Do your stocks have a high spiritual quotient? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Do your stocks have a high spiritual quotient? 

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In this issue:
» Is inflation gone or lying dormant?
» State bailouts do not help SEBs
» India should improve agricultural productivity
» Moody's is worried about India's spending
» ...and more!


00:00
 
We all know that the hallmark of a great business is one which has a strong moat, robust financials, superior management and the price of the stock is just right i.e. there is sufficient margin of safety.

But when investing, have you ever considered investing in those businesses that provide value to their customers? Sanjay Bakshi, in one of his article, gives an interesting perspective on this. Allow us to elaborate.

Many of us tend to invest in the markets for the short haul and with the prospect of quick gains. Take derivatives for example. Warren Buffett has likened trading in derivatives to gambling. Since brokers or derivative exchanges make more money when there is greater activity, they will induce investors to keep buying and selling without paying much heed to the likely benefits to the latter. Casinos are no better. A casino makes money only when its customers are at the losing end. So basically both these are instances of where money is being made off the people and is not really good for civilization.

To highlight this point further, Sanjay Bakshi gives an example of MCX and highlights why he may not want to invest in the company despite its strong fundamentals. According to him, MCX is akin to a casino. This is because trading on MCX never really results in a delivery. Indeed, most of the sellers do not own the commodity they are selling. What more, most of the buyers do not really intend to take delivery.

So essentially, all of this is only betting and that too on expected price movements. The only one who benefits from this is MCX because it is playing the role of the casino operator. So the more trading is done by buyers and sellers, the more money MCX makes. It should be noted that on an aggregate basis, both buyers and sellers do not end up richer as trading essentially is a zero sum game.

But making money does not have to be this way. In other words, one could look to invest in an ideal business, which not only provides value add for customers but also makes a lot of money for its owners.

Take Hindustan Unilever for instance. The company has strong and superior quality products in the consumer care segment something that has not been diluted despite the stiff competition in the segment. Bajaj Auto is another example. The company's aim has been to consciously launch products that provide the best experience to its customers and this is reiterated by the leadership position it enjoys in the premium bikes space. What this means is that both these companies are providing value to their customers by anticipating needs and providing quality products to cater to them. This has, not surprisingly, enabled their businesses to grow and in the process has also amply rewarded its shareholders.

So when you are poring over annual report of companies and reading up on them for your next stock ideas, you might want to give a thought to what we call 'spiritual investing'. This is by asking whether the company in question is in a business that does something good for the civilization.

Do you invest in businesses based on the value that they offer to their customers? Let us know your comments or share your views in the Equitymaster Club.

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02:10
 
Bailouts hardly ever have the desired financial consequences! In fact the very idea of bailing out unsound and poorly managed entities that are in financial distress seems unhealthy. However, governments around the world seem to see a lot of merit in bailouts. Take the case of state electricity boards in India. Way back in 2003, the Electricity Act was framed to help the SEBs put their house in order. While there was a temporary improvement in their balance sheets, a decade down the line, they are back to square one! Even the recent round of state bailouts yielded no results! About eight states together accounted for more than 80% of accumulated distribution losses. However, most of them failed to meet the requisite performance criteria.

According to Mint, low tariff increases, slow progress in reducing losses, higher electricity purchase costs and crippling debt have made the financial turnaround impossible for these entities. SEBs of Tamil Nadu, Uttar Pradesh, Rajasthan, Haryana, Jharkhand, Bihar, Andhra Pradesh and Telangana are the most crippled. Others like Uttar Pradesh and Rajasthan have not converted the outstanding state government loans into equity. So with the SEB bailout not taking off, the woes for the power generation sector and banking sector too are far from over! And this virtually means that India's economic recovery could be nipped in the bud. Investors hoping for a quick turnaround of these sectors should be cautious of their investments.

02:43
 
Is the period of high inflation gone forever? Or what the developed world is going through is just a temporary phase where the inflation is lying dormant? This is the latest puzzle that most market experts and economists are grappling with. However if a former IMF Chief Kenneth Rogoff is to be believed, inflation is just lying dormant and can never be dead. As per Rogoff, the level of inflation is not a technocratic decision that can be controlled by central bankers. It is ultimately a social choice and works within the context of macroeconomic and political framework. And as long as these are consistent with price stability, inflation can lie dormant. However, should there be any adverse shocks, high inflation can come roaring back.

While we agree with Rogoff on inflation not being under the control of central bankers, we don't think that inflation is currently dormant. It is very much alive but instead of manifesting itself in the prices of goods and services, it is currently being reflected in asset prices. This is the reason why financial assets like treasuries and equities are both soaring and creating new highs day after day. However, it won't be long before it starts reflecting in prices of goods and services as well. After all you cannot undertake money printing on such a large scale and expect to get away unscathed according to us. From an investing point of view it is thus important to have a small allocation to gold we reckon.

03:17  Chart of the day
 
Problems are nothing but opportunity in disguise. This could be the mantra for India's agriculture sector. One of major problems in the agriculture sector is poor productivity. Rice and wheat are the chief crops produced in the country. It is worth noting that India has the highest land under cultivation for rice and wheat. But where India lags behind is productivity or the yield rate which measures tonnes produced per hectare.

As the chart of the day shows, the yield rates for rice currently stand at 2.41 tonnes per hectare. This is nearly half the productivity levels seen in China. Overall, India stands at number 27 among 47 rice producing countries. Now here is the big opportunity. If India could steadily increase its productivity levels and match China, India could achieve nearly double production from current levels. This could be seen in another way as well. If India's yield rates double, which is not impossible, it could free up half the land that is currently used for rice production. If India can keep improving its productivity rates at a steady rate, it will go a long way in helping the country improve food grain production.

India needs to improve agricultural productivity


04:13
 
With Narendra Modi assuming power at the centre, the FIIs have gone berserk. Since the election results they have invested huge sums of money in Indian stock markets betting on imminent recovery amidst change in leadership. While the investor mood is buoyant, ratings agencies like Moody's are still skeptical about India's revival. The major concern is India's long term spending commitments. Moody's believes that India's fiscal position is vulnerable to excessive spending.

Though tax collections shall help curb the fiscal gap, the deficit is still higher when compared to other countries. Hence, it is pertinent for the government to reduce spending commitments. We reckon fertilizer, food and fuel subsidies are the areas that should be explored. Though it is difficult to tinker with fertilizer and food subsidies as they benefit poor people, phasing out fuel subsidies is on the radar. And this shall reduce the strain on government finances to an extent. However, it would be interesting to see how government manages its fiscal targets with unrelenting burden of fertilizer and food subsidies.

04:45
 
After opening weak, the Indian stock markets continued to slip further into the red in the afternoon trading session. At the time of writing, the BSE-Sensex was trading up by 114 points (0.4%). Sectoral indices were trading mixed with auto and power stocks trading firm. IT and realty stocks were the biggest losers. Asian stock markets were also trading on a mixed note with Singapore topping the pack of gainers and Indonesia leading the pack of losers. European markets have opened the day on a negative note.

04:56  Today's investing mantra
"The best buys have been when the number almost tell you not to. Then you feel so strongly about the product. Almost every business we bought is takes 5 or 10 minutes in terms of analysis. If you don't know enough to understand the business instantly, a couple months of analysis won't change that too much." - Warren Buffett
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11 Responses to "Do your stocks have a high spiritual quotient?"

Kukreja

Sep 15, 2014

Sir,I Salute you all and specially Mr SANJAY BAKSHI for this article, cant believe someone writing about spirituality in stock market!!!. making money is not the end game, we cant chew gold, we cant eat more than what we can.Your article reminds me,of my elders, to keep away from gambling.Please keep it up.

Like 

Ashok

Sep 13, 2014

Congratulations Mr Ramesh, you invested in BHEL at lower price. I was not so wise and invested in bhel on recomendation of EM though at higher level and it is one of the worst performing stock in my portfolio down by almost 25%.(Incidently this stock was recomended in ? valuepro way back and has gone no where). Should i exit, average or do nothing?? Any suggestion please..

Like 

V.JEGANATHAN

Sep 13, 2014

The investors in the secondary market should be more careful and vigil since they make money or lose money in the trade is immaterial, the only winner in all your trades are the share brokers vide their commission earnings. If you are a gainer in a trade, from your profits the commission is shaved off and if you are a loser in the trade, you have to shell down the commission from your pocket which add your pains. In any way the winner is share broker, that too always. He never loses.
In the subject matter of spiritual investing many companies, organisations are working for the society and shareholder's wealth addition: To name a few, The Karur Vysya Bank Ltd., LG Balakrishnan Brothers Ltd, etc. In the first case in the last decade 3 bonus and 3 right issues were declared and in the second case the recent bonus issue of 1:1 made the shareholders richer, the cum bonus rate was around Rs.1000 and now the ex-bonus rate is Rs.700. Like many companies in mid segment performing silently.

Like 

V.JEGANATHAN

Sep 13, 2014

The investors in the secondary market should be more careful and vigil since they make money or lose money in the trade is immaterial, the only winner in all your trades are the share brokers vide their commission earnings. If you are a gainer in a trade, from your profits the commission is shaved off and if you are a loser in the trade, you have to shell down the commission from your pocket which add your pains. In any way the winner is share broker, that too always. He never loses.
In the subject matter of spiritual investing many companies, organisations are working for the society and shareholder's wealth addition: To name a few, The Karur Vysya Bank Ltd., LG Balakrishnan Brothers Ltd, etc. In the first case in the last decade 3 bonus and 3 right issues were declared and in the second case the recent bonus issue of 1:1 made the shareholders richer, the cum bonus rate was around Rs.1000 and now the ex-bonus rate is Rs.700. Like many companies in mid segment performing silently.

Like 

S. Venkatesan

Sep 11, 2014

I fully agree that we should make good money with our investment.
But it is eaqually important that the investment boost the good services and benefits for the country and community.

Even before you publish the article - "Spiritual investing " my first stock buy in my life is my investment in MT Ecucare because, it is in educational field.

I sunscribed

Like 

KD

Sep 10, 2014

You are right. Capitalism is the best system in the world. Read Atlas Shrugged by Ayn Rand.

Ironically, I got very heavy dose of socialism in USA from a person of Indian origin who came from Kerela!!

Like 

Vishwanath

Sep 10, 2014

'spiritual investing' - the company in question is in a business that does something good for the civilization?

Should we invest in liquor companies? Do they do any good to the civilization?

Like (1)

deivanayagam

Sep 9, 2014

of high value

Like (1)

Krishnan

Sep 9, 2014

Generally the articles that you write are ok and informative but I found today's lead article (Spiritual quotient) rather silly and absurd.
I have heard of Sanjay Bakshi but I found the arguments made against investing in MCX quite ridiculous and reflective of a personal bias that has no foundation in reality. Am quite surprised that someone seasoned like him should still be a victim of such personal bias.
To think that 'investing' is the ONLY way to go and thereby anything that does not resemble this approach is nonsense, is a terribly biased view. Who is to judge that commodity trading (or any form of trading for that matter) is not the real thing because it does not result in delivery is a ridiculous theory. Not to speak of being downright hypocritical!
Are people investing in the markets doing it with some altruistic or socialistic or nationalistic fervor! How sublimely ludicrous! EVERYONE is in it for the money. Period. Pretending otherwise is just that- pretence.
Step off your stupid horse, Mr Bakshi, the one you seem to think is so high and lofty that everything else appears to be irrelevant from where you sit.
Come taste the coffee and smell its aroma. Considerably more money is being made trading commodities and forex than is being made in long equities.
That you don't know this fact just means that you don't know. Please don't make a theory out of it and prattle it about. Many people will end up getting misguided.
Utter bilge.

Like (1)

parimal shah

Sep 9, 2014

The reason SEB are in bad shape is the free power to farmers.
That free is often diverted and those required to pay bills have to often pay higher tariff.
If domestic tariff rates are charged to the farmers and subsidy, if any, and if eligible; may be given via bank credit transfer.
A farmer showing agricultural income of INR 1 crore or more is certainly not the one who needs free power.
Many so called farmers (on paper) are conduits for black money.
Hence, a token tax of Rs.10 on income exceeding 25 lakh from the farmers will keep a trail and gradually the menace of black money may be reduced by this route.

Like (1)
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