Don't make this investment in 2010. And never!

Jan 11, 2010

In this issue:
» Kolkata outpace Mumbai, Delhi in property price rise
» 2010 outlook on Indian IT sector
» Can mid and small-caps outperform in 2010 as well?
» Gold, silver rise on global currency devaluation fears
» ...and more!!

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There are 'great' businesses that 'will' make you big money in the long term. There are 'good' businesses that 'may' make you good money in the long term. And then, there are 'terrible investments' that 'will' definitely lose you money in the long term. It is this third category that you must stay clear of.

Buffett describes such terrible businesses as ones that 'grow rapidly, require significant capital to fuel the growth, and then earn little or no money for shareholders'. His topmost example of such a business is airlines. But there are several others such terrible businesses existing in India that you must stay clear of. And this is despite the fact that some of these businesses promise a bright growth opportunity in terms of growing their revenues and profits. But it is not just revenues and profit growth that matter. What also counts is shareholder returns.

The ones that come to our mind exist in sectors like retailing, power, textiles, and oil marketing. We see businesses in power and oil marketing continue to get hurt by wide regulations that restrict returns for companies. As for the ones in retailing, continuous expansion of mall space will consistently eat into their cash flows.

We do not think that investing large amounts of capital into such businesses is a bad thing in itself. But you as an investor need to make sure that there is a good chance that such capital investments will actually translate into healthy shareholder returns in the future. If you see such chances as minimal, stay clear of investing in these businesses!

 Chart of the day
Most middle class households in India still prefer investing in real estate and gold over equities. If you were investing in real estate in the past couple of years, which destination would have given the best returns?

The answer is not Mumbai, Delhi or Bangalore. Kolkata, Faridabad and Bhopal would have been better choices. As per the National Housing Bank's Residex - an index of property prices, real estate prices in Kolkata have outpaced other metros since January 2007. The causes of Kolkata's price rise are many, the key being that property values there started-off at a lower base as compared to Delhi and Mumbai.

Data Source: Mint

The Sensex gained 81% in 2009. No small feat indeed! But the BSE-Midcap and BSE-Smallcap indices turned in an even better performance, gaining 108% and 127% respectively. This scenario raises an interesting question. Will mid-caps and small-caps continue to outperform in 2010 as well?

They indeed would if the markets continue to make new highs. However, should a correction happen, they are also likely to fall the most as they tend to be more volatile. So, given these possibilities, how does one choose the middle ground? Well, by not making mid-caps and small-caps a large part of one's portfolio. Also, look for small companies that have strong balance sheets. For that will give them enough firepower to live through the bad times.

Anyways, stocks in India had a mixed day today. While the BSE-Sensex opened the day on a strong note, profit booking pulled it down towards the fag end. The index was up around 30 points (0.2%) at the time of writing. Mid and small-cap stocks rose much faster, as the BSE-Midcap and BSE-Smallcap indices clocked gains of 1.1% and 1.9% respectively.

Most other Asian markets also clocked gains today. Indices from Hong Kong (up 0.4%) and Singapore (up 0.3%) led the gainers' pack.

All is not well with the world economy. Paper money is getting worthless across the world. The latest to join the race to currency devaluation is oil exporting major Venezuela. Its President Hugo Chávez late last week announced a steep devaluation of the Bolivar.

The government sees this as a way to restart the stagnant Venezuelan economy ahead of this year's elections. And what other fast way to do that then to force consumers to spend their cash that will soon lose value?

Staying with devaluation of paper money, at least one set of investors seems to be enjoying it. We are talking about those buying into hard commodities like gold, silver, and crude oil. The first trading week of 2010 proved good for these commodities. Silver was the best of the lot, as it closed the week higher by around 5%. Crude oil and gold followed with gains of 4.3% and 3.8% respectively.

With central banks around the world printing money and propping up supply of money, higher inflation is likely to stay for some time. In this scenario, these commodities seem a good destination. But as we've mentioned earlier, it is prudent to treat assets like gold as 'cash that won't lose value' and not an 'investment that will generate good returns'.

Now, while gold and silver may continue to rise in the international markets, rupee's appreciation against the US dollar will ensure that the price rise in rupee terms will not be equally good. As a matter of fact, the rupee has already appreciated by around 12.5% since touching the lows of nearly 52 in March 2009. Economists predict the rupee's rise to continue owing to a flush of cheap dollars flowing into the Indian equity markets.

Data Source: Trend,

The year 2009 was a rollercoaster ride for Indian IT industry. After touching the rock bottom during initial months of the year, the industry bounced back in style. The BSE-IT index surged around 130% during the year, thereby being among the top performing sectors. Experts now seem to be guessing what 2010 holds for the sector. There is a pick-up in global demand for IT outsourcing and billing rates seem to have stabilised after a long period of volatility. IT industry association, Nasscom is in fact expecting a double-digit growth for the industry during the current year.

Now, whether the good news will trickle down to the stock prices of the IT heavyweights remains questionable. High base valuations and an appreciating rupee are the near term concerns that investors in IT stocks must have to live with. In such a scenario, it seems prudent for investors to rationalise their mid-term expectations from the sector.

Improved efficiency is critical to higher corporate profits. The same gets more pronounced in case of banking and software companies that are heavily dependent on human resources. Indian banks have made the most of their technology adoption over the last 5 years. This has helped them put their work force to the best of use. As a result, their business has grown by almost 135% in the last 5 years. At the same time, growth in work force and franchise has been just around 10% and 21% respectively. In this, the once-perceived 'underperformers', the PSU banks, have managed to trump their private sector counterparts.

But this should not be concluded as inefficiency of the latter. While the PSU banks have just begun to reap the benefit of technology, the private entities have been enjoying this from their early days. In addition, plenty of natural attrition in PSU banks over the last few years has made their efficiency ratios look even better.

 Today's investing mantra
"Proper allocation of capital is an investor's No. 1 job." - Charlie Munger

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19 Responses to "Don't make this investment in 2010. And never!"


Jan 21, 2010

month of jan 2010 buy 4900 put and 5300 call both way you will sure profit


mittal r.l.

Jan 21, 2010

2010 seemsto be a very difficult to earn for small
investors. can we follow the recommendation of experts.
is it possible to go market at 21000 level. suggest the
method to earn from this type of market.


nipul thakrar

Jan 16, 2010

an excellent news regarding eu -america and also dubai
and eye opened facts about FIIS.glad to read such type of investigation.keep it up



Jan 14, 2010

I liked your - Warren Buffet's- comments on which sectors to look for while investing and why.

I endorse that we have to look closely at the negative aspects before going gung ho with any particular investment.



Jan 12, 2010

it is quite informative and interesting. but u should also thorow some light on where to invest.


R Sathyamurthy

Jan 12, 2010

I for one, take your 5 minute wrap-ups with a pinch of salt. Because, you pepper it all the time with 90% negative views and only positive view you give is about Gold and that too because there is a Quantum Gold Fund run by your sister concern or whatever.

Actually, I detest reading the 5 minute wrap-ups because it largely contains negative news. I think that is a ploy you follow to say "I told you so" later on.



Jan 12, 2010

sir, i want some buzzing stock which can give great return sir plz send some stock name...
thanking you..


N.M.R Shreedhar

Jan 11, 2010

Chart of the Day -- needs to be taken with a pinch of salt. Not clear whether the price appreciation is for commercial or residential space,whether locality-specific and so on.May be better if more info provided on how the index is arrived at. Actually all these indices don't give the true picture-- whether it is gold price, or rupee appreciation, or WPI for that matter. So it may be used to know the trend, but should not be the yardstick to make a decision. regds



Jan 11, 2010

your presentation gives information.
i shall feed back more ideas as and when possible


Dr. m p singh

Jan 11, 2010

i want to make a portfolio of Rs 20 lakhs.portfolio should be designed in such a way that i should't lose my base capital and an assured income in range of 10-20% annualised should come ie arround 2-4 lakh annually.

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