|»5 Minute Wrap Up by Equitymaster|
On This Day - 22 MAY 2012
What the Facebook IPO tells about investors' brains?
In this issue:
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But here comes the biggest paradox. Mankind's biggest boon can also easily be its worst enemy ever. It has been proved that a blanket acceptance of mental short cuts or heuristics can lead to disastrous results at times. What makes matters worse is the fact that most of the times we are not even aware that we are in the grip of heuristics i.e. we are relying on short cuts to make decisions. The key therefore is to be able to know when to and when not to rely upon these mental shortcuts.
Nowhere is the misuse of heuristics as blatant perhaps as in finance. Warren Buffett put it quite elegantly when he said that investing is simple but not easy. In effect, the Oracle of Omaha was trying to warn us of the tendency to use mental short cuts that we have picked from other walks of life into finance. You see, finance has its own heuristics or own mental short cuts if you will. But they are so much at odds with the heuristics of our other walks of life that more often than not we end up using the latter when using the former would have served us much better. Consequently, a poor financial result is all that we end up with.
The recent IPO of Facebook is a perfect example of how wrong use of mental shortcuts led investors to burning their fingers. The IPO was one of the most hyped IPOs in history and quite rightly so. The company is such an integral part of our e-world and is such a pioneer that investors thought that the company's shares are a buy at any price. But finance doesn't work that way. Usually, what is most popular is always fully priced and this is what happened with Facebook. It was valued so high that the probability of a listing gain or even a long term gain seemed pretty muted indeed. Little wonder, it opened to a pretty lukewarm response. Thus, a better idea in finance is not to buy what is popular but to go for the unpopular and the least followed stocks. This heuristic has a much better chance of success in investing than the one taken from our day to day lives.
Corruption within the Chinese political system is as stark as in the Indian politics. But despite all its ills and flaws, India still enjoys a democratic system. One of the biggest challenges facing China is the long standing desire of its people for freedom and democracy. For how long will Chinese leaders be able to suppress them? The day of reckoning may be not too far.
In the survey, nearly 89% of the employers in India have stated that they would prefer to hire MBA graduates. In fact, the demand for MBA new hires in the whole of Asia Pacific region is quite high. Companies are looking to expand their footprint both within their own countries as well as outside. And they see MBA graduates as an important key to achieving this goal. Contrast this with the slowdown in hiring as well as salary expectations in US as well as Europe. The expectations of both the students as well as the companies mirror the state of economies in which they are living in. And rightly so!
However, according to Ben Davies, CEO of Hinde Capital, it makes sense for investors to lap up gold given the current weakness. A few factors are pushing gold to further upsides. The market is oversold currently. Plus the Fed may be about to go in for further monetary easing. These two factors could provide the much needed upside for the commodity.
Sectors tied to government policies have had a tough time otherwise. Take the cases of banking, telecom, oil and gas, mining, sugar or fertilizer sectors. There are some very profitable companies in these sectors. But most are now gasping for breath. This is thanks to the government's keen interest in them. True that corruption in some of these sectors has necessitated more supervision. But unfavourable and redundant policies don't help! In fact, they can only make matters worse. Most companies are currently struggling to keep their bottomline in the positive. The least the government can do is get more cooperative.
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