A valuation method that earned Rs 1.8 lakh crore! - The 5 Minute WrapUp by Equitymaster
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A valuation method that earned Rs 1.8 lakh crore!

Oct 8, 2010

In this issue:
» Deepak Parekh warns of real estate bubble
» Experts worry about the US dollar's slide
» India job market hots up in September
» World Bank and IMF sound alarms on emerging markets
» ...and more!!

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00:00
 
An awestruck BBC journalist recently noted "Warren Buffett" has more money than the collective GDP of more than half the world's countries!" If, starting from scratch, a guy ends up making so much money solely by picking stocks over a 50 year career, it begs just one question - How does he do it!?

People the world over dedicate themselves to valuing stocks, but no one has even come close to achieving that kind of success. Understandably, many budding investors may be dying to know Buffett's way of doing this, especially in these uncertain times. In an interview with Bloomberg, Buffett spilled the beans.

He was asked that in this new economic environment, when even company CEOs are unable to give out forecasts because of lack of visibility, how does he, being a mentor to many on value investing, manage to value a company?

To which Buffett, with a few characteristic chuckles, quipped that we didn't have any visibility even in 2006 or 2007. We just thought we did. People say it's too uncertain now. But the future was uncertain then too, they just didn't know it was uncertain.

Infact, according to Buffett, the truth is that he goes to work every single day feeling that the future is uncertain. And he always will. That doesn't mean he can't value a business, or value a farm, or value an apartment house for that matter.

"I look at the asset, and I say 'What will this produce over the next say 10 or 20 or 30 years?' And if I buy a farm, I don't know whether there's going be drought next year, but I know that there are not going to be 20 straight years of drought, and I know there's not going to be 20 straight years of great rainfall!" exclaimed Buffett.

The next time you hear someone fixate on next quarters or next year's earnings, we hope you know what to tell him..

01:27
 Chart of the day
 
Today's chart of the day compares the effective tax rates, net of offsets, across some major countries around the world. By this measure, on a relative basis Indians are subject to some of the highest tax rates internationally. The US on the other hand stands at the other end of the spectrum. The Chinese too seem to have it relatively easier on this count.

Data Source: The Economist

01:50
 
Assessing risks pertaining to the real estate sector comes easy to this man. After all, he has been doing such assessments for the past 3 decades! We are referring to Mr Deepak Parekh and his association with India's largest housing finance company - HDFC. So, when we came across Mr Parekh's warnings on a bubble in real estate, in an interview to a business channel, we were all ears. It may be interesting to note that Mr Parekh continues to remain sanguine about the upmove in stock markets. This he believe gains ground from the higher earnings potential of India Inc.

But when it comes to real estate, especially commercial ones, the underlying fundamentals are not as strong. With asset prices in certain metros going beyond affordability, the excess supplies are unlikely to find takers. Mr Parekh infact advises developers to bring down prices by at least 10% to be able to encash the properties. We wonder if the builders are taking his advise seriously enough.

02:35
 
First, it was the massive asset repurchase program by the Fed. Then came the debt dilemma for European peripheral countries. And now it is the possibility of an outbreak of an all out currency war. Every time the global economy has tried to stand on its feet, it has kept encountering one hurdle after the other. However, the current problem could well prove to be the sternest yet.

Dollar's continuous slide against other major currencies is indeed worrying a lot of experts. They argue that if things are not controlled on time, it can potentially have the effect of derailing global economic growth. However, a mutually applicable solution is easier said than done. A hint of the same was on evidence yesterday when Chinese Premier stubbornly refused to let Yuan appreciate significantly. The upcoming annual meeting of the IMF is perhaps the best chance to have a global consensus on the issue. A failure here could certainly lead to very volatile days ahead for the global currency markets. We will have to wait and watch.

03:25
 
The Indian economy is much healthier than those of the developed nations. This is now well recognized. One area where this shows is in employment. As per a leading job portal, the job scene in India improved further in September 2010. This, as employers returned to the recruitment market in substantial numbers after the summer lull. In fact, out of the 27 industries monitored by the site, 21 showed month-on-month growth trends. Compare this with the US economy where the numbers remain sluggish. Employment is often regarded as a tell-tale indicator of the state of the underlying economy. Hence, the job creation in India confirms at the grassroots level the growth India's economy is experiencing.

03:55
 
We have spoken endlessly on how emerging markets are gaining popularity as investment destinations. We have also given views of experts who debate whether these markets are too expensive or would it still make sense to invest in them. The latest to join the debate are the World Bank and the IMF. The officials of these agencies are worried that the emerging markets may be in a bubble phase.

Off late, all global fund managers have been pouring money into these markets, which have sent valuations soaring to new highs. Their rationale is that these markets deserve a premium for their attractive growth rates. While the IMF and World Bank do not dispute the rationale, they are worried on the impact that a sudden outflow may cause in these markets. Fund managers tend to have a herd instinct and follow each others' lead. If any one of them decides to pull out money from the emerging markets, the rest may follow suit. This would lead to a drastic fall in these markets and could burst the bubble.

04:42
 
After opening positive, Indian markets slipped into negative territory subsequently. The BSE-Sensex was trading 67 points lower at the time of writing this. Some gains were seen in the healthcare and IT sectors. The auto and consumer durables space however saw significant selling pressure. The rest of the Asian markets were trading mixed, with China up a hefty 3.1% while Japan was down 1%.

04:55
 Today's investing mantra
"What you really want to do in investments is figure out what's important and knowable. If it's unimportant or unknowable you forget about it." - Warren Buffett

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6 Responses to "A valuation method that earned Rs 1.8 lakh crore!"

vijay kumar choudhary

Oct 16, 2010

i am requests memegar post

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kaycee

Oct 11, 2010

'Effective tax rate - India is one of the highest'!

Well on another measure too, ie personal taxation (Income Tax) versus service provided by India Inc, we are paying one of the highest tax rates, despite all these post 1991 years of window dressing tax slabs, tax rates, rebates etc.

Let me explain; every seemingly 'drastic' reduction in income tax rates or widening the tax slabs which results in 'substtatial' tax-receipts 'foregone, for the benefit of aam admi', the same is offset by imposition of service tax, for a start on a small negative list of 5 times, as the Doctor called it then, at a modest 5% when the Dr started milching this cash cow in 1991 & then the year on year addition of more and more of the so called 'services' to attract service tax. Let us face it, whenever a new service gets included or service-tax rate is increased, the cartel of associated service providers (be it chartered accountants, doctors, lawyers or telcos, pandal contractors or 3-star hotels), they promptly 'revise' their 'fee' upward, often times, using the opportunity to pad a bit of additional profit; eg when the low grade GP doctors were brought on the net, they revised their fee from Rs100 to 150, whereas he only had to pay a 12.5% tax (assuming that ever since he is actually paying the tax!).

Yet, starting from Manmohan Singh thru to Jaswant, Yeshwant Sinha, P Chidambaram and Pranab, no one leaves an opportunity to selectively play it big, to make a big deal of their 'concessions' ie reduction in tax rates or widening slabs and worse still insult us (Indian 'Individual tax payers') saying that we pay much lower than International Income tax rates of say Sweden, Singapore, Canada et al.

Insult? Yes, it has been a sustained insult (heaped by successive FMs) on every tax paying Individual Indian. In those Countries for what they pay, they get State provide, yet best in quality, services by way of roads, education, old-age health care, subsidized accommodation.

Here?! I would like to personally soak every one of those FMs staking such claims in the sewers regularly overflowing after even the smallest shower (in the heart of a major metro and supposedly up-market residential area, where I happen to live) and hang them to dry in full view of fellow tax payers!!

State provided education, health care, accommodation in India - the less said the better - Quality is absent & quantity is awfully inadequate, as the 'funds' earmarked for such 'Yojanas' gets eaten up from the very top all the way down to the end of the pipeline!

The ones who have to use them are seen as the most unfortunate, as everyone seeks these from Private providers at whatever premium individuals can afford to pay, for appropriate acceptable levels of these services, they can afford!!

Yet, CAG reports meticulously every year that thousands of Crores are swindled by politician-babu combine and that this cancer in our system is taking the rest of India for a ride.

Add to it the duplicated Ministries, Yojanas, Departments, to 'cater' for Coalition Dharma, we have large scale swindle by these fortunate few and colossal drain of resources, created from what the Govt robbed from the vast middle class, by way of tax.

The day we convict & sentence to life and sieze the assets of any of those many Chief Ministers and other powerful minions (barring a miniscule minority who value probity in public life) who started pauper 20 years ago and are living in mansions (not the ones provided by State while being a Chief Minister/Minister) in the posh locality of every major City and town and hill station of his/her State, not to mention, acres and acres of land amassed to be cashed by next generations of 'anointed' Chief Ministers (well, there is hardly a choice available in Free India, of such talents anywhere outside such Ministers' families), we shall need a lot lesser money to "Govern" and hence can effect 'real and meaningful' tax cuts.

Till then, annual budget exercise, is just a thamasha to hoodwink the vast middle-class and effectively get them to cough up more to fund the Privileged Party goers of Netha-Babu Combine. Jai Hindustaan!!

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RAPHAEL

Oct 9, 2010

If we carefully observe nature we find lot of wisdom there and lot of solutions to our ‘simple but difficult’ problems. A case in point it the Banyan Tree – It takes many years, maybe decades to take root but after, say about 2-3 decades it becomes so solidly deep-rooted that most of the nature’s furies (floods, storms, etc.) fails to shake it. Buffet’s holding of Coca Cola shares for more than 20 years explains it. Most of his wise statements are a result of his careful observation of nature.

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Madhur Kotharay

Oct 8, 2010

It is technically incorrect to compare one's wealth, a measure of lifetime of accumulation, versus GDP, which is just one year's number. However, point about Buffett's serious achievements is well taken.

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Sundaravaradan

Oct 8, 2010

Tax-rates around the world.

Highly biased chat, in my opinion!
The reader needs to have SIMILAR Graphs, for Annual Income of
1000,000$
10,000$
50,000$
5,000$
etc., which are more relevant for India and respective countries.
We also need NUMBER of such Tax payers in each country and their %-age. (You may use price parity or such equalizing methods for each country.
Statistics can convey biggest bluff, if biased!

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ashok

Oct 8, 2010

Warning given by Mr Deepak Parikh is timely but unfortunately so long as builder lobby & politicians do not take it seriously it is not going to ease the problem.This phenomena happened in 1996 & history will repeat prior to that many commoners will get their fingures burnt ! (Experiance is only the BEST TEACHER)

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