What we in India can learn from Berkshire Hathways newsletter 2016-17

So the annual newsletter of Berkshire Hathway is out and has all the wisdom needed for a value investor

 (http://berkshirehathaway.com/letters/2016ltr.pdf)

 

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Since Indian markets are at their higher end of valuations and all the stock recommendations from Shikhar capita are doing pretty well, it’s become very difficult to recommend new stocks, However

we decided to decode warren Buffett’s annual newsletter and how we read it …

  1. Insurance business-Warren buffet has given a lot of space to Insurance business in his annual newsletter and said if you get it right you can have your cash register ringing (he used this line). In the Indian context, the IPO of ICICI Pru was a good start and HDFC is already there. We believe the juice has been taken out but due to unforeseen circumstances these two stocks get undervalued (50% down from current valuations ) will be a good long-term buy. Keep an eye on both these stocks.
  2.  Book value- Book value has taken a back seat in Stock market, but the letter starts from Berkshire Hathaway’s book value. As an investor book value is of considerable importance. We believe if you look at Book values of shares you hold, you will be surprised how much over priced your shares look. So give considerations to book value of your stock holdings.
  3. Dexter Shoes- Warren candidly confesses the mistake he did with Dexter shoes. If Warren and Mr. Munger can make a mistake you and me are a novice . They saw the Moat around Dexter evaporating like a drop of water in Sahara. Be cautious in valuing Moat especially in mid-cap stocks.. they are highly overvalued as of now. In Dow jones, 90% of gains have come from 4% of stocks in last 50 years. Can you identify these 4 % stocks, if not stick to ETF.
  4.  The mindset of Investor– Now here I am really amused. Warren and Sir Munger for last fifty years actually fifty-eight years to be precise were against airlines stocks and were very averse of technology stocks. Now in their top 10 holdings, they have Delta airlines, and stake in all four airlines. For technology, they have large stakes in IBM and Apple. (Are you kidding me? it’s in top three holdings doubled in last quarter ). The lesson is that an investor should always keep his/her eyes and ears open. The worst stock can become the best stock anytime in this case in fifty years. If we look at our own market how much TCS and Infosys have increased shareholders value and airlines are not eve touched. or airlines there is detailed analysis (https://shikharcapital.wordpress.com/2017/02/12/jet-airways-could-it-fly-high/#more-467). Keep an eye on airlines stock on Indian aviation they are one of the best buys as no value investor touched them because of Berkshire Hathaway’s commentary.Recently Rakesh Jhunjhunwala has bought the stakes in all Indian airlines mimicking what Warren’s Berkshire Hathway has done in last quarter, by buying stakes in all airlines what he does is derisking with a risky investment.
  5.  Share buy backs-Warren has written in detail when Share buyback makes sense. For Berkshire Hathway its 120 % of book value. Looking at Indian companies latest is TCS. What they did is buy back at approx 2800 Rs. Now That shows a mature industry with a lot of cash and have no clue how to deploy the cash so as per Waren the best a company can do is either distribute through Dividend or buy back. Where we are shocked now Infy is considering a buyback. With Sikka at the top, we didn’t expect this to happen.If they are following what others are doing then Board loses its credibility and same with HCL. We believe with Automation and new technologies doing disruptive entries, it’s very tough times for Indian IT companies and with this mindless buyback and following herd mentality, Indian IT companies are getting into troubled waters.
  6.  Last and most important – Can you beat the low-cost ETF– HAHAHA the best part in the Buffett’s letter … We believe that the crux and legacy which Warren is going to leave .. that invest in Low-cost ETF that’s it , no humble jumble.

we will be discussing it a bit .. dated 01 January 2007 Warren get into a 10-year bet with anyone who so ever can beat S&P  index. He expected many and many fund managers to come and take warren heads own,  but-but-but-but but only one came for the bet. BTW one million dollars is SIX CRORE SEVENTY ONE LAKS.

“Under the terms of the wager, Buffett is betting (with his own money, not Berkshire’s) on the stock market performance of an S&P 500 index fund while Protégé Partners, a New York money manager, is banking on five funds of hedge funds (the names of which have never been publicly disclosed) that Protégé carefully picked at the outset. Through the seven years, Vanguard’s 500 index fund, as represented by its Admiral shares, is up 63.5%. That’s the portfolio carrying Buffett’s colors. Protégé’s five hedge funds of funds are, on the average—the marker the bet uses—up to an estimated 19.6%. (The “estimated” takes into account that not all of the five funds have final figures for 2014).”

Warren is leading with 40% gains .. what this teaches us … if warren can’t beat it please think, can you ?? In the letter, Warren mentions that he believe of almost 1000 registered money managers in the USA only and maximum 10 can beat the S&P index.

So the takeaway is that if you are a retail investor stick to Index fund and stop reading tweets from all the money managers who promise you mind-blowing returns If they can they would have been in a bet with Warren.

7. So why Shikha capital is existing- Warren’s letter for this year has made us think the same,  we will be investing our investor’s money in low-cost ETF or keep researching and find good or undervalued stocks. Till  today, we are able to beat benchmarks (tide is up and its very much up,  our recommendations like Adlabs, Westlife, rain, Adani, Jubilant are doing pretty well, may be again because tide is up  ), but yes we have been thinking, whether is it better to stick with an index fund or keep on researching. Right now no answers, let us ponder on this and we will be getting back on this …

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