Buffett sets up a date with India

May 3, 2010

In this issue:
» Buffett finally eyeing the Indian opportunity
» SEBI tweaks IPO rules
» Greece bailed out...bad behaviour rewarded yet again!
» Indian rupee's uncertain fate
» ...and more!

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We have always cheered 'long term' foreign investors pumping money into Indian stocks. So when we heard that that the 'longest' of these long term guys is eyeing India for a visit, we were all ears. We are talking about Warren Buffett, the superstar investor who is considered the world's best investor of all times.

Buffett, who has till now made only a few investments outside the US, plans to visit India next March. As he made clear during his company Berkshire's annual general meeting (AGM), he is likely to explore possible investment opportunities in India. However, as per the Wall Street Journal, Buffett has also indicated that one problem he might face on his plans on India is that laws limit how much Berkshire can invest in Indian companies. Still, he sees potential here, noting that India has made big improvements in the last 10 years.

Buffett was quoted as saying that his company had looked at Indian insurance business. Berkshire's main businesses are in insurance and reinsurance areas.

So, over the next few months, as Buffett finalises his trip to India and talks more about the broader investment opportunities he sees here, we'll be hooked on. What about you? Even you wouldn't want to miss out on the investment opportunities in India that even Buffett would like to invest into! Would you?

 Chart of the day
Today's chart of the day compares Buffett's performance with the US stockmarkets over a long term period of 45 years (1964-2009). Ironically, there isn't any comparison between the two. During this period, the S&P 500 multiplied by around 54 times. Against this, Buffet's company Berkshire's book value multiplied 4,340 times!

Source: Berkshire annual report

Here's more on the Berkshire AGM. One issue that created maximum curiosity this time around was Buffett's view on Goldman Sachs. Especially after the latter got involved in a legal wrangle with the SEC. It so appeared that Buffett's respect for Goldman had not diminished one bit. "I haven't seen anything in Goldman's behavior that makes it any more subject to criticism than Wall Street generally," he is believed to have said. What is more, he also gave a clean chit to Goldman CEO Lloyd Blankfein, adding, "If Lloyd had a twin brother, I'd go for him." Clearly, Goldman Sachs couldn't have asked for a bigger endorsement in such troubled times!

IPOs have seen resurgence of late after the lull in activity at the height of the financial crisis. And the SEBI has taken this opportunity to tweak some rules. This is to ensure fairness to those applying to IPOs. The main provision is that retail and institutional investors will be given equal treatment in terms of bidding for shares in IPOs. It must be noted that retail investors have to put up the entire 100% along with their applications. However, institutional investors were required to put up only 10% as margin money. This paved the way for a lot of oversubscription for many issues. The new provision would now mean that institutional investors will put in more effort towards deciding the issues that they would want to genuinely invest. And this would go a long way in reducing speculation to some extent.

Greece has sealed a rescue deal with the European Union (EU) and IMF. This might help it secure a multi-billion dollar bailout from the financial mess it is in currently. This might seem like music to the ears of investors worldwide. This is given that the global markets went into a spin after the country's credit rating was downgraded to junk a few days back.

We see Greece's bailout as yet another instance of bad behaviour (of taking too much debt) getting rewarded. It is also another instance of taxpayers bearing the brunt of the policymakers' short-sightedness. It is true that fear is high in such situations. And policymakers have fewer choices but to dole out billions to save the troubled entities - companies or countries.

But then, the policymakers are themselves to blame for bringing their companies and countries to such dire situations. And then their subsequent bailout just encourages more bad behaviour. This is a dangerous precedent to set for the future generation of managers and decision makers!

The key to asset allocation is picking up an asset class when it is down and out. While everyone debates stocks and bonds, the asset class to watch out for is US real estate. As per Bill Gross of the world's largest bond fund Pimco, US real estate is nearing a bottom and could eventually be a better bet for investors than stocks or bonds.

He says, "Ultimately the riskier assets will be the less risky assets. I wouldn't suggest moving into those particular sectors at the moment but ultimately risk and reward go together." However, much will depend on whether the US economic recovery is successful. On this issue, the opinion is divided. While some believe that the recovery is self-sustaining, others believe it is entirely dependent of the stimulus. The jury is still out on that one.

Anyways, it may be noted that Indian real estate has not been affected to the extent US real estate was. Thanks to the perennial short supply of housing in India! Hence, the same conclusions cannot be drawn for Indian real estate versus Indian stocks.

Obscene salaries paid to top management have been a core problem in the US so far. This is especially true of Wall Street, where bonuses have run into billions of dollars. Much to the dismay of these companies' shareholders! Luckily for you, this problem is not so prevalent back here in India. But what is distressing is that this may not remain so for long.

As per a study conducted by Economic Times, CEOs at 30 big Indian companies got themselves an average 33% pay hike in 2009. This is over twice their companies' profit growth in the calendar year 2009. Seems like whether companies are doing well or bad doesn't matter. Their CEOs manage to bargain for themselves a great package anyways. If this trend continues, we will not be far from the day where lewd top management salaries at Indian companies become the rule rather than the exception. This reminds us of the upsetting instance of the status quo at one of India's largest pharma companies, Ranbaxy. Its ex-CEO got not only a disproportionate salary, but also rather eye-popping severance package. Surely something that you as shareholders need to stand up to, and guard against!

The Indian rupee's fate is all but certain. As if the Greece-led turmoil in global financial markets was not enough, the short term foreign capital flooding Indian markets is making the RBI's job even tougher. The central bank is not mincing words on its concerns about this 'hot money'. Governor Dr. Subbarao and his colleagues expect most of it to make a flight back to safety once interest rates start picking up overseas. Until, then the unwelcome dollars may only add to the volatility in Indian forex markets.

Data source: Trend

The rupee is already riding at 18-month highs against the US dollar, leaving very little on the table for Indian exporters. The same could also wreck havoc with India's trade balance. Keeping this in mind, the RBI is considering imposing tax on short term capital inflows. It may serve two purposes. One, discourage the inflow of hot money. Two, ensure that Indian exporters are not unnecessarily penalised.

Led by fears of the impact of Greece bailout and China's tightening, Indian stock market traded weak today. The BSE-Sensex was trading down by around 190 points (1.1%) at the time of writing this. Metal and engineering stocks were leading the pack of losers. Among other key Asian markets, while Hong Kong was down 1.4%, gains were seen in Japan (up 1.2%).

 Today's investing mantra
"People who know the edge of their own competency are safe, and those who don't, aren't." - Warren Buffett

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3 Responses to "Buffett sets up a date with India"

Girish Sumaria

May 3, 2010

Buffet is invested in GS and hence has no choice but to make positive statements about it....


Man Mohan Bhatt

May 3, 2010

As he believe there is big space to Investment in the in Insurance specially in health, due to increase in living standard alongwith the awarenace in this concern.


Man Mohan Bhatt

May 3, 2010

I think he is searching big apportunity for the investment in India. Keep watching ........

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