You should invest actively only if.... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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You should invest actively only if.... 

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In this issue:
» Qualities required for active investing
» What causes hyperinflation?
» Jim Rogers on what could lead to a World War III
» Unilever CEO's take on the current economic environment
» ...and more!


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00:00
 
It is not every day that Warren Buffett strongly endorses a book. And if that book is based on investing, you can be almost certain that the author of the book comes equipped with great credentials. Howard Marks is certainly one such gentleman we believe. Founder and Chairman of the famous US based asset management firm Oaktree Capital, Marks has had a fantastic track record as an investor. Equally fantastic are his memos to his clients in which he shares his investment insights and principles.

So, what is Marks' latest memo all about? Well, it contains a very important lesson for investors. Marks argue that the academic theory that vast majority of investors cannot beat the market is certainly correct. But this is not because all assets are valued fairly at all times. Rather, as per Mark, mispricings occur all the time. However, an average investor is not able to take advantage of these mispricings because of his own shortcomings. He himself swings wildly from optimism to pessimism and from over confidence to being terrified. These tendencies make it impossible for him to spot pricing errors. Thus, as per Marks, an investor should practice active investing only if he is convinced that pricing mistakes occur in the market and he is capable of identifying those mistakes and taking advantage of them.

Herein lies one of the biggest investment lessons we believe. The theoretical world assumes that investors are precise and quite clinical in their valuation of assets. However, in reality, that is certainly not the case. On account of a variety of reasons just mentioned, assets can be wrongly priced. Thus, superior investment returns belong to those investors who consistently take advantage of these mispricings. Thus, the key to active investing is being an investor who profits from others' mistakes and commits as few as possible himself.

Do you think asset mispricings keep happening every now and then? Share your views or you can also comment on our Facebook page / Google+ page.

01:09  Chart of the day
 
India may be losing favour with the international investor community. But if today's chart of the day is any indication, it is certainly not as bleak as it sounds. As the chart highlights, India has emerged as the fifth most attractive emerging market for retail investment. Although it has slipped one place in the rankings as compared to 2011, it is still an encouraging sign for an economy looking to shore up its image. Also interesting to note is that the BRIC group of nations still continue to tempt retailers and are showing no signs of slowing down.

Source: A T Kearney

01:41
 
Eurozone is in a bad shape. Their remedy for their troubles appears to be bailouts. After giving numerous bailouts to Greece, and still continuing with it, they handed a lifeline to Spain. The leaders do not seem to be able to think beyond a few years. And as per legendary investor, Jim Rogers, this attitude of bailing out troubled nations will eventually lead to another World War.

Referring to Europe's past ways of handling crisis, he cited that this is how World War II started. And if governments continue to bailout the wrongdoers, then another war is inevitable. The government would lose their credibility. The economies would continue to spiral downwards. And eventually all hell would break loose. Well, we could not agree more with Mr Rogers. Bailouts and other such options are just short term reliefs. In the long term the only solution is to repay debt. Or declare bankruptcy and start on a clean slate. But obviously such measures are labelled as drastic by any and every government.

02:16
 
Inflation has been gradually creeping around the world due to a variety of reasons. These range from loose government monetary policies to supply bottlenecks creating shortages. But what about hyperinflation? When does inflation get out of control and become hyperinflation? Hyperinflation is defined as an inflation rate of 50% or more in a single month. What differentiates it from inflation is the root cause. Hyperinflation is solely caused by excessive money supply. Debts and deficits reach unsustainable levels. And governments resort to cover expenses through more and more money printing. The value of the currency falls and people lose confidence in the currency. And for a currency to carry weight as well as purchasing power, confidence of people in it is the key.

The hyperinflation in Germany is a classic case in point. From January 1919 until November 1923, the average price level increased by a factor of 20 bn, doubling every 28 hours. The more troubling fact is that hyperinflation is not necessarily a rare event. Since Germany, there have been 29 additional hyperinflations around the world. This is where gold comes in. When confidence in a currency is lost, there is a scramble for hard assets having value. Gold fits the bill nicely. For instance, during the German hyperinflation, an ounce of gold traded for 170 marks in January 1919. That same ounce was worth 87 trillion marks by November 1923. Thus, it goes without saying that gold is a big hedge against inflation. And one must accumulate more of it in today's environment where governments in the developed world are resorting to excessive money printing.

03:12
 
Don't rob Peter to pay Paul! This was the strong message that Unilever CEO Mr Paul Polman perhaps wanted to convey when he said "The very essence of capitalism is under threat as business is now seen as a personal wealth accumulator". And we could not agree more. The same seems to be happening in the Indian political arena. The Indian government is on a social welfare scheme announcement spree without knowing from where all these would be funded. Costly schemes such as Food Security Bill and an ambitious policy to provide free medicines to all patients attending a government health facility are some of the new additions. The fiscal deficit is in a very poor state due to already existing subsidies and welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Act (NREGA).

According to Mr Polman, the political climate is very difficult and to some extent paralyzed. He adds that politicians these days lack ambition. And this is so true in the light of current political situation in India. We have already talked about policy paralysis umpteen numbers of times. If not-so-conducive environment for investments prevails and in turn growth slows, no amount of rupee printing would work. After all, you cannot rob Peter forever. It is time to promote wealth creation again.

03:57
 
It was a mixed week for the world stock markets. While most of them closed on a flattish note Japan was the highest gainer during the week. However, markets in US, Hong Kong, China and Brazil closed on a negative note. The US stock markets were down 1% during the week. Declining home sales and rise in jobless claims overweighed markets. Even the factory output contracted affecting the risk appetite of investors in US.

The Indian equity markets ended the week on a flattish note. The Sensex regained 17,000 levels during the week but could not sustain the momentum. Reserve Bank of India's stance of maintaining status quo with respect to policy rates surprised India Inc. Keeping the rates intact was a big disappointment for the markets. Also, Fitch downgraded India during the week amidst slowdown in economic growth. This also had a sentimental impact on the markets. Further, it may be noted that Rupee hit a record low of 57 to the US dollar during the week due to weakness in domestic shares and dollar buying.

Amongst the other world markets, UK and Singapore were up by 0.6% each during the week. However, Hong Kong and China were down by 1.2% and 2% respectively.

Source: Cnnfn, kitco, yahoo finance


04:51  Weekend investing mantra
"The power of value investing flies in the face of anything taught in academics. Value is the way stocks are eventually priced. It requires the perspective of patience because the market will eventually gravitate toward value." - Joel Greenblatt
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1 Responses to "You should invest actively only if...."

shome suvra

Jun 23, 2012

To identify mispricing calculation of fair value of share is very important. Speculation is good for market but reckless speculation can trigger mispricing.

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