Monday, February 20, 2012

Are bad news bad?

Only bad news seems to be coming out from the markets. Greece default, high inflation, high interest rates hurting economic growth and corporate profits, Scams taking toll on governance, no big or small economic reforms by a government headed by the father of economic liberalization et all.
Pessimistic mood seems to be the order of the day. Investors are happier to put away their long term money in debt rather than equity. It’s just that equity investing for long term seems to be losing relevance. The feeling that you can invest tomorrow at lower price seems to be gaining momentum with every passing day.

What does all this mean for a person who is investing for long term? Dangerous frame of mind if such a person starts to develop such state of mind. It is during times like these in which the seeds of forthcoming rally are laid. You would have built up a sizeable chunk of equity holdings at low cost over a year or two of monthly SIP during such uninspiring markets.

For a serious investor who is investing with specific goals in mind 5-10 years away, such gloomy days can prove to be promising. You’ve just come across a period of time when you can quietly form a base of future fortune. In fact it is persistent equity investments during such period that you can look forward to getting a second earning member for your family.

We would like to re-iterate what we had pointed our in the 1st. part of the article:-

  • Don’t let market condition determine your asset allocation
It would be very tempting to divert your equity funds to high coupon fixed interest securities. We had said, “But abandoning equities now and moving to debt and cash would be a mistake.” In times like this it pays to keep the focus—on equities.

  • You will be rewarded for staying cool
It's not easy to step back for perspective when you are gasping for air as your portfolio value plummets. But any sensible long-term investor will tell you that bear markets are setting up the next bull market. They are also keenly aware that bull markets don't run forever. So it is only natural that in a volatile market investors should expect some short-term losses in their portfolios. Even a great company's stock can get banged around in a tough market. But that does not make you a loser (though you may look like one). While the old "buy and hold" mantra may seem like cold comfort at times like this, rest assured that it has a better long-term record than market-timing.

  • This too shall pass 
However bleak the scene appears, it is not here to stay forever. Bargain valuations are available only in such times. But the key is to understand whether such times are temporary or long lasting.

Till then “lagey raho”--stay put.

Discipline--Key to Equity Investments

We at AIMS have always believed that equity is the best asset class in the long run. History is replete with numbers/figures to support our belief, as after all history does not lie.
Over the last decade, Sensex has given an annualized return of about 18%. The numbers of equity funds that have been around for that kind of time period have done even better. To give you a brief idea of the wealth generated by Mutual Funds since 01/11/2000 till 31/10/2010:-
Fund Name
Returns CAGR (from 1/11/2000)
DSP BR Opportunities Fund
DSP BR Equity
HDFC Top 200 Equity Fund
HDFC Equity Fund
HDFC Growth Fund
Reliance Growth Fund
Reliance Vision Fund
These kinds of returns can generate serious wealth without much of an effort.
Over the past 10 years, a saving of Rs 20,000 a month at typical fixed income interest rates would have left you with just Rs 36 lakh while a SIP in a typical equity fund would have left you with around Rs 1.20 crore. That’s the kind of differential that can change someone’s life for better.
However, you will hardly come across anybody who has realized/generated this kind of wealth by just being a passive investor! We get so worked up trying to predict the sensex level and try to ride every peak and bottom that we more than often forget the basic purpose of investing; whether it is to fund our children education, marriage, our retirement etc.
Rather it is an irony that we have come across far more people who have managed to either lose money or gain very little while investing in equity. Why is this so? If equity investing is such a wonderful thing, why aren’t the streets full of ordinary investors singing virtues of the stock market? We believe that the answer lies in the large gulf between the theory and practice of equity investing.
The returns as shown above can be yours if the investors follow but a simple rule, viz;
· stick to the straight and narrow.
· Invest in a mix of stable large to large-mid stocks;
· invest regularly to average your cost and keep investing for years and years, and
· most importantly, don’t stop investing when the market is down and don’t invest more when the market is up.
Most likely we just end up doing whatever our instinct tells us to do and that the theory remains without practice. We still get queries for SIP like:-“I’ve been investing in SIPs for more than a year, should I book profits now?”
Queries like these arise since investors still equate SIP investing in particular and equity in general with short term betting and thinking that 1 year is long term!
The fruits of equity investing are available to everyone, but we’ll have to figure out how to peel that fruit.

Two Sides of a Story

We are just through with a week which has seen an upsurge of hope in investment markets around the world. All around the world stocks are up and there's talk that a turnaround is now visible. Every major index is up from anything between five to fifteen per cent over just a few days. So is this it? Are the dark clouds lifting? Is there a turnaround on the way which the markets have foreseen? It's possible but there are plenty of solid arguments against this view. Let's see what the arguments on both sides of the investments picture are.
 The Turnaround is here: It's true that the world economy is taking a severe beating, but equity prices have more than kept pace. In every equity market around the world, prices have fallen so sharply that there are plenty of great stocks available at ridiculously low prices. Sure, the economic downturn will impact many companies' profits, but eventually the profits will rise again. Such stocks will never again be available at such bargain basement prices. In any case, this is not about stock prices alone. From anecdotal evidence like Citibank's two profitable months to the improvement in the India's IIP to improving consumer confidence around the world, there's evidence that the global economic decline is not as bottomless as the doomsayers would have had us believe.
 They may have been slow of the blocks, but governments around the world have done a great deal to stave off the worst effects of the crisis. It takes some time for these actions to have an impact at the ground level, but the massive interventions of governments will start showing up strongly from now on. All things considered, there appears to be strong evidence that the worse is behind us and the turnaround is in sight.
 OK, that was one side of the argument, now let's hear it from the side that thinks that the worse is still ahead: Equities don't turnaround when they ought to turn around, but when investors start buying them in serious numbers. The evidence for this is still thin.
 The sudden upsurge in world stock prices is entirely the work of short-sellers scrambling for cover and short-term traders. In India, none of the constituencies of stock buyers are about to start pouring money into stocks. This holds for everyone from the biggest institutions (both domestic and foreign) to the retail investors. Moreover, the collapse in sales and profits has barely started showing up in corporate results yet. To think that the impact on stock prices is over and done with is a mistake. What governments are doing is to try and re-inflate the same bubble, and what the cheerleaders are doing is to try and convince us that the clock is about to turn back eighteen months. If this downturn teaches one thing, it is that the situation is unpredictable. The markets are supposed to be foreseeing good times to come, but don't forget, the same 'markets' haven't been able to foresee anything correctly for almost two years now.
 Those are two sides to the debate and the logic for both is impeccable. Which one will appeal to you more depends on what sort of a mood you are in. That probably depends on how the downturn is affecting you personally. Which is where the key to understanding the situation lies. At this point of time, the real malaise is the tremendous loss of confidence in the future that has happened to individuals, businesses and institutions.
 Would you care to predict when that will get cured?

Perennial Pessimism---A paradox

I’m going to go out on a limb and be a contrarian. I think we are overdoing this pessimism business. By ‘we’ I mean all of us —investors, businessmen, the media et al. In fact, pretty much everyone whose voice you hear nowadays lamenting how the country is going to the dogs. The problem with this view is that this country has always been allegedly going to the dogs. I’m in my mid-forties and in my living memory (at least since I was old enough to read a newspaper), there has practically never been a time when this country was not going to the dogs.
And yet if you look around every few years and compare it to what has gone before, almost everyone’s lives are better than before. Sure, some people’s lives are not as much better as could be, and almost no one’s is as much better as they would want. However, the fact remains that when you step back and take a broad look at where we are going, there is more room for optimism than there is for pessimism.
Let’s apply the concept of rolling returns to the general economic conditions in the country. Take any 10-year period in the last forty years and compare the situation at its beginning with its end and you will see what I mean. Were things better in 1970 or in 1980? The answer is obviously in the latter. 1990 or 2000? 1984 or 1994? 2000 or 2010? It’s the same answer every time. When you stand back and take a 10-year perspective, the forward surge of Indian economy and businesses is always obvious. Certainly, some 10-year periods are better than others but the situation never regresses. Some might say that a 10-year period is too long, but that’s not much longer than what would qualify as an appropriate period for a long-term equity investment.
Now, it’s possible in theory that the next ten years will be different and the country will be much worse off in 2022 than it is now. But I wouldn’t give too much to the chances of this happening.
In investing, there’s a saying that a rising tide lifts all boats, meaning that in a booming market, even bad stocks go up. At Value Research, we firmly believe that the current situation is the reverse of that. A receding tide appears to be sinking all boats. For a long time now, equity markets have been so bad, that even good stocks have fallen precipitously. However, this is as misleading as the rising tide. In the general gloom and doom that surrounds us, there are a large number of stocks that are available at very attractive prices. And therein lies an opportunity that the value investor must not miss.
The essence of value investing is to buy good stocks at a price that is less than their intrinsic value. By this definition, an Indian equity investor is just about in value investing heaven right now. Stock prices have been largely static or falling for a long time while profits have been proportionately less under pressure. The result is that there are some great valuations available on many stocks that can be invested in for the long term.
Just about the worst thing that investors can do at this juncture is to get too focussed on the short-term volatility or the general gloom and doom mood. As I said, in theory the pessimists could turn out to be correct. But I wouldn’t bet on it and in your investments, neither should you.