Investment Shastra

The Buffett Menu

Warren Buffet

Setting: Sunday Morning, 7:00 AM, Home Dining Table

I was about to start my morning breakfast with the French fries Mom had so lovingly made for me, when I realized that something was missing. In no time I reached for the fridge, got out the ketchup, and began to relish my favorite breakfast! Though I was quite engrossed in my helping, I did manage to notice my Dad looking for the newspaper upon seeing the Heinz bottle on the table.

I was about to pass it on to fancy, thinking: ‘Of course! That’s got nothing to do with the ketchup’, when, I heard him murmur something which did quite distinctively have the word ‘Heinz’ in it. I had to ask: ‘Dad, did you just say Heinz?’

‘Yes, of course, I’m glad you asked’, he exclaimed. ‘Being an equity analyst, I’m sure you know about the latest Berkshire Hathaway – Heinz deal, right? I was just looking for updates on the same.’

This wasn’t something new for me. I had, on several occasions earlier, found myself short of words in front of the Fund Manager of Accurate Investment Holdings, my Dad.

With an obvious intention to avoid answering his question, and facing any kind of embarrassment, I immediately counter-questioned him: “But Dad, does Heinz actually fit into the Warren Buffett’s Investing style?” Little did I realize that the question I had just popped would get my Dad into his usual frenzy, of discussing anything, rather everything related to the topic. So, the conversation began:

Dad: First tell me what do you understand by Warren Buffett’s style of investing?

Me: Isn’t it common knowledge Dad! Warren Buffett has a very practical and down-to-earth attitude towards investing. His investing philosophy is based on the principals of Value Investing. His interest lies in finding the true worth of a company or the intrinsic value, as he calls it, and buying when the stock is available at a substantial discount to this intrinsic value in the market.

Dad: Hmm…and, what about his views on the markets?

Me: He isn’t concerned with the supply and demand intricacies of the market, hence, doesn’t pay much heed to the efficient market hypothesis. In fact, he’s not really concerned with the activities of the stock market at all. To quote him: “In the short term the market is a popularity contest; in the long term it is a weighing machine”.

Dad (with a smile): Then, my champ, what is it that concerns him?

Me: LPV!

Dad: What’s LPV, now?

Me: Finding ‘Low-Priced Value’, or simply, finding stocks trading at a price lower than their intrinsic value. This is what Buffett’s entire investment strategy circles around. In short, he would rather buy a great company at a fair price, than a fair company at a great price.

Dad: And, how does Mr. Buffett shortlist such companies?

Me: Oh, C’mon Dad! It’s like you’re testing me now. Anyway, I’ll enlist them all for you:

How Warren shortlists a company
Dad (with a smirk): Common knowledge, but can you give me the reason as to why this economic moat is so important for Mr. Buffett?

Me: An economic moat, such as a brand name, entry barriers, patents, geographical or technological monopoly, allows a company to be the price-setter in the market for its product or service. Warren Buffett’s investment style shy’s away from companies whose products are indistinguishable from those of competitors, or those that rely solely on a commodity as raw material (such as oil and gas), hence, can be influenced greatly by factors beyond their control.

Dad: Anything he looks for in the management of these company?

Me: Yeah he does. Three criteria, you can say. The management must be rational in using the cash generated by the business, should be honest to its shareholders in admitting mistakes, if any, and, should be able to resist the urge to duplicate its competitor’s strategy.

Dad: Well…So far, so good! How would you define Mr. Buffett’s holding period in his investments?

Me (in a tone as dramatic as possible): Till death do us apart! Buffett’s holding period is forever. Since he invests in only those companies whose businesses he fully understands, and would like to own a part of the company, his intention remains to stay invested for the long-term and grow his wealth along with the company’s.

Dad: And what do you have to say about all the Food & Beverage sector companies he has invested in?

Me: Yes, his portfolio does have a lot of brand-name F&B companies like Coca-Cola, PepsiCo, Yum Foods, Wrigley, Hershey’s and the like & all of these face a price-competitive market, but because of customer preference and loyalty built up over many years, these companies occupy a position in the market that works as a moat for them. It allows these companies to edge up their prices to cover inflation and increased labour costs.

Ok Dad! I think I you have interrogated me a lot. Now can you please answer few of my questions here?

Dad: Sure…bring it on.

Me: Warren Buffett seems to have a negative view on dividends. However, his Big Four portfolio companies; Wells Fargo, IBM, Coca-Cola & American Express are all dividend paying companies. How does he justify his stand?

Dad:  In his 2012 letter to shareholders, Warren did provide the rationale for his belief in the no-dividend policy, also followed at Berkshire Hathaway. He lays down four uses to which a company can put its cash, in decreasing priority.

Warren Buffett's use of cash- against dividends

Me: And coming back to my earlier question: does Heinz actually fit into the Warren Buffett’s Investing style?

Dad: Alright… about the Heinz deal. It’s been all over the news these days. Berkshire Hathaway, along with 3G Capital, has agreed to acquire H.J. Heinz for $72.50 per share, in an offer that values Heinz at a little over $27 billion. Now, coming to your question: does Heinz, actually fit in? Let’s go by your checklist:

Heinz fitting into Warren Buffet's investment criteria
So, seems like it does conform to Buffett’s investment style. Moreover, Warren Buffett has been quoted by the news, saying: “We hope to own Heinz 100 years from now”, which qualifies for his long-term perspective on investing in the company.

Just then, my Dad’ smartphone gave out a meeting reminder. As much as he was enjoying this discussion with his young equity analyst, he had to take excuse and rush to deliver on his commitments.

As for me, I was happy with the fact that Dad had conformed to my views and understanding on Warren Buffett’s investment style, and started helping mom clear the table, off ‘the fries’, of course!!

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