You should never fall in love with your stocks - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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You should never fall in love with your stocks 

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In this issue:
» There will be more cheap money flooding the markets
» China far from being a service powerhouse
» How is shale gas impacting US oil companies?
» Why gold will not lose lustre anytime soon
» ...and more!


00:00
 
Warren Buffett once said, "You may have all these feelings about a stock, but a stock doesn't know you own it. It doesn't care what you paid for it." Buffett was echoing his mentor Ben Graham's critical advice to stock investors in his classic book 'The Intelligent Investor'. That investors should beware of emotions that corrode their investment discipline.

Bull markets tend to blind investors against the impending risks to their stocks. That rise in earnings may be temporary or due to an extraordinary income goes unnoticed. Plus heavy fixed cost obligations get camouflaged by robust profits. Risky exposures, complicated transaction between subsidiaries, contingent liabilities seem easy to be tackled. Company managements seem to be very capable irrespective of their ability to foresee challenges. Hence it is very natural for investors to fall in love with the stocks that have delivered the maximum returns for their portfolio.

But ask the man who has remained invested in the stock that made him the fourth richest in the world for 50 long years. Buffett will tell you that his love for Berkshire Hathaway does not stop him from being a devil's advocate. Having a room full of thousands of admirers is the norm for the Oracle of Omaha in Berkshire's annual AGMs. However, the legendary investor is still keen to know the reasons why an investor would want to avoid the stock.

Make no mistake. There is no change in the holding period for the stocks that Buffett considers ideal for Berkshire's portfolio. It is still 'forever'! However, that has not stopped him from checking if the virtues that attracted him to the stock hold true from time to time. In fact Buffett has continuously sold stake in rating agency Moody's since 2010. The conflict of interest in the business model of rating agencies no longer seemed good enough to the legendary investor.

Thus buying great stocks for a very long term is the ideal way to create wealth. However, that should not stop you from evaluating their credibility from time to time. If needed you should also consider replacing few of them once convinced that their credibility is permanently impaired. This is exactly the logic that we follow for our Value Investing portfolio.

Do you think it makes sense to play devil's advocate even for stocks bought for very long term? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
 
Lower interest rate is the last hope for policy makers in India hopeful of reviving the investment climate in the country. Low growth in bank credit is testimony to the fact that industries do not wish to spend on new capacities. Infrastructure investments have taken a back seat. With necessary reforms in the back burner and poor project completion rate, it is rather doubtful that cheaper credit will do any miracle. India's investment to GDP ratio, which so far has remained healthy at around 30%, may soon be over taken by several other emerging market peers.

Source: Economywatch


02:05
 
Do you know the one big picture event that financial markets are nervously looking forward to? Well, it's the announcement of the end of the quantitative easing by the US Fed and a subsequent hike in interest rates. And with US employment data coming better than expected, the buzz is only getting louder. Goldman Sachs, world's premier investment bank, has a different take on the issue though. The bank is of the view that it is not time yet for the US Fed to pull the rug from under the feet. This is because the target the Fed had set itself has a flaw in its measurement.

You see, the Fed had adopted a 6.5% unemployment rate as a threshold for the first hike in interest rates. However, the unemployment rate is looking lower than usual because of a shift in participation. In other words, a lot many people have moved out of the job market. Thus, while unemployment rate looks lower, it is still a drag on economy because inactivity has increased. This obviously means that US Fed will now have to come out with a revised rate that takes into account the issue of rate of participation of workforce. Alternatively, they will have to continue with their monetary easing well after the 6.5% threshold is breached. Either ways, the world is going to be flooded with more cheap money.

02:35
 
China has earned itself the reputation of being the world's manufacturing powerhouse. But when it comes to services sector, the country still has a lot of ground to cover. The current slowdown more than ever brings to fore this difference. Economic data released clearly points out that the manufacturing sector has slowed down. This does not augur well for an economy which largely relies on manufacturing and exports to drive growth. Had the services sector been strong, it would have been able to offset this. But that is not the case. As per an article in Businessweek, last year, services industries made up just 45% of GDP. This implies an upside of only four percentage points in the past decade. China is looking to increase this to 47% by 2015. But even that does not appear to be a sizeable number when compared to its peers. For emerging markets, on an average, the share of the tertiary sector is around 10 percentage points higher than that of China. For the US, services account for around 90% of the economy. All this only highlights the point that China still a lot of headway to make when it comes to establishing a robust services sector on par with that of manufacturing.

03:03
 
India's farmer population seems to have declined by 9 million since 2001. Currently the count stands at 119 million. Let's put it in another perspective. In 2001, farmers used to form nearly one-third of the country's working force. Today, this figure is believed to have come down to 25%. As per the International Business Times, there are a bunch of factors behind this. These include urbanization, drought situations, poor infrastructure and even farmer suicides. Having said that, the head count of the agricultural labor force (including those who do not own land) seems to have moved up by 27% from 2001.

This concern could possibly create a situation of acute food shortage over the long run. Which is why addressing the same at the earliest is important. While some may believe that much cannot be done with regards to urbanization, providing incentives to stay back within the sector is one way. But efforts towards the latter happening over the past few years - such as the farm loan waiver scheme - the farmer count continues to fall. Given the high inflation rates, it would tend to move the workforce out of the sector in search for better alternatives. On the other hand, there are reports of such sops not reaching the people who require them. We believe this is just another situation which seems to put the government in a difficult and self-created fix.

03:22
 
Oil has been a crucial commodity, and not just for meeting energy needs. The thirst of oil and its limited supplies in Middle East and few other regions has governed many key geopolitical events, and has led to even wars. However, if recent developments are anything to go by, the global energy landscape is likely to witness a gradual but crucial shift.

As per CNN Money, the US oil firms are selling their energy assets abroad and reinvesting in the domestic fields. The technology driven energy boom in US is shifting the global power balance in favor of US and away from OPEC. But it is not just technology. The reasons to shift operations go deeper. In most of the OPEC regions, the American companies have to part with around 90% of the profits made. In contrast, the business conditions in US are much viable. Further, the political stability and familiar terrain are the reasons that companies are finding hard to resist. However, the shift is not without drawbacks. The new drilling techniques fuelling the revolution are bad for environment. But with huge commercial interests at stake, we believe it is unlikely to stop the revolution.

04:00
 
Do you know which is the largest daylight robbery happening in the world? What if we tell you that the robbery has been happening right before everyone? Yet most are unaware of it... And most shockingly, it's happening legally!

An article in Market Watch explains how... We are living in a world where real interest rates (interest rates adjusted for inflation) are around minus 2%. On the other hand, per capita income growth is just about 1%. What does this 3% difference do? What happens when money supply increases at a much faster rate than economic growth? It leads to stagflation. Stagflation is a scenario where growth starts stagnating, while inflation remains high. In a near-zero interest rate environment, it transfers wealth from savers to borrowers. At a scale of more than US$ 2 trillion per annum, this indeed appears to be the biggest legal robbery ever in history.

This stagflation is still at a mild form right now. But going forward, it is likely to worsen in to a self-reinforcing pattern and lead to an inflationary crisis. We have said, time and again, that the response of central banks and government to the 2008 financial crisis has been extremely flawed. The money printing policies are building newer and bigger bubbles which will eventually lead to a full-blown crisis.

And as always, gold will come in as a handy insurance during such times of crisis. This is the reason why we recommend investors to park at least 5% of their investment portfolio in gold.

04:30
 
Buying interest in finance, pharma and auto stocks have kept the benchmark indices above the dotted line today. Backed by positive cues across Asian equity markets, the key indices in Indian equity markets have stayed in the positive territory for most of the session. The BSE Sensex was trading higher by around 59 points at the time of writing. Other major Asian markets closed in the positive while markets in Europe opened higher.

04:50  Today's investing mantra
"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses: How to Value a Business, and How to Think About Market Prices." - Warren Buffett

  • Warren Buffett - The Value Investor
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    3 Responses to "You should never fall in love with your stocks"

    Mukundn Sn

    May 10, 2013

    agree with the idea. En cashing stocks intermittently allows one to
    1. Book profit at some point before it goes down significantly
    2. It may not trend up for ever; things may change in future
    3. If it is under loss you may cut losses before it is too late
    4. Your return may be better if you efficiently enter and exit while the stocks trending

    See if yo stock is trending: Top 10 Nifty Stocks Trending Up or Down

    Like 

    Satish

    May 9, 2013

    Very well commented bro! That's the reason I hold the opinion that the order of money investments should be:
    1) 1st property
    1) Bank deposits
    2)Gold etf's
    3)2nd property
    3) mutual funds
    4) equity.

    Like 

    subir kumar das

    May 8, 2013

    When a man can't predict what will happen after 3 months then how one can foresee the approximate price of a stock after 3 years? When the country is controlled by " highly educated highly corrupted persons" how a man will think of long term investment with his hard earned money?

    Like 
      
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