The hardest part of investing...

Jun 28, 2010

In this issue:
» World's best bond fund manager eyeing stocks
» Govt. kick-starts deregulation: Do we expect more to come?
» MF industry needs to infuse confidence and trust among investors
» Financial inclusion in equity markets difficult: SEBI
» ...and more!!

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It's really hard to do something that goes against the common view. And it gets even harder when one talks about investing. After all, isn't it a hard thing to do to buy stocks when everyone else thinks you are dumb?

But then, while you as an investor might understand this, did you implement it when the time came? For instance, in early 2009?

Even when you see all around you, you find that fear factor is back in the market. Economists are worried about European economies on the verge of collapse. The US is anyways going downhill. India has its own set of problems in terms of rising inflation. Investors also fear of higher interest rates in the future. Stock valuations look expensive. The market as a whole is very volatile.

In short, for each positive financial headline you read today, there are five that talk about crises! Actually, a leading business daily today talks about why investors must avoid increasing their stock market exposure as of now!So, are you willing to buy stocks now given the risk of people thinking you are acting out of sense?

See, most investors' minds are not attuned to thinking unlike the crowd. And that is why most investors are not rich as, say Warren Buffett. But if you would like to get richer over the next 5-10 years, investing in safe stocks at low prices, when nobody else is investing, is the way to go. They might call you dumb, but then...

 Chart of the day
Today's chart showcases the P/E of the BSE-Sensex at various low levels in the past. We have taken the P/E as on the day the Sensex was at its lowest post a major market crash. As can be seen here, the P/E at the lows of February 2009 was around 12.8 times. This was still higher than the P/E of 10.9 times that the Sensex was trading at the end of 1998, after the Asian financial crisis.

Data Source: BSE

The world's best bond fund manager now has a bad outlook for, well, bonds! We are talking about Bill Gross of Pimco, who manages over US$ 200 bn through his Total Return Fund. Gross believes that "bonds have seen their best days". As per him, the three-decade rally in bonds will eventually fizzle out as 'nations sell record amounts of debt to fund their deficits, spurring a return of inflation and rising interest rates'.

So, what's likely to be Pimco's next best investment target? 'Equities' definitely is one of them! As he acknowledges, "Over the long term, stocks return more than bonds when appropriately priced at the beginning of an investment period."

Well, Gross' Total Return Fund has outperformed 97% of its fixed-income rivals during the past decade. Let's see whether he manages a similar performance handling equities now!

Confidence has to be the most underrated word in the field of finance. How most financial markets operate across the world based to a large degree of confidence is nothing short of breathtaking. Yet, it finds merely a passing mention in most financial journals. Thankfully its importance is not lost on some very influential people.

One of those surely has to be the current CEO of the Vanguard Group, amongst the world's largest asset management companies. William McNabb, as he is known, believes that restoring investor confidence in the markets is a top priority for most investment advisors. "Clients want to understand whether markets will work the way they are supposed to work," McNabb noted at a recent investment conference. Indeed!

The volatility in the financial markets in past couple of years would have certainly dented investor confidence. So much so that some of them must have left wondering whether buy and hold really works and whether the idea of diversification really matters. Indian investors may not have suffered that badly. But the asset management industry here could certainly do with a lot more confidence and trust. It is time it does away with its short termism and thinks about a long term win-win proposition for all.

The primary goal of financial inclusion is to give an identity to millions of poor and give them access to basic financial services. And this has been touted as an eye catching theme in recent times in the financial sector. That may very well be. But SEBI Chairman Mr. C.B. Bhave thinks differently when it comes to India's equity markets. He believes that India is not yet ready for financial inclusion in the equity markets.

He opines that for banks, financial inclusion means to include the very poor. The same, however, cannot be said for mutual funds. Given that equity markets tend to be risky, the poorer lot would not be comfortable investing their small incomes in equities. Mr. Bhave has also taken the opportunity to take a dig at mutual funds. He opines that the companies should not get involved in a rat race to sell (or mis-sell) their products. They should first understand who their target customer is!

We have had our doubts all along. But on the face of it, the government has taken a step in the right direction. We are talking about fuel price deregulation. The hikes last Friday are welcome.

But the larger questions remain - who will bear the under recoveries that remain especially on kerosene and LPG? How will the government deal with the inflation situation? What happens when crude oil prices move up? It may be noted that India freed fuel price controls in 2002, only to bring them back once the rise in global crude prices started impacting inflation. And most importantly, how will the government deal with the political opposition?

Hence we remain circumspect about the durability of these reforms. Nonetheless, even if all this turns out to be mere tokenism, at least it raises hopes that the government will reform more sectors in the future.

Anyways, Indian markets had a decent run today. The BSE-Sensex was trading with gains of around 175 points (1%) at the time of writing this. These gains were led by buying in stocks from the oil & gas, and power sectors. FMCG stocks were the lone losers today.

Among other key global markets, while China (down 0.7%) and Japan (down 0.5%) closed in the red, Hong Kong (up 0.4%) and Singapore (up 0.6%) closed with gains.

He is the man behind one of India's most successful private sector banks. And his astute sense of building a long term business is one that corporate India respects. Hence we were all ears when Aditya Puri, chief of HDFC Bank, spoke with a business channel. The veteran banker seemed very sanguine about the possible rise in interest rates. Markets may fear further tightening of liquidity. But Mr. Puri believes that a small rise in interest rates will do well to hedge long term growth.

He justifies that not controlling inflation at current levels may spur short term growth. But this move could shave off some growth over the longer term. He also believes that with good monsoon, supply side constraints may ease off. And with the new base rate system, banks may find it easier to re-price loans. Thus, it is unlikely that a marginal rise in interest rates will affect growth to a considerable extent. A sound logic indeed!

 Today's investing mantra
"Over many decades, our usual practice is that if [the stock of] something we like goes down, we buy more and more. Sometimes something happens, you realize you're wrong, and you get out. But if you develop correct confidence in your judgment, buy more and take advantage of stock prices." - Charlie Munger

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2 Responses to "The hardest part of investing..."

Atul saxena

Jun 29, 2010

Sir, your comments are very good and I want your subscription but I am not in a position to pay before 5th July 2010.


suresh AS

Jun 28, 2010

De-regulating petrol is good. If there is international price of crude oil is low then petrol price reduces on every fortnight. Is auto/taxi change their price every fortnight depending on petrol price? Is vegetable vendor reduce the price depending on petrol price?
What is the portion on duties and taxes on petrol? taxing on petrol is used as easiest way to collect extra fund from large public (direct/indirect)

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