»5 Minute Wrap Up by Equitymaster

On This Day - 16 AUGUST 2010
Of reckless CEOs and losing investors

In this issue:
» Who'll lead Infosys after Mr. Murthy retires?
» Where do rich Indians invest their wealth?
» More Indians buying gold as investment than jewellery
» After 64 years of independence, challenges lie ahead of India
» ...and more!!

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"Power tends to corrupt, and absolute power corrupts absolutely," said Lord Acton, an English historian. Nothing can be closer to truth than the way powerful CEOs behave. These are the men managing big (and supposedly respectable) companies.

They suffer from what psychologists call the 'paradox of power'. The very traits that helped these leaders get control in the first place disappear once they rise to power. They become impulsive, reckless and rude.

Take the case of these two 'big' Indian companies. When times were good, they resorted to financial engineering to prop their growth numbers. Investors thought these were great companies and could do no wrong. Ironically, even the top men in these companies thought the same - they could do no wrong! They spent big money in making wrong acquisitions, and went more aggressive than their financial strength would have supported.

They had wind in their sails, and thought that they connected very well with their stakeholders! After all, whatever decisions they took were applauded by the markets.

Well, those were the heydays of the pre-crisis period. After the crisis struck, not only did these companies lose business big time, their balance sheets started bleeding profusely. The wind was gone, the storm was here.

And the people who paid the biggest price were the minority investors. Those who were managing these big companies and had made those big bad decisions when the times were good, were still doing well!

Well, we are talking about companies like Suzlon and Reliance Communications. These still are widely-known companies in their respective businesses. But then, investors might remember them for their reckless pursuit of growth rather than any shareholder friendliness. These are clear cases of how a management's overconfidence can hurt shareholder returns, and hurt big time!

Data source: CMIE Prowess

Anyways, one aberration that we can talk about in this world of 'powerful' CEOs and Chairmen is Mr. N.R. Narayana Murthy, the chairman of Infosys. Off late, the big question that has risen is - Who will be the next Infosys Chairman after Mr. Murthy retires next year?

Well, a committee headed by Jeffrey Lehman (US scholar and Infosys' independent director) has been formed to carry out this task. And it is not an easy task. The selected person has to step into the boots of Mr. Murthy. And these are big boots of someone who has been responsible for shaping the face of the Indian IT industry. As per Mr. Lehmann, the main criterion is that the person should have a sound knowledge of both the IT industry as well as of Infosys. Nationality is not a bar. It could be anyone from within or even outside Infosys. However, at the end it would be someone who would be accepted by Mr. Murthy as well as the shareholders and stakeholders of Infosys.

Who do you think is the right person to replace Mr. Murthy? Share with us, or post your comments on our Facebook page.

The Wall Street Journal carries an interesting report on how India's rich invest their money. The report talks about a recent study done by Capgemini and Merrill Lynch Wealth Management, who found that India has around 130,000 people with investable assets of more than US$ 1 m. And where do these rich invest their money? The study found that a bulk of it is in stocks, bonds, and mutual funds. In fact, around 50% of their funds are parked in these assets. Out of the rest, around 50% is into real estate, including real estate funds. And then come other avenues like private equity, art, foreign funds, and gold.

Such a diversification is not really possible for investors who do not have so much surplus funds to invest. You might be one of them. For you, it would make sense to stick with carefully selected stocks and mutual funds, as well as gold. But then, apart from just investing, you also need to closely track your portfolio of stocks and mutual funds. The rich do this through their relationship managers. What about you?

 Chart of the day
Well, when it comes to stocks, rich Indians still hold small stakes in large and mid-size Indian companies. As our study of the BSE-200 companies shows, these individuals (non-promoters) hold a miniscule (average) 2.2% stake in these companies. What is more, their stake has fallen to this level from around 2.8% four years back.

* Defined as individuals holding nominal capital over Rs 1 lakh (non-promoters)
Source: CMIE Prowess

In India, gold has traditionally been used for making jewellery. But this now seems to be changing. This is because for the first time, Indians have converted proportionately more gold into investment than into jewellery. The World Gold Council figures suggest that in the case of net retail investment, there was a 19% rise for the first quarter of 2010. This is more than the 18% figure for jewellery.

One can obviously conclude that the part of the reason for the same is the impact of the global slowdown. This has resulted in a flight to gold as a safe investment haven. How long will this trend continue will depend on how long the world economy remains in trouble!

Amongst all the vested interests that are out to get hold of his money, the lay investor has one really good friend in the stock markets. We are talking about none other than SEBI. This market regulator has been really aggressive in making the investment environment much safer for Indian retail investors over the past couple of years. And it has just made one more such move.

SEBI has now made it mandatory for stock brokers to return their clients' unutilised cash lying idle with them at the end of every month or quarter. The brokers will also have to send out a statement showing clients the status of their funds at similar intervals. Further, if you as a customer choose to withdraw your funds from your broker, he will now have to transfer the same to you within one working day. This in contrast to the earlier norm of 2-3 days. There have been cases where many brokers have unscrupulously misused customer funds without their knowledge. These new rules will go a long way in putting a check on such practices.

Anyways, Indian markets traded amidst high volatility today. The BSE-Sensex was trading with losses of around 125 points (0.7%) at the time of writing this. Metal and realty stocks were the worst performers today. On the other hand, buying interest was seen in FMCG stocks.

Among other key Asian markets, while gains were seen in China (up 2.1%) and Hong Kong (up 0.2%), weakness was seen in Japan (down 0.6%) and Singapore (down 0.3%).

Sixty-four years after independence, the baggage of colonialism, the socialist experiment and the 'Hindu' rate of growth is well and truly behind us. What lie ahead are great opportunities and challenges in equal measure.

In an interview to CNBC, Dr. Amit Mitra of FICCI highlighted a few key challenges. One of the most important issues is primary education. Also, we need to look at agricultural productivity and supply chain efficiency. About 40% of food produce is wasted. That is unacceptable. On the growth front, we need two things. First is 'capital formation' - the channeling of savings to capital goods. Second is developing indigenous technology instead of always depending on imports. Of course, inclusive and better quality education right from the primarily level is a must. We agree. The need of the hour is systemic changes that increase India's ability to create further 'growth' capacity.

 Today's investing mantra
"Proper accounting is like engineering. You need a margin of safety. Thank God we don't design bridges and airplanes the way we do accounting." - Charlie Munger

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