These 'tips' will surely make you a successful investor
(Jul 15, 2015)
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In this issue:
» Four key areas that PSBs need to address
» Which banks lent more to debt ridden groups?
» ...and more!
Berkshire's shareholders' meetings as well as the publication of its annual report are some of the most anticipated events in the investing world. After all, this is where the legendary investor shares his nuggets of wisdom on the investments he has made and his thinking behind the same.
But this is not the only time he gets to showcase his advice. He has been popular with various graduating classes in the US as well. And over the years he has given his views on how to achieve success in life. Indeed, Time magazine ran an article on some of the best tips he has given to young people. But we are of the view that these apply not just for achieving success in life but in the investing world as well.
We thought it only made sense to list some of these here and why we think it works equally well when it comes to your investments as well.
Know your strengths and weaknesses: The basic idea for success in life is to identify your strengths and work towards focusing on things that you do well. In other words, it is not necessary that you must be an expert in each and everything. But you must make an attempt to know the areas where you are better than in the others.
What relevance does this idea have to the field of investing? Well, this is where Buffett's famous 'circle of competence' advice comes into play. Indeed, it is not required that an investor has to have great knowledge on each and every stock out there. The idea is to focus on businesses that are good and businesses that you can understand. So let's say that you are in a scenario where IT stocks are doing very well. If it is a sector that you do not understand, stay clear of it. Do not put your money into these stocks just because they are rising fast and are the next 'hot' tips.
Surround yourself with people you admire: It always a good idea to have a role model, someone whose values you admire and whom you wish to emulate. Buffett has always talked about how Benjamin Graham shaped up his ideas on investing. As an investor, you should certainly read a lot on successful investors and what has helped them generate wealth. But the trick is to not copy them blindly. Indeed, investors such as Warren Buffett, Benjamin Graham, Peter Lynch and the like have their own investing styles. More importantly, these are styles they have stuck to on a consistent basis. So it does not make sense to keep changing your investment criteria based on short term trends and then quote any of these investors to rationalize your decision.
Face down your fears: Life in general will throw up a lot of challenges and many of us are too afraid of facing them head on. In short we fear failure. But Buffett advises not to let fear stop you from doing things that you know will make you successful eventually. This is a dilemma that one faces in the investing world as well. One fears the prospect of losing money. And so when there is a meltdown in the markets, investors look to sell of their holdings when they should actually consider adding more of the same. It takes a lot of discipline to not get carried away by the general fear that grips markets during these times and stick with conviction to the stocks you hold.
Never ignore a great opportunity: In a commencement speech at Georgia State, Buffett said, "Big opportunities in life have to be seized." That applies to investing as well. The idea is to make a list of strong companies with great fundamentals and a sound management. However, all may not be available at attractive prices. But, should an opportunity arise where the stock price of a strong company has fallen for no good reason, it should certainly be looked upon as a great opportunity to buy it if the valuations are really attractive.
I and my ValuePro team certainly have a high regard for Buffett and his value investing style. And while we cannot invest in the same stocks that he has, there is no reason why his investment advice cannot be applied to stock markets in India.
Indeed, in the two ValuePro portfolios that we have created, we have a healthy mix of stocks that meet the stringent 'Buffett-would-buy' criteria. We have also made a list of stocks that we like but have not yet bought. But as soon as that big opportunity comes along, we will add it to our portfolios. So if this is something that interests you, why not take a look at our ValuePro service?
Do you have believe that the laws for success in life apply to the field of investing as well? Let us know your comments or share your views in the Equitymaster Club.
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The fact that public sector banks are in a mess is well known. Quite a few do not have stable managements at the helm. Their asset quality is worsening and their stocks have been beaten black and blue over time. As a result, most of the stocks are now trading well below their respective book values.
The banking system is believed to provide about half of the capital required by the commercial sector, from which PSBs have a share of about three-fourths; As such, it just gives a sense of how big the problem is and how worse it could get if quick measures are not taken to improve the scenario.
Writing in the Mint today, Usha Thorat, former deputy governor of the RBI, has identified four key areas that need attention. First - the need to improve governance in the PSBs; inductions of quality management along with them being given autonomy to run the show is required. Second - the need to curb the stress in debt burdened sectors such as power and steel. Aspects such as ensuring covenants of earlier restructuring and that banks should seek enhanced security coverage for their exposures to the sector. Such measures would give the right message to the corporate sector. To put things in perspective as to how serious the matter is - as mentioned by Mrs. Thorat - the Financial Stability Report by the RBI had identified loans (to the power sector; three years back itself) valued at Rs 550 bn that could turn into NPAs! Third - the need to bring in strong and quick measures to deal with recovery and resolution of stressed assets. She also suggested that bringing in a bankruptcy code is the need of the hour.
Final suggestion is that of pouring in more capital into the cash stressed banks. While the parameters to differentiate the good from the poor managed ones is being maintained, more information in the form of disclosures and supervisory oversight could help reduce the gap.
Mrs. Thorat, nevertheless, does not seem to be in favour of starving the poor performing banks of capital and rather believes that doing so could further weaken them. Capital can be infused with certain conditions, with focus on the good quality customers in the interim.
As we have written earlier, a way out of this rut is for the government to bring down stake - entirely or partly - in the poor performers and work towards improving their functioning overtime. After all, it would only be a bad idea to throw good money (taxpayers' money) after bad. While the government has lowered the budget for this purpose (as compared to the past), considering that PSBs have a lion's share of India's deposits and credit, the rest of the banking system will find it impossible to meet the funding requirements for the envisaged growth rates of the nation.
As Mrs. Thorat suggests - a sustainable but quick solution is certainly the need of the hour!
Continuing our discussion of poor quality loans, we came across an interesting short article in the Economic Times today, which discussed a report released by UBS on Indian banks exposure to certain debt heavy groups. Some of the groups discussed in the report included GMR, GVK, Jaypee and Lanco. The leading banks' exposure to these companies (in FY12 and FY15) has been showcased in today's chart of the day.
Which banks lent more to debt ridden groups?
*ICICI's exposure stood at Rs 169 bn, SBI's exposure stood at Rs 93 bn.
It may be noted that the management of Yes Bank has seemingly rubbished this report stating that some of the facts and figures are wrong; and that UBS has wrongly termed some of the bank's assets as 'stressed'.
We compiled the latest D/E ratio for the major companies of these groups. Please note that we only took the total of the long term and short term borrowings (and have not included the current maturity of debt) to calculate the D/E ratios of these firms. For GMR Infrastructure, the latest D/E ratio stood at stand at 5.3x, for GVK Power & Infrastructure at 11.6x, Jaiprakash Associates at 5.6x and Lanco Infratech, at negative 84 x. With the D/E ratio at such high levels, it does make us scratch our heads as to what these banks would have been thinking when they lent additional amounts to these firms; Especially considering that the total debt taken by these four companies totals to a whopping figure of about Rs 1.6 trillion!
Indian markets were trading well above the dotted line today. At the time of writing, the Sensex was trading higher by about 260 points, with gains being seen in stocks from the IT and auto spaces. Stocks from the consumer durables space were however trading weak. Both the midcap and smallcap indices also were trading firm today, with the S&P BSE Midcap and S&P BSE Smallcap indices up by about 0.2% and 0.5% respectively.
We don't have to be smarter than the rest; we have to be more disciplined than the rest." - Warren Buffett
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