Ep. 1 - Investment Philosophies of Buffett and Munger | Learn how to pick a stock

Summary

In this video, Asak Kurana introduces a new series exploring Warren Buffett's investment strategies and philosophies through his letters to shareholders. Joined by Vinit and Satya, they discuss Buffett's early life, his partnership with Charlie Munger, and their acquisition of Berkshire Hathaway. The team delves into Buffett's investment filters, insights on equity during inflation, and the importance of understanding a business's book value and intrinsic value. They also highlight the significance of asset-liability management and the concept of 'Mr. Market'. The video offers a deep dive into Buffett's approach to investing in various sectors, emphasizing long-term value creation and the importance of setting realistic expectations for investors.

Takeaways

• 📚 Warren Buffett's letters to shareholders are considered invaluable resources for finance professionals, akin to a 'Holy Bible' in the field.
• 🧩 Vinit's motivation for reading Buffett's letters stemmed from his love for reading and his professional interest in finance, aiming for accuracy in understanding Buffett's insights.
• 🕊️ Respect and remembrance are shown for Buffett's partner, Charlie Munger, and his contributions to Berkshire Hathaway, with Munger's passing noted in 2023.
• 👶 Satya shares insights into Buffett's early life, highlighting his frugality, interest in numbers, and understanding of the power of compounding from a young age.
• 📈 Buffett's early business ventures, such as newspaper delivery and weighing machine investments, demonstrate his entrepreneurial spirit and financial acumen.
• 🤝 The dynamic between Warren Buffett and Charlie Munger is explored, detailing their initial meeting, collaboration, and the eventual consolidation under Berkshire Hathaway.
• 🏭 The script discusses the various sectors in which Berkshire Hathaway invested, including textiles, insurance, retail, trading stamps, banking, and media, each with its own set of challenges and growth prospects.
• 💡 Buffett's investment filters are outlined: simplicity of business, strong earnings prospects, competent management, and an attractive price.
• 💼 The importance of distinguishing between book value and intrinsic value is highlighted, with Buffett advocating for a focus on standalone financials for a clearer picture of subsidiary performance.
• 📉 The economic context of 1977-1981 is summarized, noting high inflation, interest rates, and the challenges faced by various sectors, including the shift towards debt investments and the impact on equities.
• 🌐 The script draws parallels between historical economic situations and current events, such as the effects of money printing during the COVID-19 pandemic and its influence on inflation.

Q & A

What is the purpose of the new video series by Zeroda Vity?

The purpose of the new video series by Zeroda Vity is to discuss Warren Buffett's letters to his shareholders, providing insights and education on his investment strategies and philosophies.

Why did Vinit decide to read all of Warren Buffett's letters?

Vinit decided to read all of Warren Buffett's letters because, as a finance professional, he considers Buffett's letters as a 'Holy Bible' in the finance profession, and he wanted to be well-prepared for the discussion series.

What is the significance of Warren Buffett's early understanding of compounding in his investment philosophy?

Warren Buffett's early understanding of compounding is significant because it instilled in him the importance of valuing every penny and the long-term growth potential of investments, which became a cornerstone of his investment philosophy.

What is the relationship between Warren Buffett and Charlie Munger?

Warren Buffett and Charlie Munger are close friends and business partners. They met through an investor, and their shared investment in Berkshire Hathaway led to a long-term partnership where they operated remotely but communicated frequently about investment opportunities.

How did Warren Buffett's investment approach change from 1965 to 1977?

From 1965, Warren Buffett started writing letters that were transactional and reporting in nature. However, by 1977, he began using a narrative approach to educate his shareholders through these letters, showing a shift towards more communication and transparency.

What economic conditions were prevalent during 1977 to 1981 that affected investment strategies?

During 1977 to 1981, there was high inflation around 15-16%, high interest rates, and an increase in the US debt. These conditions led to a shift towards debt investments being attractive, but Warren Buffett still favored equities for long-term growth.

Why did Warren Buffett continue to invest in equities despite high inflation and interest rates in the late 1970s?

Warren Buffett believed that in the long run, equities help maintain and improve purchasing power. He acknowledged that inflation could increase input costs, but he focused on businesses with pricing power and strong management to navigate through these challenges.

What were the key sectors in which Berkshire Hathaway invested during the period of 1977 to 1981?

Berkshire Hathaway invested in sectors such as textiles, insurance, retail (specifically See's Candies), trading stamps, media (including newspapers), and banking.

What was the problem with Berkshire Hathaway's textile business that Warren Buffett referred to as a 'problem child'?

The textile business faced challenges due to cheap labor in other countries and intense competition in the industry. It was not a strong business and required significant management efforts, leading Buffett to refer to it as a 'problem child'.

What are the four filters that Warren Buffett and Charlie Munger used to evaluate potential investments?

The four filters they used were: 1) Simple business that they understood, 2) Good earnings prospects, 3) Competent and honest management, and 4) An attractive price.

How does Warren Buffett differentiate between book value and intrinsic value in the context of a business?

Book value represents the amount invested in the business so far, while intrinsic value represents the total earnings the business is expected to generate in the future.

What is the 'Mr. Market' metaphor used by Warren Buffett to describe the stock market?

The 'Mr. Market' metaphor is used by Buffett to illustrate the idea that the market's daily fluctuations should be seen as opportunities to take advantage of, rather than as guidance for making investment decisions. Mr. Market serves the investor, not the other way around.

Why does Warren Buffett emphasize the importance of looking at standalone financial statements for a holding company like Berkshire Hathaway?

Buffett emphasizes standalone financials because a holding company like Berkshire Hathaway has a diverse set of businesses. Consolidated numbers give a total view but may not provide a clear picture of individual business performance.

What is Warren Buffett's view on setting expectations for shareholders?

Warren Buffett believes in setting expectations conservatively. He prefers to underpromise and overdeliver, as it leads to happier shareholders and avoids disappointment if targets are not met.

How does Warren Buffett define 'earning prospects' in the context of investment?

Earning prospects, according to Buffett, refer to the future earnings potential of a business. He suggests looking at Return on Equity (ROE) to ensure that new capital invested is generating a return that at least matches the growth of the capital itself.

Outlines

00:00

📈 Introduction to Warren Buffett's Letters Series

The video series is introduced by Asak Kurana, who will be discussing Warren Buffett's investment strategies and letters to shareholders with his teammates Vinit and Satya. Vinit has undertaken the task of reading all of Buffett's letters, considering them a finance professional's 'Holy Bible'. Satya, known for his inquisitive nature, will join in the discussion. They plan to start their analysis from 1977 and cover five-year sets of letters in each episode. The first episode will cover insights from 1977 to 1981. Vinit shares his motivation for reading Buffett's letters, which includes a deep dive into Buffett's biography, podcasts, and interviews. The team expresses their respect for Buffett and his late partner, Charlie Munger, and their excitement for the learning journey ahead.

05:01

💼 Warren Buffett's Early Investments and Berkshire Hathaway

The discussion delves into Warren Buffett's early career, starting with his work under Ben Graham and the establishment of the Buffett Partnership. It highlights the partnership's impressive returns and how Buffett was introduced to Charlie Munger, leading to a strong friendship and collaboration. Together, they acquired Berkshire Hathaway in 1965, with Buffett as the majority shareholder. The narrative explains how Buffett and Munger operated remotely, discussing securities and businesses over the phone, a precursor to modern work-from-home concepts. The video also touches on the economic context of the late 1970s, characterized by high inflation and interest rates, and contrasts it with the current situation post-COVID, drawing parallels between the two periods.

10:02

🏦 Buffett's Investment Sectors and Strategies

This section reviews Warren Buffett's investments across various sectors, including textiles, insurance, retail, trading stamps, banking, and media. It details the challenges faced by each sector, such as the textile industry's struggle due to cheap labor in other countries and the asset-liability mismatch in the insurance sector. The narrative also discusses Buffett's approach to Berkshire Hathaway's textile business, which was considered a 'problem child,' and how he used its profits to invest in other businesses. The paragraph emphasizes the importance of understanding asset-liability management, especially in the context of the Indian financial sector's crises.

15:04

📊 Key Investment Filters and Berkshire Hathaway's Challenges

The video outlines Warren Buffett's four key investment filters: simplicity of business, good earnings prospects, strong management, and an attractive price. It also revisits the challenges faced by Berkshire Hathaway in different sectors, such as the decline of the trading stamps business due to digital loyalty points and discounts offered by businesses. Additionally, it discusses the retail sector, specifically See's Candies, and why Buffett and Munger valued its strong pricing power despite their general aversion to retail businesses. The importance of revenue growth, volume growth, and same-store sales growth in retail is highlighted.

20:06

📈 Understanding Book Value, Intrinsic Value, and Consolidated Statements

This segment explores the concepts of book value and intrinsic value as explained by Buffett, using the analogy of a family's investment in their children's education. It emphasizes the importance of return on equity (ROE) and the need to ensure that earnings growth keeps pace with capital growth. The video also addresses the difference between consolidated and standalone financial statements, advocating for the latter when analyzing a holding company like Berkshire Hathaway. The discussion underscores the importance of long-term investment and patience, as well as the value of detailed analysis in making informed investment decisions.

25:08

📚 Buffett's Letters as a Learning Tool and Expectation Setting

The final paragraph focuses on the educational value of Buffett's letters to shareholders, which are known for their transparency and straightforward communication. Buffett's conservative approach to setting expectations is highlighted, with the video noting how overpromising and underdelivering can lead to problems, while underpromising and overdelivering lead to satisfaction. The video concludes by summarizing the key points discussed, including Buffett's investment filters, his views on equity during inflationary periods, and the importance of understanding compounding. It encourages viewers to share their takeaways and stay tuned for the next episode, which will delve into media investments and letters from 1982 to 1986.

Keywords

💡Warren Buffett

Warren Buffett is an American investor, business tycoon, and philanthropist who serves as the chairman and CEO of Berkshire Hathaway. In the video, he is the central figure whose investment philosophies, strategies, and letters to shareholders are being discussed. His approach to investing and business management is a key theme of the video, with his letters providing insights into his thought process and the economic context of the times.

💡Berkshire Hathaway

Berkshire Hathaway is a multinational conglomerate holding company that Warren Buffett leads. In the video, it is highlighted as the company Buffett and his partner Charlie Munger built through strategic investments and acquisitions. The company's evolution from a textile firm to a diverse conglomerate is a significant part of the narrative, illustrating Buffett's investment strategies and management acumen.

💡Compounding

Compounding refers to the process where an asset's earnings are reinvested to generate additional earnings over time. In the video, it is mentioned that Warren Buffett understood the power of compounding from a young age, emphasizing the importance of reinvesting earnings to grow wealth exponentially. This concept is a fundamental principle in Buffett's investment strategy and is discussed in the context of his early business endeavors.

💡Intrinsic Value

Intrinsic value is an estimate of the true value of a company based on its underlying assets, earnings, growth prospects, and other factors. In the video, Buffett's focus on intrinsic value is highlighted as a key aspect of his investment philosophy. He often looks beyond market prices to determine the real worth of a business, as illustrated by his approach to investing in companies with strong earnings prospects and competent management.

💡Book Value

Book value is the value of a company's assets that are recorded on its balance sheet, minus its liabilities. It represents the shareholders' equity in the company. In the video, Buffett's use of book value as a proxy for intrinsic value is discussed. He uses book value to assess the historical investment in a business and to compare it with its future earning potential.

💡Asset-Liability Mismatch

Asset-liability mismatch occurs when the duration of a company's assets does not align with the duration of its liabilities, leading to financial risks. In the video, this concept is discussed in the context of insurance businesses, where short-term liabilities were mismatched with long-term investments, creating a risk that could impact the solvency of the company.

💡Conglomerate Discount

A conglomerate discount is a valuation adjustment made by investors for conglomerates, which are companies with diverse, often unrelated businesses. In the video, it is mentioned that analysts apply a conglomerate discount when analyzing conglomerates like Reliance Industries because of the complexity and diversity of their businesses. This contrasts with Buffett's Berkshire Hathaway, which, despite being a conglomerate, is managed in a way that allows investors to look at the standalone financials of its subsidiaries.

💡Standalone Statements

Standalone financial statements refer to the financial statements of a single legal entity within a group, separate from the consolidated financial statements of the group as a whole. In the video, Buffett's preference for investors to look at the standalone financials of Berkshire Hathaway's subsidiaries is discussed. This approach allows for a more detailed understanding of each business's performance and financial health.

💡Charlie Munger

Charlie Munger is the vice chairman of Berkshire Hathaway and a close associate of Warren Buffett. In the video, Munger's partnership with Buffett is highlighted, emphasizing their collaborative approach to investing and business management. Munger's influence on Buffett's investment philosophy and their shared strategies for acquiring and managing businesses are key points of discussion.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. In the video, the impact of inflation on investment decisions during the late 1970s is discussed. Buffett's view that equities can maintain purchasing power over the long term, despite short-term challenges posed by inflation, is a central theme, illustrating his long-term investment perspective.

Highlights

Introduction of a new video series on Warren Buffett, Berkshire Hathaway, and his letters to shareholders.

Vinit's motivation to read Warren Buffett's letters due to their revered status in the finance profession.

The significance of Warren Buffett's early understanding of the power of compounding and his frugal nature.

Warren Buffett's early ambition to become a millionaire by the age of 30 and his innovative ideas for earning money.

The dynamic between Warren Buffett and Charlie Munger, their meeting, and collaborative work.

Buffett's acquisition of Berkshire Hathaway, which was a struggling textile company at the time.

The economic context of high inflation and interest rates during 1977-1981 and its impact on investment strategies.

Warren Buffett's view on the resilience of the USD as a reserve currency despite high money supply and inflation.

Buffett's preference for equities over debt instruments during high inflation periods due to their long-term benefits.

Details of Berkshire Hathaway's investments across various sectors such as textiles, insurance, retail, and media.

Challenges faced by Berkshire Hathaway's textile business due to cheap labor in other countries and competitive industry.

Asset-liability mismatch issues in the insurance industry and how Buffett addressed them.

Warren Buffett's investment filters: simplicity, earnings prospects, competent management, and attractive pricing.

The concept of 'Mr. Market' as taught by Ben Graham and its influence on Buffett's market perspective.

Importance of looking at standalone financials of subsidiaries for a holding company like Berkshire Hathaway.

Buffett's emphasis on long-term investing and the concept of 'forever investors'.

Key takeaways from the video series, including the importance of compounding, long-term equity investing, and setting realistic expectations.

Transcripts

[Music]

hello everyone I'm asak kurana and

welcome to zeroda vity videos today we

are kickstarting a new video series

where we will talk about Warren Buffett

bshi hatway and his letters to his

shareholder for this series I have two

of my teammates from vity vinit and

Satya so vinit is someone who loves to

read and that is when he took this

herculan task of reading all of Warren

Buffett's letters and I thought why not

pick his brain and actually ask for some

insights where I and Satya both can

learn and you as vity viewer can learn

as well along with that I have Satya

who's as inquisitive as I am and both of

us are actually planning to take this

crash course on Warren Buffett's letter

which will help you as well so in this

very first episode we will start from

the year 1977 and talk till 1981 with

every successive episode we will cover

set of five letters each so let's begin

[Music]

okay so vinit actually you took on a

very massive task so I have to ask what

motivated you to read these letters well

I like reading um and I'm a finance

professional anyone in this profession

considers Warren Buffet's letters to

shareholders as uh Holy Bible so I had

to read it and when you said that we

have to do this kind of a discussion I

decided I should read uh his biography

and also cover his uh podcasts and some

interviews as well so yes I did all of

that uh I'll try to be as accurate as

possible any slippage here and there

dear Warren Buffett sir if you're

watching this is completely

inadvertent thank you so much for

educating your shareholders and the

public at large may God bless you with a

healthy prolonged life and we also have

in our respect and prayers your partner

Sali manger who for the Heavenly aboard

late in 2023 may his soul rest in peace

I'm already excited about how much we're

going to learn from these videos but we

need Satya also reads a lot about Warren

Buffett so SATA I want to ask from you

uh something about his childhood because

we all know that he started early but I

don't know why he yet regrets that he

did start a little late so what do you

have to tell about his childhood so

imagine a young boy who is always

interested in numbers and want to become

rich so he's always a fr in nature okay

when it comes to spending he would think

twice before spending a money he always

thinks about what would the amount that

he's spending would earn for him in

future yeah so anytime he was spending

100 he was like this is a million

dollars I'm forgoing a few decades later

oh God he already had this thought this

young yeah and um and I think the

brilliant thing is he understood the

power of compounding pretty early in his

life he know every three penny counts so

he goes and delivers newspapers in the

morning uh delivers Beverages and gums

and he's he would also get refund for

the Recycled Coke bottles because you

know every penny counts and that's the

brilliant thing right you know you

should know the benefit of

compounding and um you know I also heard

this story he telling his friend that he

want to become a millionaire at the age

of 30 becoming a millionaire and at the

age of 30 now feels or seems imaginable

but back in those days it doesn't right

so this is uh you know one a story and

there's also one more story which is my

favorite he came across this book called

a thousand ways to earn

,000 he came across this idea of buying

a weying machine the weing machine where

you put in the coin and then check your

weight right yeah so he came across this

idea of buying a weighing machine he

would sit and run tables on how long the

profit from that weing machine would

take for him to buy another weing

machine I mean this is so amazing that

he's doing all this in his childhood and

let's face it we as jenzi and Millennial

are not even thinking about investing

because we tell this to ourselves this

is so complicated let's delay it to the

point or let us earn a few uh some

amount of money and then we can do it

but I want to tell all the Genies and

Millennials when they teach you in

school time is money this is what they

actually mean he also started pretty

early on uh in his life when it comes to

investing he started reading Ben

Graham's books uh he became the strong

discip uh of Ben Graham who is

considered the father of value investing

right so this is a bit about his

background but uh vinit I want to

understand the Dynamics between Warren

Buffett and Charlie manga when did they

meet how did they work together how did

they analyze talks yeah so since you

left at Ben Graham let me begin there um

Warren took Ben Graham's investing

course at Colombia and then also started

working for um Ben Graham at his firm

when Ben Graham wanted to retire he uh

he offered Warren to take over and run

Ben's Farm Warren said wait if I can run

it for you I can run my own firm right

so he set up the Buffett

partnership and uh this Buffet

partnership was clocking amazing returns

um for for the time that it was existing

one of the investors U introduced him to

Charlie manger and they became the

thickest of friends Charlie was in LA

running his own investment firm and

Warren in Omaha his own Buffett

partnership both of them would talk for

hours at end and um discuss notes

exchange notes uh about the Securities

that they wanted to invest in or the

businesses that they would like to

acquire through these discussions that

in 1965 they acquired Burkshire hatway

Warren was the majority shareholder and

Charlie had a minority stake in it

Charlie had also acquired a few

businesses where Warren was a minority

shareholder 10 years later around 1975

is when they started consolidating

everything under Burkshire hathway and

um they continued to operate remotely

Charlie being in LA and Warren being in

Omaha and they said we just a phone call

away yeah imagine them being on calls

talking about stocks for a long time I

was imagining that now we talking about

work from home concept where teams are

actually working from different

locations but they started this trend

way back and I mean how wonderfully they

have managed bushy hatway but wi I

actually took on one point where you

said that they acquired bursh hatway I

like thought that bursh hatway was Bor

in Buffett's child what do you mean they

acquired it well burshire hatway was at

least 100 years old when Warren Buffett

acquired it in 1965 and it was in fact a

textile

company um so Warren Buffett started

writing these letters right from 1965

but they were mostly transactional and

Reporting in nature it was in 19 77 when

he started using A Narrative Approach

and using these letters to educate his

shareholders that is so

[Music]

amazing so we need coming back to the

letters now what I want to understand is

that from 1977 to 81 what did the

economic era look like at that time well

around 1977 the inflation was very high

around 15 16% and interest rates are

also gone up the US US debt kept

ballooning and in order to pay that debt

they kept um printing more and more

dollars further fueling inflation and

this was also the time when technology

had not picked up as a trend so consumer

businesses or heavy businesses utility

businesses were still the in thing when

you were investing in

equities right talking about that

printing money and inflation we could

drw parallels to what happened during

the covid times right economies were in

do drums and the central banks across

the world the printed money they reduce

the interest rates and what we've seen

uh 2 years later is the rise in

inflation especially in the US where the

printing money was rampant we've seen

the inflation touched 40e high but V

with a lot of US dollar in Supply I

wonder why USD doesn't devalue well

experts have been calling for the

collapse of the USD now Warren Buffett

called it out back in

1977 with so much printing let's say if

any other country were to print so much

currency they would go in a SP of

hyperinflation and their currency would

depreciate but this is the USD which is

which is a reserve currency and all

countries want to hold it so the more

they Supply the more they print the more

other countries keep holding it which is

why 45 years down the line the USD is

still standing strong where other

currencies have depreciated because the

demand for USD keeps increasing and that

is why it doesn't devalue at all true

but I wonder how long it

continues right uh V I'm holding on to

one thought when we were talking about

inflation and high interest rates so

generally in the economic situation like

that debt instruments are something

which look attractive so I want to

understand that what was Warren

Buffett's view on this well at the time

the debt instruments were attractive in

1977 a USD taxfree Bond would give you

16% taxfree rate right so the investors

were shifting towards debt

Investments uh whereas in equity let's

say even if a good Equity investment

were to yield 20% post tax say you'll be

left with just 14% mind you inflation

was around 15 16% so Equity was going to

leave you poorer because of the

inflation still Warren Buffett held on

to equities he said inflation like

commonly it is understood that inflation

is going to uh be better for businesses

he does not believe that with inflation

the input costs will also go up and if

the business does not have pricing power

they may not be able to pass it down to

their consumers still for an investor

overall he believes that in the long run

it is equities that help them improve

and maintain their purchasing power oh

this reminds me of how Buffet explains

purchasing power during the inflationary

periods um ASA say you have $100 I feel

Richard

already say you can buy 10 hamburgers

today but you forgo that option and you

invested that amount what would you

expect you would expect that you would

earn some money on that and you would be

able to buy more hamburgers in future

say 5 years years down the line your

investment would become $120 you would

expect to buy more hamburgers correct

but but go to the market you would still

get only 10 hamburgers you may feel

richer but you're not eating richer I

get it so there's a important personal

finance lesson that we all can take from

this uh especially during the

inflationary periods we have to make

sure that our income grows at a rate

that is higher than the inflation and if

it doesn't at least we have to make sure

that we are saving more to our

purchasing power after the example it

makes more sense it does so V I really

wanted to ask this question in the very

beginning but better late than never so

I wanted to know in what companies and

what sectors Warren Buffett was invested

and why sure bukar Investments were of

two types one were the businesses that

they wholly owned and others were

minority stakes in publicly listed

companies so the sectors were um

textiles Insurance retail trading stamps

media and banking okay let me take you

through each of these in a gist first of

all textiles which was burar Hat's

in-house business and the profits that

came out of this business were channeled

into insurance and subsequently into

other businesses so then they had

Insurance within insurance they had

National Indemnity and several other

state level Property and Casualty

insurers they also owned about 33 to 35%

in Geo Warren kept saying in his letters

to the shareholders ERS that Geico was a

better run business than his own

insurance operations but it it didn't

matter to him whether he owned the

business or had just a minority stake in

it as long as he was on the ride yeah

that's nice then there was trading

stamps this is like the Loyalty reward

points that we have on our credit cards

back in the day when you shopped at

let's say a departmental store in

exchange for the change they would give

you these trading stamps once you had

collected a lot of these stamps you

could trade them back to buy let's say a

juicer or a tape recorder there were no

discounts at the time so people would

use these trading stamps to uh get

something let's say for free but this

business eventually started declining

because credit card started maintaining

loyalty points digitally and businesses

had started offering discounts so this

business was merged into bshar hatway

and eventually shut down then there was

banking busher hathway was invested in

Rockford Bank which was a local bank

which had very stable uh ratios buer

hatway had to exit it because they were

an insurance company primary

and the regulation required them to exit

the banking business okay then there is

retail that is the Seas candies it was

experiential retail where the kids uh

would go and buy candies it had a very

strong pricing power and was run by a

very strong efficient management as well

which is why uh Warren had invested in

it and lastly there is Media where they

owned the Buffalo News and 12% stake in

Washington Post he believed that uh

media businesses had an amazing pricing

power through selling their ads which is

why he invested in them and we'll

discuss media a bit more in the next

video okay this is very interesting the

amount of Investments that he has made

um but what I want to understand is we

need was it bullish really on all these

sectors well bullish while buying them

but of course these sectors had their

own problems for example the textile

business where the manufacturing was

moving towards let's say the southern

parts of us and also towards Asian

countries where the labor was cheap so

in fact textile had become a problem

child for them oh really in fact War an

adopted a problem child wait you were

saying that it was a problem child you

were saying it was an adopted Problem

Child where are we going wrong so

Burkshire hadway the textile business

was earlier run by Stanton family okay

even in the beginning it was not a very

strong business it always had its own

problems it's a textile uh industry it's

a very competitive IND uh industry as

you said uh the labor cost was cheap uh

in other countries and it was always

difficult to run this uh business and

and sometimes with political

intervention so Warren in 1962 he

discovered that the book value of this

company is higher than the market value

okay he started buying these shares at

$7.5 per share and he always wanted to

sell these shares he never wanted to

hold these shares for a long

time once he met the promoters of the

company they had a handshake agreement

that they would or Warren would sell the

share shares at

$1.5 per share okay a few weeks later

when the tender offer came from the

promoters it was 12 and2 cents lower per

share and that's it Warren became so

Furious about it he was not expecting

this and instead of selling the shares

he wants to buy the company I mean not

that he was not going to make profit

from that deal but yes 12 12 and 1.2

cents lower per share yes all in a fit

of Frid because he thought that the

Stanton had acted in bad faith oh even

when he was acquiring he know it's a

troublemaking company and uh he didn't

want to liquidate it even then because

uh he knew he had to lay off a lot of

Workforce and uh he wants to maintain

that reputation so he knew it's a

troublemaking company yes it was a

troublemaking business so whatever small

profits that the textiles was throwing

up Warren used it to buy insurance

businesses and other businesses through

that but insurance had its own set of

problems for example let's say bushire

hathway had auto insurance business and

healthcare insurance business the

inflation in auto repairs or Healthcare

was 9% while at the same time the

premiums were growing at just 3% so your

revenues are growing at 3% while your

costs are growing at 9% Warren could see

and was warning his shareholders that

margins in Insurance business over the

next few years are going to shrink

moreover he also pointed out another

problem with the industry now inflation

was rampant so these Auto insurers said

that we cannot predict the the cost of

auto repairs one year down the line so

they they started selling insurance for

just 6 months the problem here was that

they were selling it for 6 months and

investing these premiums in 30-year

bonds now these are liabilities although

contingent that could come calling in

the next 6 months right if they could

come calling this money is logged up in

an asset that's for 30 years crazy now

this is a classic case of asset

liability mismatch yeah this highlights

how important asset liability man ment

is for a banking or insurance company

right not just in India globally maybe

in the Indian context we would have seen

you know what happened with the nbfc

crisis the dhfl and ilfs crisis of

course there are other reasons but the

main reason is asset uh liability

mismatch that happened even with s bank

yeah I mean uh these small stories that

we also have the parallels that we draw

to the Indian context that they they

teach us that how you know when you are

doing sector analysis these points are

very important when you are investing

into companies then while we are on the

sector analysis there is one more

question regarding to sector that I want

to ask you we that is I have read that

Warren and Charlie were not really fan

of retail business and yet they had seiz

candies and they kept it in their

portfolio so I want to understand what

was so special about this retail

business well Warren loved

candies okay but also that it was a very

strongly run uh business the management

was very competent and Warren brings up

uh three aspects when you're looking at

a retail business Revenue growth volume

growth and same store sales growth okay

let me explain it to you with an

example here we have volumes and here we

have revenues let's say your volumes

have grown 10% and your uh revenues have

also grown 10% meaning you are able to

sell more in quantity at the same price

okay but let's say if your volumes have

grown 10% and your revenues have grown

only 5% meaning you were able to sell

more at lower price meaning you had to

offer discounts to be able to sell s

more quantity okay again let's say your

volumes are 10% and your revenues have

grown 20% meaning you could sell more in

quantity at higher price meaning you are

enjoying a very strong pricing power so

here it's talking about the incremental

Capital that you are putting in

establishing the new stores that is

giving lower revenue and also that the

older stores are declining because

they're selling lesser in volumes but C

candies enjoyed a strong pricing power

which is why uh Warren and Charlie

invested in it so for a retail business

the revenue the sales the same store

sales all have to grow in tandem for the

business to be more profitable yes now

SE candies enjoyed very strong pricing

power so V uh let's try and generalize

these sectors and help me understand

what were a few key parameters or let's

call filters that Warren had while he

would choose on what business to invest

sure Warren and Charlie had about four

filters and Warren kept talking about

them in every letter there were four the

first it was it has to be a simple

business a business that they understood

they did not understand technology they

did not want to invest in technology the

business had to have good earnings

prospects it should be run by a strong

management strong and competent

management and the fourth which was a

dealmaker or deal breaker which was it

had to be at an attractive price that is

why Charlie M rightly said when he said

a great business at Fair price is

superior to a fair business at great

price a that's a great code and U we

have to be very careful about assessing

that fair price I want to bring up the

Ben Graham's code that waren repeats in

most of his letters you you would have

read it multiple number of times uh that

imagine you sitting in a house and uh

say a person called Mr Market comes to

your house every day buying and selling

shares okay on the days that Mr Market

is very happy he would offer to buy or

sell shares at very high prices on days

that Mr Market is not in a good mood he

would offer to buy or sell shares at a

very low prices what we have to remember

is that this Mr Market is there to serve

us not to guide us we should never get

influenced by what Mr Market is offering

us this is the lens through which Warren

Buffett wants us to see the market that

is is actually really really nicely put

uh but we need holding on to the thought

where you talked about those four uh

filters that Warren Buffett had one

filter that I want to talk to you about

is other three I could understood but

what do you mean when you said earning

prospects what does Warren has to say

about earning prospects Warren and S

always looked at the intrinsic value of

a business now since it wasn't very easy

to identify the intrinsic value they

would look at the book value which was

the closest proxy for intrinsic value

let's try to understand both let's say

there's a family that has two kids they

are spending equal amounts on both kids

education this is the book value of the

kids the amount of money that these kids

will earn through their lifetimes is

their intrinsic

value so in a business what you've put

so far is your book value what you will

earn in the future is your intrinsic

value wow right nicely

explained and uh because we're talking

about earnings growth people commonly

look at the net profit growth Warren

Buffett is saying let's say your capital

from last year has grown 20% okay but

your earnings have grown only 10% it

means the newer Capital give you smaller

profits so you should actually be

looking at Roe if your Capital has grown

20% your earnings should also grow at 20

or more so that you maintain or improve

your earnings and then there's a third

point that I would like to bring up

that's about the Consolidated statements

and Standalone statements in our

investment world we would we commonly

look at Consolidated statements yes we

do but Warren is saying if it's a

holding company like bshar hatway you

should be looking at the Standalone

financials of all the subsidiaries this

is because as a holding company it has a

diverse set of businesses so the

Consolidated number gives you a total

but not the clear picture of how the

business is however this is not

applicable to let's say a conglomerate

in India's example it would be let's say

Reliance Industries reli Industries

which is a conglomerate and has about

300 subsidiaries and Associate companies

you cannot practically be looking at all

the 300 companies which is why should be

looking at the consolidate statements in

case of Reliance and this is also why

analysts would generally apply a

conglomerate discount when they are

analyzing a conglomerate because there

are so many in companies held under a

conglomerate but if it's a holding

company in India's context let's say baj

Holdings if you're analyzing baj

Holdings you should be looking at all

the companies that are held under baj

Holdings and not just the Consolidated

number uh of baj Holdings so see SATA

he's bringing this up because he wants

his shareholder to read berkshire's

financials that way he wants them to not

look at the Consolidated numbers but at

the Standalone numbers because he and

Charlie prefer to look at it that

way a short-term investor who wants to

gain from the fluctuations in the market

cannot put so much effort right it's

only the long-term investor with a lot

of patience can go through all these

subsidies uh you know details and the

business prospects so for Warren and

Charlie their investment holding period

was forever they were forever investors

let me call them or maybe like the

Warren puet style investing where he

would hold on to a company for a longer

time period and he would only leave them

if there was an operational problem with

the particular company or business and

not otherwise so let's call those

investors like forever investors I

really love how he writes his letters

right it's very very informational and

uh very simple and straightforward but

yet connects to all of us that's that's

brilliant and I also love how

transparent they are when they are

writing these letters because Buffett

and they go through a lot of annual

reports on a daily basis not even a

weekly or yearly basis uh they know what

shareholders expect and he keeps saying

that he want to write the uh

shareholders letters in a way to provide

information that he would want to know

as a shareholder in fact he used these

letters to set the expectations straight

for his shareholders bshar hat was

averaging about 23 to 24% earnings every

year and Warren is warning them that

expect these uh this average to come

down to 15% in the long run

okay I mean I like how Warren is

conservative in terms of setting his

expectation he understands the fact that

if you overcommit and don't deliver that

is when the problem comes but if you are

conserva in terms of expectation and if

you are able to overd deliver then

people are more happy and that is why we

keep repeating to retail investors that

behavioral Finance is very very

important if you can't you know control

your emotions if you can't set your

expectations right then even though you

are doing good with managing your money

but those wrong expectations can

actually affect you a lot okay so now

we've reached to the end of our video

and before we wrap it up V why don't you

summarize it one last time sure so this

is 1977 to uh 81 when we discussing um

there was a general shift towards debt

but Warren was still heavyweight on

equities bakar was invested in textiles

Insurance retail trading stamps Banking

and

media then then we also covered his

investing filters that is businesses

that they understood with strong

earnings prospects with a competent

management and at an attractive price

and lastly we learned about Book value

intrinsic value return on equity and the

use of Consolidated versus standalone

statements when it came to a holding

company like bshar hathway nice that was

a nice quick summary but ASA and SATA

you said this that this was a crash

course for you so why don't you give

your key takeaways my first key takeaway

is maybe how to be appreciative of the

compounding benefit um he learned about

the benefit of compounding at an early

age and that every puny counts uh so I

want to be more mindful before I spend

money in future thinking about the

compounding benefit um the second one

would be

maybe how he thinks about uh investing

in the inflationary period especially

that he stuck to equity investing even

during the inflationary periods when

equities were not doing well but he

believed that in the long run equities

are the only instruments that could beat

inflation so that's my key second

takeaway um the third one would be what

else um how he's a long-term investor

yeah he's 93 and he still invests for

long term and how to set expectations

right yes that's that's very very

important as you also mentioned in the

age where there are so many screenshots

people claiming that they are earning

double digit returns triple digit

returns sometimes it is very important

to stay the investing Journey with right

set of expectations so those are my

three ke key takeaways nice SATA now

that you've talked more about the

qualitative aspect of the video that we

have learned let me bring out some

quantitative aspects that I have learned

as my key takeaways the first one I want

to mention about his one of his

accounting principles that he talk about

was Book value and intrinsic value so

you know I like the way how he has

explained that what you've put so far in

the business is your book value and what

you will be earning in the future is

your intrinsic value you were talking

about problems in insurance and how

asset liability mismanagement is a

problem and management is something that

we need to look after and if anybody any

retail investor is doing sectoral

analysis so these are the key parameters

that you know you should focus on before

your investing and talking about sectors

the third key takeaway that I like is

when he was explaining the retail sector

where he mentioned about three points of

course there are other points the three

points that we learned from the these

letters were the volume growth the sales

growth and same St uh same store sales

growth so these are my key takeaways so

I would want to ask you what were your

key takeaways do mention Us in the

comment section so this was all about

the first episode where we talked about

from the era of 1977 to 1981 the next

episode we'll taking up what we need

prom is what happened in media and we

will talk about the letters from the

year 1982 to 1986 stay tuned happy

investing