The danger in trying to time the market

In this issue:
» India improves on HDI
» The sad story of PSU disinvestments
» The moment when the company founder should quit
» The divergence between US stocks and the economy
» and more....

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00:00

We came across a story a few days back that brought to light the pros and cons of something called 'timing the market'. And we thought we would share this with our readers. Timing the markets is buying when the prices hit a bottom and selling when they peak. In theory it sounds like the ideal way to make money. But in reality does this really happen? Well let us run you through the story of this individual to help you understand better.

The individual, let's call him Mr. X, had been one of the lucky guys who sold off his entire portfolio when the BSE-Sensex had crossed 20,000 in Jan 2008. To those investors who burned their fingers in the fall following the crisis, Mr. X would appear to be a lucky and a very intelligent man. Riding high on his luck Mr. X decided to make this his new mantra in life. He would buy when the markets fell by 1,000 points and sell when there was a gain of 1,000 points.

And this seemed to be working well for him initially albeit for a very short period of time. But come later half of 2008, this strategy started failing. The stock markets were in what appeared to be a free fall. They touched the 9,000 mark by November 2008. And Mr. X was still buying. The markets did revive for a bit but then fell to 8,000 levels by February 2009. By now Mr. X was no longer confident about his strategy. He started to panic. And in his panic he sold off his entire portfolio taking a huge hit in the process.

At this point of time, Mr. X would appear to be silliest investor for the markets have been on an uptrend since. This story of the fictional Mr. X is actually the story of all investors who try and time the market. As seen, this strategy can work in your favour sometimes but in the long run it can and does make you a much poorer person. The reason for this is the complications involved. It is almost impossible to effectively call the peak and bottom with 100% accuracy. Even the best of investors have not been able to do so.

So what should you do if you wish to become rich in the markets? Well you would concentrate on fundamentals and valuations. If fundamentals of the stock are sound and valuations are cheap then buy the stock. If not, sell it. In our opinion, this is the age old and pretty much the best recipe for making money in the long term.

Do you think that it is possible to time the markets? Please share your comments or post them on our Facebook page / Google+ page

01:15		Chart of the day

For quite some time we have been bombarded with negative news surrounding India. But the latest Human Development report of UNDP (United Nations Development Program) gives us a cause to cheer. As per the report, India has managed to reduce the shortfall in human development indicators in the past 2 decades as compared to the world average. It has reduced its shortfall by 24.5% in comparison with the world average. Though it ranks below China in this index, it is still in the 5 countries that have been able to achieve this feat. Things that have worked in India's favour are its investment in tertiary education and its drug industry. In fact the latter has helped India become a strong force in the world of generic drugs.

Not undermining India's achievement on this front it is important to note that countries like South Korea and Iran have ranked higher than India. Even though they haves not grown at the breathtaking pace at which India grew its economy during this period of time. This shows that just economic growth is not sufficient to improve on HDI (Human Development Index). For this countries have to concentrate on increasing social spending. Though India comes up with quite a few socialist policies, it has failed miserable on the execution front. Socialist and populist measures are announced more as a vote gathering exercise rather than an HDI improving one.

Data source:Business Standard

02:00

It is not the first time that the government has revised the disinvestment target. It has been doing so for several years now. In fact the revision in disinvestment target for FY13 from Rs 300 bn to Rs 240 bn was well expected. After all, the equity markets refused to play along and subscribe to PSU issuances that were steeply priced. Only once the government started offering more reasonably priced issues did they find takers. That too not without the help of angel investors like LIC. While the funds raised from disinvestment this year are not sufficient, they are certainly better than last year. Last year, despite LIC bailing out the Oil and Natural Gas Corporation Limited (ONGC) issue, the government managed to fulfill just around 1/3rd of its disinvestment target! This year however better sense has prevailed. PSU offerings have been more attractively priced, thus attracting more investor interest. However, disinvestments have remained far from being the government's golden ticket to prosperity.

02:40

It's quite obvious that in a firm that wants to keep going along the growth curve, there's hardly any place for non-performers. Because if your goal is profit maximisation, non-performers will only slow you down. But what if the non-performer in question is the company's founder member? It then becomes an entirely different ball game altogether, isn't it? Well, the issue of who is the non-performer didn't make any difference to the board of famous tech firm Groupon. For it still chose to fire its CEO and co-founder recently.

However, the dilemma in a lot of other cases is not easy to resolve. On one hand, you have the founder who takes pride in the ownership of the company and would rather let it grow sub-optimally than bring in an outside CEO. While on the other there are growth aspirations of the scores of employees to take care of. We believe a solution is not hard to find once there is clarity on what the ultimate goal is. If it is all about growing strongly year-after-year and the founder is not scalable enough, hiring CEO from outside is the best option. However, the ideal scenario would be when both the founders and the CEO complement each other. While the former strategizes and lays out a vision, the latter takes care of execution. It is usually such firms with both these functions running smoothly that create long term wealth for all stakeholders.

03:15

Next time you see an unemployment figure from the Bureau of Labor Statistics (BLS) of US just junk it! And we seriously mean it. The reason being it is not reliable at all and can be revised as much as 90%. This makes it a joke in itself. How can a figure from such a reliable statistical agency be subject to 90% revision? It may be noted that BLS sends a survey to approximately 145,000 employers in US to get the employment data. But it gets response from more than just half of the employers. Not to mention that there are more than 145,000 employers in US. This makes the employer sample in itself incomplete. As such, the survey figures hold little value. But yet the media is gung ho about this number. And it also happens to be a key figure which drives the market. That's because increasing employment numbers indicate economy is improving. And stock markets being barometer to the economy, respond positively to such news.

However, it is not the unreliable unemployment figure which is driving the markets right now. There are basically two reasons for the current market rally. One is the cheap monetary policy followed by the Federal Reserve. This is creating artificial liquidity and driving markets. Second is the huge cash sitting on the balance sheet of many companies in US. In such an uncertain environment, these companies prefer to hoard cash rather than invest. And now they are using this cash to buy back the outstanding stock which is increasing the prices. As such, we feel that the current US rally is situational in nature and does not seem to have enough legs to keep carrying on.

04:35

In the meanwhile after opening the day on a positive note, Indian equity markets have slipped into the negative territory. At the time of writing, the Sensex was down by 125 points (0.62%). The other major Asian markets have closed the day on a mixed note with Korea and Hong Kong closing in the red while Indonesia and Singapore have closed the day in the green. Europe too has opened the day on an upbeat note.

04:50

Today's investing mantra

"Confronted with a challenge to distill the secret of sound investment into three words, we venture the motto, Margin of Safety." - Ben Graham