Here's why we've stopped worrying about scams

Mar 29, 2012

In this issue:
» The sectors that will put up better results
» Will Spain suffer a lost decade like Japan?
» The Black Swan author on how to prevent another financial crisis
» Oil supply is not an issue, says Saudi Petroleum minister
» ...and more!
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20th Century. The term immediately starts giving us some sad mental images. Images of events like the two world wars, the great depression, the oil shock, the Korean and Vietnam wars, coming off of gold standard and the bursting of the tech bubble towards the end of the century. These events are likely to make even the best investors nervous, let alone the average one. Yet, as the portal Daily Wealth points out, the 20th Century gave investors in the US stock market a mind boggling return of 1.5 million percent! Sure, the 20th century was amongst the bloodiest in terms of lives lost. But still an investor would have made himself tonnes of money had he bet against these events lasting forever. Instead, a bet in favour of things eventually turning around would have worked wonders.

Well, India may not be standing at a similar crossroad currently. But the mood isn't quite upbeat either. Scam after scams are tumbling out of the Government's closet and the economy too seems to have slowed down to a crawl. Thus, it does appear as if a clump of rust has gathered around the India growth story. However, as the US example shows, an Indian investor would be making a big mistake if he starts betting in favour of these scams and inflationary trends lasting forever. For these events happened in the past as well but the Indian economy took them in its stride and continued to march forward. It is not for no reason that Indian equities have returned close to 17,000% since the Sensex was rebased to 100 back in 1978-79.

You see, the key to making money in stocks is not trying to find out which scam will happen next or which party will come to power. It is about trying to ascertain how fast cars fly off the shelves in India, how people queue up outside a spanking new multiplex to catch their favourite movie or how people buy snazzy new cell phones every few months. And as long as these activities continue unabated, as long as the wheels of commerce are chugging along, politics can go take a hike we believe. This is the strategy that has made people like Peter Lynch and Warren Buffett rich and successful. There is no reason why the same wouldn't give you a shot at wealth and prosperity as well.

Do you think it makes sense to overlook significant negative events and invest for the long term only? Share comments with us or you can also comment on Facebook page / Google+ page.

 Chart of the day
Today's chart of the day is yet another reason why India's demographic dividend could turn into a demographic time bomb if steps are not taken urgently to address some key concerns. Foremost amongst them being the poor gross enrolment ratio in higher education. As shown, not only is India much below developed nations, it is also below the world average when it comes to sending its students for higher education. It should be noted that the high skill sets that accrue to its citizens as a result of higher education is of paramount importance for the India growth story to continue. Failing this, we may not reach our desired goals in terms of developing our economy further.

Source: Team Lease

The financial crisis of 2007-08 that started with the bursting of the US housing bubble swallowed the world economy in a severe crisis. Even worse was the reckless manner in which policy makers and central bankers responded to the crisis. By pumping in cheap money into the system, they only aggravated the problem instead of solving it.

Renowned economist and author Nicholas Nassim Taleb takes us back to the roots of the financial crisis. As per him, the financial crisis was the result of a mix of wrong incentives, immoral practices and use of complex financial models to manage risks. But the interesting thing is that he doesn't stop at just pointing out the dirt. He also offers a very simple yet powerful policy recommendation that would avoid such catastrophes in the future.

According to Taleb, the best way to deal with complex problems is to have simple protocols. His solution is to apply this basic principle to the financial system - "The captain goes down with the ship; every captain and every ship." He explains this with a very interesting anecdote from history. It may sound surprising but the best risk-management rule was devised nearly 4,000 years ago by the Babylonians. One specific rule went thus: "If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death." Will the policy makers of today implement a similar rule where all parties are held equally responsible? We doubt. But we still hope.

Coupling of economies has led to global financial turmoil in the past. But going by what Saudi Arabia has to say regarding crude supplies, we might see some positive impact of the same this time. High oil prices have led to increasing deficits, inflation and below par growth in Western countries. Thanks to globalization, the damage doesn't get arrested there, but the ripple effect engulfs everyone. In the interests of all, the Middle East kingdom is here to help. Saudi Arabia has assured oil supplies even in the wake of supply disruptions from other sources. One may argue what good it will do in times when crude oil prices hardly follow principles of demand and supply but ride on speculation. However, we hope supply assurance from the largest global producer will allay the fears of a shortage and bring prices to sensible levels.

First it was Ireland and Greece. Then Portugal. And now it looks like Spain is going to join the bandwagon of potential sovereign defaulters. But given that the size of the Spanish economy is more than twice the size of those three economies combined, any default would have serious repercussions for the European region. Public debt in Spain has reached 70% of GDP. It has one of the highest levels of private debt in the Euro zone. The economy is on the verge of its second recession in three years and it is under pressure from the European Union to stick to the new fiscal rules. All of this has compelled the Spanish government to announce some severe austerity measures.

Thus, Spain not recording much economic growth for years is a scenario that is very much in the realms of possibility. Which is why Spain's likely decade of lost growth could very well be akin to that of Japan in the 1990s. Throwing money at these problems will also be of no help given that consumer sentiment has dampened and consumption is on the wane. All this only means that Europe has some tough years ahead of it and an overall recovery seems unlikely anytime soon.

The much awaited earning result season is just around the corner. The burning question in most investors' minds is which sector would outperform and which would be the ones to suffer. Well, there is no definite answer to this as most of it is nothing but educated guess work. But still the trends do suggest that cement, information technology (IT) and telecom sectors may see a better result season as compared to some of the other sectors. The cement sector has seen an improvement in both volumes as well as realizations. The telecom sector too is expected to enjoy better results of recent tariff hikes as well as migration of subscribers away from companies which have suffered from the recent 2G license cancellation. The IT sector on the other hand has not really come out of the woods. In fact the only thing that has come to its rescue is the favourable movement in the rupee dollar rate. Though the recent trends in these sectors have been good, however investors would do best not to pick stocks based on such short term movements. Good performance over one or two quarters is not something that can guide long term valuations.

Meanwhile, indices in the Indian stock markets have continued their southbound journey what with the Sensex going below 17,000 and trading nearly 1% lower at the time of writing. Heavyweights like ITC and Infosys were seen driving a good part of the decline. While Asia too closed in the red today, Europe has not opened positively either.

 Today's investment mantra
"The intelligent investor is likely to need considerable will power to keep from following the crowd." - Benjamin Graham

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3 Responses to "Here's why we've stopped worrying about scams"


Mar 31, 2012

as long as Indian economy is prospering by way of purchases of young generation the stock marketwhich which is is reflection of our economy will give high returns if invested wisely inspite of scams that are surfacing daily.


Sundaravaradan S

Mar 29, 2012

20th Century:
Very thought provoking article! i mostly agree with the statement ' In the LONG Term', the Investment in Good Business, will yield better return than inflation.
As long as the population on this Earth increases, the demand for Goods & Services will increase.
The supply from the earth? Some are limited, as of now (Fuel, Metals, Land, Earth, water etc.). Some thing new will be discovered: Efficient conversion of Solar, Wind, Wave, Gravitational, Water... energies.
So the fight between demand & supply will go on! So do the Innovative Business.
We just have to keep finding good business, continuously!!
Captain of a Ship:
Those days, a Captain identified morally with his Ship; Captain was the last to escape, if at all.
I do not know, what is the current situation?
Pilot of Air-Craft Fighter:
He has the benefit of ejecting himself, first! (Like American Banks) or the whole Country will come to help him, to save his Customers (even if he faults).
He need to try the culprits in International court and GRILL them LIVE!



Mar 29, 2012

Interesting wrap up.....I'm positive about cement,IT,and telecom sectors coming out with better numbers next month onwards...

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