This can make you a successful investor... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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This can make you a successful investor... 

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In this issue:
» Why an average India isn't getting richer?
» Disciplined investors outperform mutual funds
» Bubble building up in China, warns Bill Gross
» Satyam scam just got (much) bigger
» ...and more!


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00:00
 
An overheard discussion between a financial consultant and an investor -

"Why do you want to invest in stocks?" "Of course, to make money!"

"And why do you want to make money?" "So that I have adequate resources for my child's education and marriage, and also for my retirement!"

"But then, how do you make sure that you will have adequate resources to meet these needs?" "I'll invest sensibly."

"Oh okay! And what do you mean when you say 'invest sensibly'?" "Well, that means ignoring conventional wisdom of the markets and going by what my reasoning and understanding says."

Well said, we must say! Most investors, even those who have a long term view on stocks, fail to generate good returns from the market in the long run. And one big reason they fail to do so is that they are dependent for their investment decisions on advice from sources that have nothing but a hidden agenda in giving such an advice.

A hidden agenda might be a broker's commission, or a friends' ego that is high after he has made loads of money from the hot stock that he is now advising you to buy.

But then, in investing, if everyone thinks one way, it is likely to be wrong. We saw this as recently as in 2008. As such, your success will depend on figuring out that what is wrong advice and not acting upon it. Like not buying a mutual fund just because it has announced a dividend. Like not buying a stock just because the company is offering bonus shares. Or for that matter, like not buying a hot stock which everyone has hands and eyes on.

Believe us, you are likely to make a lot of money in the long term by just being independent in your approach to investing.

Also remember one thing - you might not be smarter than most other investors. However, if you are willing to work harder than most, you will surely be amongst the happiest. Do not underestimate the value of doing an independent research on companies before investing in them. And keep in mind that every time you make a mistake, it is usually because 'you' did not do enough homework.

01:26  Chart of the day
Today's chart of the day shows why an average Indian isn't getting richer even when the country is enjoying strong GDP growth rates. The problem lies in the large population we have. While India's share in world GDP stands at just around 5%, its share in world population stands tall at around 18%. Now, while China has a slightly bigger population, it boasts of a much larger share in global GDP (at around 11.5%).

Data Source: IMF's World Economic Outlook, Oct. 2009

01:52
 
World's leading bond fund manager Bill Gross of Pimco is clearly not enthused by China's aggressive economic growth projections. In fact, he has joined some of the best known economists who suspect a bubble in the dragon economy. Gross' concerns arise from China's excessive dependence on exports. He believes that China's trade surplus that doubled month on month in October is not sustainable.

The US unemployment rate is likely to remain in double digits for the next six months. With that Americans are left with little headroom to increase consumption. The Fed will have no option but to keep interest rates nominal. And thus Chinese exported wares will find lesser buyers. Given this scenario, excessive lending and production can only choke the Chinese economy and instead, fuel asset bubbles.

Statistics sufficiently support Gross' views. China's five biggest banks lent a record 4.7 trillion yuan (US$ 688 bn) in the first nine months of 2009. Home prices in 70 major Chinese cities climbed at the fastest pace in 14 months in October 2009. We hope unlike the US the Chinese don't wait for the bubble to burst before they correct their mistakes.

02:48
 
Anyways, the BSE-Sensex was trading with gains of almost 120 points (0.7%) at the time of writing. Other gainers in Asia included China (up 2%), Japan (up 0.4%), and Hong Kong (0.8%). European markets have also opened in the positive.

Gold is trading higher in the international markets currently, at around US$ 1179 an ounce. The yellow metal is also seen making fresh highs in the Indian markets following these global cues. Further, as per an Economic Times report, the RBI is looking to buy more gold from the IMF following its last month purchase of 200 tonnes of the same. This will likely add further impetus to gold prices.

03:07
 
A recent Economic Times report throws up some interesting trivia. India's top equity diversified funds have returned 16% to 18% in the last 3 years. However, SIP (systematic investment plan) investors would have earned returns in the range of 25% to 28% during the same period. That too by investing in the same funds!

So what makes all the difference is this - lump sum investors would have invested at only one level of the market. In this case, it would be 13,680 on the Sensex as on November 23, 2006. Their investments would then have subsequently gone through a rollercoaster ride of dips and surges. Things would have been different for SIP investors though. They would have invested at regular intervals during this entire period. This would have ensured that they took advantage of the low market levels each time the markets went down. Thus automatically and effortlessly doing something even fund managers could not do!

03:42
 
Most observers now believe that world economy is on its way to recovery, even if a stuttering one. One of the consequences of the recovery will be a surge in the demand for oil. That will start eroding the pile up of crude oil inventory and eventually start pushing up prices. As per a Reuters poll of ten top oil-tracking analysts and organisations, all this is likely to happen as soon as next year. We agree with the broad direction of the call.

Unless the world discovers viable alternate supplies, the demand for oil will eventually outstrip supply over the long term. However, in our opinion the exact time prediction must be taken with a pinch of salt.

04:08
 
It appears that erstwhile Satyam still has a lot of lies veiled in its accounts. According to the latest charge sheet issued by the CBI, the total financial toll of the scam can be as huge as Rs 140 bn. This is nearly double the amount (Rs 78 bn) confessed by the disgraced former owner Ramalinga Raju. Triggering new round of uncertainty, the CBI had now charged Raju for illegal diversion of funds and fraud in filing of income tax returns. This is in addition to a plethora of charges related to deflated liabilities and inflated revenues. What is more, the fudged accounts also reported fake customers and ghost employees.

The wrongdoers left no stone unturned in perpetrating India's biggest accounting fraud. We hope that the miscreants will be duly punished. However, the innocent investors have no way of recouping their huge losses. Another instance that shows that investors have to do a very careful study of companies and their managements before taking any investment decision. One must not blame the regulator but do the due diligence himself to remain on the safe side!

04:52  Today's investing mantra
"The basic skills of math, English and writing are not enough. You must develop a basic system of values to form and guide the use of these skills. The true test will not be what you learned in college, but how you used what you learned." - Jim Rogers
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32 Responses to "This can make you a successful investor..."

B

Nov 29, 2009

Agreed that investor should do his own research. But still it does not guarantee that there will not be setbacks. Did anyone warn or expect the Satyam episode to happen?

Like 

parvatham

Nov 27, 2009

Report is very good .you can suggest some strong companies for long term investment.

Like 

Ravindra

Nov 27, 2009

Very useful article.
But, as a layman how to recognise a company, eg. Satyam, when it is carrying out fraud?

Like 

murali krishnan k

Nov 26, 2009

Your statement "why an average Indian isn't getting richer even when the country is enjoying strong GDP growth rates. The problem lies in the large population we have"; apeears contradictory to China's position. Even though China has larger population, they have shown themselves better in their richness. The problem, in fact, shd be with improper governance, not following ethics and principles properly and greediness of politicians only. Please analyse and announce in next mail. The effect of China having a 'fixed rate' for exchange valuation may also be playing a vital role.

Like 

sunil kumar sahu

Nov 26, 2009

yaa! good information.It helps me a lot.

Like 

Devang

Nov 26, 2009

Its simply beautiful. Its gives an insight of whats happenning around the Business world in just 5 minutes.

Like 

Shreyans Lahaurriya

Nov 26, 2009

Good advice...research and knowledge is a key to sound investment!

Like (1)

Subir Chaudhuri

Nov 26, 2009

It helps me to take a right move.

Like (1)

G.Natarajan

Nov 26, 2009

The template of the 5 minutes wrap shold be so designed so that one can read the sdame without moving right and left arrows.

Like (1)

Yazdi Bilimoria

Nov 25, 2009

I am fond of reading your 5MinuteWrap email every morning. Its very informative. But there are times when I feel more information is needed for the common investor e.g. you have said:
"....Also remember one thing - you might not be smarter than most other investors. However, if you are willing to work harder than most, you will surely be amongst the happiest. Do not underestimate the value of doing an independent research on companies before investing in them. And keep in mind that every time you make a mistake, it is usually because 'you' did not do enough homework...."
Could you please throw some light on what this homework involves for a lay person?
You then go on in respect of the erstwhile Satyam fraud by saying:
".... Another instance that shows that investors have to do a very careful study of companies and their managements before taking any investment decision. One must not blame the regulator but do the due diligence himself to remain on the safe side!...."
Here I do not agree with you. What resources will an ordinary investor call upon to do such homework when the top brass of Satyam were all involved in big-time fraud. Even with the benefit of hindsight, I dont see what I might have done, as an investor, to unravel this monstrosity? Perhaps, Sir, you can enlighten me.



Like (1)
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