Is your stock affected by any of these 4 evils? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is your stock affected by any of these 4 evils? 

A  A  A
In this issue:
» How has gold performed Diwali to Diwali?
» SEBI plans to build equity culture in India
» Top level at realty firms undergoing churn
» Odisha: Resource rich, economically poor
» ...and more!

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"How much will it go up and in how much time?" This is the most common question that investors tend to ask when they come across a prospective stock idea. A positive response to the above question often prompts an investor to buy the stock.

But this is not how successful investors do it. On the contrary, when faced with a lucrative investing idea, they first play the devil's advocate to figure out any potential risks that could derail their investments. A famous investing quote goes thus: "Watch the downside; the upside will take care of itself."

We came across an interesting article in the Economic Times that mentioned some key risks that Indian investors should take care of.

Number one- Be wary of big ticket acquisitions. If the past is any good an indicator, acquisitions seldom work. On several occasions, price wars between competing buyers end up with the acquirer paying a hefty premium. Financing big acquisitions often tends to erode the acquiring company's balance sheet. Moreover, integrating the acquired company and making the synergies work is not only a tall task but also very time-consuming.

Number two- Be wary of rising debt levels. Using debt is not at all a bad idea. But too much of it weighs heavily on a company's cash flows and profitability. In the current economic environment where growth has slowed down while interest rates have remained high, highly indebted companies are in deep trouble.

Number three- Be wary of companies with corporate governance issues. Management integrity is one of the most crucial factors that no investor can afford to ignore. Several companies that have been associated in shady deals have seen their stock prices being battered.

Number four- Be wary of structural changes in an industry. Sometimes, there could be nothing really wrong with a business. But some adverse regulatory changes could fundamentally alter the prospects of the entire industry. In such cases, it is best to consider the impact of such changes before investing into the stock.

According to you, what other risks should Indian investors bear in mind while making their investment decisions? Share your comments with us or post your views on our Facebook page / Google+ page

01:10  Chart of the day
Diwali 2012 is just a couple of weeks away. Traditionally, this has been the season for buying gold. We thought it would be interesting to see how gold prices have appreciated over a decade. Today's chart of the day shows the return on gold from one Diwali to the next in rupee terms. Had you invested in gold every year since Diwali 2001, you would have made enormous gains on all your gold investments. The total gains would have been about 670%. So, should you buy gold even after it has risen so substantially? Being a keeper of value, gold tends to act as a hedge against currency devaluation and negative real interest rates. At a time when central banks across the world are recklessly devaluing their currencies, gold has retained its status as a safe haven. As such, we believe that gold should account for about 10-15% of a person's investment portfolio.

Data source: Economic Times
*In Indian rupee terms

Inflation adjusted returns are bound to be tepid in the near term. In such a scenario, gold and equities seem to be only bet for long term investors. But a disproportionate exposure to the yellow metal cannot serve the purpose. Investors need to not only beat inflation but also fetch returns that satisfy their wealth building targets. In India though, less than 10% of household savings find their way into equities and mutual funds. Lack of information, poor penetration of financial products and lack of trust are to blame. Fear of unscrupulous companies seeking funding has kept investors away from primary markets in recent years. The secondary markets too have evinced little interest from investors living beyond metro cities. In fact, the sentiments about equities are so bad that even the government has made no headway in its disinvestment targets. As a result capital market regulator SEBI is targeting multiple reforms. Ones that will reinstate trust and encourage Indian investors to have equities in their portfolio.

To begin with, it will address the problem of IPO market. It will disallow companies without well-defined capex plans to raise funds. Not only will that offer better visibility but also allow investors to value companies based on the management's long term vision. For the secondary markets, the regulator is seeking participation from pension funds. The world over, equity markets have developed on the back of pension reforms. However, such reforms have evaded India so far. Government pension funds are still not allowed a healthy exposure to equities. Large pension funds from world over have shown interest in Indian equities. But the domestic funds have given equities a miss. SEBI's initiatives to facilitate investor participation in equities can go a long way in benefitting both investors and corporates.

Churning at the mid to lower level is quite high and common in companies across the board. However, it is not a common phenomenon in the real estate sector where changes are generally few at the top level. As reported by a leading business daily, companies related with the real estate sector - developers, fund houses and consultants - have seen a significant amount of churn at the top level in recent times. Managing directors of large developers have moved to head other companies, including other developers or consultants. Top executives of real estate funds have either quit to start their own ventures or moved to head some of the big names in real estate consulting business. There are various reasons being mentioned for this development by various experts. These include the slowdown in the real estate sector, thereby putting pressure on top managements. Some believe the maturity of the sector is the reason as there is homegrown talent being created thereby being large enough to move around. Given the difficult times being faced by the sector and the companies present within, we cannot help but think this development to not be a coincidence.

The US has been in the doldrums for quite some time now. And measures adopted by the US Fed have hardly done much to spur growth. Indeed, all the US central bank has done till now is to introduce more and more rounds of quantitative easing. And these actions have only fuelled debates of the possible demise of the US dollar as the world's reserve currency. If that happens, which currency will take its place? Will it be the Chinese Yuan?

Notwithstanding the current slowdown, China's economy has grown by leaps and bounds in the past several years. So much so that the dragon nation has become a force to reckon with in the international arena. Despite that, Marc Mobius does not see the Yuan as a legitimate replacement for the dollar as the world's reserve currency. He maintains for that to happen, China will have to first open its financial markets further. Mobius has a valid point there. Further, the other alternative of the Euro toppling the dollar also looks remote what with the massive debt problems plaguing the region. So, ironically, dollar's position remains unchallenged in the near future at least.

Odisha , a mineral rich state, holds a third of the country's iron ore reserves, a quarter of its coal, half its bauxite and more than 90% of its nickel and chromite. The state accounted for about a fifth of all industrial investment proposals in India in the last four years as it has attracted investment proposals worth US$ 210 bn. However, most of these investments are yet to see the light of the day. Most of these projects are delayed due to problems related to land acquisition, pending environment and forest clearances, raw material linkages and local law and order situation. Odisha has seen many protests in the past. The recent one was aimed at disrupting Naveen Jindal's upcoming steel plant. Similarly many projects involving Tata, POSCO, ArcelorMittal and Vedanta Resources have also being delayed. It is an unfortunate paradox that a state with such rich mineral resources cannot get its act together and help its people get out of poverty.

In the meanwhile, the Indian equity markets were trading above the dotted line with the BSE-Sensex higher by about 16 points (up 0.1%) at the time of writing. While stocks in the consumer durables and oil & gas space are trading firm, capital goods and power stocks are trading weak. The key Asian indices closed in the red today.

04:45  Today's Investing Mantra
"If we were to do it over again, we'd do it pretty much the same way. The world hasn't changed that much. We'd read everything in sight about businesses and industries we think we'd understand. And, working with far less capital, our investment universe would be far broader than it is currently." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Is your stock affected by any of these 4 evils?". Click here!

    2 Responses to "Is your stock affected by any of these 4 evils?"


    Oct 30, 2012



    Borkar M.R.

    Oct 29, 2012

    How rhe eqty market will go up, I mean by number of retails
    participents. At Equity Master, I suggest you carry out a
    survey by asking only one question to all people from PM FM
    (leave only 4 people President/V.President and Speaker of LS/
    RS) "How much %wise of their savings have gone into equity/MFs.
    On top of it, I say, let the SEBI chairman himself come out with
    the figure. If we do not follow what we preach or what our NETA
    and BABU want common man, Aam Aadami, to do, then do you think
    equity market will see robust growth? Secondly, there is no
    quick action to punish the people who indulge in financial
    crimes. To-day I saw a photo of Vijaya Mallya chating on F1
    track. Do you know he charged King Fisher Airline broking
    commission for providing loan' at least that was in black and
    white when loan proposal was circulated to the shareholders
    (ensuring that that reaches shareholders in such a manner that
    they will not be able to reach the meeting and vote on it. What
    the banks were doing on this proposal? How they voted? -

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