Dotcom bust was bad. This could be worse

Dec 16, 2009

In this issue:
» Fed may not upset the status quo on interest rates
» Gold could be miles away from being a bubble
» 'The lost decade' for developed market stocks
» Moody's upgrades India's rating
» ...and more!!

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00:00
 
'Power is the new dotcom', shouts out a business paper headline today. The report refers to the surge in the number of companies of all kinds wanting to get into the power business. We also see this as a scary scenario. This is given that power is not an easy business to pursue. With a host of regulations and execution risks that even large power companies face, new players will have a tough time making any business sense of their overtures.

Forget the small companies that the new report has named. We are also wary of some large companies that recently floated IPOs to raise money for their power sector plans and this is where we believe things could turn out to be worse than the dotcom bust. With backgrounds in non-related sectors like real estate and trade, some of these companies are just jaywalking into the power minefield. And when they would realize their incapabilities in the future, probably it might've been too late for them, and their investors.

Thus for you, the investor, it is important to stay away from such companies that are foraying blindly into the power sector. We agree that the potential to grow can be huge. But so will be the risks! Our sincere advice to you would be to stick with companies that have proven track records in setting up huge power plants and are available at reasonable valuations.

00:50
 Chart of the day
We usually associate the term 'lost decade' with the Japanese economy of the 1990s. Today's chart of the day shows that it can also be used for some other purpose as well - to describe the fate of equity investors in the developed markets. As the chart shows, forget real rate of returns, investors who would have invested in the developed markets at the end of the year 1999, would have lost money even in nominal terms during the following decade. In sharp contrast, emerging market equities have been a great place to be in. And if one considers the current economic environment, they are likely to remain so for the next decade as well.

Source: Yahoo finance

01:25
 
From the lost decade, let us now move on to the lost opportunity. For Indian companies that came out with their IPOs recently that is. Despite nicely oiled marketing machinery being pressed into action, adequate response has been hard to come by, especially from the retail investors. One such exemption seemed to be the DB Corp IPO that closed yesterday. In fact, it seems to have gotten the best response among all the IPOs launched this year, with an oversubscription of nearly 40 times.

What seems to have made the difference was the company's proven track record in its area of operations. However, we still believe the management should have left some money on the table for investors. We hope the companies that are lined up next work on getting even this angle right. Thus, if one has a proven track record and also has the pricing aspect right, the marketing machinery may not be needed after all.

01:58
 
It is that time of the year again when the US central bank takes a call on what yield most asset classes around the world should trade at. And it appears near certain that the status quo is going to be maintained. The Fed is expected to announce its policy decisions on Wednesday afternoon US time and no one is expecting a miracle.

With unemployment still a huge eyesore and Bernanke making it clear that his number one priority is sustaining the recovery, the question of raising interest rates just does not arise.

Hence, the attention now veers to the next most important question. Whether Bernanke and his colleagues will hint about when they will reverse course and start boosting rates. There is a possibility that they would. But it is not going to be an easy task mind you. Too fast a reversal and one puts the nascent recovery at risk and too slow a reversal would mean setting asset prices on fire and inviting the wrath of inflation. Hence, while the decision of keeping interest rates record low looks rather easy, the Fed may be on a somewhat slippery ground on the second one.

02:40
 
When even a common man on the street catches fancy to some asset class then it is rather safe to conclude that the asset class under consideration is no longer an attractive one for investment and has instead become a mania, susceptible to violent corrections.

So, is gold in some such mania phase right now? Jim Rogers, a famous investor of our times, has come to the conclusion that the yellow metal, which looks something like a mania right now to many of us, may not be even close to being one. He is believed to have surveyed 300 people, which included some big money managers at a presentation in the European city of Prague. Rogers observed that an overwhelming 3/4th of them had never owned gold. Hence, forget the common man. If even specialists like money managers have not owned an asset class believed to be the next big thing, the asset class could well be in the initial stages of its rise.

03:15
 
High debt on books does not only haunt corporate these days. Even governments are very uncomfortable with high leverage. The rulers of Dubai would want to vouch for that. This is especially given the mess that the excessive debt has landed them into. But rating agencies are meanwhile trying to play catch-up on their 'revised outlook'. Lest they get caught on the wrong footing once again and are subject to criticisms.

After having a change of heart over the US' debt-riddled AAA rating, Moody's is also willing to change its India outlook. The rating agency is enthused by India's resilience in the midst of global financial crisis. And thus it has upgraded India's currency rating. The same seems to have been particularly influenced by India's 7.9% GDP growth in the quarter ended September 2009. It being the quickest pace in six quarters.

Interestingly, Moody's believes that the Indian government is on a war footing. It is taking adequate measures to correct the high fiscal deficit position. The impact of the Rs 3 trillion stimulus executed by the government on economic recovery has been a key barometer. We believe the rating may help Indian government and companies borrow more from overseas. However, it does not dilute the concerns associated with India's deficit in any significant manner.

04:00
 
Good batsmen know that it is important to leave the ball outside the off stump in test cricket. Especially if the pitch assists the bowler and the ball is moving. In our view, investing is not too different. Like test cricket - it is a long-term game. And it is as important to leave the risky investments alone as it is to dig into the good ones.

Warren Buffett says as much. But he uses baseball analogies instead of cricket. And of course he practices what he preaches. In recent interviews with The Wall Street Journal, he says his instinct to let go of risky opportunities helped him negotiate the recent economic crisis. He was approached by Bear Stearns, Lehman Brothers, Freddie Mac, Wachovia Corp., AIG, and Morgan Stanley. Buffett's response? Not interested. The troubles are too severe. Don't waste your time on me. The company is too complicated. Not familiar with your bank.

Of course, he chose to pick businesses he understood better - companies like Goldman Sachs and General Electric. But he says the best deals were those he didn't do. Important to note that even the world's best investor could not time the bottom of the market. But he avoided the disastrous investments several others fell into. Avoiding the wrong investments - that is one lesson all investors must lesson, in our view.

04:47
 
Meanwhile, Indian stock markets traded quite volatile today with the indices alternating between positive and negative territories. At the time of writing, the BSE-Sensex was trading higher in the region of a mere 10 points. Most Asian indices however, have closed in the positive today. Europe is also witnessing all round buying activity currently.

04:56
 Today's investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch

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13 Responses to "Dotcom bust was bad. This could be worse"

HEMANT

Dec 17, 2009

GOLD WAS RS 500 PER 10 GMS WHEN I WAS BORN RS 1200 WHEN I GOT MARRIED AND THEN AT RS 5000 PER 10 GMS WAS HIGH AS PER THE MARKET AND THEN WENT DOWN TO RS 4000 BUT FROM THEN TILL TODAY GOLD IS RISINING I ALSO BROUGHT GOLD AT RS 14000/IN 2008 LAST YEAR WHEN MY SON MARRIED TO DAY GOLD IS RS 18000 GOLD IS GOOD TO HOLD BUY GOLD FOR YOUR WIFE ORNAMENTS MAKE HER HAPPY AND ALSO YOU BECOME HAPPY AS THE PRICE RISES DONOT BE SAD IF GOLD FALLS BECAUSE YOU HAVE BROUGHT GOLD FOR YOUR WIFE

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Arun Gupta

Dec 16, 2009

Power stocks are truly dotcom bubbles...Gold is indeed the next future asset to be in...Excellent unbiased writeups...congratulations for beautiful insights into the world of investing...Keep it up Equitymaster. My sincere thanks to the editor for these sweet & simple write ups & bringing to our desktops.

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N.M.R Shreedhar

Dec 16, 2009

Chart of the Day--who would,ve guessed in 1999 that the BRIC countries would yield great returns? As they say, it is always possible ,in hindsight, to conclude that investing in India during those early years would have fetched good returns.regards

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anurag gupta

Dec 16, 2009

Hii sir,
i have no words to express for your valuable remarks
and research in cap-market.I am doing MBA and found it
highly informative and learning.It helped me in
harnessing and sharpening the analytic power for
financial markets.It is next to Economic Times.Exellent
work plz keep it up sir!
Keep mailing the similar stuffs
Thanking you,
Anurag Kumar Gupta

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schintada

Dec 16, 2009

disagree on the views related to gold! the data points appear to be skewed and imo do not reflect the statistical majority. Your's is a good objective column and hence i keep coming back to it, dont skew it with such lopsided reviews

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garagad

Dec 16, 2009

its coming good

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Raviranjan Anand

Dec 16, 2009

Excellent views.
Especially the reasoning behind Gold to become a valuable asset class of the future.

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Sunil Doshi

Dec 16, 2009

I would like to disagree on the Gold Analysis.
1) The sample size is totally Western who believe in spending and not in saving / Investing. The sample is of persons who "Invest" on behalf of Others ; which is totally different then Investing One's own money.
2)As of now Qgold has retreated from 890 to 840.It was in Mania condition 15 days back but looks cooling down again for Long term Investors to start buying again.

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Ravindra Nayak

Dec 16, 2009

Ver Good indeed

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Ashok Dasgupta

Dec 16, 2009

Have been following your 5-minute wrap up almost on a daily basis. Excellent write-ups laced with witty comments.

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