I have been reading again the excellent Book ‘The warren buffett way’. This book was my first exposure to Warren buffett and his approach to Investing. I have followed and learnt from him since then. The following were the key re-learnings I have had over the past few days (I am yet to finish the book)

– ROE (Return on equity) is one the most important indicator of the economic performance of a company. A company can raise this measure through five different means
o Higher Asset turns (Sales / Total assets)
o Higher margins
o Higher leverage
o Cheaper leverage
o Lower taxes.

I have seen the above happen for several companies in the past few years and have seen the stock price follow the improvement in ROE

For ex: Bluestar (better asset turns), ICICI bank (cheaper leverage, higher margins).

– Inflation does not improve ROE and actually reduces the net return to an investor
– The best companies are the ones which have strong franchies like crisil. Over time some of them become weak franchises. Further weakning of the franchise leads to a good business and then finally to a commodity company.
– Pricing strength is a key attribute of Franchises. These companies can raise prices even when the demand is flat and can earn good returns.

2 Comments

  1. Prem Sagar says:

    Hi Rohit,
    NIce to see ur article after a long hibernation.
    I too started reading WB Way, but stopped mid-way as I had a few other books that I wanted to complete first. I really enjoyed reading Liars Poker recently. Pls do read it…
    ROE is a good way to track a co, I realize, using the Dupont method.
    And yes I do agree with ur view on Franchise and pricing power.
    But what would u say for an industry like say auto ancillaries or retail-proxies like Bartronics, control print, etc where the opportunity is huge, but they have little or no pricing power?

  2. Kotekoppa says:

    How do I create a stock screen consisting of the multiple criterion as you have talked about? In ICICIdirect site I got only a few preset criterions.
    Praveen

Leave a Reply