What is the most important thing in investing? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What is the most important thing in investing? 

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In this issue:
» Which sectors were allocated the controversial coal blocks?
» Will the regulator bend rules for this ailing airline?
» What will be the future of Asia?
» Why being a professional investor is a big challenge?
» ...and more!

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Earning high returns is something that every investor wants. After all, that is what investing boils down to. But as we have stressed over and over again, it is the philosophy you adopt that matters the most. In this regard it is always interesting to read on the philosophies and investment approaches adopted by gurus. These are, after all, people who have amassed big fortunes in their long years of investing. One such individual is Mr Howard Marks, the founder of Oaktree Capital Management.

In his book, "The most important thing" he has outlined his key learnings from over 40 years of successful investing. Rather than giving formulae and numbers, the book uses examples to describe his most important learning in the world of investing. The most important thing in the book is the importance of value investing over growth investing. Mr Marks states that "consistency trumps over drama". Using the philosophy of value investing, one can identify stocks with strong fundamentals that deliver superior returns over a long period of time.

Having identified such a stock, the next thing that an investor wonders is when to buy and when to sell. The book talks about the cyclicality in stock markets which present opportunities for doing exactly this. This cyclicality is caused by human behaviour which tends to magnify itself both during good times as well as during bad. The returns so earned have to be understood in conjunction with the risk. Here Mr Marks defines risk as the potential loss of capital and most importantly the permanent loss of capital. Understanding, recognizing and controlling risk is perhaps as important as identifying the stock itself.

Following the philosophy of value investing, understanding the risks of investing is not really something everyone can do. But those who manage to do so earn superior returns over the long term.

We will continue to review more such books, which are a must have in an investor's shelf, over next few days. If you have already read the book let us know your views or post them on our Facebook page / Google+ page

01:06  Chart of the day
The coal block allocation scam is not the first is the list of scams that the UPA government's tenure has been endowed with. But unlike the CAG or the 2G telecom scam, this one has not been centered on few individuals. In fact it has embroiled a host of top policy makers including the Prime Minister. And it seems that believing in the government excuses is a far cry. Not just for the members of opposition but even general public.

The government has explained that auctioning coal blocks would have raised output prices in power sector. However, it seems a majority of the reserves were allocated for consumption in the unregulated sectors of steel, pig iron, sponge iron and cement. As per Business Standard, just 43% of the coal blocks were allocated to power sector. Since unlike power, the output prices of these commodities are not regulated, they ended up making abnormal profits. Which means that these entities made huge profits at the cost of the nation's limited resources. Whether the government or the corporates involved in the scam, the guilty certainly need to brought to book.

Data source: Business Standard
*Pig iron, Coal to Liquid and Commercial

Financial health of a company is important when it comes to stock investing. But it is equally important when it comes to doing business with a company as well. However the question here is that is the financial health of a company important when it comes to using its services? And what if the services being offered are flying you to your destination? In our opinion, it is of utmost importance. Because if a company's financials are terrible or it is down in the dumps, then how would they ensure the safety standards? Well as per a leading daily, the regulators do not seem to think so. The airlines regulator is of the opinion that there is no reason to suspend the license of Kingfisher Airlines. The company is deep in red. It has reportedly not paid its pilots. Its problems are printed in every other newspaper. But as per the regulator the company is maintaining the minimum number of flights and is adhering to the safety standards as well. The thing is that there is a set of standards called civil aviation requirement or CAR. And financial health of the airlines is an important part of this. However, either the regulator is ignorant of this standard. Or it is bending the rules for Kingfisher Airlines. Why? Well only the regulator can answer this question.

It needs no telling that the economic center of gravity has moved from West to East. Asian countries, thanks to their high savings rate and a low base of GDP per capita, will continue to log in higher growth rates than their western counterparts for many more years to come. But what goes unnoticed perhaps is another important fact. As pointed out by the Economist, by 2030, Asia (excluding Japan) will be home to half of the world's elderly. And by virtue of this, it will also host most of the world's pensioners and patients.

Thus, it goes without saying that these countries will certainly have a big challenge on their hands. They will have to ensure that the elderly get all the help they need. This is not the only challenge though. As income levels rise, there will be a clamour for other Government sponsored schemes too like health insurance and unemployment benefits. Needless to say, this is going to put a big strain on the Government exchequer. Thus, it is imperative that a fine balance is achieved. The balance between making the schemes fiscally feasible and also ensuring that every citizen gets to lead the dignified life he /she deserves. As The Economist rightly points out, the welfare state should not only free the continent from squalor. It should also not sink it in too much debt.

How tough is investing in today's world? Global financial markets are so interwoven that if one major market sneezes all the other markets catch a cold. Then there are periods of extreme bullishness which are followed by plunges in the markets. All of which makes life tough for a professional investor. But Mr John Standerfer in an article believes that there is one factor that really tests his mettle. Which is that his performance is measured not only against his peers but also against a passive benchmark. Indeed, even in professional competitive sports, there is no passive benchmark against which that sportsperson's performance can be measured. So if a professional investor continuously fails to do better than the benchmark, in today's world that is bound to hurt his reputation. We believe that investing need not be as tough as it is made out to be. The idea is to look for companies with good track record, sound management and attractive valuations. Once you invest in such stocks, in the longer run the returns are bound to be good.

The entire European Union (EU) is submerged in a severe debt crisis. Many steps, including the current unlimited bond buying program, have been taken by the European Central Bank (ECB) to come out of the debt trap. But the results are far from satisfactory. In such a scenario, where survival is difficult can EU attract new member nations to its territory and save the Euro?

For that, first we need to understand the benefits of joining EU. Becoming EU member would attract investment from other member nations. It can also stabilise the banking industry as support from ECB is at hand. By joining euro zone the small economies would tend to become more stable and would be eligible for lower interest rates. However, becoming a EU member also has its drawbacks. Once a country enters Euro zone capital becomes cheap so there is a tendency to accumulate debt. And that's where the problem begins. Portugal and Spain are prime examples to that. However, some like Poland and Czech Republic which are part of EU but have flexible currencies are in a sweet spot. They get all the benefits of being a EU member but are saved from the massacre of Euro. Also, notable is their low debt compared to other member nations. Thus, curtailing debt and flexi currency is the mantra for survival in this environment.

Slowing economic growth and industrial output are having an effect that may slow India down even further. Gross direct tax collections increased by merely 6.5% to Rs 1.6 trillion in the April-August 2012 period. Corporation taxes showed a meagre increase of 0.15%. Collections of personal income-tax, however was up 17%. Corporation tax has remained subdued this year as most macro indicators were weak. GDP growth came down to 5.5% in 1QFY13 against 8% earlier. Industrial output contracted 0.1% as against 7% a year ago. The Finance Minister believes that collections may pick up towards the latter half of the year. September advance tax payments may give an inkling as to whether the target will be met. To raise collections, the ministry plans to focus on increasing the tax base, making people file returns and quickening the process of assessment. If tax collections don't pick up, we may see even worse numbers on the deficit front.

In the meanwhile, the Indian equity markets traded in a volatile manner today. At the time of writing, the BSE-Sensex was up by 31 points (0.2%). All sectoral indices witnessed buying interest except metal and auto stocks. Asian stock markets represented a mixed performance. Hong Kong was the top gainer and China the top loser.

04:50  Today's investing mantra
"There are all kinds of businesses that Charlie and I don't understand, but that doesn't cause us to stay up at night. It just means we go on to the next one, and that's what the individual investor should do." - Warren Buffett

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