Thursday, March 31, 2011

Investment Recipe from Warren Buffet

The last week of March ended with all good things for Indian fans. Stock market was upbeat. BSE sensex closed at 19,445. India defeated Pak in ICC world cup semi final and Wits of great investor Warren Buffet were in the atmosphere of investor community.

Investment return success of any individual can not be replicated so to repeat the performance of Warren Buffet is impossible. However, as a student of investment community we can always be receptive of the ideas. How Buffet identified the mult ibagger? This skill need both brains working together.

While selecting the share he is very conservative and goes by old theory of fundamental checking instead of aggressive gut feeling. The triad of his formula are :

1. Financial Stability,

2. Quality of Management and

3. Simplicity of Business.

The most precious secrete is to buy share of the essential goods and the business which does not have to take the beating of inflation. This means that the management should be efficient to provide goods at reasonable price, but should pass on the increased cost to the customer without losing its share. Not many companies can pass this test.

One of the most all time favourite share of Buffet is Coca Cola. This is because no company has so far been able to dislodge the coke from its position, regardless of how much money it might be willing to spend on advertising and brand building.

What he checks in the fundamentals is something which all the investment guide books would teach about :

1. Stability of earnings during past 10 years.

2. Debt to earnings ratio should not exceed 5 meaning that all infra structure and power companies would fail on this criteria.

3. Average return on equity (ROE) during past 10 years should be more than 1.5 times the interest rate on fixed deposit.

4. Ten year average return on total capital (ROTC) should be more than 12%

5. Positive free cash flow is a must.

6. If management retains earning it should have a Return on retained earnings same as ROTC.

Which Indian shares can pass on this test? May be Britannia, BASF, GAIL, L&T; HEG, WIPRO, TCS, ONGC, ITC, Asian Paints, etc. Make a checklist invest in the companies which pass these test and remain invested.  Try to avoid shares runnung on the shoulders of  rumours, which includes many Penny Stocks like Mav Biotech and mid caps like Kalindi Rail, Essar Oil India Bulls and so on. Also, all the PSUs which have to follow government directives for pricing NHPC, NTPC, MTNL etc fall under touch me not list. That is how the wealth is created  Buffet way. Wish you all happy returns during 2011-12 financial year.

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