|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 OCTOBER 2010
This may scare long term investors...
In this issue:
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So you may ask - Why take that extra risk by investing in stocks when gold can give you as much, or sometimes even higher, returns over the long term?
Your question and the underlying concern are well taken. But if you were to look carefully, there emerges a very valid reason stocks have massively underperformed and just marginally outperformed the yellow metal over the past 3 and 10 years respectively.
If you see the stock markets 3 years back, or in October 2007, these were entering a big bubble phase. So stocks and their valuations were nearly at their all-time highs. And if you see the stock markets 10 years back, or in October 2000, they were just coming out of the dotcom bubble peak. So stocks and their valuations were high then as well.
This clearly vindicates the fact that stocks, and even the good ones, bought at expensive valuations will not earn you good returns. This is even if you are a long term investor and invest for a period of 3, 5, or 10 years. Now, given that the valuations of Indian stocks are again looking stretched, you know what we are hinting at!
Anyways, despite this bullishness, Rogers still prefers silver over the yellow metal. As he recently told a leading business daily, "I would rather look at silver than gold. I own gold and I own silver, but silver is still 60% below its all time high....gold will go over $2000 an ounce certainly in the next 5 to 10 years. But silver - on a percentage basis - will probably go up even more during that period of time."
According to EPFR, a provider of data on foreign fund flows, about US$ 40 bn of investors' money has flowed into emerging market debt funds in the first nine months of this year. This is four times the previous record for a full year. Is doesn't end there. Equity funds in emerging markets have seen inflows of US$ 50 bn. This is in sharp contrast to funds in the developed markets which have seen outflows of US$ 80 bn. The quest for healthy returns is driving global investors to overlook the likely political risks associated with many emerging countries. What has given these countries the edge is that they are not mired in debt problems the way the West has. But over exuberance has its consequences. And alarm bells are ringing that the stage is set for another bubble to form - this time in the emerging markets!
Buffett is indeed right on the Chinese economy. Its transformation is unlike anything that has taken ever taken place in history. But it should also be noted that its economic model is vastly different from that of other big economies like the US. It is an authoritarian, top-down driven model. And it is often known to not adhere very strictly to issues like corporate governance and good quality disclosures.
Hence, we will not be surprised if investment opportunities in China are very few and far between. Especially of the types Buffett looks for. In fact, we believe that a lot of Indian businesses are much better managed than the Chinese ones. Thus, Buffett's complete ignorance of them does indeed comes as a surprise. Perhaps it is time for him to set the record straight on this one. It is time some Indian companies also come under his radar.
As it turns out, a lot is left to be desired. As per a leading business daily, over 3,800 engineers are set to join SBI as clerks. This may reflect well on the bank's reputation as an employer. But it begs the question why technically qualified would opt for the post. Surely, because they couldn't find a better profile! Isn't that surprising for a country that needs to deliver vast engineering projects as it transforms into a leading economy?
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