Equity Wednesday Issue #7

The secrets to Warren Buffett style of investing – 1959

Letter 3
Annual letter to limited partners – 1959

In the year 1959, the Dow-Jones industrial average (DJIA) was up 16.4%. With dividends factored in, the total return from the market in that year was about 20%. In spite of this, more stocks listed in the US declined (710) than went up (628).

Surprised? Don’t be! This happened in India as recently as last year. This is because both the constituents of SENSEX(30) and NIFTY(50) form a very small part of the overall universe of listed companies in India (5000+). Both these indices primarily have large-cap businesses as their constituents. So, in a year like last year when large-cap blue-chip stocks rallied ahead, the indices record gains. But those gains offer no view about the actual gains recorded in mid-cap and small-cap stocks. As an equity investor, it is important for you to compare the performance of your portfolio or your mutual fund with the right benchmark. And this is why we have NIFTY500, small-cap index, mid-cap index etc.

When stock market gains are limited to a few large-cap businesses, most mutual funds will struggle to beat the performance of the index. And that is exactly what happened in the US in 1959. Some of the largest fund houses at that time like Tri-Continental Corp., and Massachusetts Investors Trust struggled to beat the gains recorded by DJIA index. And every major fund manager of that time, including Buffett, said that the markets are substantially overvalued. Value investing as an investment philosophy came to be questioned!

Read Letter 1 for a definition of value investing.

This is happening now as well! Value investing has lagged some of the other investment styles like growth and momentum-based investing. But it may change.

Buffett says, “Perhaps other standards of valuation are evolving which will permanently replace the old standard. I don’t think so. I may very well be wrong; however, I would rather sustain the penalties resulting from over-conservatism than face the consequences of error, perhaps with permanent capital loss, resulting from the adoption of a “New Era” philosophy where trees really do grow to the sky.”

1959 Performance

In 1958’s letter (which you can read here), Buffett wrote about an opportunity which involved about 25% of assets of the various partnerships. In 1959, that opportunity was about 35% of the asset base of the portfolios. For anybody in the financial markets, that is a very concentrated position.

Buffett throws some light on this investment in the 1959 letter. He says that this is an investment in a trust which holds 30-40 other stocks/securities in its balance sheet. The Buffett partnerships made an investment in the company at a substantial discount to the market value of the securities. Also, Buffett was now the largest shareholders of this company. Why was it so undervalued in the first place and how is Buffett going to unlock value from this business? He talks about in the letters to come. But in 1959, he only says that the probability of superior performance from this investment is extremely high and that the value unlocking event will take place in the next year.

The rest of Buffett’s portfolio (65%) in 1959 was invested in general undervalued stocks and workouts. And for the third year in a row, Buffett says that his investment style should lead to superior results in bear markets and average results in bull markets (Why? Read here)

To be continued...

Highest Dividend Paying Stocks in India

Disclaimer: This is not investment advice. Please consult with your financial planner before investing in any of the stocks discussed in this post.

Holding stocks that pay high dividends can add a source of income to your stock portfolio. The key to shortlisting high dividend yield stocks is to make sure that they are good businesses, earning profits consistently without the need to invest a lot of money back into the business. This is what makes their dividends sustainable. 

But always keep in mind, investing in these stocks is NOT the same as investing in fixed deposits. Stock market investments carry risks. Just because a particular stock pays high dividends, it does not automatically become a good business. And if it indeed is not a business, paying dividends will become unsustainable for it and sooner or later it will have to stop paying. Worse still, stock prices of such companies will come down eventually leading to loss of capital. The message is, do your research!

This list is intended to get you started in your search for high dividend-paying companies.

How to profit from the Electric Vehicle revolution

The global mobility revolution just begun, but it is going to change the way people travel. The UK this week has laid out plans to ban sale of new petrol and diesel cars from 2030. Norway is doing it from 2025! This transformation is a great opportunity for companies that are already in this space, spearheading the revolution or supporting it. That perhaps explains why Tesla’s stock price has gone up by 6 times since the beginning of this year.

As an astute equity investor, you are probably asking – “Where could we invest to benefit from this?” Here is our view.

Within India, the opportunities are a bit limited.

  • Hero Motocorp’s investment in Ather Energy, an electric two-wheeler manufacturer, makes it one of the candidates. But unlike Tesla, much of Hero’s revenue is from fossil fuel powered vehicles.
  • KPT Industries, a manufacturer of electric power tools, has forayed into electric 3-wheelers. But they are too small and consequently too risky to invest in at the moment.
  • Investing in engineering services providers working in this domain, like ASM Technologies, KPIT etc. could be another way to get exposure. But once again, this isn’t their core business.
  • Investing in one of the two main automotive battery manufacturers in India is another option. Exide industries for example has formed a JV with a Swiss energy storage solutions provider Leclanche to build lithium-ion batteries

Looking outside India, there are so many different listed automotive companies. Chinese giants like NIO, BYD and Geely are at the forefront. One could invest in these companies. But bear in mind, automobile businesses are one of the worst to be in. Valuation guru Aswath Damodaran swears by it.

The other way to get exposure is to invest in manufacturers of battery systems, suppliers of raw materials or in the commodities involved directly. Lithium and Cobalt are two key ingredients that go into the production of batteries. And companies that are involved in mining & processing them will see a major uptick in demand. Over a mile long copper wire is used in manufacturing a single electric car and that will mean that demand for the metal will also increase. For global investors Lithium and Battery Tech ETF (LIT) traded in NYSE offers a simple and straight forward way to get exposure to a number of these stocks.