The ambitious investor's worst enemy - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The ambitious investor's worst enemy 

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In this issue:
» Tata Motors' first loss in eight years
» FDI into developing nations to rise 14% says World Bank
» A single lunch with Buffett costs US$ 2.1 m
» US may see 20% inflation going forward
» ...and more!

It has been a philosophy that two of the greatest minds in investing have lived by throughout their careers, but is nonetheless one that most investors continue to find very difficult to adopt fully. Benjamin Graham and his protégé Warren Buffett, two people who have created enormous wealth for themselves through investing, have repeated time and again, "There is no place for emotions in investing." But that's the very difficulty that millions of ambitious investors all over the world have found most difficult to surmount. Admittedly, Buffett once said, "Investing is simple but it's not easy." But that fact might just have a positive side to it. After all, you need atleast something to set the boys apart from the men.

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Continuing with the theme of keeping emotions aside, Buffett recently made some interesting comments on the current state of the US economy. He opined that the US economy continues to remain in shambles and said, "They (the US administration) are doing things, but they take a while to have an effect. You can't produce a baby in one month by getting nine women pregnant."

According to him, at these levels, the US stockmarkets continue to remain attractive with a ten year time horizon compared to other alternatives. One of his latest big sized coups has been that last September, his company Berkshire Hathaway bought US$ 5 bn of Goldman Sachs preferred stock carrying a 10% dividend, and along with that warrants to buy US$ 5 bn of common stock at US$ 115 per share. With Goldman's recent stock price of about US$ 145 per share, we can already picture Buffett sitting on his huge profit with a big smile on his face.

Zhao Danyang, a Hong Kong based hedge fund manager, recently put up US$ 2.11 m for a lunch with Buffett. That might seem like a very large sum indeed, but it may have been a small price to pay for this Buffett admirer considering that Buffett is the one whose strategy Zhao studied (as per his own admission) to make sense of the investing world. Zhao has said that his fund has had a 600% return over six years, and dedicates his success to none other than his esteemed lunch partner.

The developing nations have been hogging the limelight as of late due to their stronger resilience in coming out of the slump as compared to the developed nations. And what is more, the World Bank expects foreign direct investment (FDI) into developing nations to rise 14% to US$ 440 bn next year as a recovery all over the globe starts to take place. Amongst these developing nations, it will be BRICs at the forefront as they also move one notch up in making investments in each other.

BRICs, infact, are gradually emerging as a force to reckon with. Already they hold US$ 2.8 trillion in foreign currency reserves, which is around 41% of the world's total holdings. Besides FDI, equity inflows are also expected to surge next year.

However, all's not hunky dory. These countries too have considerable problems staring them in the face, which is probably being overlooked in this euphoria. We are talking about their burgeoning current account and fiscal deficits, which are expected to rise further as they resort to stimulating their respective economies. This problem will continue to be a major spoke in the wheel of the growth engine of the developing economies, including India.

Tata Motors, still struggling to gulp down its ambitious overseas acquisitions Jaguar and Land Rover (JLR), posted its first annual loss in eight years after sales at these luxury units plunged amid a global recession. The company, which is India's largest manufacturer of commercial vehicles, announced its consolidated results yesterday and as expected, financials were hit by the poor showing of its overseas subsidiary JLR. While it posted consolidated revenue of Rs 741 bn for the full year, it suffered a loss of Rs 25 bn at the bottomline level. It would be important to add that standalone net profits had stood at Rs 10 bn, meaning that JLR has proved to be a big drag on the company's performance.

These are indeed not good times to be an auto manufacturer. Everything that can go wrong with the industry has gone wrong over the past few quarters. But the key question for you the investor is – whether these times will leave a permanent imprint on the fortunes of the sector, or for that matter Tata Motors? We believe it's quite unlikely. This is given that the issue of interest rates, commodity prices and consumer demand that are affecting the company currently are mostly cyclical in nature. And hence, from a long term perspective, the growth story remains intact. In words, as India progresses, truckers will continue to buy commercial vehicles to transport even more goods, and people will continue to hop into cars to take themselves from point A to point B much faster and safer.

Savvy investor Marc Faber recently opined that the US will soon see inflation of about 10% to 20%, and that the US government is currently massively understating the country's inflation rate. Another startling fact that he threw light on was that since the creation of the Federal Reserve Bank in 1913, the dollar has lost 95% of its purchasing power.

"It took 100 years to lose 95% (but) I think the next 95% loss in purchasing power will happen very quickly" said Faber. In such volatile times, Faber thinks the safest place to invest is in equities or assets, even real estate.

After numerous reports of insiders selling a part of their holdings in their companies back here in India post the recent rally, executives of many companies in the US too seem to be up to something similar. As per a Bloomberg report, top executives at 252 companies in the US have unloaded shares since March 10th, with total sales reaching US$ 1.2 bn.

Insiders of Standard & Poor's 500 Index companies have been net sellers for 14 straight weeks now. The most intriguing question that would arise out of such a situation is that - does this imply that they do not expect their businesses to be able to support the current stock price levels?

Asian markets gained this week, led by stocks from the consumer goods, technology and financial sectors. This was seemingly on the back of a general optimism that the global economy is witnessing a rebound after last few quarters of extreme credit crunch that tipped the world's largest economies into recession. While the situation there – in developed economies like the US, the UK, Europe, and Japan – remains grim as consumer spending shows no sign of improving, government stimulus is likely showing some impact in the emerging markets of Asia. This week saw the key indices of Hong Kong, India, and China lead the pack of gainers while those in the US, UK, and France saw signs of weakness.

Todays market: Performance of world market
Source: Yahoo Finance

The interesting fact is that, although the prospects of emerging markets look very promising in the long term, these economies (including India's) remain very precarious and it's difficult to see how they hey are going to quickly fill this hole that has been created by the collapse in exports and weakness in domestic demand.

04:49  Weekend investing mantra
"The arithmetic makes it plain that inflation is a far more devastating tax than anything that has been enacted by our legislature. The inflation tax has a fantastic ability to simply consume capital. It makes no difference to a widow with her savings in a 5% passbook account whether she pays 100% income tax on her interest income during a period of zero inflation or pays no income taxes during years of 5% inflation. Either way, she is ‘taxed' in a manner that leaves her no real income whatsoever. She would find outrageous a 120% income tax but doesn't seem to notice that 5% inflation is the economic equivalent." - Warren Buffett
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2 Responses to "The ambitious investor's worst enemy"


Jul 14, 2009

comparison of inflation wrt income tax (5% vs 120 %) courtsey warren buffet is an eye opener. kudos and keep it up. regards- ukp


sachin pande

Jun 28, 2009

thanks for a nice round up. can u bring out some insight into the prospects on brimming tension on south korea and taliban and a possible nexus of the two.

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