Do you know this no. 1 investment rule in the world? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Do you know this no. 1 investment rule in the world? 

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In this issue:
» Billionaire gold investor believes the metal is in short supply
» Realty exhibitions are just an illusion
» Does IBM employ more people in India than in US?
» How a China bull turned into a huge China bear?
» ...and more!


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00:00
 
What is the difference between a stock that falls 90% and the one that has fallen by 95%? Only 5% one would think. But we believe there's another way of presenting this same fact. A stock that has fallen by around 95% is the one that first falls by 90% and then tumbles another 50% from there. Interesting isn't it? Another interesting stat is that in order to break even, the -90% stock investor will have to invest in a 10-bagger while the -95% stock investor will have to find a stock that is a huge 20-bagger just to recover his lost capital.

What do you think is the key message from the math we just discussed? Well, it is that the bigger your losses, the more unlikely it is that you would recover them as it would need ever increasing gains. In fact, so important is this point that we would comfortably call this the number one investment rule in the world. After all, even the legendary Warren Buffett had the same thing in mind when he discussed his two rules for investing 1) Don't lose money and 2) Always remember the rule no. 1.

Thus, what are the qualities that you would look for in a fund manager when you invest your hard earned money with him? You would certainly look at how much he has gained each year over a long term period. But what will be equally important to note would be the extent of his losses at a time when the overall market did badly.

You certainly don't want fund managers that do phenomenally well one year and then suffer catastrophic losses the next. This way, the performance might just about be average or even below par. Instead, you need managers who may barely outperform the markets during good years but suffer way less than the market when the latter has a negative year. A long string of such performances and we bet you would have gained a huge edge over star fund managers who do exceedingly well for a few years riding on some fad. And then fade away into oblivion by not respecting the number one rule of investing which is to try and never lose money.

How much importance you give to this number one rule in your investment decisions? Share your views or you can also comment on our Facebook page / Google+ page

01:11  Chart of the day
 
India is having a strange problem. At least this is what the Mckinsey Global Institute has inferred. As per the institute, India ranks the highest in terms of jobs being vacant because there aren't enough people with the requisite skills to fill them up. As today's chart highlights, from among a sample taken, nearly 36% jobs in India with large employers are lying unutilised because companies are finding it hard to find the people with the right skill sets for these jobs. Not just that, only 43% employers believe that they can find enough skilled entry-level workers. The problem though is not restricted to India alone. Infact, the survey reports that this trend could lead to a shortage of around 85 m high and middle-skilled workers by 2020 and also lead to violence in society. We sure have a big challenge on our hands.

Data Source: dnaindia.com


01:47
 
It is quite obvious that real estate players have begun to feel the pinch as demand for homes has dropped and the inventory has been piling up. And the way that they have chosen to prop up sales is through realty exhibitions. Indeed, in the recently concluded realty exhibition jointly organised by the Maharashtra Chamber of Housing Industry and Confederation of Real Estate Developers Association of India (MCHI-CREDAI) in Navi Mumbai, the increase in footfalls has set the pulse of real estate players racing.

But does this optimism make sense. For starters, increase in footfalls does not automatically guarantee rise in sales. It is quite simple. As long as home prices remain unreasonably high, no amount of realty exhibitions will find any takers for houses. This is something that the real estate players need to understand. Moreover, banks are also under increased pressure to be careful while lending to this sector. They have also been advised of not restructuring loans given to the sector. Thus, in the event of a fund crunch, real estate companies will have no choice but to lower prices. All of which points to the fact that realty exhibitions are just that and nothing more. How long the sector continues to cling on to this illusion remains to be seen.

02:24
 
A recent article carried by Firstpost reports the findings of a document carried by the magazine Computerworld. As per this, IBM, which is an American tech icon, employs more people in India than what it does in US.

As per this article, IBM employs nearly 112,000 workers in India. Also less than one-fourth of IBM's total global workforce of 430,000 employees is from US. This would mean that while US has been crying foul about Indian IT companies, it has preferred to ignore what has been going on in its own companies. Given the lower wage costs, countries like China and India, have become popular destinations for US companies to recruit. Though US policy makers have tried to discourage US companies from outsourcing, by the looks of it they have not been too successful with it. Maybe it is high time they started concentrating on their own companies than blaming the entire world for stealing their jobs. Or maybe it is best that they let the force of free enterprise prevail. If they do away with protectionist measure, the natural forces of free trade would prevail. Companies would set up shop in US as well. And employment would increase.

02:59
 
If you are an enthusiastic value investor, this story is for you. A gentleman called Zack Buckley was deeply inspired by the legendary investor Warren Buffett since the time he was teenager. The inspiration was so intense that his goal was to lead a life similar to Buffett. So he set up his own hedge fund called Buckley Capital Partners. When he started, he saw great value in Chinese companies that were trading very cheap. He researched them. He even had discussions with the company managements. Then of course, he went long on several Chinese companies.

His mental bubble burst at a Value Investing Congress when he heard a gentleman saying that 200 out of the 300 Chinese companies listed in the US were frauds. Like an enterprising fund manager, Buckley decided to visit China and see the companies in person. He visited about 50 companies. What he saw turned him from a China bull to a China bear. He found out that most companies had been making blatant lies about their businesses and profits. In the end, he sold off all the Chinese stocks he had bought. In fact, he shorted many more such shady Chinese stocks. Luckily, Buckley learnt the lesson soon enough and saved himself from a massive disaster. This just highlights the importance of visiting companies and investing in only those stocks which are run by honest management.

03:40
 
Are gold supplies running out? Rick Rule, a billionaire and avid gold investor sure thinks so. He pointed out that although demand continues to remain robust, a number of issues will make gold supplies very tight in the future, especially among retailers. There are myriad issues that gold miners are facing. Existing mines are getting depleted, lower grades are available, and there are fewer new discoveries of the metal.

Plus there are other labour issues and environmental concerns that miners have to deal with. Many mining company representatives say that it's getting harder to find large deposits and to get them into production. From 2009 through 2011, output rose an average of 3.9% per year. However, a bulk of this increase is due to China, who doesn't export gold. Simple economics tell us that when supply is short, prices rise. So, before the new gold rush takes place, it may make sense to stock up on this precious metal.

04:08
 
Value assets at cost or market price whichever is lower. Create contingency reserves for rise in liabilities or unexpected losses. These are the hallmarks of good accounting laws that Indian entities are supposed to adhere to. Many do so. But when it comes to compromising on conservative accounting for want of book profits, companies readily bend rules. Not the Reserve Bank of India (RBI) The Indian central bank is a true example of an entity that has its core values in the right place. An article in Economic Times recounts the conservative nature of RBI's accounting.

The recently published RBI annual report clearly shows the conservative policies in asset valuation. Particularly its gold and foreign currency holdings. The RBI does take the unrealized gains on such assets. On the other hand it creates reserve for fall in value of securities based on their market value. Such policies ensure that the fundamentals of the central bank remain solid. However, less profit get transferred to the government's coffers every year. We do not advocate any change in the RBI's conservative accounting policies. Doing so to aid government revenue growth will not help any purpose. At least the RBI is one PSU that government has chosen not to milk. We hope that remains the case.

04:45
 
Meanwhile, indices in the Indian equity market traded weak right from the beginning today with Sensex lower by around 135 points at the time of writing. IT and capital goods stocks seemed the worst hit. While Asian indices closed mixed today, Europe was seen trading mostly in the green.

04:55  Today's Investing Mantra
"There are always going to be times when humans act irrational and this is time to make your money. I've made a career of cashing in when people act irrational." - Warren Buffett

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    3 Responses to "Do you know this no. 1 investment rule in the world?"

    kantilal b gorasia

    Dec 7, 2012


    Dear sir I agree that one should notlosse money & for that matter do not invest so that you donot losse.

    Like 

    Digambar Kulkarni

    Dec 6, 2012

    In the world of Trading, to earn maximum you must be willing to accept lossea also...just as those who win a battle must be willing to accept injuries/ small defeates!
    Your personal Balance sheet must also match your time horozon chosen.

    Do you know, by accepting 10% risk, you eliminate 90% competitors?

    Like 

    SIVARAMAKRISHNAN

    Dec 6, 2012

    True. The rule no 1 suggested by you is an eye opener to invest on a huge 20 bagger. There are many stocks that I have entered at the fall of 90% and now many of them have fallen by another 50% from that price. But an investor with a long term view of more than 5 or 7yrs and who can afford to invest his throw away money should not mind to enter at the fall of 90% atleast which could fetch him a 10 bagger return if not 20 bagger at 95% fallen price.

    Like 
      
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