Is your job killing your investments?
(Jul 20, 2015)
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In this issue:
» Poor monsoons to create farm loan bubble?
» No respite for coal sector?
» Round up on the markets
» ...and more!
One of the most nagging thoughts I have most of the time is - What is it that makes some investors so successful? And what is it that stops most people from replicating that kind of success?
Well, you can have many varied answers and explanations to these questions. But if I have to identify one defining behavioral factor that in my view hits the bull's eye then this is what it is - What differentiates a great investor from the average run-of-the-mill investor is an entrepreneurial mindset.
Entrepreneurial versus Employee Mindset
If you are a typical employee, you have, more or less, a predefined job profile. You are responsible only for the work assigned to you. You probably have fixed working hours. Most importantly, a paycheck gets credited to your bank account at the end of every month irrespective of how your company does. You don't go to bed worrying about the competition or the economic slowdown. Your job is safe as long as you deliver what is expected of you. It's a safe and secure path.
On the other hand, an entrepreneur has no fixed work profile. He is responsible for any and every aspect of business. He has to keep his vision fixed on the big picture, while at the same time handle the day to day challenges that are part and parcel of any business. The financial risks are huge. But if the business does well, he makes handsome returns.
Of the two descriptions, which comes closest to that of an investor?
As you can see, the characteristics of a typical employee and an investor are quite contrary. As an investor, there is no one to tell you what you must do and not do. You have to choose your own investing style. If you are a value investor, then you have to understand businesses, deepen your knowledge of the industry and market dynamics, the competitive landscape, future growth prospects, durability of profit margins and return on capital, etc.
Unlike an employee, an investor is not entitled to receive a fixed paycheck at the end of every month, or quarter or even every year. The stock markets tend to be very capricious and volatile. There could be years of above-average returns. And there could be spells of poor performance.
Investing as a kind of entrepreneurship
It seems quite clear that investing is a lot like entrepreneurship. If you think about it, when you buy a stock you are not just buying a piece of paper whose prices go up and down all the time. By investing in a stock, you are taking partial ownership of a business. While you don't have to bother about the management of the business, it pays to think like an entrepreneur.
When you invest with an employee mindset, you tend to expect immediate returns from your investments, just the way you are used to receiving a monthly paycheck from your job. On the other hand, if you wear the hat of an entrepreneur, you understand how businesses work, how dynamic the markets are. You are able to sail through short term volatility and uncertainty by keeping your focus on the bigger, long term picture.
Take legendary value investor Warren Buffet for instance. We know and hear a lot about Warren Buffett - 'the investor'. But what many followers of the 'Oracle of Omaha' miss seeing is that what makes him such an incredibly successful investor is the fact that he is a great entrepreneur.
I am not hinting that we all must leave our jobs and become entrepreneurs. But what really matters is your mindset. If you carry the 'employee mindset' to the field of investing and look for quick, assured returns, you could be treading the wrong path. Be it at your job or as an investor, it would truly do wonders to your financial health if you could develop an 'entrepreneurial mindset' instead.
Do you think the safety and security that your job offers you weaken your capacity to bear risks and uncertainties in the stock markets? How do you think one can develop the entrepreneurial spirit at work as well as in field of investing? Let us know your comments or share your views in the Equitymaster Club.
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The role of monsoons in deciding the performance of agricultural sector in India can hardly be overstated. However, it is not just the farm sector that is a victim to the vagaries of the monsoons. As rainfall in India continues to disappoint, banking sector may bear the brunt. This is because the Government and RBI expect banks to make up for the deficient monsoons. What else could explain the volte face in RBI's policy with regards to priority sector lending norms?
As an article in Firstpost suggests, in April, the central bank had put an end to the distinction between direct and indirect lending targets for agriculture. The banks were supposed to lend 8% of their total credit to small and marginal farmers. However, as the fear of draught looms large, banks have raised the percentage to 13.5%.
In the past also, not only have banks been forced to lend, but have also been made to waive off huge debts to the agricultural sector. One may argue that this is a holy sacrifice that banks need to make in the broader interests of the farmers. However, the counter argument is that it is not the lack of bank credit that mars the agriculture sector.
As the chart suggests, the exposure of banks to agriculture and allied activities remains significant. If banks fulfil the Union Budget annual farm credit target, farm sector will account for around 14% of bank loans. Over the years, while the share of farm output in GDP has come down by over one third, the exposure of banks to this sector has only been rising. This signals that the real issue for poor agriculture performance lies somewhere else. The key road blocks have been poor productivity, lack of technology and supply side issues. However, while little action is taken in this regard, it is the banks that are made to bear the burden. The banking sector is already reeling under the NPA crisis - thanks to the influence of politics on credit norms. If the Government continues to intervene in the lending policies, while it is unlikely that fortunes of farmers will improve, the fate of banking sector certainly seems in dark.
Farm credit policies adding stress to banks' balance sheets
If one needs a lesson in impact and consequences of political risks, India seems to serve the purpose the best. We just highlighted how the Government interference has marred the prospects of the agricultural and banking sector. Another sector that has highlights such risks is the coal sector. Ever since the coalgate scam came into light, the coal sector has hardly been in news for a good reason. The hue and cry following the scam led to the cancellation all but 4 coal blocks allocated over a period spanning over two decades. This was followed by auction of some of these blocks to companies in power, steel and cement sectors and government run power firms.
The new coal policy has already been criticized for laying focus on Government revenues rather than building a competitive industry. The criticism will go farther it seems. As an article in Livemint suggests, months have passed since the reallocation of these supposedly 'producing' or 'ready to produce' mines. However, the mines still remain shut. The resources that are of critical importance to the economy are lying unused for issues such as lack of payment to workers and procedural hurdles such as transfer of land ownership, transfer of mining leases, environment clearances and so on. However, we hope that the lessons will be learnt and things will get better from here. If they don't, there is little hope for the Indian economy.
The Indian stock markets slipped further into the negative territory after opening the day on a weak note. At the time of writing, the BSE-Sensex was trading down 120 points (down 0.4%). All sectoral indices were trading mixed with stocks in the banking and realty segment leading the losses. However, stocks in the consumer durables and oil and gas segment were witnessing gains.
"The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." - Warren Buffett.
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|This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst) and Richa Agarwal (Research Analyst).
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