In a programme in CNBC18, Veteran market voice Ramesh Damani puts the spotlight on the investing gems of a legendary investor—the Oracle of Omaha or the man more popularly known as Warren Buffet.
Damani sat down with market bigwigs Raamdeo Agrawal of Motilal Oswal Securities and Madhav Bhatkuly of New Horizon Investments to better understand Buffet’s wit and wisdom.
Damani: Warren Buffet’s arguably most favourite, most used maxim: Rule number one: Never lose money and Rule number two: Remember rule number one.
Agrawal: I think it has to do with the margin of safety at the time of purchase of the stock. I am very cautious about what is the purchase price I give and at times I miss the opportunity also because I am being cautious on that and markets at times is very fast. For example, very recently, we purchased Central Bank of India. One of the maxim or one of the principles I have is that I try to buy stocks where I visualize next five years earnings and total earnings what I visualise in next five years, should be lesser than my total purchase price today.
Damani: Or the market cap of the company.
Agrawal: Yes, the total market cap of the company. So that’s how I bought it in 2003—I bought Bharti Tele in 2003 at Rs 25; price to book one in a business, which was fully ahead of us but we didn’t how it is going to pan out. Then I conjectured how the profits are going to move and hence I thought they will make about Rs 26,000-27,000 crore profit in next five years. The company ended up making about Rs 30,000 crore.
Damani: And the market cap was what when you bought it?
Agrawal: About Rs 5,000 crore.
Damani: Rs 5,000 crore, so 5 times the profit before you bought it. But there is a difference between notional loss and quotational loss. Quotational loss is okay, right?
Agrawal: Yes. It’s not that market knows at what price you have bought your stock. So if you have bought it at Rs 100 and price goes to Rs 85-90—that’s okay. There should not be permanent loss in a sense that it gets stuck at Rs 50 and then you realize that things have not gone the way you thought it should go.
Then you have to reappraise things—it’s not that it has not happened with us. Many times it has happened that you bought at Rs 1,000 and it came down to Rs 200 and then you book the loss. One company had a member—Float Glass India— I bought it at Rs 40 at Rs 4. The company, which acquired it, also has gone down because of that particular company. It was such a gruesome business.
Damani: What’s your favourite Buffet maxim?
Bhatkuly: Mine is about businesses. The one that I recall most often would probably, “When a manager with a reputation for excellence tackles a business with their reputation for poor economics, it is the reputation of business that remains intact.” That’s probably the cornerstone of investing or has been the corner stone of investing for me. I would sort of add to a slightly different tangent from what Raamdeo just said that if you buy a great business some times even if the price is wrong, a great business bails you out.
It’s when the business call is wrong that the price becomes critical, in fact, the most important cornerstone. But if you buy great business and get the price wrong, the business will bail you out.
My perception of a good business is one, which is able to consistently generate more cash than it’s ever likely to need, but more importantly, it’s so scalable and the external opportunity is so large that it can actually consume that cash and continue to grow the volume of cash that it is generating. Also, it is highly predictable. So one of the things that Raamdeo pointed out either in Central Bank or in Bharti—he was able to have some estimate of predictability of the future. That’s critical that unless you are able to get predictability all your valuation corner stones go back to the grind.
I’ll give you an example: Sun Pharma, run by a great Manager Dilip Shanghvi and I have known him for now a decade-and-a-half and he is a very dear friend. But Dilip Shanghvi today probably runs one of the most profitable generic companies in the world. It is highly predictable because he is only in chronic therapies, cardio vascular, anti epileptic drugs. So whether Lehman collapses, whether there is a scam in India, it doesn’t matter—people will still buy chronic therapies. He has also been able to generate consistent pricing power out of each of his businesses. He has had a point today where literally products which he has launched more than five years ago are generating two-thirds of his sales and they are actually growing faster than the industry and faster than his entire core business.
So you have some very powerful motes, which have already been built around his business. Had he been running a composite textile mill which was consuming more cash out of him consistently than ever likely to give back to him—he would have struggled.
So I think often quality of businesses makes a great difference. So while Dilip Shanghvi may have probably run the most efficient textile company, it would have probably been the best in terms of cost but he would have struggled to build a market cap even one-tenth of what he has today with Sun Pharma.