Is the RBI a Sabre-Toothed Tiger?

Sep 29, 2015

In this issue:
» Have investors wrongly timed their entry in to Mutual Funds?
» Housing for all by 2022: Fact or Fiction
» Market round up
» ...and more!

Here's an interesting exercise for you. Imagine you've travelled back in time. The year is 20,000 BCE. Civilisation does not exist. You're living in the wild. Survival of the fittest' is in full force. You and your clan must hunt to survive.

One fine morning, you and a couple of your tribe folk head out to scout for wild game. There's plenty of grass for your prey to hide. You move slowly, silently, and watchfully. Suddenly, you hear a cracking sound. Something has moved in the bush near you. What do you do? Will you wait and figure out the source of the noise? Or will you run away as fast as you can?

The answer? In this case the correct thing to do is to flee. Why? The noise could have come from the feet of a harmless creature, maybe even your prey. But what if it was a sabre-toothed tiger crouching nearby, waiting to pounce on you? Does it make sense to hang around? By taking action, you have saved yourself (best case) or you have wasted a few calories (worst case).

Now let us come back to the present. Why did we indulge in this little exercise today? You see Mother Nature has endowed us with the ability to take swift and decisive action. This was vital for human evolution. The sabre-toothed tiger killed those humans, who did not run away. Therefore, they could not pass on their genes to us. That is why we feel normal reacting to many things even if our actions are not rational.

This is especially true when our money is on the line. When it comes to money, most people are still stuck in the hunter-gatherer age. They feel it is important to 'do something' when faced with a new situation. What better example of this 'action bias' than the RBI's move today to cut the interest rate by 0.5%?

The frenzy in the market came as no surprise to us. Investors reacted in the same way as the human who ran away from the Saber-toothed tiger. The intra-day short covering was swift. But the RBI is not a Saber-toothed tiger. You do not have to react to its every move.

Here's what you should do. Pause, relax, and put things in the right perspective. The chart below will help. The repo rate is back to the level it was about two and a half years ago. It is neither low nor high right now. So there is no need to either celebrate or be depressed.

Repo rate back to 2011 levels

This ability to 'not react' is what separates investors from traders. As an investor, it's crucial to understand this. It is very easy to get carried away. But it will not do you any good to sell fundamentally strong stocks and jump into the bad ones hoping to make quick profits.

The next time you feel the 'action bias' affecting you, remember there are no sabre-toothed tigers waiting to pounce on you. You can make the biggest profits in the market by holding the best quality businesses for long periods and not trading in and out of stocks.

What do you think? Do you think it is appropriate to react to the RBI's every move? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
There was an interesting article in the Business Line today. The authors discussed how the retail investors may have got their timing wrong - in sense of buying in to the market in recent times.

Here are some stats. Asset under management rose from Rs 1.27 trillion in September last year to Rs 1.96 trillion in June this year. And a large part of this has been led by retail investors. For instance between March and July 2015, investors poured in more than Rs 451 bn into equity mutual funds. As a result of which, the mutual funds poured in over Rs 392 billion in stocks between April to August 2015. During the same period, Foreign Institutional Investors (FIIs) - who have a dominant share in Indian stock markets - were net sellers; selling stocks worth Rs 90 bn.

Today's chart of the day indicates the share of various investor categories as of June 2015. In the equity funds, the retail investors have the largest share of about 53%.

Have retail investors got their timing wrong?

The authors also went on to comment that all of this has been happening at a time when the financial performance of Indian companies has been dull; and that investors are investing at a time when there is considerable global uncertainty, thereby making the actions of the FIIs quite uncertain.

Simply going by history, retail investors (as a category) have not done well. A large part of this is because of their timing of the markets i.e. they tend to enter at a time when the market are rising - when stocks are not cheap in terms of valuations. We are not in any way saying that this time the situation may be the same. However, it would not be wrong in saying that markets have not been attractive in recent times.

As per us, timing the market is not something that investors will never be good at. So a way they can differentiate themselves from others is by extending their holding periods. Not to mention that the practice of low P/E investing is something that works well as well over longer periods. There have been multiple studies done that indicate the same results - that of performance being the strongest when money is put in at a time when the situation is dull.

Housing for all by 2022 is a commendable and ambitious target set by the government. And it seems there’s been a recent development regarding the same. The government’s think tank NITI Aayog has approved the proposal of restructuring the rural housing scheme Indira Awaas Yojana. Some of the changes proposed include increasing the house size to 25 sq mt (from 20 sq mt), making toilets a mandatory part of the house. These are expected to increase the cost from Rs 75,000 to about Rs 1.2 lakh per unit. Doing away with standard block designs and customizing the same as per the needs is another key change.

The target is to provide houses to nearly 30 million people over the next seven years. The cost involved would be Rs 2.5 trillion for the same. This amount is to be drawn entirely from the Union Budget. As reported by the Economic Times, the scheme is likely to be renamed to The National Mission for Rural Housing.

Subsidising the housing scheme and routing it entirely through the Union Budget may not be in our best fiscal interest. And therefore the execution of the said plan remains questionable. However, a thrust on building low cost housing could certainly be a big push to rural income levels, which could spur consumption growth in rural India. As our readers know, the growth in rural income and consumption levels is one of the key signs of the Megatrend that we expect select Indian companies to benefit from.

At the time of writing, the Indian markets were trading firm, with the BSE Sensex up by about 88 points or 0.3%. Stocks from the midcap and smallcap spaces were however trading weak, with their representative indices marginally lower. While stocks from the metal and oil & gas spaces were the least preferred, those from the realty and banking spaces were in demand.

 Today's investing mantra
"The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch. The problem when you are a money manager is that your fans keep yelling, 'Swing, you bum!"- Warren Buffett

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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2 Responses to "Is the RBI a Sabre-Toothed Tiger?"


Sep 30, 2015


It is not the question of money. For persons in the stock market they can subscribe to anything. I think i have remitted some money some fifteen days back i dont see a single stock not recommendation/even analysis.


Krishna Murthy

Sep 29, 2015

In India there are innumerable way the people earn their food to live. Their occupation is critical for them to lead life. It is not possible for every craft man to learn(expert) or gamble to make money. Their aim to have expertise in their occupation. Unfortunately the govt, business people, politicians, bureaucracy, judiciary, every body wanted to loot these innocent and dedicated people. To carry out loot they make rules and guidelines with cunning heart.

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