Why Warren Buffett's papa knows best? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Why Warren Buffett's papa knows best? 

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In this issue:
» RBI once again proves its importance
» Why hedge fund managers are furious with Bernanke?
» Mark Mobius sees the silver lining in rupee depreciation
» Is the US suffering from a serious lack of ethics?
» ...and more!


00:00
 
Recently, we came across a rather lengthy and a very old article penned by Mr Buffett. Well, this is not Warren Buffett we are talking about. Instead, it is his erudite father Mr Howard Buffett. The topic under discussion was the yellow metal gold and the role it should play in an economy. However, before we proceed further, it will help to listen to Buffett Jr. i.e. Warren Buffett's views on gold.

We all know that Warren is not a particularly huge fan of gold. In fact, his views on gold seem to border on hatred. And this was further made evident last year when he launched a strong attack on the yellow metal and questioned its place as a potential investment. Governments determine the ultimate value of money, he asserted. Well, this was his first gaffe we believe. Governments can only go to the extent of deciding what will constitute fiat money we believe. The ultimate value of the same however is decided by the market. Its value of course will fluctuate based on what policymakers and politicians do to it. But they certainly cannot be the last word on determining its value.

Further down, he made another error we believe. He gave an example of Coca Cola and See's Candy and pointed out how these investments will remain superior to non-productive assets like gold and tulip bulbs. We are not sure why does he find things like gold and tulip bulbs of no value when values are extremely subjective. There will certainly be a lot of people out there that will find gold more valuable than a bottle of Coke or See's Candy.

Well, we will not scrutinize Warren Buffett's views on gold any further. Instead, we find that no one else has done a better job of refuting Warren's views on gold than his own father. Writing in his memo, Buffett Sr. announced that paper money systems have always wound up with collapse and economic chaos. And therefore people should fight tooth and nail for the restoration of honest money for which there could be no better alternative than gold.

We wonder whether Buffett Jr. would participate in any such fight. For he's easily one of the biggest beneficiaries of the paper money system as he operated in markets during its most advantageous period. The period when there was no gold standard. This is perhaps the reason he has not been able to see the virtues of gold the way his father was able to. This despite the fact that over the last 10 years, the yellow metal has handily beaten Berkshire Hathaway. We suffer from no such bias we believe and hence, advocate gold as a must have in one's portfolio.

Do you agree with Buffett Sr. or Buffett Jr. when it comes to the value of gold? Please share your comments or post them on our Facebook page / Google+ page

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01:29  Chart of the day
 
If today's chart of the day is any indication, it doesn't look like we are going to run out of oil any time soon. For the current proved reserves of oil would be sufficient to meet 53 years of global oil production. What more, just 48% of that rests with the Middle East as opposed to 64% a decade ago. Much of this share has been lost to Central and South America whose share has gone up from 8% to around 20%. Global proved reserves have increased by 26% or nearly 350 billion barrels, over the past decade.

Source: BP Statistical Review 2013


01:59
 
What is the biggest strength of a hedge fund manager? Generally speaking, it is his ability to gauge the overall economic dynamics and how market forces impact various assets. But what if the economic paradigm itself begins to change? What if the market forces are not allowed to play out freely? In such a case, the hedge fund manager's competitive advantage is at risk. All his understanding of economics and markets starts falling flat.

We came across a very intriguing article in the Business Insider that highlights exactly this case. American hedge fund manager Stan Druckenmiller made a very candid confession when he was asked whether investing had become difficult in recent years. He said that his expertise has been economic forecasting. But that requires a free market system. But excessive intervention of the US Fed has completely distorted the market. Excessive money printing and near-zero interest rates have pushed investors into buying high risk assets. This, in turn, impacts prices of other assets too. And the worst thing, the economic fundamentals do not support this at all.

In such a scenario, investing tends to become very difficult. Asset prices are no more governed by market forces. They follow the whims of a certain Mr Bernanke. And this is what has driven hedge fund managers furious. The success of the US economy has been built on the free enterprise system. And now, it seems the US is killing that same mechanism. A very big worry we believe.

02:45
 
With Federal Reserve giving indications to pull the QE plug, most emerging markets took a beating recently. And India was no exception. Concerns over dwindling growth and rising inflation also worried the markets. Policy and sovereign risks further added fuel to fire. So, is it time to bid India good bye and look for pockets of opportunities in other emerging baskets?

Well, as per investment guru, Mark Mobius, the answer is no. With developed world growing at 1% he still sees opportunities in emerging markets, especially India. He feels that the markets are likely to recover from here on and more importantly we are still in a bull market. However, he feels that the recovery from the current fall will be a long drawn process.

He also has an interesting view on rupee. While the recent rupee depreciation created headlines for all the ill effects a depreciating currency can have on the economy, he senses an opportunity here. Weak rupee is beneficial to foreign investors as it encourages more investments provided they see value in India. This is one positive side of the recent fall in rupee. Obviously, it should also boost exports.

All in all, Mark Mobius still feels that India growth story is intact. However, the biggest risk to Asian equities stems from the slowdown in Chinese economy. If China slows, the entire Asian pack might slow as China is a huge export market for most Asian countries.

03:29
 
This is not the first time we are lauding the Reserve Bank of India (RBI) for calling a spade a spade. The central bank has hardly minced words with regard to economic concerns. Whether or not there is a monetary policy review. Most importantly, India has been lucky that its central bank has been headed by governors who are conservative yet assertive. Never to bow down to political or peer pressure has been the mantra at Mint road. Hence we were not surprised when yet again the policy review note yesterday focused on correcting economic imbalances.

Instead of playing to the gallery by cutting interest rates, the RBI chose to invite criticism for not stimulating growth. That only a durable receding of inflation will offer it some comfort shows the RBI's long term focus. Moreover, the problem with regard to current account deficit (CAD) is not for the RBI alone to resolve. The global uncertainly, shift in risk perception and withdrawal of foreign capital are the RBI's key concerns. It would now be prudent for India Inc to stop relying on the possibility of lower rates. They should instead pressurize the government for more meaningful reforms.

04:05
 
The US economy is still reeling from the crisis. But the question is who is responsible for the mess that the country is in. Author Jordan Mamorsky has blamed the 'holistic lapse of ethics' for the mess that the developed world in general and the US in particular are in. In his latest book titled 'The End of Ethics' the author has stated that the US morphed into crony capitalism. In a lot of ways he is right. The banks that were responsible for the crisis in the first place are still around. And continuing to work with complex financial products that lest we forget, were the root cause for the crisis. Regulators are still allowing these banks and financial institutions to continue working the way they did. And in essence they are still manipulating the markets the way they did before the crisis.

The worst are the credit rating agencies. They were the ones who had given high credit ratings to low category offerings. But have they been punished for causing the problems? Not really. They still continue to assign random ratings and no one is saying anything to them. So what has changed since the crisis? It is the general state of affairs. The global economy is depressed. Countries are going bankrupt. Business confidence is sinking. And what are the countries like US doing about it? Nothing! They are too busy printing money to think of anything else.

04:49
 
Meanwhile, indices in the Indian stock markets traded lacklustre today with the BSE-Sensex lower by around 35 points at the time of writing. Banks and consumer durables were under the maximum pressure. While Asian stocks closed mostly higher today, Europe had also opened on a positive note.

04:56  Today's investing mantra
"It just seems logical that sticking to investing in only a small number of companies that you understand well, rather than moving down the list to your thirtieth or fiftieth favorite pick, would create a much greater potential to earn above-average investment returns." - Joel Greenblatt
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5 Responses to "Why Warren Buffett's papa knows best?"

Hasit Hemani

Jun 21, 2013

Gold is an absolute money, everything else is relative and secondary.Investors will always gain in long terms.There may be a temporary short term setback in market value but he is more safe than in anything else.

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Equitymaster

Jun 20, 2013

Dear Sir Thank you for writing in to Equitymaster. Neither is it true that we have 150 stocks in open position, nor we we expect investors to buy every stock that we recommend. We also recommend that investors should ideally have not more than 15-20 stocks in their portfolio as per our suggested Asset Allocation. Please do keep sending in your suggestions and feedback. Warm regards. Team Equitymaster

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SIVARAMAKRISHNAN

Jun 19, 2013

Gold as a natural resource does not lose its pristine beauty and it is zero maintenance permanently whereas Paper Money as an artificial source needs replenishment and its frequent maintenance leads to temporary beauty and solution but will ultimately collapse.

Like (1)

Pramod Phadke

Jun 18, 2013

Today's Investment Mantra says one should invest in a small number of companies. What number is small?
So far, Equitymaster has recommended about 200 companies. At least 150 of them are in "Open" position.
Isn't this somewhat contradictary or ironic?

Like (1)

Nadir Godrej

Jun 18, 2013

Once again you are succumbing to knee jerk monetarism. The RBi has blundered by not reducing interest rates. Growth has collapsed. High interest rates can't reduce inflation in India. Indian inflation is caused by commodity prices and not wages or demand factors. The weak Rupee causes inflation. We need low interstate rates which cause growth which leads to foreign investment and a strong Rupee. The RBI is stupidly doing the opposite and causing inflation. You are supporting them. Can you deny that Indian inflation is almost entirely due to commodity prices? Look at facts and change your stance befor the Induan economy is completely destroyed.

Like (1)
  
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