|»5 Minute Wrap Up by Equitymaster|
On This Day - 4 AUGUST 2010
The magic formula of one of India's best fund managers
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So, what is Prashant Jain's magic formula? In an interview with a leading financial portal, Jain opined that he buys only into business he understands well and while he likes growth and quality, he will never overpay for growth. He further added that he believes in doing simple things well. "Many people don't want to concentrate on cash-flows and numbers like return on equity and this is where they lose out. These are simple things but a very important part of our process", is how the soft spoken Jain put it across.
Sounds eerily similar to the philosophy of a gentleman called Warren Buffett, isn't it. Indeed, people like Mr Jain help in reinforcing our belief in the science and craft of value investing. They tell us that we really don't have to make things complicated in order to achieve outsized returns in the stock market. Just keep doing simple things well and keep focusing on the long term. And there are strong chances that you would come out with flying colours.
The remedy is that the government would need to do some serious capital spending. To cater to this growth, India would need to spend roughly US$ 1.2 trillion mainly towards infrastructure in the cities. This is almost 8 times what is being currently spent today. But unless this investment takes place, the Indian cities would be the most populous glorified slums in the world. We wonder what kind of first impression that would give to anyone visiting one of the fastest growing economies in the world. Maybe the government just hopes no one would judge the book by its cover.
As per the economics Nobel laureate Paul Krugman, there are three factors that make deflation such a dreaded thing. One, when people expect falling prices, they become less willing to spend and less willing to borrow. This leads to lower consumption demand and hurts industries. This in turn leads to cost cutting and thus lower wages. Lower wages again means that people consume even lesser. So, it forms like a vicious cycle, or a 'deflation trap'.
With some of the big investors like Bill Gross and Jeremy Grantham fearing the onset of deflation in the US, we see this phenomenon bringing in more fears than inflation. At least in the short to medium term.
As a result, the debt as a % of GDP of various countries has been steadily increasing since the 70s. This in turn has escalated to the sovereign debt problems hampering Europe. US' debt position is also in a precarious state. It is obvious that solving problems by providing easy credit is not the solution to a crisis whose very foundations lay in easy credit. This will only worsen matters in the future. At the same time there are no easy options left for various governments. These are challenging times indeed.
Second, capital goods companies will receive a big fillip to their own earnings in the process of executing such capex programs for other companies. As per reports, capex plans in the process of being executed currently stand at Rs 3,000 bn in value. Further, fresh capacities worth Rs 6,500 bn are expected to come on stream during FY11. Notwithstanding any shocks from developed countries, this capex is sure to add to the earning power of India companies over the medium term.
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