Learnings for stock market terrorism from real terrorism - The 5 Minute WrapUp by Equitymaster
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Learnings for stock market terrorism from real terrorism

Mar 28, 2015

In this issue:
» IndiGo planning to list its stock
» Yellen hints at gradual pace of rate increases this year onwards
» Forex kitty at an all-time high
» ....and more!

We recently came across a rather incisive piece of writing by a historian called Yuval Noah Harari. It talks about what everyone likes to talk about these days i.e terrorism and the society's ways of dealing with it. What took us by surprise was the kind of treatment Harari gave to the whole issue and the fantastic insights he had to offer.

Sample this. Everyone remembers September 11, 2001 as the day when the World Trade Centre was flattened by one of the deadliest terrorist attacks ever. However, how many of us can recall that the very same day, there were four planes that were hijacked? While two of them crashed into the twin towers of the World Trade Centre, there was another one that crashed into the Pentagon, the headquarters of the United States Department of Defense!

Now as per Harari, during a conventional warfare between two countries, the attack on Pentagon would have been way more significant. Simply because it would have meant destroying central headquarters of the enemy and leaving its planning and coordination and a quite a lot of its infrastructure in total disarray.

But the fact that the World Trade Centre was at the front and centre of everyone's attention points to the fact that we just walked into the trap laid by the terrorists! And what is this trap? Well, Harari calls it the 'Theatre of terror'.

Its modus operandi is simple. Terrorist organisations know that they just don't have the resources to enter into a conventional war with the powers that be. Therefore they hope to change the political situation by spreading fear than by causing material damage. And what better way to create fear than to raze to ground some truly symbolic buildings and structures like the twin towers of the World Trade Centre.

Now the mistake those who fight terrorism make is that they start thinking like army generals and not theatre producers as per Harari. As a result, these attacks lead to revenge and retaliation. And while the terrorists are crushed in most cases, every once in a while the political storm created by counterterrorist campaigns does indeed work to the advantage of the terrorists. And this is certainly a big victory for the terrorists who by and large have very little to lose.

Consequently, the right way to deal with terrorism as per Harari is not to fight it with raw brute power but to keep doing one's homework intelligently and efficiently and then striking when the time is right. Allowing our natural instincts of replying drama with counterdrama of more smoke and fire would be the worst possible mistake one can make. It can actually end up benefiting the terrorists.

Now, even as we were going through this article, we couldn't help but draw huge parallels with the terror of the financial kind. The one that erupts every now and then on the stock markets. We are referring to big, violent corrections where the bottom literally falls out of the market.

And if you think of it, most of the people react to this terror exactly the same way they would do to an act of real terrorism. There is a lot of fear and panic as prices fall 40%, 50% and even 60% and beyond in a lot of cases. Just as with real terrorism people mistake this carnage to be much, much severe than it actually is. However, in reality, what go down a lot are stock prices and not their long term intrinsic values. Yes, a lot of companies which are highly leveraged and have weak competitive positions deserve the treatment they get. But running away from and having doubts about the long-term prosperity of many sound companies makes no sense.

This is where the shrewd investors just as the shrewd people who combat real terrorism can come in and make a significant difference. They can simply scoop up beaten down assets at attractive valuations and enjoy great returns over the long term.

And what is their modus operandi? They quietly go about doing their homework about the good companies they want to buy. And when the time is right in terms of valuations, they just go for the kill.

Consequently, be it financial or the terrorism of the real kind, one should not let one's natural instincts to take over. Instead, a sensible and a rational way of dealing with it yields much better returns over the long term.

Share with us your reaction the last time terror struck on the stock markets in the form of a huge correction. Let us know your comments or share your views in the Equitymaster Club.

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  Chart of the day
The flood of money unleashed by central banks globally has found its way to emerging markets. As we have stated before, India remains a top bet. FII inflows are near record highs. Corporates have seized the moment and drawn up big fund raising plans. This has led to concerns about a possible reversal of the tide as and when the US Fed raises rates. However, if forex reserves are anything to go by, India continues to remain a favorite.

Largely due to foreign institutional investors (FIIs) interest in India's equity and debt markets, forex reserves have hit a record high. As long as the government can keep up the pace of reforms, there's a strong case for India to retain its top billing. However, it must be emphasized that FII money is quite fickle. The flow can reverse due to the slightest adverse event. Thus, the RBI will need to be constantly vigilant to maintain stability on this front. Fortunately for India, governor Rajan is up to the task and has handled the situation commendably thus far.

Forex reserves touch a record high
*As on March 20, 2015

Markets are booming. Crude prices are down. Sentiments are seemingly improving. People are traveling more. Competition, while increasing, is still struggling to get its house in order.

Taking all these aspects in consideration, the time seems right to raise capital. Here we are talking about India's biggest airlines (by market share) Indigo Airlines which is looking to tap the primary markets to raise as much as US$ 400 to 450 m. As reported by business dailies, the IPO is likely to hit the markets towards the end of the current year. If the plans materialize, it would be the biggest in the Indian aviation history. The IPO would value the company at about Rs 115 bn. In comparison, Spicejet and Jet Airways are currently valued at about Rs 12 bn and 51.2 bn respectively.

Given the company's market leadership coupled with its ability to generate profits in an otherwise difficult business (where almost all players are bleeding), we believe investors would be enticed to subscribe to the issue. While we are still months away from the issue hitting the markets, investors would do well to consider the history of the airlines sector; one which faces very strong headwinds, thereby making it difficult for a particular company to have and maintain strong moats.

Investors in emerging markets like India have been hanging on to every single word that comes out of Janet Yellen, head of the US Federal Reserve. The anxiety is understandable, considering that ultra low interest rates in the US have fueled a lot of inflows into emerging country assets like stocks and bonds. Thus any big change on the interest rate front can mean a flurry of activity in terms of fund flows and consequently the prices of stocks. So what's up on this front these days?

The Fed has ruled out a move at their next meeting in April. The next scheduled session after this will be in June. Yellen said in remarks yesterday that she expects the Fed to raise interest rates sometime this year, and that increases after that are bound to be gradual. Further, after the initial increase, there is no predetermined course of tightening that the Fed is going to follow, whether upward or downward. The actual path of policy will evolve as economic conditions evolve. So should you be worried, like everybody else is, about what path the policy will follow? Not really. Not because this isn't important, but rather because this falls within the realm of the unknowable or unpredictable. Your time will be better spent on analyzing the fundamentals of the businesses you are looking to buy. For these on the whole are unlikely to change - whichever direction the Fed rate moves going forward.

Meanwhile, geopolitical tension escalated after air strikes in Yemen by Saudi Arabia and its Gulf Arab allies and weighted heavily on equity markets around the world. Therefore barring a few Asian indices, all the other major indices tumbled in the week gone by. The US and UK markets were down by more than 2% each. Even Germany and France markets fell by 1.4% and 1%, respectively for the week. Oil prices also rose above $50 a barrel on concerns that the conflict would close a key shipping route for oil tankers located between Yemen and Djibouti.

Among Asian indices, China, Singapore and Hong Kong managed to hold their heads above water. The Chinese index was the biggest gainer on expectations of fresh money inflows after its government waived off the $1 bn limit on foreign fund investment under the Qualified Foreign Institutional Investor Scheme. The Japanese index was down by 1.4% in the light of nationwide consumer price index hitting zero and sparking fresh fears of deflation.

Rising tensions in the Middle East exerted pressure on Indian indices that fell for a third week in a row, by 2.8%. All the sectoral indices have ended in red with IT, banking and energy stocks being the biggest losers for the week.

Performance during the week ended March 27, 2015
Source: Equitymaster, kitco, cnnfn

 Weekend investing mantra
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher

This edition of The 5 Minute WrapUp is authored by Rahul Shah.

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6 Responses to "Learnings for stock market terrorism from real terrorism"

Shakti Chakraborty

Mar 29, 2015

Quite enlightens.


chetan shah

Mar 29, 2015

I appreciate the advanced stock screener! However, I value stocks in relation to the cashflows the underlying companies generate. I was therefore hoping to screen stocks by the parameter (free cash flows as a percentage of enterprise value). But I was disappointed to know that cash flow is not at all a valuation parameter for you!!!

Could you please incorporate this measure in your query report mechanism as well as in your analytical reports henceforth.



Mar 28, 2015

I liked the Quote of the day
"I have owned one stock since 1969, two since 1988 and one I started buying in 1986 or so. That's my portfolio. Six stocks. I once owned 17, but that was way too much." - Philip Fisher

I request you to follow the above in Quantum Long Term Equity Fund.
I feel you are compromising on your ability to earn superior profits in this fund. The performance of QTLEF is just few notches above the benchmark does not make investor wealthier.


Ganapathy Sastri

Mar 28, 2015

An article talks about India's record reserves. The powers be, however, need to be concerned about the continued MASSIVE trade deficit ( despite reduction in import dollars due to fall in crude prices), continuing HIGH inflation (compared to less than 2% in the west) which dents our export competitiveness. If despite massive trade deficit, FX reserves have grown, it is due to FI money coming in large numbers. Also nobody talks about India's FX DEBT. Why?? Will it be at $ 500B??


Chandravadan Ajmera

Mar 28, 2015

Let me congratulate you about your extremely wide range of thinking. Your opinion far away from the subject of finances is remind me of person having Kewal gyan. Kewalgyan according to jainism is ultimate gyan. I think how to tackle the terrorism; requires a separate vast discussion on the subject. It can certainly no be tackled by army. It needs a separate think tank for that. I was curious to read the original article of Mr Y N Harari but your link took me to another artcle by Anisha Virjiof Common sense living which wah alredy read by me. can you provide original article by Mr Harari. It would be a great pleasure to hear more on the subject fro you. Thanks


mohammad umar kadiawala

Mar 28, 2015

According to me every correction i.e. a terror attack of financial stock market is a opportunity to find real terrorist and by counter attack means you have to find by your intelligent efforts where is terrorist (hidden opportunity) being hide.

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