Is your stock picking exempt from this loophole? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is your stock picking exempt from this loophole? 

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In this issue:
» Here's why the QE programs will never end?
» US banking system witnesses a historic event
» Moody's maintains its stable ratings on India
» Greece gets another chance at redemption
» ....and more!

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If one is a student of management, there's very little chance that one may not have heard of a popular management bestseller Good to Great. In fact, lot of business school professors and students literally swear by the wisdom that the book imparts. They are seen arguing that learning business strategy is all about knowing a handful of rules that most successful companies follow. And this is something that has been brought out really well in the book. They therefore assert that the book is a real gem.

Not everyone is in agreement though. A strategy professor at Oxford University is not sure the book is the best way to learn business strategy. He believes the book suffers from a phenomenon called as an 'undersampling of failure'. Simply put, this is nothing but the tendency of the book's authors to highlight only the successful companies. Thus, the question is not whether all successful companies follow the same rules. But rather the correct question should be 'Are all companies that follow the given set of rules successful? The book, by leaving out the companies that failed, falls short of doing full justice to the subject matter it hopes to tackle.

Now this is some interesting insight we believe. And the one that can be applied to the field of investing as well. Most of us learn investing based on certain rules that we come to know with experience or blindly imitate the rules laid down by other successful investors.

In the latter case, we could do our chances a world of good if we also try to find out whether majority of the investors who've imitated the same rules have been successful over a long term period. This would help us zero in on a stock picking method that really works over the long term and avoid the ones where the end result is more due to luck than the skill of the investor.

The goal is clear. No one would deny that success in investing also has an element of luck to it. Thus, as one strategist argues, one should not make the mistake of studying success in order to formulate successful strategy. Instead, one should study the strategy to see whether it has consistently led to success or not. And this is as true in investing as it is in business we believe.

Do you recall any major investing mistakes made by legendary investors? Share your comments with us or post your views on our Facebook page / Google+ page

01:12  Chart of the day
With the global economy's fate nearly sealed for the next year, calculations are underway to decide how the same fares in 2014. Not bad if the global financial power house Morgan Stanley is to be believed. It has projected global economy to grow by 4% in 2014, nearly one full percentage point higher than the year before. India too is likely to fare much better, growing by close to 7% as opposed to the 6% growth it is likely to notch up in 2013. However, it is well worth noting that all bets would be off if the US and Chinese economy fail to recover despite the stimulus measures and the Fed's expansionary policy lead to high inflation.

Source: Financial Express

What's your biggest fear? Is it rats, snakes, public speaking or is it the fear of losing all your hard earned money? Well, in these uncertain times, the fear of losing one's shirt is not irrational. When Americans smell fear, the first thing they do is park their money in savings deposits. Sudden shifts characterized by a huge inflow of funds into these accounts usually coincide with moments of great monetary stress. The biggest episodes in history have been the Lehman Brothers failure, the Greek Failure, and the debt ceiling crisis.

These three historical moments are ranked from 2 to 4. But, what caused the largest ever inflow of US$ 131.9 bn in one week into commercial bank savings deposits? This happened just this past week. But, there have been no breaking news headlines. The vast majority of the US population has virtually no money saved up. Therefore, it is quite likely that the money that has moved belongs to the rich. So we wonder why the people in the know have just decided to park the most cash ever into savings accounts. We wonder what's on the horizon.

Major central banks across the globe have been on a money printing spree over the last few years. Especially ever since the financial crisis broke out in 2007-08. The pretext has been to safeguard the financial system and to boost economic growth. The US Federal Reserve is currently doing its third round of QE. There is little doubt that it has not done much to prop up the economy. Yet the central bank has shown no inclination to discontinue the program. Same is the case with other major central banks such as European Central Bank (ECB) and Bank of Japan (BOJ).

Any reasonable person would think that in due course, these financial steroids will be done away with. But a gentleman called Mr Bruce Kasting presents a contrary perspective in his blog. He uses the term 'evergreen' monetary policy to describe inflexible policy without a defined ending. No central bank has put a deadline or limits to its easing programs. The BOJ has so far done ten rounds of QE and more is on its way. The US central bank appears to be preparing for a QE 4 soon. And then we'll have QE5 and QE6. It will just go on. What was meant to be an arbitrary monetary stimulus has almost become a new normal. If this is indeed true and the QE rounds go on very long, then the sky would be the limit for gold prices. No wonder experts have been giving unfathomable targets for gold prices!

In some good news to the Indian government which has been facing flak on economic front, credit rating agency Moody's has said that it is maintaining its stable outlook on India's rating. However, it has warned that several challenges still remain. The most important being the country's fiscal deficit. Economic growth has slowed in India in recent months, and the country has suffered mild erosion in its economic profile, with widening trade and current-account deficits.

The central government's fiscal deficit exceeded official projections for the year ended March 31, 2012, reaching 5.9% of GDP. In addition, inflation remains stubbornly high despite the Reserve Bank of India's (RBI) tightening policies. The government in-order to raise revenues has tried several methods but has found little success in that. The government must find ways to reduce the fiscal deficit that threatens to undermine the country's credit standing and possibly trigger a downgrade to junk status.

Greece is one of the most indebted countries in Eurozone. So much so, that it is almost on the verge of bankruptcy. In the past, many options have been explored to reduce the country's debt. And in the latest move, both Eurozone and International Monetary Fund (IMF) have taken the matter in their hands. Both these institutions have clinched an agreement to reduce Greece's debt by 40 bn Euros to approximately 124% of the Gross Domestic Product (GDP) by 2020. To reduce the debt, interest rate will be cut on the loans given to Greece. For some loans maturity will be extended with the option to defer the interest payments. It has also been agreed that Greece will be given some financial assistance to fulfill its debt obligations provided it meets certain conditions. This is likely to reduce the uncertainty in Eurozone and strengthen the Euro.

While these steps will reduce the debt burden on Greece, it would be interesting to see whether Eurozone members will write off some of the loans as a part of debt reduction program. If that is done, the member nations who have lent to Greece may incur a huge loss. Hence, that possibility appears remote as of now. But if Greece diligently implements its austerity plans, a haircut on the existing debt is not ruled out completely.

Have high rates of tax at any time been a deterrent in making good investments? If so, legendary investor Warren Buffett has some word of advice. Buffett opines that tax rates have never acted as a barrier for those pursuing investment opportunities. And he has rubbished claims that higher rates of tax for the rich and ultra rich will result in them preferring to hold more cash. Indeed, he believes that one of the factors leading to the rich amassing more and more wealth has been various tax cuts introduced by previous governments. So for instance, in 1992, the tax paid by the 400 highest incomes in the US averaged 26.4% of adjusted gross income. In contrast, in 2009, the most recent year reported, the rate was 19.9%.

Eventually what Buffet proposes is a minimum tax on high incomes. This he believes will block the efforts of lobbyists, lawyers and the like. As the latter have been gunning to keep the ultrarich paying rates well below those incurred by people with income just a tiny fraction of the former. That said, it is doubtful whether such a move will eventually stem the widening fiscal deficit of the US. This is the biggest challenge that the country faces and it has only become worse by the liberal money printing practices by the government.

Meanwhile, positive developments both on the domestic as well as international front led indices in the Indian equity markets to trade positively right from the word go today. Sensex was trading higher by around 260 points at the time of writing. Stocks from realty and the consumer durables space are attracting the most interest. Asian indices closed mixed today whereas Europe has opened mostly in the positive.

04:55  Today's Investing Mantra
"Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success. I've seen a lot of very smart people who have lacked these virtues." - Warren Buffett

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