|»5 Minute Wrap Up by Equitymaster|
On This Day - 18 JANUARY 2010
What to buy when the markets correct?
In this issue:
----------Last few seats available! The Equitymaster Investment Summit 2010----------
Get all your investment queries answered in person by the two masters of financial world,Bill Bonner and Ajit Dayal, as they guide you on how to build a long-term portfolio and amasswealth.
Don't wait a minute longer as the seats are filling up fast!
So if you are also one of those, and are expecting stocks to correct, what are you doing now? What about preparing a watch list of stocks you'd buy once the correction really happens?
Indian markets have made a huge recovery from their March 2009 lows. While we don't think they're anywhere near bubble territory, good values have become harder to find. Does that mean you should stop researching for new stock ideas? Not really!
What you rather need to do is make a list of good quality stocks - ones with good operating margins and return on equity, manageable debt levels, strong growth prospects, and selling expensive. In other words, you must prepare a list of strong companies worth buying if the markets crack.
One of the fundamental rules of investing is that even great companies, if bought at high valuations, don't always make great investments. Take Infosys' case. The company has multiplied profits 20 times over the past ten years. But the stock has gained just around 2.5 times during this period. That's because investors were paying too much for the company's prospects during the dot-com bubble.
It's very important to buy great companies only at the right prices. The next correction can give you that opportunity. Are you preparing yourself with a good watch list?
An article in Financial Times has perhaps a solution to this problem. It correctly argues that the time has come for India to kick-start a process whereby equity mutual funds could overtake bank deposits in a few years time. Since India has a very high savings rate, the gush of liquidity that would flow into the equities as a result of this transition would certainly make the Indian middle class and not FIIs the primary drivers of the market.
Plus, we also have the benefit of learning from the experience of countries like US as to what the best and worst practices could be and hence, make the entire exercise even more beneficial to investors. As the article rightly concludes, there are indeed risks, but even the prize, if we could avoid western mistakes, would be great. And only then, the Indian stock markets could be called as wealth creators in the true sense of the word.
After last week's fall, gold prices have started this week on a positive note. An ounce of the yellow metal is currently trading at US$ 1,134 an ounce, up by US$ 4 over last Friday's close.
As per the International Energy Agency (IEA), global oil demand this year will reach the highest level since 2007. After falling for the last two years, consumption will be expected to rise to 86.3 m barrels per day. We are not surprised about predictions of higher crude oil demand. The lifestyle of the developed world is dependent on crude oil. And emerging nations are also on their way towards that lifestyle!
But there is one discerning investor who has carefully chosen an asset class that will perform well in either scenario. This class of assets, according to him, will perform well if economies recover, and will also perform well if they don't!
The asset class is commodities and the investor is none other than Jim Rogers. According to him, stock markets are up a lot in all emerging markets including India. Thus he is not investing in them currently, but is in fact just sitting and watching how things are panning out.
But Rogers' attitude towards commodities tells a different story. In his words, "The way I am playing is mainly with commodities because if the world gets better they will get better and if the world economy doesn't get better then most stock markets are going to suffer. It's not necessarily true of commodities, if the world economy does not get better. In fact if the world economy does not get better they are probably going to print even more money. Hence, commodities will be the place to be."
Pretty convincing argument, isn't it?
Anyways, one of his statements that was intriguing was - "Availability of good-quality stock in the market will mop up some of the surplus liquidity, which is presently available and which will therefore help in stabilization of markets."
Well, while some PSUs that are on the block might be good companies. But whether they'll be good stocks (valuation wise) is what investors need to decide. Not the government!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement
Disclosure & Disclaimer: Equitymaster Agora Research Private Limited (Research Analyst) bearing Registration No. INH000000537 (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, Canada or the European Union countries, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.
Equitymaster Agora Research Private Limited (Research Analyst) 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407