Why do stocks go up & down all the time?

Apr 19, 2012

In this issue:
» Dangerous to take India's growth prospects for granted
» The Indian Govt has turned into a dictator!
» The secret behind Germany's economic success
» BRICs in easing mode to prop up growth
» ...and more!

---------------------------- Yet Another Bailout... Speak out before it's too late! ---------------------------

When millions don't even have food to eat, our government is busy bailing out companies...

And this time, again, it's Air India.

This PSU gets a Rs 4,000 crore equity infusion... funded by the taxes we pay.

Not to mention the huge debt restructuring is basically a bailout in a different garb. And this runs into tens of thousands of crores.

Is this government really made up of our representatives or is it on the payroll of those corporate giants?

We at Equitymaster feel strongly about this cause, and thus have started an Urgent Poll where you can read all about this and cast your vote to make your voice be heard!

We strongly recommend every Indian, who wants to make a change, to take a look at this.

Click Here to read more and cast your Vote... Before it's too late!


Legendary investor Warren Buffett is known to pay little heed to movements in the stock markets. He often urges investors to focus solely on buying great businesses. For him, stock prices are nothing more than entry and exit points. But the kind of wild swings that stock markets often witness can give shudders to many loyal adherents.

Why are stocks markets so insanely volatile? Do the underlying fundamentals of a business, or an economy at large, change every few seconds? Why do investment managers engage in excessive trading that often sends markets in a tizzy? Wouldn't following Buffett's wisdom help them create wealth for their clients?

Jeremy Grantham of GMO, a global investment management firm, has an interesting perspective to present. He cites 'career risk' as one of the most important factors driving investment behaviour. As per him, professionals who manage other people's money are primarily driven by the imperative to protect their own careers than to make money for their clients. If an investment manager were to make a mistake of his own, there would be a good chance of him losing his job. But what if he made a mistake that everyone was making? Most likely, he would be pardoned. This incentivises them to pay close attention to what other investors are doing. And very often, they merrily follow the herd. But this act of aping other investors gives enormous momentum to stock prices, driving them either too expensive, or too cheap.

Individual investors who invest their own money have a tremendous advantage over investment managers. Unlike the latter, investors have no compulsions that would force them to make hasty decisions. They can afford to make their own mistakes without the threat of losing their jobs. So do not be perplexed by the volatility in stock markets. Instead use it to your own advantage. Buffett comes in handy yet again when he says, "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

Does the extreme volatility in stock markets affect your investment decisions? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Indian corporates may have something to cheer about after the Reserve Bank of India (RBI) cut key policy rates earlier during the week. But it will be a big mistake if Indian consumers take that as an indication of easing inflation. Unfortunately, the monster of inflation has again raised its ugly head. As today's chart of the day shows, the latest consumer price index (CPI) data for both urban and rural consumers has rise steadily over the last three months.

Data source: Ministry of Statistics & Programme Implementation
*with 2010 as base year

'Come what may, a growth of 6%-7% is almost assured for India'. This is a comment that is literally hardwired into the brains of most stock market experts in India. But a certain Ruchir Sharma believes that it could be a dangerous assumption to make. Excessive government spending even at times when the economy is not doing well could land India into some serious problems, the gentleman has argued. In fact, he sees the economy meeting the same fate as that of Brazil in the 1970s when reckless government spending led to persistent inflation and crowding out of private investments.

Thus, rather than going down the path of fiscal spending and hoping that all will turn out well, India should start taking steps right now. Foremost amongst these include stopping crony capitalism that is so rampant in India and also making farmers leave their farms and venture outside. Mr Sharma wouldn't have been more on the ball we believe.

Whoever believes that Indian PSUs enjoy any autonomy is grossly mistaken. The series of autocratic decisions taken by the government against the interest of PSUs confirm this. No, it is not just about Coal India bailing out power companies. Or banks and LIC bailing out Air India. The latest diktat by the Finance Secretary to PSU banks to reduce lending rates close on the heels of repo rate cut is unjustified. Each bank needs to examine its commercial interest and adjust its lending and borrowing rates accordingly. Such government interference is completely uncalled for. As it is, most of these entities are reeling under the burden of restructured debt. Squeezing their lending margins will mean doing away with profitability prospects altogether! It is time that the government realises that the wealth of PSUs, especially listed ones, is not for it to squander. Social motives, although desirable, need to be taken care of in a more disciplined manner.

The Eurozone is going through a terrible crisis. That's not really news. But one country has managed to keep its head above the water in this very zone. And that country is Germany. The country has seen a recession and a slowdown but is still far from a crisis. In fact, the unemployment rate in the country is far less than that seen by the rest of the developed world. So how did it manage this? After all, the country was ravaged by wars, rebellions and even the heavy costs of Euro unification.

The answer to this question is actually very simple. It is something that The Economist has termed as 'ordered flexibility'. The leadership of Germany has in the past and even in present, introduced reforms as per the changing needs of time. It increased pension age, introduced labour reforms, cut benefits that were hurting the fiscal system, liberalised temporary work among other things. And all this in a controlled and disciplined manner. The result was the flourishing and healthy manufacturing sector, the benefits of which have helped Germany become what it is. Though there are several countries that have tried to copy Germany but so far they have all been unsuccessful in recreating its success. A big reason for this is that these countries have tried to adopt a piecemeal approach rather than adopting the whole. And that is why they have not really been successful. One cannot be selectively flexible when it suits their purpose and adopt a rigid style elsewhere. That is a recipe for disaster and not success.

Monetary easing seems to be the new trend among the BRIC (Brazil, Russia, India, China) nations. Brazil cut interest rates by 0.75% to 9% and signaled more rate cuts in the future. In a surprise move this week, the Reserve Bank of India (RBI) also cut rates by a 0.5%. The move was far more generous than what the market expected. China has also been in an easing mode, with media reports indicating a cut in bank's reserve requirements.

But, on the other hand, developed economies are being relatively tight fisted. The Bank of England took a hawkish stance and the European Central Bank (ECB) is in a monetary mess. Bank of Canada and the US Fed are also hawkish in their stance. Seeing a global slowdown, emerging markets are doing their best to try and revive their economies. On the other hand, developed countries are being more cautious. So is this a change in the world order? Or have the BRICs acted too soon?

Execution issues have been the main reason for delays in completion of many projects over the last couple of years. But the execution/project completion data for FY12 has come in as a positive surprise to many. As per Centre for Monitoring Indian Economy (CMIE), projects worth Rs 4,000 bn were completed in FY12. Now, compare this with the previous two years figures of Rs 3,400 bn and 3,800 bn respectively. Certainly the execution pace in FY12 was commendable. However, there is a catch here. The execution pace improved for projects that were announced way back in 2005. As the problems got cleared, projects gathered momentum. Nonetheless, even this is a sign of improvement.

This signifies that slowly but gradually bureaucratic and environmental issues are being ironed out. However, there is more to come. Apart from improved execution, the current pipeline of outstanding projects is also encouraging. In fact, it is so huge that even if no new project is announced over the next 4-5 years, India can continue to grow at as brisk pace. Thus, for growth, it is the execution that will matter from now on rather than new project announcements.

In the meanwhile Indian stock markets are trading strong. At the time of writing, the benchmark BSE Sensex was up by 95 points (0.55%). Auto and Pharma stocks were the biggest gainers while Capital Goods and Realty stocks were the biggest losers. Asian stocks were trading mix with Japan and China stock markets trading in the red while Hong Kong stock markets trading in the green. The European markets also opened on a firm note.

 Today's Investing mantra
"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

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    5 Responses to "Why do stocks go up & down all the time?"


    Apr 20, 2012

    No doubt what Buffet and his colleagues advocate makes sense, but how many times do investors take rational decisions? It is exceedingly difficult not to get swayed by the constant barrage of market news and info pouring forth from all media, with stories of investors who have made a killing (conveniently ignoring the vast majority who have lost their shirts) by investing in stocks. I think the best approach is to decide an amount of money which you can afford to lose in the worst case, and then speculate using this amount, leaving the balance invested in solid stocks. regds

    Like (1)


    Apr 19, 2012

    I think an investor should avoid looking at the broader picture of the market as global money flows will continue to impact stock prices and market volatility. He would then become bewildered and liken the market to a gambling den. The trick may be in following a stock-specific and sector-specific approach to stock picking. And the best time to buy will be at a time when the market (or the preffered stock)gives a good correction. Market always provides opportunities to a patient investor.

    Like (1)


    Apr 19, 2012

    "The Indian Govt has turned into a dictator!"

    So, what's new? All politicians are beggars before the elections and suddenly turn into dictators the minute they are elected to turn back into beggars, begging for our votes, when the next elections come around. This will continue as long as we remain sheep-like following their diktats without ever asking WHY?

    One of the power holders’ main activities is robbing Peter to subsidize Paul. No one wants to be Peter and everyone wants to be Paul, so the victims use various forms of bribery and other political games to curry favor with the power holders. And the whole civilization just rots away. I remember watching Milton Friedman in an interview once. He said that as far as he could tell, the collapse of every previous civilization — the Romans, Egyptians, Chinese and on and on — was preceded by the rise of a huge, powerful, ravenous government, which either grew up from within the civilization or was imposed from the outside. A big government means your days are numbered. Political power corrupts because it is, itself, corruption. It is the legalized privilege of using brute force on persons who have not harmed anyone. Only governments have this privilege. It’s what sets them apart from all other institutions. No one in a church, charity or business can use force except in self defense. Only governments have the legal privilege of initiating the use of brute force. Power corrupts not only their morals, but also their judgment. -- Richard Maybury

    Like (1)

    R VIyengar

    Apr 19, 2012

    Watching the market currently , one sees that the wild fluctuations are totally driven by sentiments.
    As Warren Buffet says, one should take advantage of it.

    My own view is that the average retail investor, does not watch the market on an everyday basis. Such behaviour is the prerogative of a day trader. Day trader in general is looking at few specific scrips and their movements. He should in my opinion be classed as speculator.
    An investor has to look at the value and the fundamentals which are long term issues.
    If you are selling a scrip / or a mutual fund it is only under two conditions viz. need for funds or to switch investment. My own take is that if you are switching first decide as to where are you going to park the money and sell only then.

    Like (1)


    Apr 19, 2012

    farmers off late get a good return on investment by selling the land and lead a good life.
    This ternd will lead to food shortage and increase in prices.
    secondly the mass consumption levels have gone up and the cause is all the Yojanas and Govt.aided wage rise and down trodded public get a min.wage of Rs.100 or more.
    Jai Ho for the inflation on food and other consumer products.

    Like (1)
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