'The disaster in Nepal reminds me of my Kashmir escapade...' - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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'The disaster in Nepal reminds me of my Kashmir escapade...' 

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The news of the massive 7.8-magnitude earthquake in Nepal came as an unnerving jolt to me. It took me back to the time when I had a narrow escape during the devastating Kashmir floods last year. Having experienced a natural calamity first hand, I know how it feels to be at ground zero. The illusion of normality, stability and permanence cracks wide apart. And you know when you are treading the thin line where one wrong step, one bad choice could mean the difference between life and death.

As I read through scores of news reports on the disaster in Nepal, I came across some very shocking facts. And I felt a strong urge to share my two cents on the issue of such extreme events...

As the various news reports suggest, more than 4,400 people have been declared dead already. The number of people injured by the calamity is about twice. The Prime Minister of Nepal has said that the death toll on account of the earthquake could hit the 10,000-mark... He has also admitted that the rescue, relief and search operations have been 'ineffective'.

The ill-effect of the calamity is not limited to the ones who have died or injured. As per the United Nations, the massive earthquake has impacted the lives of 8 million people in 39 districts. This is more than 25% of the country's population. Of these 8 million people, 2 million reside in the 11 severely affected districts. In rural areas, 90% of the people have been affected.

Many people have lost their homes and livelihoods. There seems to be an acute shortage of water, food and medicines - the basic essentials. And to add fuel to fire, the people have been further terrorized by over 60 aftershocks, rain and cold.

For the ones that have survived, a massive national crisis has only begun. The road to recovery is going to be a long, winding path.

As per the US Geological Survey's best estimate, the aggregate economic losses from the disaster could be between US$ 1 billion to US$ 10 billion. For Nepal, which is one of the poorest countries in the world and has an unemployment rate of over 40%, this crisis could set its economy back by a decade or more. The damage to the country's infrastructure has been huge. Rebuilding homes, roads, highways, hydropower dams and generators would take years.

The one big question that keeps repeating in my head is - Why does a natural calamity have to become such a large scale human tragedy?

Someone may say that the earthquake is a natural calamity. What can we do about it?

Well yes, we cannot prevent an earthquake. But can we not be well-prepared to face it?

Consider these facts... As per Down To Earth magazine, Nepal lies in one of the most geologically vulnerable regions. In fact, Nepal has had a long history of earthquakes. Particularly, the ones that occurred in 1255, 1344, 1833, 1866 and 1934 were highly devastating.

What more, some scientists have been anticipating a 'great Himalayan earthquake' (earthquake of magnitude 8 and above) for quite some time... While the recent earthquake does not qualify as a 'great earthquake', experts are not surprised by the calamity.

Remember, calamity is one thing and devastation is another. We cannot stop a calamity from occurrence. But devastation, surely, can be minimized. According to seismologist James Jackson, who was part of a 50-member team of scientists and researchers, the devastation following the earthquake was long feared, not because of the seismic activity, but because of population pressure and degradation of the environment.

What if such a massive earthquake hit one of India's metros?

The devastation in Nepal clearly shows how big a cost the country has to pay for being unprepared for a natural calamity. I came across some Indian statistics that may seem scary.

As per Business Standard, at least 38 Indian cities are located in high-risk earthquake zones. A majority of the constructions in these cities are not earthquake-resistant.

Since 1988, India has had five moderate earthquakes. In fact, four of the great earthquakes (Richter magnitude 8 and above), have occurred in India over the last 115 years.

Can you even imagine the magnitude of destruction that could happen if a similar calamity befell upon Mumbai... or Delhi... or Bangalore today? Are our cities well-equipped and prepared for disaster management? Is your residential building earthquake-resistant?

Understanding complexity, non-linearity and human misjudgment

For an earthquake-prone area, is it not irrational to not be prepared for such an event? Let us explain...

The human brain has a natural tendency to look for patterns and repetitions to understand and respond to reality. For instance, every day when your doorbell rings at 7 am, you immediately know that it is the newspaper delivery boy. The sound of the door bell at the given time signals your brain that a pattern is being repeated. That's how you know who is at the door and you respond accordingly.

This is a linear thought process. It is quite useful. It helps us deal with the myriads of chores and tasks that we perform every day.

But it also has serious limitations... How would the linear thought process deal with complex systems such as earthquakes and financial crashes? Earthquakes are rare events. They do not happen at fixed intervals. On the other hand, the non-occurrence of the earthquake emerges as the repeating pattern. So the brain takes this pattern as the reality... as normality... and eliminates the possibility of an earthquake. This is broadly how we blind ourselves from seeing rare, high impact risks.

This happens in the stock markets too... When we see the markets rising higher consistently, the brain identifies it as a repeating pattern and adapts its decision-making process accordingly. As such, rising stock prices result in more investor interest and push stock prices even higher. Then, of course, the markets correct and investors become panicky.

Value investing is earthquake-resistant

The value investing legends such as Ben Graham, Warren Buffett and Charlie Munger have known very well that 'earthquakes' do happen in financial markets. And that, such extreme events cannot be predicted or timed.

So what should one do?

Invest in such a way that 'financial earthquakes' do the least damage to your investment portfolio. This means investing in quality businesses that have the capacity to absorb economic shocks. Look for companies that have a solid, scalable business, a history of consistent profitability, low leverage and high returns on investment. Lastly, never overpay. Yes, sometimes it does make sense to pay a slight premium for high quality companies. But just don't overpay because the stock is a market favorite and nobody seems to be caring about valuations.

This is precisely how Buffett has made his billions. And saved himself from losing those billions...

My sincere prayers and empathies with all the lives affected by the Nepal earthquake...

May you be safe and successful!


Warm regards,


Richa Agarwal
Managing Editor - Hidden Treasure

What is your view about the crisis in Nepal? Do you think it is high time that India prepares itself for averting such large scale human tragedy? How do these events influence the way you think and invest? Let us know your comments or share your views in the Equitymaster Club.
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This edition of The 5 Minute WrapUp is authored by Richa Agarwal.

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8 Responses to "'The disaster in Nepal reminds me of my Kashmir escapade...'"

hmpandey

May 3, 2015

The financial calamities are taken care of by stock gurus to some extent similarly any government takes care of the provisions of earthquake management for the citizens to live in a building which has been built by taking consideration the earthquake effects in that area. Unfortunately builders with the help of corrupt officers in the government completely ignore the earthquake safeguard and result is heavy devastation and rescue operations. It is the duty of each and every individual to perform his /her duty with a sense of responsibility in whatever field they are associated.

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ABDUL REZZAK

Apr 29, 2015

I prey for nepal

Like 

K.P.N.Nair

Apr 29, 2015

Well written article. Kudus to the writer. Taken advantage of the opportunity. Keep it up.

Like 

Rajan

Apr 29, 2015

Dear Ms.Agarwal, You have experienced the floods in Kashmir and have felt the nature's fury first hand. You have also given full statistics of the enormity of the disaster in Nepal. But I am sorry to see that there is no mention of what you are going to contribute to alleviate the sufferings of fellow human beings caught in this devastation. You have also not told any of the readers to contribute their at least some of their money or material or time to support the Nepalis. You are only talking about the financial earthquake and how to avoid this. I am really disappointed.

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RAJESH SHARMA

Apr 29, 2015

Dear all,
we all know very well that we,the INDIAN lives our life as on today.
never care about the future.there may be different views on this theory,because our elders always emphasized on saving, but we the new generation or rather you can say, influenced by western culture to enjoys life as on today,who cares about tomorrow?
But the time has come, we collectively have to adopt the culture of humanity,care & honesty.
we have to strictly follow some moral standards, each & every day what we are going to do, we have to again think, --what the impact will be there on the coming generations --
is this inspire us to do better & better day by day--
think again, some moral values should be incorporated in our daily life.
at least some patriotism should be in our daily life,
in this way ,we can surely build up a STRONG & DEVELOPED INDIA.
with regards
Rajesh sharma

HARIDWAR.

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DK BHARDWAJ

Apr 28, 2015

Excellently brought out by the author. From a natural calamity to financial calamity both can be and are unpredictable. Being planned and ready to face can minimise the damage.

Like (2)

MAHESWAR DEKA

Apr 28, 2015

Based on the occurrence of earthquakes in the past in and around India, the country is divided into five seismic zones, namely zones I, II, III, IV and V. The entire state of Kashmir falls in Zone V. Western Himalayas are also classified as Zone 5. Some North-East Indian cities such as Guwahati fall in this area. The Rann of Kutch is classified as Zone 5.Despite this level of seismic hazard; little is being done to make the development akin to earthquake shaking. The quality of both design engineering and construction is way behind the expected seismic standards. All these major earthquakes establish that the casualties were caused primarily due to the collapse of buildings. This emphasizes the need for strict compliance of town planning bye-laws and earthquake-resistant building codes in India. India's increasing population and extensive unscientific constructions mushrooming all over keep India at high risk. During the last 15 years, the country has experienced 10 major earthquakes that have resulted in over 20,000 deaths. The government must see to it that buildings so constructed for residential and business purposes are constructed with every engineering norm.

Like (1)

Anand

Apr 28, 2015

The Calamity in Nepal, points out the inability of Humans to apply technological progress across regions. While Japan has buildings that can stand a Ritcher 10 Earthquake, Nepal in general may not have this.
This may also be due to the economic inequality prevalent in the world.

The people with the need for a specific technology (coming at a cost) generally cannot afford it!

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