Is the durability of your stock portfolio 'Made in Japan'? - The 5 Minute WrapUp by Equitymaster
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Is the durability of your stock portfolio 'Made in Japan'?

May 28, 2015

In this issue:
» India fails to meet global hunger reduction targets?
» Domestic demand for Indian equities likely to shoot up
» A round up on markets..
» ...and more!

As a kid growing up in the 80s and early 90s, I vividly recall people's admiration for anything that had the words 'Made in Japan' written on it. In fact, the joke used to be that try throwing anything manufactured in Japan from the 10th floor of a building. The chances were that it would still work alright.

Of course this was an exaggeration. But it simply goes to show the kind of faith people had for goods shipped out of the land of rising sun. And as far as even I can tell, I rarely came across a Japanese product that broke down or started acting up before completing something like 8-10 years in service.

Given this track record, it is natural for one to think that the Japanese came into this world with an extra gene for 'quality consciousness'. But this belief is on shaky grounds. As a matter of fact, just before this whole quality revolution came to life, Japan was pretty much the world's whipping boy when it came to manufacturing quality products. Its exports were shoddy and its goods shunned by international markets.

Then something changed. There was metamorphosis. A metamorphosis so huge that it catapulted the country's economy and at one point in time was seen as giving the US economy a run for its money. Slowly but steadily, the word Japan became synonymous with the word 'quality'.

Now, as a management student, I had a small exposure to the quality revolution in Japan in the form of a subject, if I recall it correctly, known as Productivity Techniques. Trust me it was a subject tailor made for 'mugging up'. Simply because all we got in the form of techniques were large lists made up of different quality checks and tasks to be performed. These lists, our professor proudly claimed, were pretty much at the heart of the transformation that the Japanese manufacturing underwent.

It was unclear to me whether this was indeed the case or the professor was just trying to talk his book. How can something so transformational have its roots in something as primitive and ordinary as a checklist?

Unfortunately, I did not mull over this in detail. The mystery never got resolved. Then, a few years back, I happened to read an article by a noted investor Mohnish Pabrai who had developed an investment process he believed vastly reduced his stock picking errors. And what did he call this process? Well, he termed it his own 'Investment Checklist'!

Pabrai's checklist was nothing but a systematic deconstruction of all the mistakes he had made in his investing career. Not just that. His hundred or so checkboxes also contained the mistakes made by some of the greatest minds of investing, Buffett included.

And what does he do with this checklist? Well, every time he studies an investment proposal, he runs it through all the items on his checklist. He wants to ensure that in his excitement to invest, he is not missing anything important that could later lead to disastrous consequences. Pabrai is of the view that a lot of investment errors including those of geniuses like Buffett, stem from mistakes that look plain silly in hindsight. In other words, Pabrai feels that having checklists stops investors from getting into tunnel thinking mode and helps evaluate a stock from all angles possible.

Pabrai however did not get the checklist idea from the Japanese quality revolution. He instead got inspired by it after reading about a famous surgeon whose simple five point checklist led to the saving of more than 1,500 lives and nearly US$ 200 m across US hospitals.

Now, this really got me thinking. The humble checklist proved mighty effective not just in manufacturing but in health care and then in investing also which I believe is a far less scientific endeavour. And as I kept digging up for more information, I was shocked to know the kind of positive influence it was having everywhere it was being put to use. Surprisingly, at a lot of places, people didn't even know that what they were effectively doing to avert disasters was nothing but resorting to simple checklists.

You see, the technological advancements that we have made over the centuries are nothing short of breathtaking. The things we use and rely on have gotten more and more complex. However, our brains are not much different from our first ever ancestors that roamed the earth.

Consequently, we can leave very few things to memory. A small mis-step here and there, and there could be hell to pay. The good news is that something as simple as checklist can help us navigate quite effectively in this complex world. Checklists are what we believe the perfect antidotes to the follies of our brains. So, if you haven't started yet, you better get cracking on developing your own investment checklist. There's little doubt in our minds it can do wonders to your investment returns.

Do you think having a checklist and improvising on it all the time will make someone a much better investor? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
We recently came across a set of statistics that casts a shadow over the much touted 'acche din ' for the Indian economy. As per an article in Livemint, India is home to one fourths of the world's hungry. As far as record of hunger reduction is concerned, the data looks even more grim. India ranks lowest on the metric of hunger reduction, with a decline of just 36% (since 1990-92) in the share of under nourished population. This compares to a decline of 41.6% the world over and a decline of 44.5% in the developing regions. With such dismal statistics, it fails to meet global targets on hunger reduction and lags behind regions such as Bangladesh and China. The latter have brought down the proportion of hungry people by 50% over this period.

This shocking data raises a very important question in our mind regarding the relevance of statistics on GDP. While we as a nation are obsessed with GDP growth numbers, there is hardly any parameter that reflects the equality and quality of this growth. No wonder India is not even in the top 20 when it comes to ranking on GDP per capita which is a more relevant data to assess the living standard of the average Indian. Despite being one of the fastest growing economies that has surpassed even China, there is a lot that India needs to do about the inclusivity aspect of growth.

India ranks poor on hunger reduction parameter
Data source: State of Food Insecurity in the World report, 2015, *Developing regions

Among the many things that mark the reign of Mr. Modi, a revival in the stock markets and comeback of retail investors is something that deserves a mention. Even though we are yet to witness a turn around at the ground level, the sentiments are running ahead of fundamentals. That said, being home to the youngest population in the world, households seem quite underexposed to this class of investments that offers high returns and high risks. As per an article in The Hindu Business Line, domestic households hold around US$ 1.1 trillion in fixed deposits and huge investments in gold. In comparison, exposure to equities at US$ 0.4 trillion, direct and through mutual funds and institutions looks pale. Especially considering the fact that returns in fixed deposit have barely been enough to take care of increase in inflation in the past.

Among the many factors that have led to retail investors' underparticipation, lack of investor education, financial scams and lack of investor friendly environment are the key ones to blame. To ensure higher participation, the regulator needs to work on corporate governance standards and regulations that will boost the confidence of retail participants. There indeed have been some positive changes in this regard. Will this lead to higher participation of retail investors?

As per a report by Morgan Stanley , with the improvement in qualitative environment, the domestic flow in equity markets over next decade is set to touch US$ 300 bn. This compares to investments worth US$ 50 bn and US$ 134 bn in equities by households and FIIs respectively in last decade. While we do consider equity markets a great opportunity to enhance returns, we suggest investors to keep an eye of the quality of stocks and asset allocation limits while investing.

Indian markets lost initial gains and slipped into the red in the afternoon session. At the time of writing, the Sensex was trading lower by about 142 points. Barring oil and gas, consumer durables and IT, all sectoral indices were trading weak with stocks in the healthcare and banking sector leading the losses. The midcap and smallcap indices were also trading in the red, down 0.6% and 0.2% respectively.

 Today's investing mantra
"It is more important to say "no" to an opportunity, than to say "yes". - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Rahul Shah and Richa Agarwal.

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2 Responses to "Is the durability of your stock portfolio 'Made in Japan'?"


May 29, 2015

It is a bit tricky. It is not physical checklist that helps. The content in the checklist that is what are the items that are to be included in the checklist are more important. Similarly what is the weight-age for each of the checklist item. I am going to have my own checklist, but how to know it include all of the required and deciding factors??
Definite thought provoking article.Thanks


Prakash Basrur

May 28, 2015

Importance of a "Check List" is , no doubt , very high despite technology ( be it mechanical like in a pharma or food plant or the using computers in refineries and auto-making robotics ). What about the Germans ? Did they use check lists like the Japs ? The bottom line is the genetic characteristic of both Japanese and the Germans for perfection and sincerity ! For our "Make In India" do we have those in us ? Will "Brand India" be accepted by our own population ?

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