Is this the biggest myth about stock investing? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Is this the biggest myth about stock investing? 

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In this issue:
» This could heavily jolt US financial markets
» India's FM promises a responsible budget
» US economy on a weak footing
» Indians are cutting back on discretionary items
» ...and more!


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00:00
 
He has the best operating and capital deployment record in American business... if one took the 100 top business school graduates and made a composite of their triumphs, their record would not be as good as his.

Any guesses who has the above comment been attributed to? Most of you would think Warren Buffett, isn't it? Well, you are right but only partially we believe. The Oracle of Omaha is indeed a part of the above comment. But with his role having been reversed. In other words, Buffett is not being paid a tribute here but in fact he is the one who is paying this tribute to a certain gentleman! And the gentleman under question is Mr Henry Singleton.

Now, you may not have heard of Mr Singleton but the fact is that he helped co-found one of America's most successful conglomerates, Teledyne Inc.

It is not every day that Buffett, the world's best capital allocator in our opinion, speaks so highly of the capital deployment skills of another gentleman. Thus, it would be interesting to know the kind of strategy Mr Singleton followed that made even Buffett sit up and take notice.

Well, the secret to Mr Singleton's strategy is that he had no strategy. As a matter of fact, he totally stayed away from any specific strategy. He was of the view that businesses are subject to tremendous number of outside influences with vast majority of them being totally unpredictable. Thus, it was important to stay flexible as per him.

This simple yet profoundly important statement has huge implications for investing we believe. If the best capital allocator in business has no idea of how the future would shape up, we don't think our chance of doing the same would be any better. This in effect shatters one of the biggest myths in investing as per us. The myth that in order to invest successfully, one has to know the future and thus, invest in stocks based on this knowledge.

Well, Mr Singleton's comments are proof that this is just not true. What matters as per us is that rather than trying to predict the future, investors should spend their energy and effort on trying to find stocks that have ability to perform under all circumstances.

In other words, they should invest in stocks that are fundamentally sound, run by good management and are trading at attractive valuations. A carefully constructed portfolio of such stocks has better odds of beating the market in the long run than the one based on our assessment of the future we believe. We could hear even Buffett and Singleton nod in agreement.

Do you believe picking fundamentally good stocks for the long term is a better strategy than trying to predict the future? Share your comments or post them on our Facebook page / Google+ page

01:27  Chart of the day
 
Today's chart of the day may not appeal to your intellect but it sure would to your taste buds we believe. For it shows the list of countries with the highest per capita ice-cream consumption and how do these stack vis-a-vis India and China. As highlighted, the tiny nation of New Zealand gorges on the most amount of ice cream on a per capita litres per year basis. However, what would bring a wide smile to the faces of ice-cream makers across the world is huge under penetration of this frozen dessert in developing markets of India and China. Even a small increase here could mean huge surge in demand for ice-creams.

Source: Businessinsider.com


01:58
 
Much has been said and written about Fed policies, mostly negative. And here is another take from none other than Harvard economist Martin Feldstein, once chairman of President Ronald Reagan's Council of Economic Advisers. He believes monetary easing is stretched to an extent where the risks outweigh benefits.

While the job and housing statistics look slightly better now, he believes the trend will reverse sometime in future as higher interest rates will rule. With current interest rates effectively at zero and inflation adjusted 10 year treasury yields in the negative; it is just a matter of time before Fed tightens the rates. And that could mean another crisis with high inflation amid high level of unemployment. While Fed through its quick fix measures has been able to prop up the housing prices and push stock prices, this is likely to be a fake recovery. Eventually, the easing will need to be pulled back and that could lead to a hard landing for the US economy.

02:28
 
The slowdown in the economy seems to be taking a toll on the spending patterns of Indians. As inflation remains high and growth has slowed down, most Indians are not expecting much of a rise in wages and salaries. This means that disposable incomes are expected to be squeezed from both sides. This is in contrast to countries such as Indonesia and China where consumer sentiments continue to remain healthy.

As a result most Indians are taking it slow when it comes to discretionary items such as automobiles, consumer goods and apparel. For instance, purchases of many of these items are being postponed. Either that, or there is more down trading as consumers are opting for cheaper alternatives. Of course, these are near term concerns and the next couple of quarters could also witness sluggishness. However, one can hope that recovery begins thereafter. The long term consumption story however remains intact given that the penetration level is quite low in India as compared to other countries.

02:58
 
Its potency to damage economies is grossly under estimated. Governments across the world are trying their best to sideline it. Central banks are pretending to be oblivious to its rise. Ones, like the Reserve Bank of India (RBI), which acknowledge its lethal effects are shown the door by policy makers. This toxic problem threatening to bring down global economic sanctity answers to the name of 'inflation'. Again wholesale inflation is tricking governments and investors globally to see the rosier picture. But consumer inflation shows the grimmer reality.

An article in Moneynews elaborates on how even the US government has become a victim of this inflation anomaly. And why the potential fall in US GDP could be much worse than envisaged. Inflation is in fact expected to become the biggest challenge for policy makers across the globe in 2013. However, that may be in very different ways. It goes without saying that Asian central banks have to be wary of cheap liquidity from developed nations. In contrast, central banks in the West cannot keep printing money. By doing so they do are entering into the vicious cycle of inflation.

03:32
 
The national budget is just a month away. And with the country going to polls in 2014, one might expect some populist moves in the budget. However, finance minister, P Chidambaram has already given indications that the upcoming budget would be a responsible one. By responsible he meant that the government is committed to take reforms forward and will also be taking steps to curb the deficit.

Generally, in the run up towards elections, budgets tend to be populist in nature to woo the vote bank. And the reform agenda is forgotten for a while. This time around too the government may dole out some freebies here and there to garner mass appeal. But the focus would remain on carrying forward reforms and addressing structural issues. Also, the focus to curb fiscal deficit would mean there can be very little tax sops in the budget. Whether the FM actually walks the talk remains to be seen though.

04:01
 
Ever since the 2008 financial crisis broke out, the world economy has treaded a very fragile and capricious path. There is overall sense of gloom and pessimism. In fact, many have taken to predicting the next big crash, the next big crisis. Will it happen in 2013? Or 2014? Will it be the Eurozone or the US?

With the global economy going through a tough patch, many have been banking on China to prop up global economic growth. What many are not expecting is a full blown financial crisis in China, the emerging economic superpower. We came across an interesting article that discussed this possibility. Though it would be difficult to pinpoint exactly when the bubble would burst, there are some indications that things could eventually get there.

One must remember that the Great Depression struck the US just before it emerged as a global superpower. Could China's fate be similar? While the economy has been growing at a rapid pace, its debt burden has been bulging. In fact, its non-financial debt as a percentage of GDP is close to reaching the same levels that the US had scaled just prior to the 2008 financial crisis. It's already at the same level where Japan was prior to the 1990 banking crisis. If this indicator is anything to go by, China could be heading towards a major disaster. It seems like it's only a question of time.

04:44
 
Meanwhile, indices in the Indian equity markets have been trading weak today with the Sensex lower by around 80 points at the time of writing. IT and metal stocks were seen exerting the maximum pressure. While Asian indices closed mixed today, Europe is trading mostly in the negative currently.

04:54  Today's investing mantra
"The person that turns over the most rocks wins the game. And that's always been my philosophy." - Peter Lynch
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3 Responses to "Is this the biggest myth about stock investing?"

Ramamurthi

Feb 1, 2013

Food Inflation in India is not due to supply and demand.It is manipulated by vested interests. In spite of the erratic spread of the monsoon there is enough stock of all essentials. In fact about 30% are lying in the open or ill designed granaries exposed to the vagaries of the weather. The manipulation starts with the Mandi mafia, who have their peers in the ruling clique. The MSP is a figure used to the advantage of the Mafia, while the producer loses. The distribution is regulated to keep the prices high.
In the case of packaged items the MRP is almost always jacked up since there is no check on it. This is evident from the discounts offered when demand is sluggish.
It is because of this manipulations the inflation levels do not react to text book monetary policies of the RBI.

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damodar

Feb 1, 2013

"non-financial debt" (as a percentage of GDP)! Which debt is not financial? Does it mean like indebtedness to one's parents/friends/teachers etc etc? Funny, the author quotes terms peculiar to some segment experts when writing to a general audience! Or does the author want to refer to the debt of a government as differentiated from those of financial institutions/ corporates etc? One can only wonder!

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SIVARAMAKRISHNAN

Jan 31, 2013

The triangle of asset allocation of large caps (50-60%) mid-caps (25-30%) and small caps (5-10%) is an ideal investment portfolio but then the essence of market is more of a gamble and a lottery for the brave and fortunate ones. In that sense each segment of the large, mid and small caps can further be divided into fundamentally sound stocks with attractive valuations of 80-90% allocation and 10-20% for stocks that can be assessed as future value creators.

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