A Three Point Checklist to Identify a Great Promoter

Nov 16, 2016

In this issue:
» A 'Realty' check on The Banks
» Banks awash with Liquidity could slash Deposit rates
» Update on markets
» ...and more!
Rohan Pinto, Research analyst

Fighting on a furious field,
Once a javelin pierced his shield;
Soldiers, with a loud lament,
Bore him bleeding to his tent.
Groaning from his tortured side,
'Pain is hard to bear,' he cried;
'But with patience, day by day,
Even this shall pass away.'

- Theodore Tilton

Dear Reader,

I recently wrote about the need to find managements that have the capacity to suffer.

The conclusion: Managements that can endure short-term pain to invest for the future can create great long-term wealth for their shareholders.

The past week has been a roller coaster ride. The government, on a mission to stamp out black money, has created a bit of short-term pain.

Long lines, cash shortages, frozen funds.

People are now hoarding loose change, salt, etc. Many companies have been negatively impacted. Especially companies catering to the micro finance segment for whom cash plays an integral role in day to day operations. There is angst and a feeling of despondency. The stock markets seem to be in a free fall.

We believe these problems are temporary. Yes, even this shall pass away.

Renowned value investor and behavioral finance professor Mr Sanjay Bakshi, includes the capacity to suffer on his three-point checklist to identify a good promoter. The checklist is simple. You want a promoter with:

  1. A growth mindset
  2. Willingness to delay gratification
  3. Capacity to suffer

And when you find a promoter with these qualities, stay invested with them for a long time.

The CEO of Indian Government has these qualities.

He has grand vision-plans for India. He is willing to take unpopular steps that draw criticism from all corners. And he's embraced short-term sufferings to accomplish his vision of a developed India in the long run.

Now, we too must do our part. We must endure some of this pain. This cleansing of our economy will help the country prosper in the long run.

How can you benefit from the government's moves?

The simple fact is that if you hold stocks of good businesses run by 'intelligent fanatics' in the long run, you will be rewarded for your patience.

Current market volatility should be viewed as an opportunity to make long-term bets on solid and fundamentally strong businesses.

We have one such long-term bet on a company. The company is run by a fanatical entrepreneur who has foregone his commissions and receives a modest salary. We believe it will create a lot of wealth for our subscribers in the long run.

The Hidden Treasure service aims to identify honest, intelligent fanatics who run small companies that have the potential to grow disproportionately compared to their larger peers. Will you partner with such owner operators and create wealth alongside them?

03:45 Chart of the Day

One of the biggest sectors likely to be hit by the demonetisation drive is real estate. With the sector largely thriving on cash transactions, the huge hit on high denomination notes is expected to bring in the much needed curbs on such deals. Therefore, it is no surprise that realty stocks have been pummeled on the bourses.

Realty Check on Banks

Banks have benefitted from the surge in deposits due to limits on the amount of money that can be withdrawn with the balance getting deposited in the account. Moreover, rising financial inclusion has also contributed to the growing deposit base of banks. However, banks having exposure to commercial real estate are also likely to face the music from the government's crackdown on black money.

Among banks, Yes Bank has the highest share of exposure to commercial property at 6.8%. However large private sector banks such as Axis Bank, ICICI Bank, and HDFC Bank have shares of 4.3%, 3.2% and 2.2%, respectively. Largest bank State Bank of India has a miniscule 0.9% share of exposure to commercial real estate.


Apart from cracking a whip on black money, another positive outcome from demonetisation is likely to be the much anticipated fall in interest rates. Banks are already flush with liquidity as people rush to exchange the old currency notes. This has led to a sharp jump in the low cost deposits of banks. These funds are being parked by banks in government bonds pushing up prices and lowering their yields. As per Business Standard, the yield on 10-year government bond has fallen by 26 basis points since the announcement of demonetisation. Remarkably, India is the only major economy that is witnessing a bullish bond market.

With the Marginal Cost of Lending Rate regime in place, banks will have to pass on the lower cost of funding from surplus liquidity in form of rate cuts. However, fall in the lending rate is unlikely to stoke credit demand in an already depressed market. The excess liquidity will continue to be parked in bonds further pushing down yields as well as interest rates. And as the bank's margins come under pressure, they are likely to slash deposit rates impacting public savings. Tanushree Banerjee, Co-Head Research, has a very interesting take on the likely pitfalls of lower deposit rates for the country's large population of savers. Here's what she says,

  • The government's concern so far has only been about lower interest cost for borrowers. The fact that at negative real interest rates, bank deposits will become unviable, has been of little concern.
    Reluctance to park money in low yielding bank deposits could have multiple adverse impact on the economy.
    First, the household savings appetite could truncate further.
    Secondly, investors looking for fixed returns may get lured by the steep yields offered by risky corporates on their bonds.
    Thirdly, households may choose to go back to investments in gold and real estate instead of growing their financial assets.
    The only chance of our fears being unfounded is if the government manages to cut down the fiscal deficit meaningfully.

After opening the day on a firm note, Indian equity markets continued to rise in the post noon trading session. At the time of writing, BSE Sensex was trading higher by 206 points and NSE-Nifty was trading lower by 49 points. Each of the mid cap and small cap indices are trading higher by 1.6% and 1.3%, respectively. Stocks from auto, IT and consumer goods are the biggest gainers.

04:55 Today's Investing Mantra

"When a management team with a reputation of brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst) and Madhu Gupta (Research Analyst).

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