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Stocks Don't Learn from History. Why Should You

Sep 8, 2017
In this Issue:
» Retiring Indians Face a Double Whammy
» Auto Industry in Midst of Disruption
» Market Update
» And more...
00:00
Tanushree Banerjee, Co-Head of Research

26 July 2005...

The day is etched in my memory.

One of the worst floods in Mumbai history.

I walked home waist-deep in water...

After spending the night at the office.

The thing is, that flood should not have come as a surprise. Cities in Gujarat were flooded just a month before...

We could have prepared better...

It's similar to what happened in December 2015 when Chennai's drainage systems failed.

The government said the system was designed for the 'worst-case scenario'.

The floods forced them to rethink their definition of 'worst case'.

Japan sees more floods, earthquakes, and tsunamis than almost any other country...

That's why the Fukushima reactors were protected by ten-meter-high seawalls.

And they still weren't high enough...

When the tsunami struck in 2011, the gigantic waves effortlessly topped the walls. In just seconds, the basements were flooded and the emergency diesel generators were disabled.

As we all know, the result was a massive nuclear hazard.

The recent floods - in Mumbai and several other cities worldwide - prove nobody has learned anything.

Of course, it's easy for those unaffected to question if the disaster could have been averted.

'If only the city planners had more safety buffers in place...'

But history is full of 'ifs'...

And so are the stock markets.

Every market crash, more or less, happens for the same reason.

Only the quantum differs.

The biggest BSE Sensex intraday crash was 826 points on 18 May 2006...

That is, until 21 January 2008, when the Sensex fell 1,408 points.

No one thought the market could fall more than 800 points in one day...

Until it did.

In every market crash, a new set of investors loses a lot of 'new money'...but they learn the same old lesson.

What lesson?

The importance of safe stocks.

Warren Buffett famously said, 'Predicting the rain doesn't count. Building an ark does.'

Investors who learn from history build 'arks' into their portfolio.

Indeed, the safest stocks in the portfolio and the margin of safety in others are the arks.

We all know any number of catalysts could bring the markets crashing down.

Geopolitical risks...poor earnings...excessive valuations...

And we all know the next crash could bring markets down much more than the 1,400 points in January 2008 (which is, relatively, nothing today...).

Predicting the crash does not count. Building an ark into your portfolio does.

The smartest investors are getting ready now.

02:30 Chart of the Day

Indian retirees are the most vulnerable in the world - as per a recent RBI report. The reason? The borrowing and investing habits of Indian families. Irrespective of class, most household wealth in India is tied up in real estate and gold.

Meanwhile, investments in financial assets and pension funds remain miniscule - less than 5% of total household wealth. This is in contrast with households in other countries that invest significantly in financial assets and pension funds but have almost no gold holdings.

Indians Marred by Lopsided Investments And Unsecured Borrowings


The borrowing patterns of Indians are widely different than other nations, placing them at a higher risk. Unsecured loans - borrowed at high interest rates from unscrupulous money lenders - are 56% of all liabilities.

Nearly 46% of family finances are devoted to repaying unsecured debt borrowed by seniors, compared to 19% in the US and 15% in China. That means many elderly folks face the double whammy of unsecured debt without the security of a pension fund.

03:00

Equitymaster Insider Ankit Shah recently revealed the dark side of the IPO grey market to his readers. But that was back when the market was red in the face about the DMart and CDSL IPOs. Of course, now the insurance IPOs are rearing to go...

ICICI Lombard will open on 15th September. Insiders can expect an IPO analysis and valuation by the 14th.

But if you're still wondering whether to invest in insurance IPOs in the first place, help is at hand.

Download our guide - Handbook of IPO Investing (with special focus on Insurance IPOs).

04:00

Changes to the government's emission norms have hit the auto industry, which was already reeling from the eight-month ban in FY16 on diesel vehicles in the NCR.

In April this year, the industry found itself in the dock once again when the government implemented Bharat Stage-IV norms and prohibited the of sale of Bharat Stage-III vehicles.

The government also decided to expedite the transition to BS-VI standards to 2020 - two years ahead of the previous implementation date and completely leap-frogging the BS-V level.

The transport minister's recent directive reflects the government's determination to bring out sweeping changes to the industry. The minister wants automakers to transition to vehicles that run on green fuels - electricity, biodiesel, ethanol, and compressed natural gas - or face the music. As per the Paris climate accord, the country has committed to shift to an all-electric auto fleet by 2030.

The writing is clearly on the wall: Unless the capital-intensive auto manufacturers swiftly take steps to comply, they face the risk of becoming obsolete in this disruptive race.

04:30

Indian equity markets opened the day in the green. At the time of writing, the BSE Sensex is up 94 points and the NSE Nifty was up 29 points. The midcap and small-cap indices are up 0.3% and 0.5%, respectively. Stocks from the consumer durables and capital goods sectors are the major gainers.

04:56 Investment Mantra of the Day

"We don't have to be smarter than the rest. We have to be more disciplined than the rest." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Madhu Gupta (Research Analyst).

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1 Responses to "Stocks Don't Learn from History. Why Should You"

David Dsouza

Sep 8, 2017

Excellent practical observations and conclusions. Strangely, this latest edition addresses precisely the pains I am experiencing as a retired individual striving to be financially stable.The 46% quote is spot on.

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Equitymaster requests your view! Post a comment on "Stocks Don't Learn from History. Why Should You". Click here!