»5 Minute Wrap Up by Equitymaster

On This Day - 5 APRIL 2012
Does your portfolio have such poisonous stocks?

In this issue:
» Gold bull run has not yet ended
» Aadhar is tasting success in India's hinterland
» A silly looking comment from a central banker
» Bankers request RBI to lower rates
» ...and more!

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Last week, we had an opportunity to meet with the management of an auto ancillary company based in Delhi. This company is one of the market leaders in its field. It counts marquee players such as Maruti Suzuki and Bajaj Auto amongst its many clients. Thus, when we arrived at the premises, we hoped to get a good insight on the functioning of the firm. But barely had we settled into our seats, a rather intriguing question came our way. 'What kind of an increase in our market cap can we assume from this meeting', asked the person on the other side rather nonchalantly. Although we were taken aback a bit, we decided to give him the benefit of the doubt and proceeded with our discussion. Few more minutes into the meeting and out came another shocker. 'Minority investors get what they deserve', opined the same gentleman when quipped about certain decision taken by the management that were not in the best interest of minority shareholders. Well, it was all downhill from there. We quickly realised that it would be a big mistake if we recommend the firm to our subscribers.

You see, there are many reasons a firm can count as a bad investment. High leverage, eroding market share and reducing profitability are just amongst the few. But if there is one reason investor should have absolutely no tolerance for, it is the quality of the management we believe. This is because a risk to the business from a bad management is a risk that is present at all times. One would never know when the management decides to allocate the profit from the business in a disproportionate way. And take the minority shareholders for a ride in the process. Thus, it does not matter how strong the financials of the firm and how cheap the valuations. In fact, the company we met had financial and valuations that would make a value investor drool. But still, an investment in a firm that has a history of bad management practices should never be considered. Just as any number multiplied by a zero is zero so is the return for a minority shareholder from a business with unethical management. Even if the firm becomes one of the biggest in its industry, there is always a risk that minority shareholders will get a big zero at the end of the day.

Do you think the quality of the management is the most overriding criterion for investing in a stock? Let us know your comments or post them on our Facebook page / Google+ page.

 Chart of the day
The first quarter of the current calendar year came to a close recently. And it has been a good year so far for the Indian stock markets. How about the sectoral indices though? Which ones have found favour with investors and which ones have gone out of favour? As today's chart of the day shows, the realty index was the hot property amongst sectoral indices during the first quarter. It registered a gain of close to 30% since the start of the year. BSE Bankex and Auto haven't been far behind either. Interestingly, FMCG index that was so popular last year, does not find a place in the top five. Reversion to the mean anyone?

Source: ACE Equity

Remember the last time you saw a magic show? One of the popular hand tricks involves the magician starting with just one coin. Then as the trick unfolds, several coins pop up out of nowhere. The act is done with such finesse that it is almost impossible to pinpoint the underlying trick. The act, deservingly, draws a lot of cheer and applause.

But it is no joke when central bankers also start pulling off similar tricks. We have often written about how US central bankers have been fooling the masses by recklessly pumping cheap money into the economy. In the process, they have only aggravated the problem further instead of solving it. But we just came across a shocking news report that reveals that such outrageous monetary policies are not just the monopoly of central banks of developed economies. The newest central bank to join this notorious group is Argentina. The President of Argentina's Central Bank (BCRA) opines that printing money does not cause inflation. According to her, inflation is caused by "other phenomena like supply and external sector's behaviour". Such erroneous statements force one to doubt the sanity of individuals heading powerful organisations. Either they are plain stupid. Or, we fear they are impeccable tricksters. Our gut slants towards the later. And this is dangerous. We cannot afford to cheer and applause.

Gold has been rising for the past eleven years now. But, the biggest question is whether there is scope for further growth. Inflation fears, the sovereign debt crisis and a worldwide slowdown still persist. But there is one more fundamental reason why gold may still break new barriers. This indicator is negative real interest rates. Interest rates in almost every country except for India are at benign levels. But inflation has showed no signs of backing down. Thus, real interest rates (nominal rate minus inflation) are in the negative territory. While this scenario can erode the value of money sitting in your bank account, it could not be better news for gold.

According to empirical data from Casey Research, gold has always performed well when real interest rates are at or below 2%. When real interest rates are negative, cash or bonds are worthless investments because their return is lower than inflation. Gold emerges as the true winner as it can hold on to its purchasing power. Politicians in the US, EU, and a number of other countries are hell bent on keeping interest rates low to spur growth. Inflation is still above comfort levels. Thus, real rates may be in the negative zone for some more time. So is it time to buy more gold? We sure think so.

That the coming fiscal will bring with it a new set of economic challenges is not unknown. But Indian banks are putting their best foot forward to ensure that credit shortage does not dampen growth prospects further. The upcoming monetary policy meeting is therefore seen by them as an opportune moment. An aggressive rate cut by the Reserve Bank of India (RBI) will not just help credit offtake. It will also help ease the pressure on banks' profitability. Burdened with heavy restructured assets and rising possibility of slippages, banks are looking for redressal. Benign interest rates could also ease the pressure on asset quality. Given that the RBI's motive of cooling down inflation is not yet met, we doubt if the central bank will give in to the pressure. The sharp rise in oil prices could also be a deterrent. Further, easy liquidity may not be the most certain way to achieve higher growth. This has already been tested in the Western economies. Hence the RBI's decision in the upcoming policy meet is best determined by broader economic objectives.

The government's Unique Identification program, Aadhar, could be India's answer to end corruption. This is what the villages across Jharkand are witnessing. Aadhar has helped to simplify the payments made under the government's various social welfare schemes. It includes payments made under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) as well. Aadhar has helped in reducing the number of scrupulous payments by assigning a unique identification to each beneficiary. This has helped identify and remove all ghost applicants from the system. For example, a family is supposed to have only one job card. But it had 2-3 job cards by way of ghost applicants. With the introduction of Aadhar the ghosts were removed from the system. This way the siphoning off of funds on account of MGNREGS has come down. In addition to this, the payment method has also become simpler and easier and beneficiaries are able to receive funds immediately rather than having to wait for nearly two to three months. All in all, Aadhar is becoming a success in the state.

Meanwhile, it was a truncated trading week for the Asian stock markets. While Chinese markets were closed for the first three days of the week Indian stock markets will remain shut during the last two days. The US stock markets lost 1.0% during the first three days of the week. Fears that the European debt crisis may further worsen amidst weak bond auction in Spain worried investors. However, indications from the last Federal Reserve meeting suggests that the economy is likely to bounce back due to strong unemployment data recorded over the last three months.

The Indian stock markets were marginally up 0.5% during the week. The market shed gains in the last trading session after a three day winning streak as investors booked profits. The next few weeks will determine the course of the markets from here on as investors keenly await the Reserve Bank of India's (RBI) monetary policy and fourth quarter results of the FY12.

Amongst the other world markets, Hong Kong (up by 1.1%) was the biggest gainer for the week followed by India (up by 0.5%). France registered the worst performance during the week and was down by 3.2% followed by Japan (down by 2.6%).

Source: cnnfn, yahoo finance, kitco
Note:- Indian stock markets are shut on April 05 and April 06 2012
and hence we have taken the closing as
of April 04 for all markets to maintain uniformity in comparison.
The Chinese stock markets were shut during the first three days of the week due to public holiday.

 Weekend investing mantra
"The really good manager does not wake up in the morning and say, "This is the day I'm going to cut costs," any more than he wakes up and decides to practice breathing." - Warren Buffett

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    Note: We regret to inform that there will be no issue of the 5MinWrapUp on Friday (6th April, 2012) & Saturday (7th, April, 2012) on account of holidays.

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