|»5 Minute Wrap Up by Equitymaster|
On This Day - 6 JULY 2011
No business channel wants you to read this!
In this issue:
It's never too late to get rid of 'bad stocks'.
After all, you never know how bad a market crash could get.
But what are these 'bad stocks'? How do you identify them?
For answers to these questions, and more,click here to read on...
Do not believe us? Let us delve into this excellent illustration by a leading business daily that will help nail the point we are trying to make. There is certainly no doubt in anyone's mind that most business channels are big advocates of frequent portfolio repositioning. This strategy not only makes your broker rich at your expense, it also leads to another very important drawback. That of frequently staying out of the market. And this may not be a very good idea. For it could result into a situation where one ends up missing some of the biggest moves of the stock market.
Research has shown that by missing the ten best days since January 2001, an attractive return of 16% per year turns into a mediocre return of just around 8% per year. And what happens if you miss the 25 best days? Well, the returns reduce to a puny 0.8% per year, way below what even a fixed deposit offers. Hence, it is very important to understand that a business channel will have plenty of reasons for every upswing and downswing in the market. But this doesn't mean that you should base your portfolio decisions on the same. You would be much better off not watching the channels and instead, focusing on fundamentally good stocks and staying invested for the long term.
Source: The Financial Express
That inflation based on WPI metric is faulty is anybody's guess. For the WPI index takes into account archaic items like typewriters that are these days found only in museums. But the unemployment numbers too seem to be giving an utterly wrong picture. The industrial production (IIP) data has been extremely volatile for even experts to make an educated guess. With such incompetency in economic data gathering, it is most unfortunate that we expect the RBI to do wonders with its policy decisions.
Considering that broking is a cyclical industry this is something which has not come as a surprise to many. However, this time it could be different. The current slowdown is due to a structural change in the industry where the smaller players are either leaving the business or are getting marginalized. Or else what could have explained their misery when the Sensex is at 19,000! So, once the tide turns, the larger players who survived may get the entire share. And we know what happens to the prices (commission structure) when few players dominate the market.
When the crisis began, the US Fed chose to deal with it by pumping billions into the financial system and prop up the economy. It was followed by another round of quantitative easing (popularly referred to as QE2) which was a massive US$ 600 bn bond buyback program. None of these programs have really worked as spending has not taken off and unemployment in the US continues to remain at high rates. All of which has translated into US not really showing any sustainable recovery. What these programs have in fact done is drive down the value of the dollar and wreak havoc on the government's finances. Alan Greenspan has said that he would be surprised if there was a QE3 because it would continue erosion of the dollar. While logic favours no more rounds of quantitative easing; whether the US Fed chooses to heed the same is the million dollar question.
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