The stocks that top up the power of compounding... - The 5 Minute WrapUp by Equitymaster
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The stocks that top up the power of compounding...

Jul 5, 2011

In this issue:
» Can temple treasure resolve state's fiscal woes?
» An education bubble shaping up in India too?
» Is China hoarding up major commodities?
» Bankers rewarded with stocks instead of cash bonuses
» ...and more!
----------------------------- A Good Time To Sell Bad Stocks -----------------------------

It's never too late to get rid of 'bad stocks'.

After all, you never know how bad a market crash could get.

But what are these 'bad stocks'? How do you identify them?

For answers to these questions, and more, click here to read on...

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00:00
 
The power of compounding is one of the biggest wonders of the world. It especially works well for wealth generation. Legends like Warren Buffett have used it to have a dramatic effect on the growth rate of portfolio returns. It is probably one of his most elaborated investment techniques and yet eludes most students of Buffett like value investing.

But mind you that Buffett himself has been very careful about which stocks to let the power of compounding work its magic on. Stocks like Coca Cola that Buffett has held in his portfolio for decades are not just good companies. Nor were they just attractive bargains when he bought them. They are what you can call the gold standard in handsome dividend paying companies.

Take the case of Walmart for instance. This is a company that Buffett considers one his greatest 'errors of omission' having invested in the retailing behemoth as late as 2005. And it is not difficult to find out why. The company has not just paid dividends for the past 36 years. Its dividend per share has also increased in each of these years. Thus for an investor who has held the stock for most of this time, the dividend inflow alone could have created a neat fortune with the power of compounding. The payout ratio in excess of 20% could have ensured that a fifth of Walmart's yearly profits went into the shareholders' pockets each year for over 3 decades!

Thus while there is no short cut to selecting fundamentally sound stocks at attractive bargains, the results could be bettered with some dividend stories. After all, even a few of them could make a handsome difference to the compounded return on your portfolio over the longer term.

01:15
 Chart of the day
 
As per the RBI, bank credit to the NBFC space rose a whopping 55% YoY in April 2011. In comparison, total non-food credit saw a growth of only 22% YoY. Bank credit to important sectors like industry and services also saw a relatively muted growth of 27% and 22% respectively. The central bank is concerned that loans to NBFCs may increase exposure to speculative sectors like capital markets and real estate. As seen in today's chart, commercial real estate has borne a high risk weight ever since the RBI became wary of loans to that segment. Hence the possibility of the RBI increasing provision requirements for other risky loan segments going forward cannot be ruled out.

Source: RBI

01:50
 
Most of us have read about temple treasures only in mythological and history books. But a temple treasure comprising of gold, silver and precious stones in 21st century seems straight out of someone's imagination. For the state of Kerala where the royalty managed Padmanabhaswamy Temple has thrown up such a fortune, it could mean the end of all economic woes. Expected to be worth around Rs 1 trillion, the temple treasure could come to the rescue of several debt laden economically backward states in the country. The state of Kerala alone reported has debt in excess of Rs 300 bn. However, will the graft accused government be able to salvage its reputation by ensuring that the fortune is well protected and put to the best use?

What according to you will be the best way to use the temple treasure for the economy's welfare? Share your comments with us or post them on our Facebook page.

02:35
 
The global meltdown appears to have adversely impacted India's education sector. Otherwise what would explain the fact that two of the most prestigious courses in India - engineering and MBA - are no longer finding takers like they once did. For instance, 25% of the 15 lakh seats in the country's engineering colleges and 40% of the 3.5 lakh seats in MBA institutes are estimated to go unused this year.

The reasons are not hard to find. While more capacities have been created for these courses, industry is not finding the required talent from these courses. Further, parents and students are no longer finding the return on investment on these two courses very lucrative especially after investing lakhs in these courses. Because of the global meltdown, job opportunities in various sectors have waned. Thus, the time taken to cover the investments in these courses has increased. Moreover, there is no guarantee that all fresh engineering graduates will bag jobs suited to their skills. Thus, rather than creating extra capacities for these courses, what needs to be focused on is the kind of skills that students are taught to acquire. That would mean ensuring that professional degree colleges have good quality faculty that will ensure that the skills that students grasp are in tune with the requirements of the industry. Creating more seats only for the purposes of accommodating more students will not yield the desired results over a longer period of time.

03:00
 
The World Trade Organization (WTO) has lashed China for restricting the export of major raw materials. The country has been rather creative in covering its monopolistic tendencies under the garb of environmental concerns. However, it will be without any effect it seems. The outcome is in response to a complaint on raw materials filed by U.S, Mexico and EU two years back. China still has the option to appeal the decision. If it fails to do so or loses, it will have to remove import restrictions, failing which it will face retaliatory trade sanctions.

The decision is a huge relief for steel makers and industrial producers. However, it has parallel implications as well. As the country stands vulnerable, the recent development is also an ideal setting for U.S and EU to file a further complaint against China's quota on export of rare earth metals. The same are used in high tech industry. As the country comes more and more under the scanner of global agencies, we believe it's high time it learns to grow and compete globally without the crutches of unreasonable trade restrictions.

03:40
 
First it was the stock broking industry which took a hit, seeing mass layoffs. But, now even the investment banking industry is under pressure due to volatile markets. The market for initial public offerings (IPOs) has all but run dry so far in 2011, compared to last year's bonanza. Most companies have either shelved, or deferred their IPO plans indefinitely. Merger deals are also taking longer than expected to close.

According to Dealogic, India's investment banking revenue stood at US$ 271 m in the first half 2011. This is 24% lower than the same period in 2010. The numbers of merger deals announced have also declined 38% on a year-on-year basis. Falling revenues have forced domestic I-banks firms to hand out more stock and less cash bonuses, to their employees. They have thus taken a cue from banks in US and Europe. Senior executives at Goldman Sachs, and JP Morgan were doled out hefty stock bonuses in 2010. We see this as a positive move. We hope that this way, senior executives are become more concerned sustainable, long-term, growth, versus the short term profit making gimmicks that led to the subprime crisis.

04:10
 
Remember Lehman Brothers. Yes, it is the same embattled firm that followed Bear Stearns to the grave after the latter filed for bankruptcy in early 2008. What more, Lehman Brothers is also said to be one of the key factors that triggered the global financial crisis. However, nearly three years on, the liquidation of the company is still not complete. It has unsuccessfully filed for two bankruptcy plans only to be accompanied by competing plans from rival creditor groups. The third plan though, filed recently, is finally likely to meet with acceptance of some kind. As per the plan, bondholders in the company that were able to scoop up the company's bonds for as much as 7 cents on the dollar will take home an amount thrice as much. In other words, they will get compensated to the tune of 21.1 cents on the dollar. Yet another example of how deep value investing pays rich dividends.

04:35
 
Due to profit booking in heavyweights across sectors, especially engineering, commodities and real estate, the benchmark indices in the Indian stock market failed to make inroads in the positive territory. At the time of writing, the BSE Sensex was trading lower by 57 points. Major Asian indices closed lower, with Indonesia leading the pack of losers. Europe has also opened on a mixed note.

04:50
 Today's investing mantra
"If your actions are sensible, you are certain to get good results; in most such cases, leverage just moves things along faster. Charlie and I have never been in a big hurry: We enjoy the process far more than the proceeds - though we have learned to live with those also." -Warren Buffett

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49 Responses to "The stocks that top up the power of compounding..."

Sreenivasan V.K

Jul 18, 2011

Most of this fund must be used for the development of the state. Items of archeological values must be kept in a museum. The contention that all this belong to the
temple is a nonsense. Marthadavarma was using the temple as a safe keeping place for his valuables that he collected as taxes and that he exorted from the neighbouring places. It is in the history that he invaded the neighbouring princely states. He might not have. Done that for fun. Along with that there may be some valuables offered by the believers. Gold bars and items like that does not have any archeological values. That should be sold and the money shall be used for the betterment of the people.

Like 

ravichandra

Jul 18, 2011

Sri ramakrishna mills ==what is in store for the shareholders ????????

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Rajiv

Jul 17, 2011

Well written article. It will also help if examples of a few stocks where power of compounding has worked, but these should be stocks that your MF discovered, and continues to hold. Also, Buffet had many good FMCG picks. Do you advocate any at such high PEs?

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madhu choudhury

Jul 16, 2011

good

Like 

GPGUPTA

Jul 15, 2011

Good

Like 

uday

Jul 15, 2011

i need daily stocks references

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Vishnu

Jul 13, 2011

The Treasure from Padmanaban Temple can only be used once the government will bring all the "religious money" from mosques, churches,gurudwara etc.This find belongs to the deity that hold a huge religious sentiment and India being called a secular country should follow the same rule for every one across all religions.Until any such steps are taken no govt has the right to decide any action on the find, besides the treasure consists of a vast heritage and historical value hence liquidation of this national heritage is foolish and blasphemous .

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mani

Jul 12, 2011

i think the treasure shud be used for the mass development, for education, health facilities n all those basic needs that are actually deficiet in our country or r not available coz of political interferance

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shivanand tiwari

Jul 12, 2011

In my opinion the treasure found in the temple should be used for the welfare of the society.The gold silver etc should be sold and the proceeds must be utilized to establish a factory in the name deity.It should handled by the trust of the temple.The profit earned should be used for the development of the temple. The other items which are historically important should be kept in a museum made in the name deity. A free hospital should be established and free treatment should be provided. As per law deity are considered as individuals so no one has right to take the fund and miss use it.I understand in the name of deity all the treasure should be utilized.No one has got the right to miss manage the huge funds of the god.

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rajan

Jul 12, 2011

Temple treasure: Don't give key in the hands of thiefs (politions)and see the vanishing trick.

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