Is history repeating itself in 2015? - The 5 Minute WrapUp by Equitymaster
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Is history repeating itself in 2015?

Jan 2, 2015

In this issue:
» New project announcements at 18 quarter high!
» Are PSU banking reforms round the corner?
» Is the US Fed all set to raise rates in mid 2015?
» ....and more!

The New Year brings with it hope and optimism. After a blockbuster 2014, investors are eager to know what 2015 holds in store. Indeed, after an index gain of nearly 30% last year, the good times could well continue, at least in the near term. We don't want to play spoilsport at this time but we believe it is important to share a lesson from history. We don't mean to give a history lesson here but an article in a leading financial daily about retail investors, prompted us to write about this. As per the article, retail investors are being lured into the markets with 'low brokerage' accounts. What has this got to do with history? Allow us to explain.

In the words of legendary value investor, Sir John Templeton: "Bull markets are born in pessimism, grow on scepticism, mature on optimism and end in euphoria" . In other words, the best time to invest is when there is pessimism all around because that's when stocks are cheap. But is this usually when retail investors get into the markets? Sadly, it's just not the case. After all, how many enthusiastic phone calls did you receive from your broker in 2008 or in 2013? History has shown time and again that the retail party tends to begin only in the optimistic phase. Thus, most small time investors enter the bull market late and then get badly burned when the euphoria ends. The article made us realise that history is all set to repeat itself!

Has your broker given you a call about his 'low brokerage' or 'pay only for profits' trading accounts? If yes, then you're not alone. You see brokers are mostly aware of Templeton's statement. They know that pessimism has been left far behind and people are getting less sceptical about the markets by the day. Optimism is in the air. A good union budget next month, will only add to the positive sentiment. In short, they know that the time is right, to get the retail crowd back into the markets. And what better way to do so, than by launching trading accounts with a new marketing twist? In fact, one brokerage house mentioned in the article had used the very same 'low brokerage' marketing strategy 10 years ago, in the last bull market.

This is why we wish to caution investors at the start of the New Year. We believe that when it comes to the markets; 'the more things change the more they remain the same'. We may not know when this bull market will end but we do know quite a bit about the gimmicks used on the gullible retail crowd. Such tricks only encourage trading and speculation. This is a game that retail investors cannot win.

It is unlikely that your broker has your best interest at heart! So what should retail investors do? If your broker is repeating the bad behaviours of the last bull market; it does not mean you need to do the same. How about making a new year's resolution to adopt long-term Value Investing? We believe this resolution would be the best way to improve your investment returns in 2015 and your overall finances too. Do you agree?

Will you chose Value investing over trading in 2015? Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
With the stock markets already having rallied, expectations of a brisk economic recovery are extremely high indeed. And if there is one true test of the economic momentum building up, that has to be a substantial rise in investment demand. As today's chart of the day shows, announcements of investments in new projects were at an 18 quarter high in December quarter gone by. As can be seen in the chart, this is in fact a sharp increase from the June 2014 quarter.

While this seems like very good news indeed, dig a little deeper and one realizes that one big component of these Rs 4.1 trillion of new investment announcements comes from a large Rs 1.5 trillion order placed by the airline Indigo for 250 aircraft. This chunky order may have single headedly boosted the new investments figure for the quarter. However, it too is indicative of the optimism that the airline has about the Indian economy. Besides, related data also shows that the number of stalled projects have come down sharply to Rs 998 bn at the end of the December quarter. This compares with Rs 1.66 trillion worth of stalled projects at the end of the September quarter. This too is great news considering that stalled projects have become one of the biggest banes of the Indian economy over the last 2 years or so.

Is growth picking up?

As the old year gives way to the new, the start of 2015 finds the finance minister, the Reserve Bank of India (RBI) governor and chiefs of state owned banks in a two day brainstorming session with the aim of crystallizing key points for the long due banking sector reforms. And as this session ends tomorrow, a reforms blueprint for implementation will be put forth to Prime Minister Narendra Modi. Reports suggest that the meeting's agenda will include issues like universal financial inclusion in India, increasing the use of technology, strengthening risk management systems, loan recovery and asset quality, talent management in public sector banks (PSBs) etc. Restructuring of PSBs with an aim to make them leaner and more efficient will be top on the agenda.

While such a session of serious discussions on improving productivity at PSBs is all good, one factor that may put a spoke in the wheel of actual implementation is likely to be stiff resistance from labour unions. This is because any move that involves things like rationalizing staff and closing additional branches etc will mean an immediate uprising by these labour unions. Indeed, getting around this problem will be a formidable challenge and must necessarily consume a big part of this brainstorming session.

Moving on from India's banking sector to the US central bank, economist in the US widely expect the US Federal Reserve to increase interest rates sometime during the second half of 2015. Notably, this is expected to happen even though the crude oil price tumble is having the effect of falling inflation as well as inflation expectations for the year.

This curious phenomenon, where interest rates are increased even as inflation falls, comes on the back of almost 6 years of near zero interest rates. Economists reckon that policy makers at the Fed will focus on things like an improving labour market and other such positives that may eventually lead to rising prices for stuff like wages, rent and other services. What will be interesting to see is the effect that such an increase in interest rates by the Fed will have on the stock markets, especially those of emerging markets.

In the meanwhile, backed by strong buying in index heavyweights, the Indian markets were soaring high with the BSE-Sensex trading higher by about 381 points or 1.3% at the time of writing. Stocks across the board were trading strong with those from the engineering and banking spaces leading the gainers. As for markets in Asia, most ended the day on a strong note; while European indices were trading weak at the time of writing.

 Today's investing mantra
"Risk comes from not knowing what you're doing".- Warren Buffett

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1 Responses to "Is history repeating itself in 2015?"


Jan 11, 2015

Some resemblance/ repeat always reflect. Copy of events is impossible. Well covered .

Like (1)
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