The undisputed Heavy Weight Champion of Investment

As far as I am concerned, the stock market doesnt exist. It is there only as reference to see if anybody is offering to do anything foolish Warren Buffet Is seems ridiculous but the undisputed heavyweight investment champion of the world has been Warren Buffet. His coups on the stock markets have made him a legend: in 1964, American Express collapsed to $35 a share from a previous year high of $62. At a time when the general janata speculated the worst about the company, Buffet, only 34, had started building his position. His rationale was simple: That the companys dealing in credit cards and travel services would survive unscathed the scandal afflicting AmEX, and that the companys brand name would survive the short term. His foresight was vindicated: within five years the AmEx stock had climbed to nearly $90. Buffet picked up a vast chunk of shares in The Washington Post in 1973. Eleven years and a whopping dividend warrants later, the holding had swollen to 18.68 lakh shares at an average cost of $5.69 a share in 1985, The Washington Post reverted to Buffet with an offer: they anted to buy back 14.27 lakh shares at $112 each. Take Geico Corporation as an example. Buffet got interested when the company was teetering on the edge: he picked up nearly 13 lakh shares at an average price of $3.18 a share. By 1980, Buffet has got substantially wooed: the stake has shot up to nearly 72 lakh shares at around $6.55 a share. Within three years, Geico Corporation was petitioning Buffet to be sold back 3.5 lakh shares of itself at $60 a share. Peter Lynch, generally accepted as the guru of Wall Street, conceded Buffets eye for a stock. He is the greatest investor of all time, Lynch said. Professor Paul Samuelson, recipient of Nobel Prize for economics, was typically restrained: an investment genius he proclaimed.

The best part is that to be master of one of the riskiest forms of making money, Buffet has distanced himself from it. Instead of juggling with big numbers from Wall Street, he makes his investments from Omaha in cattle country. What would normally have been written off as a drawback, Buffet feels, has been his advantage. The distance has given him a long term perspective of the stocks. The fringe benefits have been as precious; he has had his peace of mind, lives quietly, is shy about seeing himself on the front pages of glossies, tap dances his way to work each morning and for a man who has walked his way into Forbes 400 exclusively on the strength of his investments, his only concession to outward wealth is a personal aircraft. He felt so awkward enough owning it that he called it The Indefensible. There is an amazing aura about this man. Corporate executives who find Buffets name on their shareholders ledger start buying into their companys stocks themselves; his annual speech to shareholders is a widely circulated thesis on investments, so much so that it is mailed to anyone who asks for it; a stock in his investment firm of Berkshire Hathaway worth only $7 in the sixties ,would cost

$119,850.00USD ( 60 lakhs per share) ; makes only a couple

of investment decisions a year on average. For a man who is probably the second richest in America, Buffet intends to give away ALL his money to society when he dies. Buffets 40% stake in Berkshire Hathaway puts his portfolio at more than $44.4

Billion.

Buffets has been an interesting career. As a 20-year-old in 1950, he applied to join the Harvard Business School. He was rejected. Disappointed, he returned to Omaha but was surprised to find that his investment guru Benjamin Graham actually lectured at Columbias business school. Thats where he enrolled. At the end of the school, the awestruck Buffet applied to Graham for a job at the latters investment company but got a rejection slip instead. In 1954, Graham finally consented and two years later, Buffet embarked on putting some of his assembled theories into practice. Getting together $105,000 from acquaintances, he started the Buffet Partnership. The

arrangement was simple; the contributors were entitled to share 75% of the profits: Buffet picked up the rest. The mutual fund took off. The partnership grew thirty times in its value per unit with a pre-tax compound gain per unit of 30 percent a year. Gradually, 90 members were added and the Buffet Partnership , which had started out with a bare tenth of a million dollars , was now worth $100 million. Buffets personal holding had jumped in value to $25 million. In 1969, when the market was booming and most mutual fund managers were insisting on fresh investments, Buffet surprised. He dissolved the partnership. I am out of steps with the present conditions, he explained to his partners. When the game is no longer played your way, it is only human to say that the new approach is all wrong. Bound to lead to trouble..I will not abandon a previous approach whose logic I understand (although I find it difficult to apply),even though it may mean foregoing large, and apparently easy profits to embrace an approach which I dont fully understand ,have not practiced successfully, and which possibly could lead to permanent loss of capital. Buffets mantra was simple; he fished around for stocks quoted considerably below their intrinsic worth, instead of pursuing climbers because they were expected to rise higher. The accounting check-list was straight forward: he preferred stocks with a debt/equity ratio of below one; those with a current ratio of above two; a stock that was priced two-thirds of its book value; a stock that had a current P/E ratio that was less than 40% of its highest P/E in the previous five years and a share that sold in the market for no more than two-thirds of its net current assets. This, Buffet simplified, was an interplay of just two variables: price and value. Sounds easy to become one of the richest men in your land. Until you try it.

Adapted from the SAPM Lecture series of Prof. Uday Damodaran, XLRI,Jamshedpur