Warren Buffett's 2017 Letter: Takeaways for Indian Investors
Warren Buffett's shareholder letter for the year 2017 was released a few days back. I am going to take some of the themes in this year's letter and provide an Indian context and takeaway. (For a collection of past shareholder letters organised and annotated around major themes, please check - 'The Essays of Warren Buffett' by Lawrence Cunningham ).
1. Valuations are expensive. So Buffett didn't do any big deals last year. Others may ignore the level of prices and pay any price to do deals. But not the Oracle of Omaha.
- Indian valuations are stretched too. The Sensex P/E currently stands at 23.xx. High PEs tend to foreshadow lower returns in the next few years, till valuations moderate. A wonderful table compiled by Stableinvestor.com shows this trade-off very well. With a starting PE of 24+ (which is very close to current levels), the 3 year return has been -5% historically.
The takeaway for Indian investors is: valuations are stretched. The thing to do now is to accumulate dry powder and be ready to fire when markets provide an opportunity. In Buffett's pithy turn of phrase, investors would be advised to load their 'elephant guns' and be ready to fire if opportunity presents itself.
2. Stay away from leverage. Be happy with what you have and don't get greedy for what you don't need.
- One of the biggest mistakes people make when stock markets are ebullient is to extrapolate recent market performance into the future. This is also when sundry experts pop up to predict even more cheerful times ahead.
The human mind weights recent experiences higher than older experiences. It overweights recent good market returns into the future, forgetting painful drops in the not so recent past. So it's not long before investors start dreaming of making a killing by borrowing say Rs 10 lakhs from a bank at 10% & earning 20% in the markets. To this, Warren Buffett's answer is to be happy with what you have and don't be greedy for what you don't need.
Markets are unpredictable and mean reverting. A year of out-performance may be followed by a more average year. What if the market stays flat next year? The loan taken at 10% can become a noose around the neck.
3. View your stock investments as stakes in real running businesses & not a ticker symbol on the TV.
- Many investors make the mistake of treating their stock investments as merely ticker prices moving up and down on a tape at the bottom of the TV screen. Buffett's fundamental insight (and mind you this is not his original insight, but one propounded by his guru Benjamin Graham in his classic book - The Intelligent Investor) has always been that stocks are to be looked at as a fractional ownership in a running business.
When you buy Marico or United Breweries or Future Retail stock, please look at how their underlying business is performing. The stock price follows the business' performance, and not the other way around. Are you seeing more Parachute bottles in your local Big Bazaar? Keep track of industry shifts by reading and following your nose. Are you still chugging Kingfisher Beer while the cool kids are shifting to Bira?
4. Even the best quality stocks can fall precipitously when markets tank. That is the best time to load up on them. Buffet himself has listed 4 instances in his 53 year stewardship of Berkshire Hathaway when his own stock has fallen between 35 & 60% from its highs.
- Such vertiginous drops occur frequently in Indian markets even in the most high quality stocks. How many are aware that Asian Paints (among the bluest of Indian bluechips) fell by >30% within the last 2 years & quickly recovered its losses? Most bluechips offer such opportunities even in good times. In bad times, these losses can become truly staggering. For example: the peak to trough fall for HDFC Bank stock during the 2008 financial crisis was 55%.
So what is one to do? Invest steadily and regularly and keep a buffer handy to invest in case the market really tanks. Don't panic and sell out your quality stocks when the market swoons. The general direction of the markets over their 200+ year history is upwards, though punctuated by sharp downturns. Stay optimistic and stay invested. Create a watchlist of high quality names you would like to own. When any of them has a fall for any reason, be sure to pounce.
As Buffett quotes from a Rudyard Kipling poem:
“If you can keep your head when all about you are losing theirs . . . If you can wait and not be tired by waiting . . . If you can think – and not make thoughts your aim . . . If you can trust yourself when all men doubt you... Yours is the Earth and everything that’s in it.”
1. Valuations are expensive. So Buffett didn't do any big deals last year. Others may ignore the level of prices and pay any price to do deals. But not the Oracle of Omaha.
- Indian valuations are stretched too. The Sensex P/E currently stands at 23.xx. High PEs tend to foreshadow lower returns in the next few years, till valuations moderate. A wonderful table compiled by Stableinvestor.com shows this trade-off very well. With a starting PE of 24+ (which is very close to current levels), the 3 year return has been -5% historically.
The takeaway for Indian investors is: valuations are stretched. The thing to do now is to accumulate dry powder and be ready to fire when markets provide an opportunity. In Buffett's pithy turn of phrase, investors would be advised to load their 'elephant guns' and be ready to fire if opportunity presents itself.
2. Stay away from leverage. Be happy with what you have and don't get greedy for what you don't need.
- One of the biggest mistakes people make when stock markets are ebullient is to extrapolate recent market performance into the future. This is also when sundry experts pop up to predict even more cheerful times ahead.
The human mind weights recent experiences higher than older experiences. It overweights recent good market returns into the future, forgetting painful drops in the not so recent past. So it's not long before investors start dreaming of making a killing by borrowing say Rs 10 lakhs from a bank at 10% & earning 20% in the markets. To this, Warren Buffett's answer is to be happy with what you have and don't be greedy for what you don't need.
Markets are unpredictable and mean reverting. A year of out-performance may be followed by a more average year. What if the market stays flat next year? The loan taken at 10% can become a noose around the neck.
3. View your stock investments as stakes in real running businesses & not a ticker symbol on the TV.
- Many investors make the mistake of treating their stock investments as merely ticker prices moving up and down on a tape at the bottom of the TV screen. Buffett's fundamental insight (and mind you this is not his original insight, but one propounded by his guru Benjamin Graham in his classic book - The Intelligent Investor) has always been that stocks are to be looked at as a fractional ownership in a running business.
When you buy Marico or United Breweries or Future Retail stock, please look at how their underlying business is performing. The stock price follows the business' performance, and not the other way around. Are you seeing more Parachute bottles in your local Big Bazaar? Keep track of industry shifts by reading and following your nose. Are you still chugging Kingfisher Beer while the cool kids are shifting to Bira?
4. Even the best quality stocks can fall precipitously when markets tank. That is the best time to load up on them. Buffet himself has listed 4 instances in his 53 year stewardship of Berkshire Hathaway when his own stock has fallen between 35 & 60% from its highs.
- Such vertiginous drops occur frequently in Indian markets even in the most high quality stocks. How many are aware that Asian Paints (among the bluest of Indian bluechips) fell by >30% within the last 2 years & quickly recovered its losses? Most bluechips offer such opportunities even in good times. In bad times, these losses can become truly staggering. For example: the peak to trough fall for HDFC Bank stock during the 2008 financial crisis was 55%.
So what is one to do? Invest steadily and regularly and keep a buffer handy to invest in case the market really tanks. Don't panic and sell out your quality stocks when the market swoons. The general direction of the markets over their 200+ year history is upwards, though punctuated by sharp downturns. Stay optimistic and stay invested. Create a watchlist of high quality names you would like to own. When any of them has a fall for any reason, be sure to pounce.
As Buffett quotes from a Rudyard Kipling poem:
“If you can keep your head when all about you are losing theirs . . . If you can wait and not be tired by waiting . . . If you can think – and not make thoughts your aim . . . If you can trust yourself when all men doubt you... Yours is the Earth and everything that’s in it.”
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