This is how a good investor becomes great!

Aug 2, 2012

In this issue:
» One fact about the US economy that everybody missed
» Are FIIs more optimistic on India than us?
» Food prices may keep going higher in India
» Power outage exposes India's polity
» ...and more!

------------------- Take the first step towards becoming a well-informed individual -------------------

Sign up for the weekly e-letter Straight From The Hip to get a weekly dose of unadulterated views on business, social and political events across the world and their impact on our lives from astute stock market observer, Jawahir Mulraj.

Click here to sign up for the free e-letter and become a well-informed reader today!------------------------------------------------------------------------------------------------------

The Olympics are currently underway in London. So what better way to start than take an example out of the world's biggest sporting extravaganza? You see, all the champion athletes who compete in the games seem to put in the same amount of training hours and possess a similar level of work ethic. Yet, at the end of it all, there is only one winner who walks away with that elusive gold medal.

And here in lies the biggest mystery we believe. If all the participants pass through virtually the same work routine, why is it that some achieve success and others remain perennial underachievers? Most of us would put the reason down to some inborn talent.

However, a recent research in this area has shed light on a completely different reason behind this phenomenon. It has argued that if one wants to get good at something, how a person spends one's time is far more important than the total amount of time spent. Thus, the number of hours and the amount of sweat that one puts behind an activity is only a weak indicator of performance. What matters is that one should closely watch where one fails and then learn from the mistakes. In other words, unless we are constantly pushing ourselves to the limit and continuously monitoring our performance, we are never going to improve in our chosen field. On most occasions, we do our activities in our comfort zone. But true progress happens when we move out of there and get into the zone of learning.

Can this approach be used in investing as well? It certainly can but we believe it will require a small twist. As a financial blog points out, unlike sports or music, there is this problem of not getting an immediate feedback in investing. Whenever we make certain long term investing decision, its results will be known only after a time lag of 2-3 years. This could thus lengthen the whole process of learning. Fortunately, there is a solution at hand. And it says that we can become much better investors by studying the past investment made by successful investors. By recreating the situation when the other successful investors made their investments, we get a chance to understand what exactly must be going through their minds when they made their investments. You can then compare your conclusions and your logic behind investing with theirs and thus keep getting continuous feedback. Done over and over again, this approach has a much greater chance of turning you into a great investor than the one you currently seem to be using we believe.

Do you think the idea of studying past investments by successful investors could prove useful in making good investments? Share your views or you can also comment on our Facebook page / Google+ page.

 Chart of the day
Continuing with our Olympics theme, today's chart highlights India's poor performance at the world's biggest sporting event. As shown, whenever India has sent its contingent to the quadrennial games, it has taken close to 47 participants to win one medal for the country. Contrast this with the US where it has won a medal for every four participants or China which takes around 6 participants to win a medal. Clearly, India needs an awful lot to do if it wants to come anywhere close to being called both a sporting power as well as an economic super power.

Source: The Economist

Capitalism. It was this very ideology that made the US the biggest and the most powerful economy in the world. Then how is it that the same free-market economy principles have pushed the economy into troubled waters? Well, as it turns out, the reason for all its problems is not capitalism. In fact, the real reason is actually the absence of it. The root of economic malaise plaguing the US is excess government intervention. A quick glance at some statistics is a convincing proof. Take the US dollar for instance. Since 1914 the greenback has lost about 96% of its purchasing power. In other words, what cost a US consumer 4 bucks back in 1914, would now cost him 100 bucks.

The interesting fact is that 1914 was the same year when the Federal Reserve took charge of the monetary policy. Can you guess what the stated mission of the Fed was? To preserve the value of the dollar! Shocking, isn't it? That's not all though. In 1971, US President Richard Nixon took the dollar off the gold standard. Essentially, the government took charge of the fiscal policy. And what has happened over the last four decades? Government debt has escalated at an astronomical pace. While it was just about US$ 0.4 trillion back in 1971, the same now stands over US$ 15 trillion.

But wait, there's more. Unfunded liabilities tied to Social Security, Medicare, etc. run into tens of trillions of dollars. It is no exaggeration when some experts point out that the US government is virtually bankrupt. It is only thanks to its uninhibited control over the money printing press that it is still alive. So it's clear that root cause of America's troubles lie not in capitalism, but in excessive government intervention and central planning.

For those of us who have been seeing our food bills and grocery bills only increasing, a big question is when the reverse will happen. Will food prices come down? The answer to this is unfortunately no. As reported by Firstpost, there are several reasons thanks to which prices are expected to remain high. The foremost reason for this is the obvious one, i.e, lower rainfall. This along with other climate changes has hurt food production. But some of the other reasons cited by them caught our interest. The higher income level for rural India which is a result of the government's populist policies is a big reason for higher food prices. As their income improves, people tend to eat better and healthier. This causes an increase in demand for food items leading to a higher price.

Another reason is industrialization. As India heads towards a higher degree of industrialization, the land and water available for agriculture has been steadily depleting. To add to this, with the already low productivity of Indian agriculture, the supply side has not really kept pace with the demand side. This has led to a mismatch which in turn has led to higher food prices. Unfortunately, as most of these reasons are more structural in nature, it would take quite some time for the situation to get resolved. As a result, we may be looking at higher food prices not just in coming months but for some years.

With strong growth prospects and young population, India seems to have all the ingredients to be an emerging super power. Or is it so? Well, the recent spate of events says otherwise. Recently, entire North India was engulfed in power outage. Roughly, 21 states and around 600 m people were affected. Overdrawing of power by some states led to the grid collapse. True, that India is a power deficient country. But what is disheartening to know is that despite various measures suggested to overcome the same, none have been effectively implemented. For instance, nothing concrete has been done to reduce power theft and distribution losses across the country. Neither has been anything done to upgrade the transmission lines and end-use of technologies. Basically, red tapism prevailed and people suffered.

Let us highlight another such instance. While North India was facing power outage, the same day, some bogies of Indian railway in Southern India caught fire. Approximately 40 lives perished. And who is to blame for it? Certainly, not the railway minister if you were to ask us. His job is to just focus on rail fares. Passenger safety is his least priority. But that's what he is forced to do. Remember, the fate of Dinesh Trivedi who was vocal about passenger safety standards. We believe vote bank is more valuable in India than anything else. And one cannot be a super power with such administrative practices.

India has a lot on its plate right now. Considering the spate of problems that it is grappling with, the average investor would be wary of investing in the country. The problems are endless. Lack of infrastructure, high inflation, wastage of food grains, corruption, scandals, poor monsoons, slowing growth, lack of reforms and the like. So the question that becomes important is whether these problems will dent India's long term performance or whether the country will be able to come out of the dumps and still fulfil its promise of higher growth in the future.

FIIs, interestingly, are banking on a revival of sorts. That is why they have invested over US$ 12.5 bn in Indian debt and equities in the calendar year to date. Of course, judging India's success entirely by what the foreign Institutional Investors (FIIs) choose to do would be folly we believe. One need look no further than 2008. At the time, when the global crisis struck, foreign investors went on a selling spree. India was at the receiving end too even though its fundamentals were quite strong and its banks had practically no exposure to subprime debt. That there is change required for the Indian economy can hardly be doubted. The silver lining is that the government seems to have recognized this, although now it will have to deliver on execution. Whatever the case, we still believe that India has the potential to grow and that it would be too soon to write its growth story off.

Meanwhile, indices in the equity markets in India got off to a weak start today with the Sensex trading lower by around 40 points at the time of writing. Heavyweights like HDFC Bank and Reliance Industries Ltd were seen exerting the maximum pressure. While most Asian markets also closed mixed today, Europe is trading mostly in the positive currently.

 Today's investing mantra
"Buying a cyclical (company) after several years of record earnings and when the P/E ratio has hit a low point is a proven method for losing half of your money in a short period of time". -Peter Lynch

Today's Premium Edition.

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "This is how a good investor becomes great!". Click here!

3 Responses to "This is how a good investor becomes great!"

Suresh Nithin

Aug 3, 2012

Hi, I dont completely agree with this view the reason being the economic forces with which we live in the current world & the way in which the trade being conducted today. In those days the markets were not wide open for the investing community at large & it has given an oppurtunity to predict the market movements as the participants were less. Now with the concept of financial inclusion, a larger sect of the society is participating in the market & the result of this is that most of the market participants follow a herd mentality rather than understanding the fundamentals. Everyone is try for the quick money due to which sentiments overtake the fundamentals.



Aug 3, 2012

I agree partially with Ashim. yes the economic conditons, market, organisation vary from time to time hence previous decisions may not always be correct but basic fundamentals are always true in any fields. So taking clues of fundaental things from good investors that needs to be looked into, studied, we can get some guidelines \ hints \ points \ clues to build upon our own strategy. The conslusion based on this will be much better and workbale , will give better yield than what otherwise we would have preapred on our own.



Aug 2, 2012

Studying past investments by successful investors does NOT give any extra boost for good investments. The economy varies with time and this have a direct impact on investments flourishing. Also, changing technology has their direct impact on business success. Once successful firms plunge into a tailspin as a new technology renders its products/services obsolete. The answer to how a good investor becomes great is yet to be ascertained and that it is why investment consultants/advisers continue to thrive.

Equitymaster requests your view! Post a comment on "This is how a good investor becomes great!". Click here!