The 'magic formula' for winning in the stock markets

Sep 8, 2012

In this issue:
» Govt loses more than what it earns
» Govt's disinvestment target getting tougher to achieve
» Will fuel prices go up or not?
» Chinese banks- ticking debt bombs?
» ...and more!

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Each and every one of us wants that one secret formula of earning whopping returns on our investments. If anyone stated otherwise, he/she is obviously lying. But while most investment gurus discuss the philosophies of how to earn these bumper returns, no one really gives out their secret formula. They would talk about the general process followed. Or give examples of their own successes. However the secret formula remains exactly what the name suggests - a big secret.

As a result most investors keep running from one site to another, from one book to another in the search of this formula. For such investors there is a book they can refer to if they wish to learn the formula of successful investing. This book is written by a gentleman named Joel Greenblatt and goes by the name of "The Little Black Book that Beats the Market". Written in simple language that is easy to understand, Mr Greenblatt takes his readers step by step on how they could form a portfolio of stocks. This portfolio construction is his secret formula for successful investing that he shares with his readers.

His formula is simple and aims at selecting stocks that deliver high returns on assets and are trading at low PE multiples. After identifying the stocks for the portfolio he even gives the way to maintain the portfolio in order to maximize returns. But if one goes through the examples he has used, one thing becomes blatantly obvious. His formula for success works only when applied in a disciplined manner over a long term. If you think that you can follow a disciplined life of investing and want to earn high returns, then you should go ahead and read this book.

 Chart of the day
In the highly volatile and uncertain times like the one we are living in currently, one wonders as to who will eventually survive. Herein Herbert Spencer's concept of 'Survival of the fittest' comes in to mind. The concept applies as much to investments as it does to evolution of life. You see in tough times only those companies that are 'fit' can survive. These are the companies with resilient business models, strong fundamentals and healthy balance sheets . This chart shows the results of one such study carried out by Morgan Stanley and printed by Economic Times. The study uses the Altman Z-score to study 5 different financial ratios to estimate the risk of extreme financial stress for 104 companies. In simple words it checks the strength of the company's balance sheet and financials to withstand tough times. Interestingly the companies that excelled in this were those that derive their fortunes from domestic consumption.

Source: The Economic Times, Morgan Stanley

Here are some interesting facts about the Government of India and its silly ways. Back in 2008, the government directed the State Bank of India (SBI) to offer low-priced loans to lure home buyers. Subsequently, the bank launched 'teaser' loans and made losses on them. The government being the majority owner of the bank was forced to pump in Rs 79 bn to shore up its capital. If not for the teaser rates, the government could have saved the funds for better use. But as it turns out, this is not an exception but the trend. This is how the government functions. In 2010, the 3G auctions earned it about 1,060 bn. But oil subsidies during that year sucked away a sum even more than that. Last year, it raised prices of diesel, LPG and kerosene to cut subsidies by Rs 510 bn. But at the same time, it reduced duties on these products by Rs 490 bn. In the current year, the government aims to raise Rs 300 bn from disinvestment. But on the other hand, it also plans to infuse a similar amount over the next few years in the ailing public sector airline Air India. That's not all! It plans to spend another Rs 280 bn on bleeding public sector firms. The list of such instances is long.

If you look at way the government manages its finances, it reeks of inefficiencies and contradictions. The government, or rather the managers of the country appear to be highly incompetent. Will India see a change of government in the 2014 General Elections? Time, and your vote, will tell.

Do you think India will see a change of government in the 2014 General Elections and will that help improve the economic conditions? Do share your comments with us or post your views on our Facebook page / Google+ page.

Divestment in various public sector companies was touted to be a major plan of action on the government's agenda. But for the past couple of years there has been virtually no movement on this front. For instance, in FY12, the government managed to raise only Rs 140 bn as against a target of Rs 400 bn. It cited weak market conditions for the same. This is where it has been caught up in a vicious circle. One of the reasons why markets have remained volatile and the economy has also slowed down is precisely because the government has not made any progress in terms of introducing reforms. This has largely been due to consistent opposition from political parties. Since Chidambaram took over the finance portfolio, divestment seems to have gotten a shot in the arm. But opposition from various quarters is bound to once again rule the roost. And whether markets will be ready to oblige will depend a lot on what the government does to break out of this deadlock.

India is a nation where reforms are more opportunistic with political motives taking over economic logic. No wonder the fuel price hike has once again been put on hold until next week. And so have been the hopes of bleeding oil companies and domestic economy. Forget diesel. The rising crude prices have turned even petrol, a deregulated product into a loss making product for oil refiners.

Any move to hike petrol prices next week is likely to be blocked by the opposition party. It can even jeopardize the hike on diesel, kerosene and LPG that are bigger loss contributors. That said, with oil companies at the risk of losing around Rs 2 trillion, we wonder how long the Government will be able to dodge the bullet.

And the debate continues to rage. It has barely been a few days when we discussed how a reputed economist believes in the China story and how the dragon nation will continue to march ahead in the coming years. Now, how about an opposite perspective? Minxin Pei, a professor and an expert on China is worried that Chinese banks could be hiding the mother of all debt bombs. Writing on, Pei is of the view that China's colossal stimulus package of 2009 and 2010 has led to a massive build up of bad loans in the Chinese financial sector. And the areas that could be the biggest source of these loans are the Chinese property market, its state owned enterprises and the local government financing vehicles. This is not all. Pei argues that the potential risk for a financial tsunami is the greatest in China's shadow banking system. However, is this all reflecting in the health of the Chinese banking sector currently? Certainly not. So this means that either Pei's assessment is wrong or the Chinese banks are hiding what could be the mother of all debt bombs. We for one would like to side with the gentleman than believe that all is well. For the simple reason that no nation has managed to achieve what China has without a big blow up. Indeed, China's stellar performance seems too good to be true. We humans aren't given to such perfection.

Global stock markets ended the week on a positive note. The decision by the European Central Bank (ECB) about unlimited bond buying to support the struggling European nations brought cheers to markets worldwide. The fact that job growth was slower than expected in the US was put aside by investors stating that this would result in the Federal Reserve taking steps to stimulate the economy. The Fed is expected to announce additional stimulus after its policy meeting next week.

The Indian equity markets registered gains on positive global cues. The markets rallied on the last day of the week on the ECB's announcement (by 2%). At the end of the special trading session held today, the Sensex ended the week higher by 1.8%.

Amongst the other markets, barring Singapore which registered losses of 0.5%, all ended the week on a positive note led by China (up by 4%) and Germany (up by 3.5%).

Source: CNNfn, kitco, Yahoo Finance

 Weekend Investing Mantra
"The individual investor should act consistently as an investor and not as a speculator." - Benjamin Graham

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13 Responses to "The 'magic formula' for winning in the stock markets"

Amit Sengupta

Sep 8, 2012

Yes- the next parliamentary election will fix up a new cocktail out of the old ingredients and No- the destiny of the people of India will not change. The politicians, by and large are not interested in parliamentary democracy. Did you notice the monsoon session. If BJP was not inclined to carry on with the normal proceedings, nor was the Congress. At least I felt so. They had a relief that the session was over. The PM, clean but silent, was made to issue a strong statement at the close of the session, that seemed to mark the opening of the door to back room dealings. Now there is no debate and no accountability to the hapless people of India, who have been kept poor and illeterate. The Govt collects education cess. What do the Govt do with this money? Is there a data to relate it to literacy of the people of India. How many schools could we have been opened, how many high quality citizens could we have grown with the money being talked about in COALGATE scam. Shame on us that we elect these people with the hope of a clean governance.


umesh Sharma

Sep 8, 2012

Any accounting practice will be more effective if it is simple.The Government has to do away with subsidies and at the same time rationalize the duties.There is no reason why Government should collect proportional amount of increased duties when international prices of petroleum products go up due to market forces.It results in direct inflation and additional burden to the nation. The subsidies encourage corruption and corrupt practices Hence it should be removed for good and compensation by other means should be provided to the weaker section in a very transparent manner.

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Sep 8, 2012

Regarding Govt. policies, it is to state that very highly qualified Prime minister failed on monetary affairs of India. If Govt. changes in 2014, i think without will to work, there will be no change. As most of the political parties are not willing to take strong steps on subsidy & financial affairs .

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