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CAGR Insights – 28 Oct 2022

CAGR Insights is a weekly newsletter full of insights from around the world of web.

Here’s the list of curated readings for you this week:

Personal Finance

  • In search of deposits, bankers embark on door-to-door campaign – Video of Canara Bank employees selling FD scheme on road is from Goregaon East, Mumbai, confirm branch employees. Read here.
  • Invest in companies that Handle hard well – The adversity will separate the wheat from the chaff, the three-stars with upside from five-stars without it, and those who can “handle hard well” from those who cannot. Read here.
  • Ready reckoner for Passive funds – The latest edition of Cafemutual’s Passive Ready Reckoner is now out. It gives you all details that you need to know – daily AUM, TER, tracking error, tracking difference (1 year), and returns (1, 3 and 5 years). Additionally, it also captures the 1-year average trading volume and impact cost for ETFs.Read here.

Investing

  • Fundamental Analysis of Asahi India Glass– Dr. Vijay Malik brings out deep insights on Asahi India Glass, India’s leading producer of automotive and float glass. Read here.
  • A Primer on Free Cash Flow  – Free cash flow is one of the most dangerous terms in finance, and I am astonished by how it can be bent to mean whatever investors or managers want it to, and used to advance their sales pitches, says Prof, Aswath Damodaran.  Read the blog here.
  • Hedge funder David Einhorn says value investing may be gone forever- There have been serious changes to the market structure and pretty much most of the value investors have been put out of business.  Watch the interview here.
  • Understanding the hospital industry – The hospital industry is emerging rapidly due to progression in technology, increasing penetration in health insurance and growth in various lifestyle diseases across the country. This knowledge session by Parag Parikh Mutual fund team provides valuable insights. Watch here.

Economy

  • India’s Plan to Unlock Gold Gets New Focus With Trade Gap Near Record- The deposit plan and a related sovereign gold bond scheme, which allows an investor to buy a bond priced at the value of gold without an underlying physical asset, are a “far cry from success,” representing less than 2% of India’s annual gold consumption. Read here.
  • ECB raises rates by 75 bps for 3rd straight time, hints at more hikes – In recent months, soaring energy and food prices, supply bottlenecks and the post-pandemic recovery in demand have led to broadening of price pressures and an increase in inflation, the central bank said. Read here.
  • RBI MPC holds an additional meeting – The Monetary Policy Committee will hold an additional meeting, according to a press release issued by the Reserve Bank of India today. The meeting will be held under provision of Section 45ZN of the Reserve Bank of India Act, 1934, which pertains to drafting the committee’s report to the government on failure to meet the inflation targetting mandate. Read here.

CAGR Speak

  • Succession planning – Who is Next? This is one of the most daunting challenge several companies in India face. Read here.
  • Are women less confident about managing their own money?  Read here.

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Check out CAGRwealth smallcase portfolios here.

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That’s it from our side. Have a great weekend ahead!

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The content of this newsletter is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. The content is distributed for informational purposes only and should not be construed as investment advice or a recommendation to sell or buy any security or other investment, or undertake any investment strategy. There are no warranties, expressed or implied, as to the accuracy, completeness, or results obtained from any information set forth on this newsletter unless mentioned explicitly. The writer may have positions in and may, from time to time, make purchases or sales of the securities or other investments discussed or evaluated on this newsletter.

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Learning from Warren Buffet Series – Part 5

Berkshire Hathaway Shareholder letter – 1983-85

Key Takeaways from the letters (in no particular order)

Learning 1

Allocation of capital is the key – Allocation of capital is the key factor to judge a business management or a fund manager. It is one of the most crucial factors which decide the fate of the business or fund. We as investors need to keep an eye on the capital allocation decisions of management. We often see management retaining large sums of the business earnings and reinvesting it in lower return of investment projects, unrelated businesses, just so that management can expand their empire or at times we see companies having a high dividend payout ratio when they actually need to deploy capital in their business. Both these circumstances are alarming. Market in general rewards management which has a history of good capital allocation decisions.

This is true for businesses and individuals alike as capital is not free, every decision we as individuals take to save, spend or invest capital matters.

Learning 2

Become a learning machine – To be successful one need to keep learning and updating oneself. To become a learning machine one has to voraciously read, think and aim to become little wiser every day. This concept been beautifully captured in an article on the Buffet formula in the widely read and followed blog “Farnam Street”. I strongly suggest that you read the full article here.

The biggest difficulty in life is not learning new things; it is to unlearn the old. Keynes articulated the problem crisply when he said: “The difficulty lies not in the new ideas but in escaping from the old ones.”

Learning 3

Invest in management who eat their own cooking – Buffet in his 1983 annual letter to shareholders lists down the major business principles which he follows and one of the most important one is that he has an ownership orientation instead of thinking like a manager. He and other directors are all major shareholders of Berkshire Hathaway. This is one of the key takeaways for us as investors – look for companies with high Promoter holdings or mutual funds where the fund managers have their own funds invested.

Learning 4

Study your failures rather than your success – Buffet emphasizes that both in life and other aspects of life studying and learning from your mistakes is of great importance. He embodies it by giving a full detailed account of his reason of shutting down the textile business and the loss in earnings caused by the delay in taking this decision.

Learning from our mistakes has one added advantage we tend to not repeat them again in future (hopefully). As Charlie Munger says “All I want to know is where I’m going to die so I’ll never go there.”

Learn more from Warren Buffet through previous parts of our series:

Part 1 | Part 2 | Part 3 | Part 4

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Learning from Warren Buffet Series – Part 4

This time, I have combined the key takeaways from 3 letters. Because, while Warren Buffet writes these letters with a gap of one year, we are trying to bring up these articles every month. So we need to avoid being repetitive. But, most of the knowledge imparted by him is so timeless and relevant, that we are forced to write about them again and again.

Berkshire Hathway Shareholder letter – 1980-82

Key learning from the letters (in no particular order)

Learning 1

Buy right and sit tight – If your purchase price is sensible, some long-term market recognition of the accumulation of retained earnings almost certainly will occur. If you are confident about your investment, you need to wait patiently. Pascal’s observation seems apt: “It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.” If there is ever a chart which can speak, I believe the below chart of BSE Sensex would just say “shut up and remain invested”.

Sensex journey and growth

Learning 2

Forecasting folly – Forecasts are useless especially in stock markets. Investors need to avoid falling for forecasts at any costs.   “Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future.” Read why here.

Learning 3

Invest when there is blood on street – Investors need to be patient and invest when there is fear in the market, because it is during these market corrections that you will get handsome opportunities.

Learning 4

Avoid business in industries producing un-differentiated products – Businesses in industries with both substantial over-capacity and a “commodity” product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. Investors need to be wary of businesses in industries where there is no difference in products like sugar, textile, paper etc.

PayPal founder, Peter Thiel in his ground breaking book “Zero to One” says “All failed companies are the same: they failed to escape competition.”, and it is very difficult to escape competition if the product you are producing is undifferentiated.

Learn more from Warren Buffet through previous parts of our series:

Part 1 | Part 2 | Part 3

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LEARNING FROM WARREN BUFFET SERIES – PART 3

After a long cooling off period, here is our third part of the much liked series from Mr. Kshitiz Jain. This one should be read by everyone as the takeaways are extremely relevant for Indians.

Do participate in sharing the knowledge. Comment / Share / Like.

Berkshire Hathway Shareholder letter – 1979

Learning 1

Buffet explains that for investors to judge a good company the measure that should be focused on is Return on Capital Employed (ROCE). But, investors need to be careful of the factors like leverage, accounting measures etc. which can distort the ratios.

Learning 2

Buffet in his letter brings out two of the most important factors that impact the returns of individual investors i.e. Inflation and Taxation.

 “For the inflation rate, coupled with individual tax rates, will be the ultimate determinant as to whether our internal operating performance produces successful investment results – i.e., a reasonable gain in purchasing power from funds committed – for you as shareholders”

Learning 3

In my view, the below lines is what made Buffet so successful as an investor. It clearly brings out Buffet from the shadow of his teacher Benjamin Graham, who is widely known as the “father of value investing”. Quality of company should be the first criteria for an investor, only if this criterion is met, investor should look at prices.

“ Both our operating and investment experience cause us to conclude that “turnarounds” seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”

Learning 4

Buffet in this letter touches upon another common investment instrument i.e. Bonds. He suggests that investors should avoid investing in long tenor bonds, especially in an inflation-ridden world. According to him, fixed price contracts like bonds are nonexistent in virtually all other areas of commerce. Parties to long-term contracts now either index prices in some manner, or insist on the right to review the situation every year or so. Similarly, fixed rate bonds for long tenors, does not make sense as it is difficult to predict interest rate and inflation scenario for such a long term.

My two cents

Firstly, an important lesson which Buffet talks about is that investors should avoid instruments like fixed deposits (FD) which due to lower returns than inflation end up destroying the purchasing power of the investors. Investors should focus on the real return (Nominal return – inflation) generated by an instrument of company instead of the nominal return generated.

Secondly, taxation is another important factor that impacts an investor’s return. Inflation adjusted post tax return is actually what an investor will earn. For an investor’s money to grow, the post-tax return from an instrument should be more than inflation.

Equity is the only asset class which is known to give real returns over a long period of time. So for investors looking to create wealth over a long term, equity exposure is necessary.

Also read our LEARNING FROM WARREN BUFFET SERIES – PART 2 & PART 1