What you should learn from successful investors? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What you should learn from successful investors? 

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In this issue:
» US housing prices rise most since 2006
» Infosys embroiled in a fraud over visa row
» Fed in a QEternity mode!
» State of poverty in India
» ...and more!

The process of investing starts with stock selection. And for that investors rely on various external sources like brokerages. However, considering the conflict of interest evident in brokered advice most investors either opt for independent research or indulge in replication. Replication, in simple words, means trying to build a portfolio along the lines of an already existing one. And who better to replicate than some widely known successful investors!

Investors often tend to get mesmerized by the portfolios of their favourite investing legends. However in our opinion that is the best recipe for disaster. For even the best of investors can and do make mistakes. Instead it is better to understand the thought process that our favourite adopts. That followed and improvised over a long term can help generate superior returns.

We believe that investors should follow the philosophy of successful investors rather than trying to blindly replicate their portfolios. And why not delve further into the investment philosophy of one of the most brilliant investment minds of all times - Warren Buffett. His strategy is conservative and he advocates buying and holding for long term. The most important factors that he pays attention to are quality of management , business model, pricing power, return generating capability, cash flow and moat.

Moat helps the business in sustaining a competitive edge over its peers. Understanding the business model is also very important. Buffett's preaches that one should never venture outside his circle of competence.

Lastly, valuations and margin of safety are equally important when buying something. Overpaying for the most strongest of the businesses will hardly yield anything as returns would remain capped. Having a margin of safety ensures that one does not overpay.

If one buys a business after taking into consideration these factors it may well turn out to be a winner in the long term. Also, conducting one's own research is important as after all it's your hard earned money at the end of the day. Further, independent research will ensure that your investing decisions are not governed by external noise.

Do you blindly buy stocks which most successful investors have bought? Let us know your comments or post them on our Facebook page / Google+ page

01:50  Chart of the day
Success of businesses is not dependent upon product innovation or market knowledge alone. There are host of external factors that decide the fate of any business venture. Out of various factors bureaucracy is the single most important factor that can make or break any business. If a great idea finds resistance from bureaucracy than it can fall on its head. In short, external support from government is important for any business. Lower the government interference, greater the independence and better the operating environment.

Today's chart shows ease of doing business in various countries as compiled by World Bank. Singapore leads the ranking amongst 189 odd economies signifying that starting a business in this country is relatively easy. It is the 8th time in a row that Singapore has topped the charts. Singapore is followed by Hong Kong, New Zealand, US and Denmark. The rankings are assigned after taking into consideration various factors like time required to start a business, taxation structure in the country, reform measures undertaken etc.

Not surprisingly India ranks 134th in the list! Rampant corruption, layers of bureaucracy which make approvals process lengthy, red tapism and complex taxation rules has ensured that India slipped in the ranking by two places this year. If the current scenario does not improve we may well see the ranking slip further in coming years.

Ease of doing business

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Close on the heels of its stock markets creating new highs, it is now the turn of US realty to follow suit. Bloomberg reports that home prices in 20 US cities increased by nearly 13% in August 2013 from a year ago. This was the biggest jump in more than seven years with the last one recorded in February 2006. What more, the breadth of the increase was across the country it was reported. Now, this would really be music to the ears of Messrs. Bernanke and company. For not only have they managed to create a stock market bubble as per us but now also the real estate bubble. We say this because the US economy is being supported by artificially low interest rates and tremendous money infusion in the form of bond buying. And this seems to be giving people the illusion of prosperity. The reality though is far from it. There are no real jobs being created and the economy is hardly being made structurally better. All that seems to be happening is asset price inflation with most of the spoils going to the rich people. Consequently, investors would be well advised to treat this news with the circumspection it deserves. And not take this as an indication of a real recovery.

The only credit that the UPA government can lay claim to is the reduction in povertyrate over past 8 years. As per government statistics, schemes like NREGA lifted a record 137 m people out of poverty. That makes it 15% of the population. This has brought down the national poverty rate to 22%. But as per a report published in Mint, while the national figures may seem encouraging, the state wise divide is appalling. Now the income divide between India's rich and poor has only grown wider. But even amongst the poor, the concentration of extreme poverty is restricted to a few rural and urban regions. These are Chhattisgarh, Odisha, Jharkhand, Bihar, Madhya Pradesh and Uttarakhand. The analysis defines the poorest as those who consume less than Rs600 per capita per month in rural and below Rs 860 per capita per month in urban regions. This only shows that the government has chosen to camouflage the statistics to woo voters. However, despite the socialist reforms, the state of poverty in the country has hardly improved. One therefore wonders if the subsidies have met any purpose other than helping the government generate vote banks.

Software major Infosys Ltd has been accused by the US government of wrongful visas for its employees. It has been accused that the company used short trip business visas to locate its employees at client locations. And for this the estimated fine is US$ 35 m which is the highest ever immigration fine by the US. The exact amount would be decided soon.

The immigration laws in the US are being toughened to deter outsourcing. And for this the legislators has proposed stricter visa norms. In addition to this the visa fees for the H1B class of visas (used for locating employees on client sites) has been hiked as well. The legislators have been trying to come up with laws that prevent businesses from outsourcing work. The idea is that this would help increase employment within the country. Whether these rules have helped reduce unemployment in US or not is another matter. But one thing is for sure. They are hurting the way the Indian IT companies do business. For this impacts their onsite business severely both in terms of costs as well as ease. Therefore companies have been trying to figure out ways to reduce the impact of these laws. Having said that, we do not condone what Infosys has done. Agreed that companies need to work out ways to continue doing business and maintaining their margins. But resorting to wrongful methods does not bode well for the company or its reputation.

Economies in downturn need external stimulus to get back on their feet. However, any external help should be time bound. If not, artificial money printing can lead to an inflationary deadlock. Take the case of Fed's QE program for that matter. Most economists are of the view that the liquidity injection exercise should come to a halt at an appropriate time. Else it may create inflationary shocks in the future. But halting QE means that growth would suffer. This may create recessionary fears. Hence, tapering is getting delayed. In Paul Ashworth's words, forget tapering, Fed has indulged in QEternity! In other words, QE till eternity.

Considering the current state of affairs in the US economy we might see QE being prolonged than anticipated. The entire US economy is humming on the artificial liquidity that is created in the system. And Fed cannot afford to withdraw the life line of the economy in such a situation. This means that tapering talks should be taken with a pinch of salt. Right now, the US cannot afford to sacrifice growth. And money printing is the only way through which it plans to boost consumption and thus growth. Only time will tell when this money printing drive will end or will it really end or not.

In the meanwhile Indian stock markets are trading strong. At the time of writing, the benchmark BSE Sensex was up by 77 points (0.36%). Realty and Pharma stocks were the biggest winners. Most of the Asian equity markets were trading higher led by Japan and Singapore. The European markets opened on a positive note.

04:56  Today's investing mantra
"Behind every stock is a company. Find out what it's doing" - Peter Lynch
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2 Responses to "What you should learn from successful investors?"


Oct 31, 2013

I don't blindly replicate another portfolio.
I study the price pattern,working results,quality of the management and the pricing power.Mostly I restrict the selection to well known company's.

Above all I stay in cash more whenever there is a mad rash.



Oct 30, 2013


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