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.

4 comments:

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.
Praveen

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 ?

Regards.

Rohit Chauhan said...

Hi vidyanshu

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

regards
rohit