Lessons Indian mkt veterans learnt from Warren Buffett

Quoting Buffet, he says: "If you want to finish first, you must first finish," and such unethical managers make you drop out midway.

Durgesh Shah, Director, Corporate Database, says it is very difficult to follow the kind of focus Buffett talks about. He talks about just 20 stocks in a lifetime. With that in mind, Shah advises investors to keep focus on what they purchase.

Agarwal adds that the benefit of buying just 20 stocks in a lifetime is the fact that selling problems are reduced.

Deviating from Buffett, Agarwal says valuation continues to remain volatile and investing is a constant learning process.

Bhattacharya says Buffett buys great businesses when they fall apart. But great companies are not always great investments, he advises.

The trio discuss all this and more with panel moderator Navin Agarwal, MD, MOFSL.

Below is the verbatim transcript of Navin Agarwal's discussion with Raamdeo Agrawal, Sanjoy Bhattacharya and Durgesh Shah on CNBC-TV18

Agarwal: You have already shared some of the framework that you put to work in your wealth creation studies, the last 19 wealth creation studies. If you were to cull out just one out of these innumerable frameworks that Buffett shared, which one would you highlight as one that investors should really focus on?

Raamdeo: For an investor, the very first and most important one is don’t lose money and rule number two is don’t forget rule number one. That summarises everything whatever he has said, what he has done and what we have to do. If you come to the markets, don’t lose money ever, have strategy or selection process or pay the purchase price, one is buying the right stock – like buy right, sit tight, it is basically the same thing. You buy the right stock at the right price and you have to sit through. Though it looks very catchy but there is a lot of wisdom in that particular saying. Somebody asked him what is the mantra of making money in the stock market? He said rule number one, don’t lose money, rule number two, don’t forget rule number one. So, that summarizes everything.

Agarwal: What about you. You have shared quite a few of these frameworks with us over a period of last many years.

Bhattacharya: I should make a confession. A confession is in good order so that no one in the audience is fooled. I am actually not smart enough to practice most of what Buffett says. So I am actually much more pedestrian in my approach, but it is true that I have read all that he has said and it is actually very difficult for most people to try and behave like Buffett because his temperament and his intellect are both abnormal. They are not easily found on the planet, I mean there are very few guys who have it.

But just to come back - the one I really like and which has helped me personally, that is the only one which I practice regularly, it is almost like breathing for me and I don’t remember the exact quote, but I will tell you what it says. It says that if you find managers with very high energy and high degree of intelligence but they don’t have integrity that is the most deadly combination you can find because they will bleed you to death. And my experience over 25-30 years in India is that India is sort of overflowing with such managers. We have countless such managers, many of whom are worshipped and respected because people have been unable to recognise in short periods of time the damage that they can inflict.

So for me that is really – and in a strange way it ties in with Raamdeo’s first thought which is fundamental to sensible investment which is the idea of sensible investing which is the idea of capital preservation. If you preserve money, in other words, if you don’t lose money; rule number one, rule number two, he will put it in an even more catchy way than what Raamdeo said and I will tell you one. I really love that saying, ‘If you want to finish first, you must first finish’. So this is about a long distance race. So, if you want to win the marathon, make sure you don’t drop out along the way and the way you drop out is if you encounter one of these crooks.

The crooks make you drop out because they destroy your wealth so bad that you don’t finish. So in a sense the two are sort of related. This idea of capital preservation and investment results.

Agarwal : Do you want to share your favourite investment framework?

Shah: Yes, as you had mentioned, the most important thing is that one needs to understand that although he is telling us a lot of things to do most of us will find it difficult to follow and one of the things that I feel is most difficult to follow is the kind of focus he talks about. He talks about only 20 stocks in a lifetime. So, once somebody is going to start following what he is saying, he has to realise that he is talking about a serious focus whether you do 20 stocks or you do a little more than that. To me it looks like with that in mind you obviously have to keep a focus on your purchases.

Agrawal: In 1995-96 when I read first time I had 225 stocks in my portfolio a-z full because of bad deliveries and-I could produce all those statements –you get tired after the first page. So, it was not possible to the-there was no management and you didn’t know what was your return and how well you are doing and all. Very first year after reading this I understood the power of focus somewhere in 1995-96 and we brought it down one year and that time NSE came with the trading so if you sell 100 shares your hundred shares will go delivery, it will be that they would be deleted. So, that was the gift at that point of time. We cleaned up and from 225 we came to 16 shares and that very year the portfolio doubled, market didn’t double but we doubled so that focus is a huge power because you can take care of only 15-16 stocks. I have interviewed so many guys, I asked them how many stocks? They have 60stocks I said write the names, they can’t go beyond 12-13.

Bhattacharya: Just if I may explain what Durgesh said is absolutely true and one of the most important things but in simple terms I will tell you why what Durgesh said is so powerful and so difficult as well. In investing the more decisions you make the greater the likelihood you will make a mistake. So, if you cut the number of decisions you have to make and and the decisions that you make are after really deep thought, you are improving your odds, you are setting yourself for less of a chance of being wrong. The second thing which is related to what Durgesh said, if you buy only 20 stocks in a life time your selling problems also get resolved. Most people don’t recognise the corollaries of what Durgesh said but these are two very important corollaries because investing is-if you are right 55 percent of the time you are like Raamdeo Agrawal. It is very difficult to be right 55 percent of the time. Most people are blessed if they are right 51 and a half percent of the time and then you have guys like me who are at 48-49 so then that really makes life tough because the other 51 you are getting wrong. So, the importance of this relates to cutting down the number of times you put your head on a chopping block, that is why this is so powerful.

Agarwal: Digging through the letters of Warren Buffett you will find that he himself has evolved over a period of time. So some of the early letters tell you that have the purchase price been so attractive, then you had the three golden words margin of safety...

Raamdeo: But margin of safety was not by him, margin of safety was of course the biggest gift. I mean he became disciple of Benjamin Graham because in 'The Intelligent Investor' he has talked about the most insightful words, most precious thing in investing is margin of safety because they didn’t know how much to pay for. The value price; value is what you get, price is what you pay. So that gap between value and price is demonstrated by margin of safety and that is why he became the guru.