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Would You Ever Try Walking on Clouds?

Feb 27, 2016

In this issue
» Govt. capital expenditure highest in five years
» What the markets have been upto this last week
0.00
Rahul Shah, Co-Head of Research

It's as beautiful as beautiful can get. One of my favourite sights...

Peering out of an airplane window at the carpet of bright-white clouds on a sunny day is a sight to behold. I love the sight of those clouds down below, and I'm sure you do too.

But tell me - as real and as attractive as they look, would you ever consider taking a walk on the clouds?

Of course you wouldn't...

They may look real, but you know they are empty...without substance. You'd never take them seriously enough to set foot on them...

That's the thing though - I always see people trying to 'walk on clouds' in the stock market.

Just replace 'clouds' with 'stock prices', and you'll quickly see what I'm getting at.

Stock prices are flimsy. They may represent real underlying assets. But the way the stock market functions, stock prices can be as short-lived and bereft of substance as the clouds.

The market has a way of taking the prices of stocks to levels that don't make any sense. And then just as quickly bringing them back down.

Even for a moment, the tiniest moment, you make the mistake of taking them seriously...of relying on them...of making decisions based on them...you will realise that they can disappear from under your feet before you can say the word 'cloud'.

One has to understand this nature of stock prices to be a more intelligent investor.

Some investors realised this recently. Just a year back, the markets were busy touching new highs. Investors were happy and excited. Looking at these attractive prices, many first-time investors were drawn to the stock market. In March last year, the BSE Sensex touched a high of over 30,000. Investors took these prices too seriously and decided to invest on the basis of these increasing prices.

Today, the BSE Sensex stands at about 23,000.

For many individual stocks, the fall has been way sharper. Some stock prices that were flying high last year are now down in the dumps. Investors who had taken the high prices as 'real and attractive' now know just how 'short-lived and empty' they could be.

As investors, each time we feel inclined to take a stock's price at a given moment too seriously, we must remind ourselves of their fleeting nature. It is precisely this realisation that is the key to taking advantage of the highs and the lows of stock prices.

How seriously do you take stock prices as they stand at any given moment? Let us know your comments or post them on Equitymaster Club.


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2.32 Chart of the Day

Which is a rupee well spent by the Government, on capex or on things like subsidies? In a country like India that's starved of growth and that perpetually runs a deficit, it is indeed the capex, isn't it?

Investments in fixed assets helps improve productivity. It leads to greater income generation down the line. In fact, this is borne out by a study as well. As per a leading daily, for every rupee spent on capital formation by the Government, additional income generation was to the tune of Rs 2.45. And for transfer payments and subsidies, additional income generation was just one rupee.

Increase in Capex an Encouraging Sign

It is in light of this information that today's chart of the day is an encouraging sign. It highlights how Government's capital expenditure as a percentage of budget estimates has been the highest this year in the last five years.

Unfortunately, this year's jump was possible because of the wind fall from lower crude prices. Therefore, maintaining a similar pace next year could be tough, especially when finances will face strain on account of 7th pay commission and one rank one pension scheme. It will be interesting to see whether this Government chooses to be different than its predecessor in this regard.

3.45

Global markets moved indecisively this week. The European markets continued their rally from last week. The benchmark indices in the U.K, France, and Germany rallied by 2.4%, 2.2%, and 1.3% respectively. The markets are factoring in further stimulus measures by the European Central Bank (ECB). The European markets seem completely unfazed by the possibility of a Brexit i.e. Britain leaving the EU.

The US markets too ended higher for the second consecutive week. The Dow Jones Industrial Average (DJIA) was up by 1.5%. However, the Dow is still down 4.5% year-to-date. The S&P 500 ended higher by 1.6%. Markets cheered news that US GDP growth for the last quarter of 2015 was revised higher to 1% from 0.7% earlier.

In Japan, the BoJ has already implemented negative interest rate policy (NIRP). The Japanese market was up 1.4% this week. However, stock markets in India and China bucked the trend and ended the week lower by 2.3% and 3.2% respectively. The Chinese central bank has hinted at fresh stimulus measures but this did not enthuse the Chinese market.

Back home, the BSE Sensex ended the week lower by 2.3%. The key short-term trigger for the markets will be the Union Budget on Monday 29th February.

Performance During the Week Ended 27th February, 2016

4.45 Weekend Investing mantra

"Most new issues (IPOs) are sold under 'favorable market conditions' - which means favorable for the seller and consequently less favorable for the buyer." - Benjamin Graham

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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Equitymaster requests your view! Post a comment on "Would You Ever Try Walking on Clouds?". Click here!

2 Responses to "Would You Ever Try Walking on Clouds?"

PRAVEEN KHANVILKAR

Feb 27, 2016

Indian Middle Class still have faith in saving instead of spending much. And for this, middleclass invest their hard earn money on goodies viz. gold, silver and precise metals which at this moment not giving good investment return according to Money Market Guru. This backbone of Indian economy caters more then it haves.

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Karnad

Feb 27, 2016

TOP AND BOTTOM FOOLS PARADISE .

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