»5 Minute Wrap Up by Equitymaster

On This Day - 19 JUNE 2010
What are you buying now?

In this issue:
» LIC to invest big time into equities this fiscal
» Marc Faber's thoughts on gold
» RBI soothes interest rate hike fears
» Buffett's wise words - Lesson for Indian businessmen?
» ...and more!!

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It's always good to revisit one's asset allocation time and again. And especially at times like these when markets are at their volatile best and there emerge good buying opportunities. Asset allocation decisions play a very vital role in achieving good returns over the long term. It's a known fact that someone who jumps from one asset to another, according to whim, may easily end up with worse results than someone who follows a consistent plan.

So, how to go about allocating one's equity assets today? What to buy? Are large and mid caps the best options? Or can small caps still given the same kind of stupendous returns as they gave in 2009?

See, it's difficult to give a common allocation for all kind of investors. After all, what is right for a 30 year old investor might not be so for a 60 year old! Your allocation to these categories of stocks depends on your age, your work profile, and your future financial needs.

But roughly, you can start with an allocation of 60:30:10 for large, mid and small caps respectively. Alter it as you go along in your life and career. A review every 12 months is also a must. A proper allocation and a consistent review will ensure good returns over a 5-10 year period. After all, as we stand now, there are some very good opportunities available in all the three spaces for long term investors.

So what are you buying now? Large, mid, or small caps? Share with us

 Chart of the day
Today's chart of the day compares the price to earnings ratio (P/E) of key BSE indices across different times. As we see from the chart, the P/Es crashed during the crisis of 2008 and rose back sharply in a year or so. The worst performer and then the best gainer during this period has been the BSE-Smallcap index. The P/E for this index first crashed by 77% from its highs and then rose by 262%. As compared to this, the P/E for BSE-100 (represents large caps) fell and rose by 64% and 120% respectively.

Data Source: CMIE Prowess

LIC, the big daddy of Indian financial institutions is all set to loosen its purse strings yet again. As per a leading daily, the insurance behemoth will shell out more than a whopping Rs 610 bn for buying equities this year. It should be noted that Rs 610 bn was the money it invested in stocks last fiscal. Fortunately, there is not going to be any dearth of investment options either for the PSU giant. Some really big ticket IPOs are lined up with the PSUs accounting for a significant chunk of it. Thus, the ‘bailout agent' for the government, as LIC is known these days, is likely to have more than its hands full. Good thing for LIC is that all the money that it is going to spend will come from its investible surplus and not from the sale of assets. Indeed, it may certainly look like a godsend for the deficit starved Government of India!

Anyways, while the global economic uncertainty continues, stocks markets had a good past week. Russian and Japanese markets stole the show. Indian markets followed with gains of 3%. Gains in the Indian markets were largely led by stocks from the IT and engineering spaces. Oil and gas, and pharma stocks emerged as the worst performers.

Note: Country names represent their respective stock market indices;
Data Source: Yahoo Finance, Kitco, CNNfn

Crude gained the most during the week, as its price rose by 4.6% over the previous week. Continued uncertainty regarding the actual impact of the BP oil spill impacted crude's price.

The stock markets have been jittery for the past few months. Sharp rallies are followed by sharp declines and investors are back to square one. No such worries for the yellow metal. The price of gold has hit a record of nearly US$ 1,260 an ounce due to its status as a haven from sovereign and financial risk. The price of the commodity has risen by nearly 15% since the end of 2009, fuelled by sovereign risk in the euro zone, low interest rates and concern about the stability of paper currencies. In fact, many experts are also bullish on the precious commodity. Marc Faber recently said, "I buy gold, I don't know what else to buy."

RBI Governor, Dr. Subbarao has his work cut out for him. Double digit inflation and liquidity pressures need to be addressed. In order to calm the raging inflation there was speculation that he would increase interest rates. However, this difficult task has already been done for him. Cash needed for making tax payments and 3G auction outflows caused ‘effective rates' to rise automatically. The money market trend completely reversed in May 2010. From banks parking excess funds with the central bank at 3.75% (reverse repo rate), they instead had to borrow it at 5.25% (repo rate).

The RBI now seems to be making an effort to increase liquidity. It recently announced Rs 100 bn buyback of treasury bonds. We can now breathe a sigh of relief that interest rates at least will not increase in the near term. However, the inflation bugbear still needs to be tamed!

During the 20th century, the US became the most prosperous nation on earth. So, it does not come as a surprise that some of the world's richest men come from that country. But what is remarkable is how so many of them gave it all back to society. Be it John D. Rockefeller and Andrew Carnegie earlier, or Bill Gates and Warren Buffett now. Their philanthropy is as admirable as the vast fortunes they amassed.

Interestingly, the latter two are urging hundreds of rich Americans to pledge at least 50% of their wealth to charity. In an interesting article, Buffett explains the thought process behind the appeal. Firstly, many ordinary citizens routinely contribute money and time to charity. Business tycoons are relatively absorbed in their enterprises and society rewards them for it. It is only logical then that they give back to society during the dusk of their career, when they can hardly consume all they have accumulated. Secondly, Buffett points out how a little wealth makes life comfortable but too many possessions only become a headache. He says, "Keep all you can conceivably need and distribute the rest to society, for its needs."

We couldn't agree more. And we also think it is time Indian business tycoons also took a hard look at philanthropy at a time when the Indian economy makes rapid strides. Leaving everything for one's children can often be a disservice to the children. There will be a lot of under privileged citizens in India in the foreseeable future. So perhaps it is time for Indian business tycoons to also give back to the society that has and will continue to make them fabulously rich.

 Weekend investing mantra
"The idea of a margin of safety, a Graham precept, will never be obsolete. The idea of making the market your servant will never be obsolete. The idea of being objective and dispassionate will never be obsolete." - Charlie Munger

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