|»5 Minute Wrap Up by Equitymaster|
On This Day - 1 MARCH 2012
The most certain way to make money in stocks
In this issue:
He's the world's most successful investor.
Your guess is right.
The Warren Buffett Quiz. Click Here to participate.---------------------------------------------------------------------------------------------------------------
Surprising as this concept may sound, let us tell you that if used properly, it could become your sure shot ticket to the rich house. And do you know who the foremost proponent of this concept is? Well, none other than the Oracle of Omaha, Warren Buffett. The super investor has mentioned a countless number of times that he looks to invest in businesses with very strong moats. It turns out this moat is nothing but the unique ability of a firm to price its products in such a way that people are willing to pay far in excess of the cost price that has gone into its making. In other words, like the cricket match example, the value and cost associated with the product should be poles apart.
That's it. Even if you spend the rest of your lives looking for such businesses and end up finding only a handful of them, you are surely going to end up quite rich. This is because these businesses not only earn a high return on capital but are also a great hedge against inflation. People who value something won't mind paying a slightly higher price for it year after year, isn't it? Think of most of Buffett's most successful investments like Coke, Gillette, See's Candy, Wrigley etc and you will realise that buyers consider these brands to be premium. In other words, they don't mind paying for these products a price that is much higher than the cost and investment incurred to manufacture them.
Do you think investing in companies whose products are highly valued than its competitors the best way to make money in stocks? Share your comments with us or post your views on our Facebook page / Google+ page.
Regulatory changes have crushed the unsustainable margins of the larger entities since 2010. However, smaller MFIs like Bandhan and Ujjwan were proactive in slashing their lending rates. That too even before the regulatory overhaul occurred. The crackdown on Andhra Pradesh MFIs benefited them even further. Several reputed private equity investors took exposure in the smaller MFIs. The reason was better management, use of technology and good asset quality control. With the funds, these entities have managed to scale up their balance sheets. In fact Bandhan has taken over SKS in terms of share of MF loans in 2011. That the fortune of this economically benign business model is not sealed is a very enthusing sign.
Here it may be noted that in absolute terms, tax collections were higher than last year. But because the budget estimate was unrealistically high, the overall tax picture looks weak. The non-plan expenditure zoomed to 87% of the year's total in the first 10 months itself. The only silver lining in the cloud was that despite such constraints, the government did not cut back on capital expenditure which is an important contributor to GDP growth. Indeed, there is no doubt that the government will have to come out with some concrete solutions to address this issue. After all, there is so much that the central bank can do.
Let's try to understand this from a larger perspective. In the past few decades, asset prices in the US accelerated at a rapid pace. Who was responsible for this? None other than the US Federal Reserve. The central bank kept printing money recklessly. This gave a false impression of wealth creation. With the busting of the asset bubble in 2008, the grim reality of the developed world became evident. So what's going to be the 'new normal' in an environment of credit and zero-bound interest rate risk? In the opinion of Bill Gross, it's going to be muted growth, high unemployment and orderly deleveraging. For instance, falling interest rates lead to a decline in the interest component of personal income. Correspondingly, the spending power of consumers is adversely affected. This is a perfect example of how central banks can wreck havoc in an economy. Thankfully, our central banker back home is much saner than many of its counterparts.
Thus, a market that might appear expensive on a standalone basis might be cheap when consolidation comes into picture. This is precisely the case with Indian markets. The standalone Nifty P/E is 19.5x. And the consolidated figure is in the region of 15.2x. Thus, Indian markets still appear to be reasonably priced on a consolidated basis. However, they command a premium when compared to other BRIC nations. But that premium is attributable to high RoEs and strong growth prospects. And with foreign capital chasing growth, we expect the premium to sustain in future as well.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement
Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407