Why IQ does not matter in investing... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why IQ does not matter in investing... 

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In this issue:
» How has the Indian market fared year to date?
» Decoding the Dena & OBC bank scam...
» Will PM Modi's housing for all dream materialize?
» HDFC bank is India's top brand
» ...and more!

"You are an extremely intelligent person, we all know that. What makes you Warren Buffett, a great investor?" - quipped one of the reporters to the Oracle of Omaha when he visited India in 2011. And Buffett's reply stunned the entire audience.

"You don't need to have a terrific IQ to be a great investor. In fact, if you have a 160 IQ, sell 30 points to someone else". And you will still do as well in investing, claimed Buffett. This response raised eyebrows in the room as it appeared contrary to what many people believe. For an average Joe, intelligence and successful investing goes hand in hand.

However, as Buffett pointed out, the reality is quite different. In fact, in investing, there is no guarantee that a higher IQ individual necessarily has an edge over others.

So, if intelligence has little relevance in investing, what is the key for success? Discipline and temperament is what one needs, to be precise. But this is what most people lack. A person with the right temperament detaches himself from the noise and focuses on questioning the business. He has firm independent thought process backed by logic and facts. He does not get swayed by the herd mentality.

However, this is easier said than done. People inevitably fall prey to noise. The internet bubble was a prime example of that. The euphoria on the street clouded the independence and logical mindset of most individuals. And they subsequently lost discipline as well as money.

Talking about discipline, we all know that stocks go up and down. And India being an emerging market, the volatility here is high. In fact, as you will see later in today's chart, the share markets in India have returned about 34% year to date!

Now a person with a disciplined mindset who can form his own opinions could have easily benefitted from this rally. All he had to do was sit and wait patiently. And not get worried by what hosts on news channels were saying. In short, you need to have the discipline to wait and say no, if indeed.

We believe this is where the expertise of our Managing Editor for ValuePro, Radhika Pandit, comes into play. Over the years she and her team have worked tirelessly to build the two ValuePro portfolios without compromising on Buffett's ideology.

As an example, when the market was circumspect about engineering stocks she and her team stuck their necks out and recommended 3-4 capital goods stocks in the second ValuePro portfolio. A rational approach suggested valuations were beaten down due to poor sentiments. And since then, these stocks have given handsome returns vindicating our faith.

Radhika and her team ignored the outside noise and paid attention to valuations and fundamentals. This was the key to success. So, if you have not benefitted from this approach of ours we strongly recommend that you join ValuePro now. And gain from the great performance for years to come.

Do you believe intelligence plays an important role in being a successful investor? Let us know in the Equitymaster Club or share your comments below.

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Talking a bit more about Buffett's investment philosophy, he prefers to keep it simple. He does not believe in building complex algorithms and financial models. One of his key investing strategies has been investing in rock solid brands. Why brands? Strong brands tend to create a wide economic moat. So customers tend to be loyal and do not mind paying a bit more to avail their products or services. Competitors cannot easily replicate their success. So this gives good long term visibility about the company's business and earnings.

Strong brands are often among the best long term wealth creators. Take the stock of HDFC Bank, India's second largest private sector lender. It has been a wealth generating machine for a long time. It came as no surprise to us that HDFC Bank has been ranked as the numero uno brand in the country. As per a recent brand report by a marketing and brand consultancy firm, the brand value of HDFC Bank has been estimated to be US$ 9.4 billion. That is huge! The bank alone accounts for more than 13% of the combined worth of the 50 top Indian brands of US$ 70 billion.

02:25  Chart of the day
The Indian equity markets have witnessed fresh highs this year. However, the turnaround in the market sentiments has not been in line with economic fundamentals that are yet to witness a clear recovery. Much of this gain has been driven by expectations and liquidity due to foreign money pouring in.

As an article in Livemint suggests, Indian markets are the second highest gainer this year, next only to Cyprus. In the year till date, India's market capitalization has gone up by 34%, thus surpassing most of the other emerging markets by a decent margin. The Indian markets are now trading at a premium of 40% to MSCI Emerging markets.

So far so good. But what would be the driving factor for markets from here on? As one can make out, the recovery aspect already seems to be priced in to a good extent. Infact, some of the well known emerging market investors are already finding Indian equity markets quite expensive. While sentiments seem to be improving, delivery is yet to happen and is likely to take some time. Meanwhile, the Indian stock markets remain highly vulnerable to high FII exposure. Hence, investors should be cautious while placing their bets in Indian stock markets. Instead of buying the reform story, we believe they should focus on finding good businesses with enough margin of safety in valuations.

India outperforms world markets barring Cyprus

As far as global financial markets are concerned, the 800-pound Gorilla in the room is of course the US interest rate. Simply because this rate is the benchmark that helps decide most asset prices across the world. Needless to say, anytime anyone has to say something important about it, investors tend to be all ears. These days, what everyone's looking forward to is some sort of a signal about when exactly would the US Fed start raising interest rates. And if the minutes of the Fed's July meeting are anything to go by, interest rates should start climbing sooner than expected.

This even as the US labour market, the sole indicator on which the US Fed has based its monetary policy, is still not as strong as one would expect it to be. Therefore, if the labour markets strengthen further, we could finally see the US Fed starting to raise rates. Will this move impact the Indian stock markets? Of course, with cheap money moving out, stock prices are bound to decline. But investors should take this as an opportunity to get into good quality stocks at attractive valuations rather than get scared by it.

The latest 'fake deposits' scam at PSU banks like Oriental Bank (OBC) and Dena Bank smacks of indifference towards finding the systemic faults. The memories of the money laundering scam wherein most large PSU banks and private sector banks were accused a year back come back haunting. Even then, the chiefs of the banks got away with the excuse that few individuals were to be blamed. Whether the policies and compensation in the banking sector encourage gross mis-selling and fraudulent practices is completely ignored. Even the RBI has done nothing to check the systemic risks in this matter. One can certainly assume that it is only the PSU banks, with high NPA ratios, that run the risk of such deliberate wrongdoing. But it is only a matter of time before the private sector too starts showing the risks of aggressive lending. Bad landing against fixed deposits can bring in a systemic risk if the banks are unable to recover the loans. More importantly, most Indian households park more than 40% of their savings into bank fixed deposits. Hence this is an asset class the government and the RBI can least afford to lose trust on.

There is no doubt that demand for housing very much exists in the country. More so when it comes to low cost housing. So what is the government's agenda on this front? As reported on mydigiticalfc.com, it is looking to provide housing to all by 2022. This would entail 9 crore houses with an investment of a minimum US$ 2 trillion in the next 6 years. Now this is a huge amount by any yardstick? So the question is from where will this kind of funding come from? Equity inflows are not meeting this need. The obvious choice would be banks and institutional lenders. But banks in recent times have been wary of lending to the real estate sector. This is because the balance sheets of the sector are already stretched. And transparency is sorely lacking. Unless these issues are addressed head on, participation by the financial sector will be patchy at best. Thus, before talking about raising funds for the real estate sector, the government will first have to work on overhauling the fundamentals of the sector. This would involve bringing greater transparency into the sector and also providing the much needed shot in the arm to low cost housing. Only then will the funds start pouring in.

After a choppy morning trading session, the Indian stock markets have rebound and are trading in green. At the time of writing, the BSE-Sensex was trading up by 22 points (0.1%). The performance of sectoral indices has remained mixed. While stocks from metals and realty sectors have maintained the losing streak, consumer durables and banking stocks have clocked highest gains. The Asian markets too reported a mixed performance with Japanese markets leading the gains. European markets have opened the day on an optimistic note.

04:50  Today's investing mantra
"We enjoy the process far more than the proceeds. " - Warren Buffett
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5 Responses to "Why IQ does not matter in investing..."

vincent A Mendonsa

Aug 23, 2014

The write up 'IQ does not matter in investing' was quite interesting and appropriate. What is needed in investing is understanding of the product, the producers and the potential for growth with abundance of Patience.To illustrate from my experience, I had lost money in Suzlon when I bought 20 shares when the price was 250! When the shares came down to Rs.6.00, I bought 1000 shares because the product is good,there is good potential,producers are capable only problem being debt.Moreover, the new govt. is supportive of alternative sources of energy.I could sell the shares at an average of rs.35.without waiting for timing the mkt. Now I have bought shares of Mannapuram finance around Rs.21 based on the above analogy and Dividend of 25% which works out to 10%FDR in banks. Wit best regards



Aug 22, 2014

Hard cash of Rs. 25 Crores found at Corporate Office of Aditya Birla 10 months ago and no action initiated till date, old UPA gone and new NDA in power. Don't U think, it's nexus between then ruled and now ruling sections. Dear, Elections are not fought on own, but these are made to fight on with influence of others because money power plays a vital role.



Aug 22, 2014




Aug 22, 2014

You are right. This year stock market has increased dramatically. Do you think the fundamentals support this increase? Is there dramatic earning growth? Did the earning growth came from revenue increase or cost cutting?

I think, stock market is in Modi bubble. This is good time to shift the portfolio from equity to real estate.


Gopal Kandoi

Aug 22, 2014

A very interesting write up. however there is so much going on in the market it creates too much confusion.your view about increasing interest rate in US would definitely impact Indian Mkt because funds may flow out, but when we look at our economy,it looks very positive.if you could give list of value pick stocks at current level it would definitely help investors. regards

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