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Wit, Wisdom, Warren (Issue #4): Value Unlocking

Last week, I reviewed lessons from Warren Buffett’s 1959 letter to partners of Buffett Partnership.

Today, I review the letter for 1960.

This is going to be a long-long review given the amazing number of ideas I could cull out from the letter, so make yourself comfortable before you start reading it.

Lessons in beating the street
The US stock market as represented by the Dow Jones Industrial Average (DJIA) declined in 1960, after strong gains in the previous two years. Including dividends, the DJIA fell by almost 6% during the year.

Buffett’s seven partnerships (up from six in 1959) gained around 23%, thereby again outperforming the broader market by a decent margin.

In the 1960 letter, Buffett reiterated his objective…

My continual objective in managing partnership funds is to achieve a long-term performance record superior to that of the Industrial Average. I believe this Average, over a period of years, will more or less parallel the results of leading investment companies. Unless we do achieve this superior performance there is no reason for existence of the partnerships.

However, I have pointed out that any superior record which we might accomplish should not be expected to be evidenced by a relatively constant advantage in performance compared to the Average. Rather it is likely that if such an advantage is achieved, it will be through better-than-average performance in stable or declining markets and average, or perhaps even poorer-than-average performance in rising markets.

I would consider a year in which we declined 15% and the Average 30% to be much superior to a year when both we and the Average advanced 20%. Over a period of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur. The important thing is to be beating par; a four on a par three hole is not as good as a five on a par five hole and it is unrealistic to assume we are not going to have our share of both par three’s and par five’s.

A few lessons can be gained from these notes:

1. Set performance standards in advance and then follow them: As we read in the review of Buffett’s 1957 letter, he had set a standard of outperforming the market by 10% per annum over the long term.

Setting your own long-term return target will also make your task simpler as against accepting whatever return you earn and then using that as a benchmark. This way, you will see a strong year (when your portfolio advances by say 25%) as just an aberration like you will see a weak year (when you are down -20%).

The important thing to do is to start with a reasonable standard (like I want to beat the Sensex by 8-10% annually over the long run) and then try to meet it over a period of time. This will keep you focused. Of course, the standard has to be reasonable and you can’t expect to be beating the market year after year, especially during periods of mania.

2. Direct investing versus mutual fund investing: A lot of investors enter directly into stocks expecting to “do well” in the long run. Doing well isn’t enough when you are working hard to identify great businesses and then taking the risk of putting your money where your faith is.

Of course, your foremost target must not be to earn supersized returns from your overall investments. You must only target a return that can help you meet your financial objectives (like Graham’s “adequate return” as per his definition of investment).

But when it comes to stock picking, you either target outperforming the market or else give your savings to a smart fund manager who can beat the market on your behalf (and consistently over the long run).

As Buffett writes in the letter, the important thing is to be beating par (index), and especially in down markets.

There is a simple criterion I suggest people just starting out in stock picking – check your direct equity returns over five years. If you can outperform the benchmark and most good mutual funds, continue to pick stocks. Otherwise just give your money to a fund manager (of course, a majority of fund managers are a joke, but then you can always find a smart guy with some hard work).

There’s no point running on a treadmill – investments that don’t go anywhere – where you will be worse off the longer you stay.

Buffett advises something similar to his partners…

Unless we do achieve this superior performance there is no reason for existence of the partnerships.

I’m not sure how many investors and mutual fund managers are so honest with themselves and their clients respectively.

3. Good years and bad years: Stock market does not move in a straight line. There are good years, there are bad years, and they follow each other. Of course for people who started investing in 2008, there are only bad years, but even they need to understand that law of averages work very well in the stock market.

Here’s a quote from Horace that Benjamin Graham used for the foreword of the first edition of Security Analysis, and which summarises what Buffett mentioned about good and bad years above – “Many shall be restored that now are fallen and many shall fall that now are in honor.”

Thus the target for you, the value investor, must not be to earn great returns year after year. Rather, your target must be to do better than the average market in a bad year (like 2008) and do at par with the market in a good year (like 2009).

To reiterate what Buffett wrote in the 1960 letter…

I would consider a year in which we declined 15% and the Average 30% to be much superior to a year when both we and the Average advanced 20%. Over a period of time there are going to be good and bad years; there is nothing to be gained by getting enthused or depressed about the sequence in which they occur.

For the long term, however, you must set a standard return target (which should be better than what the market could earn), and then work towards meeting it.

Like Buffett was working towards beating the US market, especially in the bad years (like 1957 and 1960)…


Data Source: Buffett’s 1960 Letter

This is where the real importance of value investing lies for you – buying sustainable businesses at margin of safety so that you reduce your chances of permanent loss of capital, even in bad markets.

4. Conventional investing vs. conservative investing: Buffett wrote…

Although four years is entirely too short a period from which to make deductions, what evidence there is points toward confirming the proposition that our results should be relatively better in moderately declining or static markets.

To the extent that this is true, it indicates that our portfolio may be more conservatively, although decidedly less conventionally, invested than if we owned “blue-chip” securities. During a strongly rising market for the latter, we might have real difficulty in matching their performance.

Buffett described “conventional investing” as buying blue-chip stocks – ones that are generally traded at rich valuations as compared to non-blue-chip, and despite this fact, are considered as safe havens.


Data Source: Ace Equity

For Buffett, safety of an investment always negatively correlates with the valuation an investor pays for stocks. So a higher valuation as compared to intrinsic value means lower safety (what if things go wrong?) and a lower valuation equates with greater safety.

Thus, Buffett was happy investing in a “conservative” manner, i.e., focusing his sights on non-blue-chip stocks that traded at reasonable to cheap valuations – ones that had large margin of safety attached to them (we’ll study a case below).

This was classic Benjamin Graham, as Buffett was then 100% Graham (only later did he call himself 85% Graham and 15% Philip Fisher).

The art of “value unlocking”: Sanborn Map
In the 1960 letter, Buffett talked extensively about his investment in Sanborn Map, a map-publishing company. Sanborn Map formed a huge 35% of Buffett’s assets, and he presented it as a case study in value unlocking.

Sanborn was a Graham-style investment for Buffett. On the nature of this business, this is what he recognized…

For seventy-five years the business operated in a more or less monopolistic manner, with profits realized in every year accompanied by almost complete immunity to recession and lack of need for any sales effort.

Buffett also gave an historical perspective on Sanborn, wherein he mentioned that the company’s once-lucrative core business of map publishing declined starting 1950s (driven by a new and competitive method that made inroads into the company’s territory).

The impact on Sanborn was so much that it, as Buffett wrote, “…amounted to an almost complete elimination of what had been sizable, stable earning power”. Its net profit of US$ 500,000 in the late 1930s declined to less than US$ 100,000 by late 1950s.


Source

Then, Buffett added…

However, during the early 1930’s Sanborn had begun to accumulate an investment portfolio. There were no capital requirements to the business so that any retained earnings could be devoted to this project. Over a period of time, about $2.5 million was invested, roughly half in bonds and half in stocks. Thus, in the last decade particularly, the investment portfolio blossomed while the operating map business wilted.

In other words, while Sanborn’s core business was declining, the company was gradually adding to its investment portfolio, which at the end of 1959 was about a size of US$ 2.5 million (at cost).

On a market value basis, the investment portfolio was valued at US$ 65 per share (up from US$ 20 per share in 1938) as compared to Sanborn’s stock price of US$ 45 per share (down from US$ 110 per share in 1938).

Effectively, in 1938, Sanborn’s core mapping business was selling at US$ 90 per share (US$ 110 of stock price minus US$ 20 per share of investment portfolio). Against this, by 1958, the core business was valued at US$ -20 (US$ 45 of stock price minus US$ 65 per share of investment portfolio)!


Source: Buffett’s 1960 Letter

This raised Buffett’s interest in the company, as he saw a great margin of safety in it.

His basic assumption was that, despite the decline in business profits (Sanborn was still profitable then, and the business still exists in 2012 to provide mapping services to the US insurance industry)…

…Sanborn in 1958 still possessed a wealth of information of substantial value to the insurance industry. To reproduce the detailed information they had gathered over the years would have cost tens of millions of dollars.”

In effect, for a business that was selling at around US$ 4.7 million of market cap (US$ 45 x 105,000 shares), Buffett’s replacement value was around “tens of millions of dollars”!

Seeing this anomaly, he bought Sanborn’s stock throughout 1958 and 1959. As Roger Lowerstein mentions in his biography of Buffett – Buffett: The Making of an American Capitalist – the master investor was trusting in Graham’s testimony – sooner or later a stock would rise to value.

But it didn’t!

As Buffett wrote…

The very fact that the investment portfolio had done so well served to minimize in the eyes of most directors the need for rejuvenation of the map business.

This was a clear case of idiots running a good (cash generating) business.

Buffett was appalled at seeing that the company’s 14 directors combined held just 46 shares of stock out of 105,000 shares outstanding. In effect, these top men had no interest in seeing the value of Sanborn’s stock rise and thus were not interested in improving the company’s core earning power.

What is more, while the company was cutting back on its dividends due to declining profits, the salaries and other payments made to the directors were not cut.

Anyways, in a true Graham style, Buffett accumulated Sanborn’s shares by buying the stake of a deceased director, who was holding 15,000 shares in the company. Then, aided by his open market purchases, Buffett came to own a large stake in the company, became a director, and then lobbied the management to unlock the value in the investment portfolio.

His idea was to…

…separate the two businesses, realize the fair value of the investment portfolio and work to re-establish the earning power of the map business. There appeared to be a real opportunity to multiply map profits through utilization of Sanborn’s wealth of raw material in conjunction with electronic means of converting this data to the most usable form for the customer.

A control position added massively to Buffett’s margin of safety, which was already there in terms of the company’s stock valuation being low as compared to its investment portfolio.

After the initial opposition to Buffett’s plan of unlocking value of the investment portfolio, Sanborn’s management capitulated in 1960.

Buffett unlocked Sanborn’s value by separating the investment portfolio into a separate unit, sold the investments at fair value, and then distributed the investments among the company’s shareholders (including himself).

Effectively, he bought a wallet with US$ 100 in it for US$ 70, and not only got to keep the money, but also sell the wallet!

Buffett did all this quickly after coming on board because a large portion of Sanborn’s money was tied up in blue-chip stocks, which Buffett didn’t care for at then prices (as we discussed above).

In all, as per Lowenstein’s book, Buffett made a quick 50% profit on his investment in Sanborn.

This sharp profit in a short time and on a large proportion of his portfolio was the reason Buffett earned a market-beating return for his partnerships in 1960.

But he was quick to point out that Sanborn’s case showed…

…the futility of measuring our results over a short span of time such as a year. Such control situations may occur very infrequently. Our bread-and-butter business is buying undervalued securities and selling when the undervaluation is corrected along with investment in special situations where the profit is dependent on corporate rather than market action.

To the extent that partnership funds continue to grow, it is possible that more opportunities will be available in “control situations.”

In other words, while Buffett was always willing to take advantage of special situations (like Sanborn’s value unlocking) when they arose, he was at heart an investor who preferred to buy undervalued securities and sell when the undervaluation was corrected.

By the way, an interesting insight that initially missed my eye was Buffett’s understanding of “technology”, which he has otherwise claimed that he does not understand. 🙂

This is what Buffett wrote of the future prospects of Sanborn’s mapping business…

There appeared to be a real opportunity to multiply map profits through utilization of Sanborn’s wealth of raw material in conjunction with electronic means of converting this data to the most usable form for the customer.

If that’s not a sharp understanding of the future of technology, than what is it?

Investing heavily in your best ideas
While this may be a scary choice to make – concentrating your investments in a few stocks – that is what the young Buffett was doing in 1960s.

Sanborn, for instance, formed about 35% of Buffett’s portfolio in 1960. Plus it was a small company with an illiquid stock (just 105,000 shares outstanding).

Despite these attributes that can scare any investor, Buffett saw a great opportunity and invested heavily in Sanborn. He later did the same thing with See’s Candy in the 1970s.

Let’s me be clear here. I am not suggesting that you put 30-40% of your money in any one stock or investment. However, if you really believe in an idea, you may be willing to take it to around 10-15% of your portfolio.

Too many people over-diversify – allocating the same amount of money to their best ideas as to their worst ones. But then, as they say, “Concentrate to grow your wealth and diversify to preserve it.”

In fact, one of Buffett’s most ardent followers, Mohnish Pabrai discusses the importance of making big bets infrequently in his book The Dhandho Investor.

So while you may buy a number of stocks for your portfolio, it pays in the long run to put most of your money in your best ideas.

“But I am no Buffett!”
You might wonder – “Buffett was able to unlock value in Sanborn simply because he earned a seat on the board and then spun off the investment portfolio. I can’t buy enough shares to get on the board of a company that I think holds a value unlocking potential! So how could I profit like Buffett did?”

Well, what if I say that you are more empowered than Buffett of 1960?

Yes it’s true! The Information Age empowers you, dear investor.

If you can find a value unlocking potential like Sanborn (though it’s difficult to find such a bargain in a period when information spreads so fast…but just in case), all you need to do is own the stock and then spread the word around.

Sure, nobody may notice your analysis or even care about it at first, but then have faith in what Graham said, “Sooner or later a stock would rise to value.”

As long as your intention is not to find a greater fool to unload your junk upon (which means you are not trying to create a fake market in a junk stock), go out and tell the world about your analysis (like you may share it on the Safal Niveshak Forum :-)).

Your (genuine) story will spread, sooner than later. That will lead to value unlocking.

There have been several cases of value unlocking in India that have earned investors a good amount of money – Bajaj Auto, Cadila Healthcare, Eicher Motors, Zee Telefilms, and Piramal Healthcare are some prominent names that come to mind.

So there’s a potential to earn good returns in this space of value unlocking through special situations. I am no expert in this space, but am really looking forward to learn more (to add to my limited circle of competence).

Next Friday, I will review Buffett’s 1961 letter to partners, which you can read here.

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. hmmm………will make my nite, good nite by reading it

  2. completed reading, truly speaking i dont understand what buffett wrote in his letters but the way you explain it makes me realize how great are his thoughts and thats the only reason his company share price is more than 100,000

    yours thankfully

  3. lessons i learnt from this article:-

    1. Set performance standards in advance and then follow them
    I think i am not eligible for this point as i am just 5month old baby in equity but surely will follow it when i will be experienced enough but i play game on investing to keep track of my watch list, so there i can set such performance standards and follow them

    2. Direct investing versus mutual fund investing
    I may not go along well with this, as my father always invested directly and i have read about lots of havoc in mutual funds. I dont want to be rich like warren buffett but i want to learn the art of investing so i think its better to invest directly & learn from mistakes if it happens

    3. Good years and bad years
    i have just seen bad month (may) and good month (sept) this year till now, but i have read alot about history market crashes through many valuable blogs like safal niveshak (i am very thankful to all these blogs which provides so good quality knowledge about investing to small investors) & then searching more on internet. What i learnt is a running bull always fell prey to a hunting bear due to public sentiments & over valuations
    The current situation is the same, market is flying high on bulls fake wings. The government have just announced policies & people started over valuing it without result based performance. i hope the bull race will turn into market crash in few years & i hope all value investors are waiting for it.
    The government have announced policies to please investors,foreign investment started flowing leading to flying market and even increasing public sentiments to over predict market. The interest rates have started coming down bit & are expected to go down more resulting in increase in realty prices (note today mostly all realty sector share price increased). There are even lots of concerns about global crisis and rising inflation
    “HISTORY REPEATS EITHER IN SAME OR DIFFERENT RHYME”
    I hope all tribesmen are value investor so we are waiting for market crash & are not scared of any bull fly or hunting bear as we have paid true value for our share of business 🙂

    4. The art of “value unlocking”
    The same art is followed by stock operators to increase & decrease price of there fav shares (i doubt tulip telecom sudden rise & fall)
    but we all will use this idea to share investment ideas and hopefully to bring true value to our under valued investments
    i will surely put my investment ideas on forum & hope it will bring true values to those investment through it 🙂

    Yours Thankfully

  4. “Concentrate to grow your wealth and diversify to preserve it.” This is a forceful one for me. One sees discipline and rigour which make him what he is.

  5. Anil Kumar Tulsiram says:

    Hi Vishal

    I eagerly wait for Friday and the first thing I do is to read your thoughts on Warren Buffet letter to shareholder. Sanjay Bakshi was right when he said “Read one letter a day” to understand and digest fully the ideas contain in Buffet letters. For long I am trying to reconcile many of the buffet ideas with what other great investors has suggested and try to pick which suits my personality. Here are my thoughts on some of the ideas contain in this newsletter and I want to discuss 2-3 thoughts separately ( To be frank, I still do not know which one is better or what I know is for the time being I am more comfortable with these ideas, may be after gaining few more years of experience I may switch to Buffet ideas). But I do believe that many of his ideas may be biased by the fact that in majority of the situation he invests as a control investor and what works for a control investor may not work for a passive minority shareholder.

    Set performance standards in advance and then follow them: I am more influenced by what Seth Klarman said in his book in “Margin of Safety”. He says focus on risk rather than setting any return (even a reasonable one) for yourself or setting a benchmark. For the time being what I do ( or to be more correct trying to do) is to simply focus on whether over next 3-5 years, can I get more than 8% return from a particular return and if yes, I go ahead and invest it, without bothering whether I will beat the index or not or even without having any overall return in mind. Because if over a period of 30 years one can earn 2% extra return difference will be substantial ( for an investment of 1,000, @ 8% it grow to 10K vs 17.5K at 10%) It’s easy said then done. I also maintain a list of stocks which I rejected and currently the stocks which I have rejected have increased 18% compared to my own return of 9% and its really difficult to see your portfolio under-performing. But I could not get the same confidence on other stocks. So yes sometimes I do feel let down, but currently more concerned about safety of my principal than return. Let me reproduce the exact para from his book, than trying to explain in my own words.

    “Many investors mistakenly establish an investment goal of achieving a specific rate of return. Setting a goal, unfortunately, does not make that return achievable. Indeed, no matter what the goal, it may be out of reach. Stating that you want to earn, say, 15 percent a year, does not tell you a thing about how to achieve it. Investment returns are not a direct function of how long or hard you work or how much you wish to earn. A ditch digger can work an hour of overtime for extra pay, and a piece worker earns more the more he or she produces. An investor cannot decide to think harder or put in overtime in order to achieve a higher return. All an investor can do is follow a consistently disciplined and rigorous approach; over time the returns will come. Targeting investment returns leads investors to focus on upside potential rather than on downside risk.
    Rather than targeting a desired rate of return, even an eminently reasonable one, investors should target risk. Treasury bills are the closest thing to a riskless investment; hence the interest rate on Treasury bills is considered the risk-free rate. Since investors always have the option of holding all of their money in T-bills, investments that involve risk should only be made if they hold the promise of considerably higher returns than those available without risk. This does not express an investment preference for T-bills; to the contrary, you would rather be fully invested in superior alternatives. But alternatives with some risk attached are superior only if the return more”

    Vishal, let me know what do you think…

    • Hi Anil, thanks for your inputs! Wish I could cover each of my thoughts in one post. 🙂

      But as you must have read in my previous posts, taking care of risks before even looking at returns is the first step in investing…like I wrote here.

      The setting of performance standards comes only after you know that you must take care of the risk – especially the risk of permanent loss of capital.

      The reason I talk about setting (long-term) return standards comes from my belief that there are broadly 2 kind of people – (1) Those who are fine with “daal-roti” (like me), and (2) Those who can’t do without “butter-paneer”.

      For the first category, they are broadly looking at small/one house, small/one car, adequate life and health insurance, an emergency fund, and money for a couple of key expenses on children. For the second category, the needs and aspirations are higher – bigger/second house, latest gadgets, world tour, bigger/second car, foreign education for kids, etc. (like, sadly, a wife of a KFA employee committed suicide yesterday because she was not able to send her kid for foreign education, thanks to the crisis at KFA!!) Here, I am not saying one is right and one isn’t.

      The point is, for the first person, an average annual return of 15% (that beats inflation and also helps in some wealth accumulation). But for the second, and assuming his savings etc are same as the first person, the return target has to be higher. Of course, even he must not play with fire in pursuit of higher returns, but then he “must” earn higher returns from his investments and thus practice investing accordingly.

      This is where the need for setting a return target comes into picture. It is dependent on whether you are fine with daal-roti or whether you also want butter-paneer (and a lot of it).

      Plus, the bigger idea must be to not beat the index. The “par” for us is inflation. That is what we need to defeat. And if we can do that, we can automatically beat the index as well. What is more, if I am not able to beat the index over say a 5 year period, and thus also fall short of inflation, I would do myself a favour by giving my money to someone like Prashant Jain, who can help me in this regard.

      As Puneet commented in his last article on Charlie Munger, I must first know where to bang the pipe. That is a given. So, taking care of risk first and return later is a given.

      Also as you wrote above – “An investor cannot decide to think harder or put in overtime in order to achieve a higher return. All an investor can do is follow a consistently disciplined and rigorous approach; over time the returns will come.” So why do you want to follow a consistently disciplined and rigorous approach? For beating the opportunity cost of capital, right?

      So the return target that I talked about above is my personal opportunity cost of capital, which I must be clear about before starting out as an investor.

      I hope this cleared what I wanted to communicate above. 🙂

      Regards,
      Vishal

      • Anil Kumar Tulsiram says:

        Thanks Vishal

        You are always very clear in your post. For the long time I am struggling to reconcile various thoughts which I have come across from reading about various investors. To be frank, I am just dumping my confused thoughts on you to seek some clarity. Thanks for your reply.

        • Indeed that’s the way to go like you are doing Anil. We all need to build a latticework of mental models, as Munger says, and then hang our experiences on them. What you say as “confused thoughts” are in fact clear things that we all need to learn vicariously. So thanks for sharing your thoughts!

  6. Anil Kumar Tulsiram says:

    The second idea where I have difficulty reconciling with Buffet ideas is betting big on your best ideas. I fully appreciate and understand that to make most of one’s conviction and in-depth analysis one should bet big on best ideas. Lot of discussion supporting concentrated investing has happened here.

    I think the entire debate is dependent on the investment approach one is following. If one wants to invest in “Wonderful companies at fair price like Buffet” then concentrated investing is the way to go as there are not many of such companies are available, but if one’s approach is to buy “fair companies at wonderful price like Tweedy and Browne partnership firm” then wide diversification is the way to go. I am more comfortable with Tweedy and Browne approach of restricting position in single stock to maximum of 3% as I invest in stocks which are cheap by PB and PE basis and try to avoid value traps. In simple words “How much diversification is enough: As much as, if that stock goes bankrupt it will not result in undue financial stress to you.” Here is what they have mentioned in their various letters to shareholders.

    “To minimize errors in analysis or events which could adversely affect intrinsic values, we adhere to a policy of broad diversification; with no one issue generally accounting for more than 3%, at cost, of the net assets of the portfolio and no industry accounting for more than 15%, at cost, of the net assets of the portfolio. Not only does diversification reduce risk, it also increases the probability through the workings of the law of large numbers that a return will be realized from the entire portfolio.”

    “Some very successful money managers prefer to make larger, concentrated bets in fewer stocks. Our confidence in our abilities may not be as great as their confidence is in theirs. People should do what they feel comfortable doing. We feel comfortable diversifying to a degree others may feel is excessive. When we ask ourselves, ‘‘What is the downside of diversification?’’, we do not get an answer that makes us want to change that policy.”

  7. R K Chandrashekar says:

    Dear Vishal
    Few things i liked about this post:
    1. Set performance expectation before investing
    2. invest heavily in your best bets and diversify to preserve your wealth. Some justification for my over diversification!
    3. Art of value unlocking.
    Now on the subject of value unlocking- It can take many forms: Here are a few :
    1. Delisting/ Buy back- iflex IPO was given to us @ 265 in 2002. Subsequently a 1:1 Bonus followed. In 2007, we were offered 2000+ for a buy back.
    There were many more in the past- like Carrier Aircon, Alfa Laval, Atlas Copco. Bosch and GSK Pharma could be potential candidate in future??
    2. Derating: Some major news and the share get derated . Eicher tie up with Volvo, and now Tata Global with Starbucks.,Strong fundamentals
    which are not on the investment radar of analysts- take J & K Bank- Dominant position in Kashmir, low cost of deposits, low NPA, High NIM
    most govt transactions, high dividend yield. If you bet that Indians are prone to diabetics, you may think of Zydus Wellness- dominant share in sugar free
    substitutes.
    3. Holding co’s trading at a huge discount to the underlying stocks in its portfolio- Bajaj Holdings core investment in Bajaj Auto, Bajaj Finserve, Bajaj Elec, ICICI Bank, etc
    While looking at these situations, one should not go overboard and not lose sight of intrinsic value and margin of safety. Like in cricket, the law of averages will finally catch up.
    Unfortunately it caught up with Virat Kohli and Shane Watson in the T20 Super Eight!!

  8. Hi Vishal,
    Excellent review of the letter and when I think of Sanborn example, i remembered my own experience with a company called R Systems. This is very small IT company and had got my eye during my M&A days of research. There was cash sitting from the days of IPO and also had decent cash flow. In 2008, when the market tanked the stock was available at deep discount levels. Besides, the cash flow and the cash in hand the company had real estate in Noida. This had provided margin safety along with small dividend which a must when i invest. The stock never moved much for next 2 + years. Then came an investor like Buffet and started accumulating the stock took over more than 30% of the stock. Promoters too started buying the stock to inch towards 50%. Finally, this year, the company doled out huge dividend this year and I am pretty sure who was behind it :). The promoters are still buying the stock since they know the intrinsic valid of the company.

    Looking forward to next review of yours!

    Cheers, ignatius

  9. Aksh Sheth says:

    Hi Vishal,

    Excellent Post! I nevertheless feel that we are not Buffet and we can’t be like one. If I talk about Indian Market, There are many Investment/Holding companies which are quite undervalued at the moment with respect to their NAV. The question is how to unlock the value in these companies and force the market to reflect it’s true worth as Buffet did in above case.

    Regards,
    Aksh

  10. Dear Safal

    Nice articles and thanks for sharing the knowledge.

    In this post are you sure of the “historical p/e” graph. Has really the small cap and midcap overtook the sensex in 2011-2012?

    Regards

    Shinu

  11. harishshenoy says:

    Sir,
    Heard 3 decade old textile mills company ,bought over by chennai based indusrialists,who later on restructured to split it in to 3 companies hold huge land bank in prime locations around chennai and Bengaluru.Any views on Binny ltd ?Is it a case of pure ignorance by the investor community?????Will the revaluation of land bank held in books at historic cost prove to be a game changer?Nothing concrete seems to be emnating from management on these issues.Singer (india) ,subsidery of Singer(asia) holdings seem to be on the path of recovery and management plans to utilise indian subsidery as global outsourcing hub .Any views?

  12. Nice review again Vishal. The Sanborn case is mentioned in Warren Buffett’s biography which is a good example deep value investing.

  13. Excellent analysis. Keep it up!

    Thanks,
    Nagesh

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