Introduction to December Issue

If it was half empty, I would have said there wasn’t a big rush today; but there was no scope left for optimism. It was Friday evening, and at 10 at night Barista was completely empty. Where have the people gone? Oh, Recession! The dirty ‘R’ word. I saw it first in financial dailies; then it started gracing the front page of the Times of India. Then it was everywhere. Now advertisements hawk ‘beat the recession’ tricks which range from deals such as 1 kg sugar free with 5 kg rice, to two digit EMIs on home appliances. Even the supplements like Bangalore Times have articles on anti-recessionary measures! “How to keep in good shape during the recession.” Any guesses about what’s recession got to do with keeping yourself in shape?” Well, you can’t afford to go to the gym now, can you? Ha ha …

I need to save. I need to save more for the rainy day. My company is saving on printing paper by reusing printouts left unclaimed. What can I do? Do the same with toilet papers?

Hey! We are not in recession. As far as I know, there hasn’t been a recession in India since I came to know the difference between ordinary paper and that special piece of paper called currency. Of course we had a Hindu rate of growth until the 1990s, but who cares if a freight train is late.

I did some search on google (or as we say “I did some research!”). I was reading a paper on the economic history of India[1]. It analyzes the growth rate between 1950 and 2003. It says: “… in the first 30 years, there were four years in which the annual rate of growth was negative, and another four in which it was between 0% and 2%. In the subsequent 22 years there was no year of negative growth and only one year in which economic growth was between 0% and 2%”.

Thanks you Sir for the data.
My dear fellow countrymen!
Can you drop the R word please! If you talk too much about it it, it will soon be knocking your doors.

Am I sounding like the Iranian president Ahmadinejad who was answering questions at a forum at Columbia University? When asked about homosexuality, he said, “It’s a western problem! In Iran, we don't have homosexuals like in your country. In Iran, we do not have this phenomenon. I don't know who has told you we have that."

Next time, when your boss blames the recession for not being able to give you a salary hike, act Ahmadinejad, “In India, we don’t have recession. I don't know who has told you we have that”.

The reason we talk about the recession is that we have been foolish enough to presume that the growth rate will remain high. We don’t have any magical power to predict. We only react and project. We draw trendlines. When crude rises from 50 to 100, we say it will go upto 200. When it falls to 40, we say it will fall below 20. When we are growing at 8%, we claim we’ll grow in double digits. When the growth slips to 6%, we say Recession!

Lets get real. Lets remember that Sensex is not the only barometer for economy. Layoff of 200 people in a BPO is just a drop in an ocean of 50 crore workforce of India. The drop in corporate profits doesn’t mean, economy as a whole is writhing in pain. In fact many of the results you see from corporate sector, can be analyzed with elementary economics.

Cut in production, for example, is not as unusual an activity as it is made out to be. A car manufacturer supplies cars to its dealers who in turn sell them to the end customers. At any time, the entire supply chain has enough inventory to supply few weeks of demand even if the production stops. The manufactures don’t come to know immediately when the demand starts slowing down. So you have an inventory pile up. Then the manufactures are forced to cut production, reduce the number of shifts in plants, shut off some plants and lay off some temporary workers. This triggers similar reaction from auto component suppliers. That quarter, the company may report fall in profits or even loss but that’s part of the game. In due course of time, the production matches the demand, the inventory is scaled down and things go on as usual, albeit at a slower pace. The slowdown in demand makes it impossible for high cost producers to sell without loss. They sustain the losses till they can and then they shut shop. That is also normal.

In the longer term, slowdowns force companies to cut costs, to be lean and fit for survival. It weeds out unprofitable and uncompetitive businesses and the freed up capital gets utilized elsewhere. The slowdowns aren’t as bad as they are made out to be. But the hysteria surrounding them makes governments take decisions that don’t make sense from pure economics point of view. The human cost becomes a key factor in policy decisions.

What strategies should Indian investors adopt to deal with recession?
Ignore it!

Warren Buffett isn’t lying when he says "We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businessmen. We try to price, rather than time our purchases. In our view, it is folly to forego buying shares in an outstanding business whose long-term future is predictable, because of short-term worries about an economy or a stock market that we know to be unpredictable. Why scrap an informed decision because of an uninformed guess?[2]

If Buffett terms his economic forecasts as “uninformed guess”, you must be really conceited and ignorant, if you let the talk of recession drive your investment decisions. As for foregoing a coffee at Barista, I would say it’s a good excuse to save.


References
1. Virmani, Arvind, India’s Economic Growth History:Fluctuations, Trends, Break Points And Phases, January 2005,
http://www.icrier.org/pdf/Growth05_Policy1.pdf

2. Warren Buffett’s Letter to Shareholders
http://www.berkshirehathaway.com/letters/1994.html

1 comments:

Editor, UnfairValue said...

From the Editor's desk: Comments from our Readers

I am a regular at you blog and do sincerely enjoy you take on various issues pertaining to investing. Your lucid style makes the writing all the more enjoyable.
-Ankit Shah



This is really good material!! Hats off to Kamlesh for presenting
well-researched articles in a lucid manner, also explaining it with real-life examples, quotes and stories, as well as making it
humourous! I am sure the effort has been enormous and thanks to
Kamlesh for this "priceless" service at "no cost" (to us). As they say, the most valuable things in life come free (or near-free).

Frankly, after I read the first issue of Unfair Value (which was good also), I thought it was a good one-time effort and thought that the quality of the subsequent issues may not be able to keep up with the first one. But I am so happy to be wrong here .... in fact, the quality is increasing ! The Law of Diminishing Returns does not apply
for once :)

Now that my expectations have been raised so much, I will keep
expecting more and more :) Look forward to the next issue!

That also reminds me - here is this guy giving us so much - we can at least contribute our thoughts to "Unfair Value", if nothing else!

- Nasir Khambatta

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