Why Warren Buffett chose to stay silent on this issue.. - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why Warren Buffett chose to stay silent on this issue.. 

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In this issue:
» Is water the new gold?
» Henceforth, RBI will decide which loan is an NPA
» Janet Yellen: Most models that forecast inflation are inept
» Minimum wage debate confuses Buffett as well
» ...and more!

With shareholder activism gaining momentum, compensation packages of top management are under scrutiny like never before. Any compensation plan which is deemed excessive faces stiff resistance from minority shareholders. Considering that activism in developed markets is even higher, episodes of shareholders revolting management on critical business issues is nothing new.

One such episode has come to light recently in the US. But the pertinent issue here is not the quantum of compensation but rather the means adopted for it. And the person opposing the same is none other than Warren Buffett. The company in question is Coca Cola (Coke) which has the tradition of rewarding its employees through stock based compensation. In a way, it aligns the interests of the managers and shareholders. But when a major part of the compensation is linked to shares, it leads to dilution and transfer of wealth to managers. And this does not bode well for minority shareholders.

Going by Warren Buffett's standards of high integrity, he rightly opposed Coke's compensation plan which was deemed to be excessive. But he abstained from voting against the plan!

This has drawn some amount of criticism against him. When he had a chance to take stance against a compensation plan, he chose to stay silent. This is reflected when he was quoted saying - "I could never vote against Coca-Cola, but I couldn't vote for the plan either" .

While Buffett may have made his point clear by opposing the plan, absolving from his responsibility to vote against it has turned out to be a major point of debate.

What does this indicate?

This indicates that when it comes to doing research, it always pays to have a fiercely independent thought process. For even legendary investors like Warren Buffett can be vulnerable to irrationality. It is quite possible that Buffett might have come under the influence of his disproportionately large holdings in Coke. And hence, may have chosen to overlook this issue in the interest of the long term wealth generating ability of the company.

Or there could be some other constraints that are holding him back. But as investors we need to ask ourselves whether we are held back by the same constraints. If not, there's no reason why our view can't be different from that of Buffett's. This example therefore yet again illustrates why the best investors in the world are the ones that go by what the facts tell them rather than get swayed by what their peers are doing. Even if that peer happens to be someone like Warren Buffett.

Buffett opposed Coke's pay plan recently but chose not to vote against it. Do you think investors like him should use their voting rights more responsibly? Let us know in the Equitymaster Club or share your comments below.

Editor's Note: We hope you've been following American wealth coach Mark Ford's writing on the Daily Reckoning. More recently, Mark began revealing his 11 Secrets to Building Wealth with his Indian readers... They make for great reading and we strongly recommend that you access them (for Free) now.

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01:50  Chart of the day
The value of rains for smooth functioning of Indian economy can hardly be underestimated. In India, food production is largely at the mercy of monsoons. Further, food constitutes major component of price basket and hence determines inflation and guides monetary policies. As such, monsoon forecasts are a matter of great interest for all.

This time, at the centre of these predictions is a phenomenon called El Nino. For those who are new to the term, El Nino obstructs rains and has been a cause for draught in India in 2002, 2004 and 2009. Going by the weather forecasts, we have reasons to worry. As per India Meteorological Department (IMD), the chances of a drought and sub normal rainfall are 23% and 56% respectively. It is not just low rainfall, but its distribution as well that will impact the agricultural output. The weather office has predicted the rainfall in four month monsoon period at 95%. This is a tad below the long period average (LPA) that ranges from 96% - 104%.

It is important to note here that while the share of agriculture has come down in GDP, it still is a key driver of economy of rural areas where 60% of India's population resides. Our best hope is that the actual rainfall overshoots the forecasts. And keeping history in mind, it is quite a possibility. After all, in the last six years, the actual rainfall has surpassed the forecasts 50% of the times. Whatever be the case, we hope this will wake up authorities to make agriculture self sufficient and not just rely on nature.

Should India brace for a dry spell ahead?

You would have heard of several sectoral indices but did you know that there exists a water index? Well, the index is not just in existence but if one considers the last 10 year period; the index has outperformed even stalwarts such as the gold and energy indices! In other words, it seems as if water has suddenly become more precious than gold.

But how can it be? Water covers more than 2/3rds of our planet and is certainly not in as short a supply as gold. Well, what we are concerned with is fresh, potable water. And surprisingly, there isn't much of it going around. As per cnn.com, only 2.5% of the total water available is fresh and worse still, only a portion of that is drinkable.

Little wonder, companies that have something to do with water treatment or water management are finding a lot of favour lately. Are there any such companies in India? Certainly there are. But before one plunges headlong into them, it is important to know whether the business models here are sustainable and come equipped with some kind of a moat. Otherwise, most of the profits from the water business wouldn't flow to the shareholders. But to some other stakeholders we reckon.

The inflation conundrum is giving sleepless nights to the Fed Chairperson. Be it U.S. or Japan, the models that project inflation stand broken. And when such admission comes from the globe's largest central bank, it is a serious matter. The models that forecast prices in the U.S. have failed. Be it during the recession or the period thereafter, they just failed. Shockingly, U.S. inflation has always stood higher than the simulations. Also the inflation model in Japan met with disaster. That was during the deflationary period from 1998 to 2012. While Japanese price continued to decline, the models proved otherwise.

Not to forget that the U.S. inflation behavior during the financial crisis has been acutely puzzling as well. And it continues to be so! Hence, the sanctity of the economic models is definitely in question. We hope the dust to settle down sooner than later.

The rise in non-performing assets of PSU banks in the past fiscal has given rise to many doubts. The most pertinent one is whether bank's inability to recover bad loans is as real and projected by them. And if so, whether the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI Act), 2002 has completely failed. For the uninitiated the said act was meant to be a pariah for banks burdened with NPAs. The act allows banks and financial institutions to auction borrowers' properties if they fail to repay their loans. It thus enables banks to reduce their non-performing assets (NPAs) by adopting measures for recovery.

However, that has certainly not helped over the past year. The reason being an amendment to the SARFAESI Act in 2005 allowed different regulators to have different loan classification for NPAs. And that resulted in delayed acknowledgement that the loans are indeed bad. However a recent Gujarat High court judgment has repealed the amendment. It has in fact allowed RBI to become the only regulator to frame policies on NPAs. We believe that although belated, this judgment will certainly allow the central bank to control the NPA malady in the sector.

How much wage per hour can be considered a "living wage"? Well, this is definitely a difficult question to answer. At US$ 7.25 per hour in the US, it can be debated whether this federal minimum wage is considered so. When a journalist at CNN asked Warren Buffett for his views on the subject, he said that he is all for raising the wages. However, what needs to be gauged is the trade off. This would be in terms of how much unemployment would be generated due to the same. And as such, this is a question that Buffett finds difficult to answer.

In his view, a better way to tackle the problem would be to increase the earned income tax credit, which is an antipoverty program designed to encourage and reward work. While it seems that President Obama is in favour of hiking the same to US$ 10.1 per hour, given the fragile situation of the economy and the possible impact it could have on the unemployment levels, a different approach towards tackling this issue would be advisable.

The Indian stock markets after opening weak drifted further into the negative territory. At the time of writing, the benchmark BSE-Sensex was down by 183 points (-0.8%). Barring pharma, all the sectoral indices were trading in the red. FMCG and oil & gas stocks were the biggest losers. Majority of the Asian stock markets were trading negative with Hong Kong and Taiwan being the major losers. However, the Japanese index was trading marginally up. Most of the European markets opened the day on a weak note.

04:50  Today's investing mantra
"Our approach is very much profiting from lack of change rather than from change. With Wrigley chewing gum, it's lack of change that appeals to me. I don't think it is going to be hurt by the Internet. That's the kind of business I like." - Warren Buffett
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4 Responses to "Why Warren Buffett chose to stay silent on this issue.."


Apr 28, 2014

I believe Buffet is eminently practical. He did voice his opposition to the issue but refrained from voting against it. Why?
As a major shareholder in Coke, his vote would have resulted in a lowering of share price. That would be tantamount to cutting the nose to spite the face. Makes sense that Buffet votes by slowly cutting back his stake in Coke over a period of time. Why should he advertise it?



Apr 26, 2014



Easwara Narayanan

Apr 25, 2014

Abstention is no opposition to bad decision. On the contrary, it is a case of silence being tantamount to consent.


H K Prakash

Apr 25, 2014

We need not examine every drop of urine or cc of gas or bead of sweat passed by Warren. His decision was personal. Let it be.
We are humans, sadly irrational, not robots. That adds to our charm

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