The secret to double digit returns over 40 yrs! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The secret to double digit returns over 40 yrs! 

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In this issue:
» After government, will the CAG wake up PSUs?
» Bundesbank chief on the perils of ECB's bond buying
» SEBI to hold auditors accountable for corporate governance
» Indian property market growth at six-year low
» ...and more!

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John Bogle. The name rings a bell in every investors' mind who has followed or read about the fortunes of mutual fund industry over past few decades. Thirty seven years ago, he founded the Vanguard Group. The legendry fund manager is best known for popularizing the index fund. Being a low-cost option it revolutionized investing in the US since 1960s. Mr Bogle's fund generated compounded annual returns of 13.6% over 40 years. This was a shade lower than his contemporary John Templeton's track record of 15.1% average annual returns over the same period. Nevertheless, that does not take away any credit from Bogle's astute fund management skills.

In fact we believe that some key investing principles followed by stalwarts like Bogle could be the guiding light for investors. Especially, in difficult times like these. These are not just simple enough to practice but also prevent investors from making the most common mistakes.

The two most important rules obviously pertain to having patience with investments. That stock valuations revert to the mean and one must treat time as friend to take advantage of compounded interest cannot be emphasized enough. Besides this one must try to diversify risk but getting the stock asset allocation right. Having realistic expectations and buying into those companies that you are comfortable with go a long way in fortifying the stock portfolio. Having said that, investors must beware of the fact that fundamentals change over time. Hence they must keep track of their stocks' performance without ruling out the possibility of unforeseen risks. Last but the not the least, Bogle, like Buffett, insisted that there are no 'secrets' for successful stock investing. All that one needs to follow is a well researched, patient and disciplined investing practice.

More importantly, these rules of investing are applicable to all investors and stock portfolios of all sizes. You do not have to be a Buffett or Bogle to benefit from these principles of sound investing. However, following their proven methods could do a whole lot of good to your long term portfolio.

01:30  Chart of the day
Just yesterday, we wrote about how the government's efforts at dissuading gold imports. But there are enough reasons for the government to be worried about the impact of gold imports on the country's current account deficit. As per Reserve Bank of India (RBI) data, amongst the BRIC countries, India has the second largest current account deficit after Brazil. However, the Indian rupee has seen the maximum depreciation amongst BRIC currencies over the past 12 months.

Data source: RBI

The Comptroller and Auditor General (CAG) of India has woken up the government from its deep slumber. With its much talked about and publicized reports on the 2G scam and the coal scam, CAG has become a household word. After whipping the government into some action, CAG has now expanded its focus to include the PSUs. The latest on the receiving end of CAG's whip has been none other than Oil and Natural Gas Corporation (ONGC). CAG has hauled the company for slacking in its exploration activity. As per CAG's report, ONGC has a healthy reserve replacement ratio. But its production has been almost static. It has the lowest drilling efficiency as compared to its private as well as public sector peers. And on top of it, ONGC has not undertaken a system of independent assessment of its technical capacity. To this affect it has not really done anything to inspire confidence in its stake holders. The CAG report has offered suggestions to improve this including introducing transparency and competitive tension by hiring consultants and experts. Hopefully, ONGC as well as other PSUs would treat the latest CAG report as a wakeup call. It is time that they wake up and get out of the PSU 'babu' mentality. They were set up with the intention of doing a particular job. High time they did it rather than whiling their time away.

Do you think the CAG's reports will force even inefficient PSUs to improve performance? Let us know your views or post your comments on Facebook page / Google+ page.

Yesterday, we highlighted how the US Fed is considering the idea of a bond buying programme, unlimited in time and scope. If this wasn't dangerous enough, the European Central Bank is believed to be on the verge of something pretty similar. This makes us wonder whether is there any central banker who's sane enough to recognise the perils of such a policy action. Fortunately, there is one such person in the form of Jens Weidmann, the head of Germany's Bundesbank.

In a recent interview, Mr Weidmann has expressed his strong reservations against bond buying and has termed is as state financing via the printing press. He has also argued that there is real risk that central bank financing can become addictive like a drug. We believe that he cannot be more accurate. However, in a group full of monetary hawks, he may find himself in a minority. It certainly looks like there is very little that can stop the onslaught of the coming gusher of liquidity. Gold may perhaps be one of the few things that could help us stay afloat.

Every cloud has a silver lining. And corporate scams like Satyam like are no different. Such scams have been an eye opener to the loop holes in corporate governance practices and offer opportunity to make amends. The latest move in this direction applies to audit firms.

What happened at Satyam was not just a misdeed of company management. The sad neglect of duties on the part of auditors was equally responsible for one of the biggest corporate scams in Indian history. Earlier, these firms could wash their hands off by putting the blame on auditors. However, this won't be the case now. The capital market regulator Securities and Exchange Board of India (SEBI) is now looking to bar audit firms from certifying accounts of listed companies for a certain period if accounts of books certified by them are found to be cooked. It is one thing to have a code of conduct for auditors, quite another to make sure they are followed in letter and spirit. It is the laxity in the latter that leads to a breeding ground for corporate scams. We believe that Sebi's decision will go a long way in plugging this gap.

That the Indian economy has slowed down is something that cannot be disputed. In the January to March quarter, GDP growth fell to a low of 5.3% and the data on industrial production is also not something to be enthused about. The RBI in the meanwhile has been under pressure to cut rates to bolster growth. The central bank had undertaken 13 consecutive rate hikes in the past, before deciding to halt as growth slowed down. Although, it did cut rates by 0.5%, the last two quarters has seen the RBI maintain status quo. Obviously, the biggest worry for the central bank is inflation. And while growth has slowed down, inflation has not really cooled down. What is more, there could be added pressure in the coming months as monsoons have failed to live up to expectations.

The RBI has clearly stated that inflation is a bigger concern for it than growth. What this means is that the burden of bolstering India's growth cannot solely lie on the central bank. The government needs to swing into action as well. It needs to cut down deficit and reduce supply constraints so that inflation does not remain a concern for the years to come.

Amidst rising prices volumes in the Indian property markets have dried up. And if the forecast of Jones Lang LaSalle, the world's second largest property consultant, is to be believed the next twelve months are going to be equally tough. As per the property consultant, growth in India's property market is expected to fall to less than 5% over the next 12 months. Compare this with the annual growth of 17% since 2007. Skyrocketing prices have impacted affordability in the residential segment. On the other hand, slowdown in discretionary IT spend has reduced the demand for office space. Further, it may be noted that elections are due in US during the month of November. Any change in policy after elections with respect to outsourcing into India can further impact the demand for office space. Thus, unless some big ticket reforms get rolled out soon viz. foreign direct investment in retail volumes will stay under check.

Right from start of the session, the indices in Indian equity markets moved deeper into the negative territory today, with no signs of recovery. The BSE Sensex was trading lower by around 130 points at the time of writing. Telecom, auto and engineering stocks were under the maximum selling pressure. Most other Asian indices closed lower today while Europe also opened on a negative note.

04:50  Today's investing mantra
"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." - Warren Buffett

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    7 Responses to "The secret to double digit returns over 40 yrs!"

    Praveen VS

    Aug 31, 2012

    First of all PSU should be listed. Majority stake should be given to public. Their working should be target oriented. Now the days are spend in answering RTI queries and unnecessary paper works to avoid audit and vigilance queries. No time for real work.



    Aug 30, 2012

    As long as the government remains a majority stake holder in the PSU's , their performance will never improve, for the simple reason that any trace of accountability will hurt the politician's interests. The way out is to privatise these massive white elephants and make them accountable , allow healthy competition and give these companies the freedom to price their products in the market place.regards


    Suresh Kumar

    Aug 29, 2012

    With 69% direct ownership of GOI in ONGC, little is expected in terms of professional running of ONGC. The government understands Babu culture kind of process, which is slow, opaque and can be twisted for the benefit of the ministers. It's high time that the government fast-tracked allocations and projects worth more than 10 million US Dollars. Allocations should be through bidding by professional bidders and execution should be through a professional watchdog having independent authority like CAG. Can this be done ? The answer is probably a NO.


    C.V. Subramaniam

    Aug 29, 2012

    I had often wondered why, if Satyam could be revived, why not Ai India by the same or similar team of experts. I'n fact, one could think of a Corporate Revival Team which could address companies I'n triuble like AIR India and other such PSUs.



    Aug 29, 2012

    CAG findings are right. But as you have rightly pointed out that unless Babugiri in PSUs is allowed to continue & Our rulers do not change their attitude this will continue. Ministers have hardly any time to devote towards proper working of their own schemes & they are busy in their resp.constituencies. Nobody wants to go up to the root cause of problems which are numerous.We do not have professionals at the helm of affairs.Unfortunately we cannot predict how long will it take to improve the situation. For example Many super thermal power projects are planned without availability of quality Coal. What will happen when the power generation will start ? Waste of capital expenditure ! (At the cost of Tax payers) like Air India........



    Aug 29, 2012

    Never ... the CAG report will only provide more fodder to stall Parliament !!



    Aug 29, 2012

    Never ... the CAG report will only provide more fodder to stall Parliament !!

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