The biggest reason you should not invest now

Nov 1, 2010

In this issue:
» FIIs maintain their stronghold on Indian companies
» List of expensive stocks just getting longer
» China needs to consume more, US needs to invest more
» Gold will be the last one standing
» ...and more!!

------------------------------ Now or Never ------------------------------
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"Why do you want to invest in stock markets?" comes the question. "To make money," pat comes the reply. "And why do you want to make money?" comes the cross-question. "You see, stock markets are rising and I am making good money. I have a credit card debt and a personal loan on me, so I want to make money to repay these as early as possible," is the instant reply.

Well, if you find yourself as the one who wants to make money from stock markets to repay his or her credit card or personal loan, or for that matter any short term loan, you must stay out of the stock markets!

It is important to understand that stocks are not money making machines as these are made out to be in bull markets. Stock prices can be violent in the ways they move, and it does not take enough time for markets to crash whenever it sees problems on the anvil.

So, the heart of the matter is that if you have a short term debt to repay and are looking at your stocks to bail you out, stop looking at stocks at all. A sharp correction in stock prices can just compound your financial problems. First repay your debt, then invest in quality stocks...and that too from a 5-10 years perspective.

 Chart of the day
Today's chart shows the count of BSE-500 stocks that have been trading at P/E multiples of greater than 30 times at different time periods. The highest count was in, as expected, the heydays of 2007 end, just before the bubble was about to burst. As we stand now, the count is again on the rise. Is this a warning bell of an impending correction? It seems to suggest so!

Data Source: CMIE Prowess

Retail investors and domestic institutions are cashing out of the market. As a result stocks are facing a foreign invasion. FIIs now control 1/3rd of the free float (shares not held by promoters) of the top 500 stocks on the NSE. In the 2007 rally, FIIs reduced their holdings as the markets trended upwards. This left retail and domestic investors in the soup when the imminent crash came. In this rally, FIIs are the only ones moving the markets. As of June 2010, FIIs held 31.8% of the free float while retail investors held 18.4%. Three months later, FIIs hold 34%, while retail investors hold 17.8%. Indian investors seem to be following the 'once bitten, twice shy' philosophy. Anyway, at these overall stretched valuations, the downside risks are high.

The US Fed is just not getting right its measures to bolster the US economy. It seems ready to announce plans of injecting another big dose of liquidity into the system. Branded as Quantitative Easing 2, or QE2, the chances of this second round of liquidity doing any wonders appear remote, especially when the first round has hardly done much to pull the economy out of the slump.

In fact, the consensus among economists is that this stimulus is likely to do more harm than good. For starters, the Fed is hoping that more quantitative easing will drive down interest rates. And induce consumers and businesses to spend more. But the current rates are already at an all time low. And consumers are hardly spending. Plus, there is hardly any headroom for the Fed to reduce rates any lower. The fear is that in the future this kind of easing will only magnify asset bubbles in other markets, raise the specter of inflation and spark currency wars as the dollar devalues.

More importantly, stimulus itself is not expected to have any positive effect on the US economy. Already, the US deficit has reached alarming levels. And so, we wonder why the US is hell bent on loosening its purse strings especially when its European counterparts are beginning to tighten up their act.

We seem to be living in an historical moment. But the irony is, as an article in Bloomberg points out, we are largely unaware of it. And what is this historical moment? Well, it is the end of the current currency regime with the US dollar as its centre. The transition though is not going to be smooth. It is on the contrary going to be extremely chaotic. This is because the people who are in charge of preventing the world's financial system from getting dysfunctional are in fact leading us to it.

The world's central bankers seem to be taking a very theoretical look at things. They believe that by engaging in quantitative easing, just the right kind of inflation can be created. An inflation which will make people spend and take the world towards renewed prosperity. Hence, these bankers are printing money left, right and centre. However, such an approach is full of risks.

The ability of financial markets to overshoot cannot be emphasized enough. And if at all there is overshooting, the economy will become even more fragile and unpredictable. Amidst such a scenario, gold is the only metal that will be left standing. Hence, it will not hurt if a certain percent of one's investment is put into gold right now.

Billionaire Carlos Slim has proposed a solution to ease the economic troubles of the US and China. As per Slim, China needs to consume more and US needs to invest more. He says that if China yields to global pressure and devalues its currency, it will lead to pressure on commodity prices. For currency devaluation to have a positive impact on the global economy, China will have to couple it by increasing consumption. For the US, Slim says that the key to solving the economic problems is to boost private sector participation. At the near zero interest rates, most private sector investments would be highly profitable. Therefore, the government needs to focus on ways to boost private investment rather than doling out huge amounts of benefits in the form of quantitative easing.

Anyways, Indian markets had a strong outing today. The BSE-Sensex was trading with gains of around 340 points (1.7%) at the time of writing this (the BSE stopped trading between 12 pm and 2.30 pm due to a technical snag). Today's gains were largely led by stocks from the banking and realty sectors. Among other key Asian markets, China and Hong Kong closed with 2.3% and 2% gains respectively. Pressure was seen in Japanese stocks that ended down by around 0.5%.

 Today's investing mantra
"Why should it be easy to do something that, if done well, two or three times, will make your family rich for life?" - Charlie Munger

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11 Responses to "The biggest reason you should not invest now"


Apr 21, 2011

After have burnt my hands in the stock market i learnt that because i burn my hands some body is cheerful good luck to them



Apr 21, 2011

p;.show me



Mar 19, 2011

is there any correction in market .plz let me know with good reaon...........


uvais Aamir

Feb 11, 2011

bharti aritel ni future callnow?



Jan 15, 2011

2)REL INFRA (RS 800 )



Nov 14, 2010

dear sir,

Ihad burnt my fingure in last 3 year

now i have 2 lacks only

guid me how to allocate in whichn stocks for multybagger or good returns


Manish Modi

Nov 11, 2010

I feel no one can time the markets. We should invest in good stocks at every level. I mean whenever we have surplus cash. However, I agree that a first time investor will be at greater risk entering the market at this level.


JS Pandher

Nov 10, 2010

Dear Sir,
If I invested Rs 1 lac in Coal India Ltd and reaped a benefit of Rs 39000/- what mistake have I made? Similarly, IPO of Bedmutha gave returns of more than 100 percent.Was it bad? I am confused.


ratneshwar prasad

Nov 2, 2010

how has stock markets behaved earlier in times of hyper inflation?



Nov 1, 2010

Is the stipulated currency war situation deliberate? making chaotic situation to necessitate the change from current currency regime into a global currency. Like the move to introduce Amero!
Search North American currency union

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