Most important investment tip you'll ever receive

Oct 7, 2010

In this issue:
» Don't force us to appreciate Yuan, says Chinese premier
» Equity mutual funds continue to see huge net outflows
» India expensive but deserves a premium, feels Mark Mobius
» Capex to grow at double digits
» ...and more!!

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Let alone investors, very few surgeons in India would have heard of Dr Atul Gawande. For the uninitiated, Dr Gawande is a reputed practising surgeon in the US. Now, what does investing has to do with surgery, you would ask? Well, it is not as much surgery that we are interested in but Mr Gawande's path breaking discovery. This discovery we believe has the potential to improve your investment success to the extent that you perhaps cannot imagine. It certainly worked wonders for this very famous investor. Sticking religiously to the principles laid out by the surgeon, this investor is yet to make a single investment mistake.

Well, this discovery is nothing but a rather simple looking checklist. Dr Gawande thought of this idea when he encountered a disturbing trend in hospitals. There was a profound failure on the part of health care professionals to follow even basic steps to stop infections and other major complications. And what did a simple 5 point checklist do? Well, as per the New York Times, over 18 months, the program saved more than 1,500 lives and nearly US$ 200 m!

Can the concept of checklist be imported into the field of investing? Yes, of course. Simply look at all the great investors and their mistakes. Note down the reasons behind the same. Also, do not forget to examine your own investment mistakes that led to a permanent loss of capital. Combine the two lists and voila, you have your own investment checklist. The next time you come across any attractive investment opportunity, run it through all the items on the investment checklist. It should get past most items on the checklist. Simply ignore the one that doesn't. Repeat this process with every potential investment. There are chances that after few years, you would be amazed at your own investment success.

 Chart of the day
We are almost through this year's monsoon season. Hence, this would be a good time to sit back and take stock of how the rain gods have behaved this year. As today's chart of the day shows, it has not been a bad year at all. With the rainfall in the country coming in at 2% above its long term average, this year's monsoons have been the best amongst the previous three years. Little wonder, firms that cater to the rural demand are rubbing their hands in anticipation of some pretty strong boost to their topline.

Source: LiveMint

Rs 70 bn. That's the magnitude of outflows that domestic equity mutual funds have seen in the month of September. Foreign investors may be falling head over heels to get a piece of the India growth story. But back here in India, investors seem to be have wised up to the fact that rising markets call for selling a part of one's portfolio, and not buying more.

However, there might be another reason for this selling activity too. A report in the Financial Express observes that this is the fourth straight month of redemption for equity schemes. It may have something to do with SEBI banning entry loads in August 2009. For since then, equity schemes has seen net redemption of over Rs 214 bn. And this is no coincidence. With the commissions of distributors of mutual funds taking a severe hit due to the above, they may no more be as aggressive at peddling their wares as they once used to be. As a result, fewer individual investors seem to be getting talked into investing in expensive stocks.

The currency war is indeed hotting up. And the latest to come on board is China. Wen Jiabao, its premier has lashed at international pressures to let the Chinese Yuan appreciate. As per FT, Jiabao has strictly warned other countries to not pressurise China on the renminbi rate. "Many of our exporting companies would have to close down, migrant workers would have to return to their villages. If China saw social and economic turbulence, then it would be a disaster for the world," Jiabao is believed to have said. He was obviously alluding to the fact that Chinese export companies had very thin profit margins and thus, any rapid appreciation in the renminbi could lend a huge blow to its economy and employment.

This indeed is one of the biggest signals yet that China's move to let the Yuan appreciate in the recent past was no more than a lip service. The US though is not going to be won over by Mr Jiabao's excuse. Especially at a time when it desperately needs to boost its own employment and get its economy out of a hole. This episode is quite likely to take a nasty turn in the time to come. Be prepared for some real volatility in exchange rates.

Rs 2,850 bn in cash and Rs 1,032 bn in liquid investments is stunning amount of money. Here we are not discussing the networth of some Indian billionaires. Instead this is the cash position of 1,818 listed companies collated by a business daily for the end of FY10. In a stark contrast to previous cycles of monetary tightening when companies were strapped for cash, India Inc is not to be caught on the wrong foot this time. Having carefully built their war chest of cash, Indian companies are geared to spend a lot more on capex. As per estimates, the growth in capital expenditure is expected to sustain in double digits in FY11. High capacity utilization led by economic revival is expected to necessitate capacity addition. And Indian companies will not be deterred by the higher borrowing costs. For PSUs too, the government has sufficient cash through 3G licence fees and disinvestment proceeds. Oil and gas, power and metal sectors have led the capex tally in the past two years. But others are expected to catch up soon.

With global liquidity soaring high and absence of attractive opportunities in the crisis struck developed world, investors are turning towards emerging markets as popular investment destinations. The emerging markets look more promising with high growth and high returns on investment. However, experts have now started to question if the emerging markets, especially India, are too expensive to invest in. Investment guru Mark Mobius agrees with the experts. He states that emerging markets, particularly India, is indeed expensive but also states that it deserves a valuation premium due to its high rate of growth. This growth is real and is largely fuelled by its domestic consumption. Mobius agrees that India has a huge current account deficit. However, he feels that this would not lead to severe problems as the inflow of funds from FIIs and FDIs routes have helped maintain a positive balance of payments situation in the country.

How bad is the difference between 'fairly bad' and 'very bad'? Quite big if one is talking about the state of the US economy. Goldman Sachs, for one, opines that the US economy is likely to be "fairly bad" or "very bad" over the next six to nine months depending upon which of the two main scenarios pan out. A fairly bad economy would be one in which the economy grows at a 1.5-2% through the middle of next year and the unemployment rate rises moderately to 10%.

A very bad economy would be one in which the economy returns to an outright recession. Goldman Sachs is putting its money on the first scenario. At the same time, it has placed the odds of a renewed recession at 25-30%. This is up from 15-20% predicted at the start of the year. For the average American, for whom unemployment has become a big issue, both these connotations do not hold much meaning. The difference for them is only on a piece of paper.

Meanwhile, the Indian benchmark indices endured a roller coaster ride right since the start of the trade today with the BSE-Sensex trading lower by around 40 points at the time of writing. The weakness was being lent by IT and banking heavyweights. While majority of the Asian indices closed in the red today, Europe has also opened on a negative note.

 Today's investing mantra
"All intelligent investing is value investing - acquiring more than you are paying for. You must value the business in order to value the stock." - Charlie Munger

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17 Responses to "Most important investment tip you'll ever receive"

Lalitha Kaul

Oct 7, 2010

Please also tell us Dr Gawande's check list!



Oct 7, 2010

"Checklist for investment", after reading the tip provided by you & the the factual account of B-17 given by Aditya Mukherjee, reminds me how I lost huge amounts in equity market because I did not check the relative fundamentals before buying a stock & also lost invarably while selling too because in haste I forgot that I had decided to sell it under certain circumstances only. But I failed to adhere to my own check lists.
I will not forget it anymore. Thanks for reminding me of check lists.



Oct 7, 2010

few stock which you may not consider but are multibaggers
1-sonata software
2-subex systems
3-sasken communications
4-kpit cummins
watch these stocks in 5years especially kpit cummins it will be referred as titan is mentioned today


Chandresh Jariwala

Oct 7, 2010

I feel checklists are of use when we are investing in Efficient Market or Rational Markets. Medical Profession is fixed by research done on small part of group to be implemented on all group. Whereas, Equity Market in general is Not Efficient Market and works mostly on Hypothesis and Probabilities....


NK Uppal

Oct 7, 2010

The most important tip makes very interesting reading. It would only be apt that a company like you actually develops this check list for its members and offer it to them as a part of its services.


J Thomas

Oct 7, 2010

On 30 Oct 1935 the prototype of the Boeing B-17 bomber was on a demonstration flight for the US Army Air Corps. The aircraft made a normal taxi and takeoff. It began a smooth climb, but then suddenly stalled. The aircraft turned on one wing and fell, bursting into flames upon impact.

The investigation found "Pilot Error" as the cause. The first pilot, Major Ployer P. Hill, unfamiliar with the aircraft, had neglected to release the elevator lock prior to take off. Once airborne, Leslie Tower (the Boeing Chief Test Pilot, who was standing between the two pilots) evidently realized what was happening and tried to reach the lock handle, but it was too late.

The B-17 was declared as ‘too much airplane for one man to fly.’ But the test pilots sat down and put their heads together. What was needed was some way of making sure that everything was done; that nothing was overlooked. What resulted was a pilot’s checklist. Actually, four checklists were developed - takeoff, flight, before landing, and after landing. The B-17 was not ‘too much airplane for one man to fly’, it was simply too complex for any one man’s memory. These checklists for the pilot and co-pilot made sure that nothing was forgotten.

With the checklists, careful planning, and rigorous training, the initial twelve aircraft managed to fly 1.8 million miles without a serious accident. The U.S. Army accepted the B-17, and eventually ordered 12,731 of them.

The idea of the pilot’s checklist caught on. Other checklists were developed for other crew members. Checklists were developed for other aircraft in the Air Corps inventory. Very soon checklists became standard for all aircraft and spacecraft.

If the idea of a checklist for surgery is new, it’s a serious lapse on the part of the medical profession.


aditya mukherjee

Oct 7, 2010

It's marvelously explained after very detail study by professionals .

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