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How Many Analysts Does It Take to Pick Your Best Stock?

Mar 25, 2015

In this issue:
» Has FII interest peaked?
» Is India 'e-commerce ready'?
» Undergrads in demand by startups!
» ...and more!

00:00
Most of you would have come across the light bulb jokes that stereotype a category of individuals based on their problem solving skills. Now what these jokes tend to highlight is that mastery in an art or science tends to, at times, prevent human beings from taking simple decisions. Or as Buffett puts it - There seems to be some perverse human characteristic that likes to make easy things difficult.

Let us explain this with yet another light bulb joke - How many analysts does it take to change a light bulb? Well, as you may have guessed, the answer to this question is not all that simple.

You probably need one analyst to tell you that replacing one light bulb in your house may not help. Instead, you need to have a plan to replace all of them to achieve energy efficiency and optimize costs. But before you even begin to do this, you need to make a stockpile of 1,000 candles in case of emergency.

One to tell you that manually replacing light bulbs is cost inefficient and you need to automate the process.

And one to ask you how much it is costing you to stay in the house with a non-functioning light bulb. And whether it will involve lesser capex to change that light bulb or move to a smaller, cheaper house with a working light bulb instead?

Yet another to tell you, that instead of buying just another light bulb what you really need to do is to think bigger. That you need to think like an 'investor' and a 'business owner'. And in order to do so make every asset that you own work for you. For this, it may be a better idea to first own the stock of the company that makes light bulbs.

Still another to tell you that what you need to do is buy 10 light bulbs, sell them to 10 people, each of which finds as many people as they can to sell light bulbs to while passing a percentage of the profit up to you. In doing so, teach them to teach these people to sell light bulbs while passing another percentage of the profit up the value chain. So, for a small initial investment in 10 light bulbs, you will be able to afford a lifetime's supply of replacement light bulbs.

And finally, you need the star analyst who can tell you about the kind of light bulb that is really going to take off in the next few months. And that you should be buying as many of them as you can, so that you do not lose out on this unprecedented opportunity that no one else is still aware of.

So if you are getting the drift, the more complex opinions you look out for, the more you will get.

For your investing decisions you can choose to pay heed to talking heads on TV, financial advisors, brokers, friends and well wishers. Or you could read about how to identify the simplest of businesses that can work wonders for your portfolio over the long term.

This will not only make the process of investment decisions faster and less complicated for you but also allow you to learn from your own mistakes and correct them!

Do you think the more complex the analysis the better are the chances of an accurate result when it comes to investing? Let us know your comments or share your views in the Equitymaster Club.

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01:45
Speaking of simplicity, the simplest way to determine whether the markets are overvalued is to take a look at possible upside in corporate earnings and valuations. Since the FIIs happen to be the biggest category of buyers of Indian stocks and have the deepest pockets, their interest in the markets influences valuations heavily. With the possibility of rate hike in the US and Indian corporates continuing with a weak show in earnings, the FII interest is indeed waning. And as per a CLSA article quoted by Economic Times, the FII interest in Indian stock markets has probably peaked.

However, what we would like to add here is that when one looks at valuations of Indian stocks from a historical perspective it is nowhere close to the 2007 peak. Secondly, the upside in earnings of India Inc may be limited in the near term. However, the reform measures, if executed well, could give a definite boost to the long term earnings estimates. Secondly, at a time when the global economy is facing several macroeconomic headwinds, India remains one of the best choices for foreign investors. Issues like debt overhang, deflationary pressures and asset bubbles are hardly meaningful in India. And the possibility of positive surprises both on the earnings and economy are more likely to keep long term investors patient about India.

02:55
  Chart of the day
The e-commerce boom in India is one that raises eyebrows higher as more money raising activities are getting announced at regular intervals. The values that some of these businesses (not yet profitable we may add) are garnering are simply mind blowing! But still, global institutions continue to back Indian e-commerce companies thus indicating that the opportunities would be massive and thus the growth rates are expected to be strong. However, if one takes a look at a reported released by the UN Conference on Trade and Development, India ranks very low in terms of its B2C e-commerce readiness. On an overall basis, India ranked 83, a few notches above Pakistan, Vietnam and Nepal, but well below its BRIC counterparts.

Not many Indians accessing the internet
*Figures are indicative; Ger - Germany, Indo - Indonesia

Today's chart of the day shows one of the metrics used to come to this conclusion - share of internet usage in India, which remains in its teens. Other parameters used in the overall ranking system include share of individuals with credit card usage. Here also India ranked very low as compared to its emerging market peers.

03:35
Land acquisition has been touted as a key reason for delay in projects by many. The value of projects stuck that is making rounds is Rs 20 trillion! Considering that the act was termed as 'stringent' on most aspects, relaxation of some clauses in the latest proposed amendment is being welcomed by the industry. However, a professor of an Indian Business school - his article was published in the Mint - wrote a very interesting point about the tradeoff between development through improvement of the existing utilisation of land and the development through unnecessary displacement of the people, ecologies and cultures.

Some interest points highlighted include Coal India only actively mining a fourth of the land allocated to it. Or for that matter, only 37% of land approved for setting up 576 SEZs is being used since enactment of the act a decade ago. Further, a CAG audit has revealed that only 16% of land in the active SEZs processing area is being used as compared to the norm of 50%.

A key point here would be the need for the government's focus to work on development of the massive population that is dependent on the agri sector, one whose contribution itself is on a declining mode when seen as a percentage of the GDP. We believe long term development of the major population of the country could easily help towards maintaining above average GDP growth for decades, and as such should be a key area of focus for the government.

04:20
Here's another interesting piece we came across. It seems that Indian startups are looking to hire people from undergraduate campuses rather than top B-schools and engineering schools. Their reasoning - if the quality of work by good undergraduates can be similar to that of the post grads, why pay the higher salaries! As per an Economic Times report, the number of startups hiring from under grad campuses has doubled, and in the process so have the salaries.

Young entrepreneurs driving Megatrend in India, is a story that has only just begun, as per us. While there is a long way to go before India moves higher in the ease of doing business ranks; however, by overcoming many problems, nimble and creative startups with the advantage of their small size can create huge wealth, in this decade and beyond.

04:45
After opening firm, the key indices in Indian stock markets went below the dotted line in the latter half of the session. At the time of writing the BSE-Sensex was trading 35 points (-0.1%) lower. The sectors leading the losers were power, engineering and IT. However, the banking and pharma stocks continued to find favour.

04:55
 Today's investing mantra
"In the stock market a good nervous system is even more important than a good head." - Philip Fisher

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee and Devanshu Sampat.

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Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

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Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
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