Why Buffett-owned companies are so successful? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why Buffett-owned companies are so successful? 

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In this issue:
» PSU banks mired in corruption
» Rising vacancy in India's shopping malls
» The world lost US$ 2.5 trillion since 2000 due to...
» Eurozone seeing worst since creation of euro currency
» ...and more!

Warren Buffett is known to be one of the world's most successful investors. Over the last 48 years, Berkshire Hathaway's book value per share has surged by a whopping 586,817%! Hypothetically, a dozen Berkshire Hathaway-sized companies (in terms of consolidated revenues) put together would be equivalent to India's GDP.

In fact, at least 8 of the companies that Berkshire Hathaway owns would make it to the Fortune 500 list were they standalone entities.

Buffett has built this massive empire simply by picking up great businesses at a bargain price. And now his conglomerate is bigger than several economies in the world.

What is the secret that makes Berkshire Hathaway holding companies so immensely successful? Does Buffett's ownership of a company change its prospects?

We came across a very interesting article in Yahoo Finance that explains the benefit that companies have because of their association with Buffett. Some obvious benefits because of Buffett's parentage are reputation, autonomy and financial muscle. This gives the companies a big competitive advantage compared to their peers.

But these are not the only reasons for their success. There are two very important factors that make Berkshire-owned companies so successful. The first and the most crucial factor is a very strong emphasis on integrity. Reputation and credibility are very highly valued at Berkshire Hathaway.

Secondly, there is no pressure on short term performance. Buffett is very clearly focuses on the long term big picture.

These values are very deeply ingrained in all Berkshire Hathaway companies. And this is the real secret behind its success!

Do you know any Indian companies that can boast of focus on integrity and long term growth? Please share your comments or post them on our Facebook page / Google+ page

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01:10  Chart of the day
Owing to the slowdown in the economy, several businesses are facing tough times and struggling under the weight of debt. The loan books of PSU banks have already been under pressure on account of rising non-performing assets and loan restructuring.

As per an article in the Economic Times, the worst is not over yet. PSU banks are expected to continue to witness significant loan restructuring for yet another quarter. Two major PSU banks, Bank of Baroda and Union Bank of India are expecting to restructure loans to the tune of Rs 48 bn in the June ending quarter. United Bank of India witnessed a whopping 80% drop in net profits in the quarter ended March 2013 due to bad loans and squeeze on margins. Overall, the banking sector has been significantly affected by the slowdown in the economy.

Today's chart of the day shows PSU bank stocks that have witnessed a steep decline in their price in the year so far.

Data source: Ace Equity
^Stock price decline calculated between 31 Dec 2012 and 15 May 2013;
*Indian Overseas Bank; ** Oriental Bank of Commerce

Here's more on PSU banks... Reports on corruption and poor corporate governance has become the norm in financial media. The latest to join the ranks of corrupt officers are the directors of government owned (PSU) banks. Now, the selection and promotion of top officers has never been transparent at PSU banks.

The problem is set to get magnified as several posts get vacant over the next few years with mass retirements. But meanwhile the selection of directors on the boards of PSU banks has come under the scanner. The revelation that several directors on the boards of PSU banks had political influence has raised many questions. That a director on the board of Canara Bank was related to tainted former railway minister Pawan Kumar Bansal has raised a justifiable furore.

But this is not a one of case. Nor is the case restricted to directors alone. PSUs, not just in banking but even other sectors, must make their execution appointment and promotion policies merit based and transparent. Else hiring and retaining talented employees will remain a challenge for them.

Ghost malls in China are nothing new. It has its roots in the real estate boom China witnessed in the past. Huge infrastructure was built in the expectation that it will be occupied over a period of time. In fact, the biggest mall in the world, in terms of leasable space, is in China. But it is virtually deserted. There are no shoppers or retailers in it! This shows that China overestimated its real estate appetite.

It seems that something similar is happening with India now. Most malls in the smaller towns are witnessing higher vacancy levels. In fact, in smaller towns one third of the mall space is unoccupied as per a leading real estate agency. This figure was at 7% in 2007. Thus, there has been tremendous rise in vacancy levels over the last 4-5 years.

And there are many reasons for it. The builders overestimated the demand for retail space during the boom period. They also failed to estimate the purchasing power capacity of small town individuals. They got carried away and built properties in the expectation that disposable income will rise in smaller towns pretty fast. However, that has not happened which means there is lack of demand for products. If there is no demand then the retailers who put their shops do not make enough money. This raises the vacancy levels.

We feel that unless the disposable income rises and spending power increases in these cities, vacancy levels will continue to remain high. And this will hurt builders big way.

Every business has its share of risks. Some that are within the grasp of management and some that are 'out of control'. Risks of natural disasters lie in the second category. And recent data suggests that these cannot be completely ignored. Indeed, as per an article in Business Insider, economic losses from disasters since 2000 are in the range of US$ 2.5 trillion. This is at least 50% higher than previous international estimates according to a United Nations (UN) report.

The world economy is becoming more and more interconnected. Thus, it is important for companies to provide adequately for all sorts of risks that can be encountered. This applies to natural disasters too. Although they cannot be predicted and are entirely out of control, the possibility of an occurrence still has to be given due thought. That does not seem to be the case now. Simply because direct losses from floods, earthquakes and drought have been underestimated by at least 50% according to findings by the UN.

Over the years, businesses have been constantly looking at ways to reduce costs, improve productivity and focus on quick delivery. All of this has been pushing them into hazard-prone locations. This is with little or no consideration of the consequences on global supply chains. That is why it is important that companies give these risks their due weightage so as to survive better in the longer term.

The Eurozone has been testing several things to get itself out of the mess that it is in. It has invoked austerity measures. It is printing money like there is no tomorrow. But nothing seems to be helping. As per the Financial Times, the recession has just been prolonged. The data states that the 17 bloc nation has registered yet another period of recession. This makes it the longest period of recession since the Euro currency came into existence. Unemployment soared to 12.1%. France is back into recession. Italy and Spain are not doing any better. Even Germany has shown very little improvement.

The Eurozone needs to take harsh measures if it wants to come out of this mess. It has made terrible mistakes in the past and appears to be paying the price now. Unfortunately all it is doing to deal with the crisis is giving temporary pain relief pills to the economy. All these pills do is to postpone the disaster to another date.

The Indian equity markets continued to trade in the positive territory. At the time of writing the BSE-Sensex was trading higher by about 46 points or 0.2%. The sectoral indices were trading mixed with stocks in the realty and healthcare space leading the gains. However, stocks in the software and FMCG space witnessed maximum losses. The BSE-Midcap and BSE-Smallcap indices were up by about 0.6% and 0.1% respectively. The stock markets in rest of Asia ended the day on a mixed note with China and South Korea leading the gains.

04:50  Today's investing mantra
"Do not take yearly results too seriously. Instead, focus on four or five-year averages." - Warren Buffett

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    9 Responses to "Why Buffett-owned companies are so successful?"


    May 27, 2013

    At all the ups and downs keep investing but keeping in mind the unforseen conditions, Always choose for equity at least 7 to 10 years for taking return in our pocket.Choose the right comapany with right group of prfessional management,with its market leadership present and future taking past growth as abasis,with future policies.



    May 19, 2013

    Indian companies ..? are you serious ?



    May 19, 2013



    Ramchandra Naik

    May 17, 2013

    Berkshire has a wonderful combination of short term winnings whilst keeping the long term goal in mind. This important factor helps their subsidiaries maintain a sustainable growth path.
    Back home in India, the HDFC group is a shining example so far. They managed it very well and will hopefully continue to do so for years to come.
    Last but not the least, Moody's ratings of Berkshire at Aa2 reflects a fair assessment of the company. S&P has also acknowledge the slightly negative outlook much after Moody's rating. I do not think that Berkshire's investment in Moody's has influenced the rating.


    Vikrant Vala

    May 17, 2013

    I really agree the success mantra of the way Buffet-owned companies run. I am a strong believer of this concept that CREDIBILITY should always be given preference, and there shouldn't be pressure of work in a short term duration, always focus on long term goals. The ultimate objective of Indian Economy is the same but since years they are misguided by focusing in short term growth in any means. A very good content. Loved to read.



    May 17, 2013

    In India some of the IT companies are following the principle of Buffet and INFOSYS is one .

    In the industrial sector with multifarious activities, TATAs are one of the great Indian company where it is practised.


    Vikram Agrawal

    May 16, 2013

    Strong Brands, coupled with integrity, reputation, strong managements and economic moats r the key to successful investment companies.


    Vikram Agrawal

    May 16, 2013

    Companies like Bosch, HDFC, HUL, ITC, Nestlé etc r of the likes that would fit WB's profile of investment companies.


    obaid karki

    May 16, 2013

    "Why Buffett-owned companies are so successful?" Because Warren Buffett owns Moody's who rate Berkshire Hathaway holding companies Triple-A though its Triple-junk and its Distressed assets weigh Below Allahabad Bank
    dont be affraid. just published. its Warren Buffett's Chemotherapy.

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