Can stock markets teach you how to be brave?

May 14, 2011

In this issue:
» Has your paycheck seen a hike?
» Will the housing boom hit smaller cities in India?
» Election results: People say NO to corruption and YES to governance
» Will there be currency turmoil over the next 2 years?
» ...and more!

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What do investors need to be successful? Good financial acumen, an ability to pick the right stocks, number crunching skills, or a strong stomach? Having a strong stomach seems underrated. But judging by what the world has been through over the past half-century, it may be your best defense. Warren Buffett himself said,"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market."

Based on data from Fidelity, one of the world's largest mutual funds, over the past four decades the US has been through six recessions. Globally, bubbles have burst, wars have broken out and various crises have come to the fore. Chief being the US Subprime mortgage crisis, the tech bubble, 9/11, and the Gulf War. In 2011 itself, two major macro events which shook the world were the turmoil in the Middle East and the Japanese earthquake.

Economies will keep entering periods of hardship. Not a year has gone by where something significant hasn't happened in the world. But, what prevails is human nature. The ability of a person, or a company to pick up the pieces, wake up the next morning, and try and make things better. All these events listed above had serious ramifications on stock markets, when they took place. But, markets have always bounced back. And most times stronger than ever before.

Jim O'Neill, chairman of Goldman Sachs Asset Management and the person who coined the term BRICS also echoes the same sentiment. He says that investors should stop worrying so much. Post the 2008-09 crisis, investors are overly concerned about the prospect of 'black swan events'. These are extremely unlikely, low probability events, with severe consequences. O'Neill however states that, "Every little problem that crops up somewhere in the world is not going to create another black swan". He believes that there is far too much conservatism, with investors holding onto cash instead of investing their money. There will always be bumps along the road of investing, the question is do you have the stomach for it?

There might be some downside risks to your investments, but do you look at managing these risks. Or are you thinking of staying away altogether in anticipation of the next crisis? Share your comments with us or post your views on our facebook page.

 Chart of the day
India, China both boast of huge populations, running into billions. Despite the favorable demographics, the question is whether the working population is actually talented? Well, as today's chart of the day shows, the BRIC nations feature very dismally in the Economist Intelligence Unit's Global Talent Index. China and India are ranked no. 33 and no. 35 respectively. No other nation in the world is growing as quickly as these two countries. Multinational companies looking to set up shop are frantically looking for talent. But, an adequate pipeline of employees equipped to step into the breach is just not available. The US on the other hand takes the no. 1 spot on account of its top universities. One in three colleges, in the US is ranked in the top 500 globally. These colleges churn out graduates who are well prepared to take on the world.

Either way, as India and China keep on growing, employees with the requisite experience and training become increasingly more desirable. And as a result tougher to hold on to. Employee retention has thus become a big new challenge in these emerging markets.

Source: Global Talent Index Report: Outlook to 2015, by Economist Intelligence Unit

In a similar vein, India has the highest wage inflation among its Asian peers. As per Federation of Indian Chambers of Commerce and Industry (FICCI) estimates, average salaries in India rose 15% in 2010. Aon Hewitt, a global human resources company, estimates that salaries will go up 13% this year as well. On the other hand, China which is growing faster than India is forecasted to have a 9% wage hike.

The level of economic activity as well as the demand and supply of talent are the main factors for the rise. But in India, the inflation factor is also playing a crucial role. As per Aon's estimate, double digit salary increment will continue in India for next several years. These will in turn further hurt company's profit margins which are already under pressure due to rising raw material and energy costs.

Population explosion and overcrowding of metros saw the housing boom spread to the tier 1-2-3 cities. With space constraints in metros surfacing, it seems that boom is expected to filter into the smaller towns and cities.

However, we believe that the shift from tier 3 cities to smaller towns would be challenging. And the main reason is connectivity. For any location to attract any kind of residential or commercial interest one needs to have a proper road infrastructure in place. Take the example of Yamuna Expressway. It connects Noida and Agra in the state of UP. There is a housing project coming up alongside the expressway. Some area has already been sold off along the road even prior to the completion of the project. Thus, there has to be some connectivity mechanism in place for any area to garner housing interest. There was some road infrastructure in place between metros and tier 1 cities. But there are major connectivity issues between tier 3 cities and smaller towns. So, perhaps we have to wait for some time before the housing boom ultimately shifts to the smaller towns and cities.

The verdict was announced for the recent state assembly elections. West Bengal saw an end to the 34 years rule by the Left government marked by a convincing victory for Mamta Banerjee of Trinamool Congress. This is a kind of revolution for the state whose people have finally voted against the bad governance. In the state of Tamil Nadu, Jayalalithaa of AIADMK won against the DMK, whose leaders were found to be involved in the 2G telecom scam. In this case the people of Tamil Nadu have voted against corruption.

The common message that comes out is loud and clear. People want good governance and political reforms. They won't easily accept corruption and arrogance of the people in power. Now it is upon the new political leadership in these states to understand this message and deliver to the people who elected them. And if they do so, they will surely reap the benefits of getting re-elected for the next term as well.

The developed world is fighting to get their economies to grow. The developing world is growing but is fighting higher levels of inflation. As a result both are shifting blame from one to another and blaming each others' currencies for their problems. Amidst all this, legendary investor, Jim Rogers has predicted that the turmoil the world's currency markets will reach crisis levels within the next two years. He opines that the way things are going; the world would see a currency crisis or at least a massive downfall by 2012-13. And, the one to blame for this would be the US. Thanks to gross mismanagement at their end, the US dollar is expected to lose its status as the world's dominant currency.

In recent times, the US dollar has witnessed serious declines in value. At the same time, countries like China are setting up pacts with other countries to use alternative currencies limiting their dependence on the dollar. So will the greenback actually become redundant? The way things are going, it certainly looks sooner or later the world would have a new currency standard. As to which currency would take the baton from the dollar, only time will tell.

It was a lackluster week for the majority of the world's markets. Commodity concerns, reappearance of Greece's debt issues and concerns over further tightening in emerging markets added to the weakness in world stock markets. The biggest loser of the week was Japan down 2.1% while Singapore was the biggest gainer up 2.1%. Besides Singapore, Hong Kong closed the week up 0.5% while Indian stock markets were marginally up by 0.1% on the back of assembly election results which went in the favor of the ruling Congress party and its allies.

In Europe, Germany was the biggest loser down 1.2% while France and UK closed the week down 1% and 0.9% respectively. In the Americas, Brazil was down by 1.8% while US was down by 0.3%. China closed the week down 0.7%.

Source: Yahoo Finance

 Weekend investing mantra
"Just as a cautious businessman avoids investing all his capital in one concern, so wisdom would probably admonish us also not to anticipate all our happiness from one quarter alone." - Sigmund Freud

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3 Responses to "Can stock markets teach you how to be brave?"


May 14, 2011

There is no other way to be in the stock markets other than to really be in it all the time. The most important factor is to buy cheap, plan to hold for several years and always have enough cash to buy more of the already cheap stock in case it falls.

Yes, having the stomach to see it fall is necessary but if you are buying cheap at all times (e.g., single digit P/E always), then you need less of stomach to bear the drop in price than when buying simply because some investment advisory (even Equitymaster included) is telling you to buy a stock.



May 14, 2011

When greed prevails and governance takes a back seat, unpredictable events become more likely.

Greed is human nature (that is why philonthrophy is uncommon) and lesser said the better about "Governance" globally as well as locally.


jagdish sanghvi

May 14, 2011

I dont think stock markets can teach you to be brave, but will create situations requiring one to be brave. Learning to be brave would solely depend on one's mental make up and maturity and focus on the subject.

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