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How a Billionaire Lost His Money, and You Could Too

Mar 3, 2016

In this issue:
» Domestic fund managers big buyers of stocks
» IMF's views on the leverage of Indian companies
» ...and more!

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Rahul Shah, Co-Head of Research
  • Having recently turned 60, I have decided to spend more time in England, closer to my children. [...] I am resigning my position with immediate effect.

- Vijay Mallya, UB Group Chairman

So began his statement last week announcing his exit as non-executive chairman of United Spirits Ltd. For someone as ambitious and flamboyant as Mallya, saying something like this would be considered a mark of character...almost noble perhaps.

Except, it looks like he had little other option.

Once a billionaire, Mallya these days has been busy making desperate bids to salvage whatever little is left of his wealth. Today, some of his bankers want him arrested and his passport impounded.

We won't go into the details here... But Mallya has been the owner of flourishing spirits and beer businesses, among many others. His undoing was his entry into the airline business in 2005. Kingfisher Airlines was launched on his son Siddharth Mallya's 18th birthday. It was intended to be India's only world-class, premium airline. Fuelled by debt, Kingfisher soon became the number two airline in India.

But what looked like a masterstroke at the time was actually a fatal mistake. Call it pride, ambition, hubris, or anything in between. Mallya made the mistake of entering a notoriously tough industry known to have a dreadful track record.

And he didn't just stop there. He bet the farm on it.

Investors and businessmen alike have a grim lesson to learn from his trials. Different industries have different economics. Some are good, some are bad, and some others are downright ugly. It makes a world of sense to take gauge of this when choosing businesses to invest in.

Rather than pride your own ability to pick a good stock or manage a profitable business even in a bad industry, it is often much wiser to altogether avoid businesses in industries with bad economics.

At Equitymaster, we make it a point to take careful stock of the long-term economics of the industries businesses operate in. We seldom count on individual companies' managements to be so brilliant that they can sail their ship in a perpetually stormy sea.

As part of the premium edition of The 5 Minute WrapUp, we've been doing a series on the economics intrinsic to various industries. We've already covered the airline industry and many others including banking, real estate, auto (subscription required).

Businessmen who have tasted success in the past often come to have supreme confidence in their ability to manage any business - however difficult it might be. Like a Midas touch, if you will.

As an investor, never make the same mistake while picking stocks.

Do you make it a point to analyse the long-term economics of a company's industry before investing in it? Let us know your comments or share your views in the Equitymaster Club.


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2.18 Chart of the day

Fund managers in India remained net buyers of stocks for the 22nd straight month, reports a leading business daily. The chart below shows how they continued pumping in money in the just concluded month of February, making net investments of close to Rs 6 bn. The trend that started back in May 2014 has continued unabated despite all the noises around how there have been many a slip between the cup and the lip of the current regime. What has further helped matters in our view is lack of any significant redemption pressures.

As one of the fund managers highlighted, the trend of buying at lows might continue if the incremental inflows in equity schemes remain decent. Is this the dawn of the new Indian investor? An investor who doesn't get bogged down by near term volatility and keeps his eyes firmly fixed on the long term. Well, this is something only time will tell. But this is an environment where other asset classes of choice viz. real estate and gold aren't looking in the best of shapes. And therefore, this could partly explain the new found allure for equities.

Mutual funds bullish on India

3.18

While mutual fund managers are bullish on India, here's a statistic that should certainly give them some scare. And it comes from none other than the IMF (International Monetary Fund). The institution is of the view that the leverage of Indian firms is amongst the weakest in emerging markets. And, as a leading daily highlights, this is not the only worry. There are two more. Not only has the profitability been dented seriously but more and more debt is owed by companies that are finding it difficult to pay even interest expenses.

We believe this is the reason why all those rosy projections about India's growth over the medium to long term should be tempered down a bit. Because even though a part of the economy will do well and log in strong growth rates, there is this other part that could pull the overall growth down. Therefore, the choice really is between keeping things the way they are or taking that strong one-time measure that may stifle growth in the near term but place us on a firmer footing over the long term. On the evidence so far, it is the former approach we seem to be taking as of now.

4.48

Meanwhile, the Indian indices continued with their resurgence what with the BSE Sensex trading higher by more than 350 points at the time of writing. Gains were seen even amongst the BSE Mid and Small Cap indices. Amongst sectors, metals and capital goods stocks were seen attracting the maximum interest.

4:56 Today's investment mantra

"It is fair to assume that an outstandingly successful company has unusually good management. This will have shown itself already in the past record; it will show up again in the estimates for the next five years, and once more in the previously discussed factor of long-term prospects. The tendency to count it still another time as a separate bullish consideration can easily lead to expensive overvaluations." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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Equitymaster requests your view! Post a comment on "How a Billionaire Lost His Money, and You Could Too". Click here!

5 Responses to "How a Billionaire Lost His Money, and You Could Too"

ssnraju

Mar 13, 2016

A pre decision or at the time of decision analysis is more interesting and difficult than postmortem analysis.
Is anybody, the stock analysts are able to advice investors not to go for King Fisher Air Lines, saying Mr. Vijay Mallaya is not right in going for that business.

Like 

SANKARAN VENKATARAMAN

Mar 5, 2016

All your reports are of 2014 ONLY. NO report given in 2015 of any Industry. Pl.do so in 2016 as present levels give good opportunity for Quality investing wih good scope for appreciation for longterm investors.

Like 

SANKARAN VENKATARAMAN

Mar 5, 2016

In Education field only MT EDUCARE AND NAVNEET EDUCATION OK

Like 

Ramalingam S

Mar 4, 2016

It only reiterates the saying that if Character is lost everything this is lost and the character of the Commander-in-chief reflects in the company.

Like 

Mythili

Mar 3, 2016

Hi,

What's your view on the economics of starting a high quality school for children belonging to low to middle income families using new age technologies and teaching methods?

Regards
Mythili

Like (2)
  
Equitymaster requests your view! Post a comment on "How a Billionaire Lost His Money, and You Could Too". Click here!
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