»5 Minute Wrap Up by Equitymaster

On This Day - 3 JANUARY 2011
Who wants to become a wealthy investor?

In this issue:
» Indian stocks outshine gold over ten years, but then...
» Corporate fraud in India on a rise
» Rising oil prices present a new headache for the RBI
» 2011 outlook for Indian real estate stocks
» ...and more!!

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The question is - Who doesn't want to become one? We save and invest, all with the aim of living a comfortable life when the cheque stops coming. In achieving our financial goals, we make resolutions and we sometimes show our willpower to achieve them. But then, is this enough to become wealthy over the long term?

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:

  • Habit of not timing the market and instead investing regularly
  • Habit of diversification
  • Habit of doing the homework before every investment
  • Habit of patience
Success in investing is guaranteed, but only if you practice the right kind of habits.

What other good investing habits do you practice in your aim to become a wealthy investor? Share your views with us or post them on our Facebook page.

 Chart of the day
Today's chart of the day captures the performance of Indian stocks versus gold over the past ten years. As the chart shows, stocks have outperformed gold in six of these ten years. However, just because of the sharp drop in prices during 2008, the point to point outperformance of stocks hasn't been that great. Over a ten year period, i.e. between Dec-2000 and Dec-2010, stocks have returned 416% while returns for gold stand at 404%.

Data Source: Gold.org, Yahoo Finance

Rising oil prices present a new inflationary headache for Asia. Benchmark US crude has hit a 26-month high near US$ 92 per barrel. The century mark is neither far, nor does it seem difficult. A weak dollar and OPEC's evident reluctance to increase output add to the case for costlier oil in 2011. This is going to further complicate the task for policymakers.

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?

With inflation at the consumers' level in double digits, for most of us it is time to dig deeper into our pockets. Those hoping to get their home loan, car loan or personal loan sanctioned will feel the pinch harder. 2011 is not going to offer any relief to borrowers from banks. In fact it may get a lot more difficult to afford big ticket loans. Banks have already factored in the rise in liquidity costs in their lending rates. With inflation showing no signs of easing off, banks have no near term plans to reduce their lending rates. With regard to how much will be rate rise, banks have given estimates in the range of 0.5% to 1%. Also with the sector's credit growth (23% YoY in 9mFY11) already exceeding the RBI's target of 20% this fiscal, the regulator has little reason to curb rate hikes. We believe that such scenario will not hurt individuals very badly if they have an option to defer their purchase. But for companies with bad working capital management or insufficient internal accruals, the days ahead are certainly tougher.

A lot has been said about the Citibank fraud committed by one of its employees. He has been accused of swindling millions. This has caused the bank to not just lose in terms of money but also clients' trust and most importantly its reputation. The question we ask is - Was there anything that Citibank could have done to prevent this from happening? Most importantly can this happen again?

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.

In the meanwhile, Indian markets have started 2011 on a decent note. The BSE-Sensex was trading with gains of around 75 points (0.4%) at the time of writing this. Today's gains were led by stocks from the metal and realty sectors. IT stocks had a bad day today. Most other key Asian markets were closed today, with the exception of Hong Kong and Singapore, which closed with gains of around 1.4% and 1.2% respectively.

Guessing games on which sector will outperform the rest in the New Year have well and truly begun. A lot of the votes seem to be going in favour of real estate. After all, not only was the sector a big underperformer in 2010 but realty prices have also crossed their peak levels seen in 2008. Thus, in view of these positives, a lot of brokerages are flashing their bullish signs for the sector.

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.

 Today's investing mantra
"Chains of habit are too light to be felt until they are too heavy to be broken." - Warren Buffett

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