Buffetisms

A recent discussion with a friend triggered this post. While discussing some stock recos, one of the questions he asked was regarding the price targets I expected for the stocks I had recommended to him over next 2-3 years – Aditya Birla Nuvo, L&T and CARE. If you read Warren Buffet’s quotes, you will realize that simple thinking or a simple solution to a problem is often the best solution. And I for one, do try to follow his philosophy, where possible and more importantly applicable.

Let’s just see the stocks I have written about and see which of Buffet’s philosophies went into them:

Buying a stock is about more than just the price

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."

For this reason alone, I have avoided Page Industries and Eicher Motors. Given that they have good businesses which have done well over the last few years, but they certainly don’t quote at fair prices. I would rather go for Ashok Leyland or Tata Motors which are much more reasonably priced than Eicher Motors. When u are at the top, the only way u can go is down.

The next few are some of my favorites.

The best time to buy a company is when it's in trouble. 

"The best thing that happens to us is when a great company gets into temporary trouble...We want to buy them when they are at the operating table."

In the last 3-4 years or so, a couple of my recommendations have been Wockhardt and MCX which fit this philosophy to the t. Both are excellent businesses but ran into grave trouble, some of their own making and some not. As I had written in my blog, there was nothing wrong in MCX’ business then (Aug. ’13) and nothing is wrong now. But then, it quoted close to 300 and today it is quoting close to 840. And the cause of this trouble was not the business but the parent company which was in deep trouble over irregularities in its subsidiary NSEL.

Same is the case with Wockhardt. With a seasoned Khorakiwala at the helm, it made some wrong bets on foreign currency derivatives way back in 2008. Saddled with a debt of over Rs. 3700 crore, Wockhardt had gone in for the corporate debt restructuring (CDR) process. Following that, it defaulted on redemption of $110 million (around Rs540 crore then) of bonds in October 2009. To add to its troubles, a group of 3 FCCB holders filed the winding-up petition against Wockhardt in January 2010 which was admitted by Bombay HC. The fact of the matter was that Wockhardt was slammed from 2 sides – one was the INR appreciation (Wockhardt’s business was heavily export-centric, accounting for as much as 80% of its turnover) and the other was the inability to pay back the FCCB amount. This led to a run on its share price which collapsed from above 1000 closer to 100 in no time.

The company made some wise moves to get out of this trouble – it sacrificed a part of its hospital business, the entire nutrition business and animal health business. With this, some amount of sanity was restored. In 2009-10 Wockhardt’s debt equity ratio was at an alarming level of 5.5 which now reduced to just 0.4.  During this period, the share price moved from less than 100 to close to 1500.

Once there was some clarity on how it wanted to move forward, I boarded it at a reasonably good price and made good money. Again, there was nothing fundamentally wrong with its business; it made some wrong moves and more importantly put together plans in place to get out of the mess it found itself in. I still hold it from around 700 levels and expect that it will move much higher from here onwards, though it has appreciated by close to 50% in the last 2 years or so. Of course there may be bouts of ups and downs but then it can’t be a 1-way street can it? I am sure that the able Mr, Khorakiwala would have learnt his lessons and is putting in place a structure to prevent such mishaps, leading the company to more assured and stable growth.

Stocks have always come out of crises.

"Over the long term, the stock market news will be good.”

In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."

The one company which fits the bill above is JSPL.

If you see the price action in the recent times, it seems clear that people have accepted that the damage has been done to the extent that any improvement on the coal auction side would help them come back which is one of the reasons they lost this entire ground. Also the penalty issue which is still hanging fire could start abating if they were to get some sort of a respite which is likely.

At the same time the ordinance for the mining side could improve even the steel business for them. So all in all, they can come back from this much stronger, much like Wockhardt. If you are patient enough with this, returns could be manifold.

Take the next 2 together.

Think long-term

“If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.”

Forever is a good holding period

"When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever."

As I have written in my blog, when you invest In equity u should have a minimum holding period of 3-5 years, the longer the better. If u catch a good company, the returns over a longer time-frame can easily be 20% compounded annually. And very few instruments will give u that kind of return in India, now or in the future.

For e.g. take Aditya Birla Nuvo (ABN) which I wrote about in Nov. last year. With a young KM Birla at the helm (he is less than 50, so unless something untoward happens, has a long way to go; and he has running the Birla group splendidly for the last 19 years from the age of 28), ABN can also flourish from hereon. Once it starts hiving off its subsidiaries into separate companies, real value-unlocking will happen

Same with L&T the only diff. being there is no defined promoter family behind L&T, but there is a professional board which will ensure its wellbeing.

 I started buying ABN from ’05 when it was called Indian Rayon and was around 350. Since then, I have bought it at various levels over the years, even at levels of 1000 thus getting an average price of around 700. And I have no intention of selling it off anytime soon, unless I need the money.

Same with L&T – started in ’99 when it was around 200 and kept adding at various levels. Since then, it has given 3 bonus issues, 2 of them 1:1. Can you ask for more?

CARE is a new entrant since it came with an IPO only in 2012 @750. Now it is around 1600. But compared to its peers, it is still not expensive. I have already written about it earlier. This is the only stock among the listed rating peers which as yet hasn’t been grabbed by any rating MNC (CRISIL has S&P, ICRA has Moody’s, and now IDBI wants to get out of CARE to monetize its holding, giving any other MNC exactly the entry it may be looking for). And mind u, being a niche stock, it will never be cheap on the valuation front (not the price). But if u stick to it, returns are likely to be secure and manifold.