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Be wary of promoters' greed

In India some promoters don't treat other shareholders as equal partners

I have never met Warren Buffett. Nor have I made the pilgrimage to his annual Woodstock-like event in Omaha. But you don't need to hear every word spoken or written by Buffett to recognise the genius and simplicity of his investment strategy. Buffett's recipe for success is to invest in simple-to-understand businesses which are run by trustworthy and dedicated managers, and stay invested for the long haul. And of course, get invested at a very sensible valuation.

While much of the literature on Buffett focuses on his investments in privately held companies that he buys large stakes in (and never disrupts the existing management), the reality is that his largest investments are in listed companies that any of us can buy: American Express, Coca Cola, Procter & Gamble, and Wells Fargo. He has also made investments in publicly-listed companies that he has taken “private”, such as power utility MidAmerican Energy and railroad company Burlington Northern Santa Fe.

One can easily adopt the Buffett investment model in the publicly listed markets in India. There are many businesses run by pretty good management teams that have done well in the past - and can do well in the future. But the addiction of watching the progress of the stock market - the voting machine, as Buffett calls it - and reacting to every sliver of information borders on mass hysteria. The impatience of the typical investor and his greed to make it rich overnight are his worst enemies.

The challenges
Buying a stake in privately-owned businesses in India would pose a challenge - it would be very difficult to duplicate Buffett's success in the USA. Indian founders rarely understand that other shareholders too have certain rights and that, by virtue of no longer being the sole shareholders of their company, the original founders are obligated to share their success fairly with others. The tendency to stash money away in a side-pocket or find creative ways of getting more than their fair share from the company will pose a headache. A delayed justice system is also an encouragement for wrong doing.

An instance of double-speak?
While it would be an interesting exercise to see how the “old” Buffett would operate in India, the “new” Buffett's recent act of investing in Goldman Sachs may give him a wider choice of the great Indian menu of over 7,000 listed companies. In all his annual letters the “old” Buffet sermonises about the negative effect of Wall Street's greed and the dangers of derivatives. And yet, Goldman - which is at the centre stage of creative finance and is considered to be the flag bearer of all that is wrong with the global financial system - made it to the haloed list of “Buffet-owned-stocks”. If maximising the return on his investment is, in the final analysis, the overriding criteria on which the “new” Buffett invests, then he will love the motley Indian stock market. The question then may be: would Buffett still be loved by us?