Do you have smart money or dumb money?

May 3, 2011

In this issue:
» Warning signals from RBI's rate hike
» Why capex has slowed down considerably?
» How will the new savings deposit rate affect banks?
» Southeast Asian economies dump the US dollar
» ...and more!

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Money itself denotes purchasing power and economic security. So what makes it smart or dumb one would wonder! Well, the fact that idle money can lead to loss of purchasing power or economic insecurity is not new to us. Hence most of us strive to make the best use of our surplus money. In other words we try to channel our savings to the best investments. But unfortunately rarely anyone ends up rich like Warren Buffett or Peter Lynch or Jim Rogers. In fact at times when we compare the performance of our investments even with that of our peers, we find ourselves lagging. So, what is it that makes some investors and their money 'smarter' than others?

The concept of smart money can be easily understood with Ben Graham's theory of Mr Market. The typical nature of Mr Market is to get investors to follow the herd mentality when others are getting greedy. Or to get them develop cold feet when other investors too are shying away. You follow Mr Market's advice and end up with the best recipe for losing money. This is what investors with 'dumb money' do!

Those with smart money, however, defeat Mr Market in his own game. In Graham's words, they are "greedy when others are fearful and fearful when others are greedy". So they buy the stocks that markets have written off. Or those that have their negative near term prospects clouding market sentiments. These investors buy gold when no one is if the precious metal shows the potential to beat stock returns. These investors ignore advice on business channels and do not bother about notional gains and losses. All said the smart moneyed investors are those who take decisions based on an independent evaluation of fundamentals. And believe us, that is the best and only way to build long term wealth.

What else do you think differentiates smart money from dumb money? Let us know your views or post them on our facebook page.

 Chart of the day
The Indian central bank declared the first monetary policy for the financial year 2011-12 today. High commodity prices, persistent inflation and expectations of a moderation in demand drove the RBI to tighten the monetary policy noose. The RBI raised the rates at which it lends to banks (repo rate) by 0.5%. Thus, the repo rate now stands at 7.25% from 6.75% previously. As today's chart of the day shows, in terms of quantum of hike, this hike is one of the highest since July 2010.

Data source: RBI

Most of our troubles in life come from taking things for granted. Consider the case of India's GDP growth. That it will grow at a minimum of 7%-8% in the future is almost as assured as the fact that the sun will rise in the east tomorrow. In the process, we forget the all important factor of investment. Surely, if India wants to keep growing, more capacities for absorbing greater demand will have to be created. However, things are not looking all that great on this front. This warning was sounded by none other than MD & CEO of CMIE, one of India's most respected and independent economic think tanks.

Nationwide data available with CMIE shows that new investment announcements slowed down drastically in the past few quarters. And there has also emerged a significant delay in commissioning of new projects. What more, number of projects abandoned have also doubled in value terms in the recently concluded March quarter. Shockingly, the reason for these delays is not some fundamental factors like availability of finance or interest rates. But it has more to do with issues related to proper land acquisition, environmental clearances and corruption. And the quickly the policymakers do something about this, the better it will be for country's long term growth potential.

"Everything comes gradually and at its appointed hour." Nothing could be more apt than this quote for Posco as its five year long wait finally pays off. The steelmaker has got a go ahead for its plans to construct the 12 m tonnes capacity (4 m tonnes in first phase) plant in Eastern India (Orissa). The story goes back to 2005 when the project was conceived. It was only in January 2011 that Posco was granted conditional environmental clearance for the same. What has kept the project pending since then was lack of forest clearance. The villages had a claim to land on which the project was supposed to be built and hence, the forests land could not be diverted. Recently, the claims were found to be fraudulent. Now, in a major breakthrough, the company has been allowed to clear forest land for its US$ 12 bn factory.

However, the nod comes with a caveat. The new agreement should not allow export of iron ore (raw material for steel) from India. There is already a 20% tax on material's export. This ban makes sense as such exports can have adverse impact on domestic steel manufacturing companies ramping up capacity. After a long time, the environment ministry is in news for the right reasons. We hope the trend continues.

Overall, the news is positive as it gives strong signals to global investors that environmental clearances won't derail necessary infrastructure projects in the country.

The RBI today decided to increase the savings deposit rate from 3.5% currently to 4%. In the recent period, the spread (difference between interest rates) between savings bank deposit rates and fixed deposit rates have increased sharply. The hike in savings account rate was imperative considering that real interest rates (adjusted for inflation) on savings account balances have been in the negative for quite a while now.

This move will impact banks which have a high CASA (current account and savings account) base. The likes of SBI, HDFC Bank etc that have benefitted from a larger proportion of low cost deposits will be seeing some margin pressure. However, the same will only be temporary before the benefit of a larger account base catches up. However, the RBI has not ruled out deregulation of the savings rate, a move that may see banks trying to cannibalize market share of their peers.

The US dollar has been witnessing tough times. The dollar has lost nearly 7.4% of its value this year. This is a key concern for the Southeast-Asian countries as well. These 10 countries hold nearly US$ 6 trillion of forex reserves. And a large part of these reserves is US dollar denominated. As a result, any decline in dollar value would mean erosion of value of these reserves. To avoid this, the 10 countries have decided to use their reserves collectively to earn better returns on them. In line with this, they have decided to collectively create a pool of funds that would invest in infrastructure in these countries. In addition to this, the countries have also created a pool of US$ 120 bn. This fund would help the member nations through currency swaps at the times of liquidity shortages.

China in particular has been advised to start utilizing its huge quantum of reserves towards the health and education of its own people. China accounts for nearly half of the forex reserves of the region. It looks like these countries wish to limit the reign of US dollar. Something that China has been trying to do for quite some time now. Finally it appears to be gaining success in its motives.

The benchmark indices in the Indian stock market reacted sharply to the RBI's rate hike move, that came in sharper than expected. At the time of writing, the BSE Sensex was trading lower by 394 points (2.0%). While the Chinese and Japanese indices are leading the gainers in Asia, the Indian markets are the biggest losers. Europe has opened on a negative note.

 Today's investing mantra
"We try to price, rather than time, purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?" - Warren Buffett

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4 Responses to "Do you have smart money or dumb money?"


May 4, 2011

As u said osama is a Bomb only. Excellent & a very good initiative.



May 4, 2011

Hi Equity Master team,
The article "Do you have smart money or dumb money?" is thought provoking and worth persuading ordinary people to re-evaluate thier invetsmnet strategies.
But having said that, I personally feel that money,
per se, doesn't have a mind of it's own to be regarded as smart or dumb but it is the individual investor which renders it "smart" by making informed choices of investing in instruments that generate "smarter returns" and beating the easily accessible instruments that generate "dumb or negative returns".
But being a smart investor to deploy money in markets(buy)when others are selling and pull out (sell) when others are pouring in (buying) eventually turns out to be a matter of "timing".
And timing the market is like Obama chasing Osama (although he finally got it after 10 years!!)
However, even to time the market u need to know which stocks to catch and which to leave so having a knowledge of the fundamentals is equally important.
But it is inde[pendently not sufficient to renedr the investors as smart invetsors.
The crux is one needs to have fundamentals in place (i.e.,be ready) to enter the market in "time" and similarly exit the market in time(book profits).




May 3, 2011

Eq. Master Team,
After going through your article I am prompted to quote a phrase often repeated by my old time friend and (an erudite Police official)
He used to be on duty when the general public used to be enjoying their holidays !!
He used to quote so convincingly thus (from the Great Bhagavad Gita): "" Ya nisha sarvabhoothanam thasyam Jagrati Samyami, Yesyam jagrati bhoothani Thanisha pasyatho Muneh ""!!
( A rough translation would run thus : When it is night for the many ordinary folk, the Police have to be doing their (night Patrol) duty; and when it is daytime for the people, it is night for the saints !!

Your article on money(both "smart" and "dumb" ) also has similar connotations as well ! I hasten to conclude as I honestly declare that I am not at all an economist (neither smart nor dumb) !!



May 3, 2011

Predictions about GDP are futile.The policy makers draw rosy pictures for their own benefit (facts are not taken in to consideration).This is because 1.Absence of long term policy
2.Despite having "HARWARD" graduates with long experiance in economics one bad factor is POLITICS.3.. Lastly as you describe Curruption ! Less said is better on this .We Indians are now immune to these things . I dont think India as a subcontinebt will regain it's past glory in next 50-100 years.Temporary medicines will not work Drastic surgery is necessity of this hour & will nobody can think-due to becoming unpopular (Loose elections !)

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