A few years back i became interested in moser baer. This company seemed (on the face of it ) to be doing very well. It was getting into a product (CD) which was growing fast. The margins were great. The return on capital was high. The valuation looked great.
But then digging deeper, there were a few things which troubled
– was the depreciation enough to take care of the rate of obselence of the Fixed assets in the fast changing memory business
– how would the margins behave when 1) growth slowed down 2) the price deflation continued and accelerated ( memory prices have dropped by factor of 10 in the last 3-4 years )
– the business seems to be needing regular equity infusion for growth (maybe not important if the business is in high growth phase )
I was looking at the latest results and inspite of the topline growth the margins seem to be dropping. In addittion CD/DVD are getting cheaper by the month. so there is going to a constant pressure on margins. End of the day, it is a commodity business where the price of the product just keeps dropping. In addition , any new memory would require new captial equipment and hence more capital ( especially if it is a new technology )
So the business looks profitable , but if one looks closely ,the money coming out has a mirage like feel …you can see it , but never touch it
Charlie munger – Wesco meeting 2005
I was reading the transcipts of the meeting on fool.com . There were several comments from munger which really impressed me.
– He referred to a “seamless web of deserved trust” which is necessary to run any large coporation. This is a profound idea. how companies in india work this way ?
– he talked out currency trading being a zero sum game. he would prefer equity where it is not a zero sum game
– he talked about lowering return expectations in the current environment. Annhieser busch could that example. A certain investment with lower return. This is important. Better to be sure of lower returns that optimisitic of fantastic results
Found the Q&A really fantastic.
Warren Buffett’s talk with students at Tuck school of business
I came across a transcript buffett’s talk with the students at Tuck school of business. I have pasted the link below. What i found intersting (actually the entire talk was very interesting) were the replies to the following two questions
Q: I have worked in various technologies businesses, but I understand that you do not typically invest in the technology sector. Why is that? How do you view technology as an individual and as an investor?
A: Technology is clearly a boost to business productivity and a driver of better consumer products and the like, so as an individual I have a high appreciation for the power of technology. I have avoided technology sectors as an investor because in general I don’t have a solid grasp of what differentiates many technology companies. I don’t know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don’t overpay for them. Technology is based on change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles.
Q: I worked in the paper and packaging business this past summer and really enjoyed my experience. None of my classmates are interested in the paper business and the company I worked for has not had MBA interns in years. Clearly the paper business has its challenges, but do you see this as an opportunity or a roadblock?
A: Well, you’ve got it right that the paper business is challenged. High capital intensity, low margins, cyclical. It is a brutal business; no one cares who made the box their Dell computer came shipped in. In general, commodity businesses, even you’re the low-cost producer, are difficult. There are generally two recommendations I offer to college and business school graduates. The most important thing about where you work is that you admire/love it. So it sounds like you liked your experience, and that’s great. But we come to my second recommendation, which is to get on the right train; that is, moving in the right direction. There’s no course in business school called “Getting on the Right Train”, but it’s really important. You can be an average passenger but if you get on the right train it will carry you a long way. You want to learn from experience, but you want to learn from other people’s experience when you can. Managing your career is like investing – the degree of difficulty does not count. So you can save yourself money and pain by getting on the right train.
So makes one think, how will some of the current ‘performers’ like maruti, tisco, telco and others will perform in the long run. Some of these have high return on equity, but is it sustainable over a complete business cycle
here’s the link :http://mba.tuck.dartmouth.edu/pages/clubs/investment/WarrenBuffet.html
BRK buys Annhieser Busch (BUD)
Looks like a typical buffett move. A company with strong brands such as Budwieser, oligopolistic industry , very high Return on equity for the company, strong distribution, a product / business model which will not change (who is going to stop drinking beer ??) and hence predicable.
seems the only disadvantage is the mcap of the company is small so BRK cannot take a very big position