An advice no investor should miss! - The 5 Minute WrapUp by Equitymaster
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An advice no investor should miss!

Jun 16, 2011

In this issue:
» RBI continues with its interest raising spree
» No government wants you to know this indicator
» Economic 'growth shocks' will continue, says Stephen Roach
» US$ 5,000 an ounce gold only a matter of time
» ...and more!

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00:00
 
It goes without saying that becoming rich is one of the most important goals of our lives. And why wouldn't it be. After all, what better achievement for a human being than to be able to improve his standard of living by a few notches? But the fact remains that not many of us reach this milestone. We get sucked into a vicious circle of living from paycheck to paycheck. Never quite earning enough to be able to buy some of the luxuries that the world around us has to offer.

If you too have got sucked into this circle and are finding no way of coming out, we have a small suggestion for you. Try changing your attitude towards savings and it may make a world of a difference few years down the line. Yes, you've heard it right. Most of us do not set aside any money at all because we believe it is too small to make any meaningful difference. But that's a completely wrong attitude to have. You see, as humans we are quite innumerate. Our math skills absolutely pale in comparison to say our communication skills. As a result of this, we fail to appreciate the enormous power of sustained compound growth. Thus, even if we save a very small portion of our income on a regular basis, the total accumulated wealth over a long term period can be enormous.

Please bear in mind that the important thing is not how much you save. But what matters is whether you save anything at all. So, if you haven't done it already, we suggest you start doing it right away. As soon as you get your income, save a small part of it and then focus on living off the balance amount. We assure you that if invested wisely, there is hardly anything that can stop you from becoming rich few years down the line. Do remember that this is the first and foremost step in becoming a successful investor. Everything else like picking attractive stocks and bonds only come later.

Do you think saving a small amount right now makes a big difference few years down the line? Share your comments with us or post your views on our Facebook page.

01:21
 Chart of the day
 
Talking of becoming rich, no other country seems to have perfected the art better than the US of A. At least that's what the chart below seems to indicate. As shown, as per a latest survey, US has emerged as the country with the highest number of millionaires. With more than 5 m millionaires, it is way ahead of the next country on the list, Japan. While China at more than 1 m and India at little less than 0.2 m millionaires are also in the reckoning, it is only a matter of time before these nations start moving up the ranks as the centres of wealth and prosperity shift from the West to the East. This is not to say that numbers in the developed world would go down. But only that they may not grow as fast as their developing counterparts.

Source: Rediff.com

01:49
 
The Indian central bank declared its second monetary policy for the financial year 2011-12 today. Skyrocketing commodity prices, inflationary pressure drove the RBI to tighten its monetary policy once again. The RBI raised the rates at which it lends to (repo rate) banks by 0.25%. Thus the repo rate now stands at 7.5% from 7.25% previously. The rate at which RBI borrows from banks (reverse repo), has been pegged at 1% below the repo rate. Thus, the reverse repo rate has automatically adjusted to stand at 6.5% from 6.25% previously.

The increase in the price of commodities globally was cited as the 'key risk factor' troubling the RBI. A slowdown in the pace of global growth is a worrying factor. Uncertainty about the resolution of the Euro debt crisis is also a cause of concern.

Post the RBI's aggressive stance in its previous monetary policy review, 47 banks raised their base rates by 1.5-3% during July 2010-May 2011. Thus, credit growth may see a further moderation, hurting India's GDP growth prospects.

02:22
 
Have you heard of this term called MPD or marginal productivity of debt? We guess you haven't. There is a reason why you don't hear about it much. It is one of those economic indicators that no government likes to talk about. Not because it is unimportant, but because it can create a lot of uproar.

What does MPD mean? In economic parlance it relates to the change in the level of all debt- government, corporate, consumer, etc- in an economy to the change in its gross domestic product. In simple terms, MPD shows the relation between debt taken and income created out of it.

To show you how good an indicator it is, let us take the case of the US economy. Back in 1957, US$ 1.86 of debt generated US$ 1 of net national income. Pretty neat! But look at what happened by 2006. It required US$ 4.6 of debt to create the same US$ 1 of national income. What this means is that the additional US$ 2.74 of debt failed to produce any income for the US economy. This situation is only getting worse. As more and more debt gets added with a corresponding decline in productivity, the US seems to be headed towards a very major breakdown.

As an investor, you can use this same metric to evaluate a company's productivity as well. If you find a company piling up debt without showing a corresponding rise in income, then there is enough reason to worry about it.

03:19
 
A less than expected advance tax payout in the first quarter of the fiscal year 2012 has brought a lot of disappointment to investors. Most believe that lower operating margins and interest costs spell doom for their stock investments. We think that there cannot be a worse analysis of stock market behaviour. And if advance tax numbers were really such a solid indicator of business prospects Income Tax authorities would be the wealthiest.

Short term numbers like advance tax can mislead investors by offering a myopic view of the business cycle. To top that they could even misrepresent facts as the company could have an extraordinary expense or income that quarter. Further for most sectors, growth in the first quarter of the fiscal is slower and picks up in the latter half. Hence investing based on advance tax numbers is the surest way of picking the wrong stocks, most often at the wrong prices.

03:48
 
Morgan Stanley' Mr Stephen Roach has stated that considering the global economic and political scenario, economic 'growth shocks' would continue for several years to come. He opines that these shocks would be on account of the unstable Euro-zone. It would be further impacted by the weak recovery from US. With regards to Asia, he is a bit more optimistic as he feels that China would help the region maintain better growth rates. While Mr Roach may be correct on the growth rate shocks, we, however feel that investing based on the same may not be the right approach to have. Such shocks are normal especially at times of recovery. As long as the long-term picture remains hunky dory, such falls should be looked at as opportunities to buy and not to fret.

04:13
 
If a report released by Standard Chartered is to be believed, gold's bull run is unlikely to end anytime soon. In fact, as per the bank, it may just be a matter of time before gold reached US$ 5,000 an ounce. There are several reasons for this. For starters, there is a limited supply of gold. The report states that a comprehensive study of 375 gold projects supply suggests a very limited production growth for the next five years. And a ten year gold bull run has not done much to drive gold production. This is because gold prices would have to be much higher to generate a minimum rate of return of 20%. This tall task has then discouraged gold mining. Secondly, central banks the world over have begun to accumulate gold as the severity of the debt crisis in Europe and the US became more pronounced. And thirdly, there is a huge appetite for this precious metal from emerging economies such as India and China. Thus, one cannot entirely rule out the possibility of gold scaling higher even after the massive rally that we have already seen in this yellow metal.

04:49
 
Meanwhile, indices in the Indian stock market have continued to trade below the dotted line on yet another occasion today with the BSE Sensex trading lower by around 50 points at the time of writing. Heavyweights like RIL and TCS were seen adding the maximum selling pressure. Most of Asia closed lower today whereas Europe has also opened on a negative note.

04:56
 Today's investing mantra
"The best investment against inflation is to improve your own earning power, your own talent. Very few people maximise their talent. If you increase your talent, they can't tax it or they can't take it away from you." - Warren Buffett

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9 Responses to "An advice no investor should miss!"

PADMANABHAN.S.

Jun 18, 2011

Lets not forget the grand old man of investing Warren Buffet, he believed in the power of compounding and spent money only if necessary and lets now forget even today he lives in the same apartment which he bought years ago even though he could today afford to live in a villa by the exotic sea side resort.

yes regular savings with intelligent investment will go a long way in raising your bar and standard of living.

Can anybody forget INFOSYS ... an amount of Rs.10,500 invested in INFOSYS in late eighties would have fetched the investor a few crore rupees.

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v.r.kamath

Jun 16, 2011

The article is descriptive and mind blowing, I am really thrilled.

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lmsharma

Jun 16, 2011

this is true only if you beat the inflation rate;otherwise moneys go to bankers!

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Rajni Mohan

Jun 16, 2011

Small drops of water can fill a pot.It depends upon us when we want it full. Small saving can help us start a small idea which can become big.

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rusbom

Jun 16, 2011

Thriftiness is good, no doubt. But accumulation of "things" is a bigger problem that needs to be attended by each individual personally in his mind. So long as you have uncontrolled desires for more and more thing and you simply accumulate things (whether u have money or not is not the question), Every One of us should consume Lesser and Lesser as we evolve, then only can we be happy and save our earth too. When there are NO desires for more and more, you will have greater savings and financial independence and no loans or mortgages!!!

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GOUTAM

Jun 16, 2011

YES IT MAKES A BIG DIFFERENCE IF YOU SAVE A SMALL PORTION OF YOUR INCOME SYSTEMATICALY AND REGULARLY. AT THE FAG END OF YOUR LIFE YOU WILL BE PROUD OF YOUR REGULAR SMALL INVESTMENT

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PRATIK SHAH

Jun 16, 2011

MARGINAL PRODUCTIVITY OF DEBT GOOD TO JUDGE FINANCIAL HEALTH ? NOW I WOULD LIKE TO KNOW FROM YOU WHETHER NAREGA PROGRAM HELP OUR COUNTRY TO BUILD ANY NEW ASSETS OR ITS JUST FUTILE EXERCISE BY GOVERNMENT BECAUSE RIGHT NOW ANY PART OF THE COUNTRY EVERY ONE FACING LABOR SHORTAGE AND SLOW DOWN IN ECONOMY AND AT THE SAME TIME INFLATION IS NOT COOLING DOWN BECAUSE GOVERNMENT SPENDING DOES NOT RESULT IN TO ANY PRODUCTIVE PURPOSE ON THE CONTRARY DIG THE PIT AND FEEL THE PIT ! PLEASE LET ME INFORM WHETHER AM I RIGHT OR WRONG ?

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Sthithapragnja

Jun 16, 2011

Eq.Master Team,
Humble Kudos from an ordinary AAM AADMI !!
I am prompted to oberve in all humility fortitied with abundant ignorance to cite the old adage ""LITTLE DROPS OF WATER MAKE THE MIGHTY OCEAN ". There is also a wonderful supplementary to this adage " IF YOU WORK TILL YOUR BONES CREAK, YOU CAN EAT TILL YOUR TEETH START CREAKING "
Furher I had recently read someqhere a very meaningful advice " Many people spend and thereafter ,if anything is left, they save. But there still are a few wise
people who first save and thereafter spend the remainder
for their necesities: Further there are also gradations thus : Necessities, Comfort and then luxuries!
With the efflux of time, former luxuries become necessities !!(For example Transistor Radio, Colour televisions and even the Cellphones are fine examples of "HAS BEEN " (Luxuries!!) becoming present day necessitities isn't it ??
I hasten to conclude !!

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vikas

Jun 16, 2011

yes you have rightly said that a penny save regular,changes the life after some years. THIS IS A VREY GOOD ADVIE

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