Why Buffett Continues to Stay Out of India - The 5 Minute WrapUp by Equitymaster
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Why Buffett Continues to Stay Out of India

Dec 28, 2016
In this issue:
» Equities favour the patient investor
» Gold loses its glitter in 2016
» Market Roundup
» And More...
00:00
Rohan Pinto, Research analyst

In an interview with Outlook Business in mid-2014, Buffett categorically stated that he can't find investible ideas in India. It seems his views have not changed since then.

India has grown its GDP at an average annual rate of 7-8% for the past decade. Yet, the world's best investor can't find an Indian listed company to invest in?

Here is Buffett in his own words:

  • Part of the reason is that the companies are too small for us; they may not be too small for our subsidiaries or even the couple of the investors in the office. I really have to work on very big things now and there aren't a lot of those companies. If there is a really big opportunity, I would love it. But if you are talking about a billion dollar plus ideas, there aren't many. Find me one, though.

If you read the acquisition criteria for Berkshire Hathaway, which Buffett talks about in every annual report, you would find that Buffett is looking for businesses in the US$5-20-billion-dollar range.

The Buffett of today is looking to shoot flying elephants - i.e. investments that will move the needle for the ever-growing Berkshire Hathaway.

He is constrained in India not because of lack of opportunities, but the enormous size of the capital to be employed.

There might not be many billion-dollar ideas for Buffett in India.

However, the uncertainty and volatility wrought by demonetisation has created small pockets of opportunities for the intrepid retail investor.

Quality companies that were earlier trading at expensive valuations have corrected and are now looking much more reasonable.

However, if you want to exploit such market anomalies, you must have the right mindset. The below conversation from the HBO series Boardwalk Empire talks about these key characteristics...

  • You have no move, Mr Thompson. You do nothing.

    He's under attack, Arnold.

    All the more reason for patience. I've made my living, Mr Thompson, in large part as a gambler. Some days I make 20 bets. Some days I make none. Weeks, sometimes months in fact, when I make no bets at all because there simply is no play. So I wait, plan, marshal my resources and when I finally see an opportunity and there is a bet to make, I bet it all.

The Power of Patience and a Longer Time Horizon

Markets will always offer you pitches daily. It is your job to remain patient and not be tempted to swing every day.

However, when the right opportunity arises, you need to be alert to the opportunity...have the clarity of thought to think long term...and when you get a juicy fat pitch, you need to swing hard.

Morgan Housel believes that patience and a longer time horizon are sources of sustainable advantage. Here is Morgan:

  • The willingness to wait longer than your competition

    Rewards sit on a spectrum: Small, unpredictable ones in the short run; big, higher-odd ones if you wait longer. It's amazing how much of a competitive advantage can be found by simply having the disposition to wait longer than your competitors.

    Waiting longer gives you time to learn from, and correct, early mistakes. It reduces randomness and pushes you closer to measurable outcomes. It lets you focus on the parts of a problem that matter, rather than the chaos and nonsense that comes in the short run from people's unpredictable emotions.

    If you can wait five years when your competitors are only willing to wait two, you have an advantage that is both powerful and uncorrelated to intelligence or skill.

Of course, Buffett has both of these essential qualities. But Berkshire's size constraints don't allow him to capitalise on opportunities in India.

But you, dear reader, have no such constraints.

At ValuePro, we always strive to remain patient and have a longer time horizon. Amid all the present chaos, we have found a solid bet in the healthcare industry. Our patience and perseverance has finally bore fruit.

The recommendation report goes live on Monday, watch this space closely.

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02:30 Chart of The Day

Benjamin Graham once famously said:

  • "In the short run, the market is a voting machine but in the long run, it is a weighing machine."

In simple words what he meant to say is that the long term investor is amply rewarded for his patience. The power of compounding always unleashes in the long term, maximising the return potential to the full. A look at the 5 year rolling market returns offered by Indian markets clearly shows how remaining invested over the long term reaps the maximum benefit. In the past five years, an equity investor saw his 5 year rolling returns increase from 3% to a peak of 20% before tapering off to 10%.

Tapering Rolling Returns of Sensex


Post demonetisation, the ensuing cash crunch has led to a forced slowdown at least for the next 1-2 quarters. The much awaited recovery in the economy may have been pushed ahead for some time. Added to this, the anticipation of further rate hikes by the US Fed has led to increased volatility in the stock markets.

However according to us this is a very narrow outlook. We are not into predicting when the demonetisation pains will ease or the next increase in interest rate by the Fed will take place.

We are more interested in how the long term trend will pan out.

In fact the Co-Head of Research, Rahul Shah, has written about the very real possibility of a 70% upside in the Sensex. This is what he had to say:

  • The aggregate data we have pulled for Nifty companies suggests that profit margins were at a ten-year low at the end of FY15. Even if they were to rise to the average of the last ten years, not immediately, but three years out, the upside would be close to 70%.

    Put differently, markets will go up 70% over the next three years if profit margins revert to the mean.

Therefore, the present gloom may just be the right opportunity to ride the wave and earn higher returns over the long term.

03:10

Another asset class whose returns have tempered down in 2016 is gold. As per the World Gold Council, the price of the yellow metal increased by 7.2% to $ 1,137.67 per ounce till date. However, this is much less than a 30% jump in prices witnessed in the first half of the calendar year when the conditions were not favourable for the rate hike by the Fed. But a hawkish stance by the Fed thereafter pulled down prices by 17% in the latter half of 2016 reducing overall returns considerably.

Back home in India, gold demand waned off in 2016 on account of higher prices and weak rural economy. Even the 42-day strike by jewellers post the imposition of 1% excise duty hit demand. Moreover, the Sovereign Gold Bond Scheme also adversely impacted physical demand of gold. Resultantly, the consumer demand for gold fell by 39%, 18% and 28%, respectively in the March, June and September quarters of 2016, respectively.

In the near term, gold demand is likely to remain weak in the aftermath of the liquidity shortage post demonetisation. Also, further rate hikes by the US Fed in line with its guidance, can further dampen demand and dent prices.

04:30

After opening the day flat, Indian equity markets have been on an uptrend in the post noon trading session. At the time of writing, BSE Sensex was trading higher by 133 points and NSE-Nifty was trading higher by 46 points. The mid cap and small cap indices are trading higher by 1.2% and 1.4%, respectively.

04:50 Investing Mantra

"Someone's sitting in the shade today because someone planted a tree a long time ago." - Warren Buffett

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

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Equitymaster requests your view! Post a comment on "Why Buffett Continues to Stay Out of India". Click here!

1 Responses to "Why Buffett Continues to Stay Out of India"

KD

Dec 31, 2016

India is not growing at 7-8%. This is miscalculation. It is actually growing at 25-30% per year.

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Equitymaster requests your view! Post a comment on "Why Buffett Continues to Stay Out of India". Click here!
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