Tuesday, March 14, 2006

Berkshire hathaway's marathon run continues...

Berkshire Hathaway has been an investor's dream over the last four decades. During 1965-2005, it yielded a return of 21.5 per annum. This essentially means that an investment of Rs.10,000 in Berkshire Hathaway in 1965 would've turned into Rs.1.99 crore by the end of 2005. Now thats a "mount everest" of a record, which few can think of achieving, let alone doing it. It is my goal in life to better this record, whether I do it or not, we will know in a few years from now. But, I will surely try.

Coming back to the company.

The performance of the company is surely great, if seen over the 40 year period. But, if one looks at the performance over the last seven years, it aint that impressive. Annual gain - 6.6 per cent per annum. Ofcourse, when compared with the performance of the S&P 500, it surely is a good one. But, nevertheless, by its own standards, Berkshire's recent performance seems lacklustre. Is this the end of Berkshire's marathon run of the last four decades ? I dont know.

Maybe after currencies, Warren Buffet needs to look at emerging markets, India specifically. However, I do not know how many companies in India will qualify for Warren Buffet to make an investment ? A few names that come to my mind are - Gas Authority of India (an all-India pipeline network, a virtual monopoly in gas transportation, a definitive moat), Maruti Udyog, Hero Honda, Raymond, State Bank of India, and Larsen & Toubro.

But, one thing is sure Warren Buffet is and will remain the best investor of all times !!

A few snippets from this year's annual letter to the shareholders -

1). When growth rates are under discussion, it will pay you to be suspicious as to why the beginning and terminal years have been selected. If either year was aberrational, any calculation of growth will be distorted. In particular, a base year in which earnings were poor can produce a breathtaking, but meaningless, growth rate.

2). On derivatives contracts (of a term as long as 100 years) - Its difficult to imagine what "need" such a contract could fulfill except, perhaps, the need of a compensation-conscious trader to have a long-dated contract on his books. Long contracts, or alternatively those with multiple variables, are the most difficult to mark-to-market (the standard procedure used in accounting for derivatives) and provide the most opportunity for "imagination" when traders are estimating their value. Small wonders that traders promote them.

3). When a problem exists, whether in personnel or in business operations, the time to act is "now".

4). Companies always, ofcourse, hope to earn more money in the short-term. But when short-term and long-term conflict, widening the moat (an advantage that cannot be easily reproduced) must take precedence. If a mgmt makes bad decisions in order to hit short-term earnings targets, and consequently gets behind the eight-ball in terms of costs, customer satisfaction or brand strength, no amount of subsequent brilliance will overcome the damage that has been inflicted. Take a look at the dilemmas of managers in the auto and airline industries (in US ofcourse) today as they struggle with huge problems handed them by their predecessors. Charlie is fond of quoting Ben Franklin's "An ounce of prevention is worth a pound of cure". But sometimes no amount of cure will overcome the mistakes of the past.

5). The underlying factors affecting the US current deficit continue to worsen, and no letup is in sight. Not only did our trade deficit - the largest and most familiar item in the current account - hit an all-time high in 2005, but we also can expect a second item - the balance of investment income - to soon turn negative. As foreigners increase their ownership of US assets (or of claims against us) relative to US investments abroad, these investors will begin earning more on their holdings than we do on ours. Finally, the third component of the current account, unilateral transfers, is always negative.

The US is extraordinarily rich and will get richer. As a result, the huge imbalances in its current account may continue for a long time without their having noticeable deleterious (harmful) effects on the US economy or on markets. I doubt, however, that the situation will forever remain benign. Either Americans address the problem soon in a way we select, or at some point the problem will likely address us up in an unpleasant way of its own.

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