The way to profit by going against the crowd

Sep 7, 2012

In this issue:
» No takers for office space in Dubai
» ECB announces its new bond buying program
» America's obsession with credit cards waning
» CRR is becoming a bone of contention
» ...and more!

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Understanding stock markets is something that has interested the investing community for the past many decades. And although there has not been much to differentiate one boom or bust from the earlier one at a basic level, more of these wild fluctuations occur again simply because of the inability to learn from past mistakes.

For instance, what would you do when we are in a firm bull market and most of the stocks keep gaining every day? Most often than not, during a bull market investors jump the bandwagon in the hopes that the markets will rise further and will reward them handsomely. Similarly, when pessimism takes over, some of the most solid companies are dumped. And although these present very good value, there are hardly any takers for these stocks. Many market participants also try the ever futile exercise of timing the markets. Stock markets may be volatile but that does not mean that they do no reward investors. They do. So how should one go about taking advantage of these fluctuations and reap good returns?

These questions have been answered by noted investor David Dreman in his book "Contrarian Strategy: The Next Generation'. Dreman has come out with some investment rules that address topics such as the reliability of future estimates, whether the past trend should be an indicator of analyzing the future, how to handle nasty surprises and so forth. More importantly, he talks about how to avoid herd mentality and has also outlined 4 strategies aimed at boosting portfolio profits. Interestingly, although many a time most of the true and tested principles of investing are known to us, we fail to follow them time and again. This has also prompted Dreman to address the topic of investor psychology all of which makes for fascinating reading. Indeed, if you want to equip yourself with some contrarian rules of investing and take advantage of market fluctuations, this book must surely find a place on your bookshelf.

We will continue to review more such books, which are a must have in an investor's shelf, over next few days. If you have already read the book let us know your views or post them on our Facebook page / Google+ page

 Chart of the day
When businesses slow down, some impact gets rubbed off on office vacancy rates in cities. As today's chart of the shows Dubai had the highest number of office vacancies in the second quarter of 2012 as the city still grapples with the property bust. Vacancy rate in Mumbai is also on the higher side and could probably be attributed to higher office rents not finding many takers in the city especially when the Indian economy has slowed down. Interestingly, London offices remained fairly occupied even though rents there were the highest during the quarter at a time when the UK economy is not doing particularly well.

Data Source: The Economist

The global stock markets seem to be celebrating a happy Friday. The reason behind this is not the upcoming weekend but an announcement by ECB. ECB President Mr Draghi has announced a bond buyback program for the crisis hit Euro zone. The highlight of this program is that there is no limit. So the ECB would continue to buyback bonds, thus driving up bond prices and lowering yields on the same. The idea is to lower borrowing costs for countries that are in trouble. This way such countries can borrow at cheaper rates to payback their older debts which are becoming due.

Now in theory this sounds like an ideal program. Continue to keep interest rates and borrowing costs low. Let the troubled nations borrow more to come out of their troubles. But the problem is different. The thing is that triggered the entire crisis is that these countries borrowed beyond what they could afford. And by letting them borrow more is not addressing the situation. Moreover it is just a matter of time that ECB and its supporters would eventually run out of funds to keep buying back bonds. Another alternative is to just let them suffer the pain of their misgivings. True the pain will be intense. But in the long run these countries would emerge stronger and better. And the stigma of their indebted past would get wiped out when this happens. By letting them borrow more albeit at lower costs is just giving them a short term fix. The problem is they need a long term solution.

If Bernanke is looking for any inspiration to get the US economy out of the woods, he need not go any further than his own country's shores. For following into the footsteps of an average US consumer is exactly what he needs to do. And what is it that the US consumer is doing? Well, he is cutting down on his debt. As per FT, America's obsession with plastic aka credit cards has slowed down considerably post the 2008 crisis. To be precise, the outstanding credit card debt in the US is full 22% lower than what it was during the 2008 peak. What more, even the total consumer borrowing, which includes mortgage debt has also come down sizably.

Of course, some of this reduction can be attributed to circumstances forcing the people to cut back debt. But as per the article, voluntary factors are also playing a big role. This certainly is the right approach to take we believe. And not what the US Fed seems to be doing. The US central bank is trying to cure a problem of debt with still higher debt. While this solution may work in the short term, it will bring nothing but even greater pain in the long term we believe. Thus, it is time the Fed gets rid of its wrong tactics.

The Reserve Bank of India (RBI) is not known to be a spineless entity. Despite stiff resistance from the Finance Ministry, the central bank has stuck to its ground on several occasions. This time the object of conflict is the cash reserve ratio (CRR). Currently at 4.75% of banks' deposits, the reserve is one of RBI's favourite monetary policy tools. It is supposed to give RBI enough teeth in fighting inflation. For banks need to park these funds with the central bank and cannot use it for lending. The tightened credit therefore helps in reducing price levels in the economy. At least temporarily. However, it is true that the CRR has not had enough impact on India's steep inflation levels in the recent past. To add to the banks' woes, the reserve does not even earn any interest from the RBI. At a time when bank profits are under stress, such non-remunerative reserves are definitely an eye sore! And we are not surprised with the government siding with the bankers in their protest against the CRR. After all this makes their case against the RBI stronger. We only hope that this scuffle does not weaken the RBI's conviction.

Indian banks not only survived but thrived in the wake of the global financial crisis. But, 4 years later, they are faltering on the back of issues and political logjams. The 2G scam, the poor financial health of state electricity boards, the Kingfisher and Air India fiasco wreaked havoc on the balance sheets of banks. And now the Coalgate scam has been added to the mix. The government is worried that loans given by banks to the 57 companies named by the Comptroller and Auditor General of India (CAG) over irregularities in allotment of coal blocks may turn bad. Bankers have been asked to collect information on such debt. But evaluating this it is extremely complicated as the resolution still isn't clear and it may be too early to jump ship. However, the deteriorating asset quality of banks needs to be underscored. The non-performing assets (NPAs) of Indian banks rose 46% to Rs 1.4 trillion in FY12. Plus as per an assessment by the central bank, a fifth of restructured loans in the system may go bad. Factoring in the Rs 2.2 trillion of restructured loans on the books of banks as on March '12, the proportion of bad loans in the system could rise to a whopping 3.9% from 2.9% in FY12. If this comes true it could wipe out a significant portion of bank's profits. Let's hope Indian banks can survive this crisis as well as they did the last one.

And while we are on the topic of the coalgate scam, the Supreme Court has said that the route of auction has been found to be the best method for alienation of scarce natural resources. It will also help in curbing large scale corruption in all sectors. At the same time India Inc has urged the government to adopt transparent methods for allocation of natural resources. So is the auction route the best method for allocating resources? While auctions could be a preferred option since they bring about transparency and secure the best possible price, revenue enhancement cannot be the only consideration while allocating natural resources. In deciding which method of allocation is appropriate in a given case, one has to ask why the property or entitlement in question is being disposed of in the first place. The method of allocation would depend on the government's objectives which would, in turn, depend on the reason for disposing of the asset in question.

In the meanwhile, the Indian equity markets rallied through the session today. At the time of writing, BSE Sensex was up by 316 points (1.8%). All sectoral indices witnessed gains with metals and banking stocks up by more than 2% each. Asian stock markets too displayed positive investor sentiments.

 Today's investing mantra
"Our experience has been that pro-rata portions of truly outstanding businesses sometimes sell in the securities markets at very large discounts from the prices they would command in negotiated transactions involving entire companies" - Warren Buffett

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    3 Responses to "The way to profit by going against the crowd"

    prashant maheshwari

    Sep 8, 2012

    hahahahahahahaahahahahahaha, always said but implemented by none



    Sep 8, 2012

    In this context, let me share my experience with you and readers. It is not reading a book, but God's grace and me not being greedy that has helped me for gains from the market. During 1995-96, I sold 100 Flex Engineering(allotted @ Rs 50/-)for Rs 440/- and 100 Electrex for Rs 120/-(allotted @ Rs 30/-) and bought a residential plot which now values to about Rs 18 lacs. Those shares are extinct now ! I am for Equity,but I learned this lesson for life which no book would have told me THEN.
    Yours faithfully,


    sunilkumar tejwani

    Sep 7, 2012

    true to his color, Mr. Mario Draghi has done true to his tradition. Give more syrup to a diabetic patient. Like What Goldman Sachs has been doing. Create more toxicity to kill existing toxicity. He has time and again proved, he is a true ex- Goldman Sachs employee, as unprincipled as Goldman Sachs is. God save the European Central Bank and the Euro!

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