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 1^st. 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	:-	27.73%
DSP BR Equity	:-	27.68%
HDFC Top 200 Equity Fund	:-	32.12%
HDFC Equity Fund	:-	32.10%
HDFC Growth Fund	:-	25.46%
Reliance Growth Fund	:-	36.13%
Reliance Vision Fund	:-	32.60%

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.

(source:- www.valueresearchonline.com)

Mistakes to avoid in 2012

2011 is history! It was not a good year for investors—both domestic and foreign. Nifty lost 21% during the calendar year. The general consensus is that the market is likely to remain lackluster in near to medium term. A sense of despondency has enveloped the equity investors.

However, this does not mean that you should stay away from the market. You may not know when the market may stage a turnaround. Many investors—including the savvy institutional investors—were caught off guard in 2009 when the markets posted handsome gains (close to 90% returns) after tanking in 2008. History has proved it time and again that serious money can be made only by serious and focused investors—never by traders! Making money or more aptly creating wealth is a serious and boring business.

However, you should tread cautiously to get the most out of this market. Here are some pit falls that you may avoid in 2012.

Don’t buy a stock or a fund because it is cheap

Majority of stocks and funds have borne the brunt of the downfall throughout 2011. For example infrastructure stocks and funds have seen serious erosion in their valuations. However, this does not mean that you should go and buy all of them. You need to do some serious research if you are investing in stocks, or rely on the expertise of a fund manager-- if you access equity market through the mutual fund route-- if he has a proven track record. If you do not have the risk appetite than you should confine yourself to a regular diversified fund rather then sector specific funds. While the latter can give you above average returns in bullish times; they can fall sharply in bearish times also. They tend to be highly volatile on either side. Not more that 5-15% of your corpus should be invested in such sector specific stocks/funds provided you have conviction in the sector over long term.

Don’t Panic

Do not press the panic button and sell off your holdings should the markets decline further even from current levels. Markets take their own time to turnaround. Agreed that things are bad on the economic front, but Indian economy is still far away from being written off. Remember, the night is the darkest just before dawn. Just as markets usually do not factor bad news in bullish times, so too it ignores good news in bad times. Consider the following:-

·      Doomsayers may point out that Indian economy may be growing at a lesser pace (from 9% growth    rate in recent past to 7%-7.50% presently) and hence investments in equity market should be deferred. The rate of growth may be slow-- albeit it is growing! Mind you 7--7.5% is still a very decent growth rate from a global perspective. 

·    According to business publications, manufacturing activity in India climbed to a 6-month high in December 2011. IIP expanded sharply at 6.50% in November this year after showing a 5% degrowth in the month before.

·     Auto companies have shown robust growth in numbers for December 2011.Overall car industry grew 9% in December compared to a 7% growth in November this year. And that too in a high interest environment.

·    Corporates have shown a growth trajectory in profits even if it is lower as compared to earlier years.

·       RBI has indicated that it will focus more on growth rather than inflation. It has also re-iterated that it may not go in for any more rate hikes—rather it may look at reducing rates if inflation starts to moderate.

Discard trader mentality

One common mistake that investors make is that once they buy a stock/fund, they expect it to go only in one direction—up. Markets do not move as per our wishes. Remember, it is not your thinking that makes big money, it is sitting. Investors, who had sold out in panic during the 2008 fall, are still licking their wounds. However, those who had bought into the panic laughed their way to their banks. Differentiate between long term investing and short term trading. Rs. 1 lac cannot become Rs. 50 lacs through trading! Long term investing is the only route which can multiply your investments, maano ya na maano!

Don’t stop your SIPs

SIPs are usually the first victims during any market downturns. Investors more often than not discontinue their SIPs while holding on to their stocks (even if is a losing proposition). SIPs are an excellent way to accumulate units at low prices and in the process lower your average holding cost. It has the power to evolve as a second earning member of your family—even when you stop earning! While lump sump investments have an element of timing involved, SIP eliminates the risk of market timing. One common query that we face during out interaction with our investors—current and prospective alike—are: - My SIP has completed 1 year. Should I stop now, since market is not looking good? There may be a period of under performance in say a fund or stocks. That does not mean that you discard them. Consider the following returns matrix showing returns of a broad category of mutual funds for the period 01/01/2008—30/12/2011.The Nifty during this period gave a negative return of (-) 7% CAGR approx during the same period.

  

Mutual Fund Scheme	SIP returns (CAGR)	Non–SIP returns (CAGR)
BSL Top 100 Fund	3.00%	(-) 4.90%
DSP BR Top 100 Equity Fund	3.96%	(-) 2.63%
Franklin India Blue Chip Fund	7.17%	(-) 0.94%
HDFC Top 200 Fund	5.69%	0.09%
HDFC Equity Fund	6.85%	(-) 0.66%
IDFC Premier Equity Fund	11.81%	0.47%
ICICI Prudential Discovery Fund	11.02%	0.22%
DSP BR Small & Mid Cap Fund	7.29%	(-) 4.02%
Reliance Equity Opportunities Fund	10.91%	(-) 1.55%

The above table proves that SIP is the vehicle not only the right strategy to beat bearish market, but also a right vehicle to create long term wealth over long term. After all investments are done with a view to meet your life’s long term goal, be it children education and/or marriage, your own retirement etc. Another argument in favour of SIP is that since your income is monthly, then why should your investments be lump sum or one time? 

Get your asset allocation in place

One of the most basic principles of investing is that you should not put all your eggs in one basket. No matter how bullish you may be about a particular asset class. Even financial planners like us recommend asset allocation to our clients and sticking with it. Prudence suggests that you should diversify your investments across different asset classes viz; equity, debt/fixed income, gold etc. A portfolio so diversified will not only be less volatile but also maximizes your over all portfolio returns. Returns are important, but so are your goals too, fulfillment of which depends upon your judicious investment strategy. (Refer our earlier article on “Why investors must look beyond returns of 04/2/2011—the same has been uploaded on our blog:-  http://www.investwithaims.blogspot.com/2011/02/why-investors-must-look-beyond-returns.html). 

Wish you a prosperous and safe 2012!!

Irrational Pessimism

At the end of the year, I generally write about how the returns of the various categories of mutual funds and other investments have been during the year. However, this year I’m not so sure whether anyone would have all that much enthusiasm for such an exercise for 2011. It’s been a most forgettable year and everyone who has any kind of market-linked investment knows very well what they have lost and would like to put that behind them as soon as possible. My putting some percentages to the pain will probably be neither interesting nor useful.

Unfortunately, most people seem to see as many problems looking forward as they do when they look back. It’s hard to recall a time when the general mood among investors and businessmen was of such pessimism. So much so that one has to wonder how much of this actually makes sense on any rational basis. Remember the phrase ‘irrational exuberance’ that was used to describe the heady days of 2003-2007? Now, it might just be the opposite. We could well be in an ‘irrational pessimism’ or an ‘irrational melancholy’ phase. We could be in a negative bubble (if you could visualize such a thing) and which is as hard to see from inside as the normal sort of bubbles are.

It’s not hard to trot out a litany of economic catastrophes that could hit us. However, the mental weightage that we assign to them could be excessive. The problem is that some of these catastrophes could be self-fulfilling prophecies. If a whole lot of businesses don’t invest in their future, well then the investments won’t be justified. And that’s the same for the investment markets. The irrational exuberance was not justifiable, but I think some rational exuberance may be in order.

(Courtesy: - www.valueresearchonline.com)

Yahi hai right way--to create wealth

All that an investor needs is to be able to differentiate a bad investment from good one—in order to create wealth successfully. However, over the last 4 years, it has become clear that managing one’s reaction to panic situations is as important if not more. It matters how you see and stay through the crisis. 

Data from Mutual Fund registrars suggests a manifold jump in investors investing through SIP. However, it is times like the present ones that have a potential to break this style of investing.  Investors (Informed or otherwise) either cancel or pause their SIPs (and/or lump sum investment) whenever stock markets have crashed sharply over a short period of time. The general message that we get during our regular interaction with investors is “My sip (or lump sum investment) has just completed a year and it’s running in a loss. Markets are looking bad, so I will renew my sip or invest further –as the case may be—once the situation—domestic or global—improve!”

We try to impress upon our clients that it’s the worst thing to do—if not disastrous! The whole idea of SIP is to invest regularly through highs and lows of the market. More often than not we witness the case of another investor who started investing when markets started improving –having stopped at a high level (high defined by hindsight only)! They believe they have done a smart thing…but have they really?

We have a case study (though hypothetical) to prove our point.

Consider an investor who invests regularly in fund that tracks sensex. The investor invests Rs. 10,000/- per month regularly since 1997. In the 15 odd years, he would have invested close to Rs. 17.50 lacs. The investment would be worth approximately Rs. 48 lacs—a return of 13% CAGR.

Contrast this with an investor who pauses every time the market crashes. This investor—typically one amongst us—would be congratulating himself on stopping his investments sometimes in the year 2000 when the market dropped to sub-4000 levels from a peak of 5900. He would have probably started investing when the market approached the 4000 levels again. He would have stopped investing again when the market crashed to 15000 levels from a high of 21000 sometimes in 2008 mid. He would have in all likelihood started investing again in the middle of 2009 post general elections—when the market went up spectacularly.

  

This strategy—which seems to be the most natural thing to do—would have lowered his returns. Instead of earning a profit of Rs. 30 lacs on an investment of Rs.17.50 lacs, he would have earned Rs. 16.50 lacs on an investment of about Rs. 12.30 lacs.

Moral of the story: - We do not know how long the market will remain listless…however, what we do know is that the only sensible thing to do is to continue with your investments. Or as Lord Krishna would have preached: - karma karte raho….Since, SIP ensures that you also buy when markets are down, you should be glad that the market is giving you an opportunity to buy low. Seems to be some kind of a cruel joke, but then is it not the truth….