Luxury of being Buffett like without being Buffett - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Luxury of being Buffett like without being Buffett 

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In this issue:
» RBI keeps key rates unchanged
» Overhauling FCI on the government's agenda
» Source of high inflation is rural India
» US govt. seems clueless on the US economy
» ...and more!

For an investor such as Warren Buffett who wants to keep cash on hand sufficient enough to cover unusually large insurance claims, US$ 55.5 bn is a huge amount. But that is the cash on hand as of June 30 that his company Berkshire Hathaway is sitting on. Indeed, as per an article in Moneynews, this is more than double the cash that he would ideally like to have at hand.

So why is this not being invested? It is a well known fact that Buffet is a value investor and will only invest in good quality companies that are available cheap. Mr Buffett says, "We insist on a margin of safety in our purchase price. If we calculate the value of a common stock to be only slightly higher than its price, we're not interested in buying. We believe this margin-of-safety principle, so strongly emphasized by Ben Graham, to be the cornerstone of investment success. "

So obviously one can infer that Buffett is not seeing much value in US stocks currently. This is hardly surprising. The rise in US stocks has so far been more a product of loose monetary policies by the Fed rather than any strong recovery in the economy. A correction seems imminent and when that happens, probably Berkshire's cash position will reduce to that extent.

The other problem that Berkshire faces is size. As the size of the portfolio has become huge over the years, Buffett's hands in some ways are tied, because further investments will have to be of big ticket nature for them to contribute meaningfully to the overall portfolio. This means that even though there could be brilliantly managed mid-sized and smaller companies out there, he is hard pressed to invest in them. This has also made the churning of his portfolio all the more harder. As a matter of fact, his biggest regret in recent years has been his inability to liquidate his Coca Cola holdings when the stock touched record highs based on very expensive valuations. He just didn't have any other investment opportunity of the quality and size of his Coca Cola holdings to be able to make that kind of a purchase.

That is why being a relatively smaller investor has its advantages. Because Buffett's value investing philosophy is an approach that any serious investor can follow in order to generate long term wealth. And because there are no hindrances with respect to size, there is that much more flexibility to invest not only in largecaps but also in strong quality midcap stocks and midcap stocks and small cap stocks companies as well if one has enough cash at one's disposal.

ValuePro allows us to use this luxury to the best of our advantage! Not only do we follow Buffett's investment philosophy while picking out the best stocks for both the portfolios created, but we are also not constrained by size. And so we have the flexibility to invest in fundamentally strong and attractively priced companies across marketcaps.

Do you think that it is easy for Warren Buffett to find good investment options where he can invest surplus cash? Let us know in the Equitymaster Club or share your comments below.

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In the first quarter Monetary Policy review today, the RBI kept the key lending rate (repo rate) unchanged. Repo rate or the rate at which at the central bank lends money to commercial banks remains unchanged at 8.0%. Even the cash reserve ratio (CRR) stayed at 4%. However, in an effort to ease some liquidity the statutory liquidity ratio (SLR) was reduced from 22.5% to 22%. In the last policy review too, the central bank had chosen to tinker with the SLR, while keeping other rates unchanged.

The RBI's inflation target, as measured by the Consumer Price Index (CPI), is below the 8% mark by early 2015, and 6% by early 2016. The central bank believes that the recent fall in international crude prices, the benign outlook on global non-oil commodity prices and still-subdued corporate pricing power should support disinflation. However, pass-through of administered prices, continuing uncertainty over monsoon and possibly higher oil prices stemming from geo-political concerns can thwart RBI's inflation control efforts.

The RBI's latest move has come in anticipation of revival in economic activity, fall in consumer inflation and fiscal tightening. If the economic parameters fail to reach RBI's target; the central bank may again review its liquidity stance. Meanwhile, it is unlikely that banks will want to bring down the deposit and lending rates too soon. Growth in credit in the near term will therefore largely depend on economic revival as against fall in interest rates.

One of the biggest challenges facing the Indian economy has been the persistently high inflation. The RBI has been battling hard to bring inflation under control. It hasn't budged on its hawkish stance despite pressure to bring down interest rates to restore economic growth. But in spite of its efforts, inflation hasn't shown any signs of taming down. What is the real reason for RBI's inability to reign over the inflationary monster?

An article in shares an interesting perspective on the issue. Firstly, we have to understand what has been driving inflation higher. And the answer to this is food prices. Rising food prices have bucked all monetary and fiscal efforts to bring inflation under control. The RBI can control the level of credit in the economy. However, there is very little that the central bank can do to bring food inflation lower; and even more so because the real driver of food inflation seems to be stemming from rural India. There seem to be three key factors that have significantly impacted rural food inflation - minimum support prices, higher rural income owing to welfare schemes and rising deregulation of fertiliser prices. The Food Security Act will make the food inflation scenario even worse. This is because highly subsidized food to the rural poor will allow them to spend more on protein foods, wherein inflation has been very high. And the impact it will have on government finances is another thing to worry about.

So, it is high time we realize that inflation is beyond the control of the RBI and that other, more directed measures need to be taken if we want bring inflation to sustainable levels.

Overhauling the Food Corporation of India, the key government agency involved in the public food distribution programme of the country, was a point listed in the election manifesto of the current government. While FCI has been entrusted with this mammoth task - the largest of its kind in the world - the fact of the matter is that a huge portion of the food stock is going waste due to poor storage facilities. As reported by the Mint, simple plastic sheets are used at some sites to cover food grains. In addition to this, another challenge is to address the problem of corruption, wherein food grains do not reach the intended beneficiary households. As per estimates, such figure is higher than 40%. Not to mention that the amount of food that the government agency is managing is double that of its storage capacity, especially the covered warehouses which have not been expanded for eight years now. While these are just some of the challenges that need to be addressed, these are reforms that are very much required considering that India is expected to dole out over Rs 1,00,000 crore in the form of food subsidies this year. Not to mention the impact this could have on curbing inflation as well.

03:27  Chart of the day
India's foreign exchange reserves recently have been on the increase. In fact, they have now increased to beyond US$ 300 bn, which is near its record highs.

But bring a little more analysis to the table and one quickly realizes that we still do not stack up quite as well as some of the other developing countries. That is because our imports are currently in the region of US$ 38 bn per month. Thus, our 'import cover' i.e. the number of months that our forex reserves can pay for, stands at about 8.6 as at the end of June. This is a fall from about 15 months in 2008. Moreover, when compared to other BRIC nations like Brazil, Russia and China too, we still may have some way to go. However, in absolute terms we are still in a comfortable position as anything above a 3 month cover is usually considered adequate.

Is India's import cover sufficient?

Here's perhaps the biggest proof of how economic advisors to the White House have no idea of what's ailing the US economy. President Obama recently gave an interview to the popular magazine The Economist. And it looks like he's been lulled into believing that all is well with the US economy. As a matter of fact he has opined that things have never been better after he took office. And he has given examples of how the policies of his Government have produced a record stock market, record corporate profits and more than four years of record job growth among other things. Besides, not only has the housing market bounced back but the unemployment is also lower than what it was pre-Lehman.

Therefore, as per him corporate leaders should simply stop complaining. Instead, he has advised companies to strive to improve the livelihood of the middle class through high paying jobs. Now, this is a great contradiction as per us. The very same policies of injecting cheap liquidity and keeping interest rates artificially low that's leading to record stock market are also increasing the rich poor inequality. Therefore, if Obama is really serious about doing something about the middle class, he should ask Fed to raise interest rates and leave the economy alone. Otherwise, while the going will look good as long as the show lasts, eventually we will face an even bigger crisis than what we faced in 2008.

The Indian stock markets continued to widen losses after interest rates were left unchanged by RBI. At the time of writing, BSE-Sensex was trading lower by 70 points (-0.3%). Majority of the sectoral indices were trading in red with power and capital goods stocks being the major losers. Auto and consumer durable are among the few stocks trading in the green. Majority of the Asian markets were trading in the red with Taiwan and Japan leading the losses. However, Korea and Taiwan markets were trading positive. European markets opened the day on a positive note.

04:56  Today's investing mantra
" Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well" - Warren Buffett
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2 Responses to "Luxury of being Buffett like without being Buffett"


Aug 7, 2014

While on the subject of ValuePro, observe that you've put it on the Buy List but in the ResearchPro it is stated as a Sell. Would you explain this dcholtomy ? Isthis related to the holding period for the stock ?



Aug 6, 2014

It is said that Food Corporation of India, intentionally, allow wheat to spoiled, as liquor manufacturer are interested to buy them at very cheap price, as it is used as main raw material for making vine. And such form of wheat available at higher price in the international market.

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