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Does 2015 Signal the Fading of the 'Buffett' Magic?

Dec 30, 2015

In this issue:
» Commercial banks are the biggest lenders
» India's market cap to GDP ratio has fallen
» ...and more!
00.00
Radhika Pandit, Managing Editor of ValuePro

If Indian investors feel that the Indian stock markets gave them a raw deal in 2015, they will be interested to know that legendary investor Warren Buffett had a terrible year himself.

Indeed, Berkshire Hathaway has lost around 11% in 2015. This is the worst performance since 2008 when the shares of the company were down around 32%. The battering that Berkshire stock took in 2008 is hardly surprisingly. That was when the global credit crisis hit the financial markets and most stocks across countries and regions were at the receiving end. However, even though Berkshire was down 32%, it still outperformed the benchmark index, which plunged 38.5% that year.

An 11% fall in 2015 may not be as bad as it was in 2008. However, this time Berkshire has underperformed the benchmark index. Indeed, the S&P 500 has not lost more than 2%. For Berkshire, the sharp fall in commodity prices has clearly taken its toll. The company has also been hit by the underperformance of its big ticket investments such as IBM and American Express.

So should a bad 2015 worry Buffett? For a long-term investor of Buffet's caliber, one year is hardly a yardstick by which to measure success. Indeed, what matters is the long-term track record. And here, Buffett has seriously excelled. In a career spanning 50 years, Berkshire Hathaway has multiplied wealth for its shareholders by a whopping 7,511 times. During the same period, the S&P 500 multiplied 112 times.

The last ten-year track record is not bad either. As reported in the Financial Times, in seven out of the ten years, Berkshire Hathaway has outperformed the benchmark index.

So clearly, Buffett's philosophy of investing for the long haul has worked wonders for Berkshire Hathaway. No investor, however great, can expect to beat the benchmark index consistently year after year. There are bound to be ups and downs.

Clearly, 2015 was a forgettable year for Buffett. But considering his 50-year track record, it would be unwise to write him off entirely.

As his investing mentor, Benjamin Graham, opined, 'The stock market may be a "weighing machine" in the long term, but in the short term it is a "voting machine".'

Thus, the reason for Buffett's success is that, at the heart of his stock selection process, there are four very simple rules. Every stock that he invests in has a business model he understands, has some sort of enduring competitive advantage, has an honest management team, and allocates capital intelligently. And the clincher: It is available at a valuation with a sufficient margin of safety.

And that is what my team and I endeavour to do for the ValuePro service. We manage two portfolios of stocks that have been selected based on the stringent criteria set by Warren Buffett. Both have outperformed the Sensex so far, and we expect them to do even better in the coming years.

Do you think that Warren Buffett should worry about how bad 2015 was? Let us know your comments or share your views in the Equitymaster Club.


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03:03 Chart of the day

Scheduled commercial banks (SCBs) continue to dominate the formal credit delivery channel in the country. With a lion's share of 71% in the total credit flow, the importance of SCBs in financial inclusion remains paramount. But financial inclusion in the country remains woefully low. The number of branches of SCBs per 100,000 of the population in rural and semi-urban areas is still less than half of that in urban and metropolitan areas. India also ranks poorly in comparison to the other countries. While 50% of the country's adult population holds an account with a financial institution, this figure is close to 70% for the other BRIC countries and more than 80% for US and UK.

One of the reasons why SCBs have not been able to penetrate the unbanked segment is the high cost of acquiring and servicing small ticket loans. To get around this problem the government recently issued licenses for 21 new banks that include payment banks and small financial banks to be run by micro-finance institutions with a wider reach in the unorganised credit market.

After banks, Non-Banking Financial Companies (NBFCs) have a sizeable share of 12% in the formal credit infrastructure in the country. NBFCs have established their presence in diverse areas by penetrating into segments that are otherwise unbanked or under-banked. There has been some consolidation with the number of registered NBFCs falling from over 12,500 in 2010 to less than 12,000 in 2015. Going ahead, banks and NBFCs will play an important role in expanding the reach of financial services in the country.

Commercial banks are the biggest lenders

04:01

In India, equities have underperformed most asset classes in 2015. And trading at a price-to-earnings multiple of 19.7 times, the Sensex appears to be expensive right now. This is particularly true as the growth in corporate earnings continues to remain a damp squib. However, the redeeming factor is that the country's market capitalisation in 2015 has not risen in line with its economic growth. As per a report by Livemint, the country's share in the global Gross Domestic Product (GDP) has risen to around 3% in 2015. But its share in world market capitalization has fallen by 0.1% to around 2.3% during the year. Resultantly, India's market cap to GDP ratio has fallen to 68.4% in 2015 as compared to 75.9% in the preceding year.

Therefore with India projected to grow faster than most of the emerging economies, its equity markets may still not be grossly overvalued and provides scope for appreciation. But the true litmus test lies in the anticipated recovery in corporate earnings that have been evasive so far.

4:45

Indian equity markets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, the BSE Sensex was trading lower by 48 points and the NSE-Nifty was trading down by 15 points. Mid cap and small cap stocks, however, bucked the trend and were trading marginally higher each. Losses were largely seen in IT, and banking stocks.

04:55 Today's investment mantra

"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."- Warren Buffett

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

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