Current thoughts on Shriram City Union Finance (SCUF)

The markets have been unforgiving in many different ways. Off late, the route the market has taken is to sell all risk and get into safer instruments. Entire sectors have been brushed with a broad stroke and left to bite the dust. One such sector is the NBFC sector. While opaque accounting, financial shenanigans and unconstrained lending in the name of growth has brought some well deserved nails on some coffins, there are others that have been dragged down by sheer association.

I believe that Shriram City Union Finance is one such case.

SCUF is a deposit taking NBFC that serves the predominantly in the south with a sizeable operations in the west of India as well. They serve the underbanked, specifically the self-salaried and MSME who get easier access to NBFC’s (shadow banking system) as compared to banks.

The security closed on March 27th at INR 765.35 / share on the NSE. The market cap is INR 5,332 crores with ~6.6 crores shares outstanding. The security has a book value of INR 1070 per share or INR 7,062 crores. First nine months earnings for 2019-20 were INR 128.38 per share or INR 845 crores. 2018-19 full year earnings were INR ~150 / share or 988 crores. AUM was 29K crores.

SCUF is earning around INR 43-44 per share per quarter and growing. The market is valuing the entire company at 4.5 times earnings or earnings yield of 22%. It will be worthwhile to take a look deeper into what might be driving the same.  A quick snapshot of the financials is as seen below.

Screenshot 2020-03-29 at 4.03.13 PM

As you can see, the company has fairly good NIM, high spread, good ROA and ROE and fairly manageable leverage. Furthermore, CRAR seems to be good and decent cash on hand as well.

Since the company serves the self employed and small businesses, the GNPA and NNPA is higher than usual but the company has managed fairly well in the past on the actual write downs. SCUF has been conscious of the market it is serving and has managed with lower LTV ratios, stronger security, higher spreads and a good ecosystem to manage collections. The situation before Covid was as follows:

Screenshot 2020-03-29 at 4.06.47 PM

There are several factors that would have impacted the business or caused the valuations to drop.

  1. Covid impact and net payments
  2. Concerns on repayments
  3. Liquidity in the market
  4. AL mismatch and liquidity concerns
  5. Corporate governance

Covid Impact: It is very early to estimate the real impact of Covid. This could go several different ways but I think we can draw large enough boundaries and what the expected outcome could be for SCUF. Just because of the sheer segment that SCUF lends to, we should expect a lot of stress. The small businesses are on the first line that will get affected by Covid and the subsequent economical slowdown that comes along with it. There are broadly two lines of thoughts that investors are divided upon: one is that this will be a short disruption, everyone self isolates, the virus dies and we have a V-shaped recovery. The other narrative is that because of the exponential growth in the cases we have been having, it will be many quarters or years before it becomes business as usual again.

In the former case, there are two more tailwinds that are there: RBI has provided permission to defer payments for three months, interest will continue to accrue, and the effects of the virus will be short-lived. Even if we assume that the operating expenses of the company will not come down, it will cost the company INR 375 crores with no income to keep the shutters open and incur every single rupee to keep the shutter open. This will impact the business around INR 57 / share. One quarter of earnings lost. This is like losing a dividend check. With the NPA rule being waived, it is the best case scenario.

In the latter case, beyond the initial tailwind due to the deferral from RBI, if things deteriorate further, we could see customers falling behind on payments, GNPA and NNPA spiking up and write off spiking up as well. Given the P/B of 0.71 that is the market is attributing indicates that they expect this scenario to play out. The market is expecting a INR 1700 crore write off (as of today) from this episode or close to 6% of the entire book (net of assets recovered) as an outcome of this prolonged exposure in the market. The markets that provide us some advance information is the China and the South Korean market. Things are recovering back but at a slower pace. I think it is fair to assume at this point that the same may repeat in India as well. It will eventually recover but at a much slower pace than most people expect. A fair amount of this write-off is already baked into the price. Why will the write offs not be higher? We will address it in the repayments section.

Repayments:

Here we need to digress a bit to understand the culture of Shriram and why ultimate repayments are Shriram will be higher than what we would think in a conventional sense. Shriram group hires people from the same social standing and the communities as their customers. Since they were serving the underbanked, their offices are frugal as as possible and they speak the same layman language as that of the customer. Furthermore, they are connected to the customers at the place of business and are well versed with the balance sheets etc. The credit process is designed in a way that the branch manager, who is effectively connected to the community is responsible for the approvals and is also held very responsible for the collections as well. Typically, customers prefer to work with Shriram group in general because of two main reasons a. they had a connection with the branch manager and an existing relationship. The system and offices were designed in a way that it would not scare the customers and would make him feel like he was borrowing from someone just like himself. b. compared to a bank where they would have to wait for 45 days to get a loan sanctioned, with the right data, they could get a sanction within 48 hours at Shriram. Furthermore, most of the customers getting a loan from Shriram City already have a relationship with Shriram Transport or Chits or insurance or have an existing relationship with the branch with a manager.  Coupled with the fact that most of the loans are with low LTV / higher security than required, incentives aligned with a branch manager who is responsible for collections and a connection to community, defaults are on the lower side than what one would expect from this clientele.

This ecosystem is not going to change anytime soon. While the clientele will be hit by Covid, it is fair to assume that the branch manager will work closely with the customers to figure out the best possible way to get repayments done. The last thing the branch manager or the customer wants is a security pulled in from someone in the community. This has been evidenced through low real losses through previous recessions. However, it must be clearly noted the repayments are different from reported NPA’s. It is safe to presume that GNPA’s and NPA’s / stage 2 and 3 assets will spike but ultimately will get repaid. The repayments will depend on the pace of recovery more than anything else.

Liquidity in the Market:

It is no secret that Piramal has been trying to pare his stake in Shriram for a while now to further boost capital at the Piramal group. There will be always be a hang over the stock that over 10% of the shares outstanding will trade. If Piramal decides to sell in the open market like they did with STFC, it will create a glut of liquidity pushing the prices further down. However, it does look highly unlikely something would happen at these prices. It is a good 33% lower than where Piramal took his stake and I just don’t see him selling at these prices. Furthermore, TPG is trying to exit SCUF parent company at Shriram City as well.

AL Mismatch and Liquidity concerns:

Screenshot 2020-03-29 at 8.45.16 PM

This will be a quick back of envelope calculation: If one assumes that Jan and Feb was business as usual at Shriram City, you will see that they would have excess liquidity of 5000 crores. This will need to be netted for disbursements that would have happened. If you use the prior quarter number, it is around INR 1900 crores per month. This would have left around 1200 crores in excess liquidity. Their cash balance was another 800 crores. Their scheduled repayments was ~2200 crores in March. With a collection efficiency of 10% in March, they could meet that. I am sure the number was a lot higher. Now with the NPA moratorium, I think it will provide some relief to Shriram repaying back its creditors as well. Over the 4 next months (which I think will be more like 6 months with the RBI moratorium), they will own around INR 5000 crores out of which they have access to 2000 crores; and receivables of INR 6,200 crores. If the collection efficiency is above 50%, their ALM will be fine over the next 6 months. However, one needs to account for the CET ratio and minimum cash they will need to maintain as per regulatory norms etc. If India does not get back to 50% of its efficiencies over the next 6 months, we are going to have much bigger problems. Given the current situation, I think they are sitting okay for now. Unless the situation deteriorates extremely badly, I think they will do okay. On top that, the conservative balance sheet will continue to have access to the capital markets. While the interest rates might wary, it is tough to imagine a balance sheet like Shriram city shut from capital markets.

Corporate Governance Concerns: I think between Shriram Capital, Transport Finance and City Union, the Shriram Group has shown a fair amount of good corporate governance till date. We have had RT leading the group, Ajay Piramal and there has not been a peep about governance. They have taken their lumps where needed and moved on. Nothing to indicate that minority holders are at an disadvantage at this point. We will need to see who will be at the helm once Piramal moves on.

All in all, while there are headwinds that SCUF is going to face, at ~22%+ earnings yield most of these concerns are baked in. Investors need margin of safety. The company is trading at 70% of liquidation value. They are yet to lose money in a single quarter. They have the ability and the cushion to lose money for a while and still be okay. The ecosystem is still firm and recovery will be on the back of companies like SCUF. It does provide an enterprising investor with a variety of possibilities.

I am interested in your thoughts and comments. please mail me: contact@beowulfcap.com

Disclosure: Long several NBFC’s and Banks including Piramal, SCUF, STFC.

Disclaimers: See FAQ here. Not a recommendation. Not a registered advisor. Just sharing my thoughts.

 

 

Managing downside risk in a downturn!

As value investors, a lot of us are starting to find the environment to be idea rich after a long time. Finally, the valuations are compelling, the companies we have researched are cheap, the war chest is ready to crack open, ready to be used. During such times, there are new risks that needs to be actively managed. While I watched the 2009 recession hunting for a job in the U.S, I did not live through the panic in the securities market during the recession of 2008/9. This is my first real test. There have been drawdowns in the past which have been sharp and never so deep.

One of the risks is through concentrated positions. A ton of wealth has been made through concentrated positions. 2-3 years from now, when the markets are back up (hopefully) there will be stories about investors who bought by the truckloads during the downturn and made a killing on some of the ideas. What won’t get said, are the ton of the people who got crushed during the downturn by investing in concentrated positions (2/3/4 positions) and the companies going to zero. Survivorship bias will exist in this regard. People recall Mike Burry a lot more than Bill Miller. It is highly preferable to give up some upside in order to reduce the chances of going back to Go on the board.

Here is where capital allocation and portfolio management go hand in hand. As much as tempting it is to back the truck into a certain securities and concentrate, a dose of diversification will prevent complete blow ups from happening. There are multiple ways this can be achieved. Buying a basket of stocks in a similar category, allocating a certain % to index funds, looking at preferred stocks, closed end funds, special situations etc. can provide other opportunities even in the securities space. Of course, this conversation here is limited to the securities space where we are finding bargains at this point. Other asset classes are not considered here.

Some of the steps that I am taking while managing through this downturn :

  1. Kept aside cash required to manage next 2-3 years + emergency cash even I were to lose my job.
  2. Had a clear plan written down on how portfolio management would happen in a 30-40% down market when I was clear and lucid.
  3. Diversifying more than usual while adding new bargains
  4. Baskets of stock in a similar story. Everything might not go to zero (unless my stock picking skills are similar to the CDO’s constructed by US banks a decade ago)
  5. Index funds / quasi index like Berkshire get a certain allocated % of the capital allotted
  6. The rules make is tougher and tougher to double down into the same ideas

I am very interested to see how this will pan out. While the ride has been painful, I am far from panicking yet. Just a pit in the stomach once in a while so far.

GCI Liberty: Thoughts!

I have been looking at various securities this weekend to work on what is finally turning out to be an idea-rich environment. GCI Liberty, the sole cable provider in Alaska, was an interesting company to look at given that it belongs to the Malone complex. Amongst the dozens of securities and tracking stocks that the Liberty empire has, GLIBP (GCI Liberty Preferred) and GLIBA (GCI Liberty Common A) are two such securities.

GCI Liberty has always traded at a discount to the underlying Liberty broadband and Charter shares. I wanted to do a quick back of the envelope NAV calculation to see the level of discount and whether it would interest me among all the other opportunities on hand. Unfortunately, the discount using a fairly conservative approach turned out to be close to 20% and not much higher that I was expecting. Please note that the below NAV calculation aims to capture only the key components and is a rough guesstimate of the NAV.

Screenshot 2020-03-23 at 5.12.43 PM

However, the cumulative, non-convertible preferred stock trading at $22.25 with a 7% coupon (payable in 4 quarterly payments) with a $25 liquidation value callable after 2021 with a yield of 8.71% is mildly more interesting play with the common equity providing the cushion required for the dividend payments.

Update: To reflect the cash on the balance sheet. Thanks to Rocco for pointing it out.

Markel Corp. equity portfolio

Reposting with edits as the prior post is not updating online.

Markel (MKL) closed at $785/share as of March 20th. Since the reported book value of MKL was $802 as of Dec 31st, I wanted to look into the equity portfolio of $MKL and see the effect on its book value. At the closing price of $1,143 on Dec 31st, MKL traded at a P/B of 1.42.

Given the carnage in the market, the equity value of its U.S listed stocks are down from $7.2B to $4.95B (see below) which is 31% below 12/2019. Of course, there is a possibility that Markel could have sold stocks before the meltdown or could have increased the equity holdings materially but neither will be known at least until early May.

With 13.7M shares outstanding as of 31/12, the book value change just from marking the equity book to market would be $162/share. Adjusting for this, the book value for Markel would be ~$640/share. Markel also has deferred taxes of $996M related to investments. This translates to $72/share. At the corporate tax rate of 21.2% (2019 rate) Markel can offset about $34/share of the equity price decline resulting in a book value of $674/share. The new price/book will be 1.16. This is definitely more cheaper than 31/12.

At this point, it is also not clear whether the insurance operation will take any hit due to any exposure to Covid as well. While Markel does trade much cheaper than it has for a long time, it is far from trading below book value like it did very briefly when the acquisition of Alterra was announced.

Disclosure: Long Markel.

Thanks for @rationalwalk for pointing out the deferred taxes.

Stock Value as of 31/12 Price on March 20th Portfolio Value
KMX – CarMax Inc. $430,729,000 $44.27 $217,501,608.90
BRK.A – Berkshire Hathaway CL A $375,247,000 $257,346.00 $284,367,330.00
BRK.B – Berkshire Hathaway CL B $345,720,000 $170.06 $259,572,271.42
BAM – Brookfield Asset Management Inc. $334,930,000 $38.65 $223,962,874.65
DIS – Walt Disney Co. $268,206,000 $85.98 $159,443,891.40
MAR – Marriott Int’l. $240,057,000 $74.58 $118,229,362.02
DEO – Diageo plc $227,333,000 $109.56 $147,884,088.00
HD – Home Depot $200,909,000 $152.15 $139,978,000.00
GOOG – Alphabet Inc. CL C $181,244,000 $1,072.32 $145,361,554.56
AMZN – Amazon Corp. $180,963,000 $1,846.09 $180,791,285.88
V – Visa Inc. $179,472,000 $146.83 $140,244,674.50
UNH – United Health Group Inc. $176,094,000 $206.59 $123,747,410.00
DE – Deere & Co. $174,282,000 $111.63 $112,288,617.00
WBA – Walgreens Boots Alliance $121,310,000 $46.42 $95,509,150.00
BLK – BlackRock Inc. $110,594,000 $354.72 $78,038,400.00
RLI – RLI Corp. $107,779,000 $73.63 $88,155,137.36
ADI – Analog Devices $101,705,000 $85.08 $72,812,399.88
TXN – Texas Instruments $91,663,000 $97.60 $69,735,200.00
ADP – Automatic Data Processing Inc. $90,484,000 $112.06 $59,470,242.00
JNJ – Johnson & Johnson $89,097,000 $119.89 $73,228,812.00
AAPL – Apple Inc. $88,105,000 $229.24 $68,780,023.40
UL – Unilever PLC $87,333,000 $47.17 $72,056,892.00
GS – Goldman Sachs Group $78,613,000 $138.41 $47,322,379.00
MSFT – Microsoft Corp. $74,847,000 $137.35 $65,189,057.00
LOW – Lowe’s Cos. $69,580,000 $66.36 $38,555,160.00
WSO – Watsco Inc. $69,808,000 $145.71 $56,462,625.00
BX – The Blackstone Group $68,415,000 $37.67 $46,070,410.00
GD – General Dynamics $68,247,000 $113.99 $44,114,130.00
ADM – Archer-Daniels-Midland $67,824,000 $30.61 $44,791,613.00
ANTM – Anthem Inc. $67,655,000 $191.59 $42,916,160.00
MMC – Marsh & McLennan $67,905,000 $79.87 $48,680,765.00
NVO – Novo Nordisk A S $62,221,000 $49.46 $53,169,500.00
MA – Mastercard Inc. $61,465,000 $211.42 $43,520,807.00
AXP – American Express $59,911,000 $74.12 $35,670,250.00
ECL – Ecolab Inc. $59,113,000 $141.88 $43,457,844.00
ITW – Illinois Tool Works $57,302,000 $125.78 $40,123,820.00
BF.A – BROWN FORMAN Inc. A $52,916,000 $45.94 $38,727,420.00
SCHW – Charles Schwab $51,493,000 $30.75 $33,293,025.00
MCO – Moody’s Corp. $49,804,000 $175.80 $36,879,324.00
APO – Apollo Global Management $48,306,000 $26.84 $27,175,500.00
PGR – Progressive Corp. $46,329,000 $68.28 $43,699,200.00
SBUX – Starbucks Corp. $45,689,000 $58.03 $30,156,334.04
NSC – Norfolk Southern Corp. $44,552,000 $123.71 $28,391,445.00
SMG – Scotts Miracle-Gro Co. $44,808,000 $83.53 $35,249,660.00
TRV – Travelers Companies Inc. $43,139,000 $89.51 $28,195,650.00
CAT – Caterpillar Inc. $41,941,000 $95.50 $27,122,000.00
CFX – Colfax Corp. $41,294,000 $16.40 $18,615,148.00
MMM – 3M Co. $40,312,000 $124.89 $28,537,365.00
SPGI – S&P Global Inc. $40,138,000 $208.79 $30,692,130.00
KKR – KKR & Co. L.P. $39,838,000 $19.07 $26,043,899.00
CG – Carlyle Group $38,817,000 $19.39 $23,461,900.00
WHR – Whirlpool Corp. $38,733,000 $74.45 $19,546,028.55
HAS – Hasbro Inc. $38,442,000 $46.10 $16,780,400.00
TROW – T. Rowe Price Group $38,258,000 $90.34 $28,366,760.00
NKE – NIKE Inc. $37,079,000 $67.45 $24,686,700.00
SRCL – Stericycle Inc. $36,244,000 $44.68 $25,378,240.00
MHK – Mohawk Industries $35,595,000 $58.66 $15,310,260.00
MSCI – MSCI Inc. $35,370,000 $243.07 $33,300,590.00
LYV – Live Nation Inc. $34,927,000 $33.97 $16,601,139.00
ACN – Accenture $33,565,000 $149.94 $23,900,436.00
ITIC – Investors Title Co. $33,957,000 $110.90 $23,654,970.00
UTX – United Technologies $33,546,000 $82.53 $18,486,720.00
BF.B – Brown-Forman Corp. $32,055,000 $48.85 $23,164,034.95
TSN – Tyson Foods $32,365,000 $53.62 $19,061,910.00
NVR – NVR Inc. $31,819,000 $2,326.89 $19,441,165.95
BA – Boeing Co. $30,752,000 $95.01 $8,968,944.00
FDS – FactSet Research Systems $31,273,000 $217.98 $25,407,748.80
HEI – HEICO Corp. $30,588,000 $70.20 $23,983,408.80
JPM – JPMorgan Chase & Co. $30,066,000 $83.50 $18,009,280.00
FB – Facebook Inc. $29,390,000 $149.83 $21,454,157.70
ROK – Rockwell Automation Inc. $28,394,000 $126.89 $17,777,289.00
ROL – Rollins Inc. $27,169,000 $35.00 $28,677,250.00
LUV – Southwest Airlines $26,478,000 $31.94 $15,666,570.00
LBRDA – Liberty Broadband Corp. CL A $25,566,000 $87.38 $17,934,745.00
LSXMK – Liberty SiriusXM Series C $25,129,000 $25.48 $13,300,560.00
SEIC – SEI Investments $25,092,000 $38.56 $14,776,192.00
CVS – CVS Health Corp. $24,665,000 $54.70 $18,160,400.00
DAL – Delta Air Lines Inc. $24,386,000 $21.35 $8,902,950.00
PH – Parker-Hannifin $24,411,000 $102.43 $12,148,198.00
CMCSA – Comcast Corp. $23,429,000 $33.37 $17,385,770.00
LBRDK – Liberty Broadband Corp. CL C $21,643,000 $90.67 $15,605,485.71
CHH – Choice Hotels Int. Inc. $20,996,000 $57.67 $11,707,010.00
LSXMA – Liberty Sirius XM Series A $20,593,000 $25.33 $10,790,580.00
LNAGF – Linde AG $20,098,000 $151.30 $14,282,720.00
PEP – PepsiCo Inc. $19,899,000 $103.93 $15,132,208.00
SHW – Sherwin-Williams $18,090,000 $412.70 $12,793,700.00
ATVI – Activision Blizzard Inc. $16,685,000 $52.05 $14,615,640.00
CSCO – Cisco Systems $16,402,000 $35.60 $12,175,200.00
GOOGL – Alphabet Inc. $16,742,000 $1,068.21 $13,352,625.00
MCHP – Microchip Technology $16,651,000 $59.64 $9,482,760.00
MXIM – Maxim Integrated Products $15,501,000 $44.12 $11,118,240.00
EFX – Equifax Inc. $15,063,000 $105.65 $11,357,375.00
UNP – Union Pacific $15,434,000 $117.84 $10,060,000.80
HCSG – Healthcare Services Group $13,947,000 $21.58 $12,376,130.00
HXL – Hexcel Corp. $13,489,000 $32.01 $5,889,840.00
IFF – International Flav/Frag $13,676,000 $102.41 $10,855,460.00
BK – Bank of New York Mellon Corp. $12,784,000 $29.07 $7,383,780.00
EA – Electronic Arts $13,159,000 $86.94 $10,641,456.00
PAYX – Paychex Inc. $12,759,000 $51.97 $7,795,500.00
FWONK – Liberty Media Corp Formula One Series C $11,929,000 $23.00 $5,968,500.00
COST – Costco Co. $11,507,000 $290.42 $11,369,943.00
DLTR – Dollar Tree Inc. $11,578,000 $75.97 $9,351,907.00
AMT – American Tower Corp. $11,078,000 $195.39 $9,417,798.00
VRSK – Verisk Analytics Inc. $11,051,000 $124.25 $9,194,500.00
FWONA – Liberty Media Corp Formula One Series A $10,048,000 $20.85 $4,785,075.00
PM – Philip Morris Intl. $9,743,000 $61.09 $6,994,805.00
CDK – CDK Global Inc. $9,673,000 $30.98 $5,480,269.06
WFC – Wells Fargo $9,415,000 $26.50 $4,637,500.00
MCK – McKesson Corp. $8,728,000 $124.97 $7,885,607.00
AON – Aon Corp. $7,707,000 $149.55 $5,533,350.00
CABO – Cable ONE Inc. $7,740,000 $1,270.76 $6,607,952.00
CCK – Crown Holdings $8,124,000 $46.96 $5,259,520.00
TRU – TransUnion $7,448,000 $54.98 $4,783,260.00
ALB – Albemarle Corp. $5,332,000 $53.43 $3,900,390.00
LBTYA – Liberty Global Inc. $4,070,000 $17.63 $3,155,770.00
OI – O-I Glass Inc. $4,175,000 $5.67 $1,984,500.00
TRUP – Trupanion Inc. $4,120,000 $23.84 $2,622,400.00
DISCA – Discovery Communications Inc. $3,567,000 $18.76 $2,194,920.00
GHC – Graham Holdings Co. $3,323,000 $317.12 $1,649,024.00
PAG – Penske Automotive Group $3,615,000 $22.09 $1,590,480.00
Y – Alleghany Corp. $3,461,000 $467.71 $2,024,248.88
BLL – Ball Corp. $2,716,000 $54.89 $2,305,380.00
AN – AutoNation Inc. $2,120,000 $26.50 $1,155,665.00
KHC – Kraft Heinz Co. $2,185,000 $22.28 $1,515,040.00
WRB – W.R. Berkley Corp. $1,866,000 $47.58 $1,284,660.00
C – Citigroup Inc. $1,623,000 $38.06 $773,379.20
DHI – D.R. Horton $1,654,000 $31.38 $983,668.86
SHAK – Shake Shack Inc. $1,799,000 $34.78 $1,050,356.00
BKNG – Booking Holdings Inc. $411,000 $1,177.43 $235,486.00
BUD – Anheuser-Busch InBev $1,067,000 $40.30 $523,900.00
LEN.B – Lennar Corp. CL B $1,075,000 $25.28 $607,984.00
IAC – IAC/InterActive Corp. $286,000 $130.75 $150,362.50
ILMN – Illumina Inc. $332,000 $242.00 $242,000.00
LEN – Lennar Corp. $329,000 $34.08 $201,072.00
Grand Total $7,202,787,000 $4,952,512,945.77

Buffett Partnership — in Today’s context

The initial piece below in italics is adopted from buffettfaq.com

According to a business week report published in 1999, you were quoted as saying “it’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.” First, would you say the same thing today? Second, since that statement infers that you would invest in smaller companies, other than investing in small-caps, what else would you do differently?

Yes, I would still say the same thing today. In fact, we are still earning those types of returns on some of our smaller investments. The best decade was the 1950s; I was earning 50% plus returns with small amounts of capital. I could do the same thing today with smaller amounts. It would perhaps even be easier to make that much money in today’s environment because information is easier to access.

You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all. A company that I found, Western Insurance Securities, was trading for $3/share when it was earning $20/share!! I tried to buy up as much of it as possible. No one will tell you about these businesses. You have to find them.

Other examples: Genesee Valley Gas, public utility trading at a P/E of 2, GEICO, Union Street Railway of New Bedford selling at $30 when $100/share is sitting in cash, high yield position in 2002. No one will tell you about these ideas, you have to find them.

The answer is still yes today that you can still earn extraordinary returns on smaller amounts of capital. For example, I wouldn’t have had to buy issue after issue of different high yield bonds. Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.

I know more about business and investing today, but my returns have continued to decline since the 50’s. Money gets to be an anchor on performance. At Berkshire’s size, there would be no more than 200 common stocks in the world that we could invest in if we were running a mutual fund or some other kind of investment business.

If you are an investor in a market like India today, would this is applicable to you? What would be the things that would work for you and things that would hinder you…

  • Value investing works everywhere globally however it is the margin of safety that varies across the different region
  • In a country like India, where investor protection is very low, value traps and dubious management are the norm of the day, the statistical bargains  become a whole lot more riskier with the probability of permanent loss of capital increasing
  • The statistical bargains that Buffett talks about relies on two sources of safety — cheapness and concentration like he did in his partnerships. Even with these, it looks tough to create alpha without good investor protection. When one studies the Buffett partnership model carefully, Buffett created alpha through workouts and generals and in some cases, the generals that got  converted into workout e.g. Sanborn maps, Dempster and to some extent Berskhire Hathaway (though history ensured that Berkshire had a different fate) Without the strong investor protection, it is doubtful whether similar situations can be worked out in India
  • Other sources of Margin of Safety like quality, moats, superior business models, management with the backwind of a market like India where alpha has been created over a long period of time might have better probabilities of success. If one were patient and did not worry much about volatility and could handle concentration, the odds of success in the market magnifies several points over. It might be possible to replicate the sort of success Buffett had in India though with different sources of value than he did in the 50’s but it definitely won’t be a walk in the park like Buffett makes it sound.