ambulance, a for-profit service with a sliding scale payment system that has revolutionized medical transport in Mumbai and Kerala.

Today, Mather is also a co-founder of Moksha-Yug Access, a microfinance instiution that operates in rural India, and The Education Initiative, which is involved in e-learning and in creating schools across India. In addition, Mather is a lawyer focusing on litigation in public interest -- battling for transparency in governance and use of public funds, human rights, civil rights and primacy of constitution. He is a TEDIndia Fellow.



Available at: Ted.com

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A Look at Friedman & Keynes Theories Post Crisis.

Writer John Cassidy talks with Kai Ryssdal about the article he wrote for The New Yorker.

Kai Ryssdal: The recession that we are just now beginning to work our way out of has been miserable for a huge chunk of the economy. For economists, though, it's literally been a once-in-a-lifetime chance to see how some of the dominant theories in the dismal science hold up in reality.

There are, in essence, two of those theories. One based on the ideas of John Maynard Keynes. The other popularized by Nobel prize winner Milton Friedman and named after the university where he taught: the University of Chicago. The Great Recession of '08-'09 has exposed some weaknesses in Friedman's ideas. And in the most recent issue of The New Yorker magazine staff writer John Cassidy explores the decline and fall of the Chicago School of economics. When we talked I asked him if he would start with a little primer.

Read the full post at marketplace

Listen to the Audio:

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