The most certain way to make money in stocks
In this issue:
» Government finances under a lot of stress
» Micro finance in India is alive and kicking
» Nifty is not overvalued with respect to peers
» Bill Gross' words of wisdom for investors
» ...and more!
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Surprising as this concept may sound, let us tell you that if used properly, it could become your sure shot ticket to the rich house. And do you know who the foremost proponent of this concept is? Well, none other than the Oracle of Omaha, Warren Buffett. The super investor has mentioned a countless number of times that he looks to invest in businesses with very strong moats. It turns out this moat is nothing but the unique ability of a firm to price its products in such a way that people are willing to pay far in excess of the cost price that has gone into its making. In other words, like the cricket match example, the value and cost associated with the product should be poles apart.
That's it. Even if you spend the rest of your lives looking for such businesses and end up finding only a handful of them, you are surely going to end up quite rich. This is because these businesses not only earn a high return on capital but are also a great hedge against inflation. People who value something won't mind paying a slightly higher price for it year after year, isn't it? Think of most of Buffett's most successful investments like Coke, Gillette, See's Candy, Wrigley etc and you will realise that buyers consider these brands to be premium. In other words, they don't mind paying for these products a price that is much higher than the cost and investment incurred to manufacture them.
Do you think investing in companies whose products are highly valued than its competitors the best way to make money in stocks? Share your comments with us or post your views on our Facebook page / Google+ page.
01:28 | Chart of the day | |
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Source: LiveMint |
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Regulatory changes have crushed the unsustainable margins of the larger entities since 2010. However, smaller MFIs like Bandhan and Ujjwan were proactive in slashing their lending rates. That too even before the regulatory overhaul occurred. The crackdown on Andhra Pradesh MFIs benefited them even further. Several reputed private equity investors took exposure in the smaller MFIs. The reason was better management, use of technology and good asset quality control. With the funds, these entities have managed to scale up their balance sheets. In fact Bandhan has taken over SKS in terms of share of MF loans in 2011. That the fortune of this economically benign business model is not sealed is a very enthusing sign.
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Here it may be noted that in absolute terms, tax collections were higher than last year. But because the budget estimate was unrealistically high, the overall tax picture looks weak. The non-plan expenditure zoomed to 87% of the year's total in the first 10 months itself. The only silver lining in the cloud was that despite such constraints, the government did not cut back on capital expenditure which is an important contributor to GDP growth. Indeed, there is no doubt that the government will have to come out with some concrete solutions to address this issue. After all, there is so much that the central bank can do.
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Let's try to understand this from a larger perspective. In the past few decades, asset prices in the US accelerated at a rapid pace. Who was responsible for this? None other than the US Federal Reserve. The central bank kept printing money recklessly. This gave a false impression of wealth creation. With the busting of the asset bubble in 2008, the grim reality of the developed world became evident. So what's going to be the 'new normal' in an environment of credit and zero-bound interest rate risk? In the opinion of Bill Gross, it's going to be muted growth, high unemployment and orderly deleveraging. For instance, falling interest rates lead to a decline in the interest component of personal income. Correspondingly, the spending power of consumers is adversely affected. This is a perfect example of how central banks can wreck havoc in an economy. Thankfully, our central banker back home is much saner than many of its counterparts.
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Thus, a market that might appear expensive on a standalone basis might be cheap when consolidation comes into picture. This is precisely the case with Indian markets. The standalone Nifty P/E is 19.5x. And the consolidated figure is in the region of 15.2x. Thus, Indian markets still appear to be reasonably priced on a consolidated basis. However, they command a premium when compared to other BRIC nations. But that premium is attributable to high RoEs and strong growth prospects. And with foreign capital chasing growth, we expect the premium to sustain in future as well.
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04:51 | Today's Investing Mantra |
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4 Responses to "The most certain way to make money in stocks"
Digambar
Mar 1, 2012The value can be a little more than the cost OR much more than the cost.
The value can be , how much the product is able to tickle the consumer? ... the consumer's sensory organs?
He is going to get his pleasure from a combined effect of gathering of senses created by his mind.
His mind works based on his knowledge, experience and imagination.
Think of a movie ticket. Pepple are willing to pay Rs 150 or 200 in a multiplex now.
If hthe individual has to take part in a sex and crime activity in his personal life to get the same level of pleasure, he would be spending much more... thats why he is willing to buy a ticket.
The value covers the cost and profit of production, distribution and exhibition.
To attract the consumer the value could be added by umproving the quality of production or sharing the profit with him by reducing the price.
A cleaver maker of a product or service can really exploite the weakness of human mind.
Tobbaco, alcohole, opium, drugs are the historic examples of this.
The exposure of skin on the screen/stage is another glittering exampleof this exploitation of human mind!
If one can spot the value potential of a product or a service and invest in it, he cam amke a fortune!
Steel, coal,cotton, cement,processed foods, midicines, atomic power are knowen examples.
Producing Value with the least cost will maximise the profit.
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Khan
Mar 1, 2012it is not always right to say that investing in companies whose products are valued higher than their competitors is the right way to make money..
Naveen
Mar 1, 2012Good article is this "The most certain way of making money".
I have question for the author.
If you "were able" to buy Would you buy the FACEBOOK ipo having a position(as a long term) Or can you price the stock? and value it for a business.
Lets be sport on giving a writeup of your thoughts on this. yeah
Regards
AD
Mar 2, 2012I am sure Warren Buffet has reasons for what he says. But looking at Indian landscape - there are enough companies with a strong moat that are not doing wonders for the Investor. Bharat Forge , SAIL, Coal India, Oil companies,RIL , L&T, Bharti and & DLF are great examples. What else makes a huge difference is their strategy and policy towards investors.