In the cover story of this issue, we have a set of ten topics on which we have collected what might be called ‘The Condensed Wisdom of Warren Buffett’. During his 60 years as a businessman and investor, Buffett has written and spoken about practically everything that can be a topic of concern to equity investors.
However, for an Indian investor who has been keeping abreast with business news in the country, the surprise would come in from what Buffett hasn’t written about. It certainly was for us. Try as we might, we couldn’t find anything that the grand old man of investing had written about fiscal deficits. Nor had he written about central bank rate policy and how that might affect some sectors more than others. Nor, in fact, did he have anything to say about how the interaction between different political parties and their factions could derail governance or lead to policy paralysis.
In short, Buffett’s ideas about what investors should be worried about are at no small variance with the Indian business media and commentators. Some of this may be due to the fact that many basic policy issues are well-settled in US but they are not in India. However, it’s not as if such issues don’t exist in the US. Central bank and government policies, huge fiscal deficits and dysfunctional politics are just as big issues over there as in India. Equally similar is the obsession of the mainstream business media. However, there’s a message in the fact that Buffett refuses to make such issues a factor in deciding which companies are worth investing in and which are not.
I’m not suggesting, even for a moment, that the political and the policy factors are not important. On the broad scale of the entire economy, they are incredibly important. After the budget, there’s been a lot of discussion about the fiscal deficit and whether the figure of 5.1 per cent projected by the finance minister is achievable or credible or whatever. Actually, the precise number doesn’t matter. For businesses, one thing is clear--whatever the savings and surpluses that are generated in the country, they will be first absorbed by the government and then whatever is left will be available for businesses to invest and grow.
The government has budgeted a borrowing of Rs 4.79 lakh crore over the year. Even if everything goes just as budgeted, this will be well over 50 per cent of the total increase of deposits over the year. No matter what, businesses are going to be squeezed out of the borrowings market by the government.
However, when it comes to picking businesses and managements that will get you the kind of long-term returns you want, there are another set of reasons that might take precedence. In fact, the poor policy environment makes the choice of individual stocks even more important. In a time of broad-based equity gains (as in 2004-2007), it mattered much less where you invested. Practically the whole economy was booming, low-cost money was flowing in easy from all directions, consumption of everything was booming and even sub-optimal businesses didn’t have too many problems.
As an investor (and as a fund manager), it didn’t matter much what you picked. As long as you avoided the obvious disasters, the returns were fine. Those times are gone. Perhaps they’ll come back eventually in a long cycle, but in the months and years to come I wouldn’t bet on it.
Here are two aphorisms which Buffett has used in different contexts. ‘A rising tide lifts all boats’, and ‘It’s only when the tide goes out do you realise who was swimming naked.’ Guess which one is more appropriate right now.
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