Sensex below 16,000. What should you do?

Aug 27, 2011

In this issue:
» Onion prices to strain household budgets
» Inflation hurts household savings
» 'One in every two Indian employees wants to quit'
» India's borrowings set to increase
» ...and more!

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2011 appears to be a bad year for the stock markets not just around the world but also in India. Our very own BSE Sensex has lost nearly 23% since the beginning of the year. So much so that it has slipped below 16,000 this week. This has definitely got most investors panicking. The top of the mind question for all is what should we do with our investments? Should we panic like others and sell. Or should we buy more?

We recently came across a newspaper article explaining and advocating the philosophy of 'value averaging' in such times. In simple terms, value averaging subscribes that investors should allocate some money towards equities every month. The allocation of the money should be based on the movements in the market. So the investor decides on a total amount that he wants to invest in the equities. He then allocates a certain percentage of this amount in the markets. In the months when markets fall, the investment is more. And when markets are rising, the investment is less. As a result, the investors are theoretically buying during falls.

It sounds like an ideal philosophy to have. Buy at lows and sell at highs. But the theory of value averaging may not be very easy for an average investor to practice. For it can be very difficult to judge the proportion by which investments must be increased or decreased every month. Instead the easier thing for investors to do would be to invest in fundamentally sound stocks as and when they are trading with reasonable margin of safety in valuations. And to accumulate the stock whenever valuations become more attractive due to price falls. But the important thing to note here is that the investor has to be patient. He /she cannot panic during falls but instead has to invest more. And when markets rise, the investor's patience gets rewarded in the form of huge returns.

Do you think that the concept of value averaging can help the investors in maximizing returns? Share your comments with us or post your views on our Facebook page.

 Chart of the day
Is there a recession in the developed world? Or is it headed towards recession? These are two questions which are on the top of the mind of most readers. Today's chart of the day shows that while it may not be in a recession already, the developed world is definitely headed that way. Data on the GDP (Gross Domestic Product) growth of the OECD countries shows that growth has slowed down in recent times. The OECD (Organisation for Economic Co-operation and Development) comprises of 34 countries which are mostly the developed countries. The latest GDP data shows that growth has slipped to its lowest in six quarters. If the trend continues, then the developed world will slip back into recession as it did in 2009.

Data source: Economictimes

It is time for onion tears once again! Quite literally we mean! Onion prices jumped between 20% and 50% in wholesale markets in Maharashtra over the past week. The steep and sudden rise in prices has been attributed to farmers' unwillingness to release their stock. To add to that decay of existing stocks due to high moisture content and supply disruptions have supported the price rises. A leading business daily has quoted onion traders' estimates of nearly 20 to 25% of overall stocks being damaged this year. The losses come close on the heels of the ubiquitous onion showing a price rise of nearly 346% in a month in December 2010. Then too supply disruption and poor storage were the main culprits. Government intervention in onion exports and import duties helped ease the matter. But it clearly shows that no lessons have been learnt. The government continues to claim that it is "monitoring the situation closely". Also discouraging exports is not the solution to solving supply side problems. Unless the issues at the core of food supply logistics are dealt with more diligently, we believe that the RBI can do nothing to solve our inflation problem!

India so far has had a very healthy savings to GDP ratio, one that would put its developed counterparts to shame. Powered by an annual average growth of over 8% between 2004 and 2008-09, India's savings rate surged to over 30% of GDP, including both physical and financial assets. But now for the first time in 13 years, the country's savings to GDP ratio has fallen below 10%. The culprit? Rising inflation and interest rates. Indeed, these have eaten into the disposable incomes of the Indians who are compelled to shell out more on daily expenses and loan repayments. Further, with negative returns on deposits in real terms because of high inflation and sharp slide in stocks, there is also the possibility of reallocation of financial savings to non-productive assets such as gold. To add to the woes of the average Indian, adjustment of bank deposit rates has been slow and equity markets have been quite volatile all of which has had a telling impact on savings. So far at least, RBI's rate hike exercises have not had the desired impact in terms of bringing prices down significantly. But when that happens, Indian households should see the savings rate pick up again.

Too many opportunities can be a bad thing. With economic liberalization and influx of opportunities in the private sector, job hopping has become a trend. So much so that one who sticks with the same firm for long is branded as lacking in skill and initiative. As per a survey done by a very famous HR consultancy Mercer, one in every two Indian employees is considering leaving the job. Out of about 2,000 private sector employees, 54% are considering a switch in the job. The same figure for those in age bracket 16-24, who are considered to be the ones with the highest potential, is even higher at 66%. The fact that such percentage was just 26% in 2004 brings us to full grips with the gravity of the situation.

However, the results are hardly surprising. The mushrooming placement agencies and job portals are a live testimony to the recent trend. The improving economy and abundant opportunities have become the biggest challenge for HR. With changing times, 'survival of the fittest 'applies not just to employees but stands true for firms as well. Because firms that face serious retention issues and talent flight can hardly go far.

It seems that the Government of India is all set to miss its fiscal deficit target. The reasons are many. On one hand, slowing economic growth largely due to weakening global economic environment will adversely impact the revenue collections. On the other hand, due to higher crude oil prices, expenses on subsidies on petroleum products and fertilizers are surging. The prevailing weak sentiments in the stocks markets are adding to the woes as it will impact the budgeted disinvestment plans as well. All this will widen the fiscal deficit gap. As a result, the Government of India would be left with no other option but to borrow more. According to a senior government official, the Indian government may borrow at least Rs 300 bn more than it has planned for the current fiscal year. This would put further pressure on the bond markets.

What are the options left for the government? There still exists a big gap between the local fuel prices and global crude oil prices. Another fuel price hikes may help government to cut its swelling subsidies expenses. The government should also take the right steps to curb the supply side constraints to tame the stubborn inflation. This would help maintain the growth momentum, which in turn help lessen the fiscal deficit.

Global stock markets finally found some ground to hold on to after weeks of disappointment. The growing worries about an impending recession in the US gave way to hopes of revival in the world's largest economy. The US stock markets closed the week up by nearly 4% post the much awaited speech by Ben Bernanke, the Federal Reserve Chief on Friday. The Fed Chief in his speech has indicated that further stimulus measures could be taken in an extended policy meeting in September. The global markets were weary that QE III could be avoided this time as the earlier QE II had resulted in high inflation.

Indian stock markets fell for the fifth straight week and were down by 1.8%. This was largely due to the global concerns growing ahead of US Federal Reserve Chief Ben Bernanke's speech regarding quantitative easing. Amongst the other world markets, France was the maximum gainer (up by 2.3%) followed by China and UK. However, Singapore managed an increase of only 0.5% over last week.

Source: Yahoo Finance

 weekend investing mantra
"Understanding how to be a good investor makes you a better business manager and vice versa." - Charlie Munger

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19 Responses to "Sensex below 16,000. What should you do?"

jiban paul

Aug 28, 2011

When you lost about thirty to forty per cent the only way
to recover losses should be to resort to value averaging,



Aug 28, 2011

bubying position



Aug 28, 2011

Very simply said than done. In moments of volatility in the markets, as of now, few investors will be disciplined enough to apply the 'value averaging' concept as emotions will also come into play. The most objective way to play a volatile market is applying this principle thru' SIP in Blue-chip growth funds.


Avinash Sangal

Aug 27, 2011

I fully agree with your views. On a personal level, I have been practising it for quite sometime now. I do it as a hobby and use it for managing my personal portfolio. I am not doing it for earning any money by giving advise on selection of stocks. I fully agree with your recent recommendation of 3 large cap stocks as "BUYS". Though, you are not willing to disclose name of these stocks, unless one subscribes to your services. However, it is very easy to identify the 3 stocks by your description. If Mr. Goyal is interested, we can exchange notes on personal level.


ramchandra varma

Aug 27, 2011

Yes,i am in agreement that buy at every dips.When market goes to southward then one should buy fundamentally strong stocks.


Tukaram Shetty

Aug 27, 2011

I agree with the newspaper article and your view on value investing. I do have a better solution for common investor who has say i.e. Rs 10000/- to invest per month. On the day he choose to invest, he must see the P/E of Nifty Index and invest 10000/15, 8000/17, 6000/19, 4000/21, 2000/23 respectively and remove his investment when Index PE above 25 and invest more than 10000/- when the PE is below 15


Aniket Girish

Aug 27, 2011

This statement regarding value averaging: "But the theory of value averaging may not be very easy for an average investor to practice. For it can be very difficult to judge the proportion by which investments must be increased or decreased every month.".. as per my understanding this statement is a little bit per Intelligent Investor by Benjamin Graham, this technique is also called dollar cost averaging..which involved investing FIXED amount of money every month or so..which ensures that when prices are high, less number of stocks are bought for the same amount and when prices are low, more number of stocks are is quite easy for an average investor to practise...n it should be probably applied to a low cost index fund..correct me if I am wrong.


Pranab Kumar Ghosh

Aug 27, 2011

Just wait & watch.The sensex may fell further due to the incompetent policy from the Govt.At present this unstable and they just passing the time to complete their tenure.No positive approach comes to enlighten the country.Most of top of the Govt.has reaches to their end of their age. To make the significant progress of the country the top of Govt.should be energetic & efficient by all means.It can possible when the fresh young blood came to the top of Govt. and they have to love their country honestly.



Aug 27, 2011

If Stock market is falling from year to year and every year then the this accumulation of stocks will not fetch the purpose. Intensive search for the fundamentally strong and growth oriented company should be done prior to investing.

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