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A Stock Investing Lesson from Albert Einstein

Aug 6, 2016

In this issue:
» India sets an inflation target
» The GST's impact on consumer products
» ...and more!
00:00
Ankit Shah, Research analyst

Did Albert Einstein invest in stocks?

No. But can we learn something about investing from the great man?

Yes, absolutely!

A few years ago, I came across a memoir on Einstein. It was written by the famous American physicist John Wheeler. I read it out of curiosity. I didn't think I would learn anything about investing. I was certainly wrong about that.

The simplistic story of Einstein that most people have in their minds goes something like this...

As a boy, he struggled in school.

He eventually got a job at the Swiss patent office. There he came up with the Theory of Relativity.

And the rest is history.

While all this is true, it is also woefully inadequate. Einstein's true genius is not understood by many even today.

It was not that he could think a lot deeper than everyone else. Many scientists back then were as brilliant as him, if not more.

Even his mathematical skills weren't the best. As Wheeler points out in the memoir, any good mathematician could and did understand four-dimensional geometries. Yet, it was Einstein who did the work.

With the benefit of hindsight, it is astonishing that no one came up with the theory of relativity before Einstein.

So what makes Einstein so special?

The answer lies in the job he held at the Swiss patent office for seven years between 1902 to 1909. The job didn't pay well. But it was the best he could do at that time.

In those days, a patent application had to be accompanied with a working model. Every morning he would face a long list of applications. He worked under deadlines.

His boss was a kind man but strict about work. He asked Einstein to explain, in one sentence, why an application should be accepted or rejected.

Every day, Einstein would filter out the clutter of information in each application and get straight to the core questions. Will the invention really work? If yes, why? If not, why not?

In other words, he became habituated to extract the simplest point out of great complexities.

So perhaps it's not so astonishing that no one discovered relativity before him. He was trained to get to the central point as quickly as possible. This can only be done by first cutting out all that is useless and then focusing intensely on only what matters.

As a research analyst, I know this is the most important thing in picking stocks. The stock market is a massive noise-generating machine. It churns out a relentless stream of completely useless information. This does not help anyone become a better stock picker.

By choosing to focus on only the business fundamentals and valuations, it is certain that you will get better long-term returns. Because in the stock market, these are the things that matter.

What do you think? Do you tune out the noise while picking stocks? Let us know your comments or share your views in the Equitymaster Club.

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02:35 Chart of the Day

It came as a shocker to us when RBI governor Raghuram Rajan announced he wouldn't be serving another term at the central bank. We believed that the RBI was in good hands under his leadership. So, Rajan's exit from RBI next month will be a big loss for us.

But there's some positive news we came across in Business Standard. No, Rajan hasn't changed his mind. He is not staying back. But his legacy will. Let me tell you how. Yesterday the government announced an inflation target of 4%, plus or minus 2%. The Monetary Policy Committee (MPC), which is being set up, will have to adhere to the target till 31 March 2021.

Last year, the government and RBI had agreed on a monetary policy framework with the inflation target set. However, it didn't have legal backing. So the latest move by the government does validate Rajan's inflation-fighting policies.

Today's chart of the day shows the quarterly consumer price index (CPI) inflation since the start of financial year 2015-16. As you can see, the inflation is within the set target.

Inflation Target Set at 2-6% till March 2021


03:30

After a long wait of 13 years, the much awaited Goods and Services Tax (GST) will finally become a reality. The consumer good companies that had been eagerly waiting for its passage, all this while, are now an anxious lot. While they do not doubt the benefits that are likely to accrue from the standardized taxation, the GST tax rates that would apply on different product categories has been a bit of a concern.

Presently, home and personal care products attract tax rates of around 25-30% whereas food and beverages are taxed at lower rates of less than 10%. Ayurvedic products and medicines are taxed at rates of less than 5%. Past recommendations by the GST Council had proposed four broad tax slabs for goods and services. These include exempt category with zero tax, concessional category with 12% tax rate, standard category with 18% tax rate and demerit category with 40% tax rate. It was initially proposed that tobacco products and carbonated drinks would fall in the demerit category. But carbonated drink makers are opposing the move to be treated at par with tobacco products.

The GST regime will have its own share of hiccups as different consumer product categories adjust to the new rates. But in the long run it will ring in benefits of cost savings and better operating leverage that are likely to passed on by companies to the end-consumer.

04:00

Speaking of the GST, my colleague Vivek Kaul, has brilliantly explained what you probably did not hear about GST from the mainstream media. I strongly recommend that you download Vivek's free report on the GST, 'What the Mainstream Media DID NOT TELL YOU About GST.'

04:15

Global indices closed on a mixed note for the week. Hong Kong (up 1.2%) and the UK (up 1%) were among the biggest gainers. Japan (down 1.9%) and Singapore (down 1.4%) were the top losers in the pack.

During the week gone by, the Bank of England (BoE) cut its benchmark interest rate to 0.25% from 0.5%. This is the first cut since 2009. Along with the above move, the Bank's Monetary Policy Committee (MPC) announced additional measures to stimulate the UK economy.

The Reserve Bank of Australia (RBA) also cut its interest rates to a record low during the week. It reduced the cash rate by 25 basis points to 1.5%. This, the bank stated, was to spark historically weak inflation. This was the RBA's first cut since May and second such move in the year. The move was in response to a slowing jobs market in Australia. It was reported that the country created roughly 7,000 jobs a month on average this year, compared with more than 30,000 a month in the second half of 2015.

US stocks ended marginally up for the week. The US payrolls report, released yesterday, stated that US employment rose more than expected for the second month in a row. Wages have too picked up, raising the probability of a rate hike by the Fed later this year.

Central banks across the world are seeking to push their economies to grow by cutting interest rates and introducing stimulus measures. Last week brought two major announcements from the central banks of Japan and the US.

A recent entry in Vivek Kaul's Diary explains how central bankers make us poorer. And Asad Dossani, editor of Daily Profit Hunter, explained how to successfully trade these kinds of political events.

Back home, the Indian indices closed little changed. The BSE Sensex was up 0.1% for the week. The Rajya Sabha passed the constitutional amendment bill for the goods and service tax (GST). Half of India's 29 states will still need to approve the bill, but the dream of 'one nation, one tax' finally seems to be coming true.

You can read about all the important market developments in the week, in our Saturday RoundUp.


04:55 Weekend investment mantra

"We have a passion for keeping things simple." - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst).

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