Investing in 'new age' sectors can be dangerous! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Investing in 'new age' sectors can be dangerous! 

A  A  A
In this issue:
» PM says poor growth could affect national security
» Several listed firms yet to comply with shareholding norms
» Govt plans to unlock land bank of sick PSUs
» Euro zone needs to get rid of the euro
» ...and more!

------------------ Everyone talks about their winners... What about the losing stock picks? ------------------

It's always good to acknowledge your loss making stock picks... You get to learn from them, and that helps to better the track record in the future.

Also our valued readers, like you, get a complete picture of how our stock picks are performing.

And that's exactly why we have always shared our loss making stock picks...

You see, an 81% success ratio, which our Blue Chip stock recommendation service has, is not a perfect score.

Both you and us know that! And that's why today we want to invite you to read every word of this message. In it we reveal 2 of our loss making picks, and share with you, exactly what we believe happened there. Read On...


"What industry will be the next growth driver in the 21st century and what do you see that supports that? " legendary value investor Warren Buffett was once asked. Can you guess what answer he must have given? He simply said, "We don't worry too much about that." He went on to elaborate with the example of the automobile and the airplane industry. It was impossible back in the 1930s how much these two industries would impact the world. They have indeed been a great boon for society. However, for investors both these sectors have been absolute disasters. Of the 2,000 automobile companies that had mushroomed during that period, only a handful have survived. The fate of the airline industry has been even worse, with perpetual losses of billions of dollars.

The fate of a much-touted emerging sector has reaffirmed that Mr Buffett's wisdom has no expiry date. We are referring to the solar energy equipment sector. It goes without doubt that the world has little choice but to gradually switch towards sustainable and renewable energy sources. And solar energy is definitely a sector with very high potential. But does a high growth sector necessary translate into shareholder wealth? In this case, the answer seems to be no.

The global solar photovoltaic demand surged from a little over 7,000 megawatts (MW) to nearly 20,000 MW in 2010. And as per certain estimates, the current global demand stands at about 30,000 MW. But you would be surprised to know that the Indian solar manufacturing sector is on the verge of collapse with over 80% of the units shut down. In fact, not just India, the sector is facing severe headwinds across the globe. What's the reason? The answer is extreme optimism. Currently, the manufacturing capacity is two times the demand. Over enthusiasm about the industry's high growth prospects led players to set up huge capacities. But in recent times, the sector has been facing the brunt of the crisis in the Eurozone, one of the main markets. Dormant demand in India coupled with intense competition from Chinese counterparts made matters only worse.

Whatever be the fate of the solar equipment manufacturing industry, there is one very crucial lesson that investors need to take home. Be very careful while putting your money in the so-called 'new age' sectors purely on basis of huge growth potential. At best, avoid investing in sectors that do not have a sufficiently long operating history. Another important lesson is to let go of the urge to predict the future. Stick to the basic of value investing. Invest in stocks with strong fundamentals, solid past track record and sufficient future growth visibility.

Do you think it makes sense to invest in new emerging sectors? Share your comments with us or post your views on Facebook page / Google+ page.

01:33  Chart of the day
The US has been imposing sanctions on Iran in order to curb its nuclear programme. But an article in Financial Times points out that curtailing Iran's oil exports may be difficult. This is because Iran is a major exporter of oil, accounting for about 5.2% of the world's total output in 2011. As such, sanctions on Iran can have significant consequences on world oil prices. Today's chart of the day shows the countries that are major importers of crude oil from Iran. Emerging economies are among major importers of crude oil from Iran. It must be noted that India is free from US sanctions as the latter had granted exemptions to over a dozen emerging economies in June 2012.

Data source: The Financial Times
*First quarter of 2011

The fact that the government has sunk into a state of paralysis when it comes to reforms is something that has been harped upon many times. Even Prime Minister Mr Manmohan Singh has acknowledged this. But he also had another interesting point to make. He believes that politicians should treat India's economic growth as a national security issue. Why is that? Simply because lack of meaningful growth and consequent dip in standard of living will only harbour greater social unrest. The recent uprisings in the Middle East are a classic case in point. There is no doubt that India has grown at a stupendous rate in the past. And it has the potential to do so in the coming years as well notwithstanding the current slowdown. But it needs to expand even faster to create jobs for millions of people who will reach working age in the next few years. And a political deadlock at all times is certainly not going to help matters. Whether politicians pay heed to Mr. Singh's appeal remains to be seen though.

Promoter holding is one of the key things to look at while investing in a company. A larger share of promoter holding indicates the confidence of the people who run it and vice versa. But an unnaturally large shareholding means that there is very little of the company to offer to the public. This could increase an investor's risk. This is in the form of lower liquidity levels as well as lower decision making power for minority shareholders. Naturally the regulator, Securities and Exchange Board of India (SEBI) feels the same way as well. Therefore it is irked that many listed companies have not disclosed their shareholding details. As reported by Business Standard, 1,259 (25.3%) of the 4,977 listed companies have not given their shareholding details as of March 2012.

One reason for this has been the fact that many of these companies are not compliant with the minimum public shareholding norms. But the problem this year has been the limitation of avenues through which promoters could reduce their stake. With the topsy turvy way the share markets have been behaving, the equity market route has not been too conducive. Therefore, SEBI is looking to increase the avenues for disinvestment. The Board plans to meet soon and consider changes to the existing norms on disinvestment, etc. Hopefully they would be able to come out with norms that are conducive to both the shareholders as well as the promoters of the companies.

Browsing through just a couple of pages of any business daily over past few months would have made one fact amply clear to you. That most government owned entities are not in the best of health. PSU oil majors are begging for price rise of their output. Having to bear subsidies for much longer would certainly seal their fate. PSU banks have been riddled with non performing assets. Under the garb of restructuring, most are just temporarily trying to defer the loss provisioning on their books. In such a scenario what perplexes us is that the government is not worried about the sustenance of profitable entities. Instead it is keen to bail out the sick ones! For that the government is contemplating to unlock the land bank of PSUs to generate revenue. As reported by Economic Times, close to 60 sick PSUs in the country together hold about 20,000 hectare of vacant land. Of these HMT, NTC, Hindustan Photofilms and ITI hold about 100 acres in the metros. Funds fetched by disposing off these lands will largely go into resurrecting sick PSUs. For the time being the government has plans to infuse around Rs 46 bn in six loss-making enterprises. Unlocking value from redundant assets is a good idea. But wasting them by investing in loss making ventures completely does away with the economic logic. We wonder when better sense will prevail on our economic policy making!

As a member of Euro zone, the country of Austria may not be in as much trouble as say, Italy or Spain. But that hasn't stopped the Austrian politicians from demanding a breakup of the Euro Zone. A billionaire gentleman who's keen to form his own party in Austria has perhaps fired the first salvo. Europe can only function if every country has its own currency; he is believed to have said. And the sooner Austria gets rid of the Euro, the better for the Austrian people, he further remarked.

So there you have it. A topic that was so far being discussed behind closed doors now seems to have found its way into the field of politics. Does this put the existence of Eurozone in further danger? We think so. The whole concept of Eurozone had shaky foundations right from the word go we believe. It allowed weak countries like Greece to borrow at the same rate as say the Germans despite their starkly different fundamentals. This meant that Greece kept on borrowing without the fear of its borrowing rates being raised, thus eventually leading to a bubble. And now, after the bubble has busted, no amount of bail outs will solve the problem according to us. The only real solution lies in disbanding the Euro and allowing each country to get rid of its excesses.

The Indian equity markets hovered in the negative zone for most part of today's trade. At the time of writing, BSE Sensex was down by 41 points (0.2%). It was a mixed bag for sectoral indices with auto and capital goods stocks being the top gainers. Asian stock markets too traded mixed.

04:50  Today's investing mantra
"We look for wide moats around great economic castles. Growth is good too, but we prefer strong economics." - Warren Buffett

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    8 Responses to "Investing in 'new age' sectors can be dangerous!"


    Aug 17, 2012

    here is tremendous demand in rural area in view of the load shading.The campaniles should exploit the scope.



    Aug 17, 2012

    Dear Sir,
    Land Bank of PSUs are eyed by the "Eagles of India" from the time the disinvestment process started. The prime land banks of Hindustan Teleprinters Ltd(HTL) are swallowed by the same Eagles in the name of Disinvestment ! It is high time a white paper on "Where all the money of disinvestment has gone? " is published by the Govt.
    Yours faithfully,



    M s s murthtmutyala

    Aug 16, 2012

    My experience of more than 30 years with stock markets many a time revealed that what is good for the country or to the economy may not necessarily bring rewards in terms of appreciation in stock markets.
    A company being in a 'new age sector' may at best be one of the criteria to be taken for investing in addition to other criteria such as tract record ,management efficiency ,and other fundamentals.

    Like (1)

    sunilkumar tejwani

    Aug 16, 2012

    it is rightly demanded by Austria to disband euro. This will lead to the real value of currencies of respective currencies. And I will not be surprised if Greek drachma is valued in pennies and German mark valued at I N R 70 and above. The Greeks are historically known to live off the blood of others since ages. They should be brought to their knees. Similar should be the case with other P I I G countries.

    Like (1)

    sunilkumar tejwani

    Aug 16, 2012

    it is foolhardy & naive to call anything as new age investment theme. It was dot com in the late 1990s, infrastructure in 2006. We all know the results. Hence the concept which works in the stock exchanges is value investing in strong fundamentally sound companies with a strong moat irrespective of sector in which they operate.
    Thematic investment ideas are a product of vested interests, especially investment bankers, brokers and operators who just want to off load their wares at a hefty price to unsuspecting gullible public.

    Like (1)


    Aug 16, 2012

    The industry is taking the same path as thermal-power equipment . We have large demand but the global demand-supply equation is turning it into a buyers'market. Prices for generating solar power are dropping steeply ; and will help in the long run. Units manufacturing basic PV material need an economy of scale which is difficult operating out of India.Assemblers of these units can survive as they need smaller capital costs .

    Like (1)

    Borkar M.R.

    Aug 16, 2012

    (1) Without entering, may be cautiously, one will never know
    whether water is warm, shallow, deep or cold. Put a little bit
    of your money. Do not take Gung Ho approach.
    (2) The one has to ask the question why America has made
    exception to India? Is it too much love for India? It is
    absolutely selfish decision. Why Pranabda was made President?
    Let us look at after super imposing that on the canvas of
    "American interest in the American Economy and Global Economy.
    Who is to survive? India or America?"

    Like (1)

    Kersi Mahudawala

    Aug 16, 2012

    It makes no sense to invest in new emerging sectors.One should invest in only those sectors which are well known with strong fundamentals.One should always go for value buying.

    Like (1)
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