My notes from Berkshire Letters to shareholders.
Re-reading for the 2nd time. Will read 3rd time as well, as advised by @iramneek

Source: berkshirehathaway.com/letters/letter…

1977

1. On how ROE is a better measure of growth than earnings growth

Most companies define “record” earnings as a new high in earnings per share. Since businesses customarily add from year to year to their equity base, we find nothing particularly noteworthy in a management performance combining, say, a 10% increase in equity capital and a 5% increase in earnings per share. After all, even a totally dormant savings account will produce steadily rising interest earnings each year because of compounding.
Except for special cases (for example, companies with unusual debt-equity ratios or those with important assets carried at unrealistic balance sheet values), we believe a more appropriate measure of managerial economic performance to be return on equity capital. In 1977 our operating earnings on beginning equity capital amounted to 19%, slightly better than last year and above both our own long-term average and that of American industry in aggregate. But, while our operating earnings per share were up 37% from the year before, our beginning capital was up 24%, making the gain in earnings per share considerably less impressive than it might appear at first glance.

2. Why businesses which have tailwinds are better than others

It is comforting to be in a business where some mistakes can be made and yet a quite satisfactory overall performance can be achieved. In a sense, this is the opposite case from our textile business where even very good management probably can average only modest results. One of the lessons your management has learned - and, unfortunately, sometimes re-learned - is the importance of being in businesses where tailwinds prevail rather than headwinds.
Unusual managerial discipline will be required, as it runs counter to normal institutional behavior to let the other fellow take away business - even at foolish prices.

3. Why to avoid day to day or even annual changes in stock price

Most of our large stock positions are going to be held for many years and the scorecard on our investment decisions will be provided by business results over that period, and not by prices on any given day. Just as it would be foolish to focus unduly on short-term prospects when acquiring an entire company, we think it equally unsound to become mesmerized by prospective near term earnings or recent trends in earnings when purchasing small pieces of a company; i.e., marketable common stocks.

4. How to select businesses
We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be
(1) one that we can understand,
(2) with favorable long-term prospects,
(3) operated by honest and competent people, and
(4) available at a very attractive price.
We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.

Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies. Consequently, bargains in business ownership, which simply are not available directly through corporate acquisition, can be obtained indirectly through stock ownership. When prices are appropriate, we are willing to take very large positions in selected companies, not with any intention of taking control and not foreseeing sell-out or merger, but with the expectation that excellent business results by corporations will translate over the long term into correspondingly excellent market value and dividend results for owners, minority as well as majority.

5. On sound management of a company

While control would give us the opportunity - and the responsibility - to manage operations and corporate resources, we would not be able to provide management in either of those respects equal to that now in place. In effect, we can obtain a better management result through non-control than control. This is an unorthodox view, but one we believe to be sound. 1978

1. Short term stock price moves are unpredictable.
We make no attempt to predict how security markets will behave; successfully forecasting short term stock price movements is something we think neither we nor anyone else can do. In the longer run, however, we feel that many of our major equity holdings are going to be worth considerably more money than we paid, and that investment gains will add significantly to the operating returns of the insurance group.

2. The problem of a low margin and highly competitive industry
Earnings of $1.3 million in 1978, while much improved from 1977, still represent a low return on the $17 million of capital employed in this business. Textile plant and equipment are on the books for a very small fraction of what it would cost to replace such equipment today. And, despite the age of the equipment, much of it is functionally similar to new equipment being installed by the industry. But despite this “bargain cost” of fixed assets, capital turnover is relatively low reflecting required high investment levels in receivables and inventory compared to sales. Slow capital turnover, coupled with low profit margins on sales, inevitably produces inadequate returns on capital. Obvious approaches to improved profit margins involve differentiation of product, lowered manufacturing costs through more efficient equipment or better utilization of people, redirection toward fabrics enjoying stronger market trends, etc. Our management is diligent in pursuing such objectives. The problem, of course, is that our competitors are just as diligently doing the same thing. The textile industry illustrates in textbook style how producers of relatively undifferentiated goods in capital intensive businesses must earn inadequate returns except under conditions of tight supply or real shortage. As long as excess productive capacity exists, prices tend to reflect direct operating costs rather than capital employed. Such a supply-excess condition appears likely to prevail most of the time in the textile industry, and our expectations are for profits of relatively modest amounts in relation to capital.

3. Competitor self-delusion & impact on all players in the market explained through the reinsurance business.
It is very easy to fool yourself regarding underwriting results in reinsurance (particularly in casualty lines involving long delays in settlement), and we believe this situation prevails with many of our competitors. Unfortunately, self- delusion in company reserving almost always leads to inadequate industry rate levels. If major factors in the market don’t know their true costs, the competitive “fall-out” hits all - even those with adequate cost knowledge.

4. Committing to equities only when these conditions are prevailing.
We get excited enough to commit a big percentage of insurance company net worth to equities only when we find
(1) businesses we can understand,
(2) with favorable long-term prospects,
(3) operated by honest and competent people, and
(4) priced very attractively.
We usually can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action. For example, in 1971 our total common stock position at Berkshire’s insurance subsidiaries amounted to only $10.7 million at cost, and $11.7 million at market. There were equities of identifiably excellent companies available - but very few at interesting prices. (An irresistible footnote: in 1971, pension fund managers invested a record 122% of net funds available in equities - at full prices they couldn’t buy enough of them. In 1974, after the bottom had fallen out, they committed a then record low of 21% to stocks.)

5. Preference to buy small fractions of businesses at bargain prices.
We continue to find for our insurance portfolios small portions of really outstanding businesses that are available, through the auction pricing mechanism of security markets, at prices dramatically cheaper than the valuations inferior businesses command on negotiated sales (such as corporate acquisitions and takeovers). This program of acquisition of small fractions of businesses (common stocks) at bargain prices, for which little enthusiasm exists, contrasts sharply with general corporate acquisition activity, for which much enthusiasm exists. It seems quite clear to us that either corporations are making very significant mistakes in purchasing entire businesses at prices prevailing in negotiated transactions and takeover bids, or that we eventually are going to make considerable sums of money buying small portions of such businesses at the greatly discounted valuations prevailing in the stock market.

6. Not looking for quick repricing (upwards) but of a prolonged period of lower prices for businesses that they wish to buy
(A second footnote: in 1978 pension managers, a group that logically should maintain the longest of investment perspectives, put only 9% of net available funds into equities - breaking the record low figure set in 1974 and tied in 1977.) We are not concerned with whether the market quickly revalues upward securities that we believe are selling at bargain prices. In fact, we prefer just the opposite since, in most years, we expect to have funds available to be a net buyer of securities. And consistent attractive purchasing is likely to prove to be of more eventual benefit to us than any selling opportunities provided by a short-term run up in stock prices to levels at which we are unwilling to continue buying.

7. Buying worthwhile amounts are not nibbling.
Our policy is to concentrate holdings. We try to avoid buying a little of this or that when we are only lukewarm about the business or its price. When we are convinced as to attractiveness, we believe in buying worthwhile amounts.

8. Let great managements do their work and you participate.
While there may be less excitement and prestige in sitting back and letting others do the work, we think that is all one loses by accepting a passive participation in excellent management.

9. If retained earnings are deployed at attractive rates, don’t disturb the process
We are not at all unhappy when our wholly owned businesses retain all of their earnings if they can utilize internally those funds at attractive rates. Why should we feel differently about retention of earnings by companies in which we hold small equity interests, but where the record indicates even better prospects for profitable employment of capital? (This proposition cuts the other way, of course, in industries with low capital requirements, or if management has a record of plowing capital into projects of low profitability; then earnings should be paid out or used to repurchase shares - often by far the most attractive option for capital utilization.) The aggregate level of such retained earnings attributable to our equity interests in fine companies is becoming quite substantial. It does not enter into our reported operating earnings, but we feel it well may have equal long-term significance to our shareholders. Our hope is that conditions continue to prevail in securities markets which allow our insurance companies to buy large amounts of underlying earning power for relatively modest outlays. At some point market conditions undoubtedly will again preclude such bargain buying but, in the meantime, we will try to make the most of opportunities.

10. Low-cost operators find more ways to cut costs.
Our experience has been that the manager of an already high-cost operation frequently is uncommonly resourceful in finding new ways to add to overhead, while the manager of a tightly-run operation usually continues to find additional methods to curtail costs, even when his costs are already well below those of his competitors.

Over the past few editions #DSPNetra has highlighted a number of indicators which depict an 'unsettling calm' in stock markets.

Here is a thread 🧵putting all the indicators together.
Read on: 1. Eight Years of Calm Rivals 1980s Low Volatility Era

BSE Sensex Index has now gone for almost 8 years without a bear market.

Defining a bear market:
One of the ways to define a bear markets is a decline of more than 20% and a time period of more than one year to regain previous highs. COVID decline was much deeper but the markets recovered in about 9 months to reclaim all time highs. This made sure that participants avoided the long-drawn periods of pain when stocks don’t deliver returns.

The previous period of such a stable and smooth market was way back in 1980s. Volatility moves in clusters and current cluster of low volatility would likely give way to higher volatility. We don’t know when or why, though. But history tends to rhyme more often.

I read a bunch of books in 2023.
Here is a thread 🧵 on 'Book Bundles.

Book Bundles?
These collections, if read together, can help build a broader view on the topic.

This is my current understanding and there is a vast ocean that I would have definitely missed.

Take a read The workings of the brain

A few key lessons:
1. Your brain does not react—it predicts. Contrary to how we think about the brain as a reactive machine, it is actually a prediction machine. Our world view is because we make our own reality, literally, in our own brain.

2. It takes more than one human brain to create a human mind. Our brains are incomplete for a reason. Infants come with an incomplete brain and complete it by learning from the society. The age bracket of 5 to 8 years is the best time for brain plasticity ( debatable, but broaderly accepted).

3. Words can have a powerful effect on your body. Many species, including humans, regulate one other’s nervous systems. Ants, bees, and other insects do this using chemicals such as pheromones. Humans are unique in the animal kingdom, however, because we also regulate each other with words. A kind word may calm you, as when a friend gives you a compliment at the end of a hard day.

These books can help you learn a great deal about the 3 pound magic called the 'Brain'.

Book list

1. "Seven and a Half Lessons About the Brain" by Lisa Feldman Barrett.

2. SELF COMES TO MIND: Constructing the conscious Brain by Antonio Damasio

3. "Livewired: The Inside Story of the Ever-Changing Brain" by David Eagleman

4. "How Emotions Are Made: The Secret Life of the Brain" by Lisa Feldman Barrett.

Understanding Our Mind by Thich Nhat Hahn is another great read which I read years ago and presents a different angle.

I have used the ICE BofAML Move Index across various publications. It has been one of the most important indicators, especailly in 2023.

Here is short thread 🧵on what it is: MOVE is widely used as a benchmark for measuring the level of risk in the US Treasury market. Higher MOVE readings generally indicate higher levels of market uncertainty or volatility, while lower readings indicate lower levels of market volatility.

How is it calculated? Read on

"I believe that learning how to think about how to eat, learning to understand what makes us fat and diabetic, means implicitly learning what to cook, how to order in a restaurant, and how to shop at the supermarket."

"The Case for Keto" by Gary Taubes

US Crude Oil inventory rebuild has begun. Stocks now well within the historical range. US Oil production also now at post COVID peak of 12.2mbpd. Sitll 900,00 bpd below the peak achieved in March 2020.

5 'Health Hacks' I use

Lift weights for keeping your body fit and to age slower; eat high protein, high fat diet or the one that suits your lifestyle; run/cardio for endurance and longetivity

1/5 Try to sleep and wake up at the same time everyday. Identify your circadian rhythm and synch with it. Don't allow yourself a casual miss and extra '10 mins' of sleep. Find a day everyweek to sleep 10 hours at a stretch.

2/5

India's trade deficit has clocked $24.8 Bn a month in FY23 so far. At this rate, the FY23 full year deficit can reach $298 Bn or ~8.5% of GDP.

FY13 recorded the highest trade deficit ($190Bn) ever at 10.4% of GDP. A crisis year.

What's ailing the foreign trade? A thread 🧵 This is how India's trade balance has moved over the years. See image

Some of my favourite videos. Adding in this thread 🧵to watch them again when I have to.

1. The paradox of choice by Barry Schwartz
2. Toasmasters 2015 World Champion: 'The Power of Words' Mohammed Qahtani

India's services exports. A thread 🧵

In FY22 India's Net services exports clocked a surplus of $107Bn. A record.

But India's IT, Telecom & Computer exports were $111Bn alone.

Learn what dragged this surplus and why is it set to change. Gross inflow of Services trade in FY22 were $254Bn.
This number has grown at 6% since FY12 when it clocked $140bn

On a Net basis (Exports - Imports) India's services trade is at +$107bn.

What constitutes India Services trade?

Bad data and news from US, EU could lead to a correction in global stocks.

This can lead to a correction in Indian stocks. A dip could be another opportunity to add equity exposure in this multi year bull market in India.

Be mindful of valuations, earnings and the trend. This phase could witness
-Falling stocks, commodities and USD
-A recovery in bonds, which means, lower long bond yields.

If this setup plays out, it could be one of the best bull market correction entries.

India imported 27.5 Million Tons (MT)/ $21Bn of Petroleum crude & products (POL) in Jun'22. The average price of import was $105.

Exports of POL were 12 MT / $10.6Bn, a record high.

In July the Govt imposed export duty. This led to a decline of $4bn in POL export earnings.
1/4 India used to export less than 5 MT of POL prior to the Russia Ukraine war. The new O&G markets opened this window of POL exports.

This also means that India's Oil imports are slightly elevated at this time. This distorts import cover calculations as well.
2/4

The Coming Collapse of Inflation and How To Benefit From It

@ankitapathak_ and I wrote a note on why red hot inflation is likely to cool.

Read this intro thread 🧵with the link to full report. What Are We Saying?

1. Biggest driver of inflation – commodity prices – are falling. US Housing, the core inflationary component is red hot. This is likely to cool off and mean revert.

A 🧵
India Crude basket is now above $100.
For the first time since FY14, it has exceeded $100 mark YTD.

But here is a thread which tells you how India's Energy Worries are tapering over the years.

Few talk about long term boring changes.
Here is a take on one such change. Indian economic growth is becoming more broad based. It's now emerging as a dominant part of BRIC while others struggle.

Ex of China (because of poor investment returns), Indian economy is now as large as Brazil + Russia combined from being 1/3rd less than a decade ago.

Bank Nifty (LTP 33,532) is headed higher, much higher.

Here are the reasons why Banks could be one of the best performers ahead. A quick thread 🧵 1. Credit growth in India is improving at a fast pace.
From the lows of under 6% yoy last year, banking credit growth is now at 11% yoy and is likely improving further.

In FY23, we might reach early teens for Credit growth nos.

The best time to buy Indian stocks is when an external crisis roils the market.

In hindsight, US Recessions have been a good time to buy Indian stocks. But it's not easy to have the courage to do it.

What's the next best time?
Read this thread 🧵 to know. Spend sometime on the attached image. Note the following:

1. The US 10-2 yr Bond yield curve has been adjusted for crude oil prices. Oil spikes invert the curve faster and signals a slowdown.

2. For India (large oil importer) this is a better indicator of stress.

A message from commodity futures market.
A thread🧵

Why commodity futures curves have begun to lose backwardation in spite of such a massive supply shock due?

What message is it sending? Read on... To understand this, it's important to know the term structure of the commodity futures market.

Commodities require storage. Buyer of any commodity has to pay storage cost (cost of carry) to hold the commodity in physical form. The futures market replicates this cost.

India inflation touched 6.95% yesterday. Here is the inflation X-ray, a deeper look at the data.

A thread 🧵 The breakup of India's Consumer Price Index or Consumer Inflation:

Food and beverages 45.9%
Pan, Tobacco and Intoxicants 2.4%
Clothing and Footwear 6.5%
Housing10.1%
Fuels And Lighting 6.8%
Miscellaneous 28.3%

The above makes up the CPI basket.

What does Fed rate hike, balance sheet run-off and yield curve inversion mean for markets?

A thread 🧵

This topic is likely to dominate the narrative for next few months. Read along and share your views. The US Federal Reserve raised the Fed funds rates by 25bps in March 2022 and is set to raise it further. It is using communication as a tool.

Fed governors are indicating bigger (50bps) hikes and that too many times over.

Why is Fed raising rates?

Read on

Why there is a case of cyclical recovery in Indian economy? A thread🧵

The flow of financial resources to commercial sector & the economy is a very important indicator to gauge the health of economic growth.

Here is a what the data is saying. Read slowly. It's a complex topic In FY20 India's Nominal GDP (NGDP) (in INR) was Rs. 200 trillion (Lakh Crores).

Assume Rs. 200 trn as India's GDP. Each year Indian economy grows by some %.

Assume that in a year Indian NGDP has to grow by 10%. So Rs. 200 trn will become Rs. 220 trn.

An addition of Rs. 20trn

Why and when the markets stopped caring about the Russia-Ukraine conflict? A short thread🧵

The news coming in from Ukraine remains concerning with huge losses and humanitarian crisis.

But for the last 10 days the markets seems to 'Not Care' and react to the news.

Read why Markets become very jittery if they can sense a large financial panic because of an external event.

One gauge to measure what the market is pricing-in is the funding stress indicator.

For instance, the FRA-OIS spread in US measures the funding stress in interbank markets.