Envy: An (Un) necessary evil

Warren Buffett has apparently said in jest that out of the seven deadly sins, envy is the worst….because at least we enjoy while committing the other six sins. In case of envy it is only pain and no pleasure.

Despite this, I notice that envy is widespread in our society. Here are a two instances:

  • A client of mine met me last week. I noticed that he was not his usual chirpy self. When I inquired about the reason for his despondency, he explained that he was perturbed to note that while his Portfolio Management Scheme (PMS) Account with our firm had given him a return of 12% over the past year (no mean feat, considering the the broad indices were actually down by 17%). It perplexed me that instead of being ecstatic he was downcast but I soon knew why. Apparently, his friend had invested in another PMS account which also invested in Gold Exchange Traded Funds. Hence his friend had earned a return of 21% on his investment, which apparently gave him bragging rights over my client.
  • Every year once the annual bonus is distributed among colleagues at my company, I always notice a few glum faces. In most cases, they are not glum because they feel shortchanged, but are dejected because a few of their colleagues have received slightly more than them.

How do we deal with this debilitating feeling? While I do not profess to be a psychologist or psychiatrist, here are a few options that work for me. Continue reading

Omaha diary

Warren Buffett describes the meeting of shareholders of Berkshire Hathaway held in the beginning of May each year as ‘Woodstock* for Capitalists’. In a way the description is apt. Just like the crazed music lovers who descended for the original Woodstock, faithful investors numbering to about 40,000 land up in the mid-western American town of Omaha to listen to the jugalbandi of Warren Buffett and his partner Charlie Munger.

* Woodstock was an open air music festival held over three days in 1969 which attracted a crowd of 500,000 enthusiasts.

Woodstock for capitalists

Picture of a section of the Qwest Center hall before the start of the meeting

For any serious investor especially from the value investing school, this is a must do thing at least one time. I had an opportunity to attend the meeting this year and it was an amazing experience.

Continue reading

Berkshire in-the-money on Goldman Sachs

Goldman Sachs posted better than expected results and the share price closed at $ 130.15. The warrants which Buffett purchased for Berkshire are again in the money and the 10% yield on the preferred stock looks heavenly.

Currently Goldman is clamouring to repay the TARP funds received from the US government in the past. Who wants to work under compensation restrictions after all? $ 500,000 (half a million) is hardly anything after all! However there seems to be a catch. The US government may not accept back the funds under the assumption that banks not paying back would be seen as weak.

Will Goldman pay off Berkshire instead? If it were to, Berkshire would make 15% on the preferred for around 6 month holding (including the 10% redemption premium). This would translate to a 30% annualised return. Plus Berkshire would have a free ride on $ 5 billion worth of Goldman stock at a price of $ 115 per share.

The rating agencies have got to be nuts to downgrade Berkshire.

Is this a new bull market or should we sell everything and stay liquid?

I have been harassed by market timing clients lately. All of them want to invest in equities but they want to do it at the market bottom when the economy starts to revive. One of the clients was incredulous (20 to 25 days back) when I said that I was fully invested. He said “Come on don’t be ridiculous, everyone knows that the economy will be in a bad shape for some time to come and markets will come down”. Now he is in a dilemma. Markets have run up 25% and he has been selling all this while. His question now is should he sell more or should he buy so as to not miss out. I wish I had an answer.

Warren Buffett wrote the following in his 2008 letter to Berkshire shareholders.

“Neither Charlie Munger, my partner in running Berkshire, nor I can predict the winning and losing years in advance. (In our usual opinionated view, we don’t think anyone else can either.) We’re certain, for example, that the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”

That got me to look at some past recessions (as usual, the US data is more readily available than Indian data). Here is a link to an excellent post on how long recessions have lasted and how markets have done in those recessions. 

http://seekingalpha.com/article/108810-how-long-will-the-recession-last-and-how-will-the-market-perform

In 8 out of the 14 recessions in the US a new bull market started well before the recession ended. 

Let us look at India and a financial crisis that India was facing in 1991. India had to sell 20 tonnes of gold in May 1991 and to pledge another 47 tonnes in July 1991 to raise foreign exchange to meet its import needs. (Please bear in mind that Dr. Manmohan Singh had not yet achieved the rock star status. There were questions regarding the survival of the government and of the country itself). So what did the stock markets do during this time? Crash? Hardly. The BSE Sensex rose from just under 1,000 on January 1, 1991 (999.26 to be precise) to 1275.23 on July 1, 1991, a gain of 27.5% !!!

This is not to say that we are definitely in a bull market or that share prices can only go up. If I could predict the weekly and monthly market movements, why would I work at all? I would be owning an island somewhere and chilling out, just buying when an upmove was about to begin and selling out when the downward trend was about to start.

As individual investors and as investment managers all that we can do is to select good businesses at attractive valuations to invest in and then let the businesses prosper over the long run. In the interim if Mr. Market overvalues those businesses significantly, we use the opportunity to sell. There is no exercise as futile as trying to predict the markets, economy or election outcomes.

(PS – BSE Sensex was at 1957.33 on January 1, 1992, an increase of more than 95% over the level of January 1, 1991. So much for predictability)