Has Buffett's value investing style reached an expiry date?

Nov 18, 2011

In this issue:
» Will the menace of insider trading in India end?
» The higher order effects of money printing...
» Bill Gross: Debt-driven growth is a flawed model
» Labour issues will continue to bother manufacturing sector
» ...and more!
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It is said that every great idea has an expiry date. We thought why not test this adage on legendary investor Warren Buffett's style of value investing. It was extremely successful for him in the 20th century and so far. Buffett's massive conglomerate Berkshire Hathaway stands as a living testimony to the merit of value investing. But do the changing times and global dynamics call for a revamp in Buffettology?

We'll say 'yes' and 'no' both. While a greater part of the 20th century economy was driven by brick-and-mortar businesses, we currently belong to the digital age. Web and communications technology have fundamentally altered the way businesses are done. The economic environment of today is more volatile and uncertain than ever before. Coupling of economies with the larger global arena have raised the exposure of businesses to external perils. Businesses and countries are rising fast and falling even faster. Add hyper competition to that and you will figure that it is increasingly difficult to forecast cash flows and profits. So yes, with the structural changes in the global business environment, you cannot go out with a very rigid set of ideas. You have to be willing to look at things and situations in a different perspective.

In fact, if you look at Buffett's investments over the decades, it is apparent that he too has evolved his ideas in tune with the changing times. While his guru Benjamin Graham was mostly focussed on quantitative analysis, Buffett learned the value of the qualitative aspects and enlarged the scope of value investing. For a long time, he was averse to touching technology stocks, since he believed they were outside his circle of competence. With his recent big ticket investment in IBM, he seems to have clearly redefined himself yet again. And the list goes on.

At the same time, he has held on strongly to the core principles of value investing. Irrespective of what's going on the global economy, it will always be rewarding to buy companies that have a strong business moat, are run by good management and are available at a price that offers a good margin of safety. That's all you have to keep in mind we believe.

Do you think value investing still holds value, or has it reached its expiry date? Share your comments with us or post your views on Facebook page / Google+ page.

 Chart of the day
Indians are known for their appetite for gold and are the largest importers of yellow metal in the world. However, in recent times high international gold prices coupled with a depreciating rupee have dampened demand for the precious metal. Demand declined by 23% year-on-year (YoY) from 263.9 tonnes in 2QFY11 to 203.3 tonnes in 2QFY12. This was in contrast with global demand which went up by about 4% YoY during the same period. In China, demand shot up by almost 16% YoY. Today's chart of the day shows that gold imports were down by 20% YoY to 200 tonnes during the quarter ended September 2011. It is, however, important to note that while demand for physical gold demand in 2QFY12 showed a downtrend, derived products like gold exchange-traded funds (ETFs) witnessed a substantial increase. With inflows of 77.6 tonnes, gold ETFs and other such products witnessed a growth of 58% YoY.

Data source: Business Standard

Insider trading has been a menace that has shaken investor confidence in Indian capital markets several times. Not one or two, but the promoters, key shareholders and top management of several mid and large Indian corporates have indulged in it on several instances. Many a times the regulator has found evidences against them too. But hardly anyone has been brought to book. If SEBI chief Mr U K Sinha is to be believed, this may soon become a thing of the past. For not just the willful defaulters but also the top management of a company that is lax in compliance will be dealt very strictly. Mr Sinha has in fact in an interview to a business daily sent very clear signals to those on the wrong side of law, willfully or otherwise. Absence of adequate compliance and legal systems will no longer earn the regulator's pardon. We believe that if executed to the tee, such strict supervision will do a whole lot of good in attracting substantial long term money to Indian markets.

The appeal that the European Central Bank (ECB) print money and become the lender of last resort has perhaps reached the highest decibel level. Almost every expert on every possible platform is sparing no effort in arguing that printing money is indeed the best option. But is it such a good idea after all? Printing money will no doubt help prevent the crisis in the near term but then what next? There is a very interesting concept called the higher order effects of an action. And we believe that all these experts are turning a blind eye to the same. They seem to be obsessed with alleviating immediate pain and are paying absolutely no attention to the long term or the higher order effects of such an action. What if the ECB prints money and citizens of Germany and France lose trust in the currency and start selling it left, right and centre? What if the resulting depreciation of the Euro against the dollar forces the US Fed to do its own printing to prevent the exchange rate from going too high? And lastly, what about the emerging economies like China and India? How much more inflation can they take? Well, these are just few of the problems that could come with money printing by the ECB and there could be many more. Little wonder, Germany is worried as hell about the issue.

Taking debt to grow is actually as ridiculous as it sounds. Unfortunately it did not really sound too ridiculous to the experts and policy makers of the western world. But the truth is that it is a flawed business model as at some point of time or the other the debt would need to be paid back. This is exactly what the head of the world's largest bond fund, Mr Bill Gross, has to say. In his view 'debt driven growth is a flawed business model when financial markets no longer have the appetite for it'. Investors all over the world have become wary of countries that declare new debt programs to fund future growth. They no longer feel that that is the right way to go. And they have been proved right by the crisis that both the US and the Eurozone have seen in recent times. In his opinion, it would be better for countries to adopt fiscal tightening and deleveraging measures to gain back the confidence of the investors. Just mounting up more debt will not help in any way.

Strong growth in manufacturing industries is vital to the overall growth of India's GDP. That is why the National Manufacturing Policy (NMP), aims to increase the percentage share of the sector in the GDP to 25 by 2025 from the present 16. The aim is to create 100 m jobs by then in National Manufacturing Zones (NMZ). But while the intention is in the right direction, execution will not be as simple. And the major hurdle could be labour laws. That India's labour laws are quite inflexible is well known. And here the major thorn on the NMZ's side will be the labour ministry. Indeed, the labour minister has ensured that the NMZs do not curtail labour laws. Further, the labour minister has managed to keep the labour unions happy by bringing legitimacy to workers' unions inside the NMZs. Moreover, the crux here is that while the powers to inspect and enforce labour laws has been given to the CEO of the NMZ, the powers to design the enforcement of these laws has been retained by the labour ministry. This means that the possibility of disagreements between the NMZs and the labour ministry in the future cannot be ruled out. And this then could make the achievement of the targets set by the NMP that much more difficult.

In the meanwhile, the Indian stock markets were trading deep in the red after opening weak. At the time of writing, the BSE Sensex was down by 207 points (1.3%). All sectoral indices were trading in the negative. Declines were seen across entire Asia with China (down 1.8%) and Hong Kong (down 1.9%) being the top losers.

 Today's investing mantra
"Following a value approach won't be easy for everyone, especially in today's media-dominated, short-term oriented markets, in that it requires deep reservoirs of patience and discipline. Yet it is the only truly risk averse strategy in a world where nearly all of us are, or should be, risk averse." - Seth Klarman

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7 Responses to "Has Buffett's value investing style reached an expiry date?"


Nov 22, 2011

As an avid Buffet watcher, I can understand his way of thinking. He did not invest in IT in the DOT COM days of late 1990s as most of the companies had unclear business models, poor cash flows and unproven and unpredictable revenue and profit streams. That will never change for Buffet. That does not mean he will stay away from IT. If the above are positive, and there is a solid brand and a large institutional strength firm behind it, he will invest. So he has now added a new vertical - software.
I would say the value investing principles remain unchanged. Even software can throw up such solid value opportunities. If I am not mistaken, he also owns Fiserv, which is a software products firm.



Nov 19, 2011

It seems that the big guys of the underworld (not those Sicilian dons and their clones in the rest of the world) are now eying on the commodities and gold as they are losing faith on the financial products and the stock markets. Otherwise on one hand people are talking about surpluses and in the same speed also talking about deficits and one could not really fathom the real cause for the demand supply misses. The speculation on the commodities market is the real cause for the current inflationary pressure.



Nov 18, 2011


kindly study about mr. u k sinha, he is the one who has given clean chit to reliance which was earlier fined yo the tune 1539+ 513 = 2052 crores by then SEBI chief and IITian Mr. C B Bhave who was a honest and bold officer. His extension which was cleared earlier by PMO for a period of 2 years was denied due to lobbying by the reliance, sahara and Bank of rajasthan -Talwars and ICICI bank due to hefty penalties imposed on them. Nobody is talking why these penalties were nullified by Finance ministry Ms Omita Paul and Mr. U K Sinha. This is known to everybody and neither media nor so called Team ANNA is taking up the issue. Why Ms Omita Paul is OSD to Mr. Pranav mukherjee since 1980. Nexus of politicians , businessmen, media and corrupt officers is creating these type of problems.



Nov 18, 2011

No Not exactly...Value investing is intact and also Buffett's investing style is also intact.
It is understood that Buffet included Bill in his Board of directors and got to meet him often to associate with him ans sure the conversations are of more on values and business. Then on his circle of competence started expanding and master mind alliance started working for him. Curious man is going to live long as much as he is curious.

Like (1)

Anupam Garg

Nov 18, 2011

i can't believe the mentioned stats...23% decline in physical demand vs 58% rise in ETFs??

are the ETFs becoming a bubble waiting to explode?

Like (1)

Narasimha Rao

Nov 18, 2011

Your analysis is correct. Buffet's style of not giving any dividends inspite of profits with a view to building up value may not suit many investors. Who knows with so much volatility the value of an investment may evaporate by 75 % in just a few months as happened with even with good Companies like: All Inbfra Co's in India, Voltas, all Major banks, Including PSU Banks, Engg Companies Suzlon, Textile Co's like Alok etc. Days & Scenarios have vastly changed and the approach should be revised to match that. I exited Bharti Airtel because i donot like Companies which donot declare dividends. I appreciate Tatas & Birlas for that. They believe in both Dividends & Value enhancement.

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Nov 18, 2011

The television is still called by that name but the difference between now and 30 years ago is that then there were only B&W TVs and today we have 3D TV. Hope this explains Buffetology. The basic premise remains the same. In another words, the roots of any tree or plant are the same in color – brown and soiled but the leaves, fruits, vegetables and flowers above the ground are of distinct colors.

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