For equity investors around the world, trying to be like Warren Buffett is becoming an increasingly common obsession. On the face of it, copying what an expert does doesn't seem like a smart way to become an expert. This has nothing much to do with investments or even business. Consider the batting skills of Sachin Tendulkar. Could anyone, just anyone, become a top-notch batsman by simply copying the strokes that Tendulkar plays? It sounds unlikely, to say the least. Anyone who tried to do so would very quickly come up against a set of limitations that Tendulkar doesn't have. Perhaps he would discover that one of the prerequisites are reflexes of a speed that the average person lacks, and that none of Tendulkar's shots work very well when executed by someone with average reflexes. However, that doesn't mean watching Sachin Tendulkar play would be useless for an aspiring cricketer. What he would need to do is to try and distil general techniques and principles instead of trying to copy exact actions. This is perhaps the only way in which it makes sense to try and benefit from studying what Warren Buffett does. There's little point in trying to look for India's Coca Cola or India's Kraft or India's Borsheims because Buffett has invested in those companies in America. The characteristics that embody those stocks in the US may be completely different from what similar companies in India would offer to investors. Instead one has to try and figure out what the underlying principles are and then try and see which stocks, if any, they would throw up in India.
When I try and distil these principles down to their basics, they boil down to what one could call the three Ps of Buffettology. The three Ps are: Predictability, Price and People.
Predictability. Buffett's liking for some sectors and his famous refusal to get into some sectors like technology boils down to predictability. His investment choices are entirely based on products whose basic demand will remain predictable for decades to come. Not just that, the factors that will determine success or failure will also remain the same as they are today. At the core of Buffett's portfolio, there are companies that dominate businesses like soft drinks, shaving blades, candy, cheese, furniture, jewellery and (recently) railway freight services. I don't see any upheavals there.
Price. This is the heart of value investing. Investments must be made at a low or at least fair price. This rules out any hot growth stocks, at least at any point of their history when they are widely recognised as growth stocks.
People. If you read what Buffett writes or says about his investments, he always lays great emphasis on the quality of management in his investments. Even in his private investments that he has taken complete control of, he ensures that the original management is not disturbed.
How would you apply these principles to your investments in Indian stocks? Do note that we at Value Research are not claiming that a complete replication is possible. Maybe it isn't, just like Tendulkar's. But adopting the broad principles may greatly improve your investment returns.