Peepal Capital

The failure to beat the index is one of the core messages I have seen in the first few letters of Warren Buffett. This is a very difficult thing to do on a consistent basis. Kenneth Andrade is one of the popular fund managers in India. I believe he did a spectacular job managing a mutual fund. I have only heard and not seen the numbers. But I go by what others tell me. Today in multiple groups I received his August 2019 update. And it reaffirms how difficult it is to beat the index.  His Old Bridge All Cap fund has as good as a fixed deposit unfortunately. I hope his picks give his investors the alpha they have been looking for. Few years ago I had reached out to the company inquiring whether they could manage my money. Luckily they were not taking more money. Kenneth has a nice point in his letter which goes as A thought does cross the mind – was I really lucky in my journey as a portfolio manager between 2003 - 15. In the last 20 years, I had never to explain and then de

It's worth reminding ourselves that bull markets don't last forever and that patience is required on both sides. The typical winner in the Lynch portfolio takes 3 to 10 years to play out. Stock price is the least useful information but it is the most widely tracked. On the internet companies Lynch says that few companies will dominate the area. Shareholders in these triumphant companies will prosper, while shareholders in the laggards, the has-beens, and the should-have-beens will lose money. Whenever you invest in a company you are looking for its market capitalization to rise. When looking at a company who has say a 100 or a 200 PE look at what it revenues need to be at say a 40 PE. Then see whether that revenue exists today for a company or not. It will be rare that such an enormous amount of revenue will be generated by some company. On internet businesses he says there are 3 ways to invest in this theme - First is the 'pick and shovels' method. In the gol

1962 Semi-annual 1 Lot of details on operational aspects of the partnership are mentioned. These semi-annual letters in my opinion are not timely, some are written in July and some the next year in January. I can overlook this for the sheer quality of ideas which Warren Buffett shares. The Dow was down this year till the time the letter was written. Buffett's investment in Dempster has been paying off with prompt sale of its assets. I think in the early years Buffett focused a lot on such opportunities wherein he could buy a company cheap strip its assets of and sell them at fair value and make money. Dempster is just one case. Though the index was in red the partnership was in green with close to 22.3% point advantage. 40% of its overall gain was because of only Dempster. Buffett importantly highlights that  such results are distinctly abnormal and will recur infrequently, if at all. Again he reemphasizes that in a good year for Dow he will look bad by saying ' If t

1961 Semi-annual 2 Buffett talks about him not losing as much as the index in the bad years and appearing average in good years. This time he gives a numerical target. He says that for every 1% drop in the Dow he should lose only 1/2%. That is an ambitious target. Roughly his fund should have 0.5 portfolio beta? He does perform fabulously well. DJIA is down 21.7% but his partnership is down only 7.5%. 6 month or even a year is too short a time frame to judge investor performance he says again. Buffett says that the Dow is no pushover. Whenever people will beat the Dow it will most likely be a poorer performance than a superior one he says. This is true today too seeing most active fund managers failing to beat the marquee index. Not much content in terms of investment knowledge in this letter. I think there should be only letter a year.

1961 Semi-annual 1 I have lost count of the times Buffett says that he will look good in a down market and bad or average in an up market. Despite 1961 being a good year for both the general markets and his fund he holds onto his view above. He actually beats the DJIA by 23% odd! This letter marks 5 years of compounding. His fund has a staggering 251% vs 75% of the index. He again highlights how tough it is to beat the index. He quotes a result of 32/38 mutual funds losing to DJIA and 6 who were ahead were only by a few percentage points. I think in the Indian context the story is the same. Though we do not have index funds (of such popularity) I think they could be the real deal of the future. Buffett again explains his methodologies which is divided into three types of investments Generals - Buying undervalued securities Work Outs - Where he can unlock some value with some corporate action Controls - Where Buffett can have a say in running the operations of the company

1960 Semi-annual 2 Buffett says that 6 months or even 1 year is too short a time frame for measuring performance. His personal view is that a 5 year is an appropriate period. He reiterates that his fund will under perform in a bull market. Very important quote -  Our holdings, which I always believe to be on the conservative side compared to general portfolios, tend to grow more conservative as the general market level rises. At all times, I attempt to have a portion of our portfolio in securities as least partially insulated from the behavior of the market, and this portion should increase as the market rises. However appetizing results for even the amateur cook (and perhaps particularly the amateur), we find that more of our portfolio is not on the stove. Provisions of combining all the 6 partnerships makes a mention in this letter. Not that there is a learning for me here. He and his wife hold maximum stake in the combined entity, minimum investment is a paltry $25,000. Not

1960 Semi-annual 1 The letters now have become 2 in a year. Not sure for long this will continue. Buffett reemphasizes that the DJIA couldn't be beaten by even 10% of the stocks a year ago. I think he has been pro Index Investing since eternity. History now makes sense to me on this subject. In 1960 the DJIA declined but more stocks lost than won. He is curt in saying that if the partnerships don't perform better than the index i.e. DJIA there is no reason for the partnerships to exist. Like this approach. Buffett always has said it is better that his funds hold or lose little value in a declining market that gain disproportionately in an upward market. Love this approach. I find it conservative and cautious too. He talks a lot about details of his partnerships. More related to operational issues. These can be avoided. The first case study:  Sanborn Map The investment mentioned in the previous 1959 letter which took 35% of the portfolio value was that in Sanborn Map

One of the key drivers of value accretion is ROIC. Value is only created when a firm generates cash flows at rates of return which is greater than its cost of capital. Else value is destroyed. A derivative of this principle is that any firm activity which does not increase cash flows (at rates greater than the cost of capital) does not increase value. Value is more sensitive to ROICs than growth rates. Different industries have different dynamics of ROIC. If ROIC is negative and the company grows its top line that actually results in value destruction. McKinsey did a study of 5000 companies from 1963 to 2007 of ROICs of various industries. I being an average investor would strictly avoid some of the industries. I have luckily done so. Diagrams: Courtesy McKinsey

1959 The DJIA made progress but there were more stocks in the red on the NYSE than in green. Buffett is skeptical of the levels of stock markets. He says the blue chips have a substantial speculative component in their pricing with a corresponding risk of loss. He reflects that there could be other standards of valuations which is evolving but he doesn't think so finally. He is happy to face penalties of over conservatism than face permanent loss of capital. He calls this 'New Era' of investing as a philosophy where trees grow to the skies. All his 6 partnerships were in profit and the only operating expense he has is the Nebraska tax of 0.4%. This looks extremely small. In 1958 he invested in a Work Out which now is 35% of the portfolio. This investment is itself invested in 30 to 40 other high quality securities. Rest of the portfolio is in undervalued and some work out operations. He is confident that his overall portfolio will lead to superior results in bear

1958 Buffett says that there is  exuberance  in the markets. Any reason is used to justify high valuations. He aptly says that the duration of the stay of  mercurially  tempered people in the market will be as long as profits can be made quickly and effortlessly. I am assuming he thinks that value investing is the only way of making money which I humbly disagree. If the mercurial people are making money by say trend following then so be it. But being a master of one's own domain is what matters and I assume he is the master of masters in his. He reiterates that he chooses not to make any kind of forecasts. Even if price correction happens which undoubtedly will one day intrinsic value will not be lost. In his Work Outs i.e. Special Situation investing of 1957 the price had remained constant and he had build up position in the stock. He discloses the company name a bank. But the key point is that he perhaps holds no position in the stock at the time of writing the 1958 le

1957 Though Buffett says this is the second letter I think this is the first which is actually a 'letter'. I don't know if a 1956 letter exists or not but I believe that it would have been an inaugural letter to all the partners. Nevertheless going into what matters most, his ideas. When the general market is priced above intrinsic value then there is a greater chance of decline in stock prices. This decline effects  all  stocks whether they are undervalued or not.  If the market is overvalued currently think about 5 years down the line with what probability you will look back and say the market was valued to its intrinsic levels. Buffett talks about two segregation in his portfolios. First he calls  General Issues  and the second he calls  Work Outs . General Issues are the ones which is a standard equity investment in the business for growth basis fair valuations (I think in these years he was focusing only on undervalued stocks). Work Outs are investments w