Are you waiting for a correction to invest?

Jan 16, 2010

In this issue:
» India in a sweeter spot than others amongst the BRICs
» What makes world's best fund manager 'best'?
» Bill Gross, Grantham on the next decade for markets
» Indian banks could see NPAs surge in 2010
» ...and more!!

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Since the current rally began in March 2009, we have seen the Sensex gaining around 80% till date. What is more, of the eleven months since then (March 2009 included), the index has clocked positive gains in eight. Now after a strong bull market run like this, it is pertinent that investors start fearing a sharp correction in stock prices.

And you might be one of them! After all, that's a normal way of thinking after such bull runs and especially now when concerns still surround the global economic recovery.

We all fear corrections. And we all feel the ardent need to do something when a correction like event strikes, even if we expect it to be just a minor one. Like selling some stocks, fearing the markets might go down even further.

But then, we at Equitymaster believe that after the sharp rise in stock prices we saw in 2009, a correction this year should be expected and not feared. Corrections are just a normal part of stock markets and do not alter the overall bull market trend. And given the way India's economy and companies are evolving; the markets will definitely be in for a good time (notwithstanding the normal hiccups) over the next 5 to 10 years.

One must never try to time a correction. It is nearly impossible. Anyone can give into fears, pessimism, and crowd mentality. But what distinguishes a successful investor is discipline and patience.

Investing systematically and in good quality stocks, without trying to time the market or fearing a correction, is the way to go.

Are you waiting for a correction to invest? Share you view

 Chart of the day
Today's chart of the day makes it clear why India is in a much better place than her BRIC peers when it comes to the value of its forex reserves. As the chart shows, India has the highest portion (6.7%) of its forex reserves invested in gold. Compare this to China's 1.5% allocation to the yellow metal. What is more, India's allocation to US Treasury bonds is the least amongst the BRICs. This is again a positive given the US bonds are said to be amongst the big bubbles building on the horizon. Both these aspects - highest proportion of reserves in gold and lowest in US T-bonds - speak volumes of our conservatism. And this should stand the country in good stead if the financial crisis were to strike again.

Data Source: Financial Express

The last few years of the decade gone by were dramatic to say the least. So, what do you think the next decade will bring? Bill Gross, founder of bond giant PIMCO and Jeremy Grantham, founder of GMO, which manages US$ 102 bn for institutions, were recently asked this question by CNN Money. And if they are to be believed, the next decade is going to be a dull affair.

They believe that inflation will be a major concern over the next ten years. Commodity crises will grab headlines. As will protectionism. Both agree that investors should lower their returns expectations. They should prefer stable and reasonably valued stocks. As per them, the decade for glamour stocks with high multiples is now behind us.

Gross and Grantham disagree on one point though. Gross believes that China and Brazil will do well. However, Grantham believes luck will run out for China. Its economic excesses will show up at some point. In fact, he believes the emerging markets have all the makings of the next bubble.

We agree that investors would do well to be careful about valuations while buying. As individual investors, the ability to buy at one's own sweet-will is a great advantage. One shouldn't give it up so easily.

The decade gone by was indeed a treacherous one for the US stock markets. Thus, if a fund manager managing a decent sized fund was able to just preserve his capital, it could have been a worthwhile achievement. It comes as no surprise then that Morningstar, the premier global research firm chose a gentleman named Bruce Berkowitz its top mutual fund manager for the past decade. For the record, Berkowitz, who manages the Fairholme Fund, managed to give annualized returns of 13.2% during the decade, leaving the benchmark S&P 500 in the dust.

And if you thought Berkowitz is all about making flashy predictions and taking excessive risks, you would be in for a big surprise. In fact, forget multi-year forecasts, Berkowitz does not even try to forecast as much as one year forward. "We don't try to, or we've never made very good money trying to predict the future. It is impossible for me to do that," Berkowitz mentioned in a recent interview.

So, what does he attribute his enormous success to? Well, Berkowitz belongs to the Benjamin Graham and Warren Buffett school of thought. He holds not more than 15 to 20 companies in his portfolio and tends to focus on companies that have exceptional management, generate a lot of free cash flow and are available at a huge discount to intrinsic value. Indeed, what better proof than Berkowitz that over the long-term its value investing that counts. And also, it's the discipline that matters and not how intelligent or how smart you are.

If one were to go by a report from the credit rating agency Fitch, Indian banks are in for some tough time in 2010. The report states that Indian banks have loaded themselves with significant liabilities, especially in the commercial real estate loan business. And a large part of these loans, almost around Rs 300 bn, might turn sour during the current year. This is almost 50% of the NPAs that Indian banks recorded in the whole of 2009, and a large part is due to loans extended to commercial real estate companies.

Data Source: Economic Times

Interestingly, Fitch reports that a large part these commercial real estate loans are on the books of PSU banks. And this is despite RBI's regulatory limits on banks' exposure to individual and group borrowers. Now, while the Indian banking sector as a whole survived the global subprime crisis, we might have another crisis of sorts building up here! Seems scary enough!

It was a dull last week for the Indian markets. The BSE-Sensex closed with marginal gains of 0.1%. China was a better performer with 0.9% gains. The worst asset class during the week was crude oil, which lost around 6% over the previous week. Gold prices also dropped, but by a very marginal 1%. .

Note: Country names are representative of their benchmark stockmarket indices;
Data Source: CNNfn, Kitco

 Weekend investing mantra
"Some people seem to think there's no trouble just because it hasn't happened yet. If you jump out the window at the 42nd floor and you're still doing fine as you pass the 27th floor, that doesn't mean you don't have a serious problem. I would want to address the problem right now." - Charlie Munger

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135 Responses to "Are you waiting for a correction to invest?"

Dr. S. P.Thakur

Mar 20, 2010

Equity master, yes, i am awaiting a dip to buy.In 2010 aswell recession is continued. The market rally is based on liquidity and laverages given by the GOVERNMENTS TO FACE AND TO MEET THE RECESSION.I apprehand that market will come to the level of 2007, a brod based market, not before 2012.--yours-Dr Shital Prasad Thakur


mr nair

Feb 6, 2010

i am investing in markit after correction,so plz which sector and which stock



Jan 27, 2010

The people generally wait for the corrections to enter , but do not book the profits when market the market go up.......



Jan 21, 2010

i never wait for correction, i buy when i have to buy



Jan 19, 2010

yes im waiting for a deep correction to invest


Amit Jain

Jan 19, 2010

Waiting for correction will again be a foolish thing of fighting the old age proverb,, Dont ever time the markets. I believe staying invested in good quality stocks, will be the best thing an investor can look for. They can be sure of getting good and fruitful returns in future.



Jan 19, 2010

YES I am expecting Nify about4800 in March before budget and then sharp rise in July about 5600 nifty



Jan 18, 2010

dont be upset over correction. it is part of stock trade. Go for stocks of well managed companies. watch their past performance and match it vis-a-ovis index progress. There is gain in the long run irrespective of ups and downs in between. I bought L&T at Rs.117/- per .share in 2001 and sold it for Rs.4500/- in Jan 2008 and agains bought the same stock at Rs.565/- in April 2009 and holding the same now. CMP of the stock is Rs.1654/- This is only an example



Jan 18, 2010

definitely there is a correction whether it comes within 6 months or year after but it would be logic behind that global interest rates.


Milind Parate

Jan 18, 2010

During the budget for the coming year at the end February, there may be a correction. Because, buyer wait for changes in Govt. decisions for any policies to chage. Accoringly the trend will change and the direction of maket may change. So stop buying new stocks after 1st week of Feb.2010.

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