The Three-Step Guide to Be as Successful as Buffett... - The 5 Minute WrapUp by Equitymaster
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The Three-Step Guide to Be as Successful as Buffett...

Feb 8, 2016
In this issue:
» Government's divestment track record: Not much to show for...
» Should one consider taking a bite into the banking space?
» ...and more!
0.00
Radhika Pandit, Managing Editor of ValuePro

How has Buffett done it?

What's made him so successful?

Is it his approach?

Can we emulate it?

We think so...given the investor has discipline and the right mindset. Buffett's style is neither complex nor unapproachable.

If you want to emulate the Oracle of Omaha's approach to stocks, take note of these three essential Buffett characteristics...

Be contrarian: Buffett has his own mind and never follows the crowd. In fact, he prefers to do just the opposite. But he's not contrarian for the heck of it...

Take the markets right now. The crisis in China, weak crude prices, and disappointment with the Modi government has taken its toll on the Indian indices. Since the start of 2016, we have seen a spate of corrections. Investors are nervous. Many are looking to for the exit and want to stay away altogether.

Buffett thinks differently. For him, market volatility is the best time to get greedy and pick up quality stocks at a discount. And this is exactly what you should do as well.

Buy businesses, not stocks: What does this mean? Buffett doesn't buy stocks hoping that the price will go up. There is more to it than that. Buffett believes in investing in quality businesses. These businesses will certainly see short-term stock price fluctuations. But these businesses reward shareholders immensely over the long term. And Buffett buys businesses for the long term.

What are the hallmarks of a quality business? Wide moat, little debt, healthy financials, and good dividend payouts. More importantly, Buffett wants businesses that will be relevant even 50 years down the line.

So when you are selecting stocks, you need to ask yourself whether the company in question meets most of these 'Buffett-would-buy' criteria, as we like to call it.

Buy stocks with adequate margin of safety: This is the key. Buffett believes in buying stocks that are trading at a sufficient discount to their intrinsic value. The idea is not to not overpay for any stock, including good businesses.

Even if you have zeroed in on an excellent stock that matches all the fundamental criteria that Buffett so values, it still wouldn't make sense to buy if the price is too high.

Rich valuations do not make rich investors.

Some of Buffett's most successful investments are Coca Cola, American Express, and Wells Fargo. These stocks became multibaggers for Berkshire Hathaway because of these three essential Buffett characteristics.

My ValuePro team and I stick to Buffett's principles when picking stocks for our two portfolios. We make sure the business is good, is relevant, and has healthy financials and a competitive advantage. And we are rigid about margin of safety.

We prefer to buy stocks only if they are trading at a discount of 20-25% of their intrinsic value. This means plenty of quality stocks don't make it into our portfolios. But we don't like paying an exorbitant price for any stock - no matter how good the business is.

And we don't plan on changing these principles any time soon. Since inception, both portfolios have outperformed the benchmark index.

Do you think you can be as successful as Buffett? Let us know your comments or share your views in the Equitymaster Club.


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2.35

It was 25 years ago when the government began the procedure of divestment with an aim to bring in economic reforms; including liberalisation, privatisation and globalisation of the Indian economy. But as per business paper Mint, the government has been unsuccessful in in meeting its targets nearly two-third of the time. In fact, it has been consistent with this poor record for the past six years.

Despite starting on a very strong note this year - raising Rs 127 bn in the first half of FY16, the best half yearly collection in seven years - the tumbling share prices of the government run companies has led it to cut the divestment target for the current year by as much as 57% to Rs 300 bn from the original target.

From a perspective of an investor, delaying the stake sale does make sense as most of the PSUs are battered black and blue. However, the fundamental question here is whether the government should be running as many businesses in the first place. For instance, the government owns 27 banks across the country. As Vivek Kaul has been writing about time and again, it doesn't make sense for the government to run so many banks just because it has social obligations to meet. And in doing so, the government is only becoming a poor investor as it continues to throw good money after bad.

3:16 Chart of the day

Continuing with our discussion on PSU banks, we came across an interesting chart in the Business Standard today. It showed the NPA position of the worst off private sector bank versus the worst off public sector banks. The chart below shows the same.

Private vs Public: Comparison of NPA Positions

As you can see, the worst off private sector banks are in a relatively much better position as compared to their counterparts from the public space.

Some of the key reasons for the public sector banks to be in a mess include the continuation of lending to the stressed sectors. Particularly infrastructure, mining and power. Also the PSUs have much larger exposure to corporate groups with poor cash flows. All of this has only led to lower margins for the public sector banks; as a result of which, there is a substantial difference in share price returns of stocks from these spaces. As pet the Business Standard, Rs 100 invested in the Nifty Private Bank index at the start of 2013 would be worth about Rs 142 today. Same amount invested in the Nifty PSU Bank index would be worth about Rs 59.

The interesting bit is that all of the public sector banks are now trading way below their respective book values. While this may seem very attractive, it also does give sense of how the market has given up hope on stocks from this space. In comparison, majority of the larger banks from the private space are trading about two times their respective book values. Stocks of Kotak Mahindra and HDFC Bank trade in excess of four times their book values; these valuations are believed to be amongst the highest in the world at present.

So should one be looking through the rubble of the carnage of the public sector bank stocks?

While it is easy to paint all PSU banks with the same brush, given their government ownership, the fact is that within the space there are players with different kinds of strengths and weaknesses. It will definitely take a lot for even the best PSU banks to fetch the valuations that their private sector peers deserve. But, in the meanwhile, the deep discount valuations definitely leave room for sufficient upside in select few.

4.40

After opening the day on a shaky note, the Indian stock markets rose above the dotted line steadily. At the time of writing, the BSE-Sensex was trading higher by about 50 points (up 0.2%), while the NSE Nifty was trading up by 13 points up (0.2%). Sectoral indices were mixed with stocks from the banking and capital goods sectors leading the gains, while weakness was seen in stocks from the pharma and Information technology spaces.

4.50 Today's investing Mantra

"The speed at which a business success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage as it may give the chance to buy more of a good thing at a bargain price." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Devanshu Sampat (Research Analyst).

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2 Responses to "The Three-Step Guide to Be as Successful as Buffett..."

Gopalan

Feb 9, 2016

Following Buffett style earlier on thru a good friend of mine, my attempts are in Gillette, Proctor & Gamble HH, Crisil etc. 1st 2 stocks may appear illiquid and the 3rd may have competition now, but the sheer level of dividends has made the returns INFINITE along with capital appreciation. Thank you.

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Vamsi

Feb 8, 2016


Be greedy when others are fearful and be fearful when others are greedy. Until unless one masters this art , cannot be a successful value investor.

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