Is this the best way to avoid toxic stocks? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is this the best way to avoid toxic stocks? 

A  A  A
In this issue:
» Dr Doom predicts 20% drop in stock prices
» Will RBI relent and finally lower rates?
» Is Buffett getting biased in favour of US banking sector?
» Are cement stocks fully valued?
» ....and more!

------------------------------------------------------- The Next Infosys -------------------------------------------------------

Have you ever asked yourself this question -

Which company is likely to be the next Infosys?

Or for that matter, the next Tata Motors or Hindustan Unilever or...

You see, what we are trying to get at is that as a smart investor you should always be on the lookout for companies that have the potential to make it big like Infosys or the other companies have...

Such opportunities are rare, but they do happen. And when they happen the payoffs can be very big.

And that's precisely why you should never stop asking yourself this question and working towards finding such companies to invest in!

Now, we know that this requires a lot of time and effort. And resources.

Not to mention the need to travel all over the country to see whether a company has what it takes to make it big.

But don't worry... we are here to help!

You see, while we make no claims that we can identify the next Infosys or Tata Motors..., what we aim to do is identify companies that hold the potential to do well in the years to come...

And to make it even easier for you to zero in on the next Infosys, we've pooled in all our core research services together so that you can get started on your search right away!

Interested? Click here for full details...

It may sound sadistic but we have taken great pleasure in knowing how a few people failed miserably in stocks. Simply because had that not been the case, the discipline of investing wouldn't have progressed this far. Take the father of value investing, Benjamin Graham for example. It is being believed that The Great Depression of the 1930s nearly wiped out Graham's entire net worth. And thus it was from this experience that he got the inspiration to create a framework for analysing stocks. And what an inspiration it was! Suffice to say that the tenets that he developed helped to create one of the most successful schools of investing.

Is it any wonder then in hindsight, it was actually good that Graham failed in investing. Likewise, we are also tempted to feel happy about the losses a certain investor suffered in the recent financial crisis. For it was his losses that led to the emergence of a very useful technique of analysing stocks.

The investor we are talking about is a gentleman called Mohnish Pabrai. Now, Pabrai was a very successful value investor up until financial crisis. But then disaster struck and he suffered huge losses. After lot of soul searching, he stumbled upon this wonderful idea of a checklist. And this checklist we believe is one of the simplest yet one of the most effective ways to avoiding errors in stock picking.

In Pabrai's case, he went back in history and analysed all the investment mistakes he made. Not only this, he also went back and analysed investment mistakes made by great investors like Warren Buffett and Charlie Munger. What he saw was certainly shocking. In most of the cases, the mistakes turned out to be pretty obvious. Not just that. The mistakes were also extremely basic. In other words, it wouldn't have taken a genius to figure out the source of error.

And herein lies the biggest insight we believe. To be a successful investor, it is obvious that you have to follow an investing framework that has stood the test of time. And once you do this, you only have to keep your mental biases in check. Because even the greatest investors are susceptible of not being able to do so. Fortunately, the concept of checklist will make your task much easier.

All you have to do is note down the reasons behind the investment mistakes you've made and also the ones made by other great investors. And soon enough, you will have some 30-40 points that you could use to evaluate every new investment of yours. Of course, over time the items on the checklist will grow and we are sure you'll be amazed at your ability to make much lesser number of mistakes. Especially mistakes that are pretty obvious but others that don't use the checklist keep on making.

Do you think the concept of checklist really helps? Share your comments or post them on our Facebook page / Google+ page

01:23  Chart of the day
If you are not already worried about food inflation and India's food security, today's chart of the day might perhaps make you start doing that. As the chart highlights, India's area under cultivation has remained pretty stagnant over the past couple of decades. This, even as its population is still growing and people moving up the food chain. Of course, there is always the yield to fall back on, but there's a limit to which the yield can improve we believe. Not to forget that the increased yield will lead to more usage of fertilizers and other crop nutrients. This trend is in contrast to countries like Brazil and US which can have vast tracts of land that can be brought under cultivation.

Data Source: RBI

If there were any hopes that the Indian economy was recovering, those were quelled by the disappointing factory output data released for November 2012. Indeed, the index of industrial production (IIP) fell by 0.1% during the month. In this, the mining sector declined by 5.5%. On the other hand, the manufacturing and electricity sectors grew by 0.3% and 2.4% respectively. In terms of industries, 13 of the 22 displayed negative growth during the month. As a result, the pressure has obviously mounted on the RBI to cut rates.

But we doubt that this will be enough for the central bank to relent. Indeed, the Indian economy has slowed down during the last couple of quarters. But the central bank is clear that inflation needs to come down. And so it has maintained a status quo on rates despite the slowdown. Now if the government pulls up its socks and takes effective measures to cut down its fiscal deficit, it will be much more meaningful in our view. And will certainly ease the pressure on the central bank.

Dr Doom predicts gloom. Legendary investor Marc Faber expects stock prices all over the world to fall by nearly 20% this year. His reason for this pessimism is the state of the global economy. Countries all over the world are battling with bad fiscal positions. Unfortunately most of the countries appear to be at the losing end of this battle. At the same time, economies continue to be depressed. Higher tax rates and depressed conditions would end up harming the corporate earnings. If earnings suffer, stock prices will follow suit.

Another reason for the gloomy picture is the political tensions and social unrests. Many countries are facing this threat. With so much tension and depression gripping the world, Faber feels that the recent stock rally is unlikely to sustain itself. His logic and reasoning appears to be on the right track. Political leaders around the world need to understand the side effects of their short term, myopic policies. They all seem to be looking at ways to postpone the crisis. Rather than tackling the underlying reason for the crisis. Till such time as the cause is understood and cured, the long term outlook is not going to get any better. No wonder that even investors like Faber are drawing out insurance policies by picking up safe haven assets like gold.

If you would have invested an equal sum of money in the top 5 Indian cement companies at the start of 2012, you would have been sitting on a hefty profit of about 77% by the end of the year. On the other hand, the benchmark BSE-Sensex returned about 25% during the same period. The sharp rally in cement stocks came in despite the overall slowdown in the Indian economy. The stock prices remained undeterred even by the penalties imposed by the Competition Commission of India (CCI) on major cement companies for alleged cartelisation and price manipulation. But come 2013 and cement stocks seem to be losing favour. While the broader markets have gained in the New Year, the same 5 major cement stocks have shed over 6% in the year so far.

What is the reason for the sudden change in sentiment? Some brokerages are beginning to believe that the valuations for the cement firms have been very aggressive. Especially, at a time when the cement demand is unlikely to grow faster than 8% over the next couple of years. Moreover, capacity additions will continue to outpace cement demand in the medium term.

In our view, major cement companies have indeed been trading at a significant premium to their historical valuations. The expectations of a sharp recovery in cement demand were a bit too optimistic.

Especially, because cement demand goes almost in tandem with the overall economic activity in the country. Unless India manages to reclaim its growth trajectory and the infrastructure sector picks up again, cement companies will grow only at a moderate pace.

Wells Fargo is his favourite bank. But that apart, Warren Buffet has a good reason to stake his reputation for supporting US banks. As per Forbes, his investment in US banks is valued at US$ 24 bn of which US$ 14 bn is in Wells Fargo alone. Understandably, the legendary value investor is keen to back the sector that investors have come to despise. In America at least.

Now, not every American bank is set to go the Lehman way. Wells Fargo, in particular, is known to have conservative policies and is emulated by the best banks in India. But Buffett's wager on the likes of Bank of America were driven more by the ridiculously under-priced warrants and preference shares he pocketed. Something that retail investors cannot dream of. Also, it is true that Wall Street regulation in recent years have tried to do away with bank bailouts. Bonuses have also been pared or deferred. But that has added very little credibility to the banking system. Thus, Buffett's view on the stability of US banks is best treated as his personal view. And one of the few instances where we would beg to disagree.

It was a mixed week for the global stock markets. While Japan, UK and US registered modest gains, all the other markets ended the week on a negative note. The US stock markets were up 0.4% during the week. It was a dull week as markets were awaiting corporate earnings for the fourth quarter. While some of the companies have already announced their results, no clear pattern has emerged as yet with respect to earnings underperformance or outperformance for this season. Perhaps, major banks that announce results next week would be the key event to watch.

The Indian stock markets were down 0.6% for the week. Factory output contracted and exports fell for the 8th straight month. The Index for Industrial Production (IIP) for the month of November contracted 0.1%. These negative events overshadowed markets.

Amongst the other markets, Brazil was down 1.6% during the week while China was down 1.5%. However, Japan was the biggest gainer registering gains of 1.1% during the week followed by UK which was up 0.5%.

Source: Yahoo finance, Equitymaster

04:56  Weekend investing mantra
"If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks" - John Bogle
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1 Responses to "Is this the best way to avoid toxic stocks?"

monika parate

Feb 1, 2013

equity is good mode of investment.

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