Biggest advantage an investment can ever have - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Biggest advantage an investment can ever have 

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In this issue:
» Will this be a bumper year for high risk assets like equities?
» What has Germany's Bundesbank worried?
» Gas prices to go up more than two-fold
» A CEO's solution to reduce India's love affair with gold
» ...and more!

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Can you tell us of an example where you encountered a product that's twice as expensive as its nearest competitor but still outsells the latter by a huge margin? Well, if you are having trouble imagining such a product, allow us to make your task simpler. One of the portals that we were browsing through believes that the famous toy brand 'Lego' fits the bill perfectly. Not only does it sell at twice the price of its nearest competitor but also has a massive market share. In fact, some of the more expensive Lego blocks could sell for as much as tens of thousands of rupees!

What explains this huge pricing difference? Of course, quality is certainly one of the factors here. Lego spares no effort to see to it that its pieces fit perfectly. But talking of quality alone will make the explanation look far from complete. There is certainly something much bigger at play here.

Enter Warren Buffett. You see, Buffett is a big fan of one of his most successful investments that answers to the name of See's Candy. After his investment in the company, what he saw transformed him completely. He realised that See's Candy had this huge untapped pricing power. In other words, the company could keep on raising prices year after year and still the demand remained as firm as ever.

And the reason was simple as per him. The whole experience of gifting a box of chocolates to your loved ones was so special that a small premium over competitors hardly mattered. All one had to do was advertise the product heavily and then sit back and rake in the cash.

It is evident isn't it? You don't want to take a box of chocolates home and tell your loved ones that you bought them the cheapest candies in town. The case with Legos isn't anything different. It is the whole experience of playing with the Lego brand of blocks that counts. The moment a kid has a Lego, there will be a spring in his stride and his friends would be dying to come over to his place and play the same. And then the Lego demand juggernaut will kick in, high prices be damned.

We think we have just described one of the biggest qualities that an investor should look for in a stock. If the company under consideration has a very strong brand that leads to people using it have extremely positive experiences, it could well turn out to be an ideal investment. These types of firms when bought at reasonable valuations can do a world of good to one's investment returns.

Can you think of any Indian products that have a very strong pricing power? Share your comments or post them on our Facebook page / Google+ page

01:20  Chart of the day
We may not be amongst the countries that rank the best in parameters like human development, ease of doing business, science and technology etc. But when it comes to illicit financial flows, it is unlikely we will miss out. As today's chart of the day highlights, total illicit financial flows out of India stood at US$ 123 bn between the year 2001 and 2010. This makes us the eight highest on this count. However, one solace could be that with US$ 2.7 trillion China is way ahead of its Asian counterparts. Having said, these financial outflows are a scourge to any nation as it robs the nation of some valuable capital and also goes untaxed, giving rise to underground economies.

Source: Global Financial Integrity

The global financial system is sloshed with liquidity. Central bankers around the world, particularly in the developed countries, are trying every desperate measure to boost growth. As a result, country after country is announcing its own plans of printing more money. Where would all this money go? Obviously to boost asset prices. But which class of assets is going to see maximum boost? Legendary investor, Mark Mobius has answer to this. Mobius opines that the high yielding and therefore the high risk class of assets will see a spurt this year. The thing is that high yield is traditionally been associated with high risk.

With the need to generate high returns and that too quickly, investment managers and banks may be tempted to invest more money in such assets. But the catch here is that exposure to high risk assets should always be limited. Let us not forget what brought about the crisis in 2008. It was the high risk asset class which collapsed the financial systems around the world. Therefore, investor would do well to not fall in this trap again. Investing in lower return but stable assets is always better than investing in high risk assets. And if you still get tempted by the high risk assets, limit your exposure to it. Else even a small fall will wipe out your entire wealth.

We came across an interesting analogy for gold. Do you recall credit default swaps (CDS)? These financial products gained a lot of popularity during the 2008 financial crisis. CDS is nothing but an insurance against potential credit defaults. If the debtor fails to pay you, the CDS would help compensate for the losses. Now, think about gold as an insurance product. The risk that it covers is currency devaluation, that is, loss of purchasing power. This explains the phenomenal rise in gold prices over the last decade. Major world currencies, especially the US dollar and the yen have undergone massive devaluation during the same period. Given that the major global central banks are in no mood to halt their money printing presses anytime soon, gold will continue to play the role of an insurer.

That equities do not feature in the 'must buy' list of most Indians is no secret. Of course this has nothing to do with rural populace or financial illiteracy or low penetration of financial products. Even well informed and urban investors in India tend to shy away from equities. The result being that every time there is significant movement in stock markets, foreign institutional investors (FIIs) take the credit. Despite high savings rate and mature capital markets, Indian equities have not managed to get the place it deserves in retail investor portfolio. Scams, market crashes, misleading banks and brokers have all added to investor misery. Some have been so scathed by their past losses that they have resolved to never enter stock markets again!

Now equities are not the only disappointment. Bond markets too have hardly offered much comfort. That has left most Indians with little option but to park investible surplus in gold. No wonder then that until recently, the government's attempt to limit gold imports proved futile. In the light of this, Mr Uday Kotak's comments at the World Economic Forum seem to carry weight. Mr Kotak has urged the government to take steps to popularize equities as a long term investment option for retail investors. An alternative asset class to gold would automatically shift focus from the latter. While Rajiv Gandhi Equity Savings Scheme was a good starting point, we certainly have a long way to go.

The Government seems to be on a roll with regard to fuel price reforms. After partial decontrol for diesel, it's the turn of gas prices. Close on the heels of the Rangarajan Committee's report, natural gas prices are likely to see more than two fold hike soon. The new gas pricing will be an average of global hub prices and cost of imported LNG. It may apply from 2013 itself on all domestically produced gas except cases where it is either governed by the Production Sharing Contract or the government had previously fixed tenure for the same.

The move is a double edged sword. It will mean rising bills for users, especially power and fertilizer sector that have been using subsidized gas. Still, for companies like Oil and Natural Gas Corporation Ltd. (ONGC) and OIL India, it will be nothing less than a game changer. The domestic gas sector is tracing a backward path because of fixed domestic gas pricing that has led to unviable economies in the segment. A better gas pricing will incentivize investment in domestic gas sector. While high gas prices will fuel inflation in the beginning, with proper implementation, they can prove to be a win-win scheme for all stakeholders in the long term.

Since the global crisis began, all the US and European central banks have done is to support big quantitative easing programs by printing more and more money. This coupled with low interest rates and big debt burdens have put the future of their respective currencies at risk. Japan does not appear to have learnt a lesson from this. Otherwise what would explain the Bank of Japan's move of adopting a massive new quantitative easing program. This includes considerable purchases of government bonds and other assets and doubling of the central bank's inflation target to 2%. The problem is that excess printing of money results in depression of a currency. This makes it less attractive to others. The Japanese do not seem to be worried about this as they are hoping that a weaker currency will lead to better exports. That is fine if one country chooses to do so. But if this action has a domino effect and more than one country resorts to devaluing currencies, the problem only gets compounded. That is why, the Bundesbank is worried that Japan's new stimulus measures are bound to lead to currency wars. And has rightly criticized Japan for the same.

Meanwhile, indices in the Indian equity markets are trading weak today with the Sensex down by about 90 points at the time of writing. Auto and realty stocks were seen facing the maximum selling pressure. While Asian stocks closed mixed today, Europe is seen trading mostly in the green currently.

04:53  Today's investing mantra
"I consider myself to be a farmer-not a hunter. And I think most people on Wall Street are hunters. They like to fell big beasts and I'm very comfortable planting a few rows and just tending to them carefully." - Tom Russo
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4 Responses to "Biggest advantage an investment can ever have"


Jan 25, 2013

Asian Paints, Britannia bread, Exide batteries, Gillette shaving products, Pidilite products, Sintex water tanks, United Breweries & United Spirits alcohol.


Kiran Shah

Jan 24, 2013

In indian market i think 2 wheeler motorcycle 'BULLET' commands that brand value.Pricing is high but demand keeps ricing.



Jan 24, 2013

This company may not be having pricing power but it will lead tha pack as far as toothpastes are concerned. It is more than 50 years old in India and still commands around 50% market share. Many competitors came to knock it off from its pedestal like Binaca, Cibaca, Forhans, Vicco Vajradanti and recently, Pepsodent and Close-up but this brand still takes half of the toothpaste pie. The Indian population is growing at a fast rate and with that a set of 32 teeth. So this brand called Colgate will always shine and always make money.



Jan 24, 2013

Petrol by Govt of India,Mla,MP seats cost,

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