»5 Minute Wrap Up by Equitymaster

On This Day - 15 SEPTEMBER 2012
The best book on investing ever written!

In this issue:
» Why China cannot be the next superpower
» The institutions that caused the financial crisis
» Family run businesses fared better, says a survey
» Performance of global markets during the week
» ....and more!

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Value investing principles lay hid in night. God said "Let Benjamin Graham be" and all was light. This is no doubt a modified version of the tribute paid to Sir Isaac Newton. But we believe it can rest just as well on the capable shoulders of Benjamin Graham. After all, his incisive essays have lit up the dark pathways of investing more brightly than perhaps any other author and practitioner. What more, his writings have also given us Warren Buffett, the most successful investor the world has ever known.

In fact, Buffett argues that had it not been for Graham's work, he would have gone another 100 years still trying to figure out the stock market. And any particular work of Graham that stands out for Buffett? Yes, certainly. Buffett calls Graham's 'The Intelligent Investor' the best book on investing ever written. So smitten he is by the book that he terms the book's chapter 8 and chapter 20 as the two most important essays ever written on investing.

This is not all though. This book, through its simple and lucid style, attempts to guide the layman investor in the basics of investment philosophy. The book aims to enable readers to earn robust and sustainable returns on investments. And that too without resorting to complex mathematical calculations.

The book lays out investment principals based on logic and common sense and is well supported by detailed analytical examples of past performance. A long-term, sound investment strategy is essentially not a by-product of superior intelligence, high business acumen or access to insider information but rather dependant on emotional discipline. It is the cultivation of this emotional intelligence that Benjamin Graham talks about in detail through real-life examples.

Despite being among the earliest of books to be written on the subject, its principles are timeless and hold true even today. In fact the principles are more valid during intermittent periods of financial turmoil and uncertainty which presents the right opportunities for investment, as per the author. The book is a beginner's guide for first-time investors as it helps them develop the right investment temperament for sound long-term investments.

Which according to you is the best book on value investing? Share your views or you can also comment on our Facebook page / Google+ page

 Chart of the day
Has the time come to reconfigure the famous BRIC acronym? If today's chart of the day is any indication, it has perhaps. As the chart shows, by logging in two consecutive quarters of high GDP growth rates than India, the emerging market of Indonesia has staked a strong claim to take India's position in BRIC. However, we believe that these are early days yet and any hard conclusion cannot be reached by relying on just six months worth of performance. If the Government of India undertakes some bold reforms like it has done recently, the position of 'I' in BRIC is more or less secure we believe.

Source: Livemint.com

What's stopping China? It has a powerhouse economy, is the factory to the world and has billions in US Treasuries. But still Asia is seeing slower growth. And a large part of this is due to the dragon nation. According to an article in Business Insider, China's problems are two cultural genes that have passed through generations. The first is the Confucian proposal that intellectuals become loyal administrators. The second comes from the writings of Zhuang Zhou, another influential Chinese philosopher. He said that a harmonious society would rise from families that avoid exchange, conflict, and who shun technology.

The consequence is a society that discourages curiosity, challenges commercialization and collaborative technology. Thus, China's lack of innovation stems from its cultural system. This is in stark contrast to the US' entrepreneurial setting where anyone can chase the American dream. The problems that China is facing are pervasive and may take years to resolve. In the cutting edge world of technology time is money. Thus, China's technological edge may forever lag its western rivals. And a similar story is unfortunately playing out in India as well. Change is needed from within. Else the Apples and Googles of the world will continue to be housed in the west.

In today's highly interconnected world, one has to think about the larger implications of their actions and decisions. This becomes even more pronounced if the action is that of the central bank of the country. After all, the policies that it formulates not just affect the lives of its own countrymen but those of all others who work or depend on it in any way. As per a study, it is a network of bad decisions by central banks that have actually caused the financial crisis that we see today. Central banks, particularly those of the troubled nations, decided to come up with policies that targeted inflation. Theoretically one can aim to keep inflation at a certain level by manipulating the interest rates. The idea behind this theory is that interest rate is a function of target inflation. So if you keep your inflation rate (expected) constant, then you can achieve the interest rate required for it or vice versa. But such policies ignore the impact on asset prices.

For example US decided to keep its interest rates at near zero hoping that it would help increase inflation. But all it did was to create a flood of cheap money which found its way into developing economies and led to the creation of massive asset bubbles. The net result was that even though US did not really recover from its recession, the impact of bubbles bursting in the developing economies led them to go into a slowdown.

Instead, if central banks had really thought through the total impact of their actions they would have realized that their job is not just to keep inflation within control. It also includes preventing asset bubbles and keeping an eye on the growth of credit. But by the looks of it they completely forgot about these two. Actually not. They did remember about the growth of credit, just forgot to put in place any measure to keep a quality check on the people taking credit. Otherwise the list of defaults would not have been as long as it is.

As the global markets have become integrated, there have been changes in the way companies are run as well in the structure of the business models. In the past decade, more emphasis was laid on businesses having professional management at the helm of affairs. India has not completely converted to this line of thought though. In fact, many Indian businesses are still family run affairs. And interestingly, in such a weak global environment, this is actually proving to be a boon.

According to a study conducted by Credit Suisse and Ernst & Young, family businesses are proving more resilient globally amid sagging economic conditions. Around 60% of them reported revenue growth of over 5% in the last one year. This is when other businesses are struggling to grow toplines. Not surprisingly, the performance of emerging market companies in the survey was even stronger. More than 25% reported that revenues grew by 15% or more in the last one year. One of the key reasons for this has been management style. Top honchos of family businesses have been running their operations from a long term horizon rather than be influenced by short term concerns. And this has certainly given them the edge over the rest of their peers.

Meanwhile, the past week was a positive one for most of the major global economies, and a spectacular one for the emerging economies in particular. The sentiments at the start of the week were positive given the announcement of ECB's decision to buy bonds to support the struggling Eurozone. The major positive development this week was the US Fed's announcement of the third round of Quantitative Easing or QE3 as it is popularly called.

Brazil and Hong Kong were amongst the top performing global markets, followed by Japan and Germany. The Chinese market however underperformed this week. The Indian markets performed well during the end of the week on the back of the government seemingly biting the bullet in terms of raising diesel prices. India's benchmark index, the BSE Sensex rose by 4.4% as compared to last Friday's closing levels.

Source: CNNfn, Yahoo finance, Kitco

 Weekend Investing Mantra
"Our best ideas haven't done better than others' best ideas, but we've lost less. We've never gone two steps forward and then one step back - maybe just a fraction of a step back" - Warren Buffett

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