The biggest investing blunder investors make

Aug 17, 2010

In this issue:
» India has adequate import cover
» MFs using all means to get new accounts
» China more bullish on Euro than dollar
» India to become the world's fastest growing economy
» ...and more!!

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Oil exploration is not an easy job. In fact, it is one of the most complex operations in the world. One that requires tremendous experience, sound knowledge and management depth. What is more, world over, governments insist on prior experience before companies are even allowed to explore. Take the case of the recent BP oil spill. Despite having years of experience in the oil exploration industry, BP became embroiled in the world's biggest oil spill in history.

So, it was mystifying when the Anil Agarwal owned Vedanta Resources announced its intention of acquiring 51% stake in Cairn India. After all Cairn India is into oil exploration. And Vedanta, which is into metals and mining, has zero exposure to the oil industry. What also works against Vedanta Resources is its questionable management. The company has already been accused of 'having contempt for the law' in its recent bid to build a bauxite mine in Orissa.

This more than ever highlights how important quality of management is. A good or bad management (as the case may be) may be a game changer in terms of where a particular company's fortunes are headed. One cannot put a number to management quality. But the track record of the company and what the management intends to do to steer the growth of the company forward is important. Justifying a particular strategy by highlighting the huge potential that India has is one thing. But are these decisions taken by the managements in the interest of the companies and their shareholders? Many a time investors give a lot of importance to how high the share price of a company is likely to go. No heed is paid to the managements' intentions and capabilities. And that could be the biggest blunder that shareholders and investors make.

 Chart of the day
Forex reserves are important, in that every country should aim to have sufficient reserves to meet its import requirements. One common rule of thumb, as stated by the Economist is that reserves that can cover three months' worth of imports are adequate. By that yardstick, today's chart of the day shows that Russia has the highest import cover followed by China and Brazil. Although India significantly lags its peers, it still has adequate reserves to meet its import requirements. A far cry from its crisis in 1991 when the reserves were barely enough to cover three weeks of essential imports.

*Data Source: The Economist

The Indian mutual fund industry has been facing tough times of late. Fund houses are finding it tough to get new clients into their system. This is given that the SEBI has knocked off the fees that distributors used to get from selling mutual funds (under the garb of entry loads). In these times thus, mutual fund companies are restoring to all means to get in new accounts. One step these companies have taken is to tap their existing clients for more funds.

Leading the ploy are bank-sponsored fund houses. These are increasingly becoming dependent on their bank sponsors or in-house partners to help garner a tidy collection. And the results are there for everyone to see. These bank-sponsored fund houses are witnessing inflows of around 40-70% of new fund offer (NFO) collections coming from the sponsor bank's customers.

The fate of the PIIGS (European nations now infamous for their huge debt burdens) may have come as a rude shock to investors in Europe. But the economy which is the biggest investor in US Treasuries does not think so. In fact China is now supposedly more bullish on the Euro zone than on the US.

The Chinese central bank has been buying more of Euro bonds rather than selling the same. As against this its sale of US Treasuries over the past few months has been well documented. Japanese bonds too have found takers in China. This may seem to be just a case of diversification of investments. However, the underlying fact may be of huge concern to the US Fed. Asian central banks, holding around 60% of the world's foreign exchange reserves, are turning away from the dollar. The world's reserve currency is in dire need of support.

Unemployment is the number one thing in the minds of most economists and investors when it comes to the US these days. And according to the world's most influential bonds fund manager, Bill Gross there is no solution in sight. Bill Gross believes the new 'normal' unemployment rate will be 7% instead of 4%. Hence, the government should spend tens of billions of dollars on new infrastructure projects to put people to work and stimulate demand.

In his own words, "Current policies have specifically promoted consumption as opposed to investment. We need some type of government-oriented policy that promotes infrastructure, that promotes re-education, that promotes the green energy that is specifically directed as opposed to pushing money into the consumption hole." We must point out though that there is an underlying danger in this approach. Government spending on infrastructure might result in a lot of wasteful expenditure - not the best use of precious capital.

It is becoming more and more obvious how gung-ho the rest of the world is on emerging markets, especially China and India. And it is now also becoming increasingly evident that the scales might tip in favour of India very soon. A recent report by Morgan Stanley helps confirm this view. A sterling demographic dividend. Continuing structural reform. Globalisation. All these factors will help India accelerate its growth rate to 9 to 9.5% over 2013-15. This even as China will cool down to a more modest 8% by 2015. It expects globalisation to give additional job opportunities to Indians. Additional capital to augment rising domestic savings and additional know-how are other collateral benefits of globalisation India will enjoy going forward. In light of these factors, the report expects India to become the world's fastest growing economy by 2013-15. Gazing into the crystal ball is always a tricky exercise. We must admit though that India has a lot of things going for it currently. Especially relative to many other large countries around the world.

The US economy has been growing at a turtle's pace. Japan has not been too far behind. Europe is almost flat with a few exceptions. China's stellar growth is expected to slow down. But Templeton's Mark Mobius feels that the global economic recovery is "well in place". According to him, the growth in the BRIC countries coupled with Turkey and South Africa will more than offset the slowdown in the developed world. While China has slowed down, but a growth of 10% is still not such a bad thing.

As per Mobius' peers too, it would be the emerging markets that would lead the economic recovery across the world. This is reflected in the performance of the markets as well given that the MSCI (Morgan Stanley Composite Index) for Emerging markets has outperformed the developed markets in recent times.

After opening in the green, markets managed to stay that way, despite some volatility. The BSE-Sensex was trading 33 points higher at the time of writing this. Stocks from the banking and FMCG space were trading in the positive while realty and IT stocks were out of favour. Sentiments were mixed in the rest of Asia, with Japan being the biggest loser.

 Today's investing mantra
"The speed at which a business success is recognized is not that important as long as the company's intrinsic value is increasing at a satisfactory rate. In fact, delayed recognition can be an advantage as it may give the chance to buy more of a good thing at a bargain price." - Warren Buffett

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10 Responses to "The biggest investing blunder investors make"


Aug 18, 2010

I think this article is unduly harsh on Vedanta and Sesa Goa. If the logic being advanced holds good - then there is no way how Equity Master Team should have come into place. Simply because they were not originally in this business or this just did not exist! There is a concept called venturing into New Areas, Diversification etc. If Anil Agarwal had gone in personally with his own wealth - would it have been okay? If yes - then why not Sesa Goa or for that matter Vedanta? If the Management Team is retained and the business grows - Profitably - why should anyone have a problem? Lets wait and watch. No Risk - No Gain. Thats the Motto for Shareholders and other stake holders. Good Luck Anil Agarwal & Team.


Murali Krishnan K

Aug 17, 2010

Diversification is not new in India Inc. Tatas have ventured into various lines. Birlas have. Reliance, Singhanias, Podars including the latest GVK and GMR have. Many have failed in the past, in their efforts. Their groups like Singhanias and Podars have lost a place, if not in all atleast in some new activities they choose. In such cases, family disputes have spoilt the show. Whatever is said and done, the victims are 'small shareholders'. Before venturing into new lines, the managements should think twice. Beware, they don't loose their money like small investors. In most of the cases, the lenders are the losers. Take the case of SPIC. Management is sitting pretty well and cool. It is the Banks and Financial Institutions that are breaking their heads to get their funds back. Management will simply say, "if the small shareholder does not have faith in the management or in the new activity, they have a right and liberty at any time, to switch over their investments from that company to another company" Investors be wise.


Madhav Rao

Aug 17, 2010

Todays Investing Mantra -I like this most.To read it I have to go to the end of the Bulletin.You beleive that if you put it first, many may not read the rest.Am I correct?


sarang ms

Aug 17, 2010

See how Mr.Anil Agarwal managing all company falling Vedanta Umbrella. Cairn India can be construed as Black Gold.It is not a blunder But his foresightedness.


Srini T

Aug 17, 2010

The Vedanta-Cairn article on WSJ Asia seems to be better analyzed, thought-through and balanced than this piece... EM guys for some reason your views / opinion seem to be biased against Vedanta, you may want to review the WSJ article to understand why i'm saying so.


Manish Desai

Aug 17, 2010

The Sesa goa's investment in Carin is classic example to alert retain investor to become smart investor.

Naturally voice of minority retail investor doesn't make any difference !

Right now, we can't comment on return on Sesa Goa's investment in Carin, especially to retail investor. For vedanta it might be like taking debt from group co, instead of taking from outside !

Smart thing done in take over is Rs.50/shr as a fee, which will definatley remove hurdles of Vedanta's - being non oil company/group.

Definately concern's raised on the management's quality will definatley effect return on Sesa Goa's investment in Carin !



Aug 17, 2010

Govt. is a mute spectator to all these day light robberies. This instance is just one more addition of long list of companies where minority shareholders are taken for granted. Clearly Vedanta is using the Sesa Goa funds for furthering its interest at the cost of minority shareholders. Govt. should act fast and impost some restrictions for such unrelated investments/diversification to restore the confidence of retail shareholders. Else the day is not far when new projects will not attract retail investors.



Aug 17, 2010

C'mon guys! Everyone is wise after the events, is it not? Vedanta were blue eyed boys till the other day for all punters & sooth-sayers of the market too! Now that the bad news had hit the fan, it is easy to blame 'oh! what an unethical management!'. For the size that they ventured into Mining - assuming for a moememt that is all legal & fair, surely they have the muscle power to go big on a diversification into oil buss. "Chi chi, what experience they have!" is all nonsense - you acquire that & for that you need size and money and nothing else, least of all expertise in Chairman himself digging a tubewell at home!! As I said, now that the horse manure has hit the fan, you can pickup 'experience' or any other straw (not surprisingly, many will now be easily available for all sooth-sayers!) to beat up Vendanta & co!!!


Harish Nayak

Aug 17, 2010

About your writing based on vedanta is not well thought after. What is the basis for Mining company should not go for Oil drilling? Managment depth, can be bought? What is managment depth of Hathway Berkshire in running Coco Cola? Reliance mgmt experience in telecom, when they started from Fibers to petro to Telecom. It is the deep pocket and managing bottom line and top line. Today management expertise can be bought in the market, if we know how to manage these 2 -top and bottom line. About managment ethics, who is clean, saint? NONE. I am not supporter of vedanta, but I did not like the way you analysed. What is macromax cell phone? How this was launched? we have seen this in last few cricket matches....! That is the way world moves. It is the deep pocket that makes the difference. We do not need to give importance to procastinations and arm chair experts like you when we want to invest. ONGC also questioned ability of Cairn take over? This lacks maturity....! Only owners changed not the method of oil drilling....! ONGC failed to note this....! I hope I made my point, please avoid these kind of judgements on managment expertise.



Aug 17, 2010

Sesa Goa's investment in Cairn India is an eye opener for the Investors and the regulator. A Company in a specialised mining business invests in a business totally different from it's operations.Don't the other shareholders have a say in a Company's operations?

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