|»5 Minute Wrap Up by Equitymaster|
On This Day - 17 DECEMBER 2012
The golden rule of investing
In this issue:
That's right. The way to make this easy is to apply the golden rule of investing devised by none other than the legendary investor Warren Buffett. The rule is to stay within 'your circle of competence'. Circle of competence is nothing but investing in companies or sectors where the investor knows more than an average investor. In simpler words it means invest only in what you know and understand rather than investing in anything and everything. It especially means that one should stay away from sectors or businesses that you do not understand at all. Investing in what you know would mean that investors should know the company's products and services. Understand the company's customers and its competitors.
If you apply this golden rule to the entire list of listed companies, you are bound to come up with only 3 or 4 companies or at the most 10 companies. These are the ones you should concentrate on because these are the ones you would be able to earn higher returns in. If you can tell clearly as to what is driving a company's growth then in all probabilities you will be able to predict its growth as well. And understand what would be the right price to pay for this growth. However, if you step out of your circle of competence then your answer to the same question would be 'I don't know'. Or worse, 'Because so and so told me it will grow at this rate". This is nothing but a recipe for disaster because you would never know if the price that you are paying for the stock is right or wrong.
So there you have it. The golden rule of investing is to stay within your circle of competence. It is important to remember though that this circle is not something that comes in one day or one month. It takes time to build and strengthen. And for that you need patience. But in the long run this circle can help you earn fantastic returns on your investment. It is the recipe of getting rich in the long term.
However, few Indian firms have perhaps failed to appreciate the value of the above statement. We are referring to firms that were aggressive issuers of a security called as FCCB. Consequently, the bad consequences are now coming home to roost. As per a leading daily, most of the companies whose FCCBs were due for redemption this year have borrowed afresh to meet their obligations. This means that they would now be paying a higher interest rate than what they paid for their FCCBs. This could worsen their interest coverage at a time when the core operation is not throwing up enough cash on account of the economic slowdown. Clearly, this is yet another example of why it pays to be conservative at all times.
In short, the bulk of India's economic debate has mostly circled around short to medium term issues. What is seriously lacking is a long term vision for the country. How India will absorb its rising workforce is a very crucial question. But there has been little directed effort towards harnessing India's demographic dividend. India has a growing working population. And this demographic advantage is likely to continue till 2050. It is worthwhile to note that most other major economies would be witnessing a reverse trend during this period.
In order to channelise the young population, India really needs to expand its manufacturing base. Necessary labour law reforms have to be made. There is also a greater need to focus on vocational education to create a skilled workforce. Such long term initiatives are the need of the hour. But the government seems to be concerned only about the immediate challenges before the 2014 general elections. A youth without a job is more likely to take to regressive anti-social activities. As such, there is a huge danger if the rising youth population does not find meaningful employment.
House Speaker John Boehner has offered to accept a tax rate increase for the wealthiest Americans. This in some sense signals a step down from the staunch Republican stance. This means that what the Democrats and the current government need to do is figure out the income levels and the tax rates. With just two weeks remaining before the fiscal cliff kicks in, it is questionable whether both parties will be able to come out with a comprehensive policy by then. But the fact that the Republicans are willing to relent appears to be an encouraging sign. And now, the ball is in the Democrats' court in terms of the steps to be taken next and certain compromises that they will need to make too. Whether this will be the solution to a much longer term problem of the health of the US economy remains to be seen though.
As per a recruitment survey published by Firstpost, hiring activities are likely to gather momentum from the first quarter of 2013. And no prizes for guessing the sectors that will lead the pack. As expected, sectors like IT and FMCG will lead the pack. Financial services and auto sectors follow next. But it is encouraging to know that even sectors like realty and telecom, which are badly affected by downturn and regulatory issues, are not shying away. The survey covers around 3,000 employers in India. Hence one can say with a reasonable degree of confidence that the employment scenario in India is finally looking better. We hope this gives the much needed boost to the economy. Fingers crossed.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement
Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407