This may scare long term investors... - The 5 Minute WrapUp by Equitymaster
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This may scare long term investors...

Oct 4, 2010

In this issue:
» Expect gold to cross US$ 2,000 an ounce, says Jim Rogers
» Mumbai sporting a realty bubble
» Emerging market funds set for record inflows in 2010
» Why is Buffett gung-ho on China?
» ...and more!!

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00:00
 Chart of the day
 
We felt uneasy when we first looked at this chart. After all, it makes a case against risking your money and investing in stocks for the long term. As it shows, an investor who kept his money entirely in gold for the past 3 years is now much richer than someone who has held 100% in stocks for this period. And then, even if one were to compare the performance of gold and stocks over the past 10 years, there isn't much to choose from.

Data Source: Gold.org, Trend; CAGR-Compounded, or average, annual growth rate

So you may ask - Why take that extra risk by investing in stocks when gold can give you as much, or sometimes even higher, returns over the long term?

Your question and the underlying concern are well taken. But if you were to look carefully, there emerges a very valid reason stocks have massively underperformed and just marginally outperformed the yellow metal over the past 3 and 10 years respectively.

If you see the stock markets 3 years back, or in October 2007, these were entering a big bubble phase. So stocks and their valuations were nearly at their all-time highs. And if you see the stock markets 10 years back, or in October 2000, they were just coming out of the dotcom bubble peak. So stocks and their valuations were high then as well.

This clearly vindicates the fact that stocks, and even the good ones, bought at expensive valuations will not earn you good returns. This is even if you are a long term investor and invest for a period of 3, 5, or 10 years. Now, given that the valuations of Indian stocks are again looking stretched, you know what we are hinting at!

01:09
 
Carrying on with gold, if one were to believe the commodities guru Jim Rogers, gold prices are likely to scale the US$ 2,000 an ounce mark in the in next 5-10 years. This is from the current price of around US$ 1,300 an ounce.

Anyways, despite this bullishness, Rogers still prefers silver over the yellow metal. As he recently told a leading business daily, "I would rather look at silver than gold. I own gold and I own silver, but silver is still 60% below its all time high....gold will go over $2000 an ounce certainly in the next 5 to 10 years. But silver - on a percentage basis - will probably go up even more during that period of time."

01:37
 
A property research firm recently conducted a survey of the prices of new houses being built in Mumbai. The average price of which - a staggering Rs 20 m - turned out to be far beyond the reach of the average well paid denizen of Mumbai. This is because, to avail of a housing loan to buy such a house, you need to be earning at least Rs 4 m per annum. Contrast this with average income of a well-off middle class person, Rs 0.5 m to Rs 1 m, and you will see that these new houses being constructed at such a furious pace are nothing but a distant dream for most. But builders continue to maintain that they are seeing brisk business. Behind this facade though is the fact that demand, whatever little there is at these sky high prices, is coming from investors and not end users. All this makes us uneasy about the 'bubble' like situation in the Mumbai real estate market.

02:16
 
If you thought fund inflows into emerging markets including India are set to stop anytime soon, think again. In fact, emerging market bond and equity funds are set for a record level of inflows in 2010. This is especially as investors look for better returns in these markets given that the scenario in the US and Europe remains bleak.

According to EPFR, a provider of data on foreign fund flows, about US$ 40 bn of investors' money has flowed into emerging market debt funds in the first nine months of this year. This is four times the previous record for a full year. Is doesn't end there. Equity funds in emerging markets have seen inflows of US$ 50 bn. This is in sharp contrast to funds in the developed markets which have seen outflows of US$ 80 bn. The quest for healthy returns is driving global investors to overlook the likely political risks associated with many emerging countries. What has given these countries the edge is that they are not mired in debt problems the way the West has. But over exuberance has its consequences. And alarm bells are ringing that the stage is set for another bubble to form - this time in the emerging markets!

03:04
 
Anyways, the rally in the Indian markets continued today as well. The BSE-Sensex was trading with gains of around 70 points (0.4%) at the time of writing this. Auto and pharma stocks led today's gains. Other key Asian markets also closed with gains, led by Hong Kong (up 1.2%) and Singapore (up 1%).

03:17
 
It is a well known fact that both Warren Buffett and Charlie Munger are big fans of the Chinese economic miracle. Buffett once again indicated the same in no uncertain terms when he spoke to the Chinese press last week. "Almost anyone, a third-grade child from America, can see that the Chinese economy is booming", the Oracle of Omaha opined at a briefing. "China's a very big economy and it is going to get a lot bigger. We need to put large sums to work, so China is a logical place", Buffett added further.

Buffett is indeed right on the Chinese economy. Its transformation is unlike anything that has taken ever taken place in history. But it should also be noted that its economic model is vastly different from that of other big economies like the US. It is an authoritarian, top-down driven model. And it is often known to not adhere very strictly to issues like corporate governance and good quality disclosures.

Hence, we will not be surprised if investment opportunities in China are very few and far between. Especially of the types Buffett looks for. In fact, we believe that a lot of Indian businesses are much better managed than the Chinese ones. Thus, Buffett's complete ignorance of them does indeed comes as a surprise. Perhaps it is time for him to set the record straight on this one. It is time some Indian companies also come under his radar.

04:13
 
Many experts point out how India's demographic profile is different from much of the world. This is not only from the ageing developed nations but also from China, which has pursued a one child policy for long. India is a nation of young people. And it will benefit from a demographic dividend in the coming decades. However, the question is whether India is really managing this boon well. What is the quality of education we provide the young? Are they then inducted into the workforce in a meaningful way?

As it turns out, a lot is left to be desired. As per a leading business daily, over 3,800 engineers are set to join SBI as clerks. This may reflect well on the bank's reputation as an employer. But it begs the question why technically qualified would opt for the post. Surely, because they couldn't find a better profile! Isn't that surprising for a country that needs to deliver vast engineering projects as it transforms into a leading economy?

04:52
 Today's investing mantra
"The way to win is to work, work, work, work, and hope to have a few insights. And you're probably not going to be smart enough to find thousands in a lifetime. And when you get a few, you really load up. It's just that simple." - Charlie Munger

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9 Responses to "This may scare long term investors..."

wasif hasan

Oct 4, 2010

I think as far as Indian markets and economy is concerned, Mr. Buffet has got it completely wrong. How can a supposedly best investor in the world ignore the best growing economy in the world. Or is it just the snobbish american attitude who think that America is the only economy in the world.

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sethu

Oct 4, 2010

Well Most of the things consumed in US are all made in China..But as far as india is concerned in USA except software in any other field ,indian presence is not at all felt; Buffet is not a great fan of software sector..so no wonder Buffet hasnot kept india in his scanner for the time being at least...

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George

Oct 4, 2010

I am disagreeing with Mr. Jim Roger's conception about preference of Silver than Gold. Average Indians would never understand the value of Silver even if it yields income more than the Gold. For that matter, I have my own experience that how much I spent my valuable time to sold out a piece of "White Gold" in the Indian jewellery market! Even if they understood after checking to know that this is Gold, because of the traditional concept they could measure its value because it is white in colour. So silver for a long time investment, I feel, don't worth.

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George

Oct 4, 2010

When India rigorously needs to improve our alround infrastructure systems mainly to compete BRIC nations especially China in order to achieve our prominance in the World Economy, certain facts emerging recently such as our qualified engineers are just joining in the clerical services, instead of dedicating their services for engineering/ construction fields. This is really quite alarming! Isn't it?

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sn malhotra

Oct 4, 2010

We need to go a little deeper into why engineers are seeking clerical jobs.Unfortunately for the country, poor quality engineering education has mushroomed in a big way in last many decades, thanks to the thousands of teaching shops.So a lot of these engineers for no fault of theirs are really unemployable as engineers.

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KSR

Oct 4, 2010


What is True for USA need not necessarily be true. The Americans see things in the light of their economy and what confronts and befuddles them. Our Indian Pundits blindly 'ape' them without stopping to think whether the situation in India is the same or different. When the Indian Economy is a Strong Domestic Consumption Story led Growing one, why bother about the doomsayers and the story of Gold? Stick to Stocks in Indian context and definitely the Investor will be well rewarded unlike in USA where a Gold Investor in 2007 would be better off today which definitely is not the case in India. For me - Stocks it is.. I am ready to wade through the troughs ahead only to ride back into the crests that will surely come ahead..

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johair madraswala

Oct 4, 2010

Pl can you inform me whether the FII funds pumping into
our stock market is actually the unaccounted money taken
out from our country by politicians and other likeminded
persons.? I feel they are heating up the market to get
the maximum benifit and will pull out leaving small
investors in a lurch.SO BEWARE.

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Raj

Oct 4, 2010

Rogers still prefers silver over the yellow metal, But in India if we buy silver and try to sell after time we will not get the same as market price. How can we take Roger suggestion in silver (india)

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SYJ

Oct 4, 2010

I think as far as Indian markets and economy is concerned, Mr. Buffet has got it completely wrong. How can a supposedly best investor in the world ignore the best growing economy in the world. Or is it just the snobbish american attitude who think that America is the only economy in the world. Would like to know from Equitymaster which countries Mr. Buffet has invested in outside america.
Regards,

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