6 reasons why you must not blindly follow this "Big Bull"...
(Dec 12, 2014)
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In this issue:
» India Inc. under pressure to maintain dividend payouts...
» Should Mr. Rajan give in to the pressure to cut rates?
» Do not ignore the fallout of the falling oil prices...
» and more....
Did you know you are a mimicry artist by nature? There are special mirror neurons in the human brain that form the basis of our natural tendency to imitate one another. While this tendency may be useful in many social interactions, it can put you in jeopardy if not handled well in the stock markets.
The Indian stock markets have witnessed a strong bull rally over the last one year. Many stocks have gone up multi-fold. So retail investors who have been late to the party could be anxiously looking for money-multiplying opportunities. And as we explained above, the tendency to imitate others is very instinctive. So many would be drawn to mimicking the stock investments of big names in the stock markets. We wouldn't say it is wrong to mimic successful investors. But what you imitate is worth considering. To imitate someone's investing philosophy and approach is one thing. And to blindly copy the stock portfolio of a successful investor is a different ball game altogether. If you find yourself doing the latter, then we have a warning for you.
We recently came across a piece of news that said that renowned Indian investor Rakesh Jhunjhunwala, also known as the "Big Bull", purchased 1.4% stake in ailing airline operator SpiceJet Ltd. Now this news may have prompted some investors to join the bandwagon. After all, an investor as shrewd as Mr Jhunjhunwala must have done thorough research and due diligence before making the investment, isn't it? Doesn't it make sense to invest in SpiceJet Ltd then?
Well, here are 6 reasons why you should not blindly follow this "Big Bull".
We're not suggesting you stop tracking what other investors are doing. What we are against is blindly following someone without understanding the merits and risks inherent in an investment.
- Ace investors are mortals and capable of making mistakes...
People tend to view highly successful people as if they are invincible, as if they are above mortal beings. Let us tell you that all investors make mistakes. Even the legendary Warren Buffett makes mistakes till date. A couple of months ago he admitted that his investment in major retailer Tesco had been a 'huge mistake'. So don't make the mistake of presuming that ace investors can never go wrong.
- Inside many a great investors also resides a speculative trader...
With the kind of halo that big investors carry around them, people may often have the perception that they are making every investment after careful, rigorous and detailed research based purely on logic, intrinsic value determination and with a long term horizon in mind. As a result, people tend to view every action by them with too much awe and in a very positive light. But let us tell you that this is not always the case. When asked about his investment in SpiceJet in an interview with CNBC-TV18, this is what Mr Jhunjhunwala said, "Generally, I play test matches, sometimes I play T-20 cricket also. I wanted to buy Jet Airways, Jet Airways was in freeze that day so I bought SpiceJet. I was in Maldives; I placed the order from there."
- You will not know when he will exit from the stock...
Another big problem with blindly following a successful investor is that you don't know what he is going to do next. You may buy on news that he has bought a stock. But what if he decides to exit the stock in a short span of time. You will be left holding a stock without knowing what to do.
- There is no guarantee that the stock will go up simply because the "Big Bull" has bought it...
Many investors tend to believe that it is safe to buy a stock bought by a marquee investor because its boosts the sentimental value and that there will be a flood of buyers for that stock. But this is a very risky game. Do you know SpiceJet skid over 12% post Mr Jhunjhunwala bought it?
- This investment probably means nothing to him...
Mr Jhunjhunwala bought 1.4% stake in SpiceJet by investing about Rs 134.1 million. Do you think this is really a big amount for him? We believe this investment is too trivial for the billionaire investor. Even if this investment goes bad, it will not affect his overall portfolio much. So it would be dangerous if you take a sizeable position in such a stock and it fails to deliver.
- Airline is inherently a business with bad economics...
While there can be temporary reprieve for the airline industry in the form of declining crude oil prices, the inherent characteristics and cost structures of the airline industry make it a perennially losing proposition. It is not just in India, but airlines across the world have had a history of huge losses. In that sense, SpiceJet is no exception. The company is sitting on a huge pile of debt and has been making massive losses. A few weeks ago we had highlighted how SpiceJet was facing the risk of becoming financially unviable and may have to be shut down. It is very difficult to turn around a business with bad economics.
Do you think it is safe to blindly follow the investment ideas of a successful investor without doing your own due diligence?
Let us know your comments or share your views in the Equitymaster Club.
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Dividends are often a crucial aspect that investors take into account while taking investing decisions. Companies with stable and growing dividends are perceived to be promising. However, a look at just dividend numbers could be deceptive. Companies with growing dividends might not necessarily be offering equally good promise
when it comes to earnings growth.
This exactly seems to be the case with India Inc. As per an article in Business Standard, 158 non-bank & financials companies have offered dividends of Rs 1,018 bn, up 24% on the back of just 9.4% annual growth in the bottomline.
What is even more absurd is that companies are taking loans to keep up dividend payments. More than one fifth of these dividend payments have been funded using borrowed funds. Some of the companies are hoarding cash for dividend payments.
The growing disconnect between dividends and earnings are a matter of concern. It has prompted Securities and Exchange Board of India (SEBI) to propose a dividend policy for listed companies. As regulation and implementation take their due time, it is up to investors to analyze the implication of such trends. Investors must note that just dividends cannot be the criteria to assess the potential of either a company or a stock. What they need to focus on is efficient capital allocation.
High dividends paying stocks may not be the best to invest
As lower food and fuel prices ease inflation in the economy, pressure is mounting on Mr. Rajan to cut interest rates. The same is expected to trigger the investments leading to a revival in the economic cycle. Known for his tough stand on inflation control, Mr. Rajan, while did not give in to the pressure, did suggest recently that a cut may follow early next year if inflation and fiscal deficit numbers remain benign. While some may find him stubborn, we agree with his approach. Afterall, it is not the interest rates that have blocked investments in the country. Unless concrete reforms are taken, only a low cost of capital might make economy more vulnerable at early stages of recovery. At a time when global economies are resorting to printing money and using quick fixes, the impending risks to emerging economies like India cannot be ignored. A rate cut decision needs some conviction on the economic stability that is yet to be seen. By not cutting interest rates just yet, Mr. Rajan is only avoiding asset bubbles and ensuring enough safeguards just in case a crisis strikes.
Even as India cheers declining oil prices and the resulting fall in inflation, there is a likely downside that we must keep our eyes open for. For a country that imports around 80% of its crude needs, falling prices have led to lower energy costs, lower fuel subsidies and improvement in the fiscal health. However, one man's gain is another man's loss. While falling oil prices are positive for net crude importers like India, they imply losses for oil exporting economies. And this loss is unlikely to be restricted just to them. As per an article in Livemint, as liquidity shrinks for these economies, for the first time in 18 years, they are likely to pull back the petrodollars from the global markets that found way into other economies in the era of high oil prices. Now this might have some grim consequences for India. You see, India has been one of the destinations for funds from the oil rich nations. This does not mean one should press the panic button. Lower commodity prices
are indeed positive for India. However, investors would do well to keep an eye on the associated risks and not get carried away by the euphoria, a lot of which has to do with foreign money inflows.
Meanwhile, Indian stock markets slipped below the dotted line during the post noon trading session after opening on the day on a positive note. At the time of writing, the benchmark BSE-Sensex was down by 170 points (-0.6%). Barring FMCG and healthcare, all sectoral indices were trading in the green with the stocks from the oil and gas and realty spaces being the leading losers. The Asian equity markets were trading mixed with Japan and Singapore leading the gains, while stock markets in Hong Kong and Malaysia were trading in the red. Majority of the European markets opened on a negative note.
"I want to be able to explain my mistakes. This means I do only the things I completely understand." - Warren Buffett
|| Today's investing mantra
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