What India should learn from the Rajat Gupta case?

A very famous quote by legendary value investor Warren Buffett goes thus: "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently." We were reminded of these lines when we read what former Goldman Sachs director and McKinsey & Company Managing Partner Mr Rajat Gupta said just before being sentenced: "I have lost my reputation that I have built over a lifetime."

Just day before yesterday, Mr Gupta was sentenced to two years in federal prison in one of the biggest insider trading cases in the US. His crime was that of leaking confidential information to a hedge fund manager at the height of the financial crisis.

An article in Business Today has pointed out some very pertinent lessons for India from this entire episode. Crime and corruption are universal. They are as rampant in the US as in India. But what differentiates the two is the robustness and efficiency of the judicial system. Take this insider trading case. The quickness with which he was tried, found guilty and sentenced is indeed commendable. To give you a gist of the timeline, the trial began on May 21, 2012. On June 15, the jury found him guilty. And on October 24, he was sentenced to 2 years of imprisonment and a US$ 5 million fine. Period.

What if Mr Rajat Gupta was facing a trial in India instead of the US? It would, without any doubt, drag on for years. Remember the Satyam scam? Mr B Ramalinga Raju, the former chairman of the company which is now Mahindra Satyam, had confessed to fudging its accounts back in January 2009. As per the magazine, the Central Bureau of Investigation (CBI) had taken up the issue in February 2009. All the 10 accused have served about 18 months in prison as undertrials. There are matters still pending with several regulatory bodies including the Securities and Exchange Board of India (SEBI). In all likelihood, it will take a long time before the final verdict is out. And this wou ld be no exception. Judicial cases in India are known to go on for years, sometimes decades. But does delayed justice have much value? As the legal maxim goes: "Justice delayed is justice denied."

Mukesh Ambani does it 5th time in a row

Attaining top slot is a difficult task. But after reaching the pedestal maintaining one's position over there is also equally challenging. Not if you are Mukesh Ambani. The Forbes richest Indians' list is out. And for the fifth time in a row, Mukesh Ambani has claimed the title of being the richest Indian on earth. His net worth stood at US$ 21 bn for the year under consideration. Second in the list was ArcelorMittal's Chairman, Lakshmi Mittal. However, Bharti's Chairman, Sunil Mittal and Adani Group's Chairman, Gautam Adani were out of the annual list of 10 richest Indians. The telecom scam and power woes saw share prices of their companies tumble which eroded their net worth. Dilip Shanghvi of Sun Pharma was a surprise entry into the list. In fact, he entered the top 5 for the first time.

It is interesting to note that the collective wealth of India's 100 richest Indians increased 3.7% to US$ 250 bn. And this increase in wealth is approximately 14% of the country's nominal GDP. In a country, where majority of the people live below poverty line, such a concentration of wealth in hands of few people is really astounding.

Only 26% of India's workforce have full-time jobs

Data source: Business Standard *% of entire population of employed full-time for an employer; **% of workforce which is looking for work or available for work

In a recent study, polling firm Gallup has revealed that only about 26% of Indians aged 15 years and above had full-time employment of at least 30 hours per week in the first half of 2012. It also suggests that workers between the age group of 15 to 30 years are five times more likely to remain unemployed and twice as likely to be under-employed compared to their older counterparts. This is indeed a shocking revelation at a time when the developed economies are struggling with dwindling growth rates and high unemployment concerns. The problem of youth unemployment and under-employment can assume monstrous proportions in a highly populated country like India and can lead to disastrous socio-economic consequences. Indian policymakers really need to find a way to unlock the so-called demographic dividend before it starts becoming a huge liability.

S&P warns India yet again

Ever since the government opened the floodgates of reforms, stock market investors rejoiced. Particularly the FIIs. They are now hoping for more 'announcements'. But it seems the rating agencies are once-bitten-twice-shy. They are no longer willing to be pacified by reforms on paper. Especially since the political consensus to see the reforms implemented is extremely weak. Moreover, it could be much longer than anticipated before the reforms actually facilitate higher GDP growth. Plus there are problems of inflation, fiscal deficit and corruption. These are not going away anytime soon.

As a result, rating agency Standard & Poor's has once again issued warning regarding India's sovereign rating. The threat this time is to relegate India's rating to 'junk'. This has mostly to do with the doubts about execution of reforms. S&P however promises a better rating if reforms get executed well. That is with improvement in investment climate. Particularly, if foreign direct investment in various sectors is implemented successfully.

Now given that global rating agencies have very little reputation of 'credible ratings', the threats need not panic investors. Having said that, any premature celebrations about the government's reformist attitude are also uncalled for.

Millionaires in India to keep swelling

As per Credit Suisse's Global Wealth Report, the number of millionaires in emerging economies is expected to jump over the next few years. In China the number could double to almost 2 m by 2017. And right home in India, as many as 84,000 Indians are expected to become millionaires by 2017.

This is a huge increase of 53%! While the Indian middle class is seeing rising wealth, there is still a great deal of poverty in the country. This is reflected by the following statistics. Almost everyone in India (around 95%) has wealth below US$ 10,000. Only a very small proportion of the population (just 0.3%) has a net worth over US$ 100,000. The falling GDP growth rate has seen India shedding US$ 700 bn from its household wealth during mid-2011 to mid-2012 period. This is the steepest fall seen in Asia. It totals 50% of the total erosion that the continent has seen over the period. Well, we just hope that this money has been spent towards productive purposes instead of conspicuous consumption. Anyway, the million dollar question is whether you will be in the top 0.3% by 2017.

IMF predicts a poor 2012 for global economy

                                                               Source: Business Standard

We recently read with great surprise about how IMF cut India's GDP growth forecast for 2012 to just 4.9%. In fact, India is not alone. As above chart highlights, the global financial institution expects all major nations to have a subdued 2012 than 2013. India though is certainly the worst off. We for one though won't read too much into this. Even if growth does turn out to be the way IMF predicts, it is just an aberration as per us and on a long term basis, India's GDP growth should rebound to its long term average of 6%-7%.

Are there elephants or rats in your portfolio?

When you are an author of two extremely successful business books, your words are bound to carry a lot of weight. And so it is with Nassim Nicholas Taleb. In fact, no one in business circles calls a highly unpredictable event exactly that. Instead, they all prefer to use the metaphor 'The Black Swan', the title of one of Taleb's most popular books. Well, Taleb would now be hoping that he gives the world yet another catchphrase, 'Antifragile', a term that is also the title of his forthcoming book.

We certainly can't predict whether Taleb will contribute a new term towards the business lexicon. But few of the ideas in the book are certainly worth making a mention. He is of the view that metabolically speaking; an elephant is vastly more efficient than a rat. However, an elephant can easily break his leg or cause significant harm to himself. A rat on the other hand can be tossed around and it will still be fine. In other words, size does lead to fragility as per him.

Now, use this comparison to describe the current problems in Europe and you will see how wonderfully things fit in. Europe was so much better off being diverse, both politically and economically. But then policymakers hit upon this terrible idea of going for a unification i.e. turning it into an elephant. And it has been all downhill from there we believe. Similarly, what hampered China, for most part of its long history, is the top down state as per Taleb. Yet another case where being an elephant led to fragility.

Interesting isn't it? Can the same rules be applied to investing as well? We certainly think so. In the investing world, elephants would be companies that are capital intensive with big balance sheets and also great deal of debt. And they may well be efficient with huge economies of scale. But are they really wealth creating? May be not to the extent required. We would rather much prefer rat like companies that require very little capital to fund their growth and use most of their cash flows to reward their shareholders. In other words, companies those are not big but rather 'antifragile' is what one should look at. So that even if there is an economic storm, they are nimble enough to take shelter somewhere and not get exposed like the big elephants. Thus, it is time you asked yourself whether your portfolio would much rather have elephants or rats?

A subdued quarter but investors should be excited

The Indian equity markets have had a buoyant time in recent weeks. The benchmark BSE-Sensex has gone up over 9% in the past one month. As a result a lot of investors have been wondering if the tide has turned for the stock markets at least. Well the underlying reason unfortunately gives nothing to cheer about. At least not to the long term prudent investor. A major reason behind the recent run up in stock prices is foreign Institutional Investors (FIIs) interest. But at the same time there is another reason for which we need to give you a bit of a backg round. It has a lot to do with the upcoming quarterly result ann ouncements.

The upcoming September quarter results are expected to be another subdued set. Inflation as well as interest rates has continued to remain firm. At the same time the slowdown has affected the demand growth for both goods as well as services. Those companies relying on external demand to compensate may have to wait a while longer as the global headwinds continue to blow. As a result, the quarter results would not give investors much to cheer about. So one would wonder as to how the expected negative news is driving up stock prices.

The answer to this is that most stock market participants are expecting this quarter to be the bottom of the earnings cycle. This means that the quarter results will mark a turnaround point for companies. After this they should start delivering healthier results. The participants have a reason to expect this too. They think that the Reserve Bank of India (RBI) will start bringing the interest rates down. This in turn would fuel investments and consequently help companies deliver better results. But they seem to be forgetting the reason why RBI had turned hawkish in the first place. I nflation is still high and with the renewed FII interest in asse t classes, is expected to continue remaining high.

Nevertheless the point is still the same. The participants are relying on short term data points to take a view on stock markets. This in our opinion is a futile exercise. It is best to leave the quarterly earnings to the companies. It is nothing more than an indicator of their short term performance. It would be better to concentrate on long term fundamentals and business models instead. And if you have identified such a stock then the short term news of negativity is nothing more than an opportunity to get this great stock at a bargain. Going along with the herd will yield nothing but pain in the long term. 

225 B-schools have closed in 2 years in India

The service sector increasingly enjoyed a larger proportion of India's GDP over the past decade. Needless to say that the youth looked forward to procuring a job in this space. A degree in engineering or management or both became the visas to well paying white collared jobs. The booming software and financial sectors also managed to absorb scores of fresh graduates coming out of these institutes. Students who did not manage to fetch admissions in the few reputed institutions were wooed by plenty of other new institutes. The 'business' of opening engineering colleges and management institutes therefore became lucrative. Hundreds of new institutes came up in the past decade and thousands of aspirants queued up to join them. That was a time when the country added up to one lakh seats to its professional colleges every year.

A decade later, the picture is one of stark contrast. As per Economic Times, since 2011, 225 B-schools and over 50 engineering colleges across India have downed shutters. With the campus placement scene being dull and students finding the fess unaffordable, the new institutes now have few takers. It is not that Indians are no longer interested in investing in higher education. But institutes that merely offer a degree without being able to impart adequate knowledge have lost their sheen. At least this has helped separate the wheat from the chaff!

Kingfisher airlines is bankrupt but has 2nd highest paid CEO

If the CEO of a firm doubles his salary in a year's time, what would you attribute this increase in pay to? The profits of course isn't it? It's only logical to expect that a firm who has doubled its profits will have no qualms about granting a similar hike to its CEO. And thus, by the same logic, a firm where profits have been reduced by half, the CEO's take home should also suffer, isn't it? Well, let us tell you that this seems to happen only in the land of Utopia. For in the real world, some things are beyond the realms of logic.

Take the salary of the CEO of the troubled airline Kingfisher Airlines. The word has it that his salary almost doubled in FY12 from what he took home the previous year. And all this despite the firm falling deeper and deeper into a financial mess. What more, the king of good times is not alone in this endeavour. Almost all the major airlines have rewarded their CEOs with an equally hefty pay rise.

We wonder what this would do to the morale of numerous employees in the industry. Forget pay rise, most of them have seen their pay checks ceasing to come in anymore. As far as we are concerned, well it gives us one more reason to defend our stand of not looking at this sector as a good investment candidate. 

Gold's investment shine wanes

                                                                                  Source: World Gold Council

Gold has been a shining metal for most investors. A large part of the yellow metal's success in returns has been attributed to its safe haven investment status. But in recent times, the price increases appear to be more speculative than investment related. The reason for saying this is the fact that demand for gold as an investment has gone down. As per the World Gold Council, the investment related demand for gold (in tonnes) has seen a decline on a quarterly basis. One reason behind this could be the surge in price which makes the yellow metal expensive to hold. This could have led to the decline in demand