Is long term better than short term?

Jan 13, 2012

In this issue:
» India is a bureaucratic nightmare
» Retail investors buying from FIIs
» Should budget-making become more transparent?
» Coal India to give India an infra push
» ...and more!
---------------------------------------- Did you miss the Webinar? ----------------------------------------

Equitymaster's Webinar on the Future Prospects for the Indian Economy with Mr Ajit Dayal was broadcasted on 30th of December, 2011.

The webinar answered questions that could be troubling any Indian Investor today. Where is the Indian Economy headed in 2012? Is Gold still a good investment? Could the Stock Market touch the 21000 figure in 2012?

If you missed watching the webinar, here is your chance to access the same.

Click Here to watch: Indian Economy - From Darling to Damned (Rebroadcast)

And let's understand what lies ahead for India and how could this impact your investments.


We came across a very interesting write up in a leading daily. It talked of the never ending argument on which investment approach was better? The long term approach of identifying stocks based on their fundamental strengths and holding them for a long term horizon? Or the short term approach of going with the momentum and buying and selling stocks based on their trend and underlying sentiment?

Obviously there are advocates who can swear by each of these approaches. Each side has its own logic and reasoning. The supporters of short term investing can give examples where they have seen super normal returns. An example for this is that in the recent stock market volatility most of the short term focused mutual funds have delivered better returns as compared to the long term mutual funds. This may lead several investors to think that investing for less than a year makes perfect sense. While this may certainly work well sometimes, however, it is unlikely that such a strategy would continue to yield superior results time after time.

The reason for this is that short term investing works very well when the investor is able to judge the momentum of the markets well. While this is not an impossible task, it is certainly not an easy task for everyone to follow. And this is where long term investing comes in. It relies more on common sense rather than complicated charts and theorems. This form looks at the fundamental strength or the intrinsic value of the company. If the market valuations are below the intrinsic value, then it is a signal to buy. If the reverse is true, then it is a signal to sell. Plain and simple logic.

Which style of investing works well for you? Short term investing or long term investing? Share your views with us or you can also comment on our Facebook page / Google+ page.

 Chart of the day
One has to go through reams of paperwork, ribbons of red tape, and layers of officials in order to do business in India. Under the table payments are a necessary cost. This ultimately results in a bureaucratic nightmare for would be entrepreneurs. A recent report by a Hong Kong-based consultancy confirms this fact. Out of the twelve Asian countries surveyed, India was judged at having the worst bureaucratic system. Poor infrastructure, rampant corruption and poor regulations make doing business in the country a frustrating affair. A lack of accountability and transparency in the system are the main reasons why this problem persists. Incidentally our country has been ranked the worst for the past decade. India really needs to get its affairs in order soon, before capital flows into the country completely dry up.

Data source: Wall Street Journal

Between the Foreign Institutional Investors (FIIs) and retail investors, who do you think is smarter? Well, if you answered the former, then maybe there is a need for you to do proper homework. Because as far as shareholding data for the recently concluded quarter is any indication, retail investors have taken up their holdings in quite a few companies and that too, at the expense of FIIs. As per a leading daily, smaller investors now own a higher stake in nearly half of the 320 companies which have so far announced shareholding data for the last quarter. We believe that this is a smart move indeed as valuations fell enough in the last year to make the long term India growth story even more attractive. The small investors have thus managed to time their move to perfection. All small investors are not taking advantage of the attractive price value proposition though. In quite a few pockets, the sentiments are still weak and people seem to be waiting for things to improve before they enter stocks. We sincerely hope that they take some lessons from their fellow retail investors and do not try to time the markets. As someone has said what is more important is the time in the market and not timing it.

The result season for India Inc has just kicked off. On the other hand, the biggest entity of India, that is, the Indian central government will present its annual financial statements sometime around mid-March. Until the Union Budget day, the finance ministry shall remain shut off from the glare of the public and the media. In fact, even the Planning Commission will go behind the curtain. But why this kind of secrecy? Shouldn't there be greater transparency in the budget-making process that concerns the entire country? We certainly think there should be. In fact, an article in Firstpost raises an interesting question-In a vein similar to the Indian corporates, shouldn't the government also consider reporting quarterly financial statements along with reviews of trends in taxation and expenditure? The government also has an important lesson to learn from the Reserve Bank of India (RBI). The Indian central bank reviews its monetary policy every quarter. As a result, it was able to respond to the changing macro-environment by a series of interest rate hikes in the last couple of years. Now take the year 2011 for instance. It started on a pretty positive note and so did the Union Budget 2011-12. But the year ended with a lot of disappointment thanks to a range of domestic and global issues. Had the government been more proactive and done quarterly financial statements, it would have been in a better position to respond to the changing economic situation.

The government coffers are already heavy with borrowed funds to be able to afford more external financing. Hence relying on cash rich PSUs is the only way to meet some of the structural plans, particularly infrastructure building. Coal India that tops the list of cash rich PSU heavyweights has been mandated to build infrastructure beyond what is necessary for coal mining. That includes building power plants and freight corridors. Since the government has recently failed to encash its stake in the PSU on the stock exchanges, indirectly using the PSUs' cash surplus to meet its targets seems like a smart decision. But this is only so long as the shareholder returns do not get diluted with inefficient usage of capital. Hence in its attempt to please its principle owner, the government, Coal India should be careful to not squander its cash booty.

The October industrial production performance sent shivers down the spine of the central bank and the government as poor set of numbers contributed to the 4.7% fall in the index. So much so that the RBI started worrying about the impact of higher interest rates on growth and maintained status quo in its latest monetary policy. So a much stronger show in November has certainly given the RBI something to cheer about. The Index of Industrial Production (IIP) grew by 5.9% during the month. What contributed to this growth was the strong show put up by consumer goods. This category grew by 13.1%, with durables rising 11.2% and non-durables by 14.8%. But capital goods remained a dampener with the sector contracting for the third straight month and highlighting the fact that the investment climate in the country has probably reached its lowest point. Overall, whether this positive trend can be sustained in the coming months remains to be seen though. More important will be what the RBI chooses to do with this data. Will it begin a series of rate cuts or will it continue to maintain the same rates in its forthcoming monetary policy? That will be the event to watch out for.

In the meanwhile, the Indian stock markets breathed a sigh of relief after languishing in the red for quite some time. At the time of writing, the BSE Sensex was up by 155 points (0.9%). Stocks in the metal and realty sectors were witnessing maximum gains. Barring China, nearly all the other stock markets in Asia closed the day on a positive note with Japan and Singapore leading the pack of gainers. Europe too has opened the day in the green.

 Today's Investing Mantra
"Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway." - Warren Buffett

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7 Responses to "Is long term better than short term?"

udaishankar morla

Jan 26, 2012

i would like to know for investment of stocks long or short is better?


Sujatha Kumar

Jan 16, 2012

I would take a middle view. Part of your portfolio, depending on risk profile, should be set aside for long term value investing, while another portion should be set aside for short term trading and increasing capital. However, in any case, it is very important to work with a stop loss in mind.



Jan 14, 2012

I am 100% agree with you that long term equity perspective
is better than short term.As the long term perspective is
lesser rirk than short term.



Jan 13, 2012

investments for long term
have their own benefits and
those in short term have its
Both are like diffrent fruits
having their own taste and the
markets are a cocktail of the
best of both hand picked
fruits giving it its unique
flavour which the technical
analysts try to interpret daily
and the fundamental analyst
over a periodic interval.
over the long term all
volatility smoothens out so an
asset allocation approach is
ideal to take advantage of
both, volatility in short term
and growth in long run


Vijay Maru

Jan 13, 2012

What is Intrinsic Value of any company. How to find that?



Jan 13, 2012

Strong fundamental stock with good Return on Equity (ROE) and with good management will surely give you the best returns over the period of time. The present stock market crisis has thrown up exciting money making opportunities and in particular selected Stocks which commands good fundamentals & which are available at their best valuations GET FULL LIST click –htt p://bhavikkshah.blogspot dot com/2011/12/why-long-term-investing-pays-you-back dot html


Amit Kapoor

Jan 13, 2012

I am not a big fan of long term investmenting. Although I consider myself a value investor, I am cognizant that the markets allow one or two opportunities every year to buy value stocks at a disount. Indian markets are far more volatile than the major established markets of the world. Hence, it is important to book profits when you have had them, so as to capitalise on the next wave of dips followed by peaks.

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