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Buffett's Three Point Plan to Great Success...

Aug 3, 2016

In this issue:
» Top 5 states are grappling with power thefts
» Why Indian companies will do better than China...
» ...and more!
00:00
Radhika Pandit, Managing Editor of ValuePro

Many, many years back, Warren Buffett famously said he isn't comfortable investing in technology companies because they are constantly evolving and he does not understand them. Of course, Buffett is allowed to change his mind, which he has in recent years by picking up stakes in IBM and recently Apple.

Does that mean that Buffett missed out on big opportunities by not investing in tech companies right from the start? Maybe. But his reluctance did spare him from the dot com bubble. And it's hard to argue with the strategy. Over the years, he's become the greatest investor of all time, multiplying Berkshire Hathaway's wealth many times along the way.

He did so by sticking to his three core principles of value investing. These principles are as relevant today as they were twenty years ago. So let's go through them.

The first is his focus on exceptionally valuable companies. These are companies with honest and able managements, unencroachable moats, and strong financials - what Berkshire calls 'non-exit businesses'. Once you are able to buy them at a decent price, it makes sense to hold them for the long term, as their strong advantages and ability to withstand competition means they will be able to sustainably deliver healthy returns to shareholders. Having said that, such businesses are not always easy to find and that too at cheap valuations.

The second is staying within his circle of competence. This means not touching companies and businesses that you don't understand - just as Buffett did years ago with tech companies. The reasons could be many: the business model, the industry dynamics, and so on and so forth. A company may very well be 'hot', but it is better to go against the crowd and stay away if you don't understand what you'd be getting yourself into.

Third is his focus on 'margin of safety'. Buffett learned this concept from his mentor, Benjamin Graham. As I have written before, Graham was not a fan of predicting the future. Indeed, since the future is highly uncertain, he believed that it was almost impossible to predict trends. That is why he preferred to rely on past track records and zero in on companies that were trading at a deep discount to their intrinsic value. It's a concept Buffett strongly endorses and follows.

These are principles that my team and I also religiously follow while managing the two groups of stocks under ValuePro. Indeed, the stocks that we have picked for ValuePro have strong business models, capable managements, and healthy financials. But importantly, we have selected these stocks because they were trading at a sufficient discount to intrinsic value.

So you see, Warren Buffett's principles have stood the test of time, even in today's fast-evolving business landscape.

Do you follow Buffett's three core principles? Let us know your comments or share your views in the Equitymaster Club.

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03:01 Chart of the day

Power shortage is one of the biggest problems faced by the country. Shortage of coal had led to poor electricity generation in the recent past. While the issue of shortfall in coal production has been rectified, another problem facing the power sector is the dismal financial health of state electricity boards (SEBs). Distribution of cheap power to attract voters as also rampant power theft have hit the financials of SEBs over the years. Burdened by huge accumulated losses and piled up debt, state run distribution companies had not been entering into power purchase agreements with generation companies. This has led to lower capacity utilisation as well as slowdown in new investments by power producers.

As per a survey by Power Finance Corporation, states that had higher incidence of power thefts as well as consumer complaints faced greater power deficits. States such as Bihar and Uttar Pradesh, that have been grappling with huge power cuts, incidentally also rank high on power thefts and pending consumer complaints. Therefore, the country's power woes will not come to an end unless SEBs pull up their socks and bring in more efficiency in their operations.

Top 5 States Grappling with Power Thefts


04:12

Finally, India Inc has some reason to cheer about. As per a report by S & P Global Ratings, India's top 200 companies, by market capitalisation, are likely to report better financial performance as compared to their Chinese counterparts. And the reason for the likely outperformance is the relatively lower government influence for listed companies in India.

As per the survey, private companies account for 75% of the net debt and operating earnings of the top 200 Indian companies as compared with less than 20% in case of the Chinese companies. Lesser government influence is likely to keep capital spending and thereby leverage in check and translate into better performance by Indian companies. The survey goes on to add that while leverage has peaked for Indian companies, it continues to increase for Chinese government-related entities.

04:45

Indian stock markets largely languished in the red in today's trading session. The BSE Sensex was trading lower by 177 points at the time of writing. Losses were largely seen in auto, and FMCG stocks, while metals and healthcare stocks managed to buck the trend. The BSE Midcap and the BSE Smallcap were not spared either as both were trading weak at the time of writing.

04:56 Today's investment mantra

"Behind every stock is a company. Find out what it is doing." - Peter Lynch

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

Today's Premium Edition.

China Leaves Little Hope for the Indian Stainless Steel Industry

What's ailing domestic stainless steel manufacturers?
Read On...Get Access

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3 Responses to "Buffett's Three Point Plan to Great Success..."

Nisha Dev

Aug 5, 2016

I did not understand the phrase " companies that were trading at a deep discount to their intrinsic value. It's a concept Buffett strongly endorses and follows.

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Shashi. Budhiraja

Aug 3, 2016

Nothing

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Shashi. Budhiraja

Aug 3, 2016

I have still to experience your product.

Like 
  
Equitymaster requests your view! Post a comment on "Buffett's Three Point Plan to Great Success...". Click here!
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