The secret that earned Buffett his 400-bagger! - The 5 Minute WrapUp by Equitymaster
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The secret that earned Buffett his 400-bagger!

Sep 4, 2015

In this issue:
» The curious case of Amtek Auto
» The impact of slippery oil prices
» Roundup on markets
» ..and more!


If you develop one skill, it should be the discipline of patience. Patience is a virtue that will help you grab the rarest of opportunities...and not let go too soon!

Warren Buffett learned this lesson the hard way with insurance major GEICO.

Buffett was well aware of GEICO. It had enriched his mentor beyond belief, and he knew it would help him create massive wealth if bought it at the right price.

One Saturday in 1951, Buffett took the train to the GEICO offices in Washington DC to learn more about the company and its management. The office was closed. But as fate would have it, a janitor directed him to a certain Mr Davidson, the assistant to the president. The two had an impromptu meeting, which was all Buffett needed to make his first purchase of GEICO stock. The legendary investor was just 21.

The next 24 years, however, never presented Buffett the right opportunity to buy more of the stock he said he 'likes best'. GEICO kept growing, and Buffett kept waiting for the right price. It wasn't until 1976 that he started buying the stock again, and kept doing so for the next 20 years, until finally acquiring a controlling stake in the company in 1996. GEICO has made Buffett 400 times his initial investment.

Buffett did not hasten to buy the stock he loved at any price. Nor did his age stop him from doing so when the opportunity presented itself. He had seen Graham buying GEICO at the age of 54. Buffett's investment in both GEICO and Coca Cola, though late in his life, were with the conviction of outstanding long-term returns. These investments, made in his 50s, turned out to be the best of his career.

So it's time you ask yourself: What's your GEICO?

Maybe it's a company you've always admired...a company you may want to work for...a company that you hope your children and grandchildren will own and prosper with.

When you find the company you 'like best', read its annual reports and follow its progress. Get to know its business like you know your siblings or your spouse. See how the company responds in good times and bad times. Then...wait for the market to give you a great opportunity to buy the stock.

It is never too late to invest in your GEICO, provided you do so at the right price.

Market crashes present rare opportunities to diligent investors. It's the time to hone your skills in patience and value investing.

Fortunately, we are not done with experiencing such crashes. Several global and domestic macro economic factors have the potential to allow us to experience multiple market crashes in the coming months. Possibly in the coming days.

So be prepared to buy the stocks you 'like best'. But be patient. Do not hasten to buy unless the valuations are within your comfort zone. But when they are, be confident in the knowledge that it's never too late to buy your GEICO.

Have you made the bucket list of stocks you can wait forever to buy yet? Let us know your comments or share your views in the Equitymaster Club.

P. S. My colleague Radhika already has a track record of hunting down few GEICO like stocks for her ValuePro portfolios. And on request she readily agreed to put down how she does it in a 3 part Master Series, which we sent out to you recently.

What's Your LONG-TERM Strategy To Profit From Market Crashes?

Hope you enjoyed our latest Master Series on Warren Buffett and obtained value from it too.

Now as you are aware, the stock market crashed last week, and there was a lot of panic selling followed by buying followed by selling again.

The fact is most investors only worry about minimizing losses and maximizing profits in the short-term.

But if you make use of the right strategy, you could use these market crashes to amass HUGE wealth in the long run.

Yes! This is the same strategy that Warren Buffett himself used to multiply his wealth 7,511 times over a 50-year period.

And now, you could use the same to multiply YOUR wealth too.

Since you went through our Warren Buffett Master Series with great interest, I'm sure you'd want to take action and benefit from this as well.

However, this opportunity will be available till 11:59 PM on 5th September 2015 only.

So hurry, click here for full details right away!

Talking about the importance of investing in the right kind of companies, the case of Amtek Auto makes a good case study. The stock of Amtek Auto Ltd is under fire and has lost around Rs 30 bn or 83% of its market cap, in the last one month. And as we write, the stock continues to plunge.

Huge debt in the books of Amtek Auto has been a lingering worry for the investors. The auto component maker reported a huge loss in its June quarter results. Further, its subsidiary Castex Technologies has undergone FCCB conversion at an exorbitant price. Added to this, the announcement of the stock's exclusion from F&O segment led investors to dump the stock.

Incidentally, my colleague and the editor of Hidden Treasure, Richa Agarwal had written The 5 Minute Premium a couple of days back, warning investors about the stock.

And here is an interesting excerpt from the write up.

    This seems to be a classic case of how chasing growth with no focus on balance sheet quality can backfire.

    The recent acknowledgment of "temporary cash flow mismatched" and infusion of around Rs 750 million by promoters has arrested the decline to some extent. However, this does little to improve company's prospects. One must also note that the company has faced a rating suspension from CARE for not providing required information.

    With multiple subsidiaries and joint ventures in different parts of the world, a lot of which remain loss making, it is difficult to predict future for this company.

At Equitymaster, we have always maintained cautious stance for the companies with excessive debt. A fast growing debt profile combined with struggling profitability is nothing less than a recipe for disaster according to us.

Till 2007, the stock of Amtek was under our active coverage. After we closed the position of this stock at Rs 474, we decided to discontinue the coverage. This decision was backed by our methods and tools that we use in filtering such risky stocks.

We understand that as investors coming across hundreds of such stocks it is difficult for you to find out which are the ones you that should avoid like plague. Hence, we have figured out a method to help you identify such stocks which we have explained in the Crash-score report. According to this tool, the stock of Amtek is in the list of highly risky stocks.

If you are under the impression that it is only poor quality stocks that you need to be careful about, dispel that myth right away! Mutual funds can be as bad.

According to Business Standard, JP Morgan Asset Management has restricted redemption to 1% per day in two schemes - India Treasury Fund and India Short-Term Income Fund, which are longer-term liquid funds. The reason: One of its holdings, Amtek Auto, was downgraded recently leading to erosion in returns. This is just one example, how, not just stocks but each of your investments needs a detailed study of quality and management.

 Chart of the day
Fluctuating and volatile oil prices is something we are living with since many decades. And we might continue to see such seesawing in the future too. Now such phases have opposite impacts on economies that are the producers and importers of oil. When the oil prices plunge, the exporting countries are thrown into turmoil while the importing ones witness some relief.

Thus, the phase of falling crude prices have a lot of ramifications for a country like ours. And most of them are positive. Given, our current account position is highly sensitive to oil prices; times like now prove to be favorable. When the prices are at their lower levels, CAD improves, though for a temporary period. Thus, such falling prices can help in giving a much needed boost to the economy in general and foreign currency reserves in particular.

But as an investor you should neither be taking a call on short term trend in oil prices nor should such trends change your views on stocks. It is important to look at long term sustainable prices of commodities like oil and invest only when the stocks offer sufficient margin of safety.

Historical oil price. 1946-till date

The Indian indices are trading weak on the back of negative cues across global markets. At the time of writing, the BSE-Sensex was trading lower by around 580 points, while NSE-Nifty was down by about 180 points. Both the S&P BSE Midcap and S&P BSE Smallcap indices were also trading weak, down 1% each. Commodity and banking are leading the pack of losers.

 Today's investing mantra
"A good business is not always a good purchase - although it's a good place to look for one" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

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Equitymaster requests your view! Post a comment on "The secret that earned Buffett his 400-bagger!". Click here!

1 Responses to "The secret that earned Buffett his 400-bagger!"


Sep 4, 2015

a) As regards, Buffett's investment in GEICO, if his initial investment in 1951 is 400-bagger, it means a return of under 10% p.a. compounded over 64 years. This does not look great by even US standards.
b) Personally, my GEICO is HDFC given its conservative management, enviable growth track and visibility of its cash flow for many years to come. HDFC which was quoting around Rs 30 at the beginning of 2000 has moved about 38 times in just 15 years.

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Equitymaster requests your view! Post a comment on "The secret that earned Buffett his 400-bagger!". Click here!
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