»5 Minute Wrap Up by Equitymaster

On This Day - 23 OCTOBER 2010
Are you using your biggest advantage as an investor?

In this issue:
» Indian IT's worrisome rise in attrition
» Micro-finance's rising woes
» India seeks G-20's assistance in managing foreign flows
» Jim Rogers spits fire on Paul Krugman
» ...and more!!

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One of the biggest questions (worries) that most retail investors have with their stock market investments is - Will my stocks make me rich one day? And they would believe anyone who tries to give them an answer to this. That's the reason during bull markets many investors buy into the hot stocks recommended on business channels and ruin their portfolios - all in the hurry to get rick...quick!

You might have been one of them too! If that is the case, you need to understand that you have a big advantage with you when it comes to getting rich with your stocks. The expert on the television show doesn't have this advantage. And that advantage is nothing but 'time'.

Yes, you read that right! You have 'time' on your side in which you can earn good returns from your stock market investments. And that can range from 5 years to 10 years, and sometimes even 15-20 years. This is the time in which you need to save and invest and grow your money to meet your financial obligations - child's education and marriage, and even your own retirement. The experts on the television channels do not have much time on their hands. After all, their salaries and bonuses are dependent on how quickly, and not how sensibly, they make money for their clients.

With time on your hands, you just need to identify good stocks and buy them at low valuations. But start saving and investing early, and let time help you in growing your wealth through the thick and thin of the stock markets and business cycles. Time (and not timing) in the stock markets can make you really wealthy. But first you need to believe in it.

 Chart of the day
The good times are here for the Indian IT companies. This is as far as their sales and profit growth are concerned. Expecting this to continue, these companies are also back on their hiring spree. So while one company plans to hire 30,000 new people this year, another has an even bigger target of 40,000. Amidst this, what is worrying is the rising attrition in these companies. As today's chart shows, the average attrition in India's top four IT services companies has been on a constant (and worrisome) rise over the past few quarters. With the aim of having even bigger workforces in the future, are these companies setting themselves for a huge future problem? We believe, yes!

Note: Data is average attrition of TCS, Infosys, Wipro, and HCL Tech
Source: Company reports

Investors who subscribed to the IPO of leading microfinance lender SKS Microfinance could have more surprises on their way. They will have to wait longer before the concerns clouding the long term visibility of the business are cleared. Lured by its triple digit growth rate, several investors had subscribed to the IPO that promised to make supernormal returns by lending to the poorest of the poor. However, the recent development in micro-lending is not all about noble causes of helping the poor attain financial stability.

Instances of harassment and suicide have in fact forced the Andhra Pradesh government to ban micro-finance institutions (MFIs) from recovering loans from their borrowers. If this continues for long, it could mean high NPAs for the lenders that have so far boasted of superior asset quality. The profitability of the MFIs is for sure headed southwards with the RBI expressing displeasure over their lending rates.

The past week was mixed for the world markets. While Russia and US markets led the gainers' pack, selling pressure was seen in Brazilian and Japanese stocks. Gold prices also dropped by 3% over the previous week. As for the Indian markets, these gained marginally by around 0.2%. The key sectors that led the gains in India were pharma (BSE-Pharma up 2.8%), and oil % gas (up 2.7%). Metal and realty stocks were the worst performers.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance, Kitco, CNNfn

With big IPOs and a buoyant recovery, Indian capital markets have been rolling in money. Markets have been awash with a record US$ 24 bn in FII money so far this year. The negative fallout of this however, has been a 5% rise in the rupee versus the US dollar. A stronger rupee makes Indian exports less competitive.

Exchange rates that keep rising without a change in trade fundamentals lead to a very unsustainable situation. This can crack as soon as interest rates rise overseas. Faced with this issue, India has asked G-20 leaders to devise a policy to manage foreign flows in a 'co-operative framework'. Our finance minister has also asked advanced economies to repair their financial markets at a quick pace. Without these measures in place, we are setting ourselves up for another bout of financial crisis.

"If central banks know anything, it's how to blow bubbles." This is as per a top global strategist at Societe Generale. These words could not be more true, especially if one talks about the US Fed. Low interest rates under Greenspan helped fuel the housing bubble and the consequent crash. The next bubble could very well be the emerging market bubble.

The MSCI BRIC Index surged 164% from its 2008 lows, beating the S&P 500's rise more than 4 times. Developed countries are seeing slow domestic growth. But, they benefit from having low interest rates and monetary stimulus packages. Investing in fast growing emerging markets is a great option for them to make high double-digit returns. Even with their rapid rise, emerging market stock valuations are still below 2008 highs, while bond valuations have already reached those levels. Stock markets in the biggest developing nations may even double at this rate, before their valuations become really stretched. Looks like there is still some time before this bubble bursts!

The Nobel Committee has come under criticism in recent days. It is for its role in awarding the revered honour to economists whose economic theories have had flawed assumptions at their core. The accusation was led by Nassim Taleb who believes that three gentlemen viz., Markowitz, Sharpe and Miller who received the Nobel Prize in Economics in 1990 were responsible for the recent global financial crisis.

Now, the attack is on another Nobel Laureate in economics - Paul Krugman. And the accuser is none other than commodities guru Jim Rogers. In a recent interview, Rogers went on to ask Krugman to resign from his post as professor at Princeton University. Rogers believes that Krugman's Keynesian economic theories have been responsible for the mess that the US economy is in. With the US finding it difficult to wriggle itself out of the economic crisis, this kind of blame game may continue for some time.

 Weekend investing mantra
"...there has developed a general notion that the rate of return which the investor should aim for is more or less proportionate to the degree of risk he is ready to run. Our view is different. The rate of return sought should be dependent rather, on the amount of intelligent effort the investor is willing and able to bring to bear on his task." - Benjamin Graham

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