What Hitler can teach us about investing? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What Hitler can teach us about investing? 

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In this issue:
» How severely will the drought affect the economy?
» Will India's problem be China's gain?
» Will India have stronger laws to curb insider trading?
» This move will boost infra projects
» ...and more!

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Rewind back in time to 1944. The long drawn World War II was nearing its end. With massive forces of the Western Allies pushing from the West and Soviet armies closing in unrelentingly from the East, Hitler's defeat was a certainty. But would he accept the reality? No chance. He continued to delude himself with the idea that he could strike a counter-attack with his two reserve armies and win the war. Similar was the case with Japan around that time. It had lost terribly in the Pacific against the Americans. Yet it lived under the illusion that the enemy would not be able to invade its homeland. We obviously know what the end result was in both the cases.

What is the reason for this kind of irrational behaviour? A certain gentleman by the name of Mr Christopher Mahoney offers an insightful explanation. He opines that it is very difficult to accept defeat in a long war. The human mind refuses to accept the brutality of defeat and suffering. In its own defence, the mind tends to delude itself in an alternative reality.

But is this tendency only specific to wars? Certainly not! Take the eurozone crisis for instance. The actual crisis is much bigger than what most policymakers are willing to believe. They still think that through policy intervention, they can save the euro from disaster. The President of the European Central Bank (ECB) Mr Mario Draghi recently declared that he would do "whatever it takes" to save the euro. To point the truth, nothing that the ECB has done so far has solved the crisis any bit. There is no tangible rescue plan so far that is likely to lessen the Eurozone's woes. The fact of the matter is that the euro is an inherently flawed financial instrument. Secondly, the Eurozone economies afflicted by the sovereign debt crisis have little choice but to face the consequences of their past excesses. There is no quick pill to escape pain.

Forget the Eurozone. Even many investors behave in this irrational manner when faced with massive losses in their stock market investments. Of course, stock price volatility owing to prevailing market sentiments must be certainly ignored. But there is strong reluctance among investors in accepting investment mistakes and booking losses on stocks whose fundamentals have turned sour. Even after facing huge losses on them, they continue to hold on. The vain hope being that the stock price will reverse and they will recover their losses. This, they believe not because the fundamentals say so. But because the alternative reality is very difficult to accept.

Do you continue to hold loss-making stocks even after the fundamentals have turned bad? Share your views or you can also comment on our Facebook page / Google+ page.

01:36  Chart of the day
India is facing a drought. This has finally been confirmed by the government. The culprit is the El Nino weather pattern which is expected to reduce the rainfall in the July to September period. The last time India had suffered such a drought was in 2009. As more than 50% of Indian agriculture depends on the monsoons, rain plays an important factor when it comes to food production in India. Food prices have already started heating up as rainfall started to fall short of average. If this continues, food prices would most likely hit new highs.

However, the current drought may not affect India's GDP (Gross Domestic Product) growth as much as it did in the past. Today's chart of the day shows that agriculture's contribution to India's GDP has been consistently declining. In the past, a drought tended to severely affect India's economic growth. But despite 2009 being a drought year, the GDP growth in the financial year 2009-10 (FY10) remained robust.

Data source: Business Today

Over the past few days, loads of print spaces were devoted to India's pitiable power sector. How the country's super power dreams have sunk into darkness was the most widely read headline. Not just in domestic but also in the international media. But unlike the ego brushing West, the Chinese have a more practical way of dealing with this news. They did not criticise Indian policy makers. Nor did they ridicule India's ambitious plans for the power sector. They are in fact quietly trying to make the most of the opportunity in disguise.

The Chinese companies in power equipment space are well positioned to feed the unmet demand in India. Some like Shanghai Electric, Harbin Electric and Dongfang Electric have already established themselves in the country. They are competitive on costs and are giving local equipment suppliers, including Bharat Heavy Electricals Ltd (BHEL), a run for their money. As reported by Firstpost, Chinese players are expected to participate in projects set to generate an additional 40,000 MW of power over the next few years.

India has missed every capacity addition target since 1951. Despite this, nearly 30% of the total planned infrastructure outlay over the next five years is on the electricity sector. Transmission and distribution losses still account for 27% of power generated! It is time India takes some concrete steps. One is to facilitate private sector participation in the power equipment space. That, along with partnership with Chinese players, could be the only way to reduce our electricity woes.

There are many factors that affect the cost of equity in a country. You would be surprised to know that the prevalence of strong insider trading laws is one of them. On second thoughts though, this does seem to be justified. After all, wouldn't one demand a higher premium for taking on that extra risk of investing in stocks where there is greater likelihood of falling prey to insider trading? Looks like the market watch dog Securities and Exchange Board of India (SEBI) has also become well aware of this. What else could explain its efforts at gaining the power of tapping private phone conversations? It should be noted that this is not the first time SEBI is asking for permission to listen to private conversation. It had made a similar plea in 2009 and again last year but was denied on both the occasions. However, the successful prosecution of former McKinsey chief Rajat Gupta on the basis of phone conversations in the US may have provided some teeth to SEBI's case. If implemented, this will be another landmark event for the Indian capital market we believe.

Policy inaction was one of the main reasons why the project cycle was getting delayed. However, it seems that the government is in the mood to make amends right away. Recently, it set up a project clearance board for faster clearances of projects. An institutional mechanism for monitoring private public partnership (PPP) projects was also initiated. And now it has decided to relax the transfer pricing policy for government owned land. This should speed up the PPP projects in the infrastructure sector. It may be noted that PPP projects are often built on government land. So, getting a cabinet approval for each PPP project basically lengthened the project execution cycle. In fact, ministry of railways pointed out that it was not able to raise funds from PPP in 2012 due to delays in cabinet approval. Thus, we believe that relaxation in approval norms is likely to speed up the project award activity in the future. This shall give infrastructure cycle the much needed push.

In the meanwhile, the Indian equity markets were trading weak today on global cues. At the time of writing, the BSE Sensex was down by 120 points (0.7%). Barring healthcare stocks, all sectoral indices were trading weak. Among Asian stock markets, Singapore and China managed some gains while all others traded in the red.

04:45  Today's investing mantra
"We have to understand the competitive position and dynamics of the business and look out into the future. With some businesses, you can't. The math of investing was set out by Aesop in 600 BC: a bird in the hand is worth two in the bush. We ask ourselves how certain we are about birds in the bush. Are there really two? Might there be more? We simply choose which bushes we want to buy from in the future." - Warren Buffett

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    4 Responses to "What Hitler can teach us about investing?"

    t p agarwal

    Dec 26, 2013

    book the losses by now in paise OR be prepared to pay in rupees



    Aug 4, 2012

    The power equipment from China installed are simply of very poor QUALITY, compared to the equipment made by BHEL. It is unfortunate that with the usual penchant for opting for the lowest price, Government controlled power related companies are compelled to order BAD QUALITY Chinese products. Indian manufacturer are definitely far, far superior to Chinese-makes but obviously one has to pay the price for GOOD QUALITY!!


    M s s murthy

    Aug 3, 2012

    Booking loses require desclipline and confidence.having exposure to stock market investments for past 30 years I have been committing the mistake of not booking losses in time.


    Gopinathan k

    Aug 3, 2012

    I am in full agreement with you.Both about eurozone cris,
    about Hitler,Japan and also about stock investors.From
    where do you dig out such hard cold facts which normally
    we donot like to remember or pretend that it is not so.

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