High risk=High return: A myth! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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High risk=High return: A myth! 

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In this issue:
» Narayana Murthy on India's poor social infrastructure
» How most Indian billionaires became billionaires
» Jim Rogers scolds CNBC - on CNBC!
» India underperforms key global markets
» ...and more!!


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00:00
 
You know risk-taking has returned to the market when newspapers start writing about it, and business channels start talking about it. So we were not amazed to read what a leading business daily had to write today. The headline read - 'Invest in high-risk assets to get high returns'.

We agree that most investors have grown up on this philosophy that taking high investment risks will earn them high returns. After all that's the reason people speculate on risky derivatives, just because they have been advised that 'high risks equals high returns'.

Well, if that was really so, legends like Warren Buffett and Peter Lynch wouldn't have been as well known as they are now. These successful investors have made their entire fortune (as also of their clients') investing in the least risky assets. And there are countless other examples like them.

Remember Lynch's famous quote - "Never invest in any idea you cannot illustrate with a crayon." Well, this does not mean that you should only go about investing in very simple businesses. What this means is that you must invest in a company only if you are able to paint a picture of the both the importance of the business and why it will succeed. If you do not have a good understanding of why the company will thrive, you most likely will not recognize signs that it may fail.

The same also holds true with investment classes as well. If you have trouble understanding the working of derivatives, or the risks associated with them, better stay out! Taking high risks to earn high returns might instead lead you to financial ruin!

So, do you believe that high risks will earn you high returns? Share with us, or post your comments on our Facebook page.

01:08  Chart of the day
 
There's no denying that India lacks the basic social infrastructure to take proper care of its citizens. The fact was recently stressed upon by none other than Mr. N. R. Narayana Murthy who termed it as unfortunate that India did not figure among top 100 countries in human development index. He said, "Despite growth rate of 9 per cent, there are several questions bothering the countrymen and leaders. Whether growth is transforming itself into economic and social development. Whether this growth rate is helping average individuals and whether they are better off today compared to the time when the country got its independence."

Well, our chart of the day today reflects this sorry state of affairs in India. As the chart shows, among its BRIC peers and as compared to the developed world, India has the least number of doctors for every 10,000 people! Nothing can be more worrisome for a country than this. And especially for a country that always boasts of its demographic dividend.

Data Source: Global Health Facts

01:47
 
India has the second largest number of billionaires per trillion dollars of GDP. In fact, post the crisis, we may actually have the largest number of billionaires. Anyways, the economic advisor to the PM, Dr. Raghuram Rajan has a different take on this. As per him, a large number of the Indian billionaires are people who have earned their billions through their proximity to the Government.

As per Dr. Rajan, most of these people have earned their billions from things like land, real estate, natural resources and other areas that require licenses. Or in simple words, areas that require proximity to the Government. As per him, India needs to stop patting its back for getting international recognition on this front. Instead we need to pull up our socks. We need to start working on structural reforms that would help to reduce the growing economic divide within the country. We hope the PM pays heed to his advice or a movement like Naxalism will become the norm rather than the exception that it is today.

02:26
 
Most Indian companies have announced their results for the quarter ended June 2010. On the face of it, the performance has been mixed. Overall, sales of companies under our database coverage have grown by around 21%, the fastest in the past few quarters. However, profits have seen their worst performance, down around 15% YoY for the universe of companies. Higher input prices and the inability to pass on the same to customers in the face of a fledgling economic recovery has been the reason for the weak profit performance during the quarter. And hearing what most managements have said off late, the pricing power is not coming back to them anytime soon. In such a scenario, only a higher sales growth in the future can drive profits for Indian companies. And on that, we need to wait and watch!

Data Source: Equitymaster Database

02:59
 
In essence, investing is about making money. Many thoughtful investors eventually ask themselves about the utility of money they make. After one makes enough to lead a decent lifestyle and provide enough for education and health care needs, money really doesn't enrich anyone's life too much. Oh yes, there's another benefit of having money. One can be independent if one so desires. Independent in actions and views!

Take the noted investor Jim Rogers, who recently called CNBC a public relations agency - and on CNBC!

His exact words were, "They got the stocks up. That's the whole purpose of PR (public relations). Make the stocks go higher. That's what CNBC and many PR agencies are all about." Imagine saying that on the face of a CNBC anchor. Investors who know their craft realize that it is impossible to come up with everyday predictions on stock market movements. But the broadcasting business needs to create hoopla to keep viewers glued. Many people share this view. But it takes the independence of a Jim Rogers to say it on the face.

03:41
 
Another person who calls a spade a spade is Bill Bonner. In a recent Daily Reckoning, Bill Bonner examines the several schools of thought regarding the present economy. Some economists - Geithner, Summers etc - say that the US is recovering. Some others, such Marc Faber, say that the US is not recovering and it is headed into inflation. Still others agree that the US is not recovering, but they also believe it is headed into hard-core deflation. But Bill Bonner calls all of them wrong and instead believes the US is headed into soft-core, Japanese-style deflation. It remains to be seen who eventually turns out to be correct. Given the importance of the US economy, investors in India will also feel the impact.

04:09
 
While the global economic uncertainty continues, stocks markets had a mixed past week. Chinese and Russian markets stole the show, leading the pack of gainers. Indian markets were the worst performers, down 1.4% for the week. Lacklustre results from some large Indian companies led to this weak performance of Indian markets. Crude oil and gold also closed on a weak note.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance, Kitco, CNNfn


04:27
 
China humbled Germany last year to become the third largest country in terms of GDP. And now, Japan has fallen by the wayside by the Chinese juggernaut. As per a note put up by the country's chief currency regulator, China has overtaken Japan to become the world's second-largest economy after the US. China's GDP has grown by leaps and bounds over the last thirty years. The growth has averaged more than 9.5% per annum if one were to put a number to it. Furthermore, if it continues to grow by say 7-8% annually over the next decade and 5-6% in the decade after that, it will have achieved strong growth for a period as long as 50 years! A feat that is unparalleled in human history so far.

Anyways, while the future is indeed bright for the dragon nation, the skies over the horizon are not as clear as in the past.

04:56  Weekend investing mantra
"The extravagance of any corporate office is directly proportional to management's reluctance toward shareholders." - Peter Lynch
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22 Responses to "High risk=High return: A myth!"

Manoj Kumar

Aug 2, 2010

It definitely is a myth. At the same time total risk aversion is also not likely to take you anywhere. So, the trick is efficient risk management. Take one risk at a time, take small risks, the loss from which doesn't impact you much and learn to manage through those risks and then progressively take higher risks.

Like 

DR.AVINASH CHORDIYA

Aug 2, 2010

I LIKE THIS IDEA VERY MUCH.KEEP IT UP .THANK U.

Like 

MSR Krishna

Aug 2, 2010

I thought every understood the myth in wrong way...
correct way is "if some one is expecting high return he/she has to under go high risk". But the high return is not always directly proportional to the risk. some times it goes in opposite (negative results direction.

Return also changes with the path chosen or taken to reach the goal..
I mean risk may take in smart way, hard work, smartest..

Like 

S Thyagarajan

Aug 1, 2010

yes, high risks means high return. But the risk taken must be based on in-depth assessment. If you can, take the risk if not just avoid it

Like 

G E Moorthy

Aug 1, 2010

It all depends on what and when the risk factor affects. A right time to buy and sell is the mantra of investment.
You need to take risk. Without which will you grow, you will but then the phase of growth cannot be compared with the risk taking guys. A small company of INFOSYS in 1992 was not subscribed by everyone. But the person who invested even 100 shares (that time it was called a big risk) today made millions. Risk with calculating the same with your understanding of your capacity will always reward.

Like 

Dinesh

Aug 1, 2010

ery good comments... keepit up

Like 

SD

Aug 1, 2010

If China is such a great economy & growing the way you say & expected to grow the way you say - And stock mkts are supposed to be the true reflection of the state of the economy - WHY ARE THE CHINESE STOCK MKTS AT 52 WK LOW???

Like 

A.RajaShekar

Aug 1, 2010

CAN INVEST IN FCS SOFTWARE SOLUTIONSAT CURRENT PRICE AT 2.75

Like (1)

Raajesh

Aug 1, 2010

This is true only partially. One can make high return by taking high risk one off a time and not always. Next attempt he can lose all his money and captial also. So ultimately who invests in low risk assets wins in long term like a hare and tortoise race.

Like (1)

rajesh jain

Aug 1, 2010

YES I AGREE, HIGH RISK DOES NOT MEAN RETURN
WHAT I HAVE LEARNT IS TO MAKE HIGH RETURN YOU MUST AVOID HIGH RISK. RETURNS ARE MADE BY AVOIDING RISK NOT TAKING RISK.

Like (1)
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