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A great investing lesson from a tiny amoeba

Sep 28, 2012

In this issue:
» SBI leads in mobile banking
» Is India's prepared for such massive urbanisation?
» Lessons for Mr Bernanke from Mr Paul Volcker
» What is Jim Roger's latest investment idea?
» ...and more!

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If we compare the global economy of today with that of a decade ago, it has clearly gone through a paradigm shift. Did we have so many developed economies on the verge of insolvency? Or did we have a major currency that was on the brink of collapse? With so much change and chaos across the globe, an investor is bound to be disoriented. How should investors view these changing times? Would it be wise to ignore the changing macro-economy while picking stocks?

The question reminded us on an insightful article in a leading daily that appeared more than year ago. The author of the article, Mr Kajanga Kulatunga, presented a very intriguing analogy about the behaviour of slime mold. Before we go any further, let us tell you that slime mold is the green thing that grows on walls, especially during the rainy season. For centuries, scientists have been baffled by the mysterious behaviour of slime mold. It is said that when food is available in ample, the cells of slime mold operate as single-celled units. However, when food is scarce, slime mold cells come together to form clusters. In other words, the individual cells collude together and operate as a collective. The important thing to note here is that their circumstance, which in this case is availability of food, has a strong influence on how they behave.

Can this analogy be applied to stock investing? For one, it is important to understand that companies do not operate in isolation from the larger macro-economy, but rather share a symbiotic relationship. It is vital to understand companies in the context of this relationship.

Take the case of the Indian economy back in 1992. The opening up of the economy put the country in a different orbit altogether. Many new businesses flourished and set the economy on the growth track. On the other hand, companies and sectors that were sweethearts for years suddenly found themselves on the wrong foot and saw their fortunes dwindling. The Indian textile sector is a classic example of this. Had an investor simply looked at the past track record of textile stocks without taking into account the changing economic environment, his investments would have gone for a toss. So, though the companies may have had pretty decent fundamental attributes, they could not cope well with the changing circumstances.

What we are trying to say is that just because a company has done well in the past, does not mean that it will continue to do so in the future. The context and the circumstance under which past performance was achieved matters a lot. Thus, it is imperative to study the circumstances and not just extrapolate past performance into future. Agreed that there are businesses where the future will unfold, more or less, in line with the past. But you would be making a big mistake if you take this as gospel truth. In fact, in vast majority of the cases, it is the exact opposite that is true. And it is the ability to spot this difference that separates a good investor from the bad we believe.

Do you think it is important to consider the economic circumstances while investing in stocks? Share your comments with us or post your views on our Facebook page / Google+ page

 Chart of the day
Mobile bank, though still in a nascent stage, is growing at a brisk pace in India. During the financial year 2011-12, there were 25 million mobile banking transactions worth Rs 18.2 bn. What comes as a bit of a surprise is that India's largest public sector bank, State Bank of India (SBI), has the highest share in mobile banking. While SBI accounted for 81% of the volumes, in value terms it accounted for 50% market share. It reported mobile transactions worth Rs 9.1 bn during the period. ICICI Bank has the second highest market share with transactions worth Rs 6 bn. On the other hand, other major Indian banks such as HDFC Bank and Axis Bank have a very marginal share in mobile banking.

Data source: Outlook Business

Union Urban Development Minister, Kamal Nath, voiced his thoughts of making New Delhi 'vertically developed' to cope with the growing population pressure. Like other developing countries, India continues to face an alarming scale of urbanisation with an estimated 700 million people likely to move to cities by 2050. Now, this would certainly put pressure on the infrastructure facilities in the cities as well as on natural resources. It is worth noting that globally, cities use 75% of the world's resources and are responsible for 67% of all energy consumption and greenhouse gas emissions. But urbanisation is an eventuality to which India practically has no option. There are two main problems that India faces. One is, of course, that of high population. The other concern is that development in terms of growth of manufacturing and services has been restricted to few metros and Tier 1 cities.

So, is vertical development a real solution? Although we believe that in the short run, the fact of growing urbanisation can be addressed by taking resort to measures like raising the floor space index (FSI), leading to vertical development. However, we think that both government and corporates should focus on promoting growth to various parts of the country. This is the only way to achieve a balanced and holistic development across the nation.

As the US economy passes through one of its most tumultuous times, it will not be a bad idea to pay heed to Paul Volcker. After all, he faced an eerily similar situation in the 1970s and laid the groundwork for one of the most prosperous periods of US economy. A leading US daily did just that. It invited a certain Mr Silber, who happens to be Volcker's biographer and picked his brains on what should Bernanke really learn from Volcker.

Silber is of the view that Bernanke did a splendid job in 2008. When confronted with a pretty dangerous situation, he opened the floodgates and went all out with lending. But now, he does need to worry about the fallout, which sadly he is not doing. Silber argues that a study of Volcker's tenure of the 70s gave two important messages. One, inflating money supply cannot bring about permanent reduction in unemployment. And second, it is high time the US Fed started worrying about inflation. Waiting until a clear and present danger is seen will be too late as per the Volcker biographer.

Well, we couldn't have said it better. The mess that the US is in hasn't come about overnight. Thus, the Fed's attempt to keep inflating will also not lead to an overnight recovery. In fact, printing money is only going to get US into more trouble. Right now, all people need is a trust in their currency. Bernanke would be well advised not to cause significant damage to that trust. For if that happens, all hell might break loose.

A big commodity fan has turned his eyes on equities. And he is contemplating buying something from the BRIC pack. That person is none other than Jim Rogers. And the country he is eyeing is neither India nor China. It is Russia. Rogers believes that Russia and its currency offer a very attractive investment opportunity at current levels. Political stability is another comforting factor. Also, conducive investment policies under the reign of Vladimir Putin make Russia a hot investment destination.

This presents an important lesson for India. For long, policy logjam in India is making investors uncertain. They are afraid of bringing their money to India. In the past, Russia too had apprehensions over foreign capital that landed on its shores. But ultimately, the government changed its attitude towards foreign investors. It realised the importance of capital for growth. Remember, until now, capital chased India for its own reasons. But if the policy issues make investors uncertain, capital will fly to other regions.

Britain is smack in the middle of the longest double-dip recession since World War II. Official records show that the country ran up its largest current account deficit on record in the second quarter of 2012. The deficit was a whopping GBP 20.8 bn. This includes UK's trade balance and a shortfall on overseas investments. The country's citizens are facing tough times. Household spending was down 0.2% over the quarter. The largest declines were in restaurants and hotels, tobacco, and food and drink, as families cut back. However, one positive was that business investment rose 0.9% over the quarter. Overall, the economy contracted by 0.4% during the quarter, slightly less than the previous 0.5% estimate. The economy is still stagnating, and generating employment is the only way to lift economic sentiment. But this is much easier said than done.

In the meanwhile, the Indian equity markets rallied today. After opening trade on a firm note, the stocks built on the gains and at the time of writing, BSE Sensex was up by 270 points (1.5%). All the sectoral indices traded strong led by auto and metal stocks. Barring Japan, all Asian stock markets traded positively.

 Today's investment mantra
"Valuation is an art. Look at Wrigley: pick a figure for what the volumes will be, their prices, their competition, the likelihood of management being bright with cash. All of that figures into the moat and its size, and what that business will earn." - Warren Buffett

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