One important lesson from the recent correction!

Feb 10, 2011

In this issue:
» Bernanke sees inflation in emerging markets but not US
» IMF says it shouldn't have blindly followed western authorities on economics
» TRAI bowls a googly to Indian telecom firms
» The asset that you should not ignore now as per Marc Faber
» ...and more!

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If only. We bet these are the two most common words on the mind of a certain type of investors right now. The ones who have seen their portfolios bleed by 25%, 30% or may be even more in the past few months. "If only we would have known of the impending correction, we would have come out much early", most of them would be thinking. Bygones are bygones we believe. Whatever had to happen has happened. If one's portfolio is made up of good quality stocks, chances are that one would be able to recover one's money over the medium term. However, if the portfolio consisted of poor quality stocks, the person has perhaps lost his hard earned money forever.

A noted thinker, Benjamin Franklin had once said that experience is a very costly school but the irony is that students would take their education from no other. So, is there any education that investors need to take from their most recent experience in stocks? Certainly we believe. The most important lesson that comes out according to us is that stocks should not be bought on the basis of earning capital gains alone. Instead, dividends and dividend yield should also be taken into account.

This approach serves two important purposes we believe. Firstly, it will leave out many fundamentally bad stocks as focusing on an uninterrupted long term track record in dividends would mean that only the good quality stocks would come through. Secondly, by ensuring that a certain part of one's investment returns come from dividends, one would be able to set a ceiling on the price that one pays for a stock. Of course, this strategy may leave out fast growing stocks that are unable to pay dividends right now. We however believe that investing is more about money that is sure rather than money that is big but unsure.

What do you think? Is this the best strategy around or are there still better strategies. Post your comments or share your views on our Facebook page

 Chart of the day
Today's chart of the day gives us a peek into one of the important reasons why investors especially FIIs are shying away from Indian equities as of now. The chart depicts the year end RoEs of the MSCI India index over the past many years. As can be seen, RoEs for 2009 and 2010 haven't been all that great. Infact, they have been the lowest amongst all the years shown in the chart. One reason could of course be the runaway inflation that is causing pressure on input costs and the intense competition that is not allowing the same to be passed through to end users. We hope the trend is cyclical rather than structural. Or else, India's emerging market premium is in danger of shrinking.

Source: LiveMint

"Fire is in the other house. Why should we be bothered?" This seems to be the belief of the US central bank Chief Ben Bernanke these days. And the fire we are talking about here is 'inflation'. The US government has questioned the Fed for the inflation that its policies can cause in the future. But Bernanke is absolutely sure that inflation won't engulf the US in the future. That it will remain within the boundaries of the emerging markets.

This sounds in completely bad taste! The Fed's policy of printing money to save its economy has created asset bubbles around the world. Prices of everything, from oil to onions, have surged. But the irony is that the Fed is not taking any responsibility of its mischief! And we believe it will maintain this belief till its own house catches the inflationary fire in the future. It will!

The woes for the telecom sector seem to be like a drain with no plug. The telecom regulator, TRAI, has now proposed a hike in the prices of the 2G spectrum. And brace yourselves; the quantum of increase is a whopping 136% from its current levels. TRAI has recommended that the prices of the start-up 2G spectrum be revised to Rs 17.7 bn and the price for spectrum beyond the start-up to be priced at the same level as the 3G spectrum, i.e., Rs 45.7 bn.

The financial impact of this proposal, if it goes through, would be the greatest for state owned BSNL and for Bharti. The least impact would be on RCOM. Why? Because they have a dual operations license and these rules only apply to GSM not to CDMA.

At a time, when most operators are suffering from ridiculously low margins and overheated competition, the TRAI is doing everything to just increase the woes for the operators. A regulator is supposed to be neutral and balance the interests of the industry as well as that of the nation. But the TRAI seems to be more interested in filling up the government's pockets rather than helping the industry, which is already bleeding. We just hope that the proposal is dropped and not implemented.

Dr. Doom aka Marc Faber has found a new favourite in the "black gold". To quote his own words: "Whether you are very bullish or very bearish you should invest in oil." We'll share with you what he means by that.

Let us evaluate two probably extreme global scenarios. In the first case, we have a temporary crack up boom because of the expansionary monetary and fiscal policies, particularly in the US. That will revive the oil demand in the Western countries which has been declining since 2008. This would surely push up oil prices.

On the other hand, printing of money causes the standards of living of the middle and working class to go down. In turn, the population becomes distressed and dissatisfied. So to stay in power or to distract the attention of the people, the government usually goes to war. And what happens to oil and commodities prices during wartimes? They soar skyward.

Given the current geopolitically fragile environment, we completely agree with Faber's advice.

Being an independent body has a big responsibility attached to it. Notably that of forming your own opinion without being swayed by other voices. But the IMF, which was set up after World War II to ensure the stability of the global monetary system, does not seem to have paid heed to this. That is why in some sense it could be held accountable for the eruption of the global financial crisis. Yes, an IMF audit report has stated that the financial institution was uncomfortable challenging the views of authorities in advanced economies on monetary and regulatory issues. The IMF staff was in awe of these authorities simply because the latter had greater access to banking data and had more knowledge of their financial markets. Plus, the fact that there were a large number of highly qualified economists working in their central banks also seems to have deterred the IMF from expressing their independent views on many issues. And so, it turned a blind eye to the deterioration of the banks' balance sheets and other alarming indicators. Hardly commendable for an international organization of such repute and defeats the very purpose for which it was set up. The good thing is that the IMF chief has acknowledged the failure of the institution to warn of this crisis early and is taking steps to respond to the same. But whether this will be enough and will help avert another crisis in the future only time will tell.

Meanwhile, after touching the day's lows, BSE benchmark Sensex appeared in recovery mode at the time of writing this and was trading about 60 points below the dotted line. Aiding in this recovery were heavyweights like ICICI Bank and ITC. Elsewhere, most Asian indices closed in the red today whereas Europe has also opened on a negative note.

 Today's investing mantra
"Unless you can watch your stock holdings decline by 50% without becoming panic-stricken, you should not be in the stock market." - Warren Buffett

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13 Responses to "One important lesson from the recent correction!"

DC Sekhar

Feb 13, 2011

For most of the common investors, 80% of value stocks based on dividend yield and 20% growth stocks (not just momentum depending on market rides) should be the right mix. The 80% value stocks would act as the core part of a safe and longterm strategy. As the risk appetite goes up, it can change to 70:30 and at the most to 60:40. In longrun it makes sense to depend on value investment.


Shome suvra chakraborty

Feb 13, 2011

Rank the preference for the securities according to the greater excess return to risk ratios.Invest in those securities where the above mentioned ratio is greater than the cut-off point.



Feb 11, 2011

Some of your comments are bold and blunt yet illuminating as in the case of Bernakes view on inflation!!


Prem Khamesra

Feb 10, 2011

Please do not join the chorus....of exuberance in exuberant times and despondency in despondent times.

Corrections teach us only one thing. Never be driven by greed and by exuberance or despondency. Rather keep yourself properly informed and trust your own instincts.


Anupam Garg

Feb 10, 2011

thr's a reason y u hav avid readers like Raj
I do agree with views on dividend stocks. I define dividend as a gift from company for loyalty. Given the scenario of rising prices & volatility, dividend stocks provide a safeguard against both. Unlike huge capital gains which may happen once or twice in an year, a regular consistent flow of income thru small dividends is more appreciable.

But dependency on dividends is not prudent as companies sometimes refuse to shell out dividend. Thus, building a corpus of quality stocks simultaneously must also b emphasized. Over a period of time, the portfolio of stocks will become self sufficient, thereby diminishing the requirement of dividend stocks.

The choice of stocks depends completely on investor's requirements which include factors like age, earning capacity, time horizon etc. Such a strategy can definitely help the boat in sailing thru turbulent seas. However, if dividend stocks sway away with the tide, the boat is on titanic's course


Daniel Menezes

Feb 10, 2011

For sure no one will learn any important lesson from this down slide until we come out from this dirty corrupt system. That is the only statement I can give.


R Sampathkumar

Feb 10, 2011

Dear Sir/Madam

In today's wrap up, you have said as follows : quote

But here's what matters the most - "How have YOU been impacted by the crash?"
If you want to be one among the very few who are geared up for any adversity, then, you need to see this right away! unquote

Why are u not disclosing the names of those 5 companies not to invest now, at least to those who paid for subscription for 5 minute wrap up.



suresh jain

Feb 10, 2011

hai iam your subscriber for value pro can u sugest some stock that can yeild at least9% to 6%dividend waiting for reply


S K Saini

Feb 10, 2011

Your articles in The Honest Truth, straight from the hip and five minute wrap up are the best piece of advise, knowledge/awareness one can get. They are eye opener. I think they talk of the most desirable and ethical governance that we need to have. Providing these articles free of cost is a great service to to the nation and I am proud of your team. If even 10% of Indians start thinking and behaving as per your articles, we shall be the best on Earth.These articles should be a mandatory school assembly item to read in all Indian schools and then I bet, we shall get the kingdom of heaven in India, we shall get the Khuda ki riasat or the so called/desirable Ram Rajya.
Great job being done by you sir, keep it up and God bless you.
Jai Hind



Feb 10, 2011

I perfectly agree with your contention that dividend payout should form an important criteria while deciding to invest in stocks rather than banking only on capital appreciation. I believe similarly rental yield should also from an important criteria while buying/investing in real estate but people seem to be gung ho about getting capital appreciation with a 2 to 3% rental yield.

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