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Why It's No Good Tracking Daily Stock Prices...

Mar 9, 2016

In this issue:
» Dividend payout in India remains low
» Woes of telecom companies continue
» ...and more!
0:00
Radhika Pandit, Managing Editor of ValuePro

The start of 2016 has been immensely volatile for the global stock markets. China has clearly been on the mind of most investors. Wild swings in the markets combined with a slowing economy there has spooked most investors.

The US is no exception. A lot of brouhaha is being made about the US Fed's latest move and whether it will go in for more rate hikes. All of these events have made global investors jittery.

For the Indian stock markets, global events are just one part of the equation. A lot is happening in India too. Or maybe, not too much is happening. And perhaps that is most worrying of all.

The Indian economy has been sluggish for quite some time now. Post the elections, stock prices surged. Meanwhile, earnings refused to budge. As expectations began to taper down, the Indian indices were subject to a spate of corrections, which have continued in the first two months of 2016.

The Indian investor is expected to keep tabs on so many events - global and domestic. Certainly, they do influence stock price movements. But should you follow each and every one?

If you asked Warren Buffett, he'd tell you not to bother. Here's what he told investors recently on CNBC:

  • I would tell them don't watch the market closely. The money is made in investments by investing and by owning good companies for long periods of time. If they buy good companies, buy them over time, they're going to do fine 10, 20, 30 years from now.

Stocks are nothing but little pieces of businesses. Rather than tracking the daily stock price movements, what you really need to follow is the business.

Do you understand and like the business model? Are you confident in the management Has the earnings growth been consistent? Are the return ratios and dividend payouts healthy? Is the company cash rich?

If the answer to these questions is 'yes', then you know you have zeroed in on a strong company that will help you build wealth...provided you bought it at the right price, of course.

But you should expect strong businesses to face their share of challenges as well. Performance might be subpar some quarters. That's okay. Ultimately, it's the track record over years that will determine if you have made a good investment.

Indeed, my team and I are always on the lookout for good quality businesses to recommend for the ValuePro portfolios. We go for companies that have a solid business model...wide economic moat...and long-term growth visibility.

Valuations play a critical role too. So while we firmly believe in buying stocks that trade at a sufficient discount to their intrinsic value, we are quite ready to give a sell as well. This we do when either the fundamentals of the businesses deteriorate or if the stock prices have moved up so much that valuations have become irrationally expensive.

So stock prices are important in the sense that you want to buy stocks when they are cheap and sell them when they are expensive. But we do not track stock prices daily. And we don't really analyse economic events much. We study businesses. And I believe you should too.

Do you believe in tracking daily stock movements or studying businesses? Let us know your comments or share your views in the Equitymaster Club.


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3:03 Chart of the day

Investing in strong dividend paying companies remains one of the strategies followed by long-term investors. Unfortunately, Indian companies rank poorly in dividend payout as compared to the other developed countries. And the announcement of dividend being made taxable in the hands of the investor is likely to act as a further disincentive. In the Union Budget 2016-17, the government has made a proposal to impose an additional 10% levy on dividend income of over Rs 1 million. While this proposal is likely to impact the rich investor class, it may hit small shareholders indirectly.

The impact of the new dividend tax will be borne by promoters, who hold shares in the form of individuals, holding firms or Hindu Undivided Families. Therefore, many companies are rushing in to announce dividends in FY16 resulting in a windfall gain for investors. However, in the long run, the new dividend tax may result in changed dividend policies that may not be in the best interest of shareholders.

On a positive note, the dividend tax may encourage companies to plough back profits more profitably to enhance shareholders' returns. Promoters are also likely to explore other alternatives such as buybacks to return shareholders' capital.

Indian Cos. Among the Lowest Dividend Payers

Note: Dividend payout of over 100% signifies payments from other sources such as reserves or debt

4:01

Woes for telecom companies are unlikely to end anytime soon. Revenue growth has tempered down in the last three years on sluggish growth in the monthly average revenue per user (ARPU). As per TRAI, the monthly ARPU has risen from Rs 115 in FY13 to around Rs 125 at the end of September 2015 quarter. Also, growing competition among various players has hit operating profits. Even the debt burden of telecom companies continues to remain high.

Despite the challenging environment already faced by telecom companies, the Union Budget 2016-17 has raised the non-tax revenues from the communication sector sharply. At Rs 989.9 billion for FY17, the non-tax revenue is nearly 77% higher than that estimated for FY16. As competition intensifies with the entry of new players in the 4G space, the ensuing tariff war is likely to further exert pressure on the financial performance of telecom players.

4:45

Indian markets languished in the red for the most part of the trading session today. At the time of writing, BSE Sensex was trading lower by around 72 points. Barring banking and auto stocks, all the sectoral indices were trading weak, with stocks from the FMCG and metals sectors losing the most. While the BSE Midcap was trading marginally higher, the BSE Smallcap was trading marginally lower.

4:55 Today's investment mantra

"Well, any time the stocks go down, as far as I'm concerned, I like it. Because I'm a net buyer of stocks." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Radhika Pandit (Research Analyst) and Madhu Gupta (Research Analyst).

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Equitymaster requests your view! Post a comment on "Why It's No Good Tracking Daily Stock Prices...". Click here!

1 Responses to "Why It's No Good Tracking Daily Stock Prices..."

Pramala Varghese

Mar 9, 2016

Payment of dividend from certain companies are too bad and there should be mandatory instruction required to cascade reasonably the benefits of profit; eating the faith of share holders definitely will kill the confidence of investors in market

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Equitymaster requests your view! Post a comment on "Why It's No Good Tracking Daily Stock Prices...". Click here!
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