Is your stock suffering from 'Shoe Button Complex'? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is your stock suffering from 'Shoe Button Complex'? 

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In this issue:
» Will Greece learn a lesson from history?
» Who are the ants and the grasshoppers in India?
» Will China's stimulus really work?
» Is this the 'Last Great Ponzi Scheme'?
» ...and more!

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Back in 1997, an Indian entrepreneur drew inspiration from Sam Walton's retail giant Wal-Mart and went on to build India's largest retail empire. Who is this man who laid the genesis of the retail revolution in India? It is none other than Mr Kishore Biyani, the Founder and Group CEO of Future Group. In fact, investors who were able to recognise the potential and invested early in the stock of Pantaloon Retail (India) Ltd saw their fortunes multiply several times.

The prospects of the retail chain seemed quite bright until Mr Biyani decided to plunge into several other businesses. Those ranging from launching an insurance company to selling mobile phone connections. As it turned out, not everything that he touched turned into gold. Moreover, in its haste to grow fast, Future Group accumulated a huge quantum of debt that became a drag on the core business. So much so that Mr Biyani recently agreed to sell out a controlling stake in his highly lucrative clothing business, Pantaloons, to the Aditya Birla Group. There are also rumours doing the rounds that he might even sell stake in Big Bazaar and another listed subsidiary Future Capital Holdings. Whether that happens or not is a different matter altogether. But the way things have unfolded certainly cannot be ignored.

Let us ask you. What is the root cause behind all this mess? In our view, the answer is the 'Shoe Button Complex'. In simple terms, the 'Shoe Button Complex' means that success in one area can give a person an illusion that he can be successful in other fields as well. Businesses often fall prey to this complex and end up burning their fingers. Do you now understand why Warren Buffett lays so much emphasis on staying within one's circle of competence? It is worth recalling that while the world rode the tech bubble of the 1990s with stocks soaring to incredible heights, Buffett stuck to his discipline. He did not invest a single penny into tech stocks. The result is that while he missed some big investment opportunities, he saved himself from the extreme losses that many suffered when the bubble burst. Even Wal-Mart, whom Mr Biyani mimicked so well always stuck to its core competency and did not enter unrelated businesses.

We believe investors have a very crucial lesson to take home. For one, stick to investing in businesses that you know and understand best. If you're putting your hard-earned money into something that you do not understand, you're simply speculating. We certainly don't think relying on chance luck is a good investment strategy. Secondly, invest in companies that operate within their circle of competence. If you sense that the management is pursuing diverse businesses purely for the sake of growth, be wary of such stocks.

According to you, should a company focus on what it knows best or should it pursue growth wherever it seems possible? Share your comments with us or post your views on our Facebook page / Google+ page.

01:42  Chart of the day
Of late, the public sector carrier Air India (AI) has been in the news for the wrong reasons from flight cancellations to staff strikes to debt problems to bailout with taxpayers' money. Finally, the government has acknowledged the failure of the merger of AI and Indian Airlines that took place in August 2007. It is worth noting that till financial year 2006-07, both the airlines were making profits. However, as today's chart of the day shows, the combined entity has been incurring massive losses over several years in a row.

Do you think the government was right in bailing out Air India? If not, then raise your voice and participate in our Ban Bailouts campaign. Remember every vote counts.

Data source: The Times of India
*Figures have been summed up for Air India and Indian Airlines from FY05 to FY07.
Figures from FY08 to FY12 pertain to the merged entity.
#provisional figure

Ratings downgrade have been done and dusted with. The government has been pulled down. Bankers have been criticised. Rioters have mauled the streets of Athens. But the Greek economy continues to find itself in the midst of a heated debate. Its exit from Eurozone has been a matter of speculation since the last two years! However, there is still very little consensus on this. After all, declaring the economy as bankrupt will have far-reaching consequences. One that will have its tremors felt in Germany as well. But Greece is not the first or isolated case of economic debt default. Argentina's default in 2002 is an example that it can follow.

In January 2002 the fixed 1:1 Peso-US dollar parity that had been in place for ten years was renounced. In a matter of days, the peso lost a large part of its value. Also, bank accounts denominated in US dollars were converted to Pesos at official rate. Foreign investment fled the country, and capital flow towards Argentina ceased almost completely. However, the Argentine government kept a firm stance. Finally, it got a deal in 2005 by which 76% of the defaulted bonds were exchanged by others. That too, at a much lower nominal value (25-35% of the original) and at longer terms.

In Greece's case, however, the government seems less resolved to bite the bullet. Unless it takes lessons from the past, it will put not just its own but the entire Eurozone's future at stake.

Everyone must have heard of the ant and the grasshopper story. While the grasshopper made merry while the sun was shining, the hardworking ant was wise to save food for the winter. Come winter, the grasshopper had no food to eat, while the ant could survive on its stores. Firstpost has a similar take on the Indian economy. Indians are notorious savers and always think twice before spending money akin to the ant in the story. The government on the other hand is like the grasshopper. But there is an ugly twist to this story. The ant is the one who is fighting for survival, while the grasshopper is laughing all the way to the bank. The Indian consumer is battling high inflation, a rapidly depreciating rupee and high interest rates. It is about time that the some accountability is built into the use of public money. Maybe a role reversal is needed where the government works hard like an ant, and the common man at least gets to enjoy the fruit of his labour.

As a slew of negative economy data hits the Chinese economy, its leaders have resorted to economic stimulus. The Chinese central bank has announced a 0.5% cut in the share of deposits that banks must hold in reserve. The move was well expected considering the disappointing economic indicators for the month of April 2012. The country is currently caught amidst one of the worst political crisis. In such times, a cut in reserve ratio may provide a quick fix solution. However, the real problem in China, well known as a backyard of global manufacturing, is a weak demand of Chinese goods. The liquidity easing move may keep the economy on its toes for some more time. However, it hardly offers a stable solution. The dragon fire is losing its sizzle as China's economic growth rate slips below comfort zone of 7.5%. In the backdrop of current issues, what this country needs is back up fiscal plan like Government investment and tax breaks to companies.

Despite the fact that the US is racked by massive debt, the US Treasuries continue to remain popular. This is more of a perception issue. Because there is so much instability in Europe, investors are flocking to the allegedly 'safe haven' of US Treasuries. This is expected to keep treasury yields suppressed for some more time. In the meanwhile, the government has not really succeeded in cutting down its deficit. Tax receipts dropped sharply after the end of the 2011 collections suggesting that the US economy has stagnated. Hence, running to cash in on US Treasuries is certainly fraught with dangers. No wonder Business Insider has termed the US Treasury Market as the Last Great Ponzi Scheme.

The Indian stock markets traded in a volatile manner throughout today's session. At the time of writing, BSE Sensex was down by 82 points (0.5%). Most of the sectoral indices were trading in the negative led by banking and power stocks. Barring Japan, all Asian stock markets too displayed negative sentiments. Europe opened the day in the red.

04:45  Today's Investing mantra
"No formula in finance tells you that the moat is 28 feet wide and 16 feet deep. That's what drives the academics crazy. They can compute standard deviations and betas, but they can't understand moats." - Warren Buffett

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    2 Responses to "Is your stock suffering from 'Shoe Button Complex'?"

    Adi Daruwalla

    May 18, 2012

    If Mr. Biyani was a smart observer, he would have seen the follies of Mr. Parvez Damania too, who had too many fingers in many pies. Mr. Biyani should have stuck to his core competencies of Pantaloons, retail and the Bare Classica brand that was a super hit in 1993, when Viv Richards et all were brought into advertising his product, thanks to your truly.


    sunilkumar tejwani

    May 14, 2012

    fingers in too many pies, result: burn your fingers. This is the best message for all listed and unlisted corporate entities. Stick to your core competency.

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