»5 Minute Wrap Up by Equitymaster

On This Day - 28 JULY 2016
How Investors Lost Money on the Greatest Event in India's Economic History

In this issue:
» Investors in mutual funds moving from equity to debt
» Have we reached 'peak gold'?
» Round up of today's market
» ...and more!
00:00
Rahul Shah, Co-Head of Research

Do you think that whenever good things happen to the economy, equity investors make money?

Well, you are wrong.

No matter how good the event.

Take the greatest event in India's economic history for example: The 1991 liberalisation of the Indian economy. We just celebrated 25 years since that hallowed moment when then Finance Minister Manmohan Singh presented the budget before Parliament on July 24, 1991. It was the budget that kicked off the reforms.

If India's modern economic history has to be pinned down to the single most important event, this was it. These reforms changed the way India lives. In effect, it took us from living like ascetics to being spoilt for choice in every area of life.

When the reforms were announced, investors were quick to realise what was in store for the Indian economy. Naturally, they were excited.

In fact, if the stock market was any indicator, 'excited' would be an understatement. Elated about the prospects that lie ahead for the economy, and further spurred on by 'big bull' Harshad Mehta, the BSE Sensex went on to see a price-to-earnings multiple (PE) of more than 55 times.

Well, the reforms delivered. They brought on all the anticipated benefits to the economy over the next 25 years, and more.

The stock market, though, would never see such a valuation again. Not even close.

Here, have a look:


And investors who bought into these overheated markets in the name of liberalisation were in for a rude shock. The stock markets would trade at or below that level for a large part of the next twelve long years. At times more than 50% lower:


In their excitement, all calculations had gone out the window. Investors were willing to pay just about anything to get their hands on stocks. And when that happens, disaster - almost always - is just around the corner.

Benjamin Graham summed it up...way back in 1972:

  • The habit of relating what is paid to what is being offered is an invaluable trait in investment. In an article in a women's magazine many years ago we advised the readers to buy their stocks as they bought their groceries, not as they bought their perfume. The really dreadful losses of the past few years (and on many similar occasions before) were realized in those common-stock issues where the buyer forgot to ask 'How much?'

Be it liberalisation, a new government, GST or a great monsoon, you always got to ask the all-important question: Everything said and done, am I paying too much for the stock in relation to its intrinsic value?

For even though the company may turn out to do very well, or the economy may have some great years ahead of it, when you pay too much, even a good stock can quickly turn into a bad investment.

How important do you consider valuations in investing? Would you pay anything to get your hands on a stock with great prospects? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
The Way To Small Caps

For eight years, we at Equitymaster have made it our business to find solid small caps...

And what do we have to show for our effort?

Recommendations that generated returns like 250% in 2 years, 217% in 3 years 11 months, 288% in 2 years 5 months, 133% in 1 year 3 months!

Of course, past performance does not guarantee future returns...And you need to keep that in mind.

But the fact remains our research process remains the same...

And now you too could receive our recommendations...

Interested? Click here to know more...
------------------------------

02:50 Chart of the day

If today's chart of the day is any indication, looks like investors have rekindled their romance with bond funds. As the chart highlights, close to a whopping Rs 70 bn have been poured into debt funds by investors since June 1, 2016. In comparison, equities have attracted investments worth a paltry Rs 4 bn during the same period. In fact, even the couple of months prior to that, debt funds have garnered significantly higher inflows than their equities counterpart.

The reason? Well, the old habit of looking into the rear view mirror and not the windshield. Experts contend that since debt funds have given better returns than equity mutual funds over the last one year or so, investors are optimistic that the trend will continue. They further argue that as stocks markets are looking expensive and as there are hope of rate cuts on the anvil, there's even more reason to tilt towards debt.

Well, according to us, it is not the returns of the past but the valuations that count. Stocks have run up alright but they are nowhere close to being very expensive. In fact, at the current valuations, the Sensex is trading at a small premium to its long term average, which in our view cannot be termed as very expensive. Besides, when you consider that corporate profit margins are at multi-year lows and could rebound over the medium term, then the case for equities becomes even stronger. The current markets call for at least a 50%-60% tilt towards equities and the rest towards debt if not more.

Investors in Mutual Funds Moving from Equity to Debt


03:55

Now here's a gold story that you may not have heard before. It is reasoned that when giant asteroids crashed into planet earth billions of years ago, one of the elements that emerged out of this collision was the yellow metal gold. And that's it. All the gold that's there above the earth's surface and below it is a result of those collisions that took place billions of years ago. In other words, gold can only be discovered in gold mines and cannot be created from other elements. In fact, even if it can be created, the process is so expensive that one cannot currently make money by selling gold that one creates from other elements.

The point of this short discourse on gold was to highlight the fact that as per a popular website, we might have reached 'Peak Gold'. In other words, all the gold mines that are to be discovered have been discovered and 2015 was the year that could go down as the year gold production maxed. It is argued that all the gold production we have done in the past 20 years has effectively left the cupboards bare. And gold producers are hard at work finding the next big deposit which remains elusive as ever even though exploration budgets increased more than 3 times between 2009 and 2012.

If this is indeed true then aside of the demand, this new supply side scenario could fire up gold prices even more.

04:48

Indian stock markets were trading strong today with the Sensex higher by around 100 points at the time of writing. Mid and Small Cap indices were also trading strong, higher by close to 1% each. Amongst sectoral indices, realty and pharma were seen enjoying a good amount of buying interest.

04:56 Investment mantra of the day

"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid." - Warren Buffett

DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
INTRODUCTION:
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

BUSINESS ACTIVITY:
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

DISCIPLINARY HISTORY:
There are no outstanding litigations against the Company, it subsidiaries and its Directors.

GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.

DETAILS OF ASSOCIATES:
Details of Associates are available here.

DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
  2. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
  3. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  4. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
GENERAL DISCLOSURES:
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
Feedback:
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.

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.

SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

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: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407