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Learning from Warren Buffet Series – Part 4

This time, I have combined the key takeaways from 3 letters. Because, while Warren Buffet writes these letters with a gap of one year, we are trying to bring up these articles every month. So we need to avoid being repetitive. But, most of the knowledge imparted by him is so timeless and relevant, that we are forced to write about them again and again.

Berkshire Hathway Shareholder letter – 1980-82

Key learning from the letters (in no particular order)

Learning 1

Buy right and sit tight – If your purchase price is sensible, some long-term market recognition of the accumulation of retained earnings almost certainly will occur. If you are confident about your investment, you need to wait patiently. Pascal’s observation seems apt: “It has struck me that all men’s misfortunes spring from the single cause that they are unable to stay quietly in one room.” If there is ever a chart which can speak, I believe the below chart of BSE Sensex would just say “shut up and remain invested”.

Sensex journey and growth

Learning 2

Forecasting folly – Forecasts are useless especially in stock markets. Investors need to avoid falling for forecasts at any costs.   “Forecasts”, said Sam Goldwyn, “are dangerous, particularly those about the future.” Read why here.

Learning 3

Invest when there is blood on street – Investors need to be patient and invest when there is fear in the market, because it is during these market corrections that you will get handsome opportunities.

Learning 4

Avoid business in industries producing un-differentiated products – Businesses in industries with both substantial over-capacity and a “commodity” product (undifferentiated in any customer-important way by factors such as performance, appearance, service support, etc.) are prime candidates for profit troubles. Investors need to be wary of businesses in industries where there is no difference in products like sugar, textile, paper etc.

PayPal founder, Peter Thiel in his ground breaking book “Zero to One” says “All failed companies are the same: they failed to escape competition.”, and it is very difficult to escape competition if the product you are producing is undifferentiated.

Learn more from Warren Buffet through previous parts of our series:

Part 1 | Part 2 | Part 3

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The CAGR team has ensured that my money is always invested in the best funds

I have been earning, since I was quite young. Since, I was living at home at that time, I started investing in mutual funds. My mother then told me the basic mechanics of it, which I understood. But I never had the bandwidth to get into the real details. At that time the mutual fund market was beginning to sky rocket. I entrusted the money to be invested at a major International bank, the same bank my mother banked at.

After a period of interest that I had at the beginning, I really stopped tracking my investments. My relationship managers changed often. Periodically they would let me know that my wealth was x amount, or that the recession was hitting and would affect investments. But I just went with what they were recommending. In any case, my attention was diverted to my MBA, my first job. Any surplus monies was going to be used to pay back my education loan.

One day after my education loan was over, I went back to the bank and asked them what I should do with my surplus money. They recommended some investments, and I continued investing with them. I had some trepidation this time around, because many many relationship managers had changed hands over the years. And the advice they gave me didn’t quite fit in with how I understood the financial market worked.

It just so happened that around that time a colleague of mine introduced to CAGRfunds. I met the two of the founders, and told them about my past investments. They were a small team, and I felt no harm in sending my portfolio and getting it audited for free.

When I received the details from them, I realized that the annual return of my investments at the bank was something near 6-7%, not at all what I expected (I was receiving more than that in fixed deposits!). CAGR also pointed out that I was invested in a lot of thematic funds which were doing well when I invested in them, but had been languishing in the years post that.

I took this information back to the bank and they told me something that shook my confidence in them. To my shock I realized that none of them were tracking it. Later, I understood that banks are interested in getting you to invest, but not in managing your portfolio after the investment was made.

I quickly realized that I needed someone who looked into the portfolio regularly. I asked the team at CAGR to figure out a new investment plan for my surplus cash.

They came back quite quickly with a clear plan of action. I started small, but over a period of time have invested regularly with them. They keep in touch with me quite often, poking and nudging me when I’m ignoring my investments. They give me sound and sensible advice, and reviewing my portfolio periodically. I especially like the fact that they take care to explain the logic to me point by point, even when I’m asking ridiculous questions. I’ve been a CAGR client for 18 months now, and the portfolio with them has far exceeded my expectation from the market, and has left my investments at the multinational bank in the dust.

Since that time, I’ve also recommended CAGR to several people. One of them a close friend of mine was given the financial advice not to invest, and pursue her dreams to study abroad. They created a robust financial plan for her, despite the fact that their advice meant that they earned nothing in the process. I was convinced the people at this company were not after short term financial gain, but rather genuinely had their clients’ best interests at heart.

I would whole heartedly recommend CAGR to any investor. Whether you’re savvy and have everything figured out, or are just a beginner, these guys are the guys to work with for your investment needs. If you believe that the foundation for a company taking care of your investments is trust and empathetic understanding, and CAGR is the place to take your worries too.

Story has been contributed by Ronaan Roy who has been a CAGR client since January 2016. Ronaan is an MBA graduate from IIM – Indore. 

Call / whatsapp us on +91 9769356440 for a free financial consultation!

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Stand out from the crowd while following the herd

If you were standing at the crossroads, in a new city, unsure of which direction to take and you observe 9 out of 10 people moving towards the left, isn’t it likely you will follow the more numerous group? This is an illustration of the herd mentality that we are all prone to, especially in unfamiliar situations. “When in doubt, play safe”, is the philosophy that drives this behavior. Ever wondered why this happens?

1) Social Acceptance

It is natural for us to crave acceptance in a group and wish not to be perceived as someone who goes against the crowd. This social pressure often compels us to choose options we would otherwise not have considered.

2) The Ad Populum Fallacy

We are ensnared by this fallacy when we happen to be unclear about the choices to opt for. Believing that we lack some information that others have access to, we choose to endorse the choices of those others, even if the preference may appear irrational at first. We convince ourselves that it is unlikely that so many people can be wrong simultaneously.

If many believe in a particular outcome, the chances of them being correct are high, isn’t it?

This may or may not be true. ‘Argumentum ad Verecundiam’ or ‘Argument from Authority’ is also sometimes termed ‘Appeal to False Authority’ or ‘Appeal to Unqualified Authority’. Argument from authority illustrates a statement that is authenticated by expert opinion. The latter two terms refer to positions that are adopted on the basis of hearsay. We often encounter hearsay in stock markets. Millions of people trade in equity stocks based on “tips” they receive from friends or relatives and many end up burning their fingers.

The inclination of investors, to follow the herd instinct is rooted in the quest for the latest trends in the financial markets. Which mutual fund scheme is fetching the greatest returns or which scheme is a part of some top investor’s portfolio? Did equity outperform bonds in the financial year or not? Based on the answers to such questions, investors switch back and forth rapidly, without realizing that the cost involved in such a process is going to eat into their profits, if at all they make any.

How do we avoid such behavior?

Should investors stop looking at trends and suggestions? It will be wrong to eliminate networking altogether. Research and meticulously acquired expertise are the two pillars, which serve to neutralize the risk of following the crowd.

This adverse impact of herd behavior is most visibly apparent in the realm of financial markets. An investor needs to overcome the fear of isolation and drive innovative investment strategy. Towards this end, he must either gain the expertise to manage his investments with acumen or take the help of a reliable advisor, who can guide him.