|»5 Minute Wrap Up by Equitymaster|
On This Day - 5 APRIL 2012
Does your portfolio have such poisonous stocks?
In this issue:
----------------------- "An excellent analysis and narration on the present situation" -----------------------
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.
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.
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.
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%).
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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