This is where most investors go wrong! - The 5 Minute WrapUp by Equitymaster
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This is where most investors go wrong!

Mar 24, 2011

In this issue:
» Gold could more than triple from here, feel Canadian miners
» Mr bubble, Robert Shiller, has unearthed a new bubble
» Will Infosys outperform TCS at last?
» Modern food chains running rings around traditional restaurants
» ...and more!

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Apple Inc. No other firm has perhaps gotten as much attention in recent times as this venerated tech giant. And not without reason. When your product launches go on to become cult hits with amazing consistency, it is difficult to keep away from the spotlight. Not surprisingly then, even the shareholders in the company have gone laughing all the way to their banks. To put things in perspective, since the start of the last decade, Apple's shares have returned a whopping 4,400%!

And therein lies the biggest secret to investing one would believe. Just invest in a company that has blockbuster products and one's life is sorted out. If you too, like most other investors fall for this logic, you are treading a dangerous path we believe. Indeed, Apple has gone on to give fantastic returns in the last decade or so. But can we say with a great degree of certainty what the business model of the company would look like 5-10 years from now? May be not. The thing is that Apple belongs to an industry that is subject to rapid technological change. And unless one is very intimately associated with the industry, one cannot be certain how the business model of a firm will evolve over time.

This is exactly the reason why Warren Buffett recently quoted that he would rather prefer Coca-Cola over Apple when it comes to long term investing. He opined that it is very easy for him to come to a conclusion as to what Coca-Cola will look like economically in five or ten years. However, it is not easy for him to come to a conclusion about Apple.

We know for sure that close to 60% of human body weight will comprise of water even 5, 10, 50 years for now and in order to replenish the same, he will have to have a drink like Coca Cola. However, the same thing cannot be said about Apple's products. Just as we didn't know 10 years ago that access to information will be revolutionised by the likes of i-phones and i-pads, we don't know what will revolutionise information technology 10 years from now.

Thus, what most investors miss is not how successful a product currently is but what will the economics of a company look like 5-10 years from now. And this we believe is one of the cornerstones of investment success.

What do you think? Do you think investing in all successful products is the way to go or the long term economics of the business also needs to be taken into account? Share your views or post your comments on our facebook page.

 Chart of the day
Today's chart of the day shows how the world's largest car producers in 2010 stack up against each other. As shown, China looks like head and shoulders above the rest with a production in the vicinity of 14 m units in 2010. US, once the world's largest car producer, has fallen to third spot behind China and Japan. Feels good to see our country too on the list. India produced 3 m cars in 2010 and is now the sixth largest car producer in the world. However, don't be surprised to see India coming in the top three few years from now.


The quarterly result season is just around the corner. Market experts are placing their bets on who would be the better performer - Infosys or TCS? Both companies are leaders in the Indian IT industry. But Infosys has lagged behind TCS in recent times in terms of financial performance. The main reason for this has been slower volume growth and almost flat pricing. On the other hand, TCS has done well on the back of a strong order growth and better pricing outlook. However, the bigger question is will Infosys catch up and bigger still, will it outperform TCS? Many feel that this may actually happen.

The reason being that the company is expected to see larger orders as clients increase their discretionary spending. And Infosys has a greater number of discretionary orders as compared to TCS. However, we believe that the continued focus on emerging markets especially the domestic markets as well as higher proportion of BFSI (Banking and Financial Services) orders would work favourably for TCS. Whether Infosys actually does outperform TCS or not, only time will tell.

Financial history is painted with bubbles and crashes. A bubble forms when a powerful idea of a "new era" spreads contagiously among investors. It drives up prices crazily in a self-reinforcing loop. When it finally crashes, many fingers and bank balances burn away to ashes. So it is quite natural for investors to wonder where the next bubble would emerge. Let's see what the man who predicted the dot-com bubble, Robert Shiller, has to say about this.

Shiller's hunch about the next candidates for bubbles is set on two different asset classes. One is commodities, which is quite understandable. The other one, a little obscure, is farmlands. Both have a "new era" story attached to them. There are increasing fears of global warming and extreme weather conditions drastically escalating food and fuel prices. The political turmoil in the Middle East has sent oil prices beyond the century mark. We have fiscal deficits and reckless money printing exercises by central governments across the globe. All these factors have already resulted in a significant rally in food and commodity prices. In recent times, farmland prices too have been booming in both the UK and the US. And while real home prices have fallen by 37% from their 2006 peaks, farmland prices are only down 5% from their 2008 highs.

Let's see if Mr Shiller's hunches hit the nail this time as well.

'I'm lovin' it' say the modern food retailers and the consumers in unison. The eating out habit of Indian consumers has changed over the years with the advent of globalization. They are happily frequenting outlets like McDonald's, Pizza Hut, Domino's or a Jumbo King stall instead of the nearby traditional restaurants. While this can be attributed to the changing Indian lifestyle, tastes and preferences, there is one more reason that is coming to the fore. The all important cost factor that is. These modern food chains are able to price their offerings cheaper than those at traditional restaurants. Efficient supply chain from farm to the outlets, thereby eliminating middlemen helps them in sourcing inputs at lesser costs. This benefit gets passed onto the consumers. Economies of scale and practice of maintaining steady round the year supply contracts for raw materials also helps. The traditional restaurateurs, on the other hand, are not able to compete with these giants resulting in shutdowns. At least 50 restaurants have ceased operating in south Mumbai alone in the past couple of years.

Higher food prices are a cause of worry to most. But ask the farmer if he would be happy if his produce fetches a much higher price without affecting demand. The answer would be an obvious 'yes'! Similar seems to be the case with gold miners in Canada. As per Moneynews, some of the largest gold mining companies in Canada are projecting gold prices to triple in four years. Not that we see the demand for the yellow metal coming down in the near future. Governments, investors, central banks and ETFs are all expected to flock to gold. Especially as currency crises assume catastrophic proportions. With governments in developed countries showing no repose in printing money, this is certain. However, betting on the fact that the same will lead to gold prices tripling in 4 years is a far cry. The gold miners substantiate their view on the premise that countries such as China, Russia and India would buy gold as part of their foreign exchange reserves. We do not completely disagree with them. But our advice to Indian investors would be to invest only a small proportion in gold as a hedging policy. Taking huge speculative bets on a single asset has never paid off in the long term.

Meanwhile, Indian stocks continued their tryst with gravity defying moves today as well with the BSE Sensex trading around 110 points higher at the time of writing. Banking and engineering majors were seen giving the maximum push. Most Asian indices were also seen closing in the green. European indices however have opened on a mixed note.

 Today's investing mantra
"Volatility is a symptom that people have no idea of the underlying value." - Jeremy Grantham

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12 Responses to "This is where most investors go wrong!"

shahnawaz ahmed

Mar 24, 2011

i think investing in a successful product is a wise decision but it should be a very long period like 8-10 years as every investor's aim to make profit so it should be medium term and to be monitored carefully on that product relating company.


Anupam Garg

Mar 24, 2011

Economics of a company definitely matters but a company like Apple has created a separate niche image of its own in customer's minds. in today's world, tech products r bcomin status symbols. Even though a mobile with the same features as an iphone may b available at half the price, a savvy consumer wld still go 4 iphone. iphones, ipads, MACs etc r quality products comin at affordable prices. Apple has created a lot of loyal followers & until it does somthing really silly, i don't find its stock price goin down.

However, identification of such companies is difficult. Once found, they r a 1 in a million catch & shldn't b let go. But now tht Apple's price has sky rocketed, the time to make hay has gone

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