Change is here - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Change is here 

A  A  A

In this issue:
» The week that was
» The US basks under new-found hope
» Massive rate cuts across the globe
» Playing by the Book
» ...and more!

00:00   Change is here
Change is the only constant they say. And the last 11 months have shown us how. You name it and it has shown, not a negligible, but a drastic change in the past few months. Trends have changed and governments, policy makers and experts have changed their opinions, actions and visions.
The change has been ubiquitous.
From double digit economic growth prospects to recessionary trends.
From inflation to deflation.
From irrational exuberance to unreasonable pessimism.
From leveraged consumption to forced savings.
From investment in futures and options to fixed deposits and bonds.

------- Don't Miss -------

Obtain Ownership Of An Entire Research Team For Just Rs 396 A Month.

Subscribe to ResearchPro Today!

A Free Copy Of The New Book On Warren Buffett Awaits You.

Click here to find out.

The newly elected President of the United States said the obvious - 'Change is here'. And he was applauded. What he did not say was whether the change was for the better or the worse. Our experiences of economic, political and social turmoil in the past have brought about changes that have shaped the destiny of people and economies.

Take the case of India. The currency crisis of 1991 brought about the economic liberalisation that ushered us into the high economic growth phase. The tech bubble burst showed us the outcome of irrational exuberance. And eight years later, meltdown in global housing prices have once again brought about changes. Real estate prices, interest rates and commodity prices have all taken a U turn that no one had envisaged. The biggest lenders globally have gone with their begging bowls to central banks or succumbed to the crisis. The once 'happiest' economy - Iceland - has gone bankrupt. And the key benchmark indices globally have touched their multi-year lows.

Gold and crude prices have also been pretty volatile this year. Gold prices started the year at around US$ 850 an ounce. As crude oil prices started to climb and experts began predicting that oil might hit the ominous US$ 200 a barrel mark, gold quickly shot up to over US$ 1,000 in March. Post that, the metal retreated and began bouncing around in a trading range of US$ 850 to US$ 950 before dipping back below US$ 750 in September. During the past week, crude oil prices corrected by 4.5% to touch a low of US$ 61 a barrel while gold regained some favour (up 1.6%) on the back of depreciation of the US dollar.

The week gone by saw important changes on the political and economic front. The US elected its first Afro-American President. Central Bankers the world over, went on a massive rate cutting spree, something they had not done in years. Our very own conservative RBI also joined in. What is more, the central banks have not ruled out a further reduction in interest rates due to concerns of a deeper economic slump.

Amongst global markets, the Asian indices drew some respite from the additional liquidity and managed to close higher. The benchmark BSE Sensex gained 1.8%. The European markets, however, with exception to UK, continued to languish in the red. The US markets lost as much as 4.2% of the market capitalisation with reports of further job losses and earnings downgrades from corporate heavyweights.

Change is certainly here. And investors need to acknowledge the same. But that does not mean they need to change the way they invested for the long term. The principles of investing in fundamentally strong companies for the long term remain the same. And investors must continue to use the 'Four Filters' (as recommended by Warren Buffett and Charlie Munger) to fortify their portfolio against all such crisis. That is - when buying companies they should look for understandable businesses, with enduring competitive advantages, accompanied by reliable managements, available at a bargain price.

03:35  The week's biggest news

The US basks under new-found hope
This week, the citizens of the most powerful nation on earth settled a debate on the most turbulent political battle in recent times. After eight long years, a Democrat is set to step into the White House. Barack Obama will take over from George Bush and will become the 44th US President, the first ever African-American to do so. Although the US Presidential elections are one of the most watched global events, the intensity had increased manifold this time around as it coincided with a financial crisis of epic proportions.

Just to put things in perspective, a survey by the International Herald Tribune (IHT) revealed that 6 out of every 10 voters cited the economy as the most important issue during the elections with things like the Iraq war and health care being put firmly on the back burner.

As far as its impact on India is concerned, many experts are of the opinion that irrespective of who moves into the White House, Indo-US relations are only likely to strengthen given the global geo-political climate and economic power shift that is currently underway.

The RBI's liquidity pumping effort
The Reserve Bank of India (RBI) announced multiple measures to add liquidity to the system early last week. As a matter of fact, it was for the first time since 1997 that the RBI deployed all three of its main tools - CRR, SLR and repo rate - to perk up the credit markets and enable growth.

The Indian central bank reduced the CRR by 1% to 5.5%, the repo rate by 0.5% to 7.5%, and the SLR by 1% to 24%.

These announcements from the RBI came after inter-bank lending rates climbed to as high as 21% on the back of dwindling cash in the banking system. This was due to the continued large scale FII pullout and RBI's actions of stemming the rupee's decline by selling dollars. The FIIs for instance have pulled out almost US$ 12.8 bn from Indian equities this year after the US$ 17 bn investment they did in 2007.

04:15   Best of this week's 5 Min. WrapUp - Playing by the Book
That stocks on Dalal Street have been beaten and hammered out of shape is probably old news. But allow us to put some numbers to it. As per an analysis on most actively traded stocks (1,600 to be precise) published in a leading business daily, around 55% of the stocks are currently being valued by the stock market below their book value! What this essentially means is that if one buys into the complete equity of these companies and sells the assets in the open market, one could take home a pretty handsome profit. The study further reveals that the discount to book value increases as the market cap decreases. In other words, there are quite a few mid cap and small cap firms that are trading at a steep discount to their book value.

While the current opportunity to buy into stocks with attractive growth prospects is indeed once in a lifetime, we would like to add that book value could be a misrepresentation of the true value of the company in quite a few cases. For example in companies with technologically obsolete plants, actual book value could turn out to be a lot less than what the balance sheet might imply. In other cases where companies have a lot of real estate bought many years ago, book value could turn out to be a lot more understated. Similar study needs to be conducted on other assets like inventory and receivables. Thus, while investing in a company based on book value, don't just go by the book.

04:40   Weekend investing mantra
"I think that one should recognize reality even when one doesn't like it -- indeed, especially when one doesn't like it." - Charlie Munger
The 5 Minute WrapUp Premium is now Live!
A brand new initiative of Equitymaster, this is the Premium version of our daily e-newsletter The 5 Minute WrapUp.

Join us in this journey to uncover the sensible way of managing money and identifying investment opportunities across various asset classes including Stocks, Gold, Fixed Deposits... that over time can help you realize your life's goals...

Latest EditionGet Access
Recent Articles:
This Company Beat the Business World's 'Three Killer Cs'
August 16, 2017
And what it has in common with beating the stock market too.
Let's Hope This Correction Continues
August 14, 2017
Last week's correction is making a number of Super Investor stocks look a lot more attractive...
Insider at It Again. This Time Stealing from Buffett and Berkshire
August 12, 2017
What is Equitymaster Insider Ankit Shah stealing from Berkshire's success?
The '26% Secret' to Buffett's First Billion
August 11, 2017
This is what led value investors Mohnish Pabrai and Warren Buffett to their first million and billion.

Equitymaster requests your view! Post a comment on "Change is here". Click here!



Copyright © Equitymaster Agora Research Private Limited. All rights reserved.

Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement

Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.

This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.

This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.

This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.

As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: Website: CIN:U74999MH2007PTC175407