This is how Buffett makes his billions - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

This is how Buffett makes his billions 

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In this issue:
» MNC Pharma showing its might
» US is still vending subprime loans!
» Tata-JLR's long term plans
» Water on the moon...and on earth?
» ...and more!

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We were all surprised a year ago, when Warren Buffett bought US$ 5 bn of Goldman Sachs preferred stock. After all, Lehman Brothers had just collapsed and Wall Street was tottering. Moreover, Buffett's past involvement with bankers like Salomon Brothers had turned out to be time consuming affair.

But then, he rarely passes a good deal, even if there is bad news all around. In fact, especially when there is bad news all round. The next day Buffett had said, "The price was right, the terms were right, and the people were right." Buffett also secured a margin of safety from the terms of contract - a 10% dividend and also the right to buy US$ 5 bn of common stock at a strike price of US$ 115 per share.

A year later, his decision has turned out be correct. Buffett's investment in Goldman has made Berkshire Hathaway richer by US$ 3 bn in twelve months! Given the current share price of Goldman Sachs at US$ 183, the warrants alone are worth US$ 3 bn ((US$ 183 - US$115)*45 m warrants). Of course, the warrants were not available to the ordinary investor in the US. But then, all he needed to do was buy the common stock to comfortably outperform the broader market. Easier said than done! Don't you wish that Buffett could invest for you too?

Data source: Yahoo Finance

00:57  Chart of the day
Politicians and diplomats may be doing their best to woo MNCs to the Indian soil on the basis of the cheap availability of manpower in the country. However, what can be a key deterrent to not just dissuade MNCs but only homegrown entrepreneurial talent is the cost of setting up a business in India. As seen in the chart, one had to spend an average of 70% of India's per capita gross national income (GNI) for setting up a new business in the country in 2008. The same has not only constantly increased over the years but is overwhelmingly higher as compared to most other Asian countries, particularly China.

Source: Asian Development Bank - Key Indicators 2009

Over the years domestic pharma companies captured a larger share of the Indian pharma market as compared to MNCs due to their superior skills in making low cost drugs. However, now there are concerns that MNC pharma companies will gradually start displaying their might in the market. What is likely to prompt such an event to happen? While the product patent law has been introduced in the domestic market, domestic companies have been aggressive in challenging the patent applications of MNCs in the country. However, of late a spate of acquisitions has taken place in the Indian market wherein global innovator companies have acquired stakes in Indian firms to establish a presence in generics. As a result there is a possibility that domestic players who have offloaded some stake to MNCs may not be as active in challenging patents as they once were due to conflict of interest. And hence in the longer run, this may prove detrimental to the availability of low cost generic medicines in the country.

In our opinion as domestic pharma companies have firmly entrenched themselves in the market, they will continue to sell low cost generics in the country given that affordability in India is an issue. However, if the MNCs manage to buy them out, the concerns about MNCs pricing the drugs higher may turn out to be true.

Data source: Yahoo Finance

While the subprime financial crisis is fresh on everyone's mind, the US government seems to have not learnt any lesson. As per a leading business daily, the US government is now the vendor of sub-prime loans! The reason for this illogical move seems to be the American government's desperation to accelerate its economic recovery and kick start the housing market. The results are there for all to see with default rate at 7% while 13% of these loans have been defaulted for more than 30 days. Obviously, this is another potential disaster in the making especially with the US government itself having to borrow to plug its fiscal deficit.

Tata Motors-owned Jaguar Land Rover (JLR) has unveiled a new business plan for the next decade, under which it will invest substantially in a new range of eco-friendly vehicles. The same seems well in tune with the company's foresight about changes in the automobile industry. We had recommended our subscribers to Buy the stock of Tata Motors in December 2008 at the price of Rs 149. The premise was that we believed that the Tata - JLR deal will create significant value for Tata Motors' shareholders over the longer run besides lending the company JLR's technological expertise and well spread distribution network. It may suffice to say that the stock has tripled since our recommendation!

In India, logistics costs continue to remain higher than those in most developed and developing markets - it is estimated to be around 11% of the GDP in FY09, compared to 7% in the US. Transportation costs account for nearly 40% of production costs. According to a research conducted by Crisil, the Indian logistics sector is expected to grow at a compounded annual rate of 11% for the next 5 years, reaching an annual revenue figure of Rs 5.9 trillion by FY14. A conducive regulatory environment favoring logistics infrastructure spending is anticipated to result in reduction of intermediaries by streamlining operations in the fragmented sector where 80% of the freight is still carried by unorganised players. We hope that efficient logistical infrastructure and reduced wastage can improve product quality besides resulting in lower price for the end-consumer, particularly in the case of agricultural products.

India's maiden lunar mission, Chandrayaan-I finding traces of water on the surface of the moon is a path breaking discovery indeed. "Our baby has done its job," is how the Project Director for Chandrayaan-I expressed his view to a newspaper. Scientists have already begun their debate on the possibility of life existence in outer space. Some have ruled in the possibility of colonizing the moon.

However, what is interesting is that while we have been able to discover water on other celestial bodies, the intensity of the problem of water scarcity on the planet we live on has reached alarming levels.

Meanwhile, the BSE-Sensex languished in the red today despite sporadic attempts to recoup the losses during the day. At the time of writing the BSE-Sensex was trading 60 points below the dotted line. As for global markets, most other Asian markets ended the day lower, while the European markets are also currently trading in the red.

Anyways, women investors, who would like to know how to find some worthwhile investment opportunities in the Indian market might find our special investment guide for women - interesting.

04:52  Today's investing mantra
"I think that one should recognize reality even when one doesn't like it - indeed, especially when one doesn't like it." - Charles Munger
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8 Responses to "This is how Buffett makes his billions"


Sep 28, 2009



Yogesh Desai

Sep 26, 2009



Kanu K Warriar

Sep 26, 2009

Congrats for your call on Tata Motors, it indeed tripled since your recommendation.

Since your eye is always on fundamentals, its amazing how you were able to judge that a company making loss (JLR loss last qtr was 873 cr) would triple in a year on hopes of return to profits in FY12 !!!

Do keep make such predictions and keep reminding us of them.



Sep 26, 2009




Sep 26, 2009

Your endeavour is praiseworthy and knowledgeable. But I would like to give you a suggestion , you should also publish this newsletter in hindi as well.


E K Ramachandran

Sep 25, 2009

Water on the moon....what about earth especially at Chennai in our own country? We might be able to harvest water on the moon but Chennai's water problem can't be solved by moon god also?


Johnson Chacko

Sep 25, 2009

Water on the Moon. Chandrayaan was a delivery vehicle to transport M3 NASA module to the orbit of the Moon. I wonder whether our scientists were involved in developing the M3, operations after reaching moon orbit and interpreting the relayed data. If ISRO was involved in these then they can be credited with the discovery of Water on the Moon. In my opinion it is M3 that discovered water and not Chandrayaan. I will be happy if some one could correct me.


yogesh shah

Sep 25, 2009

very interesting and knowledgeable,also keeps me updated with current news

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