Are you gearing up for 'post Budget' investing?

In this issue:
» Why analysts are upset with Warren Buffett?
» Why are the rich favouring Alternate Investment Funds?
» Is India's black money problem getting bigger?
» ...and more!

00:00

We are quite sure that most of you have marked 28^th February 2015 on your calendars. And why not? After all, the expectations about the new government 'delivering' on its promises are heaped on this date. And while there is typically a lot of noise around the Union Budget every year, the last day of February is particularly very important this year. For going by the memories of 1991, many are expecting the Union Budget 2015 to be a watershed event in India's economic history. Whether or not that will indeed be the case is anybody's guess.

Now, what seems most amusing to us is the fact that investors are actually gearing up for 'post Budget investing'. Based on the expected 'break through reforms', they are readying themselves to pour their entire allocable surplus into stocks. The media and business papers are playing no small role in whetting the appetite for news based investing. And the Budget day i.e. 28^th of February 2015 is being projected as the all important day for Indian investors.

Well, good intentions apart, we certainly doubt if it is possible for the government to deliver on all its promises through the Budget. And reforms, if any, will not be temporary. Even if they do offer a meaningful upside to the earnings estimates of Indian companies, the same will pan out over a period of time. Hence investors should get enough time to take calibrated decisions on their stock portfolio.

So, it is certainly a good idea to book some profits on stocks that have ripe valuations or have a good reason to be sold. No doubt that if the Budget is indeed what it is expected to be, stocks in India could certainly get attractive. But investing post Budget cannot be about doing so in a day or week. Nor should it be about timing the markets. Just as there is no reason for you to ignore solid and attractive stocks pre Budget, post Budget investing decisions cannot be based solely on policy upsides. Do not overlook the fact that you will need to be careful about valuations. In addition, companies expected to benefit from policy upside should also have robust business models and good management.

So do not pay too much attention to the media hype about post budget investing. Continue looking for safe and value stocks even in the days preceding the event. And whether or not the Budget turns out to be a blockbuster event, do not panic. Good companies will continue to be resilient even if the Budget fails to meet expectations. And a sharp up move in valuations of companies benefitting from reforms, will not mean that investing opportunities are lost for good.

Most importantly you should not lose sight of asset allocation. Investing in the post Budget scenario, however appetizing, cannot be a reason to subject your portfolio to undue risks.

So, are you gearing up for 'post Budget' investing? Let us know your comments or share your views in the Equitymaster Club.

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01:45

Now, when it comes to corporate governance in safe stocks, it seems that even Buffett's Berkshire Hathaway is not being spared. Buffett, despite his legendary track record in creating investor wealth, has come under fire from analysts. And the basic grudge against him and Berkshire is that the entity divulges too little information for analysts to make projections. Now, at a time when analysts are being bombarded with information so as to predict the next quarter's EPS to the last decimal accurately, we can understand why Buffett is such a huge disappointment. After all, being an investor himself, Buffett cares little about quarterly performances. And sees no reason why quarterly estimates should impact analysts' views about Berkshire Hathaway. But analysts are insisting on expanding disclosures, particularly about Berkshire's large insurance businesses.

Now, corporate governance apart, we believe companies should disclose adequate information about their performance to the investing community at large. The practice of companies divulging information selectively to top analysts is against the interest of minority shareholders. And with the sole intent of getting the next quarter's EPS right, the analysts do no favour to long term investors, even with heaps of information. So we completely agree with Buffett that relevant information, necessary for long term investing, given out publicly, serves investors best. And the analysts who believe otherwise could continue speculating about quarterly earnings.

02:40

While investors have been turning cautious about stocks, there is one asset class that has become a big favorite of the rich. We are talking about Alternate Investment Funds (AIFs). While this is not a separate assets class per se, high net worth individuals (HNIs) do treat it that way. AIFs are quite simply, funds which invest in a wide variety of assets which are high risk/high return in nature. These include unlisted firms, start-ups, private equity, venture capital, hedge funds etc. In April 2012, SEBI had allowed AIFs to be launched after introducing the regulations for the same.

One look at the data (as per Mint) suggests that AIFs have been a big hit. Investments made into AIFs in 2014 were nearly Rs 7.8 bn. This is a huge jump from the 2013 figure of about Rs 2.9 bn. Clearly, stocks and real estate are not the only games in town as far as the rich are concerned. We won't be surprised if this sort of exponential growth were to continue in the short term. However, we would also add a word of caution here. A lot of this money has been made its way into small un-listed firms. These could become IPO candidates in the coming years. At that time investors would do well to stay away from issues that are offered to the general public at sky high valuations.

03:45		Chart of the day

Readers would be aware that the big news story of the day is about black money in Swiss accounts. The names in the HSBC list have nearly doubled and to be honest, we are not really surprised. As far as we are concerned, this issue is a huge blot on our economy. Conservative estimates indicate that the size of India's shadow (black money) economy is about 22.4% of GDP. Although the statistics available are dated, the proportion has not changed much in recent years.

We don't have high hopes of this gigantic stash being accounted for any time soon. Even if it has found its way back to India via 'round-tripping', it is next to impossible to measure and track it with accuracy. What compounds the problem is our obsession with Switzerland. Experts in this field have long argued that illicit funds are held in various tax havens around the world and a large part of it has already found its way back to India. Thus, we believe without the necessary political will, there is no chance of getting back the black money abroad or at home.

How big is India's black money problem?

04:30

Meanwhile, the Indian stock markets are trading well below the dotted line today. At the time of writing, the BSE-Sensex was trading lower by around 350 points or 1.2%, while the NSE-Nifty was trading lower by 90 points or 1%. Metal and capital goods stocks were amongst the big losers. Asian stock markets were trading mixed at the time of writing. European stock markets have opened in the red today.

04:50

Today's investing mantra

"All else being equal invest in the company with the fewest color photographs in the annual report" - Peter Lynch