Are you suffering from this bias? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are you suffering from this bias? 

A  A  A
In this issue:
» India to become the world's second largest internet market.
» Worst still not behind for Indian banks.
» Jack Trout: Nano hard to save, better to phase it out.
» McKinsey believes that the QE program has not fuelled the market rally.
» and more....

Buy low, sell high. This is the most basic investing principle for investors to follow. In one's endeavor to do so, it is not uncommon to see a stock's 52-week low price as a 'buy price'. Investing in a company on the rationale that it operates in a niche business is another common practice.

What is common in these two examples is the fixation or focus on one particular aspect; and not so much on the rest.

In the first example, just because the stock price has touched a new low does not mean that it would not go below that price. What tend to get ignored are the business fundamentals.

In case of the niche business example - investors would expect the company to do well as it is believed to have an advantage over other players in the sector. However, what get overlooked are the dynamics of the industry. Or at times even the financial performance of the company. The latter includes poor balance sheets, or the management's capital allocations skills, amongst others.

The above two are examples of a bias - Anchoring bias.

Anchoring bias occurs when investors tend to base their decisions or estimates subconsciously. These tend to be based on certain reference points, despite them having no bearing to the actual event or value. One example could be using previous quarters' data to arrive at future estimates. Or being biased towards currently prevailing prices; for example, BSE-Sensex level of 21,000 points prevents investors from evaluating the possibility of the market reaching levels of 8,000 points.

'India consumption story' has been talked about for a while now. And it still continues to be. Yes, India's rural economy is growing and has more money to spend. Companies that are able to cater to this population are making efforts to reach out to them. While it does show in their financial performance, we cannot help but think that the aura surrounding the consumption based stocks to be an anchoring bias. This we say in terms of the very high valuations that are being commanded by the companies. And the investing community's constant re-rating (higher in most cases) is a testimony of the same. As such, we believe that it would not be wrong in saying that investors may be facing an anchoring bias when it comes to the 'consumption related sectors' in india. While growth figures maybe supportive, the current valuations being commanded by these stocks are way higher than the long term averages. This we believe should not be ignored.

Do you think the consumption theme is an anchoring bias? Let us know your comments or post them on our Facebook page / Google+ page

01:35  Chart of the day
It is estimated that by the end of 2013, India will have about 213 m internet users. The same is expected to reach about 300 m users by the end of 2014. This translates to a growth rate of about 40% YoY. This will make India the second largest internet user market in the world by 2014. Currently, China and USA lead the numbers. China is expected to have nearly 570 m internet users by the end of 2013. The same number for the US would be about 254 m.

Largest internet users - Country wise

As reported by the Economic Times, it took India about ten years to reach the figure of 100 m users from 10 m. However, for it to double from thereon, the time taken was only three years. What has driven this strong growth? Mobile usage, largely led by the college going population coupled with rural users. What is surprising is that nearly one-third of India's internet users are from rural markets.

In any case, what this indicates is that Indian companies have no option but to take appropriate measures to cater to audiences across - online and offline. The former market certainly cannot be ignored or taken for granted given the strong potential ahead.

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Worst is still not behind for the Indian banking sector; as bad loans continue to play spoilsport. And as stated by State Bank of India's (SBI) management, the peak of non-performing loan cycle is yet to come.

The Indian public sector banks are plagued by the challenges emerging from the infrastructure and power sectors. And this is evident in their September quarterly performance. While banking behemoth SBI witnessed a dramatic earnings fall, first of its kind in two years, Punjab National Bank (PNB), the country's third largest bank witnessed a steep 50% decline in profits. Therefore, the stress on Indian banks' books continues to persist. And the red flags have been raised by the SBI's new Chairman too. Ms Bhattacharya admitted to have faced persistent stress, especially from the corporate loan segment.

Indian macro environment still remains challenging. Inflation continues to raise its ugly head. Therefore, the likelihood of interest rate hikes going ahead cannot be ruled out. Not to mention that the ability of banks to pass on the burden of higher costs to the borrowers stands limited. In such a scenario, the pressures on margins tend to intensify. Additionally, operating efficiencies of many lenders have also taken a toll, thanks to the wage hike provisions. Furthermore, many public sector lenders have sought government help with respect to strengthening their capital base to prepare for the new BASEL III norms. All-in-all, we can say that profitability of Indian banks remains vulnerable.

When Raghuram Rajan took over, he had two very important tasks to accomplish. One was to put a floor under the runaway inflation and second, pull the rupee out of its misery. It appears at least on one of these fronts, he has had a good degree of success so far. Bloomberg highlights how the rupee has jumped by 8%, the most amongst 168 global currencies, mainly due to steps taken by the RBI.

Clearly, the central bank's biggest intervention in the currency markets since the Lehman crisis seems to have had the desired effect. And this has indeed bought some time for our policymakers to take remedial measures. However, any hopes of a quick turnaround in the fortunes of the rupee should be kept in check we believe. For our currency still remains quite vulnerable to a tapering by the US Fed.

All we can do is just hope that there isn't any huge negative development on the Fed front in the near future. So that it gives us enough time to at least have some sort of improvement on the economic front.

In the world of business and marketing, positioning of a product becomes very important in order to drive sales. In this regard, Tata Motors appears to have got it wrong. At least as far as the Nano is concerned. Indeed, when the company announced the launch of Nano, the world's cheapest car, it generated a lot of buzz. There was considerable interest in how the company will be able to manufacture and launch the Rs 1 lakh car. More importantly, will it do well? However, ever since its launch, the car has failed to take off in a big way. So much so that Jack Trout, who is the pioneer of the 'positioning' theory, opines that Tata Motors will be better off killing brand Nano.

While India's GDP rose, so did the incomes of the middle class. And many of them had aspirations to graduate to better models. No one was keen on buying the 'cheapest car' which was how Tata Motors had positioned the product. Because of the poor performance of the car, Tata Motors has also been compelled to re-think its strategy. It is now looking to sell it as a 'smart city' car. Whether this change in strategy will reverse the fortunes of this product remains to be seen though.

The quantitative easing (QE) program of the US Fed has been blamed for the run up in stock prices, especially in the US. The cheap money that is the result of the QE program is held responsible for increasing liquidity in the markets thereby leading to higher prices. However a recent study conducted by McKinsey & Co disputes this assumption. The study claims that the QE program has not fuelled the market rally. The reason for this is that usually when stock markets rally, there is an increase in consumption. This increase is driven by the wealth effect as investors tend to spend more owing to the handsome returns earned on their portfolios. However this time around, this does not seem to be the case.

However, ex US Fed Governor, Kevin Warsh does not appear to be agreeing with this. As reported by Money News, Mr Warsh has stated that "The Fed's interest-rate suppression has pushed investors into stocks". In our opinion Mr Warsh's theory is closer to the truth than the findings of the study conducted by McKinsey. This is because the corporate earnings in the US have taken a hit. But despite this, the stock markets have continued to rally. This is a clear sign that there is a bubble brewing that has been brought about by excess liquidity. This liquidity in turn is a factor of the QE program.

In the meanwhile, Indian equity markets have extended their gains and are trading significantly above the dotted line. At the time of writing, the benchmark BSE-Sensex was up 261 points (1.3%). All the stock indices were trading in the green with Banking and capital goods being the biggest gainers. Asian stock were trading firm led by Indonesia and Japan. The European markets have opened on a mixed note.

04:55  Today's investing mantra
"The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage." - Charlie Munger
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