Why does the market perform better than your portfolio?

Nov 10, 2011

In this issue:
» NREGA to get a makeover
» 3G roaming costly for the government?
» 'Many nations to go bankrupt': Rogers
» What Oman gas means for India's subsidy bill
» ...and more!
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The BSE Sensex has delivered compounded annual returns of 19% over the past 10 years. This means that if an investor had invested Rs 100 in the index way back in November 2001, it would be worth approximately Rs 569 today. But not many investors have enjoyed such phenomenal returns. A leading daily conducted a study recently to try and give reasons for this. Why don't most retail investors realize the returns that are similar or equal to that of the broader markets?

A big reason for this is the 'excesses'. This is excess fear as well as excess greed. Most investors tend to panic when things start getting tough and sell their holdings. As a result, they even end up selling those stocks that are actually just reacting to negative sentiments, but otherwise are sound investment opportunities. On the other side of the table, when the same investors see gains in a particular investment, they continue to hold it even though the fundamentals no longer justify the valuations. As a result, of this excessive greed they are hit hard when the stock comes crashing down. And unfortunately such declines wipe out all the gains that the investment would have otherwise made.

The second big problem that makes high returns elusive to a retail investor is the 'herd mentality'. Most investors follow the herd. If everyone is buying a stock, they would go ahead and buy and vice versa. Very few actually dig deeper to find out why is it that they are buying the stock. Are the fundamentals good? Are the numbers interesting? Is the management sound? Is it available cheap? What are the growth prospects? Hardly anyone sits down to ponder the answers to such questions before investing in the stocks. They just buy what everyone is buying. And like any herd, when there is a stampede, there is a bloodbath. And the investors suffer losses.

So how is it that investors could avoid falling in one or both of these traps? The answer is simple. It is important to look at investments like owners. This means that you do your due diligence and invest in those companies that are fundamentally strong and available at cheap valuations. And then hold on to these stocks for long horizon. And at the end of it you will not just end up earning the returns that the broader markets offer, but also end up beating them.

Why do you think most retail investors are unable to outperform the broader markets? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
Version 2.0 of the Mahatma Gandhi Rural Employment Guarantee Scheme (MGNREGA) is to be released next week. While this launch may not come with the same pomp and flair as Apple's latest product updates, it may still have some tangible benefits, especially to the rural poor. Although this Rs 400 bn programme is the most expensive social sector programme, it has not been able to deliver at the grass root level. The six year old scheme has boosted rural incomes, but it has also stoked inflation in the country. The new version, spearheaded by rural development minister Mr Jairam Ramesh and the Planning Commission will help strengthen the administration of the scheme. Planning will be more organized, and will seek the help of experts in various fields. Hopefully these reforms will have the desired impact. Today's chart of the day shows the allocation and actual spending towards the scheme till date.

Data source: Economic Times
* Data till October 31, 2011

With its spending going up and revenues coming down, the Indian Government sure does not want to lose out anymore on options that will enable it to garner higher revenues. Against this backdrop, the fact that telecom companies in India are resorting to innovative strategies to avoid the spectrum usage charges is clearly leading to quite a bit of controversy. The bone of contention in this case is the 3G roaming deals amongst telcos that is allowing them to share each other's 3G services without actually paying up for the airwaves being used.

Besides leading to a loss of revenues for the Government, the Department of Telecommunication has argued that such deals are also creating non-level playing conditions and may hamper the future revenue potential from auction of 3G spectrum. The telecom companies however have a different story to tell. They are of the opinion that they've had a clear understanding with the Government that the 3G roaming deals would indeed be permitted. Thus, making any radical change right now would lead to their calculations going completely off the mark. The telecom players may have a point here. And we don't know whether any such understanding has been given in writing by the Government. If it hasn't been given, then this would certainly be another bolt from the blue for the already struggling telecom sector.

Oriental and western cultures are opposite to each other in many ways. Among other things, the way they save and spend stands as one stark contrast. While Indians and other oriental cultures save resources not only for themselves, but also for their children and grandchildren. At the other extreme, many a western countries have had the legacy of spending their future incomes in the present. Their descendants, as it seems now, are set to inherit massive debts. In fact, legendary commodities investor Jim Rogers goes on to say that many nations will have to go bankrupt to be able to survive. The excesses of the past are catching up. As Rogers puts it, "In 2002 it was bad, in 2008 it was worse and 2012 or 2013 is going to be worse still - be careful." So which assets does he prefer the most during such uncertain times? Commodities, of course! He justifies it very interestingly, "My theory is that if things get better I will make money in commodities, and if they don't get better I'll make money in commodities because they'll print more money and stocks will be going down a lot."

While India is already reeling under the burden of food and fuel subsidies, here comes another shock on the subsidies front. India's fertilizer subsidy bill could balloon further for reasons totally beyond its control. The scene is that Oman could increase gas selling price to Omfico, a urea production unit in Oman by four times. Since India imports nearly all urea produced by Omfico, this could translate into a 40% increase in the price of the urea imported, raising subsidy bill by about Rs 4.5 bn. However, this needs a renegotiation of the contract signed in 2005 under which the rates were fixed for 15 years. Considering the long term need of gas in India and declining domestic reserves, the decision not to agree will not come without its consequences we guess. With this, the road to subsidy reforms seems steeper. Before the subsidy burden tosses the fiscal health off balance, it's time that the government bites the bullet and makes a move away from tightly controlled market.

As much as the government would want to save India's 'power' future from sinking into darkness, issues pertaining to availability of coal seem sticky. No we are not just referring to Coal India's inability to meet the demand of coal producers. Even the likes of Tata Power that had proactively bought stakes in coal mines in Indonesia seem handicapped in sourcing the input. Coal rich nations Indonesia and Australia have imposed heavy taxes and royalty on the mining of the mineral. So much so that it has made importing the mineral financially unviable for India's first UMPP (ultra mega power project) commissioned by Tata Power. Another UMPP commissioned by Reliance Power at Krishnapatnam faces a similar fate. 55% of India's total Power generation capacity of 182,345 MW is coal-based. Also much of the targeted addition of 100,000 MW during the 12th Plan (2012-17) is expected to be coal based capacities. While the Indian government is likely to intervene in the matter to sort out the taxation issue, unless it successfully arranges coal for India's new power capacities, the sector's growth prospects may remain on paper.

The Indian stock markets were closed today on account of Guru Nanak Jayanti. Major Asian markets have closed the day deep in the red following the growing fears surrounding the Eurozone. Hong Kong, Korea and Taiwan were the biggest losers. European markets have opened on a weak note as well.

 Today's investing mantra
"A market is the combined behavior of thousands of people responding to information, misinformation and whim." - Kenneth Chang

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3 Responses to "Why does the market perform better than your portfolio?"

Digambar Kulkarni

Nov 12, 2011

Ti is the Horizon that an Investor sees, makes the whole difference.
What will an investor do today, planning for a good return after 10 or 15 years? He shurely does not want to starve today!
He is indirectly discounting for the fall in the sensitivity of his sensory organs... his youth!

He takes care of his needs for today and partly for tomorrow and cannot always wait for the day after tomorrow to come.
On the other extreme, we find Greece, Italy, Portugal and Irland have so much soverign debts that they may default... but they prefer to spend today.

It is the Choice of Horizon that makes the whole difference!



Nov 10, 2011

Intricate points are analysed with surprising clarity.

Apart from logic,the free flow of language--at once simple and elegant-makes the article all the more appealing.

That all this comes free is no mean additional satisfaction.
Thank you ,all of you.....


Adi Daruwalla

Nov 10, 2011

Someone needs to drive home the point to this existing UPA govt to stop corruption and bring the balck money back to the Centre's coffers (tijori) and use it for the public welfare. Also its high time to ensure URBAN EMPLOYMENT WITH GUARANTEE SCHEMES not just MGNREGA. This as also the corporates in the urban world indulging in corruption but being very siantly and teeling only the govt to weed it out. The top 20 corporates who have written to the govt should first do a thorough in house investigation and not jump the gun and only blame the govt. Its always a two way street and govt will not give free lunches always

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