Is this the most terrible reason to buy a stock? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is this the most terrible reason to buy a stock? 

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In this issue:
» Are FIIs doing a U-turn in India?
» India needs reforms: Obama
» Monsoon forecast has industry on tenterhooks
» Will the RBI take the sheen off gold?
» ...and more!

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Initial Public Offerings (IPOs) are the most hyped events in equity markets. Especially if it is the IPO of a well known brand, then investors go crazy. Such was the case with the social networking giant, Facebook. Investors were flocking in millions to line up for a piece of this company. Even before the final offer was announced, investment banks were giving a valuation in billions. The creme de creme of the investment world were all trying to assign their own valuation to the company. And each competing for a higher number. But there was one legendary investor who stayed away from it all. And that was none other than Warren Buffett.

To Buffett, most investors were looking at investing in the Facebook IPO just because they were hoping for listing gains. In his words, "You should not buy a farm just because you think you are going to sell it the next day for more money. That's a terrible reason to buy a stock." Judging by the way Facebook's stock has performed since IPO, Buffett seems to have proven himself right yet again. The stock is down by nearly 19% from its IPO price.

Though the Oracle of Omaha himself avoids technology stocks as they are outside his circle of competence, he has offered a valuable advice to its investors. His advice to the investors in Facebook remains an age old one. Invest only after studying the company's fundamentals. Only if you understand the company's business model, its revenue model and its fundamentals can you assign a value to the same. Once having assigned the value, the next step is to compare it to the market price. If it is available a t a discount to its intrinsic value, then the stock is a buy. Else it is an avoid.

The advice though simple is one of the most difficult one to follow. Especially when the hype and mania surrounding an IPO is at its peak. Like it was in the case of Facebook. Investors preferred to listen to the clever marketing chants of the investment bankers rather than doing their own homework. And look what happened. They ended up seeing their value erode. Therefore investors would do best to listen to Buffett and do their analysis prior to investing in anything. Be it listed stocks or IPOs. The methodology remains the same.

Do you agree with Buffett about avoiding Facebook's IPO? You can also share your comments with us or post your views on our Facebook page / Google+ page.

01:10  Chart of the day
There are news pieces nearly every day on how Foreign Institutional Investors (FIIs) are turning cautious on India. Most talk about how they are pulling money out or are planning to. In fact the figures for FII flows for the past three months seemed to reconfirm this fact. But after being in negative for three consecutive months ending June'2012, the FIIs seem to have made a U-turn in July. The FII flows turned positive in the recent month and stood at nearly US$ 1.3 bn for the period ended 13th July, 2012. There are just two things that such a turnaround could imply. One, that FIIs are again gaining confidence in India. This seems highly unlikely as there has not been much progress on reforms front or on the political front. The other case could be that Indian equity markets have fallen and as a result, FIIs are able to find bargains at better valuations. The latter seems more likely.

Source: Business Standard
* As on mid July 13, 2012

Never before has the Indian economy come under so much intense discussion and scrutiny. Some believe the Indian growth story is still on. Some others say the elephant has run out of steam. Whatever be the case, one thing is very certain. Nobody can afford to ignore India any more. Love it, or hate it, but you can't do without it. The Indian government's policy paralysis and slow reforms have been the topic of much criticism. Take the recent cover article of Time magazine that crowned Prime Minister Manmohan Singh as the underachiever of the year. Or more recently, the remarks from US President Barrack Obama. He seems to have said that India prohibits foreign investments in many sectors such as retail. As per him, India needs another "wave" of reforms to deal with the deteriorating investment climate.

It goes without saying that the US President's words cannot be taken at face value. He has his own axe to grind when he makes such a remark. But one thing is quite clear. The global economy looks at India as a very important market. If the business environment is cleared of the enormous inefficiencies, a lot of money would happily pour in.

Typically during this time of the year, what do you think has always been the biggest worry for India Inc? It is certainly the rains. And this year too it has been no different. Thus, the whole of industry is on tenterhooks and is keenly watching the progress of the monsoon as it enters a crucial phase this week. Needless to say that different sectors are trying to deal with the situation in their own unique ways. Thus, while the white goods sector plans to come up with new schemes, FMCG companies are trying to put a lid on price increase.

Then there is the automobile sector that is having a wait and watch approach. Banks too are in no mood to press the panic button and are of the view that it may be too early to take a call. Whatever may be the stance adopted by different sectors, one thing is clear that even after so many years, a prospect of poor monsoon still sent shivers down the spine of India Inc. We wonder whether this dependence will ever go away.

The June quarter results of HDFC Bank, an otherwise 'no surprises' entity, actually did show some interesting data points. No, neither the profit growth, nor the margins nor the asset quality deviated a bit from its decade long track record. But what was intriguing was the retail loan segment that was offering the fastest growth. Gold loans. although not a substantial proportion of retail loans, this segment grew by an astounding 103% in 1QFY13. Mind you, this was when the overall credit growth in the sector was in low teens! Even the Reserve Bank of India (RBI) has been critical over banks going overboard on vending gold coins. Both the speculation over gold prices and promotion of gold as an investment avenue irks the central bank. It has even put restrictions on banks' sale of gold coins. What makes the central bank nervous is the disproportionate burden imposed by the yellow metal on India's import bill. With a ballooning current account deficit and pressure on the rupee dollar rate, gold is seen as the prime culprit. Thus, although Indians' appetite for gold is unlikely to lose shine, the RBI would certainly make procuring the same difficult. We, however, do not think this would be an ideal solution to solving India's deficit problem.

As if the Europe debt crisis and the slowdown in economies are not enough, the last thing that anyone wants is corporate scandals. But these unfortunately have increased in recent times. The financial sector especially has bore the brunt of these scandals mushrooming. Some of these being unhealthy practices by bankers that led to the financial crisis, the recent Barclays Libor scandal and risky practices adopted by traders. India also witnessed the biggest corporate scam in the form of Satyam. Therefore in uncertain times such as these, the credibility of the management and the trust that one has in them becomes very important.

Equitymaster conducted a poll wherein we asked our readers to vote for the corporate group that they trust the most. The results were very interesting. The runaway winner was Tata Group, which garnered a whopping 62% of the votes. HDFC Group and Infosys trailed second but were still far behind, getting 9% votes each. It is indeed laudable that the Tata conglomerate being present in a variety of businesses has managed to earn the trust of its shareholders for each of the businesses that it operates in.

Both China and India are low cost destinations for products. Both nations employ their billion strong workforces in order to produce goods at competitive rates. But, while India sources a number of goods from China, the dragon nation seems to mainly import raw materials from India. India's trade deficit with China increased to almost US$ 40 bn in FY12 from just US$ 9.1 bn in FY07. This deficit may even soar to US$ 60 bn, if India doesn't try to improve the situation. The Indian commerce and industry ministry is desperately sending delegations to China every month in order to peddle more value added products to the nation. However, it may not be very easy to enter the Chinese market. It will take some time before India can bridge the wide gap. Plus it is not the only nation trying to enhance exports to China. A number of nations are trying to penetrate the market and try and reduce China's upper hand with regards to world trade. This makes India's task all the more challenging.

In the meanwhile, after opening the day in the green, the Indian equity markets have witnessed a choppy trading session. At the time of writing, Sensex was down by 1 point (0.01%). Among the stocks leading the losses were Tata Steel and Jindal Steel. Other major Asian stock markets have closed the day on a mixed note with China and Taiwan closing in red while markets in Hong Kong and Indonesia have closed in the green.

04:55  Today's investing mantra
"Value investing is at its core the marriage of a contrarian streak and a calculator." - Seth Klarman
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3 Responses to "Is this the most terrible reason to buy a stock?"

meenakshi pai

Jul 16, 2012

Small retail participants are getting chopped from all corner,Mutual fund,equity related invest plan,equity as an asset class too is not giving shocks,where do one small retail guy go?Last 5 years been terrible experience.I am personally very apprehensive & do not find any compelling reason to put my money in any where because end getting loosing i.g RIL index stock am loosing there as well.So I wont put any fresh money in any products equity,or mutual fund at the moment.


Gopinathan k

Jul 16, 2012

I am in full agreement with Buffet.He has proved his wisdom and maturity as only an experienced man can have.


vivek Raut

Jul 16, 2012

always we say Government should have host of reform. Instead why not corporate hve reforms? do we really have to pay high salaries in the country where educated class are available in ample. you can design a low cost product & sell to the world. India India MBA's are paid more then engineers. are system spend more to take additional education. instead keep system simple to produce low cost products. this is the only mantra to produce low cost product. instead of hiring MBA's, you can hire science or commerce gradute, train them in your training centre. this is applicable for all field.

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