What differentiates you from Warren Buffett

Apr 22, 2010

In this issue:
» Chinese telecom firms 'Indianising'
» Is India importing the Too Big To Fail?
» NREGS offers only 50% employment
» IMF: Yuan holds the key to global recovery
» ...and more!

There is one key difference between you and Warren Buffett. Mr Buffett does a thorough analysis of the businesses he buys into. He makes sure that he buys them at very reasonable valuations. He meets the management to figure out whether it is honest and capable. You too may try to do all of these. But there is one thing you cannot even try to replicate. Unlike Mr. Buffett you cannot buy large stakes in the companies. Retail investors are referred to as 'minority shareholders' in a company. It hardly matters to the management if they disapprove of an M&A activity that the company is pursuing. Or if it is keeping too much cash with itself! Or if it is venturing into unrelated businesses. For the retail investors' voices are those of the minority.

There are only a handful listed entities in India where the non-promoter holding (free float) is more than 50%. However, their number is set to increase. As per a recent listing guideline from SEBI, public shareholding in all companies will have to be brought up to 25% in three years. This will serve investors' interests in two ways. One it will lead to promoters (including the government) diluting their stakes through follow on offers. Two, it will offer minority shareholders more collective voice.

Unlike Mr. Buffett, retail investors may not be able to change the fortune of companies they buy into. But at least the promoters will now have to be more transparent in business dealings. Also companies will have to be run with not just the customers' and promoters' but also minority shareholders' interests in mind. At least this is what we hope!

 Chart of the day
Today's chart of the day indicates the extent to which poor Indians are facing the brunt of rising food prices. Prices of consumer goods, and this includes food prices, has seen the second sharpest rise in India. This is as compared to its BRIC peers like China and Brazil. Only Russia is worse off than us. Consumer prices there have risen by around 14% as per the latest available data.

Data source: RBI Macroeconomic and Monetary Developments

The RBI recently hinted at its worry regarding rising consumer prices. It also mentioned that what was initially a process driven by food prices has now become more generalised. And therein lies the biggest concern, for the RBI and consumers. The RBI's dilemma is - whether to raise interest rates further to tame inflation, or to wait before recovery takes proper wings. The consumers are anyways finding a bigger hole in their pockets!

'When in Rome, do as the Romans do' goes a famous saying. And Chinese telecom companies are practicing this to the tee. Not in Rome, but in New Delhi! We are talking about leading Chinese telecom companies hiring Indians on their boards and for top decision making levels in India. These include telecom equipment manufacturers like Huawei Technologies and ZTE Corp. This move to 'Indianise' their top team is seen as an attempt by these companies to change the public perception in India. This is given that in India, Chinese firms and their products are often viewed with suspicion. A step like this will also make it easy for these companies to do business in India and ward off intense government scrutiny. Call it a smart move by the Chinese.

Goldman Sachs has big plans for India, says a lead headline in one of the dailies. Usually, news of such type is pretty encouraging. Whenever a big MNC endorses India and plans to make big investments, it reaffirms our faith in the Indian growth story. But things are a little different with Goldman Sachs. Agreed that it is the world's preeminent financial institution and most newcomers fall head over heels to get themselves associated with the company. But the firm's reputation has surely taken a beating in the past few days. Of course, the firm has not been proven guilty yet. But if you look at the larger picture, Goldman Sachs and those of its ilk have not quite covered themselves with glory in the past few years. They have been accused, and perhaps rightly so, for aiding and abetting the gambling culture so very prevalent in the US financial system. Thus, we get scared when we hear that such banks have big designs on India. We are worried they might export just the wrong model to Indian shores. Models that have failed miserably in the west!

The UPA government has an ambitious rural welfare scheme - NREGS. It guarantees at least 100 days of work a year for one member of every poor rural household. But the funds allocated for the same seem to be far from enough. A parliamentary standing committee on rural development has said that only 51 days of work could be provided by utilizing funds available for the NREGS in FY10. FY11 seems to be on course to meet the same fate. The budget for FY11 allocates only about 3% more compared to the allocation in FY10. At the end of the day, yet another of those government initiatives that seem to lose their way by the time they reach the ground.

The middle class is the pillar of India's economic growth of the last few years. Both as a labour force and as a consuming class. And one area where the consumption trends seem most promising is media and entertainment. Better quality media in terms of content and delivery. For example, there is an increasing preference for DTH services. The quality of reception is excellent. There are no middlemen. And there is a degree of interactivity.

Hence, it comes as no surprise that India is among the most promising direct-to-home (DTH) markets in the world. In fact, a new study shows that India will become the largest DTH market in the world in terms of subscribers by 2012, overtaking the US. DTH will increasingly eat away the market share of analog cable and end up with a market share of 35% in the long term. By the way, DTH is also great news for the companies who provide the service as well as broadcasters. The money that a viewer pays reaches them without any leakage. Given the size of the opportunity, small wonder that DTH providers have been bombarding us with advertisements.

The global economy is slowly limping back to recovery. The IMF is of the view that growth in the US and wealthier nations in Europe may depend on a depreciation of their currencies compared to developing countries. And as far as the currency appreciation of the developing nations is concerned, the Chinese Yuan is the one most in focus. IMF believes that the Yuan is 'substantially' undervalued. Moreover, given that China is dependent on exports, allowing the Yuan to strengthen would help the country shift to a more domestic-led growth. This would then reduce the chances of the economy overheating.

But whether the Chinese wish to do anything significant on this front remains to be seen. The US has put a lot of pressure on the dragon nation. And China does seem to have shown some amount of willingness to let the Yuan appreciate. Nonetheless, whether or not this appreciation is considerable will be the key.

After a muted start, the Indian markets went on to add to the strength in the benchmark indices and the BSE-Sensex was trading nearly 260 points higher at the time of writing. Stocks from the banking, energy, auto and FMCG sectors led the pack of gainers. Mid and smallcap stocks also found favour as the respective indices were up 0.4% and 0.7% respectively. Other Asian markets closed mixed with China and Japan featuring amongst key losers in Asia. European markets have also opened on a mixed note.

 Today's investing mantra
"The managers at fault periodically report on the lesson they have learned from the latest disappointment. They then usually seek out future lessons." - Warren Buffett

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5 Responses to "What differentiates you from Warren Buffett"


Apr 23, 2010

why does every investor want to invest in RIL




Apr 22, 2010


I very much agree that the DTH service is well recieved and growing at rapid pace.

Does Equitymaster has any recommendation in this space? With a 5 year horizon , is it good time to enter stock like Dish TV?



ramchandra varma

Apr 22, 2010

thanks for sending such valuable information on equities.



Apr 22, 2010

This is with reference to the chart of the day. If this chart is to be believed, food inflation has not risen but declined fastest in India in march 10 compared to march 09



Apr 22, 2010

Thank U very much for sending me most valuable suggestions and kind guidance reg. market value. I'll write more afterward.

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