Why I Love Warren Buffet. It's Not What You Think

'He has been one of the clearest thinkers in the history of business.'

Writing as Le Grand Fromage, Shankar Sharma pays tribute to Warren Buffett -- the billionaire 'Old Man' who at 94, retired as CEO of Berkshire Hathway, a multinational conglomerate with total assets of more than one trillion dollars -- celebrating his unparalleled clarity on pricing power, moats and capital allocation, even as he deftly exposes the ironies in Buffett's own trades and the quirks of market opportunity.

A Saturday Revelation On Dalal Street

Somewhere in the mid‑90s, sitting on Saturday morning in my office next to Dalal Street, I was leafing through one of Warren Buffett's annual shareholder letters.

I came across a paragraph written about stock options (employee rights to buy company shares at a fixed price) and the way they were treated -- or more accurately, not treated -- in financial accounting.

Warren Buffet (WB) had posited that stock options granted to employees were nothing but an employee expense very similar to salaries and bonuses (regular payroll costs), and that there was no reason why they should not be getting charged to the profit and loss account (the company's income statement, which shows revenues minus expenses to arrive at net profit).

I told my partner sitting at the next table, and said, 'Buddhey ko aata hai' (The Old Man gets it).

Buffett's Timeless Investing Pillars

Whatever else you might want to say about WB, the fact of the matter is that he has been one of the clearest thinkers in the history of business.

For me, his greatness lies not in his investing style or strategy (where I think there is a lot to be said as to how there are core flaws and risks in his approach which have gotten papered over by an extraordinary 30-40‑year American bull market), but in his ability to think through core precepts of investing like 'pricing power' (the ability of a company to raise prices without losing customers), 'moat' (a sustainable competitive advantage), 'capital allocation' (how company managers allocate capital towards capital expenditure, acquisitions, etc) and so on.

When we came across his writings back in the 90s, they opened doors and windows in the mind -- just like Charles Ellis 'The Loser's Game and Ben Graham's (another value investor) cigar‑butt approach (buying very cheap, beaten‑down stocks regardless of business quality).

His entire professed focus in the 80s and the 90s era was to buy great brands and hold them for a very long period of time. That was the era of consumerism in America, coming out of a massive 'lost decade' of the 70s.

The extraordinary bull market that took off from 1981 created two big winners: WB and Bill Gross (Pacific Investment Management Company founder and renowned fixed‑income investor nicknamed the 'Bond King').

Buffet Ki Duniya and Indian Stock Valuations

But closer home in India, it was difficult to copy WB's strategy. He advocated buying 'growth at reasonable prices' (investing in companies growing earnings but only when share valuations aren't overheated). He advocated buying great brands at bargain prices in crises.

For us folks in India in our 20s, entering in the era of Harshad Mehta, getting Buffett-esque businesses at reasonable prices and valuations was the equivalent of eating chowmein at the Taj Golden Dragon at the price of Old Hungry Eyes, a Chinese food cart selling the same chowmein at one-hundredth the price, in the Taj's back lane.

Instead of Coke and American Express, we had Hindustan Lever and HDFC Bank around here.

HUL was a great consumer company -- and probably still is -- but back in the 90s it never traded below 15-20x. Before you start screaming -- 'You idiot, that's CHEAP for a quality company!! What are you crying about?!' -- wait. That was 15-20 x Book Value!

On P/E, HUL traded usually at 80x earnings (price/earnings ratio: Share price divided by per‑share profit). And don't even get me started on the other consumer brands like Nestle and Gillette -- Gillette never traded less than 150x earnings in India in that era.

HDFC Bank listed at Rs 30, which was three times book value. Almost every bank in the world traded at or below book value back then.

And therein was our conundrum: We wanted to follow Buffett's approach in India, but that approach in India was never available at single‑digit multiples. Therefore, even if I have to say this very uncharitably, Buffett was incredibly lucky to have been born white in America, a man who could eat cheap, lard‑dripping hamburgers, drink the worst drink in the world called Coca‑Cola, and get to buy quality stocks at single‑digit multiples.

How could the Universe be so unfairly unfair to the rest of humanity?

What Buffet Preached, And...

The other thing for me that I have admired about WB is his duality. He has professed one thing and usually done quite another.

He has railed against derivatives (complex financial contracts whose value is derived from an underlying asset), calling them 'weapons of mass destruction,' while being one of the biggest derivative players in America.

And he actively lobbied against posting collateral against his derivative positions, a regulatory move that was designed precisely to make derivatives, less WMD-like!

He has advocated against investing in commodity companies and commodities themselves -- and yet he tried his hand at doing a Hunt Brothers (In the late 1970s and early 1980s, Nelson Bunker Hunt and his brother William Herbert Hunt -- Texas oil heirs known as the 'Hunt Brothers' -- attempted to corner the global silver market leading to silver prices zooming from $6 an ounce in early 1979 to $49 an ounce by January 1980) on silver in the 80s, when he tried to corner the world silver supply (attempt to accumulate enough of a commodity to control its market price).

It is quite another matter that Indians were solely responsible for the trade blowing up on him, because what he had not calculated was the infinite mounds of silver plates, glasses, daal katoris, chammach that Indians had -- and that flooded the market when people tendered their silver utensils to take advantage of the artificially jacked‑up silver prices.

It's true. It happened exactly like this.

We Indians have always understood gold and silver way better than the Oracle of Omaha (Given his hometown is Omaha, Nebraska, and his legendary, prescient investment insights -- shared through decades of letters and trades -- echo an all-knowing Greek Oracle), as WB, is affectionately known across the investing world.

Why I Love Warren Buffet And Why It's Not What You Think

And then, of course, at very odd points in the oil cycle, WB went and bought Conoco, etc, and after telling us repeatedly that airlines are terrible business (low margins, high capital intensity), he piled into them a few years ago -- and then sold them off right at the bottom. And finally, after telling us that one should stay invested in the market and buy for the long term, there is data out there which says that his average holding period is two years (the average time he keeps a stock before selling).

And he has taken cash calls quite aggressively (moving large portions of his portfolio into cash when he deems valuations too high). Like he has done recently.

We admire in people qualities that we don't possess. Which is why I love people who say one thing and do another -- because that's a dark art I am terrible at.

Buffett has an overall Sharpe ratio of 0.7 or so (a measure of risk‑adjusted return: Excess return per unit of volatility; a higher Sharpe ratio means you're being better compensated [in terms of excess return] for each unit of risk you take). Any fund manager with that ratio would be selling bhelpuri on Dalal Street instead of managing money.

But that is the genius of WB. The single biggest lesson to take away from him was that in asset management, what matters most is storytelling -- and if you can tell a good story, mundane things like Sharpe ratios, etc, are irrelevant.

We have a few fund managers in India who have got this part of Buffett's strategy right -- way better than Buffett himself.

If you can make a fluffy omelette, you can get away with putting much less cheese.

This is the oldest omelette‑making trick in the world.

Shankar Sharma is an ace investor, investment philosopher, and founder of GQuant Investech, an AI‑tech firm.