Here's how you can be like Buffett - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Here's how you can be like Buffett 

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In this issue:
» Is the steep rise in food prices justified?
» World Bank's opinion on India's GDP
» Dadri power plant meets Singur-like fate
» HDFC sees a management overhaul
» ...and more!!

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So, want to be like Warren Buffett? It is very simple. Do it like the Omaha's Oracle did it. Easier said than done isn't it, especially in the current environment. The asset class that seems to be the talk of the town is gold and other hard commodities. And to avoid the temptation of investing in them is akin to missing your favorite Tendulkar innings. But if your returns are to come anywhere close to those of Buffett's you may have to curb the instinct. For Buffett has never been a heavy investor in commodities. His disregard for gold is well known and he has never been an admirer of other commodities as well.

Instead, he has poured his entire faith in people and organizations that have turned these so called commodities into something that is perceived to be extremely valuable for mankind and then earned a fat margin in the bargain. In other words, the bluest of the blue chips. Companies that have, year after year, taken in the commodities and done something so valuable with them that their customers have had no hesitation in paying a little more for the same product every year. To sum up, if you want to handily beat inflation, commodities might prove to be a good hedge. We at Equitymaster have traditionally advocated upto 5% investment in gold. But to actually crush inflation, you've got to invest in companies with strong competitive advantages and available at reasonable valuations. And if you take these lessons to heart, ten years from now, you could well be ahead of the pack by a fat margin.

01:14  Chart of the day

Data source: Statistical Outline of India

The steep rise in foodgrain prices have almost rendered them unaffordable for an average Indian middleclass household. Drought like conditions in few pockets and floods in some other areas made it all the more easy for the government to reason the steep prices. However, statistics tell a different story.

No doubt the shoddy state of affairs in India's public distribution system is to be blamed. But one wonders if there are other causes for the severe malnutrition and food shortage in remote areas of the country. Particularly in a state like Orissa that is one of India's most mineral-rich states.

As seen in today's chart, data from the Statistical Outline of India shows that the country has consistently increased its food production. Infact, even the per capita production has increased over the past six decades. There are 230 kgs of foodgrains produced a year to feed every Indian today as against a paltry 141 kgs in 1951. Despite this, much of it gets hoarded, wasted or lost in transit much before it reaches the needy. And this could also be a huge factor towards spiraling food price inflation. The government has a tough and imperative job at hand.

"The outside world's image of India now is of cutting-edge competitive companies that are going to take jobs away from the developed world." Few global experts have given such a reference to India in the past. However India's strong fundamentals and well guided crisis-management seems to have cemented its role in leading the global economic recovery. A business daily has quoted none other than the chief of the World Bank, Mr. Robert Zoellick citing his belief that the Indian economy is now a force to reckon with. Infact, the top banker sees both India and China scaling back their GDPs to account for a quarter of the world GDP, as was the case a few centuries ago. However, in the same breath he has added that the US retains a huge amount of dynamism, which is not going away anywhere.

The World Bank is keen to support India's infrastructural growth, including building rural roads. The bank has already lent around US$ 5.3 bn to India so far in FY10 for improving the power, roads, banking, rural development and water sectors. It only remains to be seen if India can make the best use of the funds and the opportunity.

While almost everybody would agree that we need to pay attention to creating infrastructure in India, it is easier said than done. State governments and companies also don't help their own cause. They often flout the rules in sensitive issues like land acquisition. As a result, grievances snowball into major headaches.

After the Singur fiasco, the scene has shifted to UP. The Allahabad High Court has cancelled the acquisition of 2,500 acres of agricultural land for the Anil Ambani group's Rs 250 bn gas-based Dadri power plant. Apparently, the then state government had passed a notification claiming the land acquisition for 'public purpose', when it was meant for a company. Also, agricultural land should not have been acquired as per Land Acquisition (Companies) Rules, 1963. The state government also used 'emergency provisions' which should only be used in extraordinary cases. Agreed citizen agitations are not unique to India. However, large Indian corporates need to certainly examine whether their conduct is as responsible as it should be.

Meanwhile, commodities guru Jim Rogers continues his rant against the US dollar. "The US dollar is a terribly flawed currency", he is believed to have said. He further added that the US, as recently as 1987 was a creditor nation and now it is the largest debtor nation in the history of the world and this will continue to cause problems. Thus, as the US keeps borrowing, the value of the dollar will continue to debase and hence, investors should put their money in commodities like oil and gold as their demand will continue to outstrip supply. This is in sharp contrast to the US dollar where relentless supply by the US Fed could cause a huge drop in the value of dollar.

You can call it the end of an era. The legendry Mr. Deepak Parekh, chairman of the HDFC Group, has often been called the Father of India's financial revolution. Mr Parekh is set to step down as the chief of the HDFC group this month after a stint spanning three decades. He has been the CEO of HDFC for the past 16 out of 31 years of his association with the company. He is credited for not just building the corporation and making it what it is today, but evolving the concept of mortgage credit in the country. One of the reasons for HDFC's untarnished asset quality despite the turmoil in the real estate market has been Mr. Parekh's deep understanding of the construction business. Kudos to the person responsible for building one of the country's truly blue chip companies.

Mr. Parekh is being replaced by Mr. Keki Mistry who has been with the company since the past 28 years. Mr Parekh's succession planning comes without any hiccups given the profile of HDFC's top management and the history of their association with the group. However, his keen sense of business ethics could certainly find more takers.

After being beaten down on the back of news of the Dubai debacle during the previous week, stock markets worldwide recorded weekly gains this week. India's benchmark index, the BSE-Sensex ended the week higher by 2.8%. Infact, Asian stocks posted the biggest weekly gain in seven months led by the Japanese markets where the benchmark index ended higher by about 10%. It was followed by China and Hong Kong, which ended higher by about 7% each. The foreign institutional investors (FIIs) seemed to be willing to take full advantage of the fear surrounding the markets following the Dubai debacle. They invested nearly Rs 42 bn (net figure) in India during the week. The fact that the Indian economy posted strong second quarter GDP growth numbers also made markets buoyant. The domestic mutual funds also were in shopping mood as they invested nearly Rs 29.3 bn (net figure) during the week.

Source: Yahoo Finance, Kitco
Note: Countries are representative of their benchmark indices

04:55  Weekend investing mantra
"Long-term shareholders benefit from a sinking stock market much as a regular purchaser of food benefits from declining food prices. So when the market plummets - as it will from time to time - neither panic nor mourn." - Warren Buffett
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11 Responses to "Here's how you can be like Buffett"

Shrihari Kulkarni

Dec 6, 2009

With reference to your article "Food inflation despite surplus production" - The only and simple reason for this is - POPULATION. Unfortunately, no media, no press, no geovernment, no influential politicians talk about this. POPULATION is not only root cause for food inflation but also for all other major problems that India is facing today. Hope - equitymaster will take a note of this and will spread the message apart from making money.


ganesh Lal moondra

Dec 6, 2009

The reason why food prices are rising is not confined to draught and floods only. The per capita food grains production in the country is too low to sustain. We could manage, as many people specially the women folk ate much less than their need. Now with the NAREGA and bank loan cancellations these people have money in hand which they are using for food. Now unless the production increases by a minimum 40% the prices will keep on increasing till the food again goes beyond the purchasing power of the above beneficiaries.



Dec 5, 2009

5Minute Wrapeup is perfect for me as I am not professional in stock trading. It gives me much clear picture of the stock market around the world as well large outline of stock trading during coming months.


dr.ramnarayan nanda

Dec 5, 2009

sir,we,our govt,our politicians should be ashamed of the situation where the middle class is starving due to stiff rise of prices of common food grains.dal which is termed as poorman's meat has touched Rs100/kg and govt is boasting to tackle undernutrition.we feel the absence of LALBAHADUR SHASTRI then prime minister of India who fasted weekly once when food grain was scarce
in the country.but alas now a days our leaders and ministers are quarling for flying in executive class or economy class.shame to us.thanks.


rakesh singh

Dec 5, 2009

I have asked a question yesterday, which is not yet answered.

I hope to get the reply soon.

Thanking you !



Dec 5, 2009

The US may be down, but is definitely not out, howsoever much the world takes pleasure in its discomfiture (which is because of its ill-advised iraq incursion).

If you count the number of patents issued, Nobel prizes, Olympic medals, ACM Turing awards (computer science "Nobels"), Field Medals (Maths "Nobels"), dominance of the worldwide film and music industry, Technology innovations, startup activity, dominance in all journals of most scientific fields worldwide, it is clear that the US is the leader, and by a huge margin. In some areas, it accounts for a 80-90% "marketshare", in the market of ideas. True, some of these aheievements are of immigrants who have made the US their home, but the American-born US citizens comprise a majority of these achievements too.

It is the same sense of innovation that infected their financial institutions, to their downfall.

Having worked in an American MNC, I have seen some of the American inventiveness from very near. There is a lot of catching up India and China have to do before we can claim our rightful place among the very top. It is very critical we do not become complacent too soon and start counting our victories, or rest on our laurels.



Dec 5, 2009

food prices are high primarily due to hoarding by food grain agents.. they are creating artificial demands and raising prices.. sad to see the state and central govt.. doing NOTHING abt this..Its a shame , that we are being cheated by our own ppl.. our countrymen..


Mohinder Mukkar

Dec 5, 2009

It is true to say-Brevity is the soul of wit. A very revealing and balanced approach to market.



Dec 5, 2009

I am very happy to see 5 Minute wrap up. Kindly advise us on investment in Blue chip companies for better investment and good returns in long term.



Dec 5, 2009

India in general and the poor middle class in particular have got terribly caught into this debt-driven dollar devaluation by US. The more US debt, the more the Gold is getting priced at and the middle class Indian, due to its societal customs (of gifting Gold at Marriages) are forced to pay for the sins of US citizens (paying huge amount for each gram of gold). Same is the case with pulses and food articles, Oil etc that India generally imports. Irony is to the same extent INR is not getting appreciated.. Indian Govt. in trying to maintain interest rate/stock market/industry in balance, is losing sight of common man, poor man and blindly following some way of pricing the INR-Dollar rate. US has figured out RBI's ways and are milking from our wealth (from stock market returns). I will thus conclude with an audacious statement that FDI must stop NOW. RBI must focus entirely on domestic market and industry. Let the US Dollar go to hell..yes it will impact ITES, but that has to be tackled by doubling or tripling the prizing no two ways about it...

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