And they thought retail investors were not smart!

May 5, 2010

In this issue:
» Loans that are riskier than NPAs
» Oil marketing companies are not the only ones in huge losses
» Faber: Yuan will double in value against the US dollar
» Lessons from Japan
» ...and more!

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The retail investor is more often than not assumed to be ill informed. Brokers and scrupulous adors often use this notion to their advantage. They attempt to lure retail investors into buying or selling stocks on the pretext of potential short term outcomes. And unfortunately many investors do fall into this trap.

The government too tried its hands at some of the commonly used means to allure the retail investors. This was after a spate of PSU IPOs that failed to garner the investors' favour. From retail discount to fiscal incentives to commissions to brokers, they tried it all. After all raising Rs 400 bn from public issues in FY11 against Rs 235 bn mobilised in FY10 is quite an uphill task! But to no avail. The offerings of NHPC, NTPC and Oil India early this year had to resort to bailouts from institutional investors like LIC. Retail investors refused to buy into the stories and pay expensive valuations. The issues of NMDC and REC did fare better due to a marginal discount on offer price. But the response clearly was unsatisfactory.

The latest issue of Satluj Jal Vidyut Nigam, however, seems to have broken the jinx. Investors with an eye for long term sustainable business model and attractive valuations have lapped up the issue. Of course, marginal broker commissions were paid out, but we believe it was the valuation that did the trick. And that proves our point!

As much as promoters and managements would like to believe that they can take retail investors for a ride, they are being increasingly proven wrong. In fact, we were amused when recently a bank offered perfumes to analysts and brokers at an analyst meet to promote the stock! Such attempts have and will be made to entice ignorant investors. It is only in the interest of long term serious investors to ignore such attempts and be on the lookout for sustainable businesses available at reasonable bargains.

 Chart of the day
The RBI's maiden attempt to check the stability of Indian banks threw up some interesting statistics. While it did paint a reasonably good picture of the asset quality and proion coverage in the system, there was something that drew our concern. The RBI's flexibility and banks' willingness to restructure assets in the recent quarters. While we agree that such measures are necessary in times of economic distress, these could also be a potential hazard in the long run. As today's chart shows, the restructured assets were nearly 3% of the total bank loans at the end of December 2009. If these were to become delinquent, the proportion of NPAs in the banking sector would almost double. These are therefore riskier than the NPAs, which are atleast known evils.

Data source: RBI Financial Stability report

The stockmarkets have rallied in the past one year and so have stock splits. Infact, in this year itself, as many as 15 companies have announced stock splits since March 3, 2010. The reason is obvious. Company managements are increasingly looking to enhance the liquidity of their scrips. What this would also mean is that more investors would be induced to put money into stocks due to their smaller ticket size. What is more, SEBI also issued a guideline stating that companies with a stock price of greater than Rs 500 would be allowed to go in for a stock split.

Investors should, however, note that stock splits alone should not form the basis for investing in a stock purely because the price point is now more accessible. When a company goes in for a split, the total share capital remains the same. This means that the number of shares outstanding increases. Investors at the end of the day have to purchase stocks based on how strong the fundamentals are and at the right valuations.

Oil marketing companies in (OMCs) India are compelled to sell their wares below the cost. The result - huge losses. Search as you may, you will not find a reason for this in economics. It's more about politics and perceived political compulsions. However, these OMCs are not the only ones stuck between economics and politics. Much less talked about are India's electricity distribution companies. State governments across the country are unwilling to allow distribution companies to raise consumer tariffs, despite the rising costs of power.

As per India's Planning Commission, the electricity distribution companies' losses in FY10 must have exceeded Rs 400 bn. They could further go up to Rs 680 bn by the end of FY11, unless they are allowed to ree tariffs that is. But the prospects for this appear bleak. As per reports, the central government is now worried that these companies' accumulated losses should not flare up into something bigger. Cause if it does, it can lead to a complete breakdown of the power distribution system.

How tides turn. Once considered as the 'miracle economy', Japan is a shadow of its past glory. Despite the recent recovery, there are several structural problems. To start with, Japan's economy continues to operate far below capacity. That suggests consumer prices have further to fall. Falling prices do no good to nominal GDP. And the unique tendency of the Japanese to blame on deflation and deficits elsewhere doesn't help matters. The interesting thing about Japan is the lesson everyone can learn. Especially the developed world that has suffered a big asset bust. It comes as a stark reminder that slow growth, low productivity, rising public debt and deflationary pressures can hang around much longer than most people think. It also reminds us that policymakers can make all sorts of mistakes in countering these problems.

There are very few Oases of calm in a world drowned in debt right now. And China is certainly one of them. So what if the country had also unleashed a record stimulus? At least it did not have to print money to achieve its objective. Thus, we now have a situation where there is a huge oversupply of currencies in a lot of nations and to a lot less extent in China. Simple economics tells us that something that is in huge supply will have to fall in value against something that has a limited supply. It should be no different for currencies. And this is what seems to be making experts bullish on the Chinese Yuan vis-a-vis the US dollar. Infact, noted expert Marc Faber has gone to the extent of saying that China's Yuan will double in value against the US dollar during the next decade.

"It's good for China to have a strong currency, but I don't think it will be good for the property and stock markets, because in the short term, China is less competitive," Faber is believed to have said recently. So there we have it. There are no doubt signs of bubbles building up in China in the near term. However, low levels of public debt and huge growth potential makes its currency a very good long term bet. Of course, intervention by the Chinese authorities will have to be kept to a bare minimum.

Uncertain cues from global stockmarkets impacted the Indian benchmark indices as well, which languished in the red through the session. The BSE-Sensex was trading nearly 97 points lower at the time of writing. Mid and smallcap stocks also found no takers as the respective indices were down 0.3% and 0.9% respectively. Other Asian markets except China and Japan closed in red. European markets have also opened on a negative note.

 Today's investing mantra
"For some reason, people take their cues from price action rather than from values. What doesn't work is when you start doing things that you don't understand or because they worked last week for somebody else. The dumbest reason in the world to buy a stock is because it's going up." - Warren Buffett

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5 Responses to "And they thought retail investors were not smart!"

bimla s. chandra

May 6, 2010

very interesting but more than ten minutes consuming.

W.B. quotes're really impressive.


rajesh sutaria

May 6, 2010

U have been quoting W.B all the time at the bottom but he has contradicted his own statements in past by endorsing Goldman Sachs actions. Does that prove that Blood is thicker than water Or he is trying to justify his investment calls !



May 5, 2010

I like warren Buffet's quotes always. This one is excellent. It is very true. while stock picking, I must be satisfied. Some body else's satisfaction is just not enough. Second, I must never go for a company or Industry whose working I really don't understand.Every BUY must satisfy these twin requirements.



May 5, 2010

Hi Team,

I find 5 minute wrap up really too long to finish reading it in 5 minutes... besides the index is very different from the flow....

just thought of expressing the concern.



May 5, 2010

It seems you have run out of investing 'mantras' lately as the markets are in the grip of fear. What else could explain the several repetitions?

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