Is investing in popular brand stocks 100% safe? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is investing in popular brand stocks 100% safe? 

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In this issue:
» Will US stocks fall 50% twice in the next decade?
» Will money printing never stop?
» Dual pricing in diesel to hurt state-run OMCs
» Will India become an export hub for SUVs?
» ...and more!

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Run a quick stock screener and you will see that most companies with the highest shareholder return have one thing in common. What is it? The answer is strong and valuable brands.

Investors such as Warren Buffett have been strong advocates of investing in companies owning strong brands. Robust pricing power coupled with customer loyalty is the reason why such businesses tend to outperform the broader markets.

But wait... Is it safe to simply invest in any known brand?

There have been so many cases where brands that once enjoyed leadership position have fallen from grace. Let us go a few decades back in time. BPL was the leader in heavy consumer durables. HMT was synonymous with watches. The car market was dominated by Fiat and Ambassador.

Where have they all disappeared now? The opening up of the Indian economy led to the entry of a slew of new enterprises. The incumbent players lost out to fierce competition from those who offered new product varieties, better-quality goods and were strongly marketed brands.

This was not a one-off event triggered by change in the economic environment. The making and breaking of brands is a part and parcel of business. Take Nokia for instance. A decade ago it dominated the mobile phone market with a whopping 70% share. Competition and better innovation by players such as Samsung and Apple has reduced Nokia's share to less than 40%.

But there have also been cases where strong brands that had later stagnated have managed to reclaim lost ground. Take Bajaj Auto. The auto maker was the leader in the scooter market some decades ago. Its dominance was shaken away by the entry of motorcycles. However, Bajaj has managed to make a strong comeback in the last decade with two major brands- Pulsar and Discovery.

How does all this fit together? The point we are trying to drive home is that brand power and market positions should not be taken for granted. The companies that manage to survive and thrive are the ones that proactively and consistently keep reinventing themselves to the cope with the changing business dynamics and consumer needs. Look out for companies with this kind of leadership.

Do you think it is safe to invest in companies owning a popular brand? Please share your comments or post them on our Facebook page / Google+ page

01:20  Chart of the day
Today's chart of the day shows the distribution of population and consumption in India. At the bottom of the pyramid are India's 640,000 villages, accounting for 70% of the country's population. This segment accounts for half of India's total consumption. At the middle are 7,834 small towns that comprise 18% of India's population. At the top are 48 large cities that hold 12% of the population. Both these two segments account for 25% of India's consumption each. India has the highest and rising youth population in the world. Demographic strength coupled with growing literacy and aspirations for better standards of living are set to keep India's consumption boom intact. By fiscal 2025, India's consumer sector is expected to become the fifth largest in the world.

Data source: DNA Money

Jack Bogle, founder of mutual fund giant Vanguard Group, recently made a very bold prediction about the US stock markets. And it was not about market scaling new highs after the recent rally that is being witnessed. In fact, he feels that the US stock markets are likely to witness a 50% fall not once but at least twice in the next decade.

At the first instance, this appears to be a threatening sight. But we know that stock markets typically move in cycles. A fall in the markets is followed by a rise and vice versa. However, predicting the length of the cycle is a difficult task. Forget trying to time the peak and bottom for timely exit and entry. So, how should one play the cycle? The answer is to stay in it with patience. This is what Jack Bogle, too, had to say.

He points out that there have been numerous cycles in the past like the one witnessed in 1974 and 2001. Another one was witnessed as early as 2009. And in all these cycles no one was ever accurately able to predict the reversals. The only way to sail through them easily was to be in it patiently. We certainly agree with Bogle's views here. Buy and hold is the best strategy that prevails over the longer term. Though it does have short term pain, it also has long term gain.

Central bankers and economists these days seem to be in some kind of competition with one another. Competition about whose idea is more absurd sounding than the rest of the lot. And no sooner do we feel that an idea is certainly the most absurd we have heard in recent years, another one comes along. Like this one from Columbia Professor Michael Woodford. The guy, touted as the world's most closely followed monetary theorist, says it is time we come clean on bond purchases i.e. quantitative easing. He argues that central banks should announce to the world that bond purchases are forever. And he doesn't stop at that. He wants to go further and eliminate all the Government debt on the balance sheets of central banks. This could be done with a flick of fingers, he concludes.

We don't think Mr Woodford has given anybody a loan in his lifetime. Else he would know the pain of seeing it disappear completely. Or better still get his loan back but with vastly reduced purchasing power. And this is exactly what happens in an expansionary economy. When you reduce debt by printing money, the creditors get their money back but with its purchasing power significantly reduced. Endless printing would then culminate into a day where you'll have sackful of cash which will not even buy you a fistful of essential goods. A scenario better known as hyperinflation!

The oil and gas sector in the last few months has been a key focus area for the Government. After years of inertia, the Government finally tried to bite the bullet with regards to diesel price reforms. It allowed phased decontrol of diesel prices for retail segment and total decontrol for bulk (using more than 200 litres at a time) customers. However, the dual pricing of diesel offers little reason to already bleeding state run oil marketing companies (OMC) to cheer.

Here is why. With the new policy, the bulk customers have lost the edge of getting diesel at subsidised price from state run OMCs and are forced to buy at market price. As such, the state run oil companies are at the risk of losing this segment to private oil firms. The latter will enjoy a level playing field after years of presence in the sector. Until now the case was different. The infrastructure of private firms was lying idle. Unlike state run oil companies, it did not make sense for them to sell diesel as they were not compensated by the Government or upstream segment for selling at subsidised prices.

In other cases, the bulk customers have shifted to retail pumps to avoid buying diesel at high prices thus defeating the purpose of the reform. Even in the retail segment, if diesel price does get regularly upgraded to match market prices; state oil companies are likely to lose customers to private oil companies eventually. For the former, the so-called reform has become a double edged sword indeed. While the customers and state run oil companies have another set of problems to deal with, the Government and private oil firms seem to be the real gainers from these reforms.

FY13 has been a poor year for the Indian auto industry. Most segments across the industry witnessed either a tepid rise or fall in volumes. But there has been one segment which has completely bucked the trend and reported stupendous growth. And that has been utility vehicles (UVs). So it is little wonder that the auto players want to capitalise on this opportunity. And they are looking to do this not only in the Indian market but also overseas.

Indeed, global automobile majors are looking to leverage India's cost-competitive manufacturing practices. They want to turn the country into an export hub for UVs. Besides Mahindra & Mahindra (M&M) and Renault, Fiat and Ford India are also exploring opportunities to export UVs, particularly SUVs (sports utility vehicles). This is to regions such as Europe, South Africa and Southeast Asia. India has typically been a market for small cars. But sedans and particularly utility vehicles are gaining increased acceptance from consumers. That is why, despite the robust growth in FY13, there is still potential for growth for UVs in the coming years.

In the meanwhile, the Indian share markets continued with their downward journey for the third day in a row. At the time of writing, BSE Sensex was down by 100 points (0.6%). Sectoral indices represented a mixed bag with FMCG stocks witnessing maximum selling. Asian equity markets traded mixed with Hong Kong (down by 2.3%) as top loser.

04:50 Today's investing mantra
"Diversification may preserve wealth, but concentration builds wealth" - Warren Buffett

  • Warren Buffett - The Value Investor

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    1 Responses to "Is investing in popular brand stocks 100% safe?"


    Apr 5, 2013

    The fact is that an investor should never take anything for granted. Whatever we know or whatever has happened is in the past; future nobody knows, though we all attempt to predict in our own way, but we have to act today. Brands dont exist in a vacuum, they become part of our lives; unless brands remain current they get consigned to history. As a result the company owning the brand suffers and eventually the investors suffer.

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