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Showing posts with label Warren Buffett. Show all posts
Showing posts with label Warren Buffett. Show all posts

Monday, December 26, 2022

Peter Lynch: Making Money by Investing in "Fast Growers"

“The investor of today does not profit from yesterday’s growth.” Warren Buffett

Most of us have relatives who like to fashion themselves as ‘stock-gurus’, with their stories revolving around how they ‘could have been’ millionaires now, if only they had held their nerves. The stock that comes up frequently in these conversations is Infosys. If you had invested Rs. 9,500 to buy 100 shares of Infosys in the IPO (that went undersubscribed in 1993), 1,02,400 shares (adjusted for bonus issues) worth sum of Rs. 15,56,48,000 would be in your kitty.

Infy has given CAGR returns of whopping 39.7% to investors during last 29 years (that too after keeping dividend payouts aside). Infosys got listed in June 1993 at price of Rs. 145 per share and investment of Rs. 9,500 in June 1993 is valued at ~15.55 crores today. But, is Infosys still the key to riches? As often repeated, past performance is no guarantee of future results. So, how does one find out the next ‘Infy’?

A Fast Grower is a small yet aggressive & nimble firm, which grows roughly at 20-25% a year. This is an investment category which can give investors a return of 10 to as much as 200 times the investment made by them. No doubt, it remains a favourite of Peter Lynch!

In 1950s, the Utility & Power Sector were the fast growers with twice the growth rates to that of the US GDP. As people got more power-hungry gadgets for themselves, the power bills ran through the roof & the power sector surged with booming demand. Post the Oil Shock in 70’s, cost of power generation became high with power tariffs going up; people learnt to conserve electricity. Demand, thus, fell and power sector witnessed a slowdown. Prior to it, similar decline was observed in the Steel Sector & Railroads. First, it was the Automobile Sector, and then the Steel, followed by Chemicals & Power Utility & now the IT Sector is showing signs of slowing down. Every time, people thought, rally in the fast growers of the age would never end, but it did end, with people losing money as well as their jobs.

Three phases involved in their life cycles, are:

1. The Start-Up Phase: Majority of the companies either burn up all the cash or run out of ideas by the end of this phase. Maximum casualties have been observed here, making it one of the riskiest phases. However, maximum returns can be made from them, if one enters near the end of this phase.

2. Rapid Expansion Phase: The Company’s core proposition has worked now, with the strategy being replicated by expansion of product/service portfolio or consumer touch points.

3. Mature Phase: Growth slows down, either due to high debt or low cash, owing to the massive expansion witnessed in early stage. Fall in demand or legal restrictions might also contribute to faltering growth.

The trick is to track, which phase the organization is in, at the moment. If the firm is in late start-up phase with possibility of moving to rapid expansion phase, buy the stock when it is still cheap. Once firm’s earnings start falling with its products witnessing poor demand, it’s time to bid goodbye to the stock.

The key parameters involved in Peter Lynch’s ‘two minute drill’ are:

1. P/E Ratio: avoid stocks with excessively high P/E
2. Debt/Equity Ratio: should be low
3. Net Cash per Share: should be high
4. Dividend & Payout Ratio: should be adequate
5. Inventory levels: lower the better

Stay away from companies which are being actively tracked, followed & invested in by large institutional investors. News about buy back of shares or internal stakeholders increasing their stakes should be construed as positive.

Checks specific to Fast Growers:

1. The star product forms a majority of the company’s business.
2. Company’s success in more than one places to prove that expansion will work.
3. Still opportunity for penetration.
4. Stock is selling at its P/E ratio or near the growth rate.
5. Expansion is speeding up Or stable

One must judiciously walk the tightrope between the unquestioning belief that made the stock to be held for so long and the fear of the end from nose-diving prices due to a one-off bad year. The key is to always keep revisiting the story & ask some pertinent questions like ‘What would really keep them growing?’, ‘What is their next offering? or ‘Are their products & services still in vogue?’ It is here, that one must track the point of time when the phase 2 of the firm’s expansion comes to an end. This is usually the dead-end for organizations as success is difficult to be replicated. Unless, innovation happens, downfall is imminent & thus, an exit is necessary. P/E of these stocks is drummed up to unrealistically high levels by the madness of crowd towards the end. One must keep one’s eyes & ears open to signs, which mark the end of the road for these fast growers. A great case in point is Polaroid which had its P/E bid up to 50, only to be rendered obsolete later by new technologies.

A sure shot sign of a decline is a company which is everywhere! Such a company would simply find no place to expand any further. Sooner, rather than later, such a company would see its ‘Manhattans’ of earnings reduced to ‘plateaus’ of little or no growth, simply because no space is left to expand further.

1.The quarterly sales decline for existing stores.
2. New stores opening, though results are disappointing: weakening demand, over supply.
3. High level of attrition at the top level.
4. Company pitching heavily to institutional investors talking about what Peter Lynch calls ‘diversification’.
5. Stock trading at a P/E of 40 or more, when most optimistic estimates of earning growth are lower than 15-20%, thus, unable to justify the high price.

Fast Growers, which pay, are ephemeral & one misses them more often than not. It is a High Risk & High Gain Category of Stocks. One must remember along the classic risk & return principle, that when one loses, one loses big! So, if you are in the quest for magnificent returns, a Fast Grower can be your bet provided you know when to bid Goodbye!

If you feel its difficult for you to identify Fast Growers stocks at early stage, you can subscribe to our 
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Ongoing market correction is giving good opportunity to long term investors to start accumulating good quality companies at lower levels. Do not get panic if you recently started investing, riding through difficult times in equities is most important step towards long term wealth creation. In fact, we need to be greedy when others are fearful.

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Tuesday, August 30, 2011

Warren Buffett - The Method of 12

Warren Buffett is Chairman of Berkshire Hathaway Inc., a U.S.A. holding company, with interests in several subsidiaries engaged in a number of diverse business activities.

Included in these subsidiaries is GEICO Corporation, the seventh largest auto insurer in the United States. Publicly traded companies include a 10.5% holding in American Express Company, 8% of The Coca-Cola Company, 9.5% of Federal Home Loan Mortgage Corporation, 8.5% of The Gillette Company, 16.5% of The Washington Post Company and 8% in Wells Fargo & Company.

Berkshire Hathaway Inc. also has holdings or owns several large private companies.

When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing.

The business person wants to buy the whole company and the investor wants to buy portions of the company.

The Method of 12:

1) Is the business simple and understandable?

2) Does the business have a consistent operating history?

3) Does the business have favourable long-term prospects?

4) Is management rational?

5) Is management candid with its shareholders?

6) Does management resist the institutional imperative?

7) Focus on return on equity, not earnings per share.

8) Calculate "owner earnings."

9) Look for companies with high profit margins.

10) What is the value of the business?

12) Can the business be purchased at a discount to its real value?

For every dollar retained, make sure the company has created at least one dollar of market value.

Buffett believes that in the long run, the price of the stock should approximate the change in value of the business. He believes it is foolish to use short-term prices to judge a company's success. Instead, he lets his companies report their value to him by economic progress.

Tuesday, July 26, 2011

Quotes By Warren Buffet - The World's Richest Investor

Quotes by Warren Buffet – the world’s richest investor

· ON EARNINGS – Never depend on single income. Make investment to create a second source.

· ON SPENDING – If you buy things you don’t need, soon you will have to sell things you need.

· ON SAVINGS – Don’t save what is left after spending but spend what is left after savings.

· ON TAKING RISK – Never test the depth of river with both the feet.

· ON INVESTMENT – Don’t put your all eggs in a single basket.

· ON EXPECTATIONS – Honesty is a very expensive gift. Don’t expect it from Cheap People…..!!!!
 

Friday, October 8, 2010

The Warren Buffett Way

Everyone in the investing world knows the name Warren Buffett – arguably the most successful investor of all time. His personal net worth of over $45 billion began with an investment partnership he started in 1956 with $100 in capital.

Warren Buffett built his fortune not on the financial battle grounds of Wall Street, but rather from his hometown of Omaha, Nebraska. He did it without computers or even investing in technology stocks.

Many labeled him a “value” investor – finding overlooked gems, buying them a below intrinsic value and holding the stock for long periods. However, while value is important to Buffett, quality is more important.

Warren Buffett has a gift for spotting situations that others seemed to not see. Is this the insight of genius, lucky guesses or something else?

Ten years ago Robert Hagstrom published “The Warren Buffett Way” and it was a best seller with over a million copies sold and 21 weeks on the New York Times bestseller list.

Hagstrom believed the average investor could learn from Buffett even if duplicating his fantastic results might be out of most people’s reach. Buffett often said that nothing he did was beyond the reach of any investor. Hagstrom, who is a senior vice president with Legg Mason Capital Management and portfolio manager of the Legg Mason growth fund, has updated and revised the book in a second edition.

The first part of the book describes Buffett’s remarkable beginnings from a small investment partnership to the acquisition of an ailing textile company, Berkshire Hathaway, in the mid-1960s. It then traces how Buffett turned this small company with a net worth of $22 million into a diversified powerhouse which has grown its worth to $69 billion.

The early biographical information serves as background to illustrate how Buffett developed his investing philosophy.

Hagstrom breaks Buffett’s process down into 12 tenets, which he says forms the basis for how Buffett approaches any investment whether it is stocks or, as has been the more recent case, whole companies.

These tenets are easily understood, however not necessarily, so easily executed – and that may be one of the main reasons for Buffett’s success. He is obviously very intelligent, but also patient and willing to do all the necessary “spade work” before making an investment decision.

There are too many investors who want a computer program or some other quick way to make investment decisions. Buffett was willing to do the hard work to know his investments before he made them, so there were few surprises.

Suggested Reading:

Thursday, September 23, 2010

Warren Buffet Net Worth at $45 Billion

Warren Buffett keeps his #2 slot on the new Forbes 400 list of the Richest Americans, released tonight (Wednesday).

The magazine estimates Buffett's fortune at $45 billion. That's $5 billion more than last year's $40 billion.

Despite the gain, however, Buffett remains behind his friend, Microsoft Chairman Bill Gates, who keeps his top spot on the list with $54 billion. That's an increase of $4 billion from last year's estimated $50 billion for Gates.

Oracle's Lawrence Ellison is in third place with an estimated $27 billion, unchanged from last year.

Buffett is featured in a Forbes cover story and video clip that accompanies the new list. "The Summit" features a recent conversation among Buffett, musician and businessman Jay-Z, and Steve Forbes on "wealth, success, and giving back."

Overall, it was a good year for Buffett's fellow billionaires. Forbes calculates the total combined wealth of its 400 Richest Americans increased 8 percent to $1.37 trillion from $1.27 trillion last year. That's still below 2007 and 2008 when the Forbes 400 total wealth topped $1.5 trillion.

Wednesday, July 21, 2010

The Warren Buffett Method of 12

Warren Buffett is Chairman of Berkshire Hathaway Inc., a U.S.A. holding company, with interests in several subsidiaries engaged in a number of diverse business activities.

Included in these subsidiaries is GEICO Corporation, the seventh largest auto insurer in the United States. Publicly traded companies include a 10.5% holding in American Express Company, 8% of The Coca-Cola Company, 9.5% of Federal Home Loan Mortgage Corporation, 8.5% of The Gillette Company, 16.5% of The Washington Post Company and 8% in Wells Fargo & Company.

Berkshire Hathaway Inc. also has holdings or owns several large private companies.

When Buffett invests, he sees a business whilst most investors see a stock price. According to Buffett, the investor and the business person should look at the company in the same way, because they both want essentially the same thing.

The business person wants to buy the whole company and the investor wants to buy portions of the company.

The Method of 12:

1) Is the business simple and understandable?

2) Does the business have a consistent operating history?

3) Does the business have favourable long-term prospects?

4) Is management rational?

5) Is management candid with its shareholders?

6) Does management resist the institutional imperative?

7) Focus on return on equity, not earnings per share.

8) Calculate "owner earnings."

9) Look for companies with high profit margins.

10) What is the value of the business?

12) Can the business be purchased at a discount to its real value?

13) For every dollar retained, make sure the company has created at least one dollar of market value.


Buffett believes that in the long run, the price of the stock should approximate the change in value of the business. He believes it is foolish to use short-term prices to judge a company's success. Instead, he lets his companies report their value to him by economic progress.

Sunday, May 23, 2010

15 Warren Buffett Quotes

1. You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.

2. Wide diversification is only required when investors do not understand what they are doing.

3. Never invest in a business you cannot understand.

4. Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.

5. Why not invest your assets in the companies you really like? As Mae West said, "Too much of a good thing can be wonderful".

6. The critical investment factor is determining the intrinsic value of a business and paying a fair or bargain price.

7. Risk can be greatly reduced by concentrating on only a few holdings.

8. Buy companies with strong histories of profitability and with a dominant business franchise.

9. Be fearful when others are greedy and greedy only when others are fearful.

10. It is optimism that is the enemy of the rational buyer.

11. As far as you are concerned, the stock market does not exist. Ignore it.

12. The ability to say "no" is a tremendous advantage for an investor.

13. Much success can be attributed to inactivity. Most investors cannot resist the temptation to constantly buy and sell.

14. An investor needs to do very few things right as long as he or she avoids big mistakes.

15. An investor should ordinarily hold a small piece of an outstanding business with the same tenacity that an owner would exhibit if he owned all of that business.

Friday, May 21, 2010

Top 10 Warren Buffett Books & Resources

Warren Buffett has made a name as the most successful investor of the twentieth century. Over the past thirty-five years, Warren Buffett has emerged as arguably the greatest investor in American history. If you had invested Rs 10,000 in Berkshire Hathaway when he took control in 1965, your holding would be worth more than Rs. 50 million today. The second richest man in the world, Buffett still lives in the same house he bought three decades ago for $ 31,500. Using these books and resources you can now find out about his biography, investing techniques, and thoughts on business.

1. The Essays of Warren E. Buffett: Lessons for Corporate America

In this second-edition compilation, Professor Lawrence Cunningham arranges Warren Buffett's writings and comments based on topics such as dividend payout policy, goodwill, preferred stock, zero coupon bonds, executive pay, and acquisitions. An excellent resource for business owners, financial professionals, and lay investors alike. An excellent book for any exective's library.

2. Buffettology: The Previously Unexplained Investing Techniques of WB

In her book, Mary Buffett, former wife of Warren's son, Peter, discusses the investing techniques the Oracle of Omaha uses when selecting stocks and bonds. Includes interesting annecdotes and previously unknown material.

3. Buffett: The Making of an American Capitalist

Roger Lowenstein's book, "Buffett: Making of an American Capitalist" is by far the most definitive and useful biography of Warren Buffett in print. The author researches and gives details concerning Buffett's childhood, college years, early investment partnership, and acquisition of Berkshire Hathaway. A must-read for anyone interested in value investing or Buffett himself.

4. How to Pick Stocks Like Warren Buffett

Relatively short and easy to read, How to Pick Stocks Like Warren Buffett is an excellent introduction to the world of value investing. The author, Timothy Vick, is a senior analyst at Arbor Capital Management. The book is relatively short and should provide a satisfying read.

5. How to Think Like Benjamin Graham and Invest Like Warren Buffett

After reading this book, the new to medium-level investor should be able to calculate return on equity, inventory and receivable turnover, and leverage ratios. A useful tool for those wanting to start learning to analyze financial statements.

6. The Warren Buffett CEO

Everyone knows Warren Buffett is a brilliant investor. Now, thanks to "The Warren Buffett CEO", readers can get a glimpse of his brilliance as a business manager. This book contains the biographies of the various executives of Berkshire Hathaway, all of whom have thrived under Buffett's "hands-off" management policy. Great for managers and entrepreneuers.

7. The World's Greatest Investment: 101 Reasons to Own Berkshire Hathaway

An investor who purchased $10,000 of Berkshire Hathaway stock when Warren Buffett took over, would have seen his shares climb in value to more than $51 million by the end of the 1990's. This book chronicles some of the things that have made Berkshire so successful, including a shareholder-oriented management, a diversified collection of fine businesses, and little or no debt.

8. Of Permanent Value: The Story of Warren Buffett, Updated and Expanded

For the true Buffett fanatic, this book offers never-before-heard anecdotes of Warren's life, investment partnership, and company, Berkshire Hathaway. It includes information on the Oracle's various investments, including writing stock options for Coca-Cola [an apparently uncharacteristic move]. An absolute must-have.

9. Warren Buffett Speaks

"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ." - Warren Buffett. Janet Lowe uncovers the Buffett's wit and wisdom in this excellent collection of quips and comments such as the one above from the Oracle. An excellent book to have around.

10. Thoughts from Chairman Buffett

A small, chock-full book of Warren Buffett's most famous and insightful comments ranging on everything from running a business to purchasing stocks. Definitely a great gift.