The Oracle of Omaha's words of wisdom - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The Oracle of Omaha's words of wisdom 

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In this issue:
» The curse to retail growth in India
» The crown for the most corrupt department goes to..
» Money laundering allegations pour in
» Eurozone still in deep trouble
» and more....

It is one of the most celebrated events of the year in the investor community. We are referring to the annual general meeting of Berkshire Hathaway. It is an event where shareholders and the world alike get to hear the words of wisdom from the Oracle of Omaha himself. And not just Warren Buffett, it is an event where we also get to hear from his Man Friday, Charlie Munger. And this year's meet did not disappoint investors who look to the gurus for their take on investments, market and economy at large.

On the economy of the US, Buffett is optimistic as he says that one is seeing signs of recovery. He feels that the economy is moving forward but it would not be at a breakneck pace. Instead it would not stall. Interestingly he is a supporter of the Fed's policy. He feels that whatever economic recovery that US has seen is only thanks to the Fed. This is where we differ from Buffett, because we feel the end of the money printing is going to be a bad one for US. It would only lead to asset bubbles which will eventually burst causing financial markets to collapse.

But in addition to this, there were also tips that can be used by investors to earn long term returns. And in his usual style, Buffett kept the advice simple. He says the key to investing success is that "You just have to avoid getting excited when other people are excited". This means that when markets are soaring upwards and valuations are becoming expensive, one has to avoid getting tempted by the overall exuberance. So if everyone is gung ho about a particular stock, investors need to ask themselves if their excitement is justified.

If fundamentals are strong and the management is robust, then there maybe reasons to get excited. But just getting excited does not warrant a purchase. In fact more often than not, when there is too much excitement, valuations are sky-high. And valuations are crucially important. For if you buy an expensive stock, eventually prices will fall to come in line with the intrinsic value. And when this happens investors will suffer losses. So stick with this basic rule of being cautious in your investing and you should enjoy long term returns.

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01:20  Chart of the day
The Reserve Bank of India (RBI) has announced a cut in the policy interest rate. It has cut both the repo rate as well as the reverse repo rate by 25 basis points (0.25%). The result is that these rates now stand at 7.25% and 6.25%. Since December 2012, this is the third subsequent cut in policy rates that the RBI has undertaken. But despite cutting the rates, the RBI has stated that it is cautious with regards to further rate cuts. The reason for this is the risks in the form of inflation, the current account deficit as well as the impact of further rate cuts on the economy. It has also scaled down its expectation for GDP growth to just 5.7%. Given RBI's renewed hawkish stance, it is unlikely that we would see an interest rates cut unless the deficit situation comes under control. Keeping interest rates high would attract foreign money which in turn can help the current account position. Also, though inflation appears to have eased down in recent times, nevertheless, this decline has been more on the WPI side. The CPI inflation still continues to be above 10%.

Souce: Reserve Bank of India

Have you ever contemplated opening a retail store? Well, perhaps you won't after learning of this harsh fact about what it takes to succeed in the business. In fact, forget succeeding, you would be shocked to know the things that need to be done to even get started. A leading daily highlights how retailers are getting increasingly frustrated in India due to the sheer number of licenses they need to acquire in order to start selling something. From the mundane to the petty, there's a permit that needs to be acquired for everything. And if this wasn't enough, there are bribes that need to be paid at every step of the licence acquiring process. Thus, for a retailer who's already suffering from demand slowdown, these extra costs that he has to incur are really breaking his back. Little wonder, quite a few of them are thinking of shutting shop and returning when things improve.

The biggest question is whether these plethora of licenses are really necessary? We don't think so. The permits are a throwback to the age of License Raj where India was a centrally planned economy and everything was regulated. This experiment however failed badly and the Government was forced to introduce reforms. But some sectors like retail continue to incur the wrath of the system of licenses. It goes without saying these sectors need to be freed from such archaic policies that are increasingly becoming albatross round the neck of India's economy.

Over the last few years, we have witnessed a slew of corruption scams one after another. In fact, it seems like the UPA government is running a corruption contest. Which is the most corrupt government department? Do you have any guesses?

As per an article in Economic Times, the Central Vigilance Commission (CVC) seems to have an answer. The answer is Railways. As per CVC's 2011 annual report, it had received 8,805 complaints against a similar number of railway officials. In the year prior to that, the number had stood at 8,330. However, the ministry's response in dealing with corruption cases has been dismal. Delays in processing vigilance cases appear to be a regular characteristic.

But what can one expect of a ministry where the rot is so endemic, right from the top? Didn't we just see the Railway Minister's nephew named in the recent bribery case? But are other departments any different? We are quite doubtful. Excessive corruption and poor governance have become the biggest stumbling blocks for the Indian economy.

Barely over a month ago, a money laundering allegation on India's top private sector by online magazine Cobrapost shook investor confidence. Not that each of the entities enjoyed the reputation of great management quality. But this instance in particular reiterated our doubts on whether private sector banks deserve the premium valuations they enjoy over PSUs. All this while we at least drew solace from the fact that the RBI continues to do a good job of keeping regulatory policies watertight.

But the outcome of the central bank's audit report on the operations of HDFC Bank, Axis Bank and ICICI Bank is disappointing to say the least. Adopting a diplomatic approach, the RBI has cited 'aberrations' in the operating norms of these banks. It has also denied systemic risks in the sector through the money laundering transactions. What it has not clarified is why the banks managed to circumvent critical KYC norms and how this will be prevented. More so, what should bank managements do to ensure that growth and profit motives are not at the cost of ethical operations.

As if the RBI's lackadaisical approach to this fiasco was not enough, yet another Cobrapost allegation has rubbed salt on the wounds. This time the allegation is that the three private sector banks were not alone in the money making gamble. Several other top PSU banks, other private sector banks and insurance behemoth LIC are all party to it. In fact the allegation names State Bank of India, Punjab National Bank, Bank of Baroda, Reliance Capital and Yes Bank amongst those guilty. The least we can say is that at this rate, not just investors but depositors too could start losing faith in their banks. The earlier the RBI takes a firm stand on this the better!

There are increasing signs that Europe is not completely out of the woods. Indeed, as per an article on Moneynews, the former deputy governor of the Bank of England is of the view that there are many problems still brewing at the surface. And yet the stock markets in the past many months have not reflected this. The reason behind this is Mario Draghi's assertion that come what may, the Euro will not be allowed to split up. And it is this dubious assurance that has prevented the financial markets from plunging. But the ground reality is entirely different. Fundamentals in Europe continue to deteriorate. The recent Cyprus crisis is the best example of this. Overall, unemployment continues to remain high. There is hardly any job creation and most of the debt reduction targets have been missed. Indeed, the only factor that is keeping markets together is the belief of an intervention by the ECB if things go wrong. And we believe this to be dangerous simply because the past has amply demonstrated stimulus measures to be highly ineffective.

In the meanwhile after opening the day on a flat note, Indian equity markets continued to trade close to the dotted line. At the time of writing, the Sensex was up by just 2 points (0.01%). Barring Japan and Korea, the other major Asian markets have closed the day on a positive note with China and Indonesia leading the gains in the region.

04:55  Today's investing mantra
"As in roulette, same is true of the stock trader, who will find that the expense of trading weights the dice heavily against him"- Benjamin Graham

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2 Responses to "The Oracle of Omaha's words of wisdom"


May 7, 2013

RBI's orders are not followed by Banks and other financial institutions and the only remedy is the corrupt should not only be penalised but put behind bars rpt put behind bars .Indians at high places have a tendency to break the law and get away from jail terms.

My view why stock prices do not go up when certain companies make good profit? Is there any manipulation by brokers ? Corruption is in rampant at all spheres and it is high time to punish top - from politicians to bankers.


Doraswamy Naidu

May 6, 2013

I do agree with buffett that "Investors should not get exited when others are exited in the stock market ".

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