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Lessons from Warren Buffett - XXXVII...

May 2, 2008

Last week, we read that although Warren Buffett likes the increasing prosperity and technological advancements happening in the world today, for making investments he prefers businesses that are stable and not subject to much changes. Let us go down the same letter i.e., Buffett's shareholders' letter for the year 1996 and see what other investment wisdom he has to offer.

Carrying the theme of stable, sustainable business from the last article forward, there are indeed a lot many business that are say 30, 40, 50 and more than 50 years old and are still around. But as per the master, businesses that are still continuing to add substantial value to their shareholders without diversification and will continue to do so well into the future are indeed very few. He calls these companies 'The Inevitables' and reckons that in his own investment lifetime, he has been unable to unearth a very few 'Inevitables'.

Thus, if a person who is so widely acknowledged as one of the most astute investors ever is not able to unravel more than a few 'Inevitables', we indeed have our task cut out if we were to discover a few of these companies. However, the idea that there are indeed very few 'Inevitables' on the face of this earth may make us more rigorous in our analyses of companies and thus increase possibilities of making attractive returns over the long-term period.

The master also cautions investors to be really wary of the 'Imposters', the companies, which may display characteristics akin to the 'Inevitables' but which may eventually buckle under the pressure of competition and hence, erode shareholder wealth. The companies that are most likely to display these qualities would obviously be the leaders in fast growing industries, which have continued to rule the market for many years. However, leadership alone is not a guarantee of success.

Let us see what the master has to say on the issue.

"Leadership alone provides no certainties: Witness the shocks some years back at General Motors, IBM and Sears, all of which had enjoyed long periods of seeming invincibility. Though some industries or lines of business exhibit characteristics that endow leaders with virtually insurmountable advantages, and that tend to establish 'survival of the fittest' as almost a natural law, most do not. Thus, for every 'Inevitable', there are dozens of 'Impostors', companies now riding high but vulnerable to competitive attacks. Considering what it takes to be an 'Inevitable', Charlie and I recognise that we will never be able to come up with a Nifty Fifty or even a Twinkling Twenty. To the 'Inevitables' in our portfolio, therefore, we add a few 'Highly Probables'."

If one digs a little deeper on whatever the master has to say in the above paragraph and carefully focuses on the words that he uses, it is clear that Warren Buffett is trying to bring the art of investing as much close to science as possible. Since investing is an art, how does an investor increase his odds of success? To answer the question, let us turn to a cricketing analogy. If a man is asked to choose between say a Sachin Tendulkar and a very promising debutant and is forced to bet his entire fortune on who is more likely to score a century in demanding conditions, most rational men would undoubtedly opt for Tendulkar as he has been a proven performer at all levels and against all opposition. Thus, in investing, one increases his/her chances of success manifold if one is able to find the investing equivalent of Tendulkar or what the master calls the 'Inevitables', companies that have performed consistently and in all economic cycles.

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