Is this the biggest approval for value investing? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is this the biggest approval for value investing? 

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In this issue:
» Is gold back in business?
» Have you analysed your errors of omission?
» The first central bank that will raise rates
» A summary of global markets during the week
» ....and more!

John Maynard Keynes. For those who are even remotely interested in economics, this name would have been hard to miss. It won't be wrong to say that most of the economic policies that are followed these days bear his stamp. And he is indeed the intellectual guru for many of the current breed of economists.

Therefore, given such a stellar resume, it is hard to believe that Keynes would rely on something other than his economic theories for generating wealth. In fact in the early part of his other role as an investor, he did just that. An article in New York Times highlights how Keynes speculated heavily in currencies but got nearly wiped out when his bets backfired.

Then again, while investing in the 1920s, he totally failed to foresee The Great Depression and was staring at bankruptcy one more time. Now, you don't expect people like Keynes to take such blows repeatedly and not do something about it. As expected, he was left intellectually shell shocked at the turn of events and eventually decided to change his strategy.

We believe this was the time of the great metamorphosis in his investment approach. So, out went attention to complex economic theories and short term trends. And in came the theory of value investing and long term approach. Yes, that's right; a person who invented this whole structure of an economic school of thought ditched this very approach and instead adopted the doctrine of value investing.

And how did he perform since then? Well, his performance over a long term period never looked better. As the article points out, he averaged an annual return of over 16% for many years, far outperforming the comparable universe that returned just 10% during the period.

In fact, this experience even led Keynes to develop an important investment insight. He eventually came around to the view that a prudent plan does not include timing the market, but focuses on long term value and total return. Shades of Benjamin Graham and Warren Buffett here? Well, certainly. We believe that if this entire episode of Keynes' investment history do not let people to believe in the benefits and advantages of value investing, then we don't know what will. Here's a man who developed perhaps one of the most widely followed economic theories but ultimately had to give in to the logic and philosophy of value investing. Therefore, if you aren't following value investing yet, it is still not too late we reckon.

Do you think value investing works in the long run? Let us know your comments or share your views in the Equitymaster Club.

PS: We are extremely happy to announce that we're doing something we've never done before. Perhaps for the first time in India, we would be launching our very own, Dynamic Portfolio Recommendation Service. Although we cannot reveal much about the service right now, do watch out for a message by one of our colleagues, Rahul Shah on this service on Sunday at 9 AM. So keep an eye out for his message with the subject line, 'Here's Your Founder Member Invitation...'

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01:19  Chart of the day
If anyone wants to know a big reason why our currency has often remained so volatile, today's chart of the day perhaps provides the same. As the chart highlights, India despite its huge size and potential, has attracted the lowest FDI inflows of the all the BRIC nations between the year 2007 and 2012. And this has been one of India's biggest problems we believe. While it attracts a good deal of portfolio inflows or what we know as hot money, it is the money of the FDI kind that we really need to boost our currency as well as the economy. Simply because this is more long term in nature and contributes in a meaningful way in enhancing the well being of a larger section of the society. However, instead of encouraging more FDI in India, the Government in recent times has sent more wrong signals than right. And this is where the task of the next Government at the center will be really cut out we reckon.

India's poor standing on the FDI inflows front

In a period of no uncertainty, this asset class has limited productive usage and therefore very little value. However, during periods of economic uncertainty, this asset has a track record of being sought after. Especially, due to its reputation of being an inflation hedge and a store of value. The price of gold jumped 70% from December 2008 to June 2011 as the US Federal Reserve pumped more than US$ 2 trillion into the financial system. Needless to say investors perceived this excess cheap liquidity as a potential inflationary threat. And therefore they sought to hedge their currency risk with gold.

In 2013 however, preliminary economic data from the US suggested signs of economic revival. The price of gold last year therefore tumbled the most since 1981; as investors sidelined inflation risks. However, once the US Fed started tapering its bond purchases, the uncertainties in global economy have re-emerged. Investors are aware that the QE taper will keep markets nervous. In 2014, the price of gold has climbed 8.1% amid a drop in emerging-market currencies. Where is it set to go ahead from here? Well, commenting on the short term direction of gold prices is not our domain. What we can say with a fair degree of certainty is that macroeconomic headwinds for the global economy are here to stay. And as long as investors and central banks need to find a safe haven, gold will continue to find takers. It will therefore not hurt investors to keep at least 5% of their portfolio in the yellow metal.

Post the 2008 global crisis, the developed world has been following loose monetary policies hoping that these would get their economies back on track. Be it the US Fed, the Bank of England, European Central Bank or the Bank of Japan; all of them so far have kept interest rates close to zero besides announcing massive bond purchase programs. But it looks like the UK might take the lead in reversing this policy and raising interest rates.

As per an article on Moneynews, Bill Gross opines that the Bank of England (BoE) is likely to boost short term interest rates. BoE had raised UK's economic growth forecast to 3.4% this year. This is well above its November estimate of 2.5%. Hence, there are talks doing the rounds that the BoE might raise rates much sooner than expected. Especially if economic growth accelerates. The BoE has not really confirmed this. And has stated that if rates are raised, it will be a gradual process. It has pointed out that till the time investments and growth picks up, rates would most likely remain low. This is in contrast to the US Fed, which has clearly given indications that it has no intention of raising rates in the US anytime soon. Thus, if there is a bet on which central bank will be the first to raise rates this year, UK seems the most likely candidate.

We believe that all investors must, from time to time, take lessons from their own investing behaviour. But when investors analyze their investing hits and misses, most tend to focus solely on actual investment transactions that they have made. You remember all those investment decisions that have done well. Then there are those decisions wherein you have ended up burning your fingers. You remember them too. You remember your actions because they involve an actual transaction which has repercussions on your finances.

While it is your decisions that translate into the actual investment transactions, there is a long trail of 'indecisions' that are an integral part of your overall thought process. And many investment mistakes could actually be mistakes of 'indecisions', or as Warren Buffett likes to call it 'errors of omission'. Here is an important quote from the investing legend: "The main mistakes we've made - some of them big time - are: 1) Ones when we didn't invest at all, even when we understood it was cheap; and 2) Starting in on an investment and not maximizing it."

Have you had a similar experience? We strongly believe that if you also start analyzing your errors of omission, it could help you go a long way on your path to wealth creation.

Meanwhile, barring Japan, global stock markets closed the week on a positive note. The US markets shrugged off weak economic data relating to factory output. The harsh weather conditions in the US have had a minor impact on economic activity in the US, at least the near term. However, US exports rose 0.2% in January for the third straight month. The benchmark S&P 500 index, closed near its all time high at 1,838 on Friday.

The European markets delivered a strong performance in the week gone by. The major indices of the UK, France and Germany were up by 2.6%, 4.8% and 3.9% respectively. The markets cheered positive economic data; especially the fourth quarter GDP data in France and Germany. The GDP growth for the Euro Zone came in at 0.3%. The markets also seemed to welcome a change in the political leadership in Italy as the previous government had failed to pass any major reforms.

The Indian equity markets ended the week on a flat note. The markets struggled for a clear direction in the wake of divergent performance between different sectors. Economic data remained weak as the IIP data for the first nine months of the financial year indicated a contraction in economic activity by 0.1%. However on a positive note, the Wholesale Price Inflation (WPI) for January 2014 has come in at the lowest level in the last eight months at 5.05%. This has raised hopes that the Reserve Bank of India (RBI) might not raise interest rates at its next meeting, even if it does not reduce them.

Performance during the week ended February 14th, 2014
Data Source: Yahoo Finance

04:55  Weekend investing mantra
"It is better to be roughly right than precisely wrong"- John Maynard Keynes
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
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2 Responses to "Is this the biggest approval for value investing?"


Mar 1, 2014

What is long term ... during early 2000s 3-5 years was long term. now it has shifted to 7-10 years. what will happen in future. Equitymaster recommends a share for 3-5 years and then gives a sell recommendation in 3 months


Swapnil Gangele

Feb 17, 2014

Though it would be little immature comment but if purpose of investing to earn better money to fulfill our desire there is no space but gambling yes if we are looking for basic needs then only one can give considerably time to his well chosen stocks to grow in the due course of time but one more thing which dominates in this strategy is one's ability to digest a big sentimental momenta panic/greed.

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