Do You Have a Value Investors' DNA? Take this Test to Find Out...

Jan 9, 2016

In this issue:
» US economy losing steam?
» Banks take over first company with the help of SDR
» ...and more!
Rahul Shah, Co-Head of Research

On 24th August 2015, Indian stock markets crashed. Out of the blue, BSE Sensex lost around 1,600 points. Smaller companies were hit even harder. BSE Smallcap Index fell over 8.8% in a single day. The rout in the Chinese markets sent global stocks in a tailspin, India included. Investors called it 'Black Monday'.

Now, almost five months later, it's happening again.

It began on a Monday again - 4th Jan 2016 to be precise. China's Shanghai Composite Index closed 7% lower. Trading was halted prematurely, and investors panicked. Weak manufacturing data aggravated concerns of a slowdown in China. Shockwaves quickly spread to other global markets. The Sensex ended more than 500 points lower.

It was action-replay on Thursday. China halted trading again, and Sensex dropped another 555 points.

Within the first five trading days of 2016, the Sensex has already shed a massive 1,265 points.

As you went through all these market shocks and the consequent flurry of news flashes, how did you feel?

Did you balk? Did you recoil in panic? Did you shudder at how much 'damage' the crash must have done to your portfolio, and run to check your stocks' prices?

I did no such thing.

I had a broad smile on my face. The smile became wider as the market fell lower.

I love such events. I look forward to such events. I am even guilty of praying for such events. If, after a long wait, the market suddenly opens a thousand points lower that morning, I know it's going to be great day.

Call me crazy. Call me evil. But I know that the amount of money our subscribers ultimately make in the market will be higher - not lower - due to such volatility. It lets them buy more for lesser. That can't be such a bad thing, can it?

Warren Buffett once said:

  • Whether you achieve outstanding results will depend on the effort and intellect you apply to your investments, as well as on the amplitudes of stock-market folly that prevail during your investing career. The sillier the market's behavior, the greater the opportunity for the business-like investor. Follow Graham and you will profit from folly rather than participate in it.

I take that advice very seriously.

The relationship you share with stock market volatility is perhaps the single biggest marker of how successful you will be as an investor.

And it also tells you whether you have value investors' DNA, or not.

What have your reactions been to the market crashes we have been seeing? Let us know your comments or share your views in the Equitymaster Club..

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2.18 Chart of the day

As global stock markets tumble, the blame game has begun. The most obvious target is China. The Yuan has depreciated as capital is fleeing the dragon nation. The Chinese government and regulators have not covered themselves in glory either by trying to delay the correction. However, is it right to blame China alone? We don't believe so. The US Fed is an equal partner when it comes to assigning blame for the current situation.

The easy money policies adopted by the US central bank in 2008 prevented a repeat of the great depression of the 1930s. But it has led to rampant speculation in financial markets around the world. These bubbles are now bursting one by one as the Fed reverses its loose monetary policies. Today's chart shows just how weak the US economic recovery is. The purchasing managers index (PMI) is a leading economic indicator. And its trend points to a possible contraction of the US economy in 2016. Will the Fed continue to raise interest rates in such a situation? We doubt it.

US Economy Losing Steam?


Amidst the news about China and the global stock market rout, there's an important one that quietly slipped into the backburner. The news about how Electrosteel Steels became the first company to be officially taken over by its lenders under the strategic debt restructuring package. What this means is that the lenders get to convert their debt into equity and can now find a new promoter for the company within the next 18 months.

The development goes to show that Raghuram Rajan was indeed serious when he had opined that promoters had no right to continue at the wheels of a business after pushing it down a cliff. And mind you, this is not an isolated example. Many banks are now seen going after defaulters and this is improving cash recovery. However, not everyone seems upbeat. A few experts argue that SDR essentially amounts to kicking the can down the road. Therefore, we could see credit slippages in FY17-18 if not now. Authorities are no doubt trying every trick in the book to salvage bad loans. However, it seems like swallowing the bitter pill of write offs could be the only real solution.


Majority of global markets ended the week on a dismal note as the meltdown in Chinese stockmarkets took most of the headlines this week. Trading halted twice after the Shanghai Composite Index hit the lower circuit breaker limit of 7% on two occasions. The first crash occurred on Monday, while the second happened on Wednesday. The fall was led by a downward adjustment to the yuan. The adjustment also created a lot of movement in currency markets.

US and European markets followed the trend in China with markets in Germany and US falling as much as 8% and 5.2% respectively during the week.

Further, the Nikkei's Manufacturing Purchasing Managers Index (PMI) fell to a 28 month low of 49.1 in December from 50.3 in the month of November. A reading below 50 indicates a contraction in the manufacturing activity. To add to the woes, flow of new orders fell for the first time in more than two years.

Concerns over China coupled with weak manufacturing data dragged the Indian Indices down by 4.7%.

Performance during the week ended 8th January, 2016

4.56 Weekend investing mantra

'The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to ask "How much?"' - Benjamin Graham (1972)

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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Equitymaster requests your view! Post a comment on "Do You Have a Value Investors' DNA? Take this Test to Find Out...". Click here!

2 Responses to "Do You Have a Value Investors' DNA? Take this Test to Find Out..."


Jan 9, 2016

Dear Rahul,
You are very cheerful and joyful.
However, what do you think they bought shares based on your recommendations and advised them to hold on to long term ?

Like (1)


Jan 9, 2016

When the stock market crashes I pick up bluechips as well as debt free co stocks to add on to my portfolio.I am not at all worried ABT market crashes. These are opportunities to make money by buying good stocks at lower or fair value.Pl furnish a list of 15 debt free cos with liquidity inshare market to start with.expect a reply.

Like (2)
Equitymaster requests your view! Post a comment on "Do You Have a Value Investors' DNA? Take this Test to Find Out...". Click here!