31-Jul-2005

>Ultimate Investment Reading List

  1. A Random Walk Down Wall Street, by Burton Malkiel
  2. Stocks for the Long Run, Jeremy Siegel
  3. Analysis for Financial Management, by Robert Higgins
  4. The Five Rules for Successful Stock Investing, by Pat Dorsey
  5. Why Smart People Make Dumb Money Mistakes, by Gary Belsky and Thomas Gilovich
  6. Making of an American Capitalist, by Roger Lowenstein
  7. The Intelligent Investor, by Benjamin Graham
  8. Common Stocks and Uncommon Profits, by Phil Fisher
  9. Beating the Street, Peter Lynch
  10. You Can Be a Stock Market Genius, by Joel Greenblatt
  11. Money Masters of Our Time, John Train
  12. Margin of Safety, Seth Klarman
  13. The Aggressive Conservative Investor, Marty Whitman
  14. Contrarian Investment Strategies, David Dreman
  15. Poor Charlie's Almanack, by Charlie Munger
  16. Damn Right! (Charlie Munger biography), by Janet Lowe
  17. A Short History of Financial Euphoria, by John Kenneth Galbraith
  18. Devil Take the Hindmost, by Edward Chancellor
  19. The House of Morgan, by Ron Chernow
  20. Capital Ideas, by Peter Bernstein's
  21. Liar's Poker, by Michael Lewis
  22. Moneyball, Michael Lewis
  23. When Genius Failed, by Roger Lowenstein
  24. The Smartest Guys in the Room, by Bethany McLean's
  25. Conspiracy of Fools, Kurt Eichenwald
  26. Influence, Robert Cialdini
  27. Why Smart People Make Big Money Mistakes, Robert Cialdini
  28. Fooled by Randomness, by Nassim Taleb
  29. Value Investing, by Bruce Greenwald's
  30. Competitive Strategy, by Michael Porter

Some of My technical Favourites.

Technical Analysis Of Stock Trends by Edwards Magee
The Psychology of Technical Analysis by Tony Plummer
Elliott Wave Explained by Robert Beckman
Elliott Wave Principle by robert pretcher
Elliott Waves in Action by Glenn Neely

Feel free to append the name of books you like in comments.

28-Jul-2005

>Famous Quotes from Famous Investors

Warren Buffett
"If past history was all there was to the game, the richest people would be librarians."
"Rule No.1: Never lose money. Rule No.2: Never forget rule No.1."
"Someone's sitting in the shade today because someone planted a tree a long time ago."
"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway."
"Risk comes from not knowing what you're doing."

Peter Lynch
"Go for a business that any idiot can run - because sooner or later, any idiot probably is going to run it."

George Soros
"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

John Templeton
"The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell."

John (Jack) Bogle
"If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks."

15-Jul-2005

>Chinese Revaluation. How to benefit?

As China's foreign exchange reserves reach US$711 billion , the US expects Chinese currency revaluation next month.

The Bush administration has told key senators that it expects China to revalue its currency in August ahead of a planned visit to Washington by President Hu Jintao in September, according to people familiar with the matter.

Senators Charles Schumer and Lindsey Graham, co-sponsors of a bill that would impose a 27.5 per cent tariff on Chinese imports, agreed to delay a vote on their bill after receiving what they regarded as an assurance that China will move on its currency next month.

The US Treasury has told Beijing it needs to revalue the renminbi by at least 10 per cent against the dollar. Mr Snow reiterated on Thursday that the US wanted China to move “as soon as possible.”

China is considering introducing a currency regime similar to the managed float operated by Singapore. Under this system the renminbi would be pegged to a basket of currencies reflecting the country's trade, but the details of the weights of the basket would not be made public.

A revaluation will help stave off growing US protectionism, at least for now. But don't expect it to solve the massive US-China trade deficit. It won't.

But as yet the unanswered questions are:

* How large will the revaluation be?
* By how much will China be able to ease off on its purchases of US securities?
* What will happen to US interest rates as a result?
* What will the effect be on US imports from China?

A few hints to the above questions:

* An initial revaluation of 5-10% - but moving to a currency basket will see this vary over time.
* Very little. If anything, the acceleration in China's forex reserves may see the Bank of China buying more foreign bonds - though it would be prudent for them to diversify into gilts and bunds.
* No direct effect likely on the FOMC.
* Expect some modest diversion to other Asian exporters, but a strengthening in other Asian currencies post-renminbi revaluation will partly erode any competitive gains.

The case for Yuan Revaluation??
The Yuan's unchanged value has reflected the deterioration in China’s terms of trade resulting from rapid export expansion based on labor-intensive products. Nevertheless, as shown by the recent dramatic increase in foreign exchange reserves, the international competitiveness of Chinese products has improved, and the conditions favoring an appreciation of the Yuan are now in place.

If the Chinese government turns a blind eye on this new situation and try to delay an appreciation, negative effects, in the form of low-efficiency in resource allocation, a growing economic bubble, and increasing trade frictions, could result.

What is the likely effect of Yuan revaluation on china?

First the Positives for China.

A Yuan revaluation will result in cheaper imports.

More foreign investment and government spending.

Curbing of inflation.

Reduction of foreign debt obligations for the government

Chinese economy becoming more productive.

Now the Negatives for China

Hard landing for growth,

Disastrous results for unhedged firms

Increase in value of non-performing loans in banking sector

Increased volatility as a result of influx of speculative money

A Yuan revaluation will impact the flow of funds into China. Billions of dollars sitting in China in anticipation of this revaluation could move out.

Future investments in China could slow down as Chinese goods will become more expensive to export.

China’s growth could slow down marginally over the next few years.

Effect on Commodity prices?

There could be a decline in commodity prices. Already, steel prices are beginning to fall globally and other metals could see a similar pressure on prices. (bad for steel companies)

Lower raw material prices should mean less cost pressure for manufacturers, and hence, better margins going forward. (good for steel consumers, like automobiles, electrical manufactures, ship builders etc..)

Also, this means lower inflation and reduced pressure on interest rates. Therefore, lower commodity prices is good news for the economy.


Lets see in more detail the effect of Chinese Revaluation on India

=>The Export sector companies would be biggest beneficiary, since it would become more competitive.

=>The rupee would also tend to rise against the dollar, but not as much as the Yuan. This would be negative for the IT sector.

=>Lower commodity prices would hurt steel manufacturers, but help steel consuming companies.

How to use this to Invest?

=>Companies which export would have great time since the sudden rise in Yuan would help Indian exporters get more orders. (BIG +)

=>Companies whose margins are under pressure die to high commodity prices would perform better.

=>IT sector would come under more pain due to rising rupee, (most Asian currency could rise a little with Yuan)

=>Steel and other metal manufacturers would also face the pressure of falling prices. Already too many companies lined up big investment projects, which can create a big over-supply and kill steel demand and price.

14-Jul-2005

>Whats Carbon Trading? How to benefit?

First of all what's carbon trading?
Carbon trading is the process by which companies offset the excess carbon emissions they generate by investing in companies in other countries to ensure clean energy and environment.
Companies which emit less carbon and get it certified would be in a position to cash in on by selling the carbons saved to the offenders in developed countries who need to meet the targets set out by the UN.
The market for carbon trading opened up after the Kyoto Protocol in 1997 when under the auspices of the UN, countries agreed to prune their green house gas emission levels by 5 %.
How is India Benefited?
Many Indian corporate appear to benefit tremendously, thanks to the excesses of the West.
Many of them have now discovered the virtues of carbon trading in the global markets, which promises windfall profits.
Close to 100 top Indian corporate have invested up to Rs 1 crore each in projects to reduce carbon emissions through technology upgradation.
Many countries zeroed in on India after finding out that the cost of carbon reduction projects through technology upgradation is quite competitive here.

Indian corporates are taking to carbon trading considering the prospects of what some would think are obscene profits.
The projected returns from each project could be as high as Rs 500 crore, according to consultants involved in such projects.
Which companies are close to completing actual transactions.?
Gujarat Fluro Chemicals
Kalpataru Energy
Which are in the process of completing their projects to reap the benefit of carbon trading?
Indo Gulf Fertilizers
A number of Tata group companies
Ultratech Cement
Rajashree Cements
Indian Rayon & Industries
Birla Tyres
Kesoram Rayon
Vasavadatta Cement
Essar Oil
Essar Steel (has invested a few crores which could well translate into profits of close to Rs 700 crore over the next few years)
SAIL
Sesa Group
Orissa Sponge Iron
Birla Corporation
How do the Indian Companies do carbon Trading.?
Indian companies are entering the global carbon markets either through
foreign government tenders or
through international brokers like Shell Trading, GT Energy and IFC.
Government and business entities in countries like Netherlands, Canada, Finland, USA and Japan are mainly funding the Indian projects and buying carbons.
Currently Indian companies are going through the performance improvement projects and thus generating saleable carbons.
Once these project performance are certified by UNFCCC they are entitled to sell ‘carbons’ saved in the overseas market at euro 8-10 a tonne.
Whats the total prospects of carbon Trading? Other Benefits?
India is probably reaping the benefit of being the first mover.
The first national level agency was set up in India and it has approved 93 CDM projects from India. Now 161 countries have set up their own agencies. Indian companies could earn at least US $150bn in the next few years from carbon trading.
It is not just money. Companies end up getting cleaner technologies as well.

13-Jul-2005

>Global Nuggets-2

A little "EagleEye" analysis of World Markets, its important since we live in an interconnected world..!!
As the FED slowly raises interest rates quarter point by quarter point, the financial environment may seem to be changing very little, but in reality it is becoming increasingly at risk from financial tornadoes; A tornado is a storm that appear suddenly out of a clear blue sky and produces devastation.

Citi Corp. is expected to reported excellent earnings but no one is talking about the fact that between Citi and J.P.Morgan they control 90% of the interest rate and currency Derivatives Markets, representing a risk exposure equal to some 20 times or more of there total equity.

Short term interest rates are increasing steadily, and may have to increase faster because even at 3 percent the Federal Funds rate remains significantly below the steadily rising rate of inflation.

Banks, which have covered up an almost infinite quantity of insane high risk consumer and corporate loans, by the profits from the "treasury carry trade" are looking at a bleak future. Witness the financials anemic participation in the Rally thus far. Either short term rates will overtake long term rates, in which case the "carry trade" will go into reverse, wiping out not only a huge source of profits but a great deal of equity as well, or long term rates will increase enough to prevent this, in which case banks and hedge funds are looking at huge losses on their mostly un-hedged bond portfolios, particularly corporate bonds, (whose yields can be expected to rise and prices fall more that Treasuries) secondly, consumer debt (whose default rates will soar in a period of tighter money) and mortgage backed securities, whose refinancing rate will drop to zero, defaults rise and maturity extend to infinity, as homeowners can no longer refinance themselves out of financial difficulty.

In the corporate sector, General Motors' debt downgrading will add hugely to its cost of capital, and any severe decline in the stock market will put its pension fund irretrievably under water and consumer difficulties will affect both auto sales and auto financing. The same is true at Ford and at DaimlerChrysler (which will also be affected by management's lack of focus on its Mercedes crown jewel and by the rising euro/dollar exchange rate). Porsche nearly went bust in the late 80s; a weak dollar is hell for luxury German auto manufacturers.

Hedge funds, with more than $1 trillion of capital, have invested altogether unwisely and covered their losses through profits on the "carry trade," which have distorted the government debt market beyond recognition. Expect huge losses of capital in this sector.

Fannie Mae and Freddie Mac can expect their debt ratings to decline further as rates rise and mortgage defaults soar, while their mortgage backed securities portfolios become illiquid. Only Congress can save them now; as Democrat fiefdoms they'd better hope for a big swing to the left in 2006!

Beginning in the Third Quarter the tech sector will have to report sharply lower earnings because of the expensing of stock options, which in itself will affect their stock prices and their ability to raise capital. Also, Moore's Law, by which semiconductor performance doubles every 18-24 months, is clearly approaching its limits, eliminating much of the sector's growth potential.

CONCLUSION

The cats and Dogs are Running

Regardless of what wall Street is telling you, 15 - 19 times next years projected earnings, means stocks are grossly overvalued. (only the peak bubble year of 2000 had higher valuations) Expect a repeat of the Nasdaq’s fall of 2000-2002; but what is even more troubling, this time it will not be alone. As Inflation continues its relentless assent and monetary liquidity dries up and interest rates soar the rest of the worlds markets will follow the NASDAQ.

THE TRIGGER

It’s the tightening of Credit and Rising Interest Rates that has always been the trigger and once triggered a quick reversal will not stop the carnages. Greenspan 5 ½ % interest rate drop, reversing his 2000 tightening had absolutely no effect until the Bush Tax Cuts were passed. This time there are huge budget deficits instead of budget surpluses and therefore there will be no Tax Cuts to save the day. Once over the edge, watch out below.

There is an old Wall St. adage that says, “the party is not over until the cats and dogs run” Have you all noticed what’s been happening to the OTC Pink Sheet Markets, they are not only running but they are into a full sprint on all time high record volumes.

Is a market crash about to happen tomorrow or next week or next month? To tell you the truth, I don’t know but if the unraveling began tomorrow then this letter would be a waste of time. But, like it or not, It will happen and in the not to distant future.

“To Be Fore Warned Is To Be Forearmed”

===============================================

Problem of Plenty

``This isn't what you would expect from a region expanding faster than the U.S. and more than twice as fast as the EU,'' Anderson said. ``A booming Asia should be pulling the rest of the world along with it -- resolving U.S. imbalances and promoting EU growth by purchasing more goods and services.''

Since Asia is running a current account surplus, demand in the rest of the world is pulling up Asian growth. The gap also implies that Asian nations are exporting capital, typically through their central banks' accumulation of U.S. securities.

``We have the counter-intuitive situation of a region consisting predominantly of developing countries lending to the richest developed country in the world,'' Reserve Bank of Australia Governor Ian Macfarlane said in Beijing in May.

The American homeowner doesn't mind the cheap Asian capital that lowers his mortgage cost. It's the deluge of Asian-made imports, far in excess of Asian purchases of U.S.-made goods, that worries U.S. manufacturers and lawmakers. They are quick to pin the blame on undervalued Asian currencies.

Currency Quick-fix => An analysis of the current accounts of Japan, China and India has convinced the UBS researcher in Hong Kong that the reality may be more mundane than a mercantilist conspiracy by Asian governments to keep their consumers repressed and borrow from global growth in exchange for supplying capital.

The rapidly aging population of Japan makes it difficult for the world's second-biggest economy to play a meaningful role in correcting the global imbalance.

India, the world's second-fastest growing major economy after China, last week announced a reversal of three years of current account surpluses with a small $6.4 billion deficit. So it's doing its bit for world growth. However, with a $661 billion economy, of which trade accounts for just 27 percent, India doesn't help much yet, UBS said.

Unlike India, China's $1.65 trillion economy is in a position to help, though its ``factory of the world'' status is coming in the way. Re-exports of imported components account for about half of China's overseas shipments, according to estimates by researchers Morris Goldstein and Nicholas Lardy at the Institute for International Economics in Washington. It's this ``processing'' trade that's grossly tilted in China's favor. Only considering China's ``domestic'' trade -- exports of what it makes locally minus imports of what it consumes within the country -- China ran a trade deficit from 2002 until mid-2004, the UBS study said. Right now, China is in a bind. Its ``processing'' trade is accelerating. At the same time, ``the combination of surging excess capacity in overheated sectors has turned a rising trade deficit at home into a strong surplus,'' UBS's Anderson explained. China had a $30 billion trade surplus in the first five months of 2005, compared with a $9 billion deficit in the same period last year.

Cause, Not Consequence => If Asian countries are running current account surpluses out of a mercantilist desire to keep their currencies undervalued against the dollar, why did they wait until recently to put their strategy in place?

``The behavior of China's real trade-weighted exchange rate over the past 15 years doesn't sit easily with the hypothesis that undervaluation has been a consistent element in China's development strategy,'' Goldstein and Lardy at the Institute of International Economics say.

Anderson put it more provocatively: ``There's hardly any relationship in Asia between exchange rates and current account balances.'' Weak domestic demand in Asia, he says, isn't so much a result of currency undervaluation. Rather, it's one of the two causes behind the region's growing current account surplus in the past few years, the other being a savings glut.

``Asia will spend and grow more in the years to come,'' said the UBS economist. ``Just not tomorrow.''

09-Jul-2005

>The Steely Three.. Jharkhand Chhattisgarh Orissa

India’s backyard is fast pushing out China’s investment showcase.

Orissa, Jharkhand and Chhattisgarh are emerging as the biggest investment destinations in the world, leaving behind the current global industrial hotspots like Guangzhou and Shenzhen in China.

The three tiny states have already received investment commitments close to $40 billion. More are still pouring in.

Posco => $12 billion , Orissa
Essar Group =>
$1 billion , Chhattisgarh
Essar Group => $1-billion , Orissa.
Jindal Steel and Power => $2.5-billion ,
Jharkhand
Jindal Stainless Steel’s => $1.5-billion , Orissa
Tisco’s => $2-3 billion , Chhattisgarh

Jindal South West Steel
=> $2-billion investment for capacity expansion
Maharashtra Seamless’ => $1-billion
investment for capacity expansion
Bhushan Steel’s => $1.5-billion investment for capacity expansion


first time that such massive investments in a single sector in a single country could be taking place.
In the past, countries like China might have attracted massive investments but they were in various industrial sectors and spread over some time span, they said.

massive jump projected in domestic demand for steel +
consolidation in the industry ==> main driver for expansion spree by steel majors.
While the biggies are scaling up their operations in a big way, the small players are fast becoming unviable and are slowly getting out.

Imp Considerations
1. Is the expansion based on realistic projection figures. ? Or will it create Surplus?
2. There is massive growth happening in most of the industrial sectors — whether it is infrastructure, auto and housing, and this would mean a huge growth in demand for steel.
3. Consumption of steel in India is projected to go up from the current level of 36 mt to 60 mt by 2010 and 100 mt by 2015. (is this an over estimate or realistic)
4. Availability of capital at interest rates almost at par with rates available at the international market is another factor which has emboldened the domestic steel majors to undertake big capacity projects.

Possible hunting ground for investment
----------------------------------------------------------
Not sure if steel companies would make profits but.... companies which help in setting up steel plant would surely make a ton of moeny..
==>Mining companies which provide raw ore and coal and other metals which goes into make steel can have a great day going ahead.
==>The capacity expansion would definitely benefit companies which suuply the tool and machines for steel factories.
==>Cement would also be in demand due to big use in setting up units.

08-Jul-2005

>Private Equity Inflows a look.

Summary:
Big herding effect to come to India. Many people\funds discovering India.
Can get the biggest chunk of investments in region.
Politicians should not sploil the party.


Private equity funds crowd at India

The flow of private equity (PE) money into India Inc is unlikely to wane in the days to come.


Blackstone is also looking at investments of $1bn for investment in Indian companies.
Earlier, Blackstone Group senior chairman Peter G Peterson had said the company will focus on India rather than China while investing in Asia.

Europe-based Apax Partners is also looking at investments in India.

After Blackstone, a host of players are in the process of raising dedicated India, China and Korea
funds. The combined corpus would be in the region of $1.3bn.

The players include HSBC, Actis, Ankar Capital and Mirae Asset Management.

HSBC along with Actis is looking at raising around $500m for investments in India and China, with a predominant portion earmarked for India.

Mirae Asset Management from Korea is looking at raising $200m. The entity is targeting Korean investors for investments in India and China.

Ankar Capital along with a Korean partner is also looking at raising $100m which will be invested in the Korea-India trade corridor. The money is likely to be invested in Korean companies which are looking at investments in India.

There are also talks about Ketan Patel, former MD, Goldman Sachs strategic group looking at raising $300 to $500m for investments in India and China.

The US-based Carlyle Group, with around $30bn under management, plans to raise $1bn in the next few months for a new Asia investment fund which will focus on China, Korea, India and Australia. Around a quarter of the funds raised are likely to be invested in India.

Existing private equity investors like Newbridge Capital are also considering expanding their operations in the country.

New Vernon fund has raised $250m for investments in the Indian markets. Other than private equity players, foreign institutional investors (FIIs) are big time investors in the Indian stock markets.

Also, a host of professionals and US-based NRIs are currently in the process of raising money to invest in India.

In 2004, over $8.5bn was invested by FIIs into India.
This year the investments have already crossed $5bn.

07-Jul-2005

>Indian Nuggets-1

Hindalco to split shares 1:10..
A lot more companies trying to do that. Why?
To keep the share prices up and trading in their counters high?
Why do companies need high trading in their counters?

Mittal Steel, the world’s top steel maker, said that it plans to reduce its global steel production by 1m tonnes in the third quarter of ’05, following similar cuts in the second quarter.
Is it just over supply or demand also slipping?
Is it the first sign that the global market is beginning to take more shape as demand returns to more realistic levels and China begins selling more steel than it buys.


Anil Ambani to Invest 1000 crore in Entertainment.. Already some 250 crore invested in Adlabs.
Anil Ambani also moving into banks.
Anil Ambani eyes AMP Sanmar assets
He is already into Telecom.
Why every finger in different pie?
Itching to deploy the excess cash or some coherent business strategy?
Any previous expertise in Banks and Entertainment or will having a lot of cash and ambani name do it all.

The Anil Ambani-controlled Reliance Capital (RCL) has emerged as one of the leading domestic private equity companies with investments in a dozen companies. Apart from Adlabs in which RCL has picked up 51% in a strategic investment, the Mumbai-based non-banking finance company (NBFC) has acquired significant stakes in leading corporates like KEC International, Hinduja TMT, Subex Systems, Television Eighteen and Rallis India. The current market value of its total equity investments exceed Rs 600 crore.



free power to farmers
The Punjab government made it clear Wednesday that it would give free power to farmers from Aug 15 - despite Prime Minister Manmohan Singh's stand that free power and power subsidies should be done away with.
Now that planting the seeds to future problems.....


India Inc wins war over cost, net rises 34%
The ’04-05 performance of India Inc reflects a healthy picture, in the sense that it has achieved a robust bottomline growth despite a fall in other income.
An analysis of 2,770 results available with ET showed that Indian corporates are fast awakening to the need to bring down cost, which has been eating into their margins for the past several years. A falling cost of borrowing is the best indicator of their cost-conscious approach.


Direct tax-GDP ratio set to cross 5 pc this year: Chidambaram

Tax revenue goes up with VAT

Inflation at near 2-yr low of 4.1%

Getting richer: Per capita income up 11% to Rs 23,241
Strong manufacturing and services growth propelled India’s per capita income at current prices to Rs 23,241 ($534) in 2004-05. India has thus become a $650 billion economy.


Rs 21,ooo cr (only) as bribes! That's Indians
The common man pays bribes totalling Rs 21,068 crore a year for various public services , says the ‘India Corruption Study — 2005’, released by Transparency International on Thursday.
Sixty-two per cent of those surveyed said corruption is for real, having indulged in it. A third of them said corruption is on the rise compared to last year (2004-05).

Subsidy burden to affect ONGC plans..
BPCL lost Rs 1,200 cr in Q1.. due to sunsidy..!!!



04-Jul-2005

>Book profits..Nifty near to a medium term top

========================================================
Why would booking profits be a sane thing to do now.?


Summary: Close longs. (not ready to short as yet)

-> Nifty future started kissing Nifty which means the short covering has taken place.
->Street has started talking
Bull Run till 8000 non stop which means long positions have started buildingin.
->Technical sites have started giving buy call in words like "past 7260
non stop 7800" etc.
->Media started announcing that another 5 bn USD
raised for India by GOS etc.

->From Wave analysis the market seems topped.
->There could be a little more headroom left
(to the tune of approx 1 %), but not enough to take up big risk by maintaining large long positions.

Not sure whether correction will come tomorrow or day after or after a week but it is a time to take contrarian's call.

01-Jul-2005

>Trading Like A Seventh-Grader, Peter Lynch

If you had put $10,000 into Magellan when Lynch took over in 1977, 13 years later, when he retired from the fund - your $10,000 would have grown into a whopping $288,000. How did Lynch do it? His technique was to keep it simple. For example, he invested in retail stock because he understood the business - everybody needs to shop for clothes, and he observed consumer behavior through his family's shopping sprees.

> development of a stock-picking theory based on companies that "make sense."
> because back then - before computers, before the quarter-to-quarter rat race, and before cutthroat global competition - the kinds of executives that Lynch caddied for invested in companies that produced the unglamorous staples of industry and daily life.
>"make sense" meant putting the money of Magellan's investors into businesses that were easy to understand.
>investing in companies that made everyday products. And the payoffs were huge.
>Often, Lynch's stock ideas case from everyday life and mundane observations.
>While running Magellan, Lynch was always open to any idea and ready to investigate or dig deeper, no matter where the investment idea stemmed from.
>How many fund managers actually go the store, buy the product of a company they are researching and even try out its competitors' products? This fundamental research at the grass-roots level is what distinguishes Lynch from other fund managers.
>The typical mutual fund manager gets his stock picks from piles of annual reports, stock screens flickering on his computer and the mainstream media. He talks to colleagues on Wall Street for investment ideas - the people that read the same annual reports, run the same stock screens and read the same Wall Street Journal articles every day.
>Lynch, on the other hand, gets his investment inspiration from the mall, the streets, his daughters, his dining table and even from his barbershop.
>What makes Lynch unique is the fact that his investment ideas come from all walks of life. Some of his best picks were introduced to him by his family.
>Lynch himself has often said that the small scale, individual investor has an advantage over the large mutual funds - individual investors are not governed by the kinds of rules institutions have to follow. This means retail investors can invest in stocks that institutions can't.
>Also, individuals are not under pressure, like the investment banks, to tout the stocks they have taken public. Lynch was a fan of a certain group of small-scale investors: seventh-grade students at St. Agnes School, Massachusetts.
>This group of students built a model portfolio of companies whose products they used and understood, like Walt Disney, Gap, Nike and Wal-Mart. The seventh-graders bought what they knew. Which is why they bought Pentech Intl. -- a maker of colored pens.
>This model portfolio gained 70% from 1990-92, while the S&P 500 gained 26% for the same period. And this buy-what-you-know portfolio beat 99% of all equity mutual funds during that period!


A bunch of New England seventh-graders had beaten Wall Street at its own game. And they did it simply by picking companies whose products they came across every day. The seventh-graders' success proves Lynch's point further - buy stocks that make sense to you.

Lynch achieved great success by investing in companies he understood and by staying away from businesses that he could not understand. In fact, even Warren Buffett has often admitted that he stayed away from the tech mania of the late '90s only because he did not understand technology and computers. The simple policy of staying away from what you don't understand can save you a lot of money. And investing in what you do understand can make you a ton if it.

>Master classes -Buffett & Munger

Every year a handful of Australian investors make the trek to Omaha, Nebraska, to hear Warren Buffett and Charles Munger at the Berkshire Hathaway annual meeting.

Mark Nelson of Caledonia Investments has made the trip for the past 11 years. Why does he bother? "That's easy," he says. "We need to go. Put simply, this is the annual refresher course in common sense investing that we all need."

Tape recorders weren't allowed into the Berkshire or Munger's Wesco Financial meetings so Mark Nelson and his colleague Robert Luciano had to scribble fast.

Here are some of Buffett's and Munger's edited thoughts.

Shareholder: I was wondering how it was that you got interested in investing, and what advice you might give to a young person interested in investing?

Buffett: I got interested when I was about seven years old . . . when I was about 19, I read The Intelligent Investor by Benjamin Graham. My advice is to start young, and read everything you can. If you do that you'll always do well. There are no secrets in this industry that are only available to the priesthood. There are no temples, or secret tablets; it's all public information. You don't need a massive intellect but you do need the right temperament, and then constantly look for opportunities that fit your framework. If you enjoy the game then you'll do well.

Shareholder: My question concerns rising raw material prices and import costs.

Buffett: We love companies that haven't fully recognised their pricing power; where it's still untapped. You can measure a business over time by the agony they go through in raising prices. You're not in a great business if you have to have intense management debates and a prayer session before you raise prices.

Shareholder: What are your investment strategies if we do go into a prolonged bear market?

Buffett: If the market gets cheaper then we'll be able to buy a lot more. I'm always looking to buy stocks, just as I buy groceries every week. And obviously I prefer lower grocery prices. We're not good at predicting markets, and we spend little or no time talking or thinking about it. If you can buy very good companies at a good price, then it's crazy to not buy any stock, just because it might get a bit cheaper next year after a catastrophe. We pay very little attention to macro factors.

Shareholder: Corporate boards have been in the news recently due to both action and inaction. What responsibilities do directors now have? What do you look for?"

Munger: We're completely out of step with modern practices which try to get one director from each diverse discipline, and they all tend to need the money. We don't do that.

Buffett: It's a tough job to be a director, especially when you have to deal with mediocrity. It's very difficult for a director who needs $100,000 per year, and wants to get on new boards, to try and push for meaningful changes in a company. But independence is a state of mind, and you need to challenge the ideas of executives if they don't make sense.

You can't be truly independent though if 50 per cent of your income comes from board fees. You don't want to upset the applecart.

All Berkshire directors have a significant amount of wealth tied up in Berkshire. Their income from board fees is inconsequential to them. They are all very smart and hand picked. However, those who wish to use checklist approaches may not view the Berkshire board as favourable.

Shareholder: Berkshire hasn't really invested in technology stocks before. With Bill Gates on board as a director, will that change?

Buffett: No. Charlie and I still want to understand the companies we invest in. We need to believe that we know what the economics will look like in 20 years' time. The fact that some other person has a wider circle of competence doesn't really matter. Mind you, I'll listen to what he says. I still wish I'd bought Microsoft when I first met him.

Shareholder: What other approved criteria do you have apart from financial criteria, when you are analysing your businesses?

Buffett: The financial returns being achieved in a way that we want them to be achieved is still the key for us. If a business becomes permanently flawed, then we will sell it. If it has been merely disappointing but still has potential, we will continue to hold it. We don't like to participate in what I call gin-rummy investing, where you keep discarding your least attractive investment of the moment in favour of something else.

Shareholder: What about benchmark risk?

Munger: If you're an investment manager and you're going to get fired if you don't beat your benchmark, then you'll do some strange things to make sure that doesn't happen. We are in a benchmarking world right now. You often get investors who are really closet indexers, in which case you're being played for a sucker. These guys have 85 per cent of their assets linked to the index, and they charge big fees.

Shareholder: Do you have a book recommendation for us this year?

Munger (earlier in the meeting): You really should read Fiasco, a book about the Morgan Stanley bond traders by Frank Partnoy. It'll make your stomach turn. The other book, Conspiracy of Fools, by Kurt Eichenwald, about the collapse of Enron, is also excellent. The most sickening aspect of it all is the description of the investment banks' behaviour. I always think that every now and then it's good to rub your nose in the worst aspects of human civilisation; it certainly improves your judgement going forward.

Shareholder: With Wal-Mart-type businesses now growing so large, is that a danger to our economic way of life?

Munger: I think that the country is way better off by having Wal-Mart. It's a fabulous enterprise that adds a lot of value to the customer. I also think that McDonald's is one of the great educational institutions in the world. Working there teaches young people to come to work on time, how to earn a wage, and then they go on to another, better job. I think it often does more good work, for a lot more people, than Harvard.

Shareholder: You've said previously that 15 or so great investments have made the difference for Berkshire. What have been some of their common characteristics?

Munger: Well, they all worked. But they have been very different. It does emphasise just how few great investments you really need in a lifetime. Patience and aggressive opportunism are part of our game. People who have to make an acquisition every month, will eventually crater.

>Bulls & Bears (historical view)

For at least the last 100 years, 15-to-20-year bull markets have alternated with 15-to-20-year bear markets.

From 1980 to 1992-1994 we had a super bull market.
Since the 1992-1994 4000 top in sensex till 2003 our market went no where and kept range bound.

BSE was at 4000 in 1994 and was at 3000 in 2003. (approx)

Inflation is a major problem we have..
While we may think that sensex at 7000 is much higher than its 4000 peak made in 1992.. its not when we accomodate the effect of inflation...!!

(2003 or 2005 -1994 or 1992 = 12 years approx)

4000* 1.02^12 = 5070 (assuming 2 % inflation over the 12 year period)
4000* 1.03^12 = 5700 (assuming 3 % inflation over the 12 year period)
4000* 1.04^12 = 6400 (assuming 4 % inflation over the 12 year period)
4000* 1.05^12 = 7200 (assuming 5 % inflation over the 12 year period)
4000* 1.06^12 = 8050 (assuming 6 % inflation over the 12 year period)
4000* 1.07^12 = 9000 (assuming 7 % inflation over the 12 year period)

If we take the case that we had seen 5% annual inflation during the past 12 years, this means that sensex at 7200 in 2005 is no better than sensex at 4000 in 1992. ..!!


So thats a bad things..
Plus we got to pay taxes on capital gains.

The 5% inflation adjusted value of Sensex at 3000 in may 2003 was (3000/1.05^12) = 1670..!!
Compare 1670 with 4000 in 1992-94.. thus we see that stock market can act as big-wealth destroyers for long periods of time..!!

But the good news..

The mad bull from 1980 to 1992-94 laid the foundation for the go-nowhere and inflation eat into your investment kind of bear from 1992-4 to 2003....

A bull run of 12 years or so... created a bear run of 12 years or so... which will in turn create a ...........??

Now the coming or ongoing bull run cannot be timed to perfection..
But we know that high tide is going to come..
So for long term investors the cool thing to do, is to jump in the boat of good companies and wait ..!!

in-joy.


>Global Nuggets-1

BIS: "Time might well be running out"

By now quite a few people have noticed the truly impressive annual report from the Bank for International Settlements, the world's central bankers. So far, so good was published on Monday to coincide with its Annual General Meeting. If you have time to read only one report a year on the state of global financial markets, this surely is it.

The good news is that the world economy is on track to deliver another year of
-> subdued inflation and
->robust growth, approaching 4%.
->But there is also "a growing sense of unease that it might not last.

Imbalances are the central theme of the report: "there has been little progress in tackling internal and external imbalances." These imbalances "could unwind with a potentially disruptive impact", and "time might well be running out" to tackle them:

One simply cannot ignore the number of indicators that are now simultaneously exhibiting marked deviations from historical norms. Among the internal imbalances that compel attention, real policy rates in many industrial countries and in emerging Asia continue to hover around zero. Nominal rates on long bonds, as well as credit spreads and measures of market volatility, are remarkably low. The household saving rate in many industrial countries has been trending sharply downwards, and debt levels are at record highs. House prices in many countries have never been higher. And in China, the investment ratio has risen to a startling 50% of GDP. Finally, external imbalances have never been larger in the postwar period. Any or all of these numbers might well revert to the mean, with associated implications for global economic growth. Such an unwinding might be gradual, and possibly benign, but it could also be rapid and disruptive. In large part, what happens will be determined by real-financial interactions that we should not pretend to fully understand.

Both Calculated risk and Macroblog have highlighted the report's call for a smaller US budget deficit, by cutting expenditure and raising taxes. Meanwhile the ever-widening US current account deficit:

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“US recession much closer than imagined”

The chances of a United States recession or even a decline are closer than imagined warned Bill Gross, an influential financial guru who manages the largest mutual fund in the world with assets of 450 billion US dollars.

“US officials are close to running short of fiscal and monetary fuel (cutting taxes and interest rates) which they have been using to promote growth”, and when options run out, a general softening can be expected.

“Assets could cease to expand at two digits, scarce inflation and meagre economic growth could wither and Rome will be up in flames”, anticipates Mr. Gross adding that if “Rome is up in flames yields of long term bonds will predominate, and that day can be much closer than we expect”.

Mr. Gross believes that United States low interest rates, lower taxes and the overall weakness of the US dollar have caused the real estate and stock exchange markets to soar, as well as boosting consumption.
But there has been no investment or jobs, which have gone instead to Asia.

“The legs of this US recovery are weak because they are based on an appreciation of assets and the appreciation of future assets is intrinsically vulnerable given the debilitated stimuli from interest rates”, argues the mutual fund guru.

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A little thought:

EXCERPT FROM THE US CONSTITUTION, Article I, section 10: No State shall ... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....

FROM THE US TREASURY WEBSITE: "Federal Reserve notes are not redeemable in gold, silver or any other commodity, and receive no backing by anything. The notes have no value for themselves, but for what they will buy."

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Too Much Money
A global savings glut is good for growth -- but risks are mounting


Savings. It's an almost mystical word for economists -- the Holy Grail of growth. The more a country saves, the more it has available to invest. And the more it invests -- in computers, factories, or infrastructure -- the more productive its economy becomes and the faster it can grow.

The U.S. seemed to be setting itself up for years of (really??)
->rising interest rates,
->subpar investment, and
->sluggish economic growth.


But that's not what is happening.

->Long-term interest rates are falling and have now dipped below 4%.
->The total of residential and business investment has been rising and now stands at 16.5% of gross domestic product, well above the average for the 1990s.
->And there are few signs that the economy is stalling.


These surprising events are forcing economists, investors, and policymakers to think more globally than ever before.In just the past few months, they've begun to consider seriously two intertwined and heretical notions:

What really matters for interest rates is the global economy, and there the problem may be too much savings, rather than too little.

->Look around the world, and extra money is piling up in all sorts of places.
->Japanese corporations are recording record profits, but not doing much spending.
->Chinese companies are on an investment tear, but the country is getting so much money from exports that it has billions to spare, including $18.5 billion that China National Offshore Oil Corp. (CNOOC) bid for Unocal.
->The surge in oil prices -- now about $60 a barrel -- is giving oil-producing countries such as Russia and Saudi Arabia far more money than they can use right away.
->And the aging workers of Europe are building nest eggs for an uncertain future.
->Even in the profligate U.S., businesses have been accumulating huge sums as undistributed corporate profits -- running at a record annual rate of $542 billion in the first quarter -- have almost doubled in the past two years.

The International Monetary Fund predicts that in 2005 the worldwide savings rate should hit its highest level in at least two decades.

This unexpected surge of savings is like a rose with thorns.
->Low interest rates have the potential to power productivity, build wealth, and raise living standards throughout the world.
->As more and more workers in developing countries join the global economy, cheap money makes it easier to provide the equipment and infrastructure they need to prosper.
->Access to global savings has also enabled the U.S. private and public sectors to fund a big increase in housing construction and health-care spending in recent years, while simultaneously ramping up military outlays.
->The result: guns and butter -- all without boosting inflation or pushing up interest rates.

Skittishness
But the savings glut is creating new risks for the global economy, which is having a tough time absorbing the unanticipated flood of funds.
->Instead of going into productive investments, cheap money may be overheating spending and sending asset prices soaring too high, setting the stage for a future bust.
->"The odds of a catastrophic scenario have gone up," says Kenneth S. Rogoff, former chief economist at the IMF and a professor at Harvard University.
->A unexpected rise in inflation or interest rates could tank the bond market and burst the global housing bubble, which now stretches from Barcelona to Shanghai to San Francisco.
->Doubt about the U.S. ability to finance its huge trade deficit could trigger a steep downturn in the dollar and a monetary crisis.
-> China's factory-building spree may leave it saddled with excess capacity for years to come.
-- Prices for cold-rolled steel and ethylene have already dropped sharply, and auto prices have fallen as much as 20% in the past 12 months.

"It's going to be very tough for those guys who own factories," says Morgan Stanley (MWD ) economist Andy Xie, "and a lot of them won't pay the banks."

History shows that excess liquidity can disappear overnight if investors start getting skittish and lose confidence, causing severe disruptions to markets that have gotten used to cheap money.

The global savings glut also forces investors to operate without many of the signposts they used to depend on.
->In the past, they could afford to concentrate their attention on what was happening in the U.S. If the Fed tightened credit or if the federal budget deficit swelled, long-term interest rates tended to rise in response.
->But now, in a global economy awash with savings, investors have to be much more aware of what's happening outside the U.S.
->If China revalues its currency, that could push up U.S. rates because it would mean that Beijing would eventually have a smaller surplus to invest in Treasury securities.
->If the European Central Bank eased credit, that could lead to lower U.S. bond yields -- even if the Fed were raising rates at the same time.

Global savings -- which the IMF estimates at roughly $11 trillion in 2005, almost the size of the whole U.S. economy -- is the excess of the combined income of the world's nations over their combined consumption.
That excess has grown fast in recent years, freeing up resources for investment.
What's more, the increased globalization of capital markets has unlocked national savings, making for an easier flow from one country to another.

But for many investors, the question is not whether there is a global savings glut, but how long it will last.
And on that score, there are plenty of reasons to expect it to continue for a while.
->First, the rise in oil prices worldwide is causing a massive transfer of wealth to oil-producing countries.
->Russia's trade surplus, for example, is running at $100 billion annually, up from $65 billion a year ago.
->Similarly, most of the Arab stock exchanges are at or near record levels. The UAE market, a combination of the Dubai Financial Market and Abu Dhabi Stock Market, is up 105% on the year. The Saudi stock exchange is up 65%. "High oil prices are producing huge liquidity," says Mustafa Abdel-Wadood, CEO of EFG-Hermes (UAE) investment bank.
For now, most of this money is being recycled to the global financial markets as savings rather than as investments in oil exploration and production or other productive uses.

Holding Back
->Demographic shifts are driving up savings as well, as aging societies in Japan and Europe accumulate funds for retirement. That's holding back both consumption and business investment, as many European and Japanese companies are cautious about committing much capital to expand their domestic operations.
->In Japan, the combination of weak wage growth and strong exports have boosted corporate profits, with a much smaller increase in business investment.
->The same story also holds in Europe. "Balance sheets of European companies are strong. Cash flow is strong. Everything is fine," says Herbert Lohneiss, CEO of Siemens Financial Services (SI ), the finance arm of the MunichWhat is not fine is that they do not invest enough."
->The reluctance to consume and invest is fueling enormous trade surpluses in Japan and Germany, in particular. The latest data from Japan show a current-account surplus of $171 billion for the year ended April, 2005. That's up from a surplus of $157 billion a year earlier. Germany, where domestic demand is flat and unemployment is in the double digits, is running a current-account surplus of over $100 billion over the past year. electronics and engineering giant. "


Surprisingly, the lag in business investment extends to parts of Asia as well, outside of China.
->For example, a Bank of Korea survey of 5,400 of the country's companies found that they were sitting on a record cash pile of $65 billion at the end of 2004.
->Yet there are no signs that spending on new plants and equipment, up a so-so 3.1% in the first quarter of this year, is accelerating. Indeed, South Korea hasn't recovered from a two-year slump in domestic demand. Household spending inched up 1.3% year-on-year in the January-to-March period, and the savings rate is still rising.

And then there are the staggeringly large Chinese trade surpluses. For years, economists reassured themselves that China's trade with the whole world was pretty well balanced, even if the country had a big surplus with the U.S. Those days are over. Now, China's trade surplus has more than tripled, to an annual rate of about $70 billion a year.

That $70 billion surplus is exactly that -- the extra income that China takes in from exports and that isn't used at home.
-> It's all recycled as savings into the global economy, in the form of purchases of U.S. Treasury bonds
-> and, lately, as stepped-up direct investment in U.S. companies. Analysts say CNOOC's bid for Unocal could herald a wave of Chinese takeovers of U.S. companies.

So far, the total impact on the world economy of all the savings sloshing around has been benign.
While demand is weak in some countries, cheap money is working its magic in other places, pumping up everything from investment in Chinese factories to the explosion of housing construction in Spain.

Mortgage rates in India, historically a country with a high cost of capital, have plummeted from 15% five years ago to 7.5% today. In fact, the world economy racked up its fastest growth rate in three decades last year with only a small rise in inflation rates.

"Unstable Equilibrium"
In the future, cheap money also could provide potent fuel for spending on new technologies, as soon as the next wave of innovation gets juices flowing again.

Already venture capital funds, flush with cash, are putting more money into alternative energy startups, an increasingly attractive investment in a world of high oil prices.It's easier for companies to spend money on research and development when the cost of capital is low.And the boom of the 1990s shows just what can happen when a technological breakthrough -- in that case, the Internet -- arrives in a period when there's ample savings.

Economists, though, worry that the good times are built on shaky foundations and wonder when they will end. "We're in a highly unstable equilibrium," says Martin Barnes, managing editor of The Bank Credit Analyst. "There are so many things that are three standards of deviation from normal."

What worries economists is that most of the savings is going to one country.

U.S. alone is soaking up as much as three-quarters of the excess global supply of savings.

The result: a current-account deficit totaling $668 billion last year, or 5.7% of the country's GDP. And a further rise this year looks likely. Economists fret that at some point foreign investors and governments may tire of putting big sums into the U.S., triggering a steep decline of the dollar and a jump in U.S. interest rates.
So far, of course, that hasn't happened. Indeed, the dollar has risen 7% against a basket of major currencies this year, in part aided by Europe's woes.But New York University's Stern School of Business professor Nouriel Roubini says that is only delaying the day of reckoning and sees a danger of a bumpy landing for the dollar and the U.S. economy in 2006.


It's not only the sheer size of the U.S. borrowing that could be a problem. It's also what the money is being used for.
Unlike in the late 1990s, when the U.S. was tapping foreigners to help finance productivity-enhancing investment,
->much of today's borrowing goes to pay for the federal budget deficit and
->to fund a surge in house prices that many experts believe can't last.

Fueled by ultralow interest rates, house prices jumped a record 12.5% in the first quarter from a year ago.

The surge in prices has put homes out of the reach of the first-time buyers who are the lifeblood of the housing market.
"We have real problems in the housing sector that will [eventually] cause the economy a great deal of stress," writes University of California at Los Angeles professor Edward E. Leamer in a new report.

"The deterioration in credit quality in 2003 and 2004 could well show up in increased defaults in 2006 and 2007," says Martin Fridson, head of FridsonVision, a bond research service.

If global savings is channeled in the right ways, it can be a great boon for the world economy, enabling the sort of investment and risk-taking that fuel growth. But there's far too much evidence right now that low rates are encouraging behavior that could cause trouble. Hold on to your hats.

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TOP 25 QUESTIONS

What is the Universe made of?
What is the biological basis of consciousness?
Why do humans have so few genes?
To what extent are genetic variation and personal health linked?
Can the laws of physics be unified?
How much can human life span be extended?
What controls organ regeneration?
How can a skin cell become a nerve cell?
How does a single somatic cell become a whole plant?
How does Earth’s interior work?
Are we alone in the Universe?
How and where did life on Earth arise?
What determines species diversity?
What genetic changes made us uniquely human?
How are memories stored and retrieved?
How did co-operative behaviour evolve?
How will big pictures emerge from a sea of biological data?
How far can we push chemical self-assembly?
What are the limits of conventional computing?
Can we selectively shut off immune responses?
Do deeper principles underlie quantum uncertainty and non-locality?
Is an effective HIV vaccine feasible?
How hot will the greenhouse world be?
What can replace cheap oil — and when?
Will Malthus continue to be wrong?

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