Biggest test every great investor has to clear - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Biggest test every great investor has to clear 

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In this issue:
» US sees highest poverty since 1960s and it will only get worse
» PM tries to cheer up India Inc
» Novartis patent verdict draws up the battle lines
» Now Japan unveils its brand new Quantitative Easing
» ...and more!

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Will you a call a fund manager who has managed to beat the benchmark index for 15 years in a row a successful investor? Or how about Peter Lynch who virtually shot the lights out of the S&P 500 during the time he was at helm at Fidelity? Forget it. How about the performance of Warren Buffett? Well, if the feat of turning every single rupee into Rs 6,000 over a period of close to 50 years does not make one an investing legend, we don't know what will?

However, the fact remains that none of these track records qualify the above mentioned money managers as kings of investing. Well, it is not us who are making this assertion. It is being made by another investing heavyweight Bill Gross.

Gross, the CIO of bond giant PIMCO argues in his latest outlook that most conventional measures of judging investment performance could well be inadequate. Thus, it does not matter if an investor has delivered market beating returns across market cycles and through both bull and bear markets. But even these investors cannot claim title to the throne of an investment king. And why would this be? Here comes the most interesting part we believe.

Gross is of the view that all extremely successful investors - Buffett, George Soros and even himself - have operated in markets during its most advantageous period. He prefers to call this period an epoch. And this epoch was nothing but the period starting from when the gold standard was abolished in the 1970s. This period coincided with the start of the expansion of this enormous credit bubble whose journey has continued till date. Therefore, any investor who took marginal risk and used sensible leverage was rewarded with the crown of greatness. Thus, it was the epoch that made the man rather than the man that made the epoch.

In view of this, the real test of greatness will be when performance is measured across epochs. But this is certainly not easy to measure as per Gross. Simply because epochs are very long periods and most investors never see two epochs in their investing careers. Gross' point though is not about which investor is king and which is not. It is the simple fact that even a very long term track record can be made to look ordinary when epochs change. Thus, it always helps to keep an eye out for them and try and make the required change to ensure continued success.

Do you think there is still a big question mark over the greatness of investors like Buffett and Lynch because of the concept of epoch? Please share your comments or post them on our Facebook page / Google+ page

01:28  Chart of the day
Today's chart of the day is perhaps one of the biggest anomalies of our times. Gold has had an excellent price run in the last decade or so but it still forms just 1% of total corpus allocated towards various asset classes. What this means is that there's only a tiny population out there that has benefitted from the gold bull run of the past decade. And herein also lies the biggest opportunity we believe. Imagine where the price of gold would be if there is even a small shift in asset allocations. Given gold's strong fundamentals, another bull run driven by investors wanting to make gold a larger part of their asset allocation cannot be ruled out.

Data Source:

Prime Minister Dr Manmohan Singh has clearly failed to impress most Indians in his role as chief of the nation. His stint as the country's Finance Minister from 1991 to 1996 was far more impactful. It was during this stint that he unleashed several reforms and eliminated the red tape paralyzing the Indian economy. Prior to that Dr Singh was also the governor of the Reserve Bank of India (RBI) from 1982 to 1985. Hence one cannot deny the fact that the PM knows well as to what kind of growth is sustainable for India. But his recent advice hardly reflects his economic prowess. At a CII gathering, the PM advised industries to not to be unduly pessimistic in bad times. He even recollected that despite his warning, India Inc. was over-enthusiastic during the buoyant GDP growth period in 2007.

Dr Singh believes that the government has only a smaller role to play in stimulating India's GDP. This is because India is a private sector-led economy with 75% of investment coming from non-government sources. Hence, it is nothing but investment sentiment that the government can influence. Well, we agree that in India industries have thrived not because of but despite the government. However, Dr Singh cannot shirk the responsibility of ensuring a corruption free and facilitative economic environment. It is time that he wore the hat of an economist once again to think more clearly through this.

In the US, if a family of four earns less than US$ 23,021 a year, it is termed as living in poverty. Currently, about 50 million Americans make it to this list. In other words, one-sixth of Americans are poor. Such levels of poverty have not been seen in the US since the mid-1960s. But the worst is yet to come.

The US economy has been grappling with the worst economic crisis since the Great Depression of the 1930s. With the fiscal deficit getting out of hand, the government has little choice but to trim spending. As per an article in Money News, spending cuts worth US$ 85 bn started automatically on March 01, 2013. It is said that the poor will be worst hit by these cuts. Several services that help the poor improve their conditions will seize to function.

The ultimate outcome of this will be even more income inequality. This is not something that should be ignored. Unemployment and rising rich-poor divides have often been the prelude to many socio-political crises across the globe. For the US, it seems tough times are set to linger much longer.

Drug pricing and affordability has always been a controversial issue in any country. On one hand global pharma companies have to be rewarded for their R&D efforts given the billions that are poured into research. On the other hand, there is the greater public good that needs to be considered. And this means that medicines are made available to the public at prices that are within their reach. The latest ruling on Novartis' cancer drug Glivec has once again bought this thorny issue to the forefront. There seems to be a consensus in the global pharma fraternity that patent protection laws in India are too weak. As a result of which there will not be too much incentive for MNCs to launch new drugs into the country.

Interestingly, this case has focused more on the strength of the patent laws in the country. But the sole issue is whether Novartis' drug really deserved a patent. The Indian patent law does not permit granting patents for evergreening. This is where MNC companies seek patents for drugs which are not really novel. They are tweaked so as to improve effectiveness. This strategy may have worked in the developed markets. But it never really had a chance in a country like India saddled with considerable poverty. And despite the hue and cry, the fact is that a drying global pipeline means that MNC companies cannot afford to lose out on the opportunity present in the emerging markets including India.

The new governor of the Bank of Japan has introduced a new phase of monetary easing. He plans to double the monetary base of the Bank of Japan. This would be done through aggressive purchases of government bonds and risk assets. The idea is that such an easing program would help take inflation rates to 2% over the next 2 years. The governor believes that this would help Japan's economy to embark on a phase of growth.

Given the failures of the QE programs seen in US and Europe, we really wonder whether Japan would be better off. The thing is that monetary easing is nothing but flooding the market with cheap money. This is nothing but a short term fix. It yields very little value over the long term. For long term benefits, one needs to focus more on structural reforms and changes. Unfortunately policymakers in the developed world seem to think otherwise and are adopting a myopic view instead.

Meanwhile, indices in the Indian stock markets continued with their downward journey today with the Sensex lower by around 253 points at the time of writing. Realty and IT stocks were seen bearing the maximum brunt. While other Asian indices closed mixed today, Europe too has opened on a mixed note.

04:55 Today's investing mantra
"In the stock market a good nervous system is even more important than a good head." - Philip Fisher
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4 Responses to "Biggest test every great investor has to clear"


Apr 5, 2013

Yes. Time favoured these great investors.

These investors mentioned many times that they were not seeing as many investing opportunities as they had a few years ago.

Still they are great for their common sense, their logic in arriving at a decision, bold approaches etc.



Apr 5, 2013

Couldn't agree more about epoch theory. In India it started in 1991, in US it started in 1970. No doubt, those mentioned are great investors, but it will be a mistake if we simply try aping them and their past investment strategies. The stock market has its own dynamics and one must adapt the investment strategy as per circumstances.



Apr 4, 2013

For PM Manmohan Singh's role during 1991-96, why should we ignore the real architecht of reforms process, the then PM P V Narasimha erudite scholar, visionary statesman and astute economist himself..who for the first time gave stability to the post of Finance Minister to function for 5 years as against every year changes in the FM..

Like (1)

Deepak R S

Apr 4, 2013

The Greats are Greats and they should not be denied their due crown, as their logic has been very well defined for each action they have taken, they, I am of the opnion, would have acted differently under different conditions but with the same logic, but trying to make the Best out of every situation that would have confronted them.

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