The Most Reliable and Proven Investing Strategy for These Volatile Times

Jan 16, 2016

In this issue:
» Auto volumes continue to falter
» Is the debt crisis different this time?
» ...and more!
Radhika Pandit, Managing Editor of ValuePro

We are living in volatile times. Certainly, in the financial world atleast. It all began in China in August 2015, when the rout in the stock markets spilled over to financial markets around the world.

China is not out of the woods yet. The free fall in its equity markets since the start of this year has eroded considerable shareholder wealth. It hasn't helped that the Chinese economy is also slowing. Predictably, this contagion has spread to most financial markets both in the developed and emerging markets.

Indeed, the US Dow lost 390 points Friday as concerns mounted that the US economy will fall back into recession due to problems in the emerging economies.

The Sensex has not been spared either. Since the start of this year, the benchmark index has already lost around 7%. Of course, China has a lot to do with this. But that is not the only problem. India Inc has struggled with sluggish corporate earnings for quite a few quarters now. Clearly, the Indian economy is not reviving at the pace originally envisaged. And this has made the markets jittery. Indeed, stocks across market caps have seen their prices fall.

But does this mean that you must just go ahead and dump these stocks? Not really.

You see, it all depends on the investment strategy that you follow. And here we turn our attention to none other than the legendary investor and Buffett's mentor Benjamin Graham. How would Graham address the problem of volatility in markets and predicting corporate earnings?

Right before his death in 1976, when an interviewer asked him (Special Report, Medical Economics, September 20, 1976) how he uses conventional metrics like a company's projected earnings to evaluate stocks, his answer was clear. He pointed out that while factors such as those are significant in theory, they turn out to be of little practical use in deciding what price to pay for particular stocks or when to sell them. These remain tricky questions to answer.

Instead, something much easier to take a call on (and thus more reliable for decision making) is that there are times when large numbers of stocks are priced too high in the market, and other times when they're priced too low.

Graham's extensive studies on this matter convinced him that an investor can predetermine such 'high' and 'low' levels for a widely diversified portfolio. And that he can do this without getting involved in weighing the fundamental factors affecting the prospects of specific companies or industries.

Many analysts today would cringe at that kind of thinking.

But Graham's research convincingly showed that it works. Three important things were needed for it to work though. One, a definite rule for purchasing that indicates that you're acquiring stocks for less than they are worth. Two, operate with a large enough number of stocks to make the approach effective. And finally, a very definite guideline for selling.

Rahul Shah, Equitymaster's Co-Head of Research, would know. He is a big believer of Graham's investment philosophy. After doing some extensive back testing, Rahul was firmly convinced that these principles can be applied in the Indian context too with great success. And that was how the service Microcap Millionaires was born. Through this service, Rahul and his team seek to identify the cheapest stocks out there based on financial parameters like book value or earnings and also a strong balance sheet.

And the results have been great. Indeed, since its inception, Rahul's Microcap Millionaires service is up by an impressive 67% as against the 19% odd that the Sensex has returned during the same period. Clearly, Rahul has shown that Benjamin Graham's principles carry a lot of weight and are extremely relevant during volatile times of the kind we are witnessing currently.

Do you believe Benjamin Graham's philosophy will work very well when there is a lot of volatility in the markets? Let us know your comments or share your views in the Equitymaster Club.

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02:39 Chart of the day

Auto volumes are one of the many indicators of the extent of economic recovery. And the picture here has not been too good. Indeed, as can be seen from the chart below, most auto segments have displayed sluggish growth, although passenger vehicles have done the best logging in growth of 9% YoY during the first nine months of FY16.

In the CV space, growth has been tepid at 8% YoY during the period largely on account of LCVs, which grew by 3% YoY. MHCVs turned out to be the best performers of the lot with volumes growing by an impressive 29% YoY. After two consecutive years of steep declines, MHCV volumes have been growing at a strong pace in the last many quarters.

The two-wheeler growth has been lukewarm largely on account of slowdown in rural demand. Erratic rainfall and disruptions in crop production have taken a toll on rural incomes and thereby impacted the demand for two wheelers especially motorcycles.

We believe these are near term headwinds and overall growth in volumes should pick-up once there is a sustainable recovery in the Indian economy.

Auto volumes continue to falter


It is different this time.

The run up to every economic crisis has this same sentiment echoing. Investors think that the scenario is better than before and ignore the palpable risks. We are not surprised that business blogs are once again devoting terabytes to explain why the US will do better this time.

The logic is that US households, which were at the epicenter of the mortgage crisis, now have less debt. At the end of 2007, household debt levels equaled 130% of income. Today, that has dropped to 103%. Further, thanks to low interest rates, households now pay 15.3% of income to meet debt obligations versus 18.1% in 2007. With interest rates even in the US headed upwards, we don't think the 100% plus debt level is something to be relieved about.

This amplified the pain of losses, led to a seizing up of debt markets and blew big holes in bank balance sheets.

The Wall Street Journal claims that the US banks today are in far better position to absorb losses than during the financial crisis of 2008. That is because they are better capitalized than they were eight years back. But what the WSJ has chosen to ignore is that the government that bailed out the big banks in 2008 is in a dire state this time. US government debt was equal to 101% of gross domestic product in the third quarter of 2015 versus 63% in late 2007.

The situation is not very different for government of major developed and developing economies such as the European Union, Japan and China. In fact, China's unconfirmed debt levels is the biggest risk and one of the key causes of the current market turmoil.

If you ask us, we strongly believe that history does not repeat but rhymes. And there is no reason for investors to underestimate the risks this time too.


Major global markets witnessed sharp selling activity for the second week in a row. Investors panicked as concerns regarding China's economic growth became widespread. Disappointing US data too added to the woes. All of this led to a sharp fall in indices during the last trading day of the week.

Due to the huge correction in commodity prices, the currencies of commodity exporting nations have also come under severe pressure. Oil prices tumbled to 12-year lows, falling below US$ 30 per barrel.

The China stock markets witnessed maximum selling pressure and lost another 9% in a week's time. On the other hand, UK stock markets tumbled to 3-year lows, sending FTSE 100 to its lowest levels since November 2012.

While, the Indian markets were not spared either, they still held up reasonably well this week, as compared to global peers. Barring stock markets from the Information Technology sector, most sectoral indices closed on a weak note. Stocks from the Realty and Capital Goods sectors were the worst performers. The Smallcap and Midcap stocks were also battered in the week gone by.

Performance during the week ended 15th January, 2016

4:51 Weekend investment mantra

"To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses - How to Value a Business, and How to Think About Market Prices." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst).

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Equitymaster requests your view! Post a comment on "The Most Reliable and Proven Investing Strategy for These Volatile Times". Click here!

5 Responses to "The Most Reliable and Proven Investing Strategy for These Volatile Times"

bijoy kumar borborborah

Jan 26, 2016

A determined prospective prime ministerial candidate was also a factor as his winnability was forseen by indian investors and later by fii's. As a lay observer of current affairs I could foresee Modi as the winner in February 2014. A lethargic indecisive state head is a declining factor in all spheres. Like before his candidature, still opponents want to subvert his going as a parliamentary team and head.It is the major deterrance Not only faced by Modi but the whole nation is suffering. Executive hours are made futile howling hours.
Still prevailing corruptions and slack adherence to addressing loopholes in plans,rulings,environmental and demographic concerns across the provinces ; may be a major domestic concern so far.

( I may be wrong in my saying as I a common man, but it is my view which Iam ready to dicard if get to read analytical review)


priti bhimani

Jan 26, 2016

PM has done good marketing in 28 countries but actual investment will come when investors see things going on ground.
like GST, labour reforms(which is aforgotten agenda),corruption control.
otherwise it is not going to be fruitful.


Muthuswamy Narayana

Jan 26, 2016

The problem with stock market is it acts in a knee-jerking fashion expecting results in a fliffy after hearing any plan. India is massive and it takes time to get the results at the ground level. So to write off Modi Govt. or base our investments on what is happening now and not happening as yet is short-sighted. What is important for investment decisions right now is to see whether the intermediate steps to what is promised are being monitored and taken. If yes. you cannot keep harping on 'where are the results?' question. I can understand this question when Rahul Gandhi or the congress Party asks but not when Equity master does!
Just watch what is going to happen in the next few years. The various schemes announced by the Modi Govt. are not slogans as you seem to perceive but an essential step in motivating and keeping people on track to reach those goals.

As for oil prices effect every one knows it is one of those God's gifts to India. But why do you have to say therefore that Modi Gvot has done nothing else? As Modi himself put it in his characteristic style to the accusation that Modi has simply been lucky for whatever the Indian economy is, ' Don't you think it is better to have a lucky PM than an unlucky one?!'


Sundaravaradan S

Jan 25, 2016

Sensex up:
When India felt Modi is PM, SENSEX/NIFTY went up...
The FDI went up...Because of Modi...
So many Schemes were is due to NaMo.

Sensex Down in 2016:
Yes; It is NOT because of Modi...! It is because of Oil price.
All prices, Earnings & Profit of Indian Industry went Down...Not because of Modi...! (But due to China slowing down & dumping goods, all over the world..! Not because of Namo..
All the Good Bills are stuck-up... Congress & other parties played Selfish Politics, without bothering about Indians.... Yes....It is not because of Modi..
Yes; the key-take-away..... all the Down-Syndromes....
"It is NOT because of Modi" !

Thank You...


mukesh kale

Jan 16, 2016

They both are very honest and prudent. Which also means they are not "bulls" of the market.
Secret of volatile market is " near " future trend could be up or down and you benefit both ways if you not empty basket in volatility. After 15 months of downward volatility, sensex doubled in 6 months. Reason rides on back of emotions here.

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