What makes Warren Buffett what he is? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What makes Warren Buffett what he is? 

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In this issue:
» Real estate prices ready for a fall?
» Which is the better strategy for energy security?
» India's eternal safe haven: gold
» India to be net importer of iron ore next fiscal
» ...and more!

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Warren Buffett. The name is synonymous with being one of the most successful value investors. If we take into account his track record since 1965, he has achieved an average compounded return of 20%. Mind you, this does not take into account dividends and other profits. At first glance, maybe a 20% annual return may not seem impressive. But when that number compounds for nearly half a century, it creates one of the richest men on the planet. But what really makes Warren Buffett such a legendary value investor?

We came across a very interesting interview recently. And we believe it more or less sums up the real essence of Warren Buffett.

One, he has a very good understanding of businesses. He reads extensively and is able to place new information and events in the right context. But more importantly he very well knows that there are many businesses that he doesn't understand. That's a very crucial point. He doesn't dabble beyond what he calls his 'circle of competence'. He also has a knack for reading accounting statements. On many occasions, he has been able to point out businesses that don't seem to be honest. Add to this two more important elements- rationality and discipline. Buffett has the great ability to distance his emotions from his decision making process. This, in our view, encapsulates his most important strengths.

Now, the most interesting part... While all investors try to buy low and sell high, not many are able to do that. In fact, many investors panic the moment they see the stock price falling. But Buffett does exactly the opposite. When stocks plunge, he knows it is time to get greedy and buy more. How is Buffett able to do this? How does he know 'value' so well?

The answer lies in the points we just highlighted above. Buffett gets into only those businesses he really, really understands. There are thousands of businesses whose value he doesn't understand. He simply keeps away from them. He also shares some interesting insights about 'value'. He says that finding value is not trying to pinpoint an exact number. It is just a broad range. He elaborates his point with an interesting analogy. Say, a person walks in through the door and appears to weigh between 300 to 350 pounds. You wouldn't need to know the exact weight to figure that the person is fat. It is sufficient to know that he is in the obesity zone. And that's exactly how Buffett looks at value investing. You don't need too complex computing and elaborate excel sheets to find value.

What according to you are the most important qualities of a successful investor? Share your comments with us or post your views on our Facebook page / Google+ page

01:25  Chart of the day
Nearly 24% of the people are employed in the manufacturing sector across India. This is the national average according to the latest data by the National Sample Survey Office (NSSO). But when it comes down to individual states, it seems that Haryana and Gujarat are the places to be for industry-related job seekers as these states are providing the maximum number of jobs in the manufacturing sector. As per NSSO, 319 people out of 1,000 were employed in the industry in urban Haryana. For Gujarat, the same figure stood at 306. It may, however, be noted that these two states are relatively less dependent on the services sector. India's national average of the latter is 683 (urban; out of 1,000 people). In Gujarat and Haryana, the same stands at 641 and 627 respectively (both below the national average).

As per Assocham, for a country aspiring for growth combined with employment generation, India must not over-depend on the services sector. And for the same to happen overtime, the government should work towards effectively and quickly tackling all major hurdles - those related to land acquisition and environment. At the end of the day, it is the investments in the manufacturing sector that would be the real employment creator for India's 1.2 bn population.

Data source: The Economic Times

Gold continues to attract the interest of not only global investors but India as well. In the Budget this year, the government had hiked the import duty on gold. The idea was to slow down gold imports which were putting pressure on an already deteriorating fiscal balance. That does not seem to have made much of a difference. This is because Indian households have amassed as much as 20,000 tonnes of gold worth US$ 1.16 trillion. Coupled with 557.7 tonnes of the central bank's holdings, gold stocks at known sources in the country would represent more than 75% of its GDP. From a near term horizon, while demand for gold was tepid on account of firm prices and jewellers' strike in the first half of 2012, the festive season in the latter half fuelled demand for the precious metal in India. From a much longer term perspective, gold has become a preferred choice of investment in countries across the world including India as it acts like a hedge against inflation. As governments print more and more money, the value of paper currencies has been diminishing with investors looking for tangible assets and store of value such as gold. Thus, as long as uncertainty in global economies exist, it is quite likely that gold prices will continue to rise.

Real estate prices had been rising steadily across the country. But it seems that the correction is just around the corner. Not because the builders have agreed to lower the prices for lack of sales. But because Reserve Bank of India (RBI) has taken a step in that regard. RBI has rejected banks' demand for restructuring stressed loans without providing for any contingencies. RBI feels that if the loans are restructured without providing for losses banks will lose the urge to get the payment back from builders. That's because if they don't provide for losses their non-performing assets (NPA) will remain unaffected. This might turn banks a bit lethargic when asking for payments from builders as they won't feel the pinch of rising NPA. This in turn may urge builders to hold on to the prices. That's because they won't have any repayment pressure from banks. Basically, their repayment term gets extended. Thus, builders may go scot free. And prices would remain high. Thus, we believe that RBI has taken a right step in cooling the real estate prices which are beyond a common man's reach.

Which is a better strategy - to make a one-time investment and own an appreciating asset we can't do without; or to keep paying for it forever with absolutely no bargaining power? With ONGC Videsh Ltd's (OVL) much talked about stake purchase in Kashgan oil field, a similar question has been raised. Should we keep importing oil to meet energy needs or opt for overseas acquisitions of energy assets? The crude oil prices for the last few years have been on the rise. For a country importing almost 80% of crude oil demand, the move promises energy security, something that can make or mar our future in the race to become a global super power. Looks good so far.

But there are further dimensions to look at. It could be an act of desperation by Oil and Natural Gas Corporation Ltd. (ONGC) that is facing a production decline and doesn't mind investing the huge cash pile that is anyways likely to be squandered on subsidies. Investors should view and assess such deals in light of the cost paid for such one-time investments and the production potential of the asset. After all, we have seen oil output falling from the assets acquired in the past, turning such deals into disaster.

India's clampdown on illegal mining has translated into a US$ 15 bn opportunity for global iron ore majors. Steps taken by the government to clamp down on illegal mining has cut down output in two key states, Goa and Karnataka. Now even Odisha has been added to the list. Export shipments have been slashed and now India is forced to import a raw material of which it has abundant reserves. The world's biggest producers Vale, Rio Tinto and BHP Billiton have usurped some of India's market share in China, Japan and South Korea. And now they are turning their attention to India. Their former competitor may now be their client.

It is worth noting that illegal mining has cost the two states around Rs 510 bn in lost revenues over the last decade. As a result of the campaign to end illegal mining, output has been cut by 20% in the year to March and the export decline is twice that. The situation is bleak according to Basant Poddar, vice president of the Federation of Indian Mineral Industries. For the next fiscal, India's iron ore exports may be no more than 15 m tonnes, while imports could climb to 20-25 m tonnes. This would make India a net importer for the first time ever and hurt the competitiveness of the steel industry. But hopefully, the sector will emerge cleaner in the future.

In the meanwhile, Indian equity markets are trading with significant gains. At the time of writing, the benchmark BSE-Sensex was up by 250 points (1.3%). Realty and Auto stocks were leading the pack of gainers while IT stocks were trading weak. Barring China and Indonesia, all major Asian stock markets were trading in the green.

04:45  Today's Investing Mantra
"Investors have to remember: corporate profits are going up, but stocks are going up faster. How can that continue indefinitely? Investors can only earn what companies themselves can earn; the government or the markets themselves don't kick anything in. How can you get anything more out of a farm than what it grows?" - Warren Buffett

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    Equitymaster requests your view! Post a comment on "What makes Warren Buffett what he is?". Click here!

    3 Responses to "What makes Warren Buffett what he is?"

    bharat makwanab

    Dec 2, 2012

    It seem that The Human World is running after money. The economies, world over revolving around the MONEY. There is no harm in making legitimate money from any industries. While the practicing Discipline in investment, having patience are important concepts of investment, these are subjective and cannot be defined. Practicing Warren Buffets' principle would not make another Warren Buffet. One has to evolve and practice ones' own principle.



    Nov 30, 2012

    WARREN BUFFET is a fundamentalist. That is why he is always safe. But the present day greedy investors are crazy of becoming RICH over night. Naturally they lose much than they gain.



    Nov 30, 2012

    As Buffet himself says, the qualities required to succeed in the stockmarkets are Discipline, Patience and having an adequate margin of safety -- of course, this is easier said than done.If a person can overcome greed,then he does'nt need to make money from stocks as he has no use for riches, the point here is to overcome the "make-me-rich-quickly" kind of greed.regds

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