Why Warren Buffett doesn't watch business channels and even you shouldn't

Feb 26, 2014

In this issue:
» Bitcoins have started losing faith
» What is the government doing to make PSU bank chiefs accountable?
» China's corporate debt at 120% of GDP!
» A decade long gold rally may have died
» ...and more!

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(This could impact you significantly!)

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How many of you start your day with a cup of tea and morning bazaar/opening bell shows that are aired on various business channels daily? And how many of you then make an investment decision based on advice given on these channels?

Well, if not many, at least for a few of them the answer may be in affirmative. After all, business channels contain most current information. And thus it is deemed that they help investors in making an informed investment decision. Plus the advice comes absolutely free!

With due respect to such channels, we believe that instead of being a help, they are doing a big disservice to investing community, in general. For one, the truck load of information that they share makes it difficult for long term investors to separate the wheat from the chaff. Or in other words, separate valuable information from noise. Valuable information helps while noise confuses. And considering the number of 24*7 business channels we have, an investor's mind is often pre-loaded with noise.

Also, the advice on such channels is fraught with conflict of interest as disclosure standards are not stringent. Further, since business channels propagate constant portfolio churning, following them will only make your broker rich. Not you.

Even Oracle of Omaha vouched for not paying much attention to expert views while making investment decisions in an excerpt his upcoming annual letter to shareholders. In fact, he even confessed that in the last 54 years, his purchase decision has never been influenced by external noise. He further advised - If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays. In fact, not just Buffet even his guru, Benjamin Graham propagated this investing principle of paying attention to value and ignoring stock market prices except for making buy and sell decisions.

We cannot agree more. Investing is a long term activity. One should not try to re-position his portfolio based on every piece of information that comes into the market. As an example - How will declining IIP growth for one month affect someone who has bought an engineering stock with a horizon of 5 years?

Instead, of churning portfolio on such news flow, one should focus on fundamentally good stocks and buy them for the long term. Allowing the near term noise to distract one's emotional quotient can lead to decisions which may not be beneficial in the long term.

Have you ever invested based on the advice given on news channels? What has been your experience with it? Let us know your comments or share your views in the Equitymaster Club.

 Chart of the day
Insurance companies face varied challenges. Many a times the focus is on those issues that affect new business generation. But we tend to ignore the renewal aspect of the business. And we lose out on an important metric. Here the persistency rate comes into picture. Persistency refers to the volume of business that a life insurance company is able to retain. This rate can be gauged with the help of "persistency ratio". It implies "percentage of an insurance company's already written policies remaining in force without lapsing or being replaced by policies of other insurers." Simply put, persistency = No. of Clients Paying the Premium / Net Active Clients * 100.

A high persistency rate is indicative of satisfied customer and effective sales practice. Persistency is a critical factor in the viability and success of insurance companies. Hence, they constantly look for ways to increase this ratio. Also, the Insurance Regulatory and Development Authority (IRDA) have put in place a persistency rate of at least 50% to be maintained by the life insurance agents. This percentage was later raised to 75% in the interest of the policyholders and the insurance company per se. However, the records of past 3 years (FY11-FY13) stand dismal. The persistency rate has been hovering in the range of 55%-65% in these periods as can be seen in today's chart. This indicates that lesser than 65% policies were renewed. Later the regulator asked the agents to set their own persistency rates. That is indeed a bad news! Mis-selling and mere focus on new business have knocked the persistency rates. This can prove detrimental to the industry and the customers alike.

Persistency rate of insurance policies

It's not uncommon to see a fast growing industry suffer a lot of casualties. In other words, witness a lot of companies falling by the wayside and going bankrupt. This was true of the whole dotcom boom and few other frenzies. However, does this mean that it signals the beginning of the end of the industry? May be not. However, the opponents of this whole concept of Bitcoins have a different view. They are going around arguing that the digital currency may well be doomed. What gave them the reason to launch this all out attack is the recent bankruptcy of one of the world's largest bitcoin exchanges, Mt. Gox. Apparently, Mt. Gox got duped to the tune of millions of dollars by cyber thieves who posed as company's customers and withdrew huge sums from its accounts. This left the company with no money to pay to its real customers, causing the firm to shut down. Now, sceptics of the currency have literally jumped at this opportunity to highlight why there is a need for more Government regulation. Whether the currency will survive this fresh onslaught remains to be seen. But as we said earlier, while the idea behind Bitcoin is sound, gold will be a much better way to play this whole theme of currency devaluation we reckon.

In late 2013, 10 general managers of a Kolkata-based bank had complained to both RBI and the Finance Ministry. The complaint was about the Chairman sanctioning an Rs 1 bn loan to a real estate player despite board dissent. Turns out that the bank, United Bank of India reported gross NPAs in excess of 10% for the December quarter. Also that the RBI had long placed curbs on loans from the bank exceeding Rs 100 m. The Chairman of the bank, Ms Archana Bhargava, meanwhile, seems to be have been allowed to quit.

No doubt it is not just United Bank but the PSU sector as a whole that seems to be reeling under the stress of bad loans. But cases like United Bank point to a problem that stinks of corruption rather than economic issues. These were the words of Raghuram Rajan, in 2008, long before he became chief of RBI -"Those who argue that public sector banks are in good health simply do not understand that they are condemning them to oblivion. Indeed, it seems to me that there are interest groups that want public sector banks to remain the way they are only because they can continue to be a cash cow, to be milked dry". We wonder if the RBI will implicate PSU bank chiefs for asset quality problems.

Gold's rally in the past decade has been stupendous to say the least. Prices especially rose sharply post the 2008 global financial crisis. This was because of massive doses of quantitative easing unleashed by central banks of the developed world. As the value of paper currencies began to be called into question, the demand for gold increased since it is a tangible asset, having store of value. It is also a hedge against inflation at a time when the value of paper currencies was falling.

But this bull-run reversed sharply in 2013. Gold prices tanked around 28%. Because the US Fed announced tapering off QE, it was assumed that the economy is on the mend. Thus, the demand for the metal reduced as investors flocked to other asset classes for better returns. The underlining factor for the fall in gold seems to be the perception that the global economy is recovering. But there is a problem with this notion. First, the Fed's QE program can largely be labelled as a failure since it did nothing to bolster economic growth or employment. The rise in stock prices was more a product of liquidity rather than improvement in fundamentals. Thus, if the withdrawal of QE is followed by another prolonged slump, there is an increasing possibility of the Fed once again providing support through loose policies. And hence the demand for gold will once again go up. Hence, we do not think it is prudent to write off gold entirely and we believe that it should form a part of the overall investment portfolio.

Anything in excess can be dangerous. And more so when the thing under consideration is debt! Now here is what happened in China following the onset of the global financial crisis in 2008. In a bid to beat the slowdown blues, Chinese policymakers unleashed a massive stimulus program of 4 trillion yuan. The resultant flood of cheap money sent corporates on a borrowing spree. Because funding was so readily available, companies started investing in even those projects that had poor return prospects. Now, Chinese companies are sitting on a massive debt. If Standard & Poor's estimates (reported by Reuters) are to be believed, the total outstanding bank borrowing and bond debt of Chinese non-financial companies stood at about US$ 12 trillion at the end of 2013. That's 120% of China's GDP! In short, Chinese corporate debt has hit unsustainable levels. Rising debt restructuring and defaults could spell big trouble for the dragon economy.

The Indian equity markets firmed up further in the post noon trading session. At the time of writing, the benchmark BSE-Sensex was up by 113 points (+0.5%). FMCG, auto and capital goods are the biggest gainers. Barring Japan, majority of the Asian indices are trading in the green with the China and Hong Kong markets being the biggest gainers. The European markets opened the day on a mixed note.

 Today's investing mantra
"You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ"-Warren Buffett

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4 Responses to "Why Warren Buffett doesn't watch business channels and even you shouldn't"

sachin kawde

Feb 27, 2014

I normally do my own research & make initial investment. Latter if I found that the stock had a 20-50 % gain & some one still recommending on a business channel (CNBC AWAZ only) with the similar sort of logic with which I bought it, I simply add on to it, you can say averaging but at higher price with a more than 10 yr. horizon.


Borkar M.R.

Feb 26, 2014

I am very lucky! I do not get the hand over the remote. Only by 1540 my wife hands over remote tome so I listen to the closing bells. As a matter of fact, a well sought after commentator told us over the cup of tea, some ten years back, "Do not take these -tips/recommendations given in news channel- as we are required to say that". Use your reading and analysis for investing.- Borkar


H K Prakash

Feb 26, 2014

I have an ebook with suggestions from 18 American millionaire (earned, not inherited) share market traders. One brilliant investor is also lazy! He subscribes to many trade journals and watches experts on TV and notes their recos, prepares a summary
No need to research or spoil your eyes burning the mid night oil!

Like (2)

s, nair

Feb 26, 2014

Lost confidence of channel nae their so called experts, and ultimately money.

s nair

Like (2)
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