|»5 Minute Wrap Up by Equitymaster|
On This Day - 3 JANUARY 2011
Who wants to become a wealthy investor?
In this issue:
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The answer is - no! To become a wealthy investor, one doesn't need resolutions and willpower. What one needs is the right investing habits.
You see, simply deciding to change our investing behavior may work for a while. But when we are faced with the stresses of other life events, like the need to pay off that burdensome home loan, that change of behaviour is likely to succumb to an emotional desire for making fast money.
As psychology professors would tell you, keeping a resolution is not a 100-meter race. It is a marathon, which requires you to adopt the right habits. When it comes to managing your finances or investing in stocks, there can be several habits that can stand you in good stead over the long term.
Some of these are:
Central banks in both China and India have underscored the need to get prices under control. For instance, India's RBI hiked rates six times in 2010. But food inflation saw the government perspiring. It deferred the increase in diesel prices following the huge outcry over sky-rocketing onion prices. So dealing with this multi-faceted monster called inflation is not going to be easy. Policymakers may find comfort in signs that growth has sufficient momentum. But how long can the government continue to take the fiscal hit by subsidizing fuel prices?
The answer to these questions is unfortunately 'yes'. The worst part is that internal frauds can occur in any organization not just in banks. As per a recent fraud survey conducted by KPMG, most senior executives feel that corporate fraud is on a rise in India. The reason is lack of prevention. Corporate India is still following age old practices. Most companies believe that their employees are honest and that internal frauds cannot occur in their organizations at least. As a result, they do not have any measures to check such actions. So it is not just the employees who can be blamed for taking advantage of the system. When there are loopholes, they can be misused.
However, we believe that these brokerages seem to have got their idea of an attractive investment completely wrong. As per us, a long term investment should meet four simple criteria. It should be within our circle of competence, should have a strong competitive advantage, should be run by honest and able management team, and should be available at attractive valuations.
If one holds any real estate stock against all of these four principles, it would come short on more than one factor. Thus, unless and until all of these four boxes are ticked, be it 2010 or 2011, we may want to avoid most stocks from the real estate sector.
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