The Warren Buffett (WB)-Graham & Dodd School of investment is a complete education in stock picking. If WB were operating in the Indian markets today, he would perhaps find it difficult to find companies he would want to invest in. However, over a 20-year cycle, he would have found many opportunities to buy. WB is associated with 'value' investing. India is a 'growth' story. 'Growth' means buying at prices that a 'value' investor may not buy at.
The key takeaway from WB-GD is the relevance of Return on Equity in conjunction with the Margin of Safety. If one uses these two financial measures, today's markets are unlikely to throw up investment-worthy candidates. Our markets are today in an orbit that is being justified by growth potential. With most markets doing badly, India is the proverbial one-eyed man in the kingdom of the blind.
Paucity of options
The following are the key WB-GD qualitative attributes that I look for:
Strong entry barrier. Find companies that have strong entry barriers and strengths that enable predictability of earnings. One of the examples in the WB domain is Coca Cola. In India, I have not come across an Indian company that has this attribute; only a few multinationals operating in India have it. Clearly, India is not a business pioneer even in its homeland, forget globally. Companies like L&T and HDFC come close, but one will be hard put to find more.
Management quality. Most Indian companies don't measure up due to management being a family affair. Father passes the reins to the son. The best person for the job is not chosen. So, here again, the list of Indian companies is rather small.
Forever companies. WB says that he would like to stay invested in a company forever. Here most Indian companies fail the test. Today where are the Century's, Nirlons', Mafatlals or Singhanias of yesteryears? Again, one has to stay content with an HDFC or the MNCs who will be there a hundred years from today.
In India we have two classes of shareholders, whose returns are different. The promoter shareholder gets his returns from many sources whereas the non-promoter shareholder gets incidental benefits. And the promoter only lets you see what he wants to let you see. To gain from the WB approach, we need the ability to understand the management and take a call on what the odds are of riding its coat tails.
Know when to buy
The volatility in our markets (illiquid and shallow by nature) gives great opportunities. I like to make a shortlist of companies that I like and put against them the prices I am comfortable paying. And then wait. Surely, in a person's investment life span, anything from three to five opportunities will come. And the returns will be great - much better than market returns, if I may say so.
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