The biggest question facing investors... - The 5 Minute WrapUp by Equitymaster
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The biggest question facing investors...

Jan 4, 2010

In this issue:
» Stocks, gold outperform inflation over the past decade
» Gold cheaper at US$ 1,100 than at US$ 300 an ounce
» Deepak Parekh on issues with India's economy and banking
» 2010 outlook for commodity prices
» ...and more!!

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Wish You A Very Happy & Prosperous New Year!
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00:00
 
After a terrible 2008, Indian stock markets came roaring back to life in 2009. Foreign investors that roamed the globe armed with cash and in search of higher returns loaded onto Indian stocks. Taking advantage of rock-bottom interest rates in their markets (like the US), they snapped up beaten-down shares. This sent the benchmark index - BSE-Sensex - rocketing upward to close the year with a gain of almost 80%.

But now as we move into 2010, stocks aren't as cheap as they were at the start of previous year. And the biggest question facing investors is - How will the markets perform in 2010?

We believe there are some valid reasons to remain hopeful of a good year ahead.

One is the expected recovery in earnings of corporate India. The second is the reasonable (and not overtly expensive like January 2008) valuations that so many stocks are still trading at. And the third is the low interest rates across the world (for an extended period as the US Fed says).

While there are some trends that you must be cautious of in 2010, remember there are reasons to remain hopeful.
But then, a good stock selection will be as important as, or even more important than, 'guessing' where the markets will go in 2010. So, do not act in haste. Stick with the golden rules of investing - buy quality, buy cheap, and hold for the long run. Study hard before you make any stock buying decision. And if you watch any business news channel, make sure the mute button is on.

In short, keep it simple (and less noisy) in 2010. And have a very profitable year ahead!

01:12
 Chart of the day
Long term investors must feel cheerful on seeing today's chart of the day. It shows how Indian stocks have outclassed inflation by a big margin over the past ten years. And not just stocks, even gold has had a brilliant run over these years. As we stand at the start of a new year, and a new decade, there are reasons to be hopeful of a repeat performance from these asset classes over the next 10 years.

Note: Inflation is as measured by the wholesale price index;
Data Source: Gold.org, RBI, Trend

01:33
 
Can gold at US$ 1,100 an ounce be cheaper than gold at US$ 300 an ounce? Seems like a dim question, right? But not for Marc Faber, who believes this to be true!

And the reason? Faber says, "In the same way that a company's stock could be less expensive at $100 than when it was selling for $10, because earnings growth has outpaced the appreciation of the shares and therefore its P/E has declined." He thinks the explosion of foreign exchange reserves in the world, zero interest rates, and the expectation of further money printing can lead the yellow metal to its newer highs in the current year.

02:02
 
When it comes to saving a company's credibility you need to call in the regulators. But when it came to saving the nation's credibility as the world's largest IT outsourcing hub, the government had few choices. It chose the man who has been a thought leader for corporate ethics and good governance for over three decades - Deepak Parekh, the chairman of HDFC. But saving a billion dollar scam-hit company like Satyam has been a tough job for the veteran.

In an interview to The Wall Street Journal, Mr. Parekh has ironed out the possibility of India having more Satyam like cases. He believes that the Satyam scam was a one-off. And that the government dealt it with discretion. With regard to key hurdles to India's growth, he zeroed in on poor infrastructure and energy insecurity.

On being asked as to why aren't Indian banks in the big leagues like their IT and auto players, Mr. Parekh remarked, "Consolidation is a prerequisite before Indian banks can aspire to be global banks. What India needs is a small number of large banks rather than large number of small banks." We second these thoughts.

02:51
 
The economic slowdown has its plus points. And what are these? Pre slowdown, almost all property developers worth their salt jumped on to the mall development bandwagon. As a result, real estate rates climbed up to new heights. Then, with retailers facing a downturn and refusing to take on more space, the developers were left in a quandary. As a result the space earmarked for malls was diverted to residential and commercial space.

To put this in perspective, in Mumbai nearly 2.5 m sq feet of mall space has been converted into residential and commercial complexes over the past year. This is expected to directly benefit the middle class and small businesses in the city by making available affordable real estate. At least we hope so!

03:23
 
"Monetary policy during that period (2002-2006) -- though certainly accommodative -- does not appear to have been inappropriate, given the state of the economy and policymakers' medium-term objectives." This is how the US Fed chairman Ben Bernanke recently chose to justify the Fed's low interest rate policy. This policy has been blamed by many as the direct cause for the building up of asset price bubbles in the country. The US Fed had cut rates aggressively from 6.5% in 2000 to 1% in June 2003. Bernanke has expressed that a better way to have averted the boom and bust would have been through better regulation.

Nobel Prize winning economist Joseph Stiglitz however has different ideas. He has said that economists (and these include central bankers) are among those at fault for the financial crisis. Everyone had full faith in the basic tenets of popular economics like market participants behave rationally and financial markets are competitive and efficient. But these turned out to be completely flawed. Instead, for example, the housing bubble was fueled by the idea that prices would go up forever.

And so, the blame game continues. However, when it comes to macro economics, there are no straight answers. It probably makes the most sense to only believe what seems most logical to you!

04:19
 
Heading into 2010, all the stars seemed to have been perfectly lined up for commodity prices to edge higher still. With more than 2 billion people residing in the emerging economies of China and India and aspiring to live life like an average American, demand may not be a problem for years to come. Furthermore, the recent financial crisis has meant that companies have been wary of investing in new capacities, thus constraining supply in the near to medium term. Thus, when the demand inches higher and supply fails to keep pace, there is only one direction the prices can go, upwards.

What is more, with the dollar mostly sharing an inverse relationship with commodity prices, a weak trend in dollar that many experts predict is also likely to lead to more money flowing into commodities. However, investors need to be wary about the bursting of the bubble in any of the big asset classes. For if that happens, investors could once again move their money out of assets such as commodities and seek the relative safety of government treasuries. Absent any such incident, the stage seems to be set for another positive year for commodities.

04:40
 
Indian markets have started 2010 on a good note. BSE-Sensex was trading with gains of around 100 points (0.6%) at the time of writing. The BSE-Midcap (up 1.4%) and BSE-Smallcap (up 1.7%) indices were trading even higher.

Among other Asian markets, Japan and Korea closed in the positive. These recorded gains of 1% and 0.8% respectively. As for gold, after a 29% gain during 2009, the yellow metal has opened this year on a volatile note. It is currently trading at around US$ 1,097 an ounce, little changed from its last close.

04:58
 Today's investing mantra
"It's in the nature of stock markets to go way down from time to time. There's no system to avoid bad markets. You can't do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go." - Charlie Munger

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20 Responses to "The biggest question facing investors..."

shyamal marik

Dec 12, 2017

I LOVED INTRADAY TRADE.

Like 

ravi k talwar

Apr 30, 2016

So what after more 30 years in the stock mkt now i given my headache to Equity master to guide me to invest more wisely.During starting time i lost around 3 lacs in mid eighties.Did my own research as used to spend lot of time.And if i calculate my initial investment is already out now only easy money in stock mkt which full fill my sudden expanses like my children study expanses upto MBA and investment in house.
In my opinion everybody a earning should invest some part of there earning in stock mkt.Now professional researchers are out there in the mkt and I have taken the offer of Equity Master even my son is Banking professional and Daughter is Research analyst IN MARKETING.

Like 

ravi k talwar

Apr 30, 2016

if this stock a trap to attract investor to invest.Is my money will double in 3 years or will give more return then fixed deposit.
Is my money is secured and when i need i can take out.
is this stock will click ok as many of my stocks vanish in this mkt.

Like 

jaswant gupta

Jul 24, 2012


A well compiled writeup . However , yes the question facing investors in still not answered . Market has definetely not been predictable in the past 2 to 3 years , since I have been following. Hope we have a good season in 2010.
What is your take on FDs , both company and Banks ? Any scope of rise in interest rates for the safe consumers

Like 

jasbir

Jun 10, 2010

i am always in dilemma to buy the scrip so neither invested in the gold.

Like (1)

RS Prasad

Mar 2, 2010

Excellent & eye opener for all traders.

Like (1)

Kishin kalani

Jan 9, 2010

Chinese are smart.They have bought and have buying all the commodities of the world , all the metals including Gold.Although RBI did buy some gold recently, china is proposing to buy 440 tonnes of gold this year; imagine what the prices would be.They are converting their surplus dollars in valuable commodities.Are Guv Reddy and Montek paaji listening?
Our people are smart and rich, but the Govt. is not. Thats the difference between India and China. Please correct me if I am wrong.

Like (1)

Kishin Kalani

Jan 9, 2010

For American woes ,they r responsible to 70%,and rest of the world to 30%.First it is their greed to have it more and eat it more,making them to consume 1/3rd resources.Corporate greed of most of their financial cos., more so the banks, hiding facts ( assure u they r still hiding) is responsible for downfall and the ciaos we have gone thru. 2nd is world exports to US to earn $s.Thank God ,India is faraway to reach China figures.China enumerating American example, is repeating the same and will be earthshaking when they feel the tremors.India comes nowhere near to it, but will be immensely effected due to global economy.

Like (1)

dpadf

Jan 6, 2010

t's in the nature of stock markets to go way down from time to time. There's no system to avoid bad markets. You can't do it unless you try to time the market, which is a seriously dumb thing to do. Conservative investing with steady savings without expecting miracles is the way to go." - Charlie Munger

Like (1)

Rohan

Jan 5, 2010

A well compiled writeup . However , yes the question facing investors in still not answered . Market has definetely not been predictable in the past 2 to 3 years , since I have been following. Hope we have a good season in 2010.
What is your take on FDs , both company and Banks ? Any scope of rise in interest rates for the safe consumers.

Like (1)
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