Dalal & Broacha Stock Broking Private Limited Investment Fundamentals WARREN BUFFET’S CLASS – II “Investment is most intelligent when it is most business like”. This is a key concept to which Warren attributes his personal success. Warren evolved as an investment legend over a period of time starting from the basic concept that he learned from his “Guru” Benjamin Graham (considered to be the dean of Investment Analysis.He is the author of book “Security Analysis” which is a milestone in the field of investing). Warren’s style of investing is so classic that when you journey along, it will give you exceptional insights such as : ∗ “You will find yourself waiting for the market to go down instead of up, so that you can buy partial interests in publicly traded companies that you have been wanting to own. ∗ You will start thinking businesslike and realize that the most stupidest reason in the world for owning a stock is that you think the prices are going up next week. ∗ You will learn that diversification is something people do to protect themselves from their own stupidity, not because of being investment savy. ∗ You will learn that a Rs1500 stock may be cheap and a Rs 42 stock may be grossly expensive. ∗ You will find yourself getting great investment ideas from shopping in the supermarkets.” Coming back to Investing with business perspective Warrenn’s chief idea is to invest in an excellent business at a price that makes business sense. What he means is, that investment should offer the investors, the highest predictable annual compounding rate of return possible with least amount of risk.He further says that if you can find such management with visionary ideas, say which can grow at 20% CAGR, one should stay invested in the company for long term ignoring short term market perceptions. Warren places great amount of weight on the quality of a company’s management in making an investement decision. According to him, when management generates healthy earnings for company, it has an option either to distribute them in form of dividend or re-employ them with the company. His idea of better management is one which profitably re-employs the cash into the business to maintain the future rate of growth. He believes that the stock market will, over a period of time acknowledge this increase in the company’s underlying value and cause the stock price to rise. Warren’s investment company, Berkshire Hathaway, in 80’s traded at $500 a share, and today it trades at $45000 a share (adjusted) and it has never payed any dividends. The Price You Pay Determines The Rate Of Return This is the key that you should wear around your neck all the time. It directly affects the return that you make on your investments. To quantify the statement, if somebody is willing to sell you the right to receive Rs. 1100 at the end of one year, what is the maximum that you would be willing to pay for it today: • If you paid Rs.1100, the return on your investment would be zero. • If you paid Rs.1000, the return on your investment would be 10%. • If you paid Rs. 1050, the return on your investment would be 4.7% Hence, we see that a small change in the amount, makes difference in the percentage terms. The other important factor is Predictablity of earnings of a business. This we intend to discuss in next issue along with other concepts.