Sep 17, 2008|
Simple survival lessons
In order to avert the worst collapse the world financial system could have ever seen, the US Federal Reserve has come to the rescue of the 'about-to-die' AIG Inc., the world's largest insurance company. The US central bank has loaned the insurer US$ 85 bn for a 2-year period in lieu of a 79.9% stake in the company.
As Bloomberg reports, the Fed has indicated that this step was necessary because "a disorderly failure of AIG could have added to already significant levels of financial market fragility." The report further states that AIG's extinction could have cost the financial industry US$ 180 bn because the company provided insurance on more than US$ 441 bn of fixed-income investments held by the world's biggest institutions. This included US$ 58 bn in securities tied to subprime mortgages.
So, the Fed's step is seen as a good thing to avert a bigger crisis. But was this the right thing to do considering that it could send incorrect signals to the wrongdoers (who could now also hope of support from the Fed) is a question that remains unanswered.
Also read - An ethical degree
AIG's stock has already declined almost 80% over the past 12 months on broader credit market concerns and those specific to the company. While this has sent chills down the spines of investors in the ill-fated company, they've still done better than their peers in Lehman, whose stock is down 94% during the same period.
So, is the problem there with the entire financial system? It seems like there is. But there still are companies that have managed to stay away from the crisis and have also seen their shareholders benefit from the same. Not all financial firms have made ill-advised and reckless decisions.
Case in point is Warren Buffett's Berkshire Hathaway. The company's subsidiary, Clayton Homes (the largest maker and financier of prefabricated and mobile homes in the US) has managed to stay away from the crises that the mega financial institutions have been facing.
As reported by Fortune, Clayton's loan delinquency rates (NPAs) have in fact remained stable during these times of turmoil - the rate was 3.26% at the end of June quarter last year, and it is now at 3.82%. In comparison, the delinquency rate in the traditional housing market is around 6.4%!
And the reason behind the strength of Clayton's portfolio is simply that the company has been more careful about lending. As per the Fortune report, the company keeps all loans on its own books rather than offloading them to others by means of securitisation.
Another important fact is that Clayton has lent to borrowers who can afford their monthly payments and who purchased their houses for shelter, not for speculation.
The simplicity of Clayton's business and its risk averse strategies is what has paid for Berkshire as the company has been almost untouched by the subprime mess. And the benefits have been enjoyed by shareholders in the company. When most of the financial stocks in the US have lost anywhere between 75% and 90%, Berkshire's share price is up 1% over the past one year. And this is without much volatility during this period.
Isn't it the 'weighing machine' principle of Buffett's teacher Benjamin Graham that is at work? Companies cannot make poor financial decisions without eventually having to deal with the consequences. And shareholders in well managed companies with ethical practices and visionary managements get rewarded over a period of time. Patience pays for them, as it has paid off for shareholders in Berkshire.
These are some simple lessons for companies to learn as also for stock-market investors.Also read - Lessons from Warren Buffett
Remain calm during turbulent times. Do not follow the herd. Do not act rashly. Although the crisis in the financial sector is dragging the market as a whole down, there are several long term opportunities yet to be found.
More Views on News
Jun 10, 2017
Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.
Aug 17, 2017
PersonalFN simplifies the mutual fund account statement for you.
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Aug 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
More Views on News
Aug 7, 2017
The data tells us quite a different story from the one the government is trying to project.
Aug 4, 2017
The small-cap space is full of small players that are clear proxies to great growth stories and Indian megatrends.
Aug 8, 2017
Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 7, 2017
Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...
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. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. 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.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: email@example.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407