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So whenever the topic of stock market or investing comes up, the name of Warren Buffett definitely comes to mind. So Warren Buffett has said here what is his wealth ? It was made because of just three things. What is first brother? Business quality. What is a second? Patience and what is the third brother?
Power of Compounding. And what is the wealth that he earned? When will you earn 99% brother? After the age of 65. So in today's video, taking inspiration from his strategy, we will know how he used to analyze the business? How did you identify the mode? What were the valuation techniques? And when the entire market here was in panic.
Lived in fear. Even then, how did you hold your stock? And I will tell you what all these things are through an Indian lens so that you can understand these things well. So watch the full video and if you like the video then subscribe to the channel. So let's talk in detail about how Buffett viewed business risk and compounding here?
I will also try to explain a little about how business was analysed here and what it is through an Indian lens. So now let's talk about what were the core foundation principles of Vern Buffett, he used to analyze the business, he used to invest in the stock market, first what was the intrinsic value, what is intrinsic value, fair value or real value, what is the real value of this business, I am going to buy it today, so how does Buffett calculate the intrinsic value here, through DCF, what is DCF, do you discount the cash of the future, and if someone does not know how we calculate DCF, then can you learn it from the mind of AI or what is it and can you watch YouTube videos.
I will not explain this completely because what is this, it will become a very long video, otherwise Buffett did not just look at the book value or the PE value, he only looked at all these three things together and then calculated the intrinsic value, understand that you have calculated the intrinsic value of a stock, what is it, it is coming for 100 but you are getting that stock for only 80, so what does it mean at 20% discount, so this 20%, what is your margin of safety, what will happen tomorrow, if there is any problem or my guess about the intrinsic value, it came out wrong.
Still, I have no questions, here it is very important to have this margin and safety. And the more margin and safety you have, the better it will be for you and the probability of making returns will increase. The third best thing was that he used to buy businesses and not shares. What was his mindset brother?
Thinking like an owner, can this business do well in the future ? Because if you buy a share, you think that its price should increase, it should not increase, but what Warren Buffett used to think, I am a part of a business, what do I have to do, I have to look at the growth of the business, I have to look at the management, whether they are doing well, whether the business can do very well in the future, whether the industry is growing, you understand things, if you also start thinking like this, then you will want to become a partner in a good business and how do you become a partner, brother, by buying shares, what was the last, brother, capital preservation, brother, you should never lose the money you have invested or whatever capital you have invested here, because you understand, if you bought a stock for ₹100 and what is it, if it has fallen by 50%, then how much has it become worth, brother, brother, ₹50, but if you see, if it has to go to 100, then how much gain will it have to make, brother, 100%, because it has to gain 50% more, you understand, so to reach 100 again, will it have to gain 100%, this is the reason So what Warren Buffett says is that brother, capital has to be protected because the more capital you have, the higher your returns will be.
You should understand what is 10% of 100 brother? At ₹10 and what is 10% of 50 ? You see, there is a difference of double ₹5 here. Good evening everyone. I am Krishna Kumar an MB Professional with ACC & CFA credentials. On this channel we simplify finance, investing and businesses to help you take better decisions in your financial journey.
Make sure you like and subscribe. The other thing here is what do you remember Vern Buffed, brother? The company should have economic moat. What is Mot, brother? Competitive advantage so that what if tomorrow some competition comes or what? Exactly what is similar here ? The product is made just like the company.
So can the company survive? Because Warren Buffett used to invest here for the long term. How long term is it brother? Even for about 20 to 30 years. So if you understand that the company does not have any moat, it does not have any advantage. So tomorrow any competitor comes after 10 years , 15 years and can he completely destroy the company here?
So, in what way can you first become fat? The first mode could be that the brand of the company is so big that no one can remove it from the market. So if we talk about the Indian context, what can come in it brother? Pidelite. So what about Pidelite, the brand itself is so big here, what does Fevicol care?
No one can disturb here. There is no competition at all. Think you know the name of Fevicol's competitor ? You might not know. What's the second one, brother? What is the scale of the company? You are manufacturing so much of the same product. What is there in it is that it has achieved economy of scale.
Brother, what is Dixon Technology? It works on this very thing. What is margin? The company has very little. what is on? Produces a large number of units of product. It works on the same thing. What is the reason for that? The company has achieved perfection. What is the third Bha? Network effect. The company has so many dealers and suppliers.
What is the reason for that? If there is another competition tomorrow, it will take a lot of time to create this network. The network is so complex that it will not be able to crack this thing so easily. And what is a very good example of this? Asian Paints who has what? Due to its network for 20-30 years, it has given very good returns here and has also earned good profits.
Cost leadership means that if you make any product at the lowest cost, then the consumer will buy it from you only. And what you have to do is to make it at such a low price that your competitors cannot match it, brother, this price has to be regulatory, brother, the regulation here is such that you cannot enter this industry, so that will become your mode, how can there be a regulatory mode, brother, RBI does not give banking license to banks here, so how can you measure the mode here, first is margin stability, if your margin is constant, then what does it mean that competitors are coming and going, it does not make any difference to you, you are earning some certain percentage here.
What's the second one, brother? Market share persistence means that your market share or whatever it is, is it remaining constant or are you increasing it. What does this mean brother? What do you have? There is some structural advantage because other competitors are not able to take market share from you here and you are gradually gaining their share as well.
ROC Consistency What does it mean? What is the status of the capital you have deployed? The returns that are being generated are quite good. So what happens because of this? Concretely, if you are generating profit here and reinvest it, then the same ROC return will be generated on it. So what is this even?
It becomes a compounding machine. Prying power test. Understand that any economic condition may arise here or something may go into downturn. So if the company raises the price here then the demand for the company decreases. Does the company's volume decrease? If it does not happen then is this also a mode that the consumer does not have any alternative to shift somewhere else?
And using this analogy, what is Buffett saying here ? Brother, he had bought Coca-Cola in 1988 and he had held this share for 36 years plus and what was there in it, brother, the brand mode was that even if there was a price increase here, there was not much impact on the demand, the ROC was very good, the company was continuously gaining market share in the US, it was also trying to expand all over the world and what was the margin, was the company sustainable in India, I have already told you what is paint, it is a very good example, what is the network effect of this thing, the company maintained it here very well till 2030 years.
HDFC, I told you brother, there were regulatory compliances. What is the reason for that? Only one moat was built. And one of the highest quality private banks here also HDFC HL brother what is multi category? FMCG portfolio held by HL. And what happens in FMCG is that there are daily use items. Their demand or volume will never go down.
And even if you increase the price a little, most consumers will not notice much difference. Why? Because these are daily use products. This has to be used. Circle of Competence and Management Quality. First, let me talk about the Circle of Competence, brother. So you understand what you have? What did you do B.Tech in?
in Computer Science. So can you understand the IT industry here very well, what work is being done in Infosys or TCS? What is the company model like? Brother, how is the revenue being generated? What are you? You can compare all the things well. Let's compare it to other person, let's say there is a doctor, he does not know the IT industry very well, but a doctor knows the hospital very well, so here he can look at the hospital stock, like Apollo, Max Healthcare, you understand what different persons have, they have different competencies, so you have to identify your competence and do not try to enter too much into the unknown territory because here there are 100000-2000 stocks in the market.
If you want to say goodbye to everything, you will not be able to do it. So try to invest in something that you understand. And then if you develop an interest, you start understanding things, then you can go into the industry. Understand the management quality, the business is very good. what is on?
The promoter's vision is not good. The management is not able to expand its view here. She is looking in only one direction. So if this is the problem , then the business will never be able to grow. Because the management is not ready for future risks. Not looking for new opportunities. Do you understand?
And it is the management that decides whether the company's mode will be sustainable or not. So if you guys are watching the video then you must be knowing about the power of compounding. So here this reddish maroon line, how much return is it brother? Returns of 25% CAGR. How much is the grey line brother?
CAR return of 18%. And this grey line, how much is it brother? of 12% CAR return. You see how big a difference 7% CAGR makes here over the period of 20 years. And if you look at it in 10 years, there is not that much difference between any line. So what is the reason for this? Your amount depends on three things.
What happens first? Principal. What is your second return and third? Time. And this time, what is it brother? Is in power. So you can control the principal to some extent. Suppose you will put ₹1,000 instead of ₹1,000. But what is this? Limited. You cannot control the returns much here. You can just try it here.
But what is time? Time is in your hands as to how long you want to invest. And what is one? Is in power. So what is the reason behind this formula ? What are the last years ? They give very exceptional returns. Market Psychology. You must have heard this very lovely line from everyone. Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.
This means you should be scared when what are all the people around you talking about, let's buy this stock now, and when do you have to be greedy, that everyone is saying, it's all over now, sell it, sell it, otherwise there will be more losses. So, I have brought four market crashes here. What is the first one, the dot bubble?
What is the second, the global financial crisis? What is the third one, the Indian taper trump? And what is the fourth one, the Covid crash here? So what was common in all these, the market went down by 30 to 40%. And if you understand that you had never invested money, had you invested only in these four events, you would have earned returns above 20% CAR here.
Portfolio construction, how much money should we invest if our conviction is high? So for an Indian who is just starting his SIP, what is it, where can he invest his money? 65% in large cap, 25% in mid cap and 10% can be kept as reserve here. Is. If the market goes down here, what can be accumulated?
I have not yet given much importance to what is here, gold, silver and other things. Why? Because what is this, it has increased a lot in the last two-three years. And what is the reason for that ? If you invest in these now, what is the probability of them giving returns ? It is not that much. So what does Buffett say here, brother?
A concentrated portfolio should be created. When your conviction is high. So you think this stock will do very well. What have you read about the stock for the entire 10 months, 11 months? I have listened to all the calls from the management. Here you can see how well the revenue is growing. The company is moving in a good direction.
But what happened was that you invested only ₹1 lakh in that company and how much did ₹1 lakh become in 3 years, brother? ₹1 lakh. So you will like it brother, oh my God, I have earned so much money. But if you think about it, if you had invested ₹3 lakh in it, how much would it have been, brother? ₹30 lakh.
There is a lot of difference here as to what it is. Look, there is a difference of Rs 20 lakh in these things and what is the meaning of this, meaningful returns have also been made in just 3 years. So if you get conviction, if you feel that brother, yes I am doing the right thing, then what is it brother, do not be afraid of taking higher concentration, what is index fund, it is a good choice for most of the investors because investing is a full time job, what is every investor, he cannot dive deep into it, cannot read the calls of the management, cannot track the PE ratio, he does not know when to buy and when to sell, so what is it, simply from your salary, keep investing some amount here every month in index fund and why only in index fund?
Because what is there here? The fees are very low. What is the third brother? Annual Review. Do you have to check every year whether the stock I bought is performing well or not? If he is reducing it then why is he doing it ? The investment decision I took here, the conviction I built , the thesis behind it, the original idea behind it, is that idea still valid?
So you should review the stock more thoroughly here. If it is there then brother, hold it. There is no need to do any daily monitoring here. Why? Because suppose one day the stock goes down by 10%, then if it goes up by 1% for 10 consecutive days, will that bother you? Cash is a strategic option. There is no harm in holding cash.
Warren Buffett has also held $189 billion in cash till now. So if you have cash, then you can grab opportunities here very quickly. Whenever there is a rise in the market, I will tell you about Warren Buffett's investment checklist here. If you look at all these things, then you can make good returns here.
What is first in the market? Business quality should be good. Here the company should have competence. There should be MOT. There should be predictability. ROC of the company should be higher than the cost of capital. And what is ROC of the company should remain constant. Brother, not this, -10% in one year, next year +50%, this thing will happen, right?
You too will walk in uncertainty. Financial discipline. It is very important to know whether the earnings are increasing or not, whether the ROE (ROC) of the company is high or not? How is the company's cash conversion ratio? What is Capex doing? It is very important to do capex. I have already told you in my video that if the company does Capex, then what does Capex mean?
The company is setting up a plant and buying machinery here. So what's with that? If not today, then tomorrow that product will definitely be sold. What does high capex mean in the future brother? Higher returns may come. How is the management of the company? How is the promoter group brother? How has the history been ?
Should I meet the targets I have stated or not? Does the management here fulfill the promises it made to the shareholders or not? Is the communication transparent or not? There is no significant pledging or third party transaction taking place. Valuation Valuation should be reasonable. How is the intrinsic value coming?
Are we able to measure our margin of safety or not ? You are giving it on the basis of current earnings, right? Brother, are you not thinking what the company will be like after 10 years ? It will become so big here. Hey, this will happen, that will happen. No, what do you care? Have to stay in the present.
We have to look at the present earnings. And what about him? Mostly conservatively, discounts and increases are to be made here. Not this brother, they are increasing things by 20%, they are increasing them by 50%. No, are you comfortable investing at this valuation if the company runs at this rate for 10 years?
So if you liked this video then please subscribe. At the last I would like to say that we are not a SEBI registered advisor. Please do your own due diligence before investing in stocks.
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