Warren Buffett's hidden portfolio

Mar 26, 2010

In this issue:
» Warren Buffett's lesser known investments
» Why silver is half copper and half gold
» SEBI goes easy on ULIPs
» Food price inflation eases, not the worries
» ...and more!!

We make no bones about our admiration for Warren Buffett. Truth be told, it springs from a purely selfish motive. The fact that there is a lot one can learn about investing from him. But people sometimes ask us how relevant he is for individual investors. After all, as the head of a gigantic company, isn't he in a different league? He gets deals nobody else can. Our answer is yes and no.

True, the financial might of Berkshire Hathaway does help Buffett bag unusually attractive deals. As we saw during the height of the financial meltdown. But a large portion of his investment style is extremely relevant for small investor even here in India. Take Buffett's investing method in his personal portfolio. That's right, he maintains a personal portfolio. At US$ 1.8 bn, that's a huge fund by most standards (but not by Buffett's). Hence, he has to periodically disclose it to the US regulators.

So, what does Buffett's personal portfolio look like? It is a concentrated portfolio of about 10 stocks. Just 5 stocks make 75% of the portfolio value. Most of them in 'old economy' sectors like banking, FMCG, retail, oil & gas and logistics. Almost all of these companies are really old - founded at least a century back. Most of them have diversified very little from their core area. They are all recognized brand names and have a sustainable competitive advantage. The portfolio generates a dividend yield of 2.3%. This does fly against the notion of hot-shot investing, doesn't it? But really, Buffett's portfolio is not beyond the reach of individual investors willing to do their homework and exercise discipline.

 Chart of the day

Source: The Economist

Despite all the progress human civilization has made, a sizeable chunk of it lives in appalling conditions. And some of the most appalling living conditions tend to be in urban slums. Thankfully, the share of the world's urban population living in slums has fallen from nearly 40% a decade ago to less than 33% today. As the chart of the day shows, India is among the countries where the proportion of urban slum dwellers has reduced over time. In fact, China and India have together lifted 125m people out of slums in the recent years. Unfortunately, the absolute number of slum dwellers is only growing. Hence, there is still a huge scope of improvement.

No other precious metal has been as talked about in recent times as gold. No, not even the metal that is considered to be its closest cousin. We are indeed referring to silver. Any idea why such an anomaly exists? We think the answer that Ajit Dayal, our founder, gave at the recent Equitymaster Investment Summit did come pretty close to being the perfect one. Ajit is of the opinion that silver also has industrial use far in excess of gold. Thus, it is not only a precious metal but also an industrial metal like copper. In other words, silver is half copper and half gold. A valid point indeed.

Silver seems to be neither here nor there. Ajit believes that one should invest in gold if one wants to take the bet that the world economy is going to remain in trouble and central banks will try to print their way out of that trouble. On the other hand, one should invest in things like copper or stocks if one believes that there is going to be industrial recovery and hence economic growth. Investing in silver translates into taking a 50:50 bet and it may not be such a nice thing to do.

This and other such investment nuggets were passed on to a packed house at the investment summit. In case you missed it and wish to take in more such gems, this could well be your last opportunity.

While Indian banks have already stepped up their capital requirements, they may have to brace for more. Not wanting to support any Too Big To Fail entities, the RBI is likely to tighten the controls over capital structure of Indian banks. Most banking entities in the country have raised capital in the past year. Primarily to comply with Basel II norms. However, many got away without equity dilution. That is they resorted to raising hybrid capital (having debt like characteristics) to enhance their capital adequacy ratio. However, the central bank is now planning to raise Tier I capital limit (from the current 6%) and restrict non-equity issues. With high leverage having proven to be a malaise for organisations globally, we believe that the RBI's step is in the right direction.

Unit-linked insurance plans or ULIPs are considered as possibly the single-biggest innovation in the field of life insurance in the past several decades. And this may also one of the most mis-sold products in the insurance business. Considering that returns from ULIPs are determined by the stock markets, the market regulator SEBI had been at loggerheads with the insurance regulator IRDA as to who is responsible for regulating the product.

That war of words may now come to an end. In January, SEBI had sent show-cause notices to all life insurance companies asking them to explain why they hadn't taken its prior approval before launching ULIPs. It is now seen withdrawing these notices. Today's Mint carries a comment from a person familiar with the debate. He's said that "SEBI's change of heart may have been prompted by the fact that most private insurance firms in India eventually plan to sell shares to the public, a move that will automatically bring them under the jurisdiction of the stock market regulator."

In spite of the tapering of increase in food inflation, the central bank continues to worry. This stems from the fact that softening of food prices is not sufficient to stop inflation from reaching double digit growth rates. In fact, the Finance Minster, Mr. Pranab Mukherjee expressed concern that food inflation may spill over to non food items despite food inflation coming down. This situation raises the probability of RBI increasing interest rates to suck money out of the system and continue its exit from monetary stimulus policy. While high inflation is not good for any economy, higher cost of capital is likely to put pressure on the bottom line of corporate India and restrict the growth of the economy.

With signs of a gradual recovery being evident in many parts of the world, the question that is now being asked is when the stimulus measures will be withdrawn. After all, it is hardly prudent to follow an expansionary monetary policy for a long period of time lest inflation rears its ugly head. But the US does not yet appear ready for the same. What with the recovery being dependent on stimulus measures and unemployment raging at around 10%, the Fed is no mood to tinker with its present policy. In fact, Fed Chief Ben Bernanke has stated that a modest US economic recovery still warrants the Fed's ultra-low interest rate policy. However, Bernanke has assured that the central bank stands ready to remove stimulus once the expansion looks solid. It must be recalled that when the crisis intensified, the Fed brought interest rates to near zero and purchased assets worth a staggering US$ 1.7 trillion to help the economy tide over the crisis. That certainly has helped the US economy in that conditions have not deteriorated any further. But a loose monetary policy is what sowed the seed of the crisis in the first place and the Fed would do well to not repeat the same mistake again.

Meanwhile, though the Indian stock markets were a tad volatile today, the major indices managed to comfortably hold on to their gains until the time of writing. The BSE Sensex was trading higher by about 90 points aided by buying activity amongst consumer durables, auto and energy stocks. IT and telecom stocks were the only two sectors seeing overall declines. The other key Asian markets closed on a positive note today.

 Today's investing mantra
"Warren (Buffett) and I have skills that could easily be taught to other people... But Warren and I are better at tuning out the standard stupidities." - Charles Munger

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20 Responses to "Warren Buffett's hidden portfolio"

randhir pachabhai

Mar 10, 2011

please told about investment method


subal Chandra De

Apr 16, 2010

I like Warren Buffets, I intend to get some valuable suggestion for investing in indian security market.
Thanking you.


Ajay Kr. Chatterjee

Apr 9, 2010

I want to very much interest for this!! if you would send me the details of this then I grateful to you!!
Hope realise & for this wait for your early reply.
Thanking you.
Yours faithfully
Ajay Kr. Chatterjee



Mar 30, 2010

I was rather amused to read that you now admire Warren Buffet. I do too, but am I dreaming if I say that I read in one of your pieces not long ago that you were unhappy with him and held him responsible along with the top Bankers in the U.S. for the financial crisis we have had?
Make up your mind please??!!



Mar 28, 2010



A. Johnstone

Mar 28, 2010



R Kapur

Mar 28, 2010

I think it is a great opportunity to gain from the purchase of these CDs containing the knowledge shared at the Investors' Summit/Seminar. You have a choice to buy it or not. Why criticise equitymaster for the advt?


R Kapur

Mar 28, 2010

Interesting. It makes sense to put your money in a limited number of scrips that would do well than to spread out over a large number that would be difficult to track. Regarding KD Vishwanaathan's query on gold - follow what the equity master recommends. Buy Gold ETF, Quantum with half a gram of gold is easily affordable. It works this way - you buy gold units over a period of time and when the price goes up and you need the gold to make ornaments or give as a gift to your daughter sell off the gold ETF units and buy gold with that amount. The inflation in gold price is offset by increase in Gold ETF units.



Mar 28, 2010

it's true he does have only ten in his personal portfolio. note personal. brk is different. learn the difference fobs. anyways for the one saying buffetts old news have fun watching him grow. doesn't have to be amazing but he still will and he can run your ass anyday



Mar 27, 2010

Dear Sir

Please send me the Buffett's Investing methods.



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