Meet The Investor With Most Wisdom - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Meet The Investor With Most Wisdom 

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In this issue:
» What will happen if the dollar eventually rebounds
» 80th anniversary of The Great Depression
» Another downturn round the corner
» Foreign punters under the garb of FIIs
» ...and more!

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Help us reconcile these facts. One of the most boring forms of investing and yet, it's most famous disciple being regarded as the best assessor of financial markets. The contradiction may be a little hard to digest but certainly not the accolades that have come the man's way. After all, they do not make long-term track records like his anymore. So, while Warren Buffett may have messed up some of his purchases like Conoco Phillips in the year gone by, it has not done his reputation a great deal of harm. Also, he had deals like Goldman Sachs and General Electric to show that he can still be counted upon for his Midas touch.

It is after considering perhaps these very factors that a random sample of more than 1,400 Bloomberg subscribers has retained Buffett as the pre-eminent market visionary with close to one out of every four respondents taking the Oracle of Omaha's name. The list had other illustrious people such as Bill Gross, George Soros, Nouriel Roubini and Marc Faber trailing him by a significant margin.

So, what is it that makes Buffett so successful? Is it his intelligence and passion or his independence of thought? Of course, it is all of this. However, if there is one thing that really makes him an outstanding investor, it his discipline. After all, as he often says, "Success in investing doesn't correlate with I.Q. once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing." Well said indeed. But many would still wonder what stocks Buffett would have picked, had he been an Indian.

01:34  Chart of the day
Not more than 18 months back, the global markets were jolted with the realization of a malady called 'the subprime crises'. It dragged asset prices lower as though there was no tomorrow. Asset classes across the spectrum - be it real estate, stocks, bonds or precious metals - witnessed some of their historic lows. While a part of the subprime malady has been pushed under the carpet, investor greed is certainly back in full force. Valuations for stocks in most of the benchmark indices seem to be running ahead of their fundamentals these days. Be it Indian markets or markets across the world. As today's chart shows, despite the recent spurt in Indian benchmark indices, valuations in India continue to remain at a discount to most other BRIC nations, particularly China. While we are of the opinion that the long term story for India remains intact, we would certainly recommend investors to look for appropriate valuations.

Source: BSE, RBI
Note: Countries are representative of their benchmark indices

The alarm bells for an impending crash seem to be getting louder and louder with each passing day. Renowned economist Nouriel Roubini recently added to that underlying theme in a recent interview where he said that we can possibly have a market crash all over the world. The reason? He is of the opinion that everybody is currently busy shorting the dollar, borrowing and investing in assets all over the world. That has helped push the dollar to a 14-month low. People are borrowing at zero percent interest rates in the US and investing in other countries, which is even more beneficial for them because we currently have a falling dollar. But according to him, the dollar will eventually rebound. And when that happens, everyone will have to close their short positions and dump their assets, and this is how we can have a market crash all over the world all over again!

It's been 80 years since the crash of 1929 and the Great Depression thereafter but nobody is likely to forget that phenomenon anytime soon especially in wake of the current global financial crisis which in many ways resembles the former. The Great Crash of 1929 was the most devastating stock market crash in the history of the United States, taking into consideration the full extent and duration of its fallout. And like most crashes, the period before this meltdown took place was characterized by wealth and excesses with the belief that stockmarkets could sustain high price levels. Infact, during the depression of 1929-32, the Dow Jones kept declining for around 150 weeks with prices plunging by as much as 90%.

In contrast, while the current crisis is being compared to the Great Depression, the Dow Jones spent around 70 weeks declining with prices falling by around 50%. What is also different is that governments across the world did not come to the rescue of financial institutions then like they have done now. That said, the Great Depression and the current global financial crisis are grim reminders of the massive damage that greed and quest for wealth can do.

We can't stop them. But we can atleast warn you.

Central banks the world over, including the one in India, are in a copious situation. They have too much money floating around them without visible means of their utilization. Pulling back the money supplies would mean calling short the stimuli that the economies are banking on for recovery. Hence worldwide, asset prices are rising much faster than nominal GDP growth rates. That is, monetary growth is being used to support leverage, mostly in the financial sector. As a result, instead of the money supply flowing into productive uses, the same have flowed in asset markets creating a bubble-like situation. Noted economist Andy Xie says, "Money supply growth has sparked an asset market boom that supports the economy, not the other way around. Don't get burned." We concur with his warning.

Although the RBI has been a relatively more responsible central banker, the situation in India is not very different from that in the developed nations. Globally unemployment rates are at record highs while global trade is still at one-fifth its peak level. The small- and medium-sized companies that are the most labour intensive are struggling. While experts have argued that the answer is not to limit the money supply but to reform the financial system, it must be remembered that this is not a zero sum game. Both, efficient use of liquidity and better regulated financial markets are necessary to rein in the main factors that lead to the recent crisis.

Foreign punters under the garb of FIIs looking to make a quick buck are gobbling up Indian real estate stocks while cutting their positions in blue-chips. As per statistics from The Economic Times, at the end of September 2009, FIIs owned 25% of the aggregate equity capital of 36 realty companies, higher than the previous year's 9.6% and the year before levels of 10.3.

While increasing their exposure to realty stocks, what FIIs have done is reduce their stakes in relatively defensive IT and engineering stocks. While some FIIs have outlined concerns like offshoring issues while paring their stakes in IT companies, high valuations is cited as the reason for lowering exposure to engineering stocks.

But we ask - why realty, despite most of these companies having messy balance sheets and shady disclosures?

Meanwhile, Indian markets witnessed a feeble trading session today and the BSE-Sensex was down nearly 77 points at the time of writing. Stocks from the realty and metal sectors were amongst the major contributors towards the weakness. Amongst global indices, while most Asian stocks closed in the negative, Europe was also under a spell of weakness.

04:55  Today's investing mantra
"The future is never clear, and you pay a very high price in the stock market for a cheery consensus. Uncertainty is the friend of the buyer of long-term values." - Warren Buffett
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5 Responses to "Meet The Investor With Most Wisdom"

Tapan Kumar Kes

Nov 1, 2009

I am a very small, but long term investor.When twin towers weres were blown up, I went to buy stock ofcourse to my small capacity.However, this time with the global melt down my confidence was shaken and my behaviour was opposit and consequently I lost in the market. At the age of 68 with low capital base and low low stock holding what can I expect from your company?



Oct 30, 2009

What is in a name? I am very much interested in finding out your performance as it's presented by Mutual Fund houses for their various schemes.I hope your true measure of success lies in the numbers that you might have delivered over the years.I am a long term investor but a 'risk prone' category.
I need your help to achieve my goals , but no false promises please.
Thus, please send me your past record of performance , with views of one or two satisfied clients.
Thanks and warm regards
Asit Das



Oct 29, 2009

ure suggession is effective, i am long investor invested now a big possission SUJLON @ 89 what future


Vijay ( Dubai)

Oct 29, 2009

Are you sure that the Indian P/E is around 18.9 times ? What is the EPS for the Sensex companies. I think it is Rs 800, the P/E should be over 20 times. Kindly clarify.


Bharat Sanat Nanavaty.

Oct 29, 2009

Kindly accept my compliments for coming out with this product, which aims at creating wealth over a long term. This is first of its kind, as every one talks about investments for 2-3 years. I am sure that your subscribers will greatly benefit by creating wealth for temselves and for their next generation.
Here timing the market will be the most important as entry at the least possible investment, can multiply the investment several times. kindly confirm how this is going to be handled.

Wish you all the very best for the new product launch. and Best wishes for the Festival Season to all the team members.

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