November 10, 2006

Learnings from the Book: The warren buffett way

I have been reading again the excellent Book ‘The warren buffett way’. This book was my first exposure to Warren buffett and his approach to Investing. I have followed and learnt from him since then. The following were the key re-learnings I have had over the past few days (I am yet to finish the book)

- ROE (Return on equity) is one the most important indicator of the economic performance of a company. A company can raise this measure through five different means
o Higher Asset turns (Sales / Total assets)
o Higher margins
o Higher leverage
o Cheaper leverage
o Lower taxes.

I have seen the above happen for several companies in the past few years and have seen the stock price follow the improvement in ROE

For ex: Bluestar (better asset turns), ICICI bank (cheaper leverage, higher margins).

- Inflation does not improve ROE and actually reduces the net return to an investor
- The best companies are the ones which have strong franchies like crisil. Over time some of them become weak franchises. Further weakning of the franchise leads to a good business and then finally to a commodity company.
- Pricing strength is a key attribute of Franchises. These companies can raise prices even when the demand is flat and can earn good returns.


Prem Sagar said...

Hi Rohit,
NIce to see ur article after a long hibernation.
I too started reading WB Way, but stopped mid-way as I had a few other books that I wanted to complete first. I really enjoyed reading Liars Poker recently. Pls do read it...
ROE is a good way to track a co, I realize, using the Dupont method.
And yes I do agree with ur view on Franchise and pricing power.
But what would u say for an industry like say auto ancillaries or retail-proxies like Bartronics, control print, etc where the opportunity is huge, but they have little or no pricing power?

Kotekoppa said...

How do I create a stock screen consisting of the multiple criterion as you have talked about? In ICICIdirect site I got only a few preset criterions.

Vidyanshu said...

Hi Rohit,

Question for you -

Other than Pantaloon, what would you consider a Good Franchise operation in India? Or Good Brands like Coke equivalent etc. in India ?


Rohit Chauhan said...

Hi vidyanshu

i think there are several which come to mind - crisil, ITC (via its brands), asian paints, several FMCG companies.