What Is The Key Ingredient Of Warren Buffett’s Success?

What Is The Key Ingredient Of Warren Buffett's Success?

Warren Buffett is an American investor, business tycoon, philanthropist, and the chairman and CEO of Berkshire Hathaway. He popularized one of the most favoured market indicators, the Buffett Indicator (BI). But what exactly it is and how does it work? At a time when experts are cautioning investors of a stock market bubble, let’s find out what the indicator says.

Crux of the Matter

What Is Buffett Indicator?
The indicator is called the Buffett indicator (BI) due to its popularization by Warren Buffett. BI is one of the most favoured market indicators. It can indicate whether a particular market is overvalued or undervalued, and can help in forecasting the market

Buffett indicator = Stock Market Capitalization/Gross Domestic Product

Understanding The Terms
GDP
Gross Domestic Product is the final value of the goods and services produced within the geographic boundaries of a country during a specified period of time, normally a year.

Stock Market Capitalization
It is the value of all the publicly traded companies calculated by multiplying the total number of shares (of each company) by the current share price (of each company).

How It Came Into Prominence?
The use of the stock market capitalization-to-GDP ratio increased in prominence after Warren Buffett once commented that it was “probably the best single measure of where valuations stand at any given moment.”

Inferring Buffett Indicator
Through the Buffett indicator, if investors find a stock market in an economy undervalued, they should ideally buy stocks in that market by selling stocks owned in an overvalued economy. That way, the valuation will be set right and the investor is likely to profit.

BI Of India
However, determining the valuation of the market depends on the historical average of the Buffet Indicator.

  • For instance, Indian markets have had a BI Ratio of 75% on average and have rarely crossed 100%.
  • The low ratio is attributed to India’s unorganized sector that is unlisted.

Rise In India’s BI Ratio
Because India’s historical average has been between 70 – 80%, a 98% BI Ratio is cautioning investors that the market is overvalued.

The market cap-to-GDP ratio has been volatile as it moved from 79% in FY19 to 56% of FY20 GDP in March 2020 and now stands at 98% of FY21 GDP.

Motilal Oswal Securities

Markets Are High
Recently, the Indian benchmark index SENSEX touched the 50,000 mark for the first time. But the market has been spiralling downwards since then.

Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.

Curiopedia
  • Buffet founded The Giving Pledge in 2009 with Bill Gates, whereby billionaires pledge to give away at least half of their fortunes. As of August 2020, the pledge has 211 signatories from 23 countries with over $600 Billion in pledges.
  • Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. High-profile proponents of value investing, including Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value.
  • According to the Forbes Global 2000 list and formula, Berkshire Hathaway is the eighth largest public company in the world, the tenth-largest conglomerate by revenue and the largest financial services company by revenue in the world.

Why Is US Delisting Chinese Stocks?

Why Is USA Delisting Chinese Stocks?

As straight as a Jalebi, this deal has managed to gain all the footage since New Year’s Eve. A derivative would be easier to understand when compared with this case of NYSE delisting the Chinese stocks. A rare event wherein NYSE has seemed as a flip-flopper, let us try and dissect the chunks of this not so simple case.

Crux of the Matter

But First, Terminologies

  • Delisting means the removal of listed security from a stock exchange, thus barring all further trades in that market.
  • Secondary Listing is when the company is listed on stock exchanges other than its primary listing exchange (market where its IPO was released).
  • American Depositary Shares (ADS) are equity shares of non-US Companies held by US Depositary Bank and are available for purchase to American investors.

The Turn Of Events
November 12, 2020: The executive order passed by Donald Trump banned US  investments in Chinese firms that are linked with the ‘military of People Republic of China’.

Trump claimed that Beijing is exploiting US Capital to finance the development & modernization of its military through its civilian corporates listed in US Stock Exchange. Moreover, China has never complied with the US Audit Standards reasoning them with national interest of Mainland and thus the Chinese firms lack financial transparency and accountability

The Delisting Plan
As per the November orders,  the New York Stock Exchange (NYSE) had decided to delist the stocks on New Year’s Eve.
The three telecom firms within gunshot were:

  • China Mobile Limited
  • China Telecom Corporation
  • China Unicom Hong Kong Limited

Changing Course

  • January 4, 2021: The NYSE announced that it is not going to delist the Chinese firms under the rubric that they had consulted with the relevant regulators.
  • January 6, 2021: NYSC again changed the plan and decided to carry on with the delisting of the Chinese telecom majors on January 11th. The decision came after Treasury Secretary Steven Mnuchin criticized the decision to grant pardon to the firms.

Aftermath

  • These Chinese firms made their secondary listing in the Hong Kong stock market. Thus, all international investors will still be accessible to the firm. 
  • Investments will now be going into HK’s Index instead of the US markets, whereas significant money inflow may still come from US investors.
  • The firms said that US investors who wish to continue investing can get Hong Kong Listed Shares in return to their American Depositary Shares (ADS) deposit in a predefined proportion. 

The Undecided Part
Will Joe Biden continue with this executive order or will he further reverse the decision? The question remains unanswered and so does the sustainability of this delisting. 

Curiopedia
  • The Shanghai Stock Exchange is one of the world’s largest stock markets by market capitalization at $4.0 trillion as of November 2018. Unlike the Hong Kong Stock Exchange, the Shanghai Stock Exchange is still not entirely open to foreign investors and often affected by the decisions of the central government.
  • The bid-ask spread is the difference between the prices quoted for an immediate sale and an immediate purchase for stocks, futures contracts, options, or currency pairs. The size of the bid-ask spread in, security is one measure of the liquidity of the market and of the size of the transaction cost. If the spread is 0 then it is a frictionless asset.
  • A ticker symbol or stock symbol is an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. “Ticker symbol” refers to the symbols that were printed on the ticker tape of a ticker tape machine.

What Is Bank Nifty & Why Is It Rising?

What Is Bank Nifty & Why Is It Rising?

You would have heard how Indian banks have been burdened with mounting NPAs, with some of them even having governance issues and some like Yes Bank and Lakshmi Vilas Bank failing in recent. But stocks of banks in recent have joined the bull rally of India’s stock market. Did you know there is a separate index, called Bank Nifty to measure performance of banking stocks. Well, unsurprisingly it is rising too. But why? Let’s find out.

Crux of the Matter

What is the Bank Nifty?
It is an index constituting the most liquid and powerful banking stocks in the Indian stock market. Comprising of a maximum of 12 companies, the index was launched on 15th September 2003. Banking Financial Services & Insurance (BFSI) stocks comprise of 15-20% of the free-float weight in NSE. This means movement in these stocks has a larger impact on the index, making Nifty Bank a powerful index.

Eligibility Criteria For A Bank To Be A Part Of Bank Nifty Index

  • Company should be part of the Banking Sector.
  • Company should be part of the Nifty 500 on the day of review.
  • The company should be listed for a minimum of 6 months.
  • The company should also be trading in the Futures and Options (F&O) segment.
  • A company that has come up with an IPO and is meeting the eligibility criteria for a period of 3 months instead of 6 months is eligible.
  • The free-float market capitalisation (shares that are held by the public excluding promoter holding) of the company will be done finally.
  • Weight of the stock on the index is calculated on free float basis in a way that no single stock will have more than 33% weight on the index and the top three will not have more than 62%.

Background
On 13 June 2005, Nifty Bank entered the Future and Options segment, which increased its liquidity volatility. It is one of the other two sectoral indices that is traded in the Futures & Options market, which makes it more liquid than other indices. The current lot size (order size) of Bank Nifty F&O is 25.

Nifty Bank suffered one of its deepest fall in March 2020. Global markets were already falling as a result of uncertainty due to Covid-19. In the same period, India’s 5th largest private bank, Yes Bank failed to meet capital requirements and to raise new capital, and was mounting with NPAs thus RBI put it under moratorium. Due to these reasons, the entire market as well as Bank Nifty were severely hit, leading to a massive drop.

After a massive rally, Reliance’s stock price declined in recent due to uncertainty in the oil market. Reliance’s weight in the stock index is significant enough to have a large impact on the market. After quarterly results of prominent banks like Kotak Mahindra and ICICI, Nifty Bank joined the bull market and started regaining the lost momentum.

Looking at the current trends with positive news of vaccine, decreasing uncertainty on loan moratorium impact on banks, decreasing uncertainty over NPA crisis, it seems there might not be stopping for banking stocks anytime soon.

What are your thoughts on the same? Is the worst over for Bank Nifty? Has the NPA crisis near to be solved?

Summachar brings you this story in collaboration with Finmedium that can be found on Instagram at @finmedium and on the web here.

Curiopedia
  • NIFTY 500 is India’s first broad-based stock market index of the Indian stock market. The NIFTY 500 index represents about 96% of total market capitalization and about 93% of the total turnover on the NSE.
  • Vikram Limaye is the Managing Director and CEO of the National Stock Exchange of India Limited (NSE). Prior to joining NSE, Limaye was the Managing Director & CEO of IDFC.
  • NSE EMERGE is the National Stock Exchange of India’s new initiative for small and medium-sized enterprises and startup companies from India. These companies can get listed on NSE without Initial public offering (IPO).

What Is Mahurat Trading?

What Is Mahurat Trading?

Happy Diwali folks! In India, there has been a long standing tradition of trading on the day of Diwali, usually in the evening after Lakshmi Puja is done. This trading window is called Mahurat Trading. This year Mahurat Trading will take place on 14th November from 6:15 – 7:15 PM. Let’s have a look at this tradition and see if its an apt time for a new trader to enter or a new long term investment to be made.

Crux of the Matter

What is Mahurat Trading?
The word Mahurat in Sanskrit means an auspicious day or time as per the Hindu calendar. It is believed that during this time, planets align themselves in a pattern considered auspicious. Most of the traders trade during this time for religious, sentimental, and traditional reasons.

As on the day of Diwali people also do Lakshmi Puja, Mahurat Trading is said to be an auspicious day that brings wealth the whole year. This ritual is followed by the trading community for years. This happens on the day of Diwali every year and the time for the same is notified by exchanges every year. The trading session is generally held during the evening.

History Of Mahurat Trading
This ritual started in 1957 at the Bombay Stock Exchange. At that time, Hindu traders used to celebrate this auspicious day of Lakshmi Puja and mark the start of “Naya Samvat” (New Year). Back in those days when there were no electronic ways of trading, people used to gather at the BSE trading ring for an hour or so to trade (some of you would have seen that in the series 1992 Scam of Harshad Mehta).

On this day, jobbers (people who traded for a broker) were also allowed to bring in their friends, family members, and clients to show how trading happened at the BSE. Sweets were exchanged among everyone and that day used to be one of the most awaited days. Jobbers used to believe that buying a share on Diwali would bring a lot of luck in that share and that it would give you handsome returns, multiplying your wealth.

Some Other Things To Know About Mahurat Trading
1. Propitious day to invest: It is believed to be one of those auspicious days to invest in the market for long term in good companies that can provide high returns. (Note: One should also check the market sentiments in the past few trading sessions to have a better idea of what to expect when the markets open on Mahurat).

2. Opportunity for new investors: Once a newcomer has gained knowledge about investing and trading, Mahurat Day is considered an auspicious day to enter the markets.

3. Good for Intraday profits: Good for Intraday profits: As many traders feel that this is an auspicious day and markets will remain bullish, intraday traders see this is as a good day to trade and book profits.

What Can We Expect This Year?
Due to Covid-19 pandemic, first half of this year has seen a lot of pessimism in the stock market. But sentiments of market participants across the globe have been positive after Joe Biden won US elections and Pfizer’s vaccine news. Mahurat Day may be one of those days to be full of optimism and can see a good up-move in India’s stock market.

This piece was a collaborative effort with FinMedium. It can be found on Instagram at @finmedium and here.

Curiopedia
  • Lakshmi is one of the principle goddesses in Hinduism. She is the goddess of wealth, fortune, love, beauty, joy and prosperity. It is believed that on the night of Lakshmi Puja, the Goddess comes to reside at the place of the puja during which the traders and shopkeepers stay awake with lights burning all night.
  • The Marathi word dalāl means “a broker”. Similar to Wall Street in New York City, Dalal Street is often used as a metonym for the entire Indian financial industry.
  • The Phiroze Jeejeebhoy Towers, popularly known by its original name of BSE Towers, is a 29-storey building in downtown Mumbai on Dalal Street. The building is owned and occupied by the BSE. BSE has secured a trademark for its iconic building.

What Caused Havoc On The Stock Exchange?

What Caused Havoc On The Stock Exchange?

The Securities & Exchange Board Of India (SEBI) implemented new margin and share pledging norms from 1st September. It has taken the step after several incidents of misuse of client funds were reported. Let’s have a look at the changes and its consequences that lead to, for the first time in history, disruption in the functioning of the stock exchange.

Before you delve into the story, if you want a layman understanding of the financial jargon like margin, intraday, leverage, etc, click here.

Crux of the Matter

What Are The Changes?

  • Traders must keep a higher margin in their accounts to receive the same leverage as before.
  • Brokers not allowed to extend any higher-margin limit than prescribed.
  • The required margin must be paid (by client) or collected (by broker) within T+1 (for derivatives) and T+2 (for equities and commodities).
  • Clearing corporations will impose a penalty if the broker fails to collect, or the client fails to pay.
  • Now clients’ trades will be carried out directly with the Clearing Corporation. It is associated with exchanges to handle the confirmation, settlement, and delivery of transactions.
  • Clients need a minimum margin at the beginning of the transaction as compared to required at the end of the day before.
  • Most importantly, traders will not be able to utilize funds from the selling of shares for 3 days from trading.
  • Now onwards, intraday profit cannot be used to buy new shares.

Experts say that the new margin rules aim to safeguard retail brokers who fail to manage margin leverage.

Another Reason For Change – Misuse of PoA
Previously, brokers used to give margin if the client pledged shares or signed the Power
of Attorney
(PoA). Now brokers will not have power of attorney over their clients’ Demat account. Earlier, some brokers were using one client’s assets as margin collateral for another client who was likely short of funds.

In the past Karvy Stock Broking Ltd. illegally transferred investments of 95,000 clients to its own account and pledged without any authorization. Similarly, brokers misused the PoA assigned to them.

Immediate Chaos
National Stock Exchange (NSE) could not process clearing and settlement for the first time in history on 1st September 2020. Overloading of orders choked the Clearing Corporations’ systems.

SEBI says that chaos happened as brokers waited till the last minute to pledge and re-pledge large quantities of shares. Whereas brokers pointed fingers at the lack of preparation from the depository to implement new changes. In an interim relief to investors, brokers, and the system, SEBI stopped exchanges from imposing fine till 15th September for not paying margin.

Curiopedia
  • The 1992 Indian stock market scam was a stock market scam orchestrated by Harshad Mehta. The scam was the biggest stock market scam ever committed in the Indian Stock Market. It was a systematic stock fraud using bank receipts and stamp paper which caused the Indian Stock market to crash.
  • Popularly referred to as the “Warren Buffett of India”, Rakesh Jhunjhunwala is an Indian businessman and investor. He is the 48th richest person in India, with a net worth of $2.5 billion.
  • The Big Bull is an upcoming Indian Hindi-language biographical crime film based on Harshad Mehta’s life involving his financial crimes over a period of 10 years, from 1980 to 1990. It stars Abhishek Bachchan as Mehta.