Do you have this unique investing talent? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Do you have this unique investing talent? 

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In this issue:
» Is China in big trouble?
» Huge healthcare overhaul on the cards in India
» Higgs Boson a victory for human spirit and endeavour
» US in a far worse position than Greece
» ...and more!

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Sometime back in 2005, one of the world's leading financial firms made a sincere effort in trying to understand the decision making of its top rung of leaders. Accordingly, a group of experts were hired to teach about 50 odd top executives how to make better decisions. Trust us, the list of experts read like the creme-de-la-creme of the field of decision making. The timing of the seminar wouldn't have been better we believe. It was a period when the entire financial system was intoxicated with the idea of cheap lending. A crisis of gargantuan proportion was just waiting to happen. Thus, what better time than to equip oneself with few of the best tools of decision making out there?

If you too, like us, are thinking that the firm under question managed to escape the financial crisis, let us tell you that you are completely wrong. Infact, it turned out to be one of its biggest casualties. We are indeed referring to the now infamous collapse of Lehman Brothers. It is really ironical that the very same executives who perhaps took the most cutting edge course in decision making, made few of the worst decisions in the history of financial markets.

Events like this and a multitude of others have prompted researchers to go into the heart of why time and again, people become so short sighted and heap such havoc with their decision making. The answer has been laid out in an interesting article published by the Financial Times recently. It argues that human beings essentially have two levels of thinking, one intuitive and one analytical. There are some decisions that are best left to our intuitive mind. But there are others where the analytical mind plays a more important role. However, as the Lehman example clearly shows, using one in place of the other can lead to disastrous consequences.

Any guesses which system works the best when it comes to investment decisions? It is indeed the analytical mind we believe. Little wonder the Oracle of Omaha has often been heard saying that he is willing to wait an 'indefinite' amount of time before he pulls the trigger on a stock.

Make no mistake; the world has indeed become a fast paced one with the speed only likely to improve as time goes by. Thus, there will be a strong urge to take fast, intuitive decisions in all walks of life. However, at least in investing, if we are to give one word of wisdom to navigate this fast paced world, we think that word would be 'Wait'.

Do you think you wait enough before you invest in stocks? Share your views with us or you can also comment on our Facebook page / Google+ page.

01:25  Chart of the day
Today's chart highlights how low the woman representation is on the corporate boards of Indian firms, especially in comparison to Europe and US. As the chart shows, women contribute only 5% of the total strength of corporate boards in India, a marked difference from the 35% figure in Norway and 15% in US. This is not all. India is among the bottom three in Asia in terms of women's representation (three per cent) in executive committees. Clearly steps need to be taken to remove this anomaly.

Source: Business Standard

Is it a choice of the best amongst the worst? It certainly is. Asked to pick the best economy amongst developed markets, one certainly is not spoilt for choice today. Each one has problems of such enormous proportions that one would prefer to stay light years away from them. But the woes of these economies are not reflected well in the dynamics of their currencies. At least not in the case of the greenback. Of late, the US dollar has strengthened against quite a few major currencies. But the gain is more to do with weakening economic prospects in other economies.

According to an article on Firstpost, the US dollar's strength has nothing really to do with better prospects of the American economy. Its rise against the rupee, for instance is out of investor concerns about India's fiscal deficit. But the fact remains that fundamentally, the US economy is in a far worse position than Greece. US' deficit to GDP ratio, based on GAAP accounting, at 30% is 4 times the Eurozone deficit of 7%! The unfunded liabilities of the US economy are claimed to be beyond the realm of anything that can be realistically serviced. These observations underline a very important takeaway. That investors cannot get swayed by temporary market movements. Going by Mr. Market's opinions could prove to be disastrous.

The domestic pharma market is once again set for a major change. The Indian government has put in place a US$ 5.4 bn policy to provide free medicine to its people. The idea is to make medicines accessible to the poorer sections of the society especially since 40% of the people live below the poverty line. Hence, this spells good news for the Indian population. But MNC pharma companies in India stand to lose the most. The government in the past had been keeping a hawk's eye on medicine prices. The argument for imposing price control on drugs was to make them accessible to all, something that MNC companies especially opposed.

This new policy is set to ensure that government clinics and state run hospitals prescribe free generic drugs. Doctors not doing so will be punished. From what it appears, private clinics and hospitals do not fall under this ambit and will be able to prescribe branded medicines. This development will certainly cause MNC companies to re-think their strategies in emerging markets. Indeed, with R&D pipelines drying up, most of these global companies in recent times were banking on emerging markets to provide the much needed boost.

When you start building buildings and houses like crazy, one thing is bound to happen. At some point of time or the other, either you will run out of cash or the buyers to buy these houses. If the latter happens, there is just one step that you can take. Take a break for things to cool down before you start building again. But what happens when you get hit by a bit of both, i.e., you do not have that much cash and demand has slowed down? This is exactly what seems to have happened with China. The country had put its heart and soul into building infrastructure. Construction was in full bloom till recent times and this led to a party time for all sectors that were linked to construction. Commodities and all other asset classes and companies which derived their bread and butter from construction saw a period of good times.

But as China has started dishing out poorer manufacturing numbers, these companies and asset classes have started seeing a slowdown as well. Unfortunately considering its shaky financial system, it is doubtful that construction activity in China would go back to the same levels of frenzy as we saw earlier. And unless it picks up, the other sectors that are dependent on the construction activity would not see a pick up either. In short, the country has effectively built its way into a path of slowdown. Unless it reforms its financial system, it is doubtful it would be able to come out of it anytime soon.

Ever since the break out of the 2008 financial crisis, the world economy is going through a paradigm shift. Such times are usually marked by extended turbulence and change in the economic order. The story on the political front is also not very different. Several nations that have long been suppressed by autocratic rulers are now raising their voice in favour of democracy. But that's not all. In fact, even the scientific realm seems to be witnessing a quantum leap. The news media are abuzz with stories about the scientific discovery of the Higgs boson particle, more commonly referred to as the 'God particle'. The nickname comes from the belief that the particle is a vital building block that led to the formation of the universe. The latest discovery is likely to answer several riddles about the universe that have so far been unknown to us.

Though we are not experts on quantum physics, there is something very telling about this entire episode. For one, it reaffirms the genius of the human spirit and its unrelenting quest for knowledge. It is indeed our ability to innovate and adapt that has helped us survive and develop over the long course of history. For eternal pessimists and doomsayers, this is a great lesson. Though there may be challenges from time to time, we must believe in our redemptive power. If the human species were a listed stock, we're sure Warren Buffett would have loved to scoop up a significant stake.

Meanwhile, indices in the equity market in India have been hovering around the breakeven line right from the start today. The Sensex was trading higher by mere 21 points at the time of writing. Heavyweights like ITC and Reliance Industries Ltd were seen driving majority of the gains. Asian markets closed mixed today with Europe too showing a similar trend currently.

04:57  Today's investing mantra
"Loss avoidance must be the cornerstone of your investment philosophy" - Seth Klarman
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