What we learned from Warren Buffett at the Berkshire Hathaway Meeting

Before diving into the highlights from the event, it’s worth noting some key facts about Berkshire Hathaway:

Share Price: A single share of Berkshire Hathaway, valued at $620,000 (approximately Rs. 5.2 crore), is the most expensive share in the world.
Cash Reserves: The company holds $190 billion in cash and cash equivalents, an amount greater than the combined cash reserves of all Indian listed companies.
Daily Earnings: Berkshire generates almost $100 million daily.
Global Ranking: Berkshire Hathaway is the sixth largest publicly traded company in the world.

And the credit goes to none other than Warren Buffett, who acquired a struggling textile company in the 1960s and transformed it into the giant it is today.

Earlier this month, we travelled to Omaha, Nebraska, to attend the Annual General Meeting of Berkshire Hathaway and listen to the investing legend, Warren Buffett, share his insights on investing and life.

The event was a profoundly insightful and motivational experience, attracting 30,000 attendees from around the globe, including notable figures like Bill Gates (Founder of Microsoft) and Tim Cook (CEO of Apple), as well as fund managers from some of the world’s largest hedge funds.

We met many investors who have made the pilgrimage to Omaha annually for the past 30-40 years. A lot of investors were keen to know more about India and its growth story.

From taxi drivers to business owners, everyone had praise for Warren Buffett in Omaha. Many were early investors in his company and have significantly benefited from his remarkable track record, which saw a single share of Berkshire Hathaway grow from $19 (in 1965) to $620,000 (approximately Rs. 5.2 crore) today. A police officer we spoke to mentioned that he was able to retire 15 years early thanks to Buffett’s guidance.

The meeting was scheduled for 8 AM, but eager investors began queuing outside the CHI Health Center as early as 4 AM to secure the best seats and catch a glimpse of Buffett. Each year, a 30-minute film is shown before the event starts. This year, the film paid tribute to Warren’s longtime friend and business partner, Charlie Munger, who passed away at 99 in Nov 2023.

Following the film, Buffett discussed Berkshire Hathaway’s financials and answered questions from investors, imparting his vast wisdom. Here are some of the key insights he shared:

Buffet on investing

Successful investing is all about having a few very big winners
If you understand businesses, you understand stocks
The power of compounding is the most underrated power in the world
Don’t try to time the market
The best time to sell a wonderful company is (almost) never
Apple is Berkshire’s largest holding and Berkshire is Apple’s largest institutional investor: Apple is a very high-quality business to Buffett and Berkshire plans to own it for a long time
The impact of AI on human society – both good and bad – is yet to be seen
The transition from fossil fuels to renewable energy will take time and currently, it’s not possible to transition completely away from fossil fuels
On the importance of asset allocation – maintaining $189 billion cash pile: “It wasn’t that people didn’t have money in 2008. It’s that they were paralyzed. And we did have the advantage of having some capital and eagerness even to act, and a government that, in effect, looked at as us as an asset instead of a liability.”
Getting extraordinary results in the long-term is not easy, but getting decent results is, if your behaviour is right
Distribution businesses are not wonderful businesses, but they can perform really well if there’s a great manager at the helm
Positive on India: There are unexplored and unattended opportunities in India

Buffet on life

Kindness is free
Buffett has signed the “The Giving Pledge, ”committing 99% of his wealth to philanthropy.
Biographies are a wonderful way to have conversations with great people from the past
Figure out who you want to spend the last day of your life with, and meet them often
Having the resources and the will to act when everyone else does not is a great advantage
If you’ve been lucky in life, help pull up others too
Always surround yourself with people you look upto and trust
He has read ‘The Intelligent Investor’ by Benjamin Graham at least five times.

May 11, 2024May 11, 2024

MONTHLY MARKET UPDATE & OUTLOOK – APRIL’24

Starbucks is not just a coffee shop, and McDonald’s isn’t solely a burger-selling chain

When we think of Starbucks and McDonald’s, our minds typically conjure images of coffeehouses and fast-food chains. However, there’s more to these corporate giants than meets the eye. Their innovative business models redefine the traditional notions of their industries.

Starbucks:

As the foremost coffee purveyor globally, Starbucks commands unparalleled customer loyalty. This loyalty translates into a remarkable financial phenomenon: customers have effectively loaned the company a staggering $1.6 billion, interest-free. How is this possible?

The cornerstone of Starbucks’ success lies in its ingenious loyalty program, which contributes a substantial 44% to its revenue stream. Through this program, customers load funds onto their gift cards via the app, effectively providing Starbucks with capital for growth and development.

This achievement is particularly noteworthy when juxtaposed with the fact that over 3,900 banks in the U.S. hold less than $1 billion in total assets. With approximately 39,000 outlets worldwide and a continual expansion trajectory, Starbucks amasses increasing cash reserves over time.

McDonald’s:

While renowned for its hamburgers, McDonald’s is also adominant force in the real estate realm. Holding the title of ‘The World’s Largest Restaurant Company’, McDonald’s boasts a unique business model that emphasizes property ownership.

In its 2021 Financial Report, McDonald’s reported assets worth $41.9 billion in property and equipment, ranking it as the 6th largest public real estate company globally.

This strategy stems from a visionary concept introduced by Harry J. Sonneborn in 1956: McDonald’s would own the real estate upon which future franchises would be erected. Rather than solely profiting from supplies or royalties, McDonald’s Corporation became the landlord to its franchisees.

By acquiring properties and leasing them at considerable markups, supplemented by a percentage of each shop’s gross sales, McDonald’s transformed into a real estate powerhouse. Presently, McDonald’s generates revenue through strategic real estate maneuvers, with its subsidiary handling property transactions and collecting rents from over 40,000 locations across 100 countries.

Quote of the month

Don’t be afraid to take risks and embrace failure. That’s where the best opportunities often lie.

Luck plays a role in success but the harder you work and the more you prepare, the luckier you get.

-Jim Simons, Founder, Renaissance Technologies

Goldman Sachs Bets $4 Billion on India’s Growth Story

All eyes turn to ‘the India decade’

ITS NOT INDIA’S DECADE, IT’S INDIA’S CENTURY

Economic Indicators Overview:

Manufacturing PMI: India’s Manufacturing Purchasing Managers’ Index (PMI) remained robust at 58.8 in April 2024 (compared to 59.1 in March 2024), marking its 33rd consecutive month in the expansion zone. The acceleration in output and new orders underscores strong demand conditions.

Services PMI: India’s services sector displayed strong growth in April, registering a PMI reading of 60.8.

GST Collection: Gross GST collections reached INR 2.10 trillion in April 2024, marking a 12.4% year-on-year increase and the highest ever recorded. This concludes the twenty-sixth consecutive month of collections exceeding the INR 1.4 trillion mark, following the previous record of INR 1.87 trillion in April 2023. Rising compliance, increased formalization of the economy, uptick in domestic transaction volumes, and growth in imports have contributed to elevated tax collections.

Core Sector Production: The index of eight core sector industries decelerated year-on-year to -5.2% in March 2024, contrasting with a +7.2% jump in February 2024 (revised upwards from +6.7%). Six of the eight constituent sectors recorded positive year-on-year growth, with fertilizers and refinery outputs experiencing a decline.

Industrial Production: Factory output growth, as measured by the Index of Industrial Production (IIP), reached a four-month high in February 2024, with a rise of +5.7%, compared to a year-on-year growth of +3.8% in January 2024. This growth was driven by positive year-on-year growth in three major sectors: mining, manufacturing, and electricity.

Credit Growth: Scheduled Commercial Bank Credit growth stood at 19.01% year-on-year as of April 19, 2024, compared to a year-on-year growth of 15.92% observed on April 21, 2023.

Equity Market Overview:

The S&P BSE SENSEX saw a rise of 1.1% in April 2024, mirroring the trend of the NSE NIFTY index.

The BSE Mid-cap and Small-cap indices outperformed the S&P BSE SENSEX, boasting gains of 7.1% and 9.6%, respectively.

In terms of sectors, Metals, PSU, and Power emerged as the top three performers for the month, recording gains of 10.8%, 10.0%, and 7.7%, respectively. Eleven out of BSE’s 13 sectoral indices closed the month in positive territory.

Foreign Institutional Investors (FII) flows into equities turned negative for April 2024, amounting to -$1.3 billion, following a positive flow of +$4 billion in March 2024.

On the other hand, Domestic Institutional Investors (DIIs) remained net buyers of Indian equities, with investments totaling +$5.3 billion, compared to +$6.78 billion last month.

In the year-to-date 2024, Net Foreign Institutional Investors (FII) Flows stood at +$0.04 billion, while net Domestic Institutional Investors (DII) investments in the cash markets amounted to +$18.36 billion, surpassing Foreign Institutional Investors (FII) investments.

Fixed Income:

In April 2024, while yields in the Indian fixed income market experienced an uptick mirroring global trends, the increase in Indian Government Securities (IGB) yields remained relatively subdued.

Since the end of March, the G-sec yield curve fluctuated within a range of 15-20 basis points (bps), with a relatively muted impact on corporate bonds ranging between 10-14 bps across the curve. This is in contrast to global trends, where yields saw a broader increase of 20-40 bps following a repricing of global asset prices during the month.

The 10-year G-sec yield in April 2024 fluctuated between 7.10% and 7.23% before closing the month at a slightly higher rate of 7.20%. This marks a slight increase compared to March 2024 (7.05%), February 2024 (7.08%), and January 2024 (7.14%). The average 10-year term premia improved to approximately 13 bps during the month, compared to the previous month where it remained relatively flat.

Monetary Policy: In its April 2024 policy review, the Reserve Bank of India (RBI) opted to maintain the status quo on both policy rate and stance. Despite anticipating robust economic growth and a potential decrease in inflation for FY25, the RBI underscored several factors posing upside risks to inflation. These include food inflation, potential climate-related shocks, escalating geopolitical tensions, and fluctuations in crude oil prices.

Liquidity: Core liquidity, which comprises system liquidity combined with Government balances, experienced a decline from Rs. 2.4 trillion at the end of March 2024 to approximately Rs. 1.5 trillion by the end of April 2024. This decrease was attributed to several factors, including cash leakage resulting from heightened seasonal cash demand, actions undertaken by the Reserve Bank of India (RBI) such as interventions and forex swap maturities, and an increased Cash Reserve Ratio (CRR) provisioning requirement.

Looking Ahead:

India’s growth trajectory is poised to remain positive, bolstered by a convergence of favorable factors. FY24 witnessed robust performance across all market segments, with mid and small caps particularly thriving.

Despite global challenges such as geopolitical tensions and commodity price fluctuations, the domestic economy has demonstrated resilience. Various indicators, including robust power demand, recovering rural consumption, vibrant capital markets, increasing corporate investment, and external demand growth, have fostered a conducive investment environment, potentially propelling economic expansion.

A noteworthy aspect of India’s growth narrative is the uptick in capacity utilization, primarily driven by cyclical and capital-intensive sectors. This trend suggests that businesses are investing to meet the escalating demand within the economy.

While the overall outlook for India appears positive, valuations persist at elevated levels across the board, albeit with exceptions like Large Banks and select utilities and commodities. Elevated valuations, coupled with rising bond yields, contribute to a reduction in equity risk premium.

The ongoing election cycles in various countries may trigger policy shifts, potentially heightening volatility and uncertainty in the latter half of the year. Consequently, adopting asset allocation strategies becomes crucial for effective risk management.

Aligning asset allocation with investment objectives and risk tolerance is essential for optimizing risk-return dynamics. Asset allocation funds, which invest across multiple asset classes, can mitigate volatility and offer a more balanced portfolio mix.

From an equity standpoint, Large Cap-oriented strategies such as Large/Flexi/Multi Cap strategies seem well-positioned in the current scenario. Additionally, within thematic investments, the Banking & Financial services sector appears compelling based on relative valuations.

May 11, 2024May 11, 2024

MONTHLY MARKET UPDATE & OUTLOOK – MARCH’24

Japan’s Nikkei 225 completes a roundtrip after 34 years

The Nikkei 225, an index encompassing the top 225 Japanese companies, has recently surged to levels not seen since 1989. This resurgence is noteworthy given the historical context surrounding the index’s previous peak.

On December 29, 1989, amidst Japan’s economic boom years, the Nikkei achieved an all-time high of 38,915. This period, spanning from around 1986 to1990, was characterized by significant economic growth. However, the subsequent downturn, often referred to as Japan’s “lost decades,” marked a prolonged period of economic stagnation.

The decline in the stock market in 1990 was precipitated by tightening monetary policies and stricter regulations on the real estate market. This downturn underscored the challenges Japan faced in maintaining its economic momentum.

Recent upswings in Japanese shares can be attributed to several factors. The implementation of a redesigned tax-free government stocks program for individuals, known as NISA, has played a role in bolstering investor sentiment. Additionally, there is optimism surrounding the prospect of the Japanese economy returning to a semblance of normalcy after years of deflation.

Furthermore, the Japanese market has benefited from gains in US tech shares, with particular attention drawn to the performance of chip giant Nvidia. This transpacific synergy underscores the interconnectedness of global markets and highlights the influence of external factors on Japanese equities.

In conclusion, the resurgence of the Nikkei 225 index reflects a convergence of domestic and international factors shaping the Japanese market. As we continue to monitor these developments, it is imperative to maintain a nuanced understanding of the underlying dynamics driving market trends.

Quote of the month

“The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.”

“The essence of investment management is the management of the risks, not the management of the returns”

– Ben Graham, financial analyst, investor and professor (Father of Value Investing)

India emerges as preferred investment destination for Swedish businesses

Investment guru Jim Rogers says Indian economy in a ‘sweet spot’

Blackstone plans to invest $25bn in India over 5 years

India committed to get more investments from Singapore

India is now the No. 1 investment target country among Japanese Companies

It’s hard to be in India and not be excited: Jefferies CEO Richard Handler

India is the next big playground for AI: Samsung VC, CEO JH Han

On India, we are very bullish. This is not just this year and next year. We forsee that India will be growing for the next 25 years, provided the reforms continue: Borge Brende, President, World Economic Forum

Economic Indicators Overview:

Manufacturing PMI: The India Manufacturing PMI surged to a 16-year high of 59.1 in March 2024, up from 56.9 in February 2024. This remarkable increase was propelled by a surge in output and new orders. Notably, the index was driven by heightened inflows from both domestic and export markets, signaling sustained robust demand trends.

Goods and Services Tax (GST) Collection: March 2024 witnessed gross GST collections of INR 1.78 trillion, marking an impressive 11.5% year-on-year growth and securing the second-highest collection ever recorded. This achievement also marked the twenty-fifth consecutive month of collections surpassing the INR 1.4 trillion mark, following the record collections of INR 1.87 trillion in April 2023. Factors such as rising compliance, increased formalization of the economy, a surge in domestic transaction volumes, and enhanced administrative efficiency have collectively contributed to this buoyant tax collection trend.

Core Sector Production: In February 2024, the index of eight core sector industries exhibited a robust year-on-year growth of +6.7%, outpacing the +4.1% jump observed in January 2024 (revised upwards from +3.7%). This growth momentum represented the fastest pace in three months. Notably, seven of the eight constituent sectors recorded positive year-on-year growth, with only fertilizers experiencing a decline.

Credit Growth: As of March 8th, 2024, scheduled commercial bank credit growth surged to 20.41% year-on-year, a notable acceleration from the 15.68% growth observed on March 10th, 2023.

Inflation: February’s Consumer Price Index (CPI) inflation rate dipped to a 4-month low of 5.09%, decelerating from 5.1% in January 2024. However, food inflation accelerated, reaching 8.66%. Meanwhile, Wholesale Price Index (WPI) inflation moderated from January 2024, with the February 2024 print at 0.20%, down 7 basis points from January 2024. Notably, WPI inflation remained positive for the fourth consecutive month.

Trade Deficit: Indian merchandise exports surged by +11.9% year-on-year to $41.4 billion in February 2024, while imports increased by +12.2% year-on-year to $60.11 billion. Consequently, the merchandise trade deficit widened by +12.91% to $18.91 billion as imports outpaced exports in growth rate.

Equity Market Overview:

In March 2024, the S&P BSE SENSEX witnessed a 1.6% rise, indicating positive momentum in the market.
However, the BSE Mid-cap and Small-cap indices didn’t fare as well, with performances of -0.01% and -4.54% respectively, underperforming the S&P BSE Sensex.
Among sectors, Capital Goods, Auto, and Metals emerged as the top performers, registering gains of +6.1%, +5.0%, and +5.0% respectively. Notably, six out of BSE’s 13 sectoral indices ended the month in positive territory.
Foreign Institutional Investors (FIIs) showed a positive sentiment towards equities in March 2024, with net inflows amounting to +$3.7 billion, following a modest inflow of +$0.4 billion in February 2024.
On the other hand, Domestic Institutional Investors (DIIs) continued to exhibit a bullish stance on Indian equities, with net purchases totaling +$6.78 billion, up from +$3.06 billion in the previous month.
In the calendar year 2024, while net Foreign Institutional Investors (FII) flows stood at +$1.08 billion, net Domestic Institutional Investors (DII) investments in the cash markets amounted to +$13.06 billion, surpassing Foreign Institutional Investors (FII) investments.

Fixed Income:

In its early April policy review, the RBI opted to maintain the status quo on both policy rate and stance, aligning with market expectations. While the RBI anticipates robust growth and a decline in inflation for the fiscal year 2024-25 (FY25), it emphasized the potential upside risks to inflation stemming from factors such as food inflation, climate-related shocks, escalating geopolitical tensions, and fluctuations in crude oil prices.
Core liquidity, comprising system liquidity and government balances, saw improvement from INR 2 trillion at the end of February 2024 to approximately INR 2.4 trillion by the end of March 2024. This enhancement was largely driven by RBI interventions and the maturity of forex swaps. Following a period of tight liquidity conditions throughout the second half of fiscal year 2023-24 (2H FY24), system liquidity eased in March, averaging around negative INR 43,000 crore (compared to an average negative of around INR 2.1 trillion in January 2024 and negative INR 1.9 trillion in February 2024), supported by robust government spending and inflows related to forex activities.
Fixed income yields remained range-bound throughout March 2024. The 10-year Government Securities (G-sec) yield responded to global cues, including movements in crude oil prices, US Federal Reserve policy decisions, and US treasury yields, fluctuating within the range of 7.03% to 7.10% during the month. The 10-year G-sec closed the month slightly lower at 7.05%, compared to 7.08% in February 2024 and 7.14% in January 2024. Additionally, the 10-year term premium remained relatively stable or showed marginal negativity.

Expectations of robust growth numbers, moderation in inflation and improving external balances provides RBI leeway to hold rate for longer, while assessing global uncertainty.

Events to watch out for in April 2024:

Q4FY24 Earnings Season: Beginning in April 2024, the Q4FY24 earnings season commences against the backdrop of a previous quarter that surpassed expectations. The Indian economy displays resilience, marked by cooling core inflation and promising growth projections. Recoveries in exports and demand could potentially lead to earnings that exceed expectations.
General Election Developments: Starting on April 19th, 2024, voting for the Indian General Elections will unfold over six weeks across seven phases. Market watchers closely monitor these elections as policy continuity and support hinge on the electoral outcomes
.

Commodity Prices: In late March 2024, gold reached an all-time high, registering a nearly 10% increase in 2024. Factors such as central bank buying and expectations of rate cuts have contributed to this surge. Additionally, weakening US dollar and declining yields have bolstered commodity prices. Oil markets remain buoyed near five-month highs due to OPEC+ production cuts, coupled with strong demand outlooks from China and the US. Commodity markets serve as crucial indicators for global markets.
Positive Economic Indicators: The Indian economy continues to display strength supported by demographic advantages, policy reforms, and structural changes. Key leading indicators such as tax collections, industrial activity, and power demand remain robust. Moderating inflation and a potential increase in private sector capital expenditure are additional positive drivers.
Attraction for Global Investors: India is increasingly becoming a preferred destination for global investors due to favorable macroeconomic conditions, expectations of policy continuity, etc. This trend may lead to heightened inflows.
Elevated Valuations: While the broader outlook for India appears positive, valuations remain high overall, with exceptions observed in sectors such as large banks, select utilities, and commodities.

May 11, 2024May 11, 2024

Don’t disrespect valuations

Today, I am writing to emphasize the critical importance of valuations in making informed investment decisions. Valuation represents the price one pays for the anticipated future earnings and dividends from an asset.

It is not uncommon for investors to overlook valuation metrics, particularly in times of market exuberance when the allure of skyrocketing stock prices can overshadow rational analysis (as we witness today). However, history has repeatedly demonstrated the perils of disregarding valuations, with numerous instances serving as cautionary tales:

Nifty Realty Index: Every investor is familiar with the significant bull run of 2008. The Nifty Realty index plummeted by 90%, and to this day, it has failed to recover to the levels witnessed in 2007. Investors were swept up in the belief that the real estate boom would endure indefinitely, leading to skyrocketing stock prices of real estate companies. However, inevitably, someone had to bear the consequences. Regrettably, it was the hard-earned money of retail investors that suffered the most.

1. 1. Japan: The Japanese asset price bubble of the late 1980s is a stark reminder of the consequences of excessive valuations. During this period, inflated asset prices, particularly in real estate and equities, led to a speculative frenzy. However, when the bubble inevitably burst, it resulted in a prolonged period of economic stagnation known as the “Lost Decades,” highlighting the severe repercussions of ignoring valuation fundamentals.

During the peak of the Japanese Nikkei 225, its price-to-earnings ratio (P/E) reached approximately 60 times the trailing twelve-month (TTM) earnings. It took the Nikkei 33 years (almost 12000 days) to regain the same level of 38,000 points. Are you prepared to exercise that level of patience if things go wrong with your stock?

Nifty 50 in the US: The Nifty Fifty stocks, a group of widely regarded blue-chip stocks in the United States during the 1960s and 1970s, experienced a similar phenomenon. These stocks were considered “one-decision” stocks due to their seemingly unstoppable growth prospects. However, their valuations became detached from underlying fundamentals, leading to a subsequent market correction that eroded substantial investor wealth.

IT Boom in 2000: The dot-com bubble of the late 1990s and early 2000s serves as a pertinent example of valuation excesses. During this period, the valuations of internet-based companies soared to astronomical levels, fueled by speculative euphoria rather than sound financial metrics. When the bubble burst in the early 2000s, it resulted in significant losses for investors and a shakeout of overvalued companies.

It took Wipro and NASDAQ 100 sixteen years to return to the same level it reached in 2000.

These historical precedents underscore the importance of conducting thorough valuations and maintaining discipline in investment decision-making. When investors pay exorbitant prices for assets relative to their intrinsic value, the likelihood of subpar returns increases substantially. Sound valuation analysis acts as a safeguard against such pitfalls, helping investors avoid overpaying for assets and mitigating downside risk.

In conclusion, I urge you to consider the invaluable role of valuations in guiding your investment decisions. By adhering to disciplined valuation practices, you can enhance the resilience of your portfolio and safeguard your long-term financial objectives.

Should you have any questions or require further clarification on valuation-related matters, please do not hesitate to reach out. We are committed to providing you with the insights and support necessary to navigate today’s dynamic market environment successfully.

Track your Portfolio

Month: May 2024

What we learned from Warren Buffett at the Berkshire Hathaway Meeting

MONTHLY MARKET UPDATE & OUTLOOK – APRIL’24

Starbucks is not just a coffee shop, and McDonald’s isn’t solely a burger-selling chain

Quote of the month

MONTHLY MARKET UPDATE & OUTLOOK – MARCH’24

Japan’s Nikkei 225 completes a roundtrip after 34 years

Quote of the month

India emerges as preferred investment destination for Swedish businesses

Investment guru Jim Rogers says Indian economy in a ‘sweet spot’

Don’t disrespect valuations

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