The tough art of doing nothing - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The tough art of doing nothing 

A  A  A
In this issue:
» Industrial production contracts in the year till date
» The downward re-rating of Indian banks to be more severe?
» Real estate, the preferred asset class of wealthy Americans
» Will the Canada property bubble pop?
»  and more....

The markets have been volatile. The stocks that you like or have been keeping an eye on have become or have been the market darlings for a while now; and therefore are trading at valuations above your comfort zones. So you wait. And in the process accumulate cash overtime. The same is sitting idle in your bank account, earning a paltry single digit rate of interest. With foreign institutional investors bullish on the Indian story, the quality stocks are moving up even more. And this just makes you restless.

'I should have invested in this stock at x price and I would have been up by XX% by now. ' would be a thought running through your head again and again. This is very common process that leads investors to make bad decisions.

Lots of analogies have been made to compare the temperaments required to do well in the world of sports and investing. There is the well known baseball analogy created by Buffett and Munger, wherein they talked about waiting for that one pitch in which you go all out.

In a recent post in, the author compared two other sports - cricket and football - to the process of investing. In case of former, he mentioned how two-thirds of now retired ace batsman Sachin Tendulkar's game was based around forward defence, back-foot defence and leaving the ball, without trying to play it. In short, letting the ball go is as good as playing a good shot.

Or in the case of football, goalkeepers - during penalty shots - feel the need to jump on either side as to prove that they are making the effort. A research paper by Michael Bar-Eli discusses why a goalkeeper would feel less bad about a goal being scored when he dives on either side (in anticipation of saving a goal) as opposed to standing at the center and not moving at all. In fact it turns out that the researcher had analysed 286 penalty kicks in top leagues and championships worldwide. And the data showed that the optimal strategy for goalkeepers was to stay in the center.

Coming back to stocks...

Stocks are traded for nearly 250 days each year. Companies announce results on 4 days (quarterly results) in a year. So what makes stock prices move in the balance 246 days?

We will take the help of Benjamin Graham to respond to this question.

Graham was of the view that there are three broad factors that ascertain price movements. These include 'intrinsic value factors', 'future value factors' and 'market factors'. The former need to be justified by facts and as such would include parameters such as earnings, dividends, assets, capital structure, amongst others. The 'future value factors' includes parameters such as management and reputation of a company, competitive conditions and prospects, possible and probable changes in sales, margins. And the third factor i.e. 'market factors' would solely be based on the technical, manipulative and psychological aspects of investing.

It is thus a combination of all the three that tends to influence the attitude of majority of investors, which leads to the volatility and thus movement in stock prices. As obvious as it may be, the former is purely objective and investment oriented. The latter i.e. 'market factors' would purely be speculative, while the 'future value factors' would be a combination of both.

"In the short run, the market is a voting machine but in the long run it is a weighing machine." is a famous quote by Benjamin Graham. Here he talks about how many voters (investors) register choices which tend to be a product of reason and emotion, rather than a weighing machine where the substance (company) is assessed. What Graham is essentially indicating is that the underlying fundamentals of a company will drive its performance and thus the movement in stock prices, over the long run.

So next time you think that you may have missed the bus, aim to bring in the above elements in your thought process. And it should help you take better decisions and more importantly not disappoint you over the missed opportunities.

Do you think not doing anything is as important as buying or selling stocks? Let us know your comments or share your views in the Equitymaster Club.

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01:45  Chart of the day
It's been quite some time since the Indian economy has been facing a rough weather. The prospects of the economy seem to be clouded by slowdown in the GDP, high fiscal deficit, high inflation and depreciating currency. The recently released index of industrial production (IIP) data has further added to the economic concerns. This is the third month when the industrial production has shown contraction. The industrial output has contracted by 0.6% in the month of December 2013. For the first nine months of FY14, the industrial output has contracted by 0.1%. The number when seen alone may not raise much concern. However, one should keep in mind that the same grew by 0.7% in the corresponding period last year. The main culprits for the slowdown have been manufacturing and mining sector.

Industrial growth: All down, barring electricity

Besides low demand, poor investment climate, delays in projects, environmental issues and policy bottlenecks etc are some of the key reasons for this slowdown. On the positive side, retail inflation for the month of January 2014 has eased to two year low of 8.79%. Will this make RBI cut rates as demanded by business and industry chambers? If the recent policy decisions are anything to go by, RBI seems to be targeting inflation more than growth. With a stated objective to bring down inflation further, the possibility of rate hikes during the calendar year 2014 cannot be ruled out.

When talking about bad loans and toxic assets in the Indian banking sector, investors keep referring to China and the subprime crisis in the US. Banking entities in both economies have so far managed to keep their heads above water. A presentation in the recent Equitymaster Conference made a mention of the hedge that Chinese banks have against asset quality risks. It seems the biggest banks in China have provision coverage ratio of as much as 300%. As against that the average provision coverage in Indian banking sector is just about 75%. Needless to say investors have less to worry about Chinese banks than ones in India. Again the too big to fail banks in the US were bailed out by government funding. The Indian government, however, despite its willingness to re-capitalize weak PSU banks, is unable to do so for paucity of funds. Thus neither do Indian banks have sufficient provision cover nor enough capital support. The result being that as and when entities like United Bank of India, burdened with huge NPAs, show up, the downward re-rating of Indian banks is likely to be more severe.

In the last one decade, the world has seen an unprecedented influx of cheap liquidity. This has, in turn, created asset bubbles across the globe. One big recipient of such of money inflows has been Canada. As an article in points out, the Canadian housing market is the most expensive in the world. By historical standards, it is 60% overvalued. How did this happen, especially at the time when the economy is struggling and the employment situation is grim?

Here is the answer. Canada's housing prices have been driven up by foreign investors. Apparently, Canada has been quite open to foreign investors via its investor visa scheme. As a result, wealthy people from across the globe and particularly from Hong Kong and mainland China have flocked in droves to buy a piece of Canada. And this has pushed property prices to sky-high levels.

Now, Canada's government has announced that it is scrapping its investor visa scheme. As a result, applications by many Chinese investors will get scrapped. Will this cool down Canada's housing market? Or will it result in a crash? Only time will tell...

While investors in Canada may be concerned about the housing prices in the country, the views of investors in the US are quite the opposite. As you know, the housing market took a beating in the US post the subprime meltdown in 2008. But in 2014, real estate is expected to be the top investment avenue at least for US millionaires as per an article on Bloomberg. Indeed, this is reinforced by the fact that around 77% of investors, with at least US$ 1 m in assets, own real estate. The reason for this is not hard to find. With the US Fed, sticking to its near zero interest policy to fuel growth, bond yields have been very low and hardly supports savings and investments. Equities have also risen sharply in the US to the point that they are probably beginning to look expensive. This is all the more so because the surge in equities has largely been driven by too much liquidity as economic fundamentals continue to remain weak. Thus, in a scenario where the investment options are too little, real estate is gaining favour. There are expectations of an appreciation of property values and also benefiting from a steady stream of rental income. But this will hardly hold true when bubbles once again begin to form in the property market. One needs look no further than the 2008 subprime crisis to understand that.

Guys over at have come up with a fantastic analogy to explain the mess the Government is into with respect to its finances. The analogy refers to whether a person would want to sell one's house in order to buy a brand new car. Well, no one in his right mind would do that, isn't it? The reason is simple. House is an asset, something that appreciates in value and hence, creates wealth over the long term. A car on the other hand is an expense and an asset that depreciates by 50% the moment you drive it out of the showroom the first time. Therefore the deal just doesn't make sense. However, this sort of rationality gets thrown out the window when it comes to the Government.

For the Government routinely sells its assets, something that could grow in value over time, to cover up for wasteful expenses like subsidies and dole outs. You see, the revenues that the Government earns fall well short of funding its huge expenditure, a large part of which go towards misdirected subsidies. Therefore, it is left with no other option but to sell assets like its stake in PSUs to make up for the gap. Needless to say, this isn't a sustainable trend and hence the Government's focus should be on augmenting revenues as well as reducing subsidies.

In the meanwhile, Indian stock markets lost the morning gains and slipped below the dotted line. At the time of writing, the benchmark BSE-Sensex was down by about 175 points (0.9%). Stocks from the oil & gas and banking sectors were leading the losses, while gains were seen in stocks from the realty and auto sectors. Asian stocks were trading weak with Hong Kong and China down by about 0.5% each while Japan was down by about 1.8%. The European markets opened on a weak note.

04:55  Today's investing mantra
"If calculus or algebra were required to be a great investor, I'd have to go back to delivering newspapers."- Warren Buffett
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3 Responses to "The tough art of doing nothing"

B Raj Kumar

Feb 14, 2014

I do not know whether doing nothing is tough. I have been sitting idle for the past one year, since when I have been unemployed. I am managing with my savings, but have not invested in any stocks. Well, if this suits your description of the tough art of doing nothing, so be it.

Like (1)


Feb 13, 2014

I am interested to invest in good shares to the extent of 2.00 lakhs and can wait for a minimum of 6 months to 1 year.

Like (1)

Sundaravaradan S

Feb 13, 2014

Sub: Analogy of Govt Selling House to buy Car.

I would like a different Example.
Imagine an NRI giving Power of Attorney to some-one and this persons Sells the House to buy a Car blackmailed by a Mafia! Who is the permanent Owner of PSU? Who Sells? Who gets the Money? Who Controls the Head-of-PSU? For how long? Do they loose Money from their PERSONAL account??? How else one gets Votes??!!

Like (1)
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