Being 'un-smart' can make you a wealthy investor - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Being 'un-smart' can make you a wealthy investor 

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In this issue:
» The legendary Gordon Gekko is back!
» Investing overseas is fraught with risks
» Real problem with India's oil pricing
» Worst ill afflicting the Indian economy
» ...and more!!


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00:00
 
A leading business daily today carries an interesting article on how small investors can unearth profitable stock ideas. It suggests that investors can do this by studying what the big guys - institutional investors - are buying and then toeing their line.

Well, this is an interesting way to go about investing in stocks. But how profitable is this for small investors is something we doubt. This flows from the recent statistic from the SEBI chief that around 60% of the mutual fund schemes in India have under-performed the broader markets over the past few years. So much for the acumen of the big fund houses and their star fund managers who get paid excessively!

We believe that instead of following what the big (and supposedly 'smart') money is doing, retail investors would be better served by doing independent research on companies before buying their stocks. And we are not saying this without reason. The 2000 dotcom bubble and the power and realty bubbles of 2007 are instances when institutional investors went too aggressive on their investments into these sectors and then paid a heavy price when the bubbles burst.

So, if you count history as a good teacher, you know that you can safely avoid the big and 'smart' investors betting on risky stocks, and directly invest in safe stocks to earn good returns in the long term. But then, before that, you ought to do your independent research on your potential investment targets.

01:02  Chart of the day
 
Today's chart shows the stark difference in the salary levels of the chiefs of India's large private and public sector banks and that of the RBI governor. At Rs 1.5 m per year, the RBI governor's salary is paltry compared to what the honchos in the private sector banking space earn. Even the salary of the chief of India's largest bank, SBI, is miniscule as compared to his private sector counterparts. Ironical indeed!

Source: Economic Times, Companies' annual reports

01:23
 
Indian movie enthusiasts may not be too familiar with Gordon Gekko. But he is somewhat of a cult figure in the US, especially among the Wall Street enthusiasts. His immortal words - 'greed is good' - in the famous 1987 movie 'Wall Street' came to symbolize all that the real Wall Street was to become in the next decade and a half. This month marks the return of the reel world Gordon Gekko in the much anticipated sequel to the original. And this time too, the timing couldn't have been more apt. In fact, Mr. Gekko can keep coming decade after decade and there are chances that his 'Greed is good' motto will remain as fresh as ever on Wall Street!

01:49
 
Warren Buffett once said that diversification is a protection against ignorance. And with the amount of study required, the average lay investor cannot help but be ignorant. So diversification is indeed necessary. But just how much should one diversify? Should one go to the extent of diversifying one's stock portfolio with overseas investments? While overseas investments are a possibility, investing outside India is anything but necessary.

For one, India has an astounding range of companies that one can invest in. The opportunities are plentiful. Add to that the untapped potential that most industries in the country have. And this lends them some amazing growth prospects. With such rich soil in your own backyard, it makes little sense to go around fishing in other unknown backyards (and taking undue country and currency risks).

The only potential advantage one can have by investing in overseas stocks is to have a portion of one's portfolio insulated from a crash specifically in the Indian stock markets. However, for a genuine long term investor, this is not a risk at all. As long he doesn't have to liquidate his holdings during such a bad market phase, such a crash is a non event for him.

02:41
 
Anyways, Indian markets had a good day today. The BSE-Sensex was trading with gains of around 350 points (1.9%) at the time of writing this. These gains were led by buying in stocks from the metals, banking, and realty sectors. On the broader BSE, there were three gainers for every stock that was trading in the red.

Other key Asian markets also traded strong today, led by Japan (up 2%), Hong Kong (1.8%), and China (1.5%). European markets have opened the day on a strong note.

03:03
 
We often hear the government saying that it bears a huge subsidy burden on petroleum products. Hence these should be priced at market prices. The opposition claims that this is blatant profiteering. After all, the government levies huge amounts of taxes on these very petroleum products.

An interesting article in the Economic Times makes this point even clearer. It mentions how India is at the forefront of nations which levy taxes on petrol. In fact, the whole mechanism is a giant scheme of rob Peter (taxes on transport fuel-petrol, diesel, jet fuel) to pay Paul (kitchen fuel-LPG, kerosene). Hence, on an overall basis, the government's subsidy in the oil sector is a misnomer. The article goes on to mention that even upstream producers like ONGC end up making profits and hence its claim of subsidies is untrue. A point we disagree on.

We also disagree when it says that the downstream companies - Indian Oil, BPCL and HPCL - make small profits because they pay large salaries. The burden of under-recovery for them is genuine. But yes, the government does need to simplify its structure of levying huge taxes on the one hand and doling out subsidies on the other.

04:02
 
That the ills afflicting the Indian economy is due to poor public governance has often been reiterated time and again. And Infosys's founder Mr. N.R. Narayana Murthy has once again bought this issue into the limelight. There has been continuous apathy surrounding public governance. This means that India is beset by a host of problems. These include illiteracy, malnourishment, lack of sanitation facilities and dismal food and power management. And that's not enough!

Mr. Murthy also opines that even after 63 years of independence, not much progress has been made. For instance, 350 m Indians can't read and write. The country has the largest mass of malnourished children. 250 m people do not have access to safe drinking water. 750 m have no access to sanitation facilities. And then, 35% of total production of grains is allowed to rot. He also hinted that private governance institutions have fared better. This is because of competition, entry of multinational companies and the need to compete at the global level. What is really needed is the will and discipline to bring about a much needed change in various critical areas of the Indian economy. But sadly, the government as of now does not seem up to the challenge.

04:56  Today's investing mantra
"There seems to be an unwritten rule on Wall Street: If you don't understand it, then put your life savings into it. Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product." - Peter Lynch
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5 Responses to "Being 'un-smart' can make you a wealthy investor"

A.V.Krishna Murthy

Sep 6, 2010

Yes Sir, Today's article makes a good reading for
everyone.Mutual Funds record shows that some of them are
Mutual SINKS.The truths about Petrol subsidies! Then the
poor governance-the salaries of the Honourable MP's have been hiked recently.What the RBI Governor must be thinking?

Like 

Bhupendra Vora

Sep 6, 2010

I AGREE 100% WITH MR.NARAYAN MURTHY THAT OUR PRIME NEED IS EDUCATION TO ALL AND COMPULSORY.

BUT THE PROBLEM IS THAT ALL POLITICAL PARTY AND ITS LEADERS FIRMLY BELIEVE THAT THE MASS OF INDIA SHOULD REMAIN VERY VERY POOR AND UNEDUCATED SO THAT HE/SHE CAN NEVER UNDERSTAND HOW THEY ARE RULING THE COUNTRY.DUE TO THIS MENTALITY ANY PARTY IN POWER WILL SEE THAT ON PAPER
THE PLAN WILL BE MADE LIKE EDUCATION TO ALL BUT EVERYONE IN THE PARTY WILL MAKE EFFORT TO SEEN THAT MOST OF INDIAN REMAIN UNEDUCATED OR UNDER EDUCATED.

THE CHIELDREN OF LEADER'S OF EVERY PARTY GET EDUCATION IN INTERNATIONAL SCHOOLS IN FOREIGN COUNTRY.

IN THE COUNTRY WHERE MORE THAN HALF OF ITS POPULATION IS UNEDUCATED OR UNDER EDUCATED HOW THEIR SO CALLED LEADERS (MOST OF THEM ARE UNEDUCATED AND SOME TIMES CRIMINALS TOO) WILL THINK ABOUT SANITATION FACILITIES,DRINKING WATER AVAILABILITY,MALNUTRITION ETC THEY WILL DEFINITELY THINK FOR MAKING MONEY AND MAKING THIS POOR COUNTRY MORE POOR.
WILL THIS FORUM OR ANY OTHER FORUM WILL TAKE INITIATIVE FOR COMPELLING ALL MP TO MAKE LAW THAT AGE LIMIT FOR CONTESTING MP OR MLA ELECTION SHOULD BE BETWEEN 30 AND 60 YEARS AND MINIMUM EDUCATIONAL QUALIFICATION SHOULD BE GRADUATION IN ANY LINE AND NO CRIMINAL RECORD.

Like 

SYJ

Sep 6, 2010

One reason why PSUs are not performing like private sector is poor salaries of middle and top management people and interference from govt babus (all types of secretaries like addl, joint, deputy etc). Therefore, no talented person likes to join PSU and I hope govt. wakes up to this reality. IIT or IIM graduates don't even think about joining PSUs. Most of the PSUs are debt free companies with solid fundamentals,..they can perform really well, only if talented people are inducted in the management.

Like 

sethu

Sep 6, 2010

Yes.narayanamurthy is quite right..In bureaucracy IAS itself should be eliminated..but more crooks have occupied that cadres and enjoy..Joined with politicians they will ensure that the current MISGOVERNANCE continue for ever..in this country..What Murthy seeks is chane in the mind set of these cadres ,coming out of their petty selfishness...When that happens,if atall if it happens INdia will be a real superpower in the world..

Like 

C.N.Prasad

Sep 6, 2010

It is interesting and Confusing

Where do you Want a Retail average invester to INVEST or NOT in the present day When the senex is going UP and UP/ You want us to wait for the Bububle !
Which people predicted When ever there is Correction

Like 
  
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