CategoryUncategorized

Buffett’s speech to students at univ of Florida

By Rohit Chauhan
In Uncategorized, Warren buffett
July 8, 2005
2 Min read
5 comments
B

A free link to the video was posted at www.fool.com by a board member. i have put the link below

http://tinyurl.com/c85or
several very interesting comments by buffett

1. why smart people do dumb things – buffett discussed about the LTCM episode. how a bunch of very smart people with very high IQ and knowledge, managed to blow up everything they had. i like the statement – ‘why risk what you have and need for what you dont have and dont need’ ? i think this statement is very important to an investor. just think about it …if i am well off , why do i need to risk my networth for a few extra percentage points and if i am poor , i cannot afford to do it. i guess it makes sense to invest conservatively (in companies with strong competitive advantage )

2. buffett discusses at length the economics of coke / see’s and p&g. this was in response to a question on what is it he looks in a business. buffett discusses in detail about the what qualitative factors one should look for in a business. One new point which struck me and kept me thinking is buffetts reference to the pricing power of a company. companies with strong pricing power like coke tend to have a very formidable competitive advantage. in comparison commodity companies have poor or no pricing power (except during supply shortage )

3. buffett also discussed about reit investment and how although the discount to book looks enticing , but is justified due to inability of such companies to move / sell the big amount of real estate on their books

4. buffett talks of various other topics (which he has repeated in several other forums) , like developing good habits (example of taking a 10 % option on your classmate ), not prediciting the market etc

5.buffett also talk of the ‘important and knowable’ v/s ‘important and unknowable’ , when some one asked his opinion on interest rates. he pointed out that is better to focus on the first and get into good companies than worry about the second and let go of opportunities.

a very good speech and worth the 1.5 hours (in addition it is free)

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Evaluating the cement industry – porter’s model

By Rohit Chauhan
In Industry analysis, Uncategorized
July 4, 2005
2 Min read
2 comments
E

I have been trying to assess the cement industry on the five factor model and have been able to come to the following evaluation

Entry barrier – Entry barriers are not too high in the industry. The technology is easily available. The only constraint is capital which a big player will have access to. The key barriers would be
– economies of scale which would favor the bigger players like Birla group or Gujarat ambuja
– Brands are not so critical. price plays a big factor
– Cost advantage is critical. Companies which can have a sustainable low cost position will have a competitive advantage. The major players in India do seem to have a similar cost position. Gujarat ambuja has been able to sustain a low cost position and has been able to reward shareholders.

Supplier power – Has very low impact. Mainly limited to coal / power wherein the government pricing would have an impact. But this would be common to all companies

Buyer power – Very low to no impact

substitute product – Almost no substitute product

Rivalry – High rivalry in the industry as the industry is still fragmented. Top 6 players have 60 % capacity as there has been consolidation recently. however local players can have an impact on pricing as cement as the industry depends on local supply. Cement being bulky is generally not transported from long distance

In summary due to low brand strength, high fragmentation, low cost advantages (except in case of some players ), the competitive intensity is high. Pricing is poor and depends on demand scenario. If demand drops , the profitability suffers as the players cut price to run plants at full capacity (due to high fixed costs).

Not an ideal industry for long term investment ( except if one can find a player with a sustainable low cost position )

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A good website – equitymaster.com

By Rohit Chauhan
In Uncategorized
July 3, 2005
1 Min read
1 comment
A

i regularly visit this website (equitymaster.com). One of the few indian websites which focuses on the fundamental analysis of companies and provides a good analysis of their quarterly/ annual results.

In addition, there are sometimes articles (views on news ) which give sensible advise to an investor in terms of various personal finance options .

The knowledge centre is good as it has some good articles on the economics of a number of industries such as cement / FMCG etc. There are some good articles on various investing principles too.

Only disadvantage is that a lot of the content is paid (especially the stock recommendation ). But if you believe in doing your own research and forming your own conclusions, then it is a non issue

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The market at 7200 ! so what ??

By Rohit Chauhan
In Market analysis, Uncategorized
July 3, 2005
2 Min read
Add comment
T

Look at any financial website / papers and there is euphoria all around …

Cant figure out a rational reason other than that it is good to excite people, get more hits or sell copies.

what’s the big deal about 7200 !! or any other number .

The market is selling at 14.3 times backward pe . If the economy does fairly ok , and the corporate profits continue to grow at 10-15 % , then some time in the future we could have the sensex touching 8000 and then maybe 8900 …provided there is no major shock to the world economy / indian economy … anyway how does it matter

well if the market was selling at say 20 times pe , then it would matter as i would start selling ..or if it was selling at say 10-11 times pe (like 2003 ) then it would matter …as one can buy some very good companies at good prices …but now we have pockets of overvaluation and to be fair pockets of undervaluation …so it means more work ..

so i guess if the markets shoots to 8000 + soon or drops to 6000 types , then it is action time …otherwise it is back to reading annual reports and better off watching the discovery channel

seems like a lot of noise ..but then what can once expect from the most of the financial media !!

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Porter’s discussion of strategy

By Rohit Chauhan
In Book review, Uncategorized
July 3, 2005
2 Min read
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P

Read the next chapter of the book – ‘on competiton’ . This chapter talks about strategy. Porter has detailed the difference between operational excellence and strategy.

Operational excellence to put it simplistically is doing the various operationally activities as efficiently as possible. For example , a company like Gujarat ambuja uses sea transport to move raw material and finished good and has thus reduced its transportation cost. This is operational excellence.

Strategy, according to porter is the specific choice of activities which a firm decides to perform to create a distinctive position or enduring low cost position and thus achieve competitive advantage. for example , blue star has chosen to focus on the commercial airconditioning market and has built its value chain accordingly (although they are still trying to tap the home a/c market)

In addition, by choosing specific activities and performing them differently and ensuring a fit between them, a firm is able to derive a distinct position and a competitive advantage. Such a position is difficult to replicate as a competitor can duplicate some or all the activities but may not be able to manage the fit between the activities and the tradeoffs between the activities (like blue star may focus more R&D v/s carrier would have to focus on a dealer network )

This book is good to get a deep understanding of strategy and how it can create a sustainable competitive advantage

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Porter’s five forces model and buffet’s concept of moat

By Rohit Chauhan
In Investment process, Uncategorized
June 21, 2005
1 Min read
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P

Buffet refers to the concept of moat or sustainable competitive advantage as one of the most critical factor in determining the returns for a long term investor (in addition to other criteria)

I have been reading porter’s book ‘on competition’ and trying to get a better understanding of how to evaluate a company’s competitive advantage for a long term investment.

The five forces model is very helpful in understanding the industry structure and kind of long term returns to expect in an industry. What i was able to ‘understand’ this time (have read the topic several times ) is that not all the factors are equally important and for an investor it is critical to asses which factors impact the industry and the company more and would influence the long term returns.

More important for a long term investor is to understand, how the five factors of competition will change and determine the future returns.

I am now trying the above exercise for some industries like FMCG/IT services / Banking etc . A good evaluation and insight into the trends would be far more useful that chasing some price targets or trying to predict the next quarter which in munger’s words would be ‘twaddle’

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Checking on britannia industries – further update

By Rohit Chauhan
In Company analysis, Uncategorized
June 15, 2005
2 Min read
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C

After the last post, i started analysing britannia further. Liked the following in the company then
– An ROE of 25 %
– almost zero debt
– growth in upper single digits
– A p/e of around 13
– Cash / investment on balance sheet of around Rs 100 / share
In addition the company has good brands, good marketing and distribution infrastructure and reasonable economies of scale.

However on doing a bit of detailed check , i realised that almost 40-50 % of the NP is other income from investment activities which makes the operating pe of almost 20-22 ( after

So the company no longer looks very cheap. in addition i cant get my hands around how the management proposes to use the cash flows. Its core business needs very little cash. They are doing buybacks …but not much ( share count has come down by some 5 – 10 % ). So the company seems to be piling cash and putting it into various investment.

now the above situation although not worrying , does not excite me into putting my money into the company. Most likely i will watch the company for some more time, before doing something

so i guess its time to move the next company !!!

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Analysing Goldiam industries

By Rohit Chauhan
In Company analysis, Investment ideas, Uncategorized
May 22, 2005
1 Min read
2 comments
A

Heard of this company some time back. I have started looking at it. This company is into Diamond and gold jewelry exports. It’s main market is US . It is into designing jewelry, managing the logisitics etc . Some positives

– Good ROE
– Very low fixed assets
– moderate WCAP requirement. Mainly in the Raw material inventory
– 10 % plus Net margins
– No debt
– 40 Rs / share of cash on the balance sheet

Some points which i need to figure
– what is the nature of the ‘investments’ in the balance sheet.
– what are the long term plans of the company
– nature of competition ?
– How good is the management. The company seems to have good Fresh cash flow. Other than some captial required for WCAP , the FA requirements are very low. So most of the Net profit is free cash for the company. Need to figure out what the company would be doing with the cash.

The biggest pain however is that the company’s website does not have their annual report or detail financial results. That is could be real dampener !!

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Evaluating asian paints

By Rohit Chauhan
In Company analysis, Investment ideas, Uncategorized
May 19, 2005
1 Min read
1 comment
E

asian paints has been the no.1 paints company for the last 20+ years. This company has returned almost 24% p.a returns since its IPO. Are these returns sustainable ?

Even if the level of returns may not be , i have always felt the company has strong and sustainable competitive advantages like

– A strong distribution network with lockin at key retail dealers through their color world package
– Strong brands in the paints industry like apcolite, apex, gattu etc
– economies of scale in manufacturing, adverstising distribution due to the high market shares (40 %+ )
– good pricing power as the company has been able to sustain margins inspite of raw material price increases
– good management – evident through the track record of managing low WCAP, low debt, sensible accquisitions and good brands and products

In the medium to long term the company should continue to do well in india. The challenge for the company is to port these strengths to their internation operations. That seems to be happening for the time being

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Buffet’s talk at Notre Dame

By Rohit Chauhan
In Uncategorized, Warren buffett
May 19, 2005
3 Min read
1 comment
B
I recently came across the transcript of a talk which buffet gave at Notre dame. A few gems from the talk (paraphrased )
‘You don’t want to buy a dollar bill that’s sitting for 50 cents, and it demands positive
capital, and its going to be a dollar bill ten years from now. You want a dollar bill that’s
going to compound at 12%’
‘A couple of fast tests about how good a business is. First question is “how long does the
management have to think before they decide to raise prices?” You’re looking at
marvelous business when you look in the mirror and say “mirror mirror on the wall, how
much should I charge for Coke this fall?” That’s a great business. When you say, like we
used to in the textile business, when you get down on your knees, you know you call in
all the priests, rabbis, and everyone else, “just another half cent a yard”. Then you get up
and they say “We won’t pay it”. Its just night and day. You KNOW those businesses. I
mean, if you walk into a drugstore, and you say “I’d like a Hershey bar” and the man says
“I don’t’ have any Hershey bars, but I’ve got this unmarked chocolate bar, and its a nickel
cheaper than a Hershey bar” you just go across the street and buy a Hershey bar. THAT is
a good business.’
The ability to raise prices; the ability to differentiate yourself in a REAL way, and a REAL way means you can charge a different price, that makes a great business.
I’d like to talk to you for just a few minutes about what I regard as the most important
thing in investments and also in terms of your career. Because in your career what train
you get on makes a lot of difference. Because frequently, perhaps generally, when people
get out of business school, they don’t give enough thought to exactly what sort of train
they’re going to get on. And it makes a tremendous difference whether you get involved
in a prosperous company; one that’s going to really do well. On balance, you want to go
with a company whose stock is going to be a good investment over the years because
there’s going to be much more opportunity; there’s going to be more money made, you’re
going to (garbled). And if you get involved with some of the businesses I’ve been
involved with like trading stamps
One is a marvelous, absolutely sensational business, the other one is a terrible business. If
you have a choice between going to work for a wonderful business that is not capital
intensive, and one that is capital intensive, I suggest that you look at the one that is not
capital intensive.
I read all kinds of business publications. I read a lot of industry publications. Coming in
today on the plane (garbled). I’ll grab whatever comes in the morning. American Banker
comes every day, so I’ll read that. I’ll read the Wall Street Journal. Obviously. I’ll read
Editor and Publisher, I’ll read Broadcasting, I’ll read Property Casualty Review, I’ll read
Jeffrey Meyer’s Beverage Digest. I’ll read everything. And I own 100 shares of almost
every stock I can think of just so I know I’ll get all the reports. And I carry around
prospectuses and proxy material. Don’t read broker’s reports. You should be very careful
with those.
– In addition buffet goes the economics of various businesses such as coke, gillette, textile and other commodity business
A must read for an investor.
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