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Now Is the Time to Differentiate Yourself from Other Retail Investors

Feb 26, 2016

In this issue:
» Shell entities posing new challenge for RBI
» Asset quality of even private and foreign banks have become questionable
» ....and more!
0.00
Radhika Pandit, Managing Editor of ValuePro

You, the retail investor, have been the force behind the growing heft of mutual funds since May 2014. As per the Association of Mutual Funds of India, 3.4 million fund accounts were opened in the last ten months. Most belong to retail investors. Add to this the 2.5 million accounts that were opened in the fiscal year up to March 2015.

Now, as the halo around the government recedes, there is fear that retail investors too might exit markets in droves. The budget, which is around the corner, is yet another reason for investors to be nervous.

Speculations are flying thick and fast about what the government could do to shore up revenues. There are speculations that the government may tax profits from stocks sold within three years of purchase. Currently, the tax is levied only if the stock is sold within a year. In other words, the fiscal benefit of holding stocks longer might go away.

The nervousness is palpable among retail investors who are disappointed with both corporate earnings and government inaction over the past few months. It is no surprise that the pre-budget correction this February has been the worst in seven years! A disappointing budget could be the proverbial last nail in the coffin.

If you ask me, now is the time to differentiate yourself as a retail investor. The time to prove that the herd mentality will not influence your action on stocks. The time to dig deeper and look for real reasons to invest or not.

First of all, shut out the noise about fiscal incentives - or lack of them - in the budget announcement. Remember that speculation serves only the investors who 'buy on the rumour and sell on the news'.

Think about investors who bought or held on to stocks when the Sensex collapsed on 17 May 2004. The change of government then and the subsequent ones over the decade hardly hurt wealth-creating stocks. If anything, businesses such as HDFC Bank, Hawkins, Page Industries, Gruh Finance, and TCS thrived through the changing governments and disappointing budgets.

Instead of worrying yourself sick over speculations, it is the time to differentiate yourself by acting on stocks.

You may first want to make a wish list of stocks you will be happy to own forever. They should be businesses that you'd be happy to own irrespective of the government. They should generate a steady stream of dividends. Many may split and split again and compound your investing returns over decades.

The opportunities to buy stocks when the market is rife with fear are rare. You can't afford miss them.

Many stocks perpetually trade at a premium by virtue of being safe, high-growth, wealth-creating businesses. Market crashes like the current one provide windows when even evergreen stocks start to trade at 52-week lows and the dividend yields of some consistent stocks start to look better than interest on bank deposits.

Letting go of such opportunities may mean having to wait several years before you come across such a chance again. We recently told StockSelect subscribers how they should start acting on this rare opportunity. See for yourself if you too wish to give it a try.

How do you try to differentiate yourself as an investor? Let us know your comments or post them on Equitymaster Club.

2.50 Chart of the day

Tanushree recently explained to our subscribers in the Research Digest why Equitymaster had deliberately avoided public sector banks since 2013. Interestingly, the narrative about bank NPAs does not end there. She recently shared with me some data on the ratio of incremental NPAs to NPAs recovered by public, private sector and foreign banks, over the past decade.

And guess what?

The data clearly shows that it is not just public sector but even private sector and foreign banks that the RBI needs to be worried about. For the latter certainly have been as lax about credit quality and loan recovery efforts as the former. As the chart shows, like in the case of pre 2008 bubble, private sector and foreign banks have had higher incidence of NPAs versus loan recovery since 2013.

This is precisely the reason we say that not all private sector banks can be painted with the same brush when it comes to asset quality. Some have stood the test of time. But there are several private sector entities where the NPA problem has been worrying. As a group, NPAs of private and foreign banks may get dwarfed by that of PSUs. But as an investor you need to be selective about your choice of private sector banks too.

What we are missing about Private sector bank NPAs...

3.50

Promoters' unethical activities continue to keep the Indian regulators on heels. The Reserve Bank of India (RBI) has cautioned banks about the ill acts carried out by some promoters whose assets the banks have seized due to non-repayments. In order to buy back these seized assets promoters are exploiting various means. As reported in an article in Livemint, RBI fears that these promoters are using shell entities, to buy back these assets at much lower prices.

Shell companies are often associated with frauds. These entities do not have any business or assets in place and exist only in paper. Thus they are often used to shield identities or to hide money

Major PSU banks are already burdened with bad loans. Further they continue to find challenging to buy appropriate buyers to sell these seized properties. Thus whenever banks get buyers, they are keen to sell such assets.

But selling off the seized assets to the same promoters with fake identity slays the fundamental reason to seize these assets. Further, it propagates black money and corruption. It's time banks and regulators get really strict and take such unscrupulous promoters to task.

4.45

After opening on a firm footing, the Indian indices have lost their early gains albeit trading in green. At the time of writing, BSE Sensex was trading higher by about 72 points. BSE Mid Cap index is trading down by 0.1% while the BSE Small Cap index is trading down 0.7%.

4.50 Investing mantra

"Be Fearful When Others Are Greedy and Greedy When Others Are Fearful" - 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 "Now Is the Time to Differentiate Yourself from Other Retail Investors". Click here!

1 Responses to "Now Is the Time to Differentiate Yourself from Other Retail Investors"

Ravi shah

Feb 26, 2016

Please suggest DVR stock of good quality company at attractive valuations whenever available.
Thanks

Like (1)
  
Equitymaster requests your view! Post a comment on "Now Is the Time to Differentiate Yourself from Other Retail Investors". Click here!
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Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

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