Short term trading for higher returns?

Nov 30, 2010

In this issue:
» India's GDP grows by 8.9% in September quarter
» European debt crisis to infect the US
» Indians are sending more money back home
» Funds keep flowing in emerging market stocks
» ...and more!!

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Fund managers in India currently seem a desperate lot. Otherwise what would explain their misguided notion that "the only way to maximize portfolio returns is by taking short term trading calls and having derivatives exposure."

Sadly, the belief is that churning the portfolio as many times as possible will generate adequate returns. And the volatility in the stockmarkets has only fuelled this belief. Fund managers have been caught in a vicious trap. They have churned their portfolios on an average 3-5 times every month since April. Why? Because they think this will generate higher returns. But this all too frequent churning has only translated into higher costs for the fund. And so they are putting efforts to increase returns to compensate for the extra costs.

All this is direct opposite to the sound principles of long term investing. Little do the fund managers realise that in the longer run, this frantic activity will not amount to much in terms of returns for investors. Long term investing stresses on doing thorough research before investing in good quality stocks and that too at attractive prices. The holding period is generally more than 2-3 years. The idea being that there will always be volatility in the stockmarkets in the short term. But in the long run, if a company's growth prospects and fundamentals are strong, the stock price will eventually catch up.

Will fund managers see the futility of their exercise? We are not too sure.

Do you think that frequent churning of portfolios by fund managers will generate higher returns? Share your views with us.

 Chart of the day
The Indian GDP continues to steamroll ahead. Despite a slowdown in industrial output, India's GDP grew by a healthy 8.9% for the September quarter ended 2010. Today's chart shows, that as in the previous quarters, China and India have towered over their peers as far as GDP growth is concerned. Not surprisingly, the Euro zone put up a poor performance what with the debt contagion seriously undermining efforts of a recovery in that region.

*July-September 2010
Data Source: The Economist

America is getting a taste of its own medicine. Earlier, it was a common refrain that if the US economy caught cold, the world sneezed. Now it's getting the other way round. As per John Bogle, the European debt crisis can soon spread and infect the US markets. And if it does, the infection will spread fast. Bogle's prediction cannot be easily dismissed. He is one of the legendary mutual fund managers and founder of the Vanguard group, one of world's largest asset management companies.

He recently told a leading business channel, "I look to Europe, and I'm wondering who's supporting who over there. These are not wealthy nations, any of them, and they are supporting their weakest members. I don't see how it could help but be contagion. Whether we like it or not we live in a global world and any kind of contagion is going to spread very quickly."

As the debt worries in US and Europe refuse to subside, emerging markets have become the investment destination of choice. Emerging market equities received half of the investments in stocks worldwide over the last week. Worthy to note that this was despite the rising tensions in the Korean peninsula. Also, inflows into emerging-market stocks totaled US$ 84.3 bn so far this year. Thus they topped the record inflows of US$ 83.3 bn in 2009. And there are prospects of the inflows sustaining. Within emerging markets China has been the consistent receiver of funds over the past few weeks. India's latest image of a corruption ridden economy has not done much favour to its investment appeal. This has caused some large outflows from equities in the past couple of weeks. Thus, the risk return scenario in emerging markets may continue to change. However, the fact that surplus funds from developed markets will find its way here is a given. That is unless the US adopts a drastic change in its monetary policy.

Indians working overseas send more money back home than any of their global counterparts. The remittances in 2009 were to the tune of $50 bn as per the World Migration Report 2010. This too despite a worldwide economic slowdown and anti-immigration measures adopted by industrialised countries. In contrast, overseas workers from neighbouring China remitted US$ 47 bn during the year. Together, the two Asian giants accounted for nearly half of total remittance inflows into Asia, which were pegged at US$ 162.5 bn in 2009. This translated into about 39% of total global remittances.

India is one of the prominent sources of both inward and outward migration. The Indian diaspora numbers almost 25 m persons, 10% of whom can be found in the USA, while the other destinations with a sizeable Indian population include Singapore, Malaysia and Gulf states. These remittances play a sizeable role in partly plugging the current deficit.

The financial crises in the Euro zone will impact its growth in the coming years. As per the European Commission the economy will slow down slightly due to the cutback in fiscal spending. However private demand would give it a boost in 2012 and things would get back to normal. Weaker global growth as well as burgeoning debt has led to lower growth estimates for the region. Growth next year is expected to decline to 1.5% from the 1.7% seen in the current year. However, the European Commission is optimistic that these cutbacks would help boost confidence in the financial system. This in turn would boost private consumption which would drive the growth in 2012.

Global pharma companies are a harried lot. With scores of big patent expiries looming large, many have begun taking drastic measures to shore up profitability. These include cutting tens of thousands of jobs, slashing marketing expenses heavily and so forth. As reported in a leading business daily, more than 45,000 job cuts were announced by the global pharmaceutical industry this year through October, outpaced only by government agencies and nonprofit organisations. Some of the high profile drugs set to lose patents very soon are 'Lipitor' and 'Plavix' which are presently the top 2 biggest drugs in terms of sales. Cutting back expenses will bolster profits of these companies. But this is more of a short term measure.

What this move really highlights is the failure of Big Pharma to replace with their R&D pipeline with potential drugs that will make up for the loss in sales of the existing blockbusters. Moreover, drugmakers are facing greater pricing pressure due to more recent developments, such as a new US healthcare law and price controls in European countries. Meanwhile, the penetration of generic drugs especially in the US has only increased. And the big wave of patent expiries means that there is lot of scope for generic players both in India and overseas to maximize revenues and profits. Indeed, global pharma's loss is the generic industry's gain.

While the indices languished in the red for most part in the morning session, buying activity intensified post noon and pushed the indices well above the dotted line. At the time of writing, the Indian stock market were trading higher by 172 points (up 1%). Buoyancy was largely seen in auto and banking stocks. As for rest of Asia, most markets ended in the red with China, and Japan down by around 2% today.

 Today's investing mantra
"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." - Peter Lynch

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30 Responses to "Short term trading for higher returns?"

SS Varadan

Dec 2, 2010

Portfolio Churning,frequently:

If Fund managers are not confident about their own investment decision, why should we trust them and invest in SUCH MF?? What is the difference between EXPERIENCED Fund Managers and informed Individual Investor?
Some other-side points are valid; but.... we should know the names of SUCH Schemes and AVOID them!



Dec 1, 2010

If the expression means that the majority of fund managers are doing active churning...a herd mentality is evident...a shortsighted approach. Quite obviously a grasp of the larger canvas is eluding them. I have to submit that your view is objective...its a wake up call to those guys.


Narendra Shingh Chauhan

Dec 1, 2010

Fund manager play very important roll for exercising in churning in the portfolio but it should not too frequent. Frequent churning as you stated 3 to 5 times in a month, not given higher returns but creating extra cost of burden to investors (if there is any charge in churning in portfolio. I do not know about it).

I think that fund manager should take prompt and suitable churning in portfolio time to time. It is for both short term and long term.

Thanks a lot



Dec 1, 2010






Nov 30, 2010

Our own experience shows that golden opportunities for long-term investment and true wealth creation are missed when one indulges in short-term trading. Such short-term trading hardly meets our expenses.



Nov 30, 2010

sir please valubule tips



Nov 30, 2010

This is not so dumb as you make out to be.

Your logic of long term growth holds good in the kind of markets we saw in the 1980s and 1990s. Today, with the kind of uncertainty we will see in ALL markets around the world for the next 3-5 years AT LEAST - with a possible worst case scenario of a Global Depression not out of the running - would you like to sit on your hands with a decent probability of having your fund show negative returns in the medium term?

Might as well set targets of 10% - 20% gains in specific counters and using technicals and market swings, simply keep booking profits, re-entering at lower levels and adding to quantity (at least this way adding some protection to downsides due to volatility).

Of course, I don't mean one churns wildly with no plan in hand, but smart churning to add profits periodically is what the market demands today!



Nov 30, 2010

Short term trading is eqaually important for higher returns as that of of long term strategy. It helps trader to shift from one sector to another to maximise profit. Some occassion, he may sell his long term stocks at higher and catch the same at lower in bear market. Siply keeping stock at long term has no relevance. One shold adopt all sorts of trading ie. Intraday, very short term (2 days to 1-2 weeks), short term( 15 days to 6 months), Long term ( 1-2) years. Beyand 2 years is not trading at all ( it is an investment)


Alexander Kurien

Nov 30, 2010


A reliable Technical Analysis source predicts the Dollar Index (DX) to trend upwards for the next 3 to 5 weeks, perhaps with extensions beyond this time-frame.

In the wake of this phenomena, Gold and Silver prices
would slide downwards, Gold may hit USD1250/- per Troy Ounce. Most commodities would face the same price trends.


teja reddy

Nov 30, 2010

well seriously speaking i am not much of a derivative person my self but in the current circumstances even if the sound mind tells us not to be a short term person because of the current scenario in the current market which has fulled the speculators in a major way and in a near future i think this situations will remain the same unless any other drastic changes..............

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