What could be common in You, Buffett and Archimedes?
(Apr 24, 2015)
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In this issue:
» No 'Make in India' dreams for steel
» Will the 900 bn inflow into equities buoy markets?
» Why monsoons could spoil the party
» ...and more!
Answer is the 'Eureka moment'!
If it were not for Archimedes' quiet thinking in the bathtub, we would be still wondering why a body of mass submerged in water displaces the same volume of the liquid.
But even with all his brilliance, the ancient Greek mathematician did not discover the Archimedes' principle with any hectic mathematical experiments or overnight calculations. It took him years of thinking and observing to come across the right conclusion one fine day. And that moment was his 'Eureka moment'.
If he were born in the 21st century, the urgency, hustle and hectic activity to come to conclusions would have at best helped Archimedes point out the Greek banks that are about to go bust. But he would have hardly come close to his path breaking discovery.
The problem is that as with our lifestyle, hectic activity and instant results are equated with success. So if you are an investor in a rising market, not indulging in regular buying and selling of stocks could be making you feel left out. Worse still, being told to be careful in buying high PE stocks and looking for cheaper valuations could be a test of patience for you. After all, in the pressure of quick results, you perceive the absence of 'activity' in your attempt at creating wealth as a big dampener.
Now it is not just Archimedes, but every other genius who has had a brush with the Eureka moment, has toiled for it over years. Coming back to investing, Buffett and Munger, the two individuals who manage the fund that has an unbeatable track record, have together read more annual reports than any other soul on earth. They continue to do so without worrying whether they will come across their Eureka moment the next morning. All they are concerned with is whether they will be a shade smarter the next day. Needless to say the day they decided to invest in companies like Coca Cola, Washington Post, Wells Fargo, Walmart and American Express were mini Eureka moments for them. For these very investments helped Berkshire multiply investor returns hundreds of times over the decades. But these geniuses never set a timeline for themselves for the multibagger returns. All they ensured that the goal was set right and they were disciplined about it.
As Buffett said, "We do not get paid for activity. We get paid for being right".
Thus consistent buying of stocks irrespective of valuations may not necessarily lead you to your goal. Nor is it that you should stop reading about companies that interest you for fear of valuations. It could be months and years of pursuit in finding the stocks that suit your long term portfolio. But the Eureka moments, though difficult to come by, will certainly make the big difference to your life.
Do you stop reading about companies that interest you when market valuations are high? Let us know your comments or share your views in the Equitymaster Club.
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While stock specific details should certainly form most of your reading, do not lose sight of the macroeconomic Megatrends completely. One such Megatrend that interests us is 'Make in India'. The PM's pet programme has been generating considerable interest from foreign investors. But ironically the business environment has become very tough for the domestic steel industry. The industry has been reeling under high raw material prices due to ban on iron ore mining and coal shortage. This has pushed up production cost of stand-alone steel companies. The problem has been further compounded by a sharp depreciation in foreign currencies vis-a-vis the rupee that has depreciated by a mere four per cent. Even low tariff and non-tariff trade barriers by the government are not helping much. Consequently domestic steel has become much more expensive as compared to imported steel. As if weak demand was not enough, unviable input prices are forcing domestic steel producers to cut production or operate at low utilization levels. This is likely to further strain their financial health. Unless the government takes urgent steps to arrest dumping of cheap steel imports from China, Russia and Korea, steel production will become a difficult proposition for stand-alone companies.
While Indian capital markets seem to be slippery note, here is news that could boost the markets' spirits. The markets may witness a fresh gust of liquidity, for the first time from Employees' Provident Fund Organization (EPFO). The Union Labour ministry has allowed 5%-15% of EPFO's incremental corpus of 6 lac crore to be invested in equity related instruments in the form of exchange traded funds. This could mean a potential inflow of Rs 900 bn to the India equity markets. So far, investment in equities by EPFO has been nil as compared to global exposure of 30%-40%. The organizations have been shying from equity markets on account of volatility in the markets. Further, the regulatory safeguards are not as assuring in domestic market .
However, in being so conservative, huge opportunities have been missed we believe. The historical long term returns offered by the markets have been way higher than the usual investment options such as Government securities. So, what we should be bothering about is not whether or not EPFO should consider equity class as an investment option. But what we do need to focus on is setting up right governance structures to make sure that such investments are made in a prudent and transparent manner so that the interests of stakeholders are not jeopardized. Once these issues are taken care of, limited exposure to equity class could mean inflation beating returns without adding too much risk to these funds, and hence, will be a decision in the right direction we believe.
The biggest concern that is meandering over the minds of investors wary of near term blips in the market is monsoons. Now the contribution of agriculture to India's GDP may have come down over the decades. But monsoon and food production do impact consumer inflation (CPI) quite meaningfully. And it is expected that poor monsoon and fall in food production could once again bring the CPI to unsustainable levels. Fall in oil prices had in the past few months brought the CPI within the RBI's realm of comfort. However a significant deviation of rainfall from the Long Period Average (LPA) could possibly impact food production, as seen in the past. And this will inevitably mean higher CPI and firmness in interest rates once again.
Correlation of rainfall deviation to food production
The Indian stock markets were trading in the red at the time of writing. While the BSE Sensex was down by 290 points, NSE-Nifty was down by 77 points. The stock of Infosys, trading lower almost 6%, led the pack of losers after the results declared today. Other Asian markets were trading a mixed bag at the time of writing. European stock markets opened higher today.
"Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." - Benjamin Graham
|| Today's investing mantra
|This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.
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