Coming soon! The business that made Buffett a superinvestor... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
PRINTER FRIENDLY | ARCHIVES

Coming soon! The business that made Buffett a superinvestor... 

A  A  A
In this issue:
» Where are FII's fleeing from?
» Lesson for mutual funds and rating agencies from Amtek Auto
» Global market updates
» ....and more!


00:00
Every business needs money, or capital, as we say in financial jargon. Now, capital comes at a cost. Businesses that do not earn enough to cover the cost of capital do not take long to go bust.

But what if you had a business that could get capital for free?

What if that capital kept growing year on year?

And what if you could invest the free capital for years before you return it?

Warren Buffett often admits that the insurance business of Berkshire Hathaway has been his 'fountain of free funds'. The free funds have allowed Buffett to invest in the best businesses and hold on to them for years on end. This fountain of free funds is Buffett's little secret to becoming the superinvestor that he is.

Insurance is probably the only business where you can 'legally' hold tons of money that you do not own. That too for years! The premium that is received upfront becomes the free float. It keeps coming from the same customer for years and from more customers every year. And once the underwriting costs are covered, the free float actually becomes better than free.

People pay the insurance company for holding their money in the hope that they have to never claim it. Or at least not any time soon!

If the logic seems too good to be true, reckon this: Berkshire's free float grew from less than a billion dollars in 1990 to over US$60 billion in 2010. This means the free money compounded at over 22% each year for nearly 20 years. So even after meeting some claims and providing for underwriting costs, the business was a goldmine for Buffet.

Why am I elaborating on the unique virtue of the insurance business?

Well, India has at least half a dozen large insurance companies. The regulator (IRDA) allows these companies to list after being in operation for 10 years. But so far none of them have shown the inclination to do so.

Mind you, most of these companies saw their premiums grow in double digits over the past decade. Plus a miniscule proportion of Indians are adequately insured. The ratio of premiums paid to GDP is just 3.9% in India, well below the global average of 6.3%. The growth opportunity is huge!

But their absence from the bourses deprives minority investors the opportunity to own GEICO-like insurance businesses. GEICO, if you recall, has been not just Buffett's but also Graham's multibagger.

However, regulatory changes could open up this goldmine to Indian investors. IRDA is now set to make it mandatory for the large insurance companies in India to get listed.

The first ones to line up will be the top private sector insurers with assets under management exceeding Rs 600 billion. Mind you, as in every other business, this sector has its share of rotten apples. The crux of every business is the quality of management and its capital allocation skills. Ones that fail these metrics will not do well irrespective of the amount of free float.

So instead of jumping headlong into every insurance business that gets listed, you will have to do the basic quality checks. Also, unlike Buffett, you will not have a say on how the free float is used. Therefore, best to stick to managements that have a proven track record in capital allocation.

How do you plan to go about doing the quality check for insurance businesses about to get listed? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
Stop Missing Out On Exciting Returns Like These...

Our recommendations in high potential small caps have given our subscribers exciting returns like 250% in 2 years, 110% in 2 years 4 months, 288% in 2 years and 5 months, 124% in just about 7 months and more...

But we'r sad to say that you have missed out on all of them.

However, you can put an end to that right now!

Click here to know how YOU too could benefit consistently from our 7-plus years' experience in uncovering and recommending high potential small caps.
------------------------------

03:02  Chart of the day
Speculation on whether the US Fed will raise interest rates has dominated media headlines since the past month. And needless to say, stock markets globally have been grappling with fear and uncertainty ever since. The foreign institutional investors (FIIs) have lost no time in withdrawing their hot money from Asian and other emerging markets in a bid to be prepared to take the flight home. The chart shows the markets that have borne the biggest brunt of net FII outflows in last couple of months.. While the latest data for China is not available, we would suspect that China too ranks high amongst the top losers.

Net FII investment in Equities

Coming back to speculation, no one knows for certain if the Fed will raise the interest rates. However, a rate hike would mean risk of capital flight from the Indian markets too. And this could impact valuations across the board. Just as my colleague Radhika wrote in yesterday's issue of The 5 Minute WrapUp long term investors could in fact perceive the rate hike to be an opportunity in disguise.

According to us, a sharp correction could give investors the much awaited opportunity to selectively invest in fundamentally strong companies. Thus, investors can take the advantage of the beaten down valuations by investing in companies with strong balance sheets and wide moats.


03:30
The series of controversies surrounding Amtek Auto have far from ended. And finally it seems to have drawn the attention of market regulator SEBI too! The issue caught SEBI's attention after JP Morgan Mutual Fund faced issues due to its investment in Amtek Auto's debt paper. The fund restricted redemptions in two of its schemes; India Treasury Fund and India Short-Term Income Fund. This means that investors cannot exit from such schemes for some time. This action came after the down gradation of Amtek Auto debt, leading to sharp erosion in returns. These schemes have a collective exposure of about Rs 2 bn in Amtek Auto.

In the wake of this recent incident, the SEBI has widened its probe. SEBI is examining and seeking details from companies with high debt. But more importantly SEBI has issued a strict warning to mutual funds to get their act together and do their homework well before investing in debt papers.

One of the reasons for the oversight on quality of debt papers is lack of secondary trading of such instruments in India. Hence, the mutual funds value their portfolios based on data provided by the rating agencies. Consequently, any downgrade from the agencies impacts the value of such debt holdings too.

No doubt SEBI is looking to protect the interest of investors by tightening norms for mutual funds. But we see no reason why the regulator should let the rating agencies go scot free and allow them to change their ratings without being sufficiently answerable to investors.

04:35
Markets across Asia are trading higher today with China and Hong Kong leading the pack of gainers. The Indian markets were trading above the dotted line with the BSE-Sensex trading higher by about 254 points or 1% at the time of writing. Most sectoral indices were trading higher with the banking sector leading the gainers, while oil and gas and consumer durable stocks are the key laggards. The BSE midcap and smallcap indices are however trading lower. The European markets were also trading higher at the time of writing.

04:45  Today's investing mantra
"You do not adequately protect yourself by being half awake when others are sleeping." - Warren Buffett

Editor's note: There will be no issue of The 5 Minute Wrapup on 17th September 2015 on account of Ganesh Chaturthi.
Today's Premium Edition
Liner Business: The Bane of SCI's Investors
How the Liner segment of Shipping Corporation's business has been a huge deadweight on its performance.
Read On...Get Access
Recent Articles:
How Unique Are the Companies You Invest In?
August 21, 2017
One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.
You've Heard of Timeless Books... Ever Heard of Timeless Stocks?
August 19, 2017
Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.
Why NOW Is the WORST Time for Index Investing
August 18, 2017
Buying the index now will hardly help make money in stocks even in ten years.
This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process)
August 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

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

Equitymaster requests your view! Post a comment on "Coming soon! The business that made Buffett a superinvestor...". Click here!

1 Responses to "Coming soon! The business that made Buffett a superinvestor..."

Rajagopalan Ramesh

Sep 16, 2015

Insurance Business ( Both PSUs and Private Sector Cos)
1. What is the market share of the respective companies?
2. Whether the Companies are making Underwriting Profits - the core of insurance business?
3. What is the Average Return of Underwriting profits in the last 5 years?
4. What is the Average Return (PAT) of the Company in the last 5 years?
5. What is the growth in the Solvency Ratio over the last five years?
I think the above largely cover the required parameters for selecting a good insurance company for investment.

Like 
  
Equitymaster requests your view! Post a comment on "Coming soon! The business that made Buffett a superinvestor...". Click here!

MOST POPULAR | ARCHIVES | TELL YOUR FRIENDS ABOUT THE 5 MINUTE WRAPUP | WRITE TO US

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407