Time to recall Buffett's rule no 1? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Time to recall Buffett's rule no 1? 

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In this issue:
» RBI gets tougher on restructured loans
» Why is German central bank withdrawing gold from US vaults?
» Bill Gates: India less dependent on aid
» Is rise in India's per capita income meaningful?
» ...and more!

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2012 was not too bad for Indian stock markets. If market experts are to be believed 2013 could be even better. The unmistakable optimism from all counters stems from not just the performance of domestic companies, but also global cues. The US has managed to buy time for its fiscal collapse. Economists are done with criticizing the economic policies of Euro zone. There is nothing stopping central banks in the West to approve more money printing. India's sovereign rating too is not going to 'junk' status thanks to 'feel good' reforms. These cues, however shallow, have done their bit to boost market sentiments. As a result investors may be tempted to park their surplus cash in lucrative asset classes. The worry is that while doing so, they may ignore the risks involved. Be it stocks, bonds or gold, each asset class has had a remarkable ascent over past few months. Most of it has been backed by nothing but speculation and optimism. The bull market in other words seems to be defying all traces of caution.

'Be very afraid of the markets'. This warning of bond guru Bill Gross published by CNN Money therefore drew our attention. It reminded us of Warren Buffett's golden rule number 1 - 'Do not lose money'. It also asserts the fact that when everyone around is greedy, prudent investors need to be fearful. Gross emphasizes on the risk of inflation and the flood of cheap money. He believes that it will affect all investments. But while his take is particularly targeted towards US Treasuries and bonds, we believe India investors too need to take the hint.

This is not to say that investors should stay away from the markets. By doing so they might let go of buying opportunities as and when they arise. But what is important is to have a close and hard look at the valuations of your favourite stocks. For those that have run the course or have done so too quickly, an investment review is a must.

Do you review your stocks and investments during bull markets as well? Share your comments or post them on our Facebook page / Google+ page

01:35  Chart of the day
The recent cut in interest rates by the RBI is expected to bring down borrowing rates for home buyers. Plus the same may eventually boost housing demand as well as prices. But if one looks at the data published by the RBI on rise in house prices in the metros, one gets the impression that house prices in these areas have gone up significantly irrespective of home loan rates. Considering the quarter of January to March 2009 as base, house prices in Mumbai and Delhi are up almost 132% and 125% respectively. While Mumbai continues to remain more expensive, the ascent has been much faster in Delhi.

Data source: RBI - Macroeconomic and Monetary Development

Few days back, there was this story doing the rounds that the German central bank will begin withdrawing its massive gold holdings from the vaults in US as well as France. Was this development worth a strong debate? Certainly not if the German central bank is to be believed. It shrugged it off as nothing but a confidence building measure domestically. And also opined that the decision would help streamline its ability to exchange gold for foreign currencies at gold-trading centers abroad. However, a gold expert who answers to the name of Jeff Clark is not convinced this development was as harmless as it is being made out to be.

As per him, the move further reinforces the fact that gold is money. He believes that a currency crisis is a real possibility. And thus the move by the German central bank should be seen in light of this. As per him, the bank wants to keep some gold handy so that it can be exchanged for real goods and services. And now here's the real clincher. If other country copy Germany in asking for their gold to be brought closer to home, a total clamp down on gold exports across most parts of the world can certainly not be ruled out. Thus, it will pay to have some gold outside of the country's borders as per Clark. And the time to do it would be now. Waiting for a crisis to occur would be too late as per him. That's certainly some scary stuff. Worse still, the chance of Mr Clark's prediction coming right is getting stronger by the day.

The Indian banking industry has seen a large incidence of bad debts in recent times. The bad debts are especially more pronounced in the case of restructured loans. This had prompted the Reserve Bank of India (RBI) to raise the provisioning requirements on such loans to 2.75% a few months ago. But the increased provisioning did not allay the fears of the central bank. Now it has decided to raise the provisioning further to 5%. It has directed banks to increase provisioning in a phased manner. The first step would be to take the provisioning to 3.75% effective 31st March 2014. Then it would be increased to 5% in March 2015.

The apex bank has also revised the guidelines with regards to the guarantees provided for restructured loans. The increased provisioning requirements are in line with the RBI's conservative approach to banks. It would be better to be cautious than to repent later on. After all, bad debts could completely wipe out banks' net worth. We have already seen this happening in the developed countries and would definitely not want it to happen in India too.

The per capita monthly income is an indicator of the standard of living for individuals. Higher the income, better the standard of living. As per the data released by national accounts, the per capita income of India grew at the rate of 13.7% to Rs 5,130 for FY12. This signifies that every individual living in India on an average earns Rs 5,134 per month. And while this figure may not be exciting from an urban standpoint, it is sufficient enough to maintain a decent standard of living in rural areas. But yet majority of the people in India are living below poverty line. Now, how is that possible? It's because the per capita income is not an accurate gauge for standard of living. It is calculates the total income of all individuals in the country with the population number. In short, it averages out the total income of all individuals. But there might be a few individuals who earn more than others. And this is precisely the case in India where income inequality is very high. Rich are super rich while poor cannot afford even two square meals a day. Thus, a growing per capita income for India should be taken with a pinch of salt. It does not reflect the rich poor disparity. While India does need better standard of living, it also needs income equality!

India might be saddled with issues such as poor infrastructure and corruption, but there can be no denying that the country has made rapid progress over the years. That is why Bill Gates, co-chair of the Bill & Melinda Gates Foundation, is of the view that the country is becoming less dependent on aid. What is more, the country may no longer require it in the future. This is vital in an environment where many developed nations are reducing aid. This is when they are struggling to tone down their own debt burdens. The success stories for India have been the strong growth seen by India Inc., as well as the rise of the middle class with more disposable incomes. But India still has a long way to go. There are large swathes of the nation which have not benefited from India's growth largely on account of poor infrastructure, politics and rampant corruption. Only if these issues are addresses can India move to the next level.

All kinds of excesses are eventually followed by fitting corrections. This is being witnessed in our neighbouring country China. During the heydays, Chinese local governments piled on excessive debt on their balance sheets. Now, when debt repayments are due and tax revenues are shrinking due to the economic slowdown, these government bodies are having a tough time. Given this situation, they have taken to extreme measures to prop up their revenues. An article in the Financial Times reports that such cash-strapped local governments have started demanding taxes upto two year in advance from steel companies.

It is worth noting that Chinese steel mills account for nearly 50% of the total global steel production. These companies have traditionally been cash cows for local governments. But the slowdown in the economy has adversely affected the fortunes of these companies. For instance, some of the biggest Chinese steel companies reported about 98% year-on-year drop in profits last year. In fact, unprofitable mills saw their losses zooming sevenfold. Yet, this scenario has not hindered the government bodies to squeeze these companies. It is said that companies that have not conformed to these demands have been subjected to audits, investigations and in many cases, hefty fines. This is indeed a worrying picture of the world's emerging economic superpower.

Profit booking in telecom and commodity sectors led the benchmark indices in Indian equity markets below the dotted line post noon today. The BSE Sensex was trading lower by around 81 points at the time of writing. Other major Asian stock markets closed a mixed bag while markets in Europe opened flat to negative.

04:50  Today's investing mantra
"It's in the nature of stock markets to go way down from time to time. There's no system to avoid bad markets. You can't do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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4 Responses to "Time to recall Buffett's rule no 1?"

BPS Gautam

Feb 2, 2013

"There is no system to avoid bad markets" as quoted above is a bare fact. "Conservative investing without expecting miracles" is the only way and no other way to go, I fully subscribe the view.



Feb 1, 2013

I still do not understand how the market experts call the Buffet's rule no 1 as golden rule. I think it is media frenzy Americans who wanted to show to the world that their men and women are more knowledgeable and philosophical than the rest of the world. Utter stupid rule when the financial markets are nothing but gambling and there will always be a winner who can be a loser and a loser who can be a winner. This so called golden rule should be scraped once for all as the media projects Buffet as an immortal and unbeatable personality in Stock Market. Can somebody call Mahabaratha's shakuni as the greatest wealth creator in the period of Dwapara Yuga just because he was unbeatable in the dice game?



Feb 1, 2013

Per capita income figure is certainly not a precise gauge of standard of living.Average temperature can vary by +/- 10 Deg. Centigrade.Same is applicable in case of rainfall.In our great India many are earning millions while majority (50-60%) are finding it difficult to meet two ends.Forget about millions who are below poverty line.Official defination of BPL is 2,900/- Rs in semi urban area & the same is cruel joke.Desparity is widening day by day, for which nobody is bothered.This is worst for AAM AADMI in our Mahan Bharat,a subcontinent..



Feb 1, 2013

When one takes a position in the market , it becomes essential to put a stop loss in order to keep loss to the minimum possible.It is observed that in most of the cases wherever stop loss is entered ,it gets triggered thereby resulting in loss of money. In other words Buffet's rule no 1 cannot be followed strictly.
Please elucidate as to how to follow Buffet's rule no 1 without losing money. Or one should not put a stoploss to any position taken in the market at all?

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