Archives for March 2015

18 Lessons for Investors and Managers from Warren Buffett’s 2014 Letter to Shareholders

One of my favourite Warren Buffett letters is from 2014. The reason I find this letter so special isn’t just because it marked the completion of 50 years of Buffett being at helm at Berkshire, but also because it contained a bonus – Charlie Munger’s words of wisdom and vision for Berkshire over the next 50 years.

What follows below are 18 big lessons Buffett and Munger have outlined in the 2014 letter, which are relevant for both investors and corporate managers. Though I suggest you read the original letter in its entirety by downloading it from here.

My Email Exchange with Prof. Sanjay Bakshi on Valuations

In the March 2015 issue of my premium newsletter Value Investing Almanack, I wrote on the topic of Valuations as the cover story.

My idea was to bring forth varied thoughts on valuing stocks and especially from the angle of drawing the line between paying up and overpaying for high-quality businesses.

I showed the draft of my note to Prof. Sanjay Bakshi, and he was kind enough as always to share his thoughts on how investors must look at valuations, especially when they are looking at expensive-looking, high P/E stocks in their portfolios.

What follows below is our email exchange on the subject. I am sharing it here so that a wider audience benefits from Prof. Bakshi’s thoughts on the important subject of valuations.

In the meanwhile, if you wish to read the complete March 2015 issue of Value Investing Almanack, and my detailed take on valuations and a lot of other ideas, please click here to subscribe.

Life 2.0: Deliberate Practice

Great habits are built through constant practice. The idea is to take a simple idea, and then take it seriously.

In the previous issue of Life 2.0, we talked about habits as a way of simplifying and taking control of your life. Let’s now take it one step further and explore how we can build skills at an expert level.

Everybody aspires to be really good at something. It could be a sport, an art, playing a musical instrument or any other activity like reading, painting or drawing. Sometimes when we see somebody who displays an extraordinary talent in any of these fields, it not only leaves us awestruck but inspires us.

A common myth about talent is that it’s a genetic gift and talented people are born with it. However, nothing can be further from truth. Some people do have a natural inclination towards few activities but it’s not what makes them talented.

So how do you become good at something? How do you improve your performance in a chosen activity? Well the cliché “practice, practice and practice” isn’t the entirely correct answer.

Talent is an outcome of “deliberate practice”. If you haven’t heard of this term before let me give you the definition first.

Deliberate practice is a highly structured activity engaged in with the specific goal of improving performance.

The idea was made popular by author Malcolm Gladwell in his book, Outliers. According to Gladwell, it takes 10,000 hours of practice to become a world class expert at any skill.
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Ethical Analyst: Conflict of Interest

Reputation is difficult to build but easy to lose. How we hope people in the investment industry respect this for a fact. Sadly, most don’t!

“We’ve given you so much information on our business. Now what can you do for us?” I was stumped to hear this from the CFO of a “reputed” mid-size Indian IT services company when I went to meet him sometime in 2009. I had received several such requests from lower rank managers of other companies in the past, but to expect this from a CFO was like too much!

This harmless-sounding question – “What can you do for us” – means a lot when you are stock market analyst who is preparing to write a report on a company. When a top manager asks an analyst as to what he can do for the former’s company, he is indirectly nudging the latter to write a positive report (a ‘Buy’ recommendation) on the stock. Yeah, that’s true!
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The Painful Decision to Hold Cash

One of the many investing mistakes I made during the early part of my investing career was to be rash with cash.

One salary hike, one bonus, or one big inflow of money (family gifts etc.) and I would invest the same into stocks I liked, irrespective of what the stock markets were doing.

Cash in bank was considered a wasted opportunity and every chance to “let-me-buy-stocks-now” was grabbed upon.

The question I used to ask myself was – “Why should I hold cash when it is paying nothing while stocks can grow my money much faster?”

However, over the years and after learning my lessons (from not holding cash) the hard way, I’ve found several reasons to ‘hold cash’.

Corporate Governance: How Companies Screw Investors

When a CEO combines his ego and willingness to put precious capital on the line to grow his company bigger, faster, it can create disaster for investors.

All of humanity’s problems stem from man’s inability to sit quietly in a room alone.” ~ Blaise Pascal

You must have heard the fairy tale where a spoiled princess reluctantly befriends a toad, who magically transforms into a handsome prince triggered by the princess kissing it.

Well, those were the older times. Today’s capitalistic society has been witness to a large number of spoiled princesses trying the same trick on a large number of toads, only to realize that the tale of them turning into princes they had heard of was just that…a fairy tale.

If you are confused why I am writing about the tale of the toad and princess, let me get straight to the point now.

If there’s one quick way a lot of companies and their CEOs have destroyed a lot of shareholders’ wealth in the past, it is through mergers and acquisitions (M&A).

So in the world of M&A, the spoiled princess is the company that is looking to acquire another company, and the toad is that other company that’s waiting to be acquired.

Now, despite 50 years of evidence demonstrating that most acquisitions don’t create value for the acquiring company’s shareholders, corporate managers continue to make more deals, and bigger deals, every year.
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But the Future is Bright!

Consider this financial statement of a company…

If I were a promoter of this company and asked you to invest your money in it – and you did not know me personally – would you invest?

Okay, to sweeten the deal, I lower my asking price by 10%, would you invest now?

I share with you my optimistic view on the company’s future, and how you are going to earn great returns in the future. But would you still budge?

“Okay, what are you going to do with my money?” you ask me.