Why bad news is good news for investors?

Dec 17, 2011

In this issue:
» Share buybacks by Indian companies on the rise
» Gold v/s US dollar: Which is the real safe haven?
» Asian property bubble has started bursting
» Big global banks witness rating downgrade
» ...and more!
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Barring our immediate physical environment, what is it that defines and builds our view of the external world? What is it that causes so much volatility in the financial markets every passing minute? And what is it that is beginning to put seeds of doubt in our minds as far as the future prospects of the Indian economy are concerned? The answer to all these questions is "news".

In recent times, the news media has been awash with pieces and reports on the diminishing sheen of the India growth story. All the undesirable things that could have happened- high inflation, severe rupee depreciation, slowing growth and widening fiscal gap- are staring right in our face. Moreover, a slew of corruption scandals and the political deadlock only add salt to the pain.

Are you still bullish on the 'India growth story'? Or do you think India has lost its steam and that the days of 9-10% growth are mere history? Well, we sincerely suggest you do not rush to conclusions about India so soon. Do you remember some years back how everything seemed hunk-dory about an India whose time had come to emerge as an economic powerhouse? Do you also remember the times when India emerged resilient from one of the most disastrous financial crisis that struck the globe in 2008? So what has happened now? What has gone so awfully wrong with India in 2011?

We believe what went wrong was the way we were looking at India. Psychology has a term called 'anchoring bias' to explain that. 'Anchoring' means to rely too heavily on one trait or piece of information while making decisions. In other words, we develop narrow-minded views based on some pieces of information without considering the larger picture. On the basis of what we see flashing in the news media, there are times when we are extremely bullish on India and there are times we think it is all over. In this process, we fail to weigh and keep a balance between the good and the bad elements in the economy. And stock markets, which discount the future based on the current news flow, almost always tend to go to extremes.

Going back to our headline, can you now understand why bad news can actually be good news for investors? To give you a gist, a continuous flow of bad news translates into extreme pessimism towards stocks. In other words, this is the best time to go bargain hunting. There is a famous saying: "Either you will get good and cheap equity prices or you get good news." Another very famous quote from legendary investor Warren Buffett goes thus: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." So look around and if you start sensing that people are getting too fearful, it is time you get greedy.

Do you think bad news can actually be good news for investors? Share your comments with us or post your views on our Facebook page / Google+ page.

 Chart of the day
At a time when the Indian stock markets have been severely beaten and a lot of capex plans being deferred due to macroeconomic concerns, which is one of the best ways to invest a company's excess reserves? Buy back your own shares. In fact, share buybacks worth Rs 40.6 bn in 2011 so far have been the highest in the last 4 years and about seven times as high as in 2010. With share buyback worth Rs 25.1 bn in 2011, Piramal Healthcare tops the list among 16 Indian companies that have gone for buybacks.

Data source: DNA Money

With the debt crisis worsening in Europe and a gloomy outlook forecasted for the global economy, surely gold would have found a lot of takers. But that appears to not be the case. In fact, gold dipped to its lowest level since September 2011. On the other hand, the US dollar has soared. So why are investors flocking to the US dollar when the value of paper currencies is being increasingly called into question after the umpteen rounds of stimulus measures? The truth is that the US economy is not doing well. But one of the reasons for the US dollar finding takers is that the European region and the Euro are in a relatively worse situation. Further, the dollar remains the world's reserve currency, giving it the advantage of liquidity at a time when investors are still wary of buying assets they cannot sell quickly. Does that mean gold is not a safe haven? We don't think so. Recent dips aside, as long as the developed economies continue to mire in recession and keep throwing more money at their problems, paper currencies will not carry much value. And gold in such a scenario will continue to act as a safe haven.

Another asset bubble has lived its life and is now bursting. We are referring to the property bubble in Asia. After scaling heights, property prices across the region have begun to show signs of easing off. Real estate prices in China, Hong Kong and Singapore had been spiraling upwards over the past two years. So much so that experts had begun to warn that this was nothing but a bubble that would burst soon. And whenever this would happen, the region would see a major correction in the asset prices. Concerted effort of the governments to cool property prices is one major reason for this decline. In addition to this, the region itself has seen its economic growth slowing down in recent times. The combined effect of both has led property prices to start treading the downward path. However, what remains to be seen is whether the decline would be a gradual one, or would it be a sharp one as seen in other asset classes when their bubbles burst. If this happens, then the region would see a sharp spike in the volatility in the prices of other asset classes as well.

It has been raining downgrades across the globe. Standard & Poor's started off with a bang in August 2011 by downgrading the US from its AAA rating for the first time in history. Now, the entire US banking system has been downgraded by all major rating agencies. Moody's cut ratings in September this year. S&P did the same in November. Come December, and even Fitch has joined the party. Big lenders including Bank of America and Citigroup may have to post billions in collateral and may face higher funding costs in the wake of these downgrades. But it's not only America that has been feeling the heat. With the Euro debt crisis still in full swing, European banks ratings have also been given the axe. Barclays, Credit Suisse, BNP Paribas and Deutsche Bank have all faced rating downgrades. Besides just the banks, even sovereign entities in Europe are under pressure. Belgium was recently downgraded by Moody's, and France has been put on a negative credit watch by most agencies. It is clearly bad times and there seems to be further darkness at the end of the tunnel.

Stock markets across the world witnessed yet another week of negative returns. Continuing concerns of Europe's debt crisis and downgrading of France's debt rating by Fitch led to disappointment across the markets. Fitch is in the process of reviewing the ratings of other European nations like Italy, Belgium, Slovenia, Ireland, Cyprus and Spain under review. It may in fact, downgrade these by the end of January.

The Indian stock markets witnessed selling pressure during the week with the BSE-Sensex down by 4.5%. Further depreciation of rupee as against the US dollar was the main concern of investors. This along with slowing economy, increasing fiscal deficit, prevailing high interest rates and substantial pulling out of funds by the foreign institutional investors led to the markets reaching their 25 month lows.

Amongst the other world markets, European markets suffered the most with France (down by 6.3%) and Germany (down by 4.8%) being the top losers. Singapore, Japan and Hong Kong were able to contain their losses within 2%.

Data Source: Yahoo Finance

 Weekend Investing Mantra
"You're looking for a mispriced gamble. That's what investing is. And you have to know enough to know whether the gamble is mispriced. That's value investing". - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'

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