Lessons from Mayan 'End of the World' prophecy - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Lessons from Mayan 'End of the World' prophecy 

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In this issue:
» Fuel shortage biggest reason for power project delays
» Inside the Reliance Petroleum insider trading case
» Should Govt unlock land resources to bridge fiscal gap?
» Is the French banking system coming full circle?
» ...and more!


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00:00
 
Well, the news is out. The world did not end on 21-12-2012 as per some interpretations of the ancient Mayan prophecy. Believers of the prophecy who ran to the mountains can now safely head back home and resume their daily lives.

Looking at the title, you may wonder how investing in stocks has anything to do with the Mayan prophecy. At the face of it, the two do appear to be completely unrelated. But if you dig a bit deeper, you'll see an interesting relation between the two.

In a larger context, the hype surrounding the Mayan prophecy defines how we look at the world today. Ever since the financial crisis broke out in 2008, there has been an astronomical rise in fear and pessimism about the world economy. A battery of commentators around the globe feed this fear-driven mindset with daily doses of doomsday predictions. The US economy is doomed... The euro is doomed... The Chinese growth trajectory is doomed... The Indian growth story is doomed...

Do not get us wrong, please. We are in no way trying to undermine the problems facing the world economy. But the truth is that periods of excesses are followed by periods of corrections and adjustments. This is how things go around in cycles.

Look at the past century. The world saw two major world wars during this period. Both these wars were horrifying in terms of destruction of human lives and wealth. Yet the countries that were devastated during those wars have emerged stronger and wealthier over the decades. And though there have been a series of economic crises from time to time, a majority of the time the world has been making progress. An article in Business Insider says that the US economy has been in expansion 84% of the time since 1945.

So yes, there are going to tough times. There will be corruption scandals, wars and economic crises. But this does not mean the world is going to end. The human spirit has a great track record of resilience and enterprise. And we don't see any reason why this will not continue going forward.

Investing in equities is nothing but a belief in that enterprising human spirit. Though there is a risk of volatility and even loss of capital, there is also the scope of unlimited gains. If history is anything to go by, the chances of the latter possibility are greater. In fact, equities have outperformed all major asset classes over the long term. So it is up to you to either give in to the fear psychosis or take the path to long term wealth creation.

Are you avoiding the stock markets because of excessive fear and uncertainty? Let us know your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
 
One of the biggest roadblocks facing the Indian economy has been the poor state of infrastructure in the country. It is said that lack of proper infrastructure shaves off about 2% of India's GDP growth every year. The power sector, which is the engine for growth in any economy, is facing a myriad of challenges and setbacks in India. As per an article in Livemint, new orders in the power sector stood at Rs 79 bn in the September quarter, down 91% from the corresponding period of the previous year. In fact, this is the lowest since 2005.

Moreover, about 64,000 megawatts (MW) of projects have been stalled. Today's chart of the day shows the major reasons for delay in the 64,000 MW of power projects. It is clear that the biggest problem plaguing the power sector has been shortage of fuel, mainly coal. It is worrying that despite that fact that India has one of the largest coal deposits in the world, coal supply continues to be a big challenge.

Data source: Livemint


02:05
 
Insider trading is a market manipulation practice where one party that is privy to some information profits from trading shares based on that information. These profits are at the expense of other shareholders who do not have such information. Mostly corporates are involved in insider trading cases since they have first hand information about their own company.

Take the case of Reliance Industries Ltd (RIL) for example. It is alleged that the company was involved in short selling of Reliance Petroleum Ltd (RPL) shares just before the merger between the two companies. And it made a profit of Rs 5 bn out of it. Currently, RIL is trying to settle the case through consent order. A consent order is an out of court settlement between the two parties whereby the accused pays a fine and the regulator (read SEBI here) drops the charges against it. RIL has opted for a consent order twice. However, both the times its plea got rejected. That's because the regulator felt that the penalty tendered was inadequate. Now it would be interesting to see where the case heads from here on. However, quite a few questions arise here. Will any amount of penalty be deterrent to RIL? Well, the answer is anybody's guess. Also, one wonders why SEBI took 5 years for investigatingthis case.

02:45
 
Milking PSUs is passe. Auctioning airwaves too has met with too many stumbling blocks. The government's latest attempt to auction telecom spectrum met with abysmally poor results. Hence the only silver left to sell is land resources. A recommendation from the Kelkar Committee on fiscal consolidation further justifies the government's intent. The government now believes that monetising land resources is the only way to bridge fiscal deficit.

Now, it is true that instead of borrowing heavily, it would be wiser to monetise some resources. Especially given the massive funds required to build India's infrastructure. But the method in which such resources will be monetised is unknown. And that leaves a possibility of precious resources being profligated, like in the case of telecom spectrum. The biggest government landholdings are under defence (with about 17.53 lakh acres) and the Railways (with about 10.5 lakh acres). So far, the Railways have achieved only nominal success in monetising land resources. Its own financial crisis speaks volumes about it. That too despite creating a separate statutory authority for the development of land. Hence, we are rather unsure about the government indiscriminately monetising land resources without adequate price discovery and transparency.

03:20
 
China currently is one of the fastest growing countries globally. But when it comes to performance of CEOs, the dragon nation still has a long way to go. As per rankings by the Harvard Business Review (HBR), only three chief executives from mainland China have made the top 100. This is in the latest ranking of corporate leaders' long-term performance. The ranking is based on growth in shareholder returns and market capitalisation achieved during the tenure of chief executives appointed since 1995. In contrast, 6 of the top 10 spots were held by CEOs of US companies. This is despite the fact that the US is plagued with massive debt and recession. The key here has been innovation. This is one area where the US has dominated till now leading to the establishment of some world class companies. China so far has been renowned for its manufacturing prowess and low-cost advantage. But once its companies become more innovation-focused there is no reason why they will not move up the ladder.

03:52
 
Split the 'too big to fail' institutions. This is the mantra global financial hubs are vouching for ever since the subprime bubble burst. However in the past four years there has hardly been any constructive action on this front. Yet again though, the French government has mooted a proposal to keep away risky activities from core banking. In recent times, Ireland's rescue of its banking sector pushed it to the edge of bankruptcy and into a bailout loan. Spain is now heading down the same path. Therefore government bailouts of failed banks are now a strict no-no. The French have recommended separating banks' risky trading activities into a separate subsidiary. This will keep the losses (if any) away from their more traditional lending operations. Under the bill, shareholders would be first in line to rescue troubled banks. Thus a bailout fund would be created and financed by the banks themselves. While this may solve part of the problem, holding bank traders responsible for their risky bets could address the rest.

04:17
 
Global stock markets mostly witnessed a volatile week of trade with Brazil (up by 2.4%) and Japan (up by 2.1%) being the top gainers. The US stock markets were marginally up by 0.4%. Investor sentiments were down as a result of uncertainty regarding finalisation of a deal out of Washington. The investors were concerned about failure in negotiations to avoid US$ 600 bn in tax hikes and spending cuts could result in US economy getting into recession.

The BSE-Sensex was down marginally by 0.4% for the week. Earlier in the week, the Reserve Bank of India (RBI) decided to keep the policy rates unchanged which met investor expectations. However, the apex body revised the GDP growth estimate downward to 5.7%-5.9% for FY 2013 than the earlier projected 7.6%.

Amongst the other markets, Brazil (up by 2.4%) led the list of gainers followed by Japan (up by 2.1%). Hong Kong (down by 0.4%) and Singapore (down by 0.2%) were on the losing side.

Data Source: Yahoo Finance


04:50  Weekend investing mantra
"To be a successful investor you must divorce yourself from the fears and greed of the people around you, although it is almost impossible." - Warren Buffett

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    2 Responses to "Lessons from Mayan 'End of the World' prophecy"

    RAMACHANDRAN

    Dec 22, 2012

    enlightening article leading to reality and help decide
    the optimistic limitations to invest and choose the sector and in turn companies.
    Thank you,
    V.RAMACHANDRAN

    Like 

    Borkaqr M.R.

    Dec 22, 2012

    Sir, It is the best time when others are selling, out of fear, brave ones will buy. Just an example, on its downward journey, I bought a small qty. of Satyam and again at 25 when Mahindra decided to buy. Even, if my avg. price is 60/ my gains are good and I still see some upward potential and hold on it. Even one can, in my opinion buy it current level. One can definitely get 25/20% in a year. Now on Reliance. Assuming SEBI shows its guts, waits and imposes fine of 1000Bn and Reliance pays that fine, what promoters have lost? Nothing. The introduction "Guilty Plea" system. in my opinion is another farce. Is there justice in it? The crime must be punished. - The world did not end, it restarted on 21-12-2012. Because, probably we do not know how to read "The Mayan Forecast". Like so many Market forecasters, forecasting "DOOM DOOMS and DOOMs. - Borkar

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