How to think better than most humans? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

How to think better than most humans? 

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In this issue:
» Poor governance costs India its competitiveness
» The age of double digit returns is gone, believes Bill Gross
» Can dollar remain world's reserve currency?
» Saudi Arabia could run out of oil to export by 2030
» ...and more!

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'He has the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence'. This is indeed a great complement to give to someone. And if it comes from Warren Buffett, you have to just sit up and take notice. Yes, that's correct. This tribute has indeed been paid by the world's most successful investor. And to none other than Buffett's business partner, Charlie Munger. Now, you wouldn't have heard of Munger as much as Warren Buffett. But make no mistake. The hands that made Berkshire Hathaway were as much Munger's as Buffett's. In fact, even Buffett freely admits that Charlie Munger has been one of the biggest influences on his life.

So, what is the philosophy that Munger lives by? Well, he believes that one need not be a genius in order to think better than most human beings. Developing certain thinking habits can also do the trick. And these habits are nothing but 'Big Ideas' from fields as varied as physics and psychology. The upshot is that whenever one is confronted with a problem, one can dig into his mental resources and find the ideas and models that are best suited to solving the underlying problem. And here's the real clincher. As per Munger, there are only 3-4 big ideas in any discipline and hence, most of them can be easily learned and remembered.

Insightful, isn't it? The good news is that you don't have to run helter-skelter to prepare a list of the big ideas yourself. Munger has been kind enough in doing so and the outcome has been a gem of a book titled 'Poor Charlie's Almanack'. It contains not only most of the big ideas that Munger uses to solve problems but also interesting anecdotes and speeches that he has given over the years.

As per us, full justice to this book cannot be done by reading it just once and then forgetting about it forever. Instead, the person who wants to extract the real benefit should take in the wisdom that lies in those pages slowly, one page at a time. Efforts should be made to make the book one's lifelong companion. And a strong improvement in the thinking process is all but guaranteed.

01:11  Chart of the day
Today's chart of the day highlights how much does it cost to print one currency note of different denominations in India. As shown, while the higher denomination notes cost more to print on account of them being more susceptible to forgery, the money printing cost as a percentage of the value of the note is certainly on the lower side. In order to print Rs 20 note on the other hand takes up close to 5% of the value of that note. Given these economics, we won't be surprised to find notes of still higher denomination going forward.


"India shining". This used to be the title of most presentations made by business houses and financial institutions. Everyone used the phrase to showcase the positives of investing and doing business in India. And we are not referring to something that is ancient history. This phrase signified India just a few years ago. In the year 2009, India was ranked at 49th place by the World Economic Forum in its Global Competitiveness Report.

But just 3 years on, things have changed. India has now slipped to the 59th position. The reason - poor governance and policy paralysis. The hoards of scams and negative reports have hurt the global picture of the country. At the same time the policy paralysis that seems to have a firm hold on the economy, has hurt the business sentiments. To add to this is the 'business cost of terrorism' due to the security risk. The only thing that seems to have come to India's saving is its sophisticated financial markets. If not for that, India's ranking would have been even lower.

With the euro almost on the verge of a break up, there is no major currency that can replace the greenback. Thus, the US dollar could continue to dominate the global currency landscape for quite some time.

But there is a big reason behind the dollar's phenomenal rise in stature despite it having abandoned the gold standard in 1971. In the 1970s, the US authorities sealed an agreement with the OPEC (Organization of the Petroleum Exporting Countries) to price oil in US dollars exclusively for all global transactions. Thus in a way, the dollar got backing from oil and became indispensable for global trade. Any country that purchased oil from OPEC countries would have to pay in dollars. This created huge demand for dollars, allowing the US central bank to print money recklessly. In exchange, the US assured to guard the oil producing countries in the Persian Gulf against threat of invasion or domestic rebellion.

However, over the last decade, the status of the US dollar has been challenged. In 2003, Iran started pricing its oil exports to European and Asian nations in euro. By 2009, it stopped all oil transactions in US dollars. It must be noted that Iran is the second largest OPEC oil producer. This is not the only threat to the dollar. Another major threat to the dollar is the reducing appetite of Asian central banks for holding US dollars. It is high time US policymakers stop taking the dollar's reserve status for granted.

What typically tends to be the criteria for you as an investor when choosing a portfolio? Naturally, what comes to the top of the mind are strong returns. But Bill Gross, founder of the world's largest bond fund, has another view. He opines that investors need to choose those portfolios which carry the lowest fees possible. Gross believes that with a new era of inflation dawning upon us, the days of double-digit returns are over. Thus, if inflation is already eating into your returns, it does not make sense to pay higher fees as well.

This is not surprising. The US and Europe have been mired in debt and recession for quite some time now. And the future outlook does not look very enthusing either. Obviously, various quantitative easing measures have been virtual non starters as far as fuelling growth is concerned. Depending entirely on the emerging nations such as China to rebalance growth of the world economy does not bode well given that these nations are also bogged down by their own set of problems. In light of all this, earning double digit returns on any kind of portfolio does seem a tall order and investors need to be prepared for this eventuality.

Oil markets often face speculations that fall beyond the confines of logic. But this one beats all with a wide margin. As per a recent report, Saudi Arabia, the world's largest oil producer with 13% share in global supply, may turn a net importer of oil by 2030. The warning is based on the premise that Saudi Arabia will need to double its power capacity by that time- a project that will suck up all its oil.

With a quarter of its oil already burning to produce almost half of its power, the author believes that putting this plan to action may even imply a need for oil imports. He discounts the nuclear alternative for lack of investment and cost overrun issues.

We believe that it is quite outrageous a warning. We don't deny a steep surge in power demand in Saudi Arabia, as it is still passing through the developing phase. However, that can be taken care of using nuclear power and solar panels. On the other hand, there is no substitute fuel for country's economy apart from oil. With 80% of the country's revenue coming from oil exports, Saudi Arabia can hardly manage to let its oil exports dry. We wonder how it will fund its import bill for oil.

Ignore economists. Ignore the central bank. Ignore rating agencies. But how long will the Indian government manage to ignore every finger being pointed at the messy state of affairs? Steep inflation, current account deficit, fiscal deficit are just a few of the macro economic factors haunting India for long. But there are some grave ones like the debt to GDP ratio in India exceeding 90%.

Undoubtedly with policy logjam and shortage of critical resources, it is rather difficult to buy into 'India story'. Especially if someone is hoping for a quick turnaround in the situation. We are therefore least surprised by the comments of Jim Rogers. In an interview to Business Standard, the well known investor has said that he is no longer "a fan of India". In fact that he is also short on India.

We do not blame him for the pessimistic view as anyone looking for short term gains from India is bound to be disappointed. All that we hope for is that the government should not spoil India's long term prospects completely.

Do you think Rogers is right in being negative on India? Share your views or you can also comment on Facebook page / Google+ page

Meanwhile, indices in the equity market in India are trading close to the dotted line with the Sensex higher by around 25 points at the time of writing. Heavyweights like Infosys and ICICI Bank were seen driving most of the gains. While most Asian markets closed strong today, Europe too is displaying strength currently.

04:56  Today's investing mantra
"Neither a short-term borrower nor a long-term lender be" - Warren Buffett

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    3 Responses to "How to think better than most humans?"

    prashant maheshwari

    Sep 7, 2012

    graham says minimum 10 cos and maximum 20 cos for starters, you have almost 90 cos for starters in all schemes, that shows the quality of research and their conviction, most of the people in india or abroad make money in single business or profession, when you dont have conviction such mass diversifications, think over it, if i can get your comments i would be happy, more happpy when your research outfit works differently the way you started quantum mutual fund


    prashant maheshwari

    Sep 7, 2012

    unbiased opinions on investing in india??
    you have started the quantum mutual fund, with great ideas, one of them was no entry load or exit load, lot of patience was required, you went against the tide in the industry

    let me ask you in what way is your research outfit different than the other crap available in the market like moneycontrol various schemes, dalal street, capital mkt, sptulsian, etc etc, ??? you also have large cap select - 52 stock ideas in a year, midcap select 26 per year, small cap 12 per year, have you made a mock portfolio of the recommendations given by you and seen the returns of the various schemes provided by you or you are also based on the book fooled by randomness ??


    Ramesh A. Bakshi

    Sep 6, 2012

    Jim Rogers is absolutely right. With rampant corruption at all levels and policy paralysis, this UPA Government would not be able to achieve anything during the remaining period. In 2014 too perhaps there would be another UPA 3 in power. Five more years of paralysys?
    I hope not.

    Like (5)
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