Warren Buffett just did something very unusual - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Warren Buffett just did something very unusual 

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In this issue:
» India's 8% GDP growth story
» Cash on balance sheet of PSUs at govt's mercy
» Sluggishness in the banking sector to stay for a while
» Will China be able to lend credibility to its stock markets?
» ...and more!

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We have a question for you. If you were heading a listed company, would you go find a money manager who has a bearish view on your stock? Even more, would you enthusiastically invite him to your annual shareholders meeting?

Does the question sound ridiculous? You must be wondering why on earth someone would do that. But unusual people have unusual ways of doing things. And investing genius Warren Buffett never seems to disappoint when it comes to being unconventional.

Here is what he did. In his recently published annual letter to shareholders, Buffett said he was looking for a money manager who had a negative view of Berkshire Hathaway. He wanted to invite the person to the annual meeting to "spice things up".

Soon enough Buffett found the man he was looking for. Doug Kass, a hedge fund manager and well-known stock picker has shorted Berkshire Hathaway stock. It must be noted that when you short a stock, you are expecting the stock price to fall. The gentleman will have the opportunity to question both Buffett and Charlie Munger at the meeting in May this year.

Why are we discussing this episode with you? We believe that there is a very pertinent lesson here for investors. You will agree that most investors tend to look for conformity when it comes to ideas and investments. Once they have bought a stock, they get emotionally attached. They don't like to challenge it. They try to avoid views that would contradict their position.

But this approach is dangerous. Investors tend to underestimate potential risks that could derail their investments. What Buffett has done is very unusual. By inviting a Berkshire bear, he has shown his willingness to listen to differing views.

This we believe is a very unique quality and also the reason why he is so immensely successful. Our advice to investors is that they should not only refrain from filtering away contrary views but rather embrace them. In our view, this is a great recipe to become a successful value investor.

Do you tend to avoid negative news and views on stocks that you own? Please share your comments or post them on our Facebook page / Google+ page

01:13  Chart of the day
Today's chart of the day shows the states with the highest per capita income growth during the financial year 2011-12. Bihar led the pack with a growth rate of about 11.8%. In other words, Bihar has reported a significant improvement in the standard of living of its residents. However, it is important to note that the per capita income in Bihar is quite low. So the lower base is certainly responsible for the higher growth rate. But it also shows that better governance and decision making can power economic growth and prosperity. Kerala and Maharashtra ranked third and fourth respectively. These states have reported impressive growth. This is despite the fact that they have relatively higher per capita income. The all India per capita income growth stood at about 4.7% during the same period. In terms of absolute numbers, the per capita income growth was the highest in Goa and Maharashtra at Rs 8,157 and Rs 5,216 respectively. However, one must remember that these statistics do not reflect income disparities within each state. As such, it does not indicate whether the growth in inclusive.

Data source: Livemint
*at constant 2004-05 prices

Remember the prosperous years somewhere in the middle of the last decade? Well, this was the time when our economy grew at close to 8-9% per year for a few years. Clearly, it was a momentous occasion because the rate of growth was the highest we'd seen since our independence. Not just that. Our policymakers weren't clearly satisfied with the amount of goods and services we were cranking out. They wanted to set the bar higher. And out came projections of double digit growth. But was there any plan put in place to achieve the same? Well, if the current fate of the economy is anything to go by, there hardly seemed any plan in place. Or if there was one, it was so poorly executed that forget double-digit, even a growth rate of 8-9% became impossible to achieve. Well, the truth was that the high growth rates that we saw were hardly a result of our own efforts. They happened because of the cheap money that was sloshing around the world at that time. And the moment it was taken away, our slow policy making and non-existence of reforms came back to haunt us. Shockingly, nothing has been learned from this bitter experience. And although we have lowered our GDP growth target to 8%, it would help to remind our policymakers that in order to make it more sustainable, there has to be some action on the ground. Merely relying on cheap capital will bring us back to the point where we started.

Cash rich balance sheets certainly evince a lot of interest from investors. It offers some comfort in terms of valuations as well. The price that one pays for the stock looks nominal if one considers the intrinsic value of the stock net of cash. But these are not factors that you would be pleased with if you run the government. For here, having too much cash on balance sheet does not go well with investment plans. Not having the luxury to spend on capital investment from limited tax collections, the government relies on PSUs to do the same. We cannot blame the PSUs either for their lack of conviction about the government's policy making.

Over the last few years they have preferred to keep cash with themselves rather than allowing it to get stuck in unviable projects. But the government wants to hear none of it. It is now bent on coercing PSUs into using their cash pile to kick-start a fresh capex cycle. If not they might have to lose the cash. The latter will be by way of paying a special dividend. Now, Coal India, National Mineral Development Corporation (NMDC) and Oil and Natural Gas Corporation (ONGC) are the PSUs boasting of maximum cash reserves. It will be good if their cash can be deployed to strengthen India's energy and mineral reserves. For the other PSUs, they might as well concentrate on paying off debt first before considering capex.

It's not been an easy year for banks. What with system wide loan restructurings, asset quality issues, and excess provisioning banks have seen their profits being eroded. Plus, on account of the difficult economic environment banks may miss their loan growth targets for the year. Individuals have been deferring their purchases awaiting salary hikes and budget incentives. Demand for high-end cars or high-value properties have also been lacklustre. Companies have also cut back on expansion plans on account of tepid industrial growth. Overall credit growth for banks was sluggish at the end of 10 months in FY13 according to data from the Reserve Bank of India (RBI). So far this year banks' advances grew around 9.2%, compared with 11.8% in the same period last year. This is versus the central bank's target of 16% credit growth for the year. Well, with the RBI not expected to cut rates any time soon and no real big bank reforms in the budget, we expect credit growth to continue down its slow path. We would appreciate if banks focus more on the quality of their balance sheets rather than chasing growth.

Investopedia defines the stock markets as "the market in which shares are issued and traded either through exchanges or over-the-counter markets. It provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance." Therefore, by definition, it is a place for investors and companies. There is no room for gambling. Unfortunately for China, lack of reforms has turned its stock markets into one large gambling casino. And this has kept large global investors away from them. As such, the country's shares have been given very little weightage in the global indices. But now things are expected to change.

The China Securities Regulatory Commission (CSRC) has introduced measures targeted at improving the functioning of the mainland equity markets. This includes norms to widen the pool of investors eligible to invest in Mainland shares. Other measures include increasing the availability of stock options and providing measures to boost institutional participation. It has to be remembered that till now this was a market that was concentrating only on retail participation. Reforms that help reduce gambling are always an encouraging sign for any stock market. However, we hope that the CSRC keeps one thing in mind. Foreign capital is flighty in nature. Its exodus could hurt the interest of retail participants. Therefore, the reforms have to balance the interests of both the institutional as well as the retail investors.

Meanwhile, indices in the Indian stock markets continued to trade firm with the BSE-Sensex higher by around 270 points (up 1.4%) at the time of writing. Barring IT sector, all sectoral indices were witnessing strong buying interest. Barring Singapore and China, the major Asian stock markets closed in the green today.

04:50  Today's investing mantra
"The most extreme mistakes in Berkshire's history have been mistakes of omission. We saw it, but didn't act on it. They're huge mistakes -- we've lost billions. And we keep doing it. We're getting better at it. We never get over it." - Charlie Munger

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    Equitymaster requests your view! Post a comment on "Warren Buffett just did something very unusual". Click here!

    4 Responses to "Warren Buffett just did something very unusual"

    G Darad

    Mar 10, 2013

    The kind of professionalism we admire or you have been advocating is a utopia in our kind of settings where even Buffet would come down to his knees. Our cultural moorings do play a significant role in the making of our corporate psyche and all kinds of extraneous considerations other than undistilled professionalism go into the decision-making. We are hardly prepared to listen to the man on the street who always challenges our feudal outlook. Dissent is hard to digest here and is always a rebellion.Do you still believe that more than half a dozen corporates would be able to pass the muster?



    Mar 10, 2013

    Nothing wrong. The person going short must have the guts to do that. If it is challenged by stronger hands then the person shorted would find it difficult to recover.



    Mar 9, 2013

    I read all expert



    Mar 8, 2013

    NINDAK NIYARE RAKHIYE, ANGAN KUTI CHHAWAY. BIN PANI SABUN BINA, NIRMAL KARAI SUBHAY. Its not unique for an intelligent investor to listen to its citric provided he should be an intelligent and wise one who could give a rational for something to understand in more broadly.

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