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Warren Buffett: 85 Years of Sage Wisdom

Sep 1, 2015

In this issue:
» PSBs feeling the pinch in low cost deposits
» How payment banks will hit public sector banks...
» ...and more!


00:00

The legendary Warren Buffett recently turned 85. So, what better time than now to review some of the reasons he's become the most successful investor of his time?

Buffett's investment success was mostly in the US markets, but his wisdom is universal. The following tenets have every bit of relevance to Indian markets.

Without further ado, here are some of the chief reasons for Buffett's success...

Capital allocation: One of the secrets to Buffett's success is how he structures his holdings, putting them together in a way that gives him enormous advantages.

A great example is his insurance business, which he uses as a float that partly finances his investments in publicly traded stocks. The structure of the insurance business provides a steady source of financing and allows him to leverage his stock-picking ability.

This is relevant for managements running businesses as well. Those who know how to deploy capital in a manner that adds the best possible value will certainly deliver superior returns on capital to shareholders over the long term.

Focus on your strengths: Be really good at one thing and exploit it to the maximum. Don't dabble.

As the last 50 years have clearly shown, Buffett's strength is picking strong companies at attractive prices. He would not have been half as successful had he focused on some other profession. Do you think Sachin Tendulkar would have his reputation had he decided to become an engineer instead of a cricketer?

Buffett calls this sticking within your circle of competence. The concept can be applied to stock picking as well. That is, focus on good quality businesses that you understand. Don't branch into sectors beyond your competence.

Reputation matters: Buffett's integrity and fairness have stood him in good stead when buying stakes in companies. And his focus to keep the interests of Berkshire Hathaway above all others has certainly gone a long way in bolstering the fortunes of the company. It's no wonder, then, that he expects the same from the management of the companies he invests in.

Right people deliver: Buffett has always emphasized picking the right people to run his businesses. Over the years, he has built a team of CEOs who know how to run the show smoothly and profitably. Always look for companies that boast of a sound management and strong corporate governance practices. Weed out those who don't serve the interests of minority shareholders.

Focus on your best ideas: Buffett believes in picking the best investment ideas and accumulating more of them. In that sense, he's not a fan of diversification, calling it a practice investors follow when they don't understand what they are doing.

Not all positions in portfolio of 10-12 stocks will do well. If you've done your homework, most will perform well. But your best ideas will post strong gains, offsetting the underperformers and ensuring great overall returns.

In addition to these reasons, much of Buffett's success stems from his insistence on buying at the right price. This is a difficult discipline and requires that he always be on the lookout for bargains.

And what better time to scoop up good companies at bargain prices than during a market crash?

The stock market crash on 24 August 2015, and the level of uncertainty and pessimism that came with it, provide an intriguing investment environment for discerning stock-pickers like Warren Buffett. Of course, Warren wouldn't jump in without doing his homework. Many questions must be answered first...

Why did the crash happen? Are we to expect more crashes in the Indian stock markets in the coming months? Should you be worried about them? How should you view these crashes and take advantage of them?

In case you are wondering how to get answers to these questions, well, help is at hand!

Starting today, I will be hosting a Master Series titled Profit from Market Crashes the Buffett Way. This 3-part series will touch upon all of the above points and how you can make the most of such stock market crashes and build a solid portfolio in the process.

Now I know this is of deep interest to you... and that's why I have already enrolled you for this absolutely Free of charge Master Series. So, in effect, you don't have to do anything.

Here's how this Master Series will work: Starting today, for three days, I will send you a special Master Series edition of The 5 Minute WrapUp at about 6 PM IST. In this issue, I will share, in writing, my thoughts about the crash, and how you can profit from it. At the end of the Master Series I will also show you a way to access my Warren Buffett style portfolio recommendation service under a very special offer. So, don't miss it! (Please note that there will be no videos... Only my writings addressed to you.)

So, look out for the first part of the Master Series, titled Master Series (1 of 3): One Warren Buffett quality that nobody talks about... later today!

Which of Buffett's investment advice have you benefitted the most while managing your equity portfolio? Let us know your comments or share your views in the Equitymaster Club.

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03:02
 Chart of the day
Public sector banks (PSBs) are not only battling slow credit offtake and sliding asset quality. If reports are to be believed then PSBs are also being challenged on the low cost deposit front. PSBs have traditionally enjoyed a large share of current account (CA) and savings account (SA) together known as CASA. Banks do not pay any interest on current accounts whereas on savings accounts, the interest paid is low at around 4%. Therefore CASA helps banks in keeping cost of funds low and enjoy better interest spreads.

According to a report by Nomura, there has been a moderation in CASA growth mainly due to fall in the growth of current accounts. To add to this 60% of the incremental current account deposits in the past two years have been garnered by private banks on the back of increased use of technology. Therefore the market share of PSBs has fallen in current accounts. However in savings accounts, PSBs have been able to hold their ground.

PSBs feeling the pinch in low cost deposits

04:04
Public sector banks (PSBs) are already lagging behind their private sector counterparts in terms of business growth and asset quality. As if this was not enough, they will now have to brace for higher competition. Of the two new private banks that have been granted license, Bandhan Bank recently started operations whereas IDFC Bank will be launched in October 2015. Apart from this, eleven payment banks have been approved by RBI and are expected to begin operations in around 1-2 years time frame. As these payment banks have been licensed to accept small deposits of upto Rs 1 lakh and provide payments and remittance services, PSBs will be hit on two fronts. Firstly payment banks are likely to pull away the low cost saving bank depositor base of PSBs thereby minimizing its competitive pricing in loans. Secondly, even the fee income of PSBs are expected to be hit as payment banks offer modern payment channels using mobile telephony.

Therefore PSBs that presently command more than 70% share in deposits and advances cannot afford to remain complacent on key issues that plague it. Amongst them lack of autonomy and lower efficiency due to industry wide wage pacts are major roadblocks responsible for deterioration in its financials. So if PSBs have to benefit from a pick-up in retail credit fostered by the entry of new players, they will have to gear up to clean up their balance sheets and become more efficient to meet the new challenges.

04:46
Indian stock markets languished below the dotted line in today's trading session. After opening weak, selling pressure intensified across index heavyweights and pushed the indices deeper into the red. At the time of writing, the BSE-Sensex was trading down by around 430 points. Losses were largely seen in banking, consumer durables and metal stocks.

04:55
 Today's investing mantra
"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market" - Warren Buffett

Looking to invest in real estate? Vivek Kaul, the India Editor of the Daily Reckoning, just made a bold call - Real Estate prices are headed for a fall. Well, if you are someone who is looking to buy real estate, or is just interested in the space, I recommend you read Vivek's detailed views in his just published report "The (In)Complete Guide To Real Estate". To claim your copy of this Free Report, please click here...

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

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1 Responses to "Warren Buffett: 85 Years of Sage Wisdom"

Datta Chavan

Sep 1, 2015

To be thought over REALLY!!!

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Equitymaster requests your view! Post a comment on "Warren Buffett: 85 Years of Sage Wisdom". Click here!
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