»5 Minute Wrap Up by Equitymaster

On This Day - 3 SEPTEMBER 2012
Can retail investors beat experts?

In this issue:
» Developers are finding affordable homes unviable
» Mr Narayana Murthy's remarks about India
» Mr Ratan Tata to bid adieu by year end
» Why India's GDP data is so unreliable!
» ...and more!

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Most individual investors rarely base their investment decisions on their own judgement and reason. Why is it that they are more than willing to follow other people's (read friends and brokers) tips? One major reason we believe is that they don't think they are qualified enough to make their investment decisions on their own. Many believe that researching about stocks requires a lot of complicated number crunching on Excel sheets and information that they may not be aware of. This is the reason behind all the reverence for professional fund managers.

But what if we tell you that this is nothing but a myth? In fact, you could do even better than most of these so-called 'experts'. Sounds audacious? But one of the most successful money managers by the name of Mr Peter Lynch strongly endorses this view. In his book, Beating the Street, Mr Lynch tells us how with some sincere homework you can achieve great success with your investments.

Mr Lynch lays down some very simple, easy-to-follow steps that can empower retail investors. One of his important lessons goes thus- 'Never invest in any idea you can't illustrate with a crayon.' It means that investors should have a good understanding about the company's business. If you cannot explain in simple language why you have bought a stock, you are speculating. And it is this kind of speculation that makes stock markets a gamble.

As far as the stock portfolio is concerned, he suggests that you treat your stocks like your children. Have only as many stocks as you can handle. Review your stocks about every six months.

The other important aspect about investing that he highlights in the book is about dealing with the inherent volatility of stocks. In fact, how one deals with stock market declines differentiates the winner from the rest. Learn to accept price declines as a regular characteristic of stock markets and not as an anomaly. If you can do this, you will not see price drops as a threat. Rather, you would see it as an opportunity to buy great stocks.

In his lucid style, Peter Lynch has laid down some very important lessons for retail investors. Incorporating some of his lessons can go a long way in building real riches through stock investing.

We will continue to review more such books, which are a must have in an investor's shelf, over next few days. If you have already read the book let us know your views or post them on our Facebook page / Google+ page

 Chart of the day
Back in 2008, real estate developers had drawn up aggressive plans for building 'affordable' homes (upto Rs 20 lakhs) in the country. However, on account of the severe downturn in the real estate industry and the deteriorating financial health of real estate players, the affordable housing segment is becoming financially unviable. One of the major reasons being that over the last few years, costs of construction materials such as cement and steel have shot up significantly. This has forced many developers to withdraw from this segment after doing initial projects. Only a few are going ahead with such projects now. As today's chart of the day shows, between 2009 and 2012, the number of unit launches declined by 57% in the Mumbai Metropolitan Region. The sales of affordable homes have also been witnessing a lacklustre trend. Over the same period, the absorption of affordable homes has declined by 42%. Buying an affordable home in Mumbai will probably just remain a dream.

Data source: Business Standard
*Mumbai Metropolitan Region; ^Data upto July 2012

It was not too long ago when 'India Shining' was the all pervading theme. Since then a lot of water has flown under the bridge. Economic slowdown, steep inflation, corruption, project delays and multi-billion rupees government scams. Thanks to each of these, investor appetite for Indian stocks has been quashed. Leave aside the foreign ones, even domestic investors find it difficult to believe in the India story. The FIIs have new tax levies to worry about besides India's fundamentals. But even as a country, India has proven to be a case of 'too much promised - too little delivered'. As a result, selling the 'India story' to foreigners has become that much more difficult. Coming from none other than Infosys founder Narayana Murthy, such an opinion carries much weight. Particularly since Indian IT companies work very closely with clients from the West.

India may not want to attract too much short term foreign capital into the country. We appreciate the government's and the RBI's concerns here. But getting the policy making process moving to correct past wrong doings on an urgent basis is the call of the hour. Without that, India may find itself relegated to one of the last choices for investors amongst emerging markets.

Management guru Stephen Covey had quoted "Management is efficiency in climbing the ladder of success; leadership determines whether the ladder is leaning against the right wall." We thought of this when we were reading an article on the Chairman of the Tata Group, Mr Ratan Tata. The man needs no introduction. He is responsible for making the Tata name a global phenomenon. Since taking the reins of the empire in 1991, Mr Tata has spearheaded reforms within the group. The result being that the group is now regarded as one of the most efficient and cohesive business groups in the country. Actually it is not just in the country but globally. Today nearly two thirds of its revenues come from its overseas operations. Though he did have his own shortcomings one of which was the issue of succession, nevertheless he is responsible for making the Tata Group what it is today. Now many wonder on the future of the group as Mr Tata steps down from his position at the end of this year. But the thing is that with the kind of vision that he has set for his companies and with the mechanism that he has put in place, his legacy is all set to continue. And that is what defines a good leader. That you put the system and machinery in place and set it in the right direction. And this is what one must look at before owning a company. That it has the right kind of leadership. One that takes it ahead.

We have always thought that people attach too much importance to GDP figures than required. They are important in the sense that they help determine a broad trend. But to place too much faith in them would not be wise according to us. Simply because the figures are not arrived at using irrefutable logic. GDP attempts to aggregate the various activities that take place in an economy. And this sounds a little odd to us as any attempt to aggregate the various diverse activities may not produce the most meaningful of results.

And then there is the additional problem of frequent revisions of data like what's happening to the figures in India currently. As per a leading daily, Central Statistics Office, that compiles GDP data for India has revised its figures as far back as 2008. And this is no small revision. The GDP growth figure for April to June 2008 (the pre-crisis phase) has been revised to 9.8% from 7.9%. And that for January to March 2009 (the crisis phase) has been revised to a scary 3.5% from 5.9% earlier. This is not all. There have been a couple of other significant revisions as well. In view of this, it is far better to do a bottom up stock analysis than a top down one whenever it comes to researching stocks we believe.

In the Initial Public Offer (IPO) market, the rule of Caveat Emptor (buyers beware) stands true. That's because the promoters in conjunction with merchant bankers derive the IPO price band here. There is no transparent mechanism on how the band is arrived. Buyers, if interested, simply place their bids or decide to skip the issue if they find valuations unreasonable. However, the said mechanism is opaque as buyers are unaware on how the band is arrived.

Taking advantage of this situation many promoters used to price the IPO way above their fundamentals. And through the help of merchant bankers they were also able to place their shares with friendly institutional investors. This supported the price until sometime after listing. However, once these entities exited share prices came crashing down leaving genuine investors in lurch. Keeping this in mind Securities and Exchange Board of India (SEBI) has decided to enhance the IPO disclosure requirements. Henceforth, any company coming out with an IPO would be required to provide a detailed analysis on how the band was arrived. We believe this is a step in the right direction. It will not only safeguard investors' interest but also help them make informed decisions.

In the meanwhile, the Indian equity markets traded in a volatile manner today. At the time of writing, BSE Sensex was down by 43 points (0.3%). Sectoral indices traded weak led by energy and realty stocks. Asian stock markets on the other hand witnessed gains with Singapore and Japan being the only exceptions.

 Today's investing mantra
"Everyone has the brainpower to follow the stock market. If you made it through fifth-grade math, you can do it." - Peter Lynch

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