|»5 Minute Wrap Up by Equitymaster|
On This Day - 3 AUGUST 2015
The best time to invest in the Indian stock markets is...
In this issue:
So every successful investment practically involves two intelligent decisions - a good buying price and a good selling price.
The buying decision is probably the most important one. So today let me focus only on the buying decision. What is the best time to invest in the stock markets?
As a thumb rule, I would say you must invest in a stock whenever you find great value. But most investors seldom follow this advice. They tend to be attracted to stocks when everyone else is buying stocks and valuations are heading higher and higher. In doing so, they fail in their first investing goal, which is to buy low. They buy high and hope that somebody will buy from them at an even higher valuation. That appears more like speculation than sound investing.
While common sense says the best time to buy is when the markets are depressed, most investors tend to be become so pessimistic that they wouldn't touch stocks even with a 6-feet pole.
Let's go back in time a bit. After the market crash of 2008 and the slowdown that followed, many investors burnt their fingers very badly. There was so much pessimism about the prospects of the Indian economy. People were simply not willing to buy stocks. Now, if you look back in retrospect, the period from 2009 to mid 2013 was probably one of the best times to find great value opportunities. Had you identified a bunch of sound businesses back then, your portfolio would have multiplied multifold in the bull rally that we witnessed in 2014.
I feel that this one line from legendary hedge fund manager George Soros explains the whole thing very aptly -"The worse a situation becomes, the less it takes to turn it around, and the bigger the upside."Mind you, I am not at all suggesting that you buy any random stock when the markets are depressed. You certainly do not want to accumulate junk businesses in your portfolio. Always, and always, look for value buying opportunities. And once you have purchased a solid stock at a good bargain price, more than half the battle is won.
But whether one is buying low or high requires a skill of valuation. And it is here that most of the investors tend to get confused.
Indian markets are trading relatively cheap (as compared to other emerging markets) on the basis of trailing 12 months earnings. However, as one can make out from today's chart, if expected corporate earnings growth over next 12 months is anything to go by, Indian market is one of the most expensive among the emerging ones.
As per an article in Business Standard, at a price to earnings growth (PEG) of 0.73 times, the benchmark Nifty is trading at a premium to most of the other emerging economies. And considering that actual earnings have mostly fallen short of expectations in the past, the bullish sentiments could be even more misplaced. The unhurried pace of reforms does not offer much comfort either.
However, this does not mean that there are no attractive opportunities in the Indian markets as of now. Keeping in mind the Megatrends that are likely to work in India's favor, there are businesses that will get a tremendous boost for their growth. It is for this very reason that Tanushree along with The India Letter team keeps a close watch on stocks available at a PEG multiple cheaper than the index PEG. The PEG multiple makes sure that while we do recommend strong and high growth businesses, the margin of safety does not get compromised. While index valuations may be slightly distorted considering the wide valuation gap between the constituents, this approach we believe could be the best way to capitalize on such opportunities.
The Government's recent decision to commit Rs 700 bn as fresh capital over the next four years in PSBs is a big relief for the latter. As an article in Business Standard suggests, this is more than 10 times the budgetary commitment, suggesting that the rot is much deeper than estimated.
As an economy is on the verge of a turn around, it will need credit support from banks. Public sector banks, still reeling from the consequences of bad lending decisions, especially to the infrastructure segment, are hardly equipped to offer this support. While capital infusion is a temporary relief, it hardly addresses multiple issues that plague PSBs.
The first issue that needs to be addressed in this regard is the government's approach towards these banks, which historically has given little importance to financial viability. The public sector banks need to be made more autonomous before any kind of financial accountability is demanded of them. But these issues are hardly being taken care of and banks are still being dictated on lending norms. Unless accompanied by structural reforms in the sector, the decision will amount to putting more capital to postpone the disaster with magnified proportions.
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