|»5 Minute Wrap Up by Equitymaster|
On This Day - 27 JANUARY 2011
Is this the best way to predict a company's future?
In this issue:
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Thus, if forecasts aren't quite cut out for the job, what then is the best way to predict a company's future one might ask? We are of the opinion that forecasts shouldn't be made at all.
What better authority to turn to than Warren Buffett if you are not quite convinced. It is believed that the Oracle of Omaha has never ever in his investing lifetime tried to do any kind of future earnings estimates. All he has done is dig deep into the company's past track record and has tried to come up with evidence that the underlying business is as much resistant to any kind of change as possible. If in the last 10 years, the business model has changed 2-3 times, then it may not be a good business to invest in as per Buffett.
We sincerely believe that other investors should also do the same. They should ideally look into the 10 year financial history of a company and if at all they find evidence of frequent changes in the company's business model, then such a company may not be fit for investing after all. We believe such a method will prove to be far more useful than the other one of trying to profit from a financial forecast 2-3 years into the future.
The healthy performance was not only on the profit front. With respect to revenues, these grew by a healthy 26% YoY (excluding oil & gas companies and banks). Strong domestic demand was the key growth driver as the overseas markets continued to be mired in a recession. Whether such a strong performance will be sustained in the coming quarters is a big question mark though. Input costs are rising and with inflation refusing to ease off, interest rates are also expected to rise. All this is most likely to put pressure on profits. Hence, a few more quarters will give a better picture of how the economic scenario for India Inc. will pan out.
Economist Nouriel Roubini believes that China will keep buying US Treasuries as long as the former remains dependent on exports. If that indeed turns out to be true, the double digit growth rate that China boasts of may help the US more than China. We think that chasing growth rates for the sake of it has not served any economy's long term interests. Nor will it serve China's. As long as India's sustainable GDP growth rate is free of encumbrances, having it in single digits should not be a problem.
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