The investing diet that will Never let you feel Sick
(Apr 14, 2015)
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In this issue:
» Are low CPI numbers a reason to cheer?
» Should RBI move the US or Singapore way?
» Why governments have no problem with QE
» ...and more!
1 in every 5 Indians is obese. 20% of the nation is diabetic. 30% of the nation suffers from high blood pressure.
These health headlines may often force you to sit up and take notice. And in some cases also convince you to change your diet. They bring the realization that you may be consuming more gratifying food than nutritious food. And that a health disaster is around the corner.
Unfortunately the most nutritious food is also the least gratifying. But even though you may resent having them, you ensure that they form the largest portion of your daily diet. For that is the only way to ensure good health.
The reason I am reminding you of this, at the risk of sounding like a nutritionist, is because we should be thinking on the same lines about our financial health too. But we don't!
The reason investors have burnt their fingers in every market crash is because they have allocated too much money to the potentially 'high risk - high return' stocks. And even if a few stocks have not performed as per expectations or never recovered from the crash, investors lost their shirts.
That brings us to the question - What kind of investing diet do you follow? Is it all about instant gratification or do you have an appetite for safety as well?
If you ask me, the cornerstone of a good investing strategy is ensuring that you take care of the downside. The upside then takes care of itself. In a recent interview with Howard Marks, Joel Greenblatt articulated the secret of his investing success as "My largest positions are not the ones I think I'm going to make the most money from. My largest positions are the ones I don't think I'm going to lose money in".
So when we get queries from subscribers as to why buy blue chips which have already run up so much over the past decade, we have just one answer. Because the best blue chips are the ones that will protect your wealth in the most difficult times. They are the ones that will keep you in good financial health and ensure that you eventually meet your financial goals.
Our asset allocation pyramid shows how the safest stocks would be the best place to start your investing journey and the one that should enjoy the biggest allocation in your portfolio at all times. Having done so, you will never regret investing in stocks. Nor will you ever have to worry about the next 2008-like carnage.
So before your stock portfolio makes you feel sick, ensure that you make some necessary changes to your investing diet. Rest assured the benefits will there for you to see.
Do you allocate more to wealth growing or wealth protecting stocks? Which cultural habits and behavioral patterns are your assets? Which tendencies would you like to unlearn? Let us know your comments or share your views in the Equitymaster Club.
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In India, the best measure of inflation is the Consumer Price Index (CPI). The CPI for March 2015 has come in at a three month low of 5.17%. What does this tell us?
Well, it's perhaps safe to say that the days of 8-9% consumer inflation may be behind us. A falling rate of food inflation is the reason for this bit of good news. Food inflation has declined by 8.64% in March to 6.14% in March 2015. Despite this, the monsoon continues to play a big role. The recent unseasonal rains may lead to an uptick in inflation again. The RBI is watching food prices carefully before it cuts rates further. From an investor's point of view, we believe it would be prudent to not expect a huge fall in inflation soon. If the monsoons were to disappoint this year, it would be negative for interest rate sensitive stocks and sectors.
Will consumer inflation rise further?
If you have been a long time reader of Equitymaster, you would have seen the change in frequency of our updates on economic events like Monetary Policies etc. Not that we did not care about the RBI's stance or change in interest rates then. Nor is it that every basis point tweak in Monetary Policy changes our views on stocks now. It is just the media has tutored investors into believing that they should be reacting to the minutest economic event. Apart from the fact that such strategies are more suited to trading than investing, the frequent updates do divert the attention of even long term investors to speculative ideas. However, investor demand has over the years forced even the RBI to update if not change its stance every quarter. It would be wrong to say that Dr Raghuram Rajan is more articulate with his economic view points than say, ex-RBI governor, Dr Y. V Reddy. The fact is that Dr Rajan is forced to say or do something double the number of times Dr Reddy did. And that necessarily is not the best thing for a central banker.
It seems the RBI has over the years gravitated to the kind of Monetary Policy updates that developed nations like Japan, Germany, Australia and the US. The central banks of these nations review their decisions on interest rates 14, 12, 11 and 8 times a year, respectively! The RBI does so 4 times (every quarter). Going by the Monetary Policy success of these nations, it does not take much to conclude that more frequent rate reviews leaves room for bigger blunders. And there can be no better example than Japan for this.
However, interestingly, the central bank of Singapore, which is also a developed nation, has stuck to reviewing its Monetary Policy just twice a year. And here too the central bank has more often than not taken decisions to keep its exchange rate stable than tweak interest rates to adjust liquidity.
According to us, the RBI should gravitate away from the speculative nature of monetary policy making in the West. And instead adopt more staid yet solid approach to balancing growth and inflation.
We constantly criticize money printing decisions (QE) of central banks. However, the reason why the governments have no problem with this is because the 'money printing' helps the government boost its finances. This is because most of the demand for this so called money comes from the government itself. For example, 16% of the US government's debt is held by the US Fed. The Fed printed this money to purchase the US government's bonds.
Now the interest it receives on these bonds is part of its profits. The Fed then remits this profit back to the government. This effectively means that the US government is paying itself interest on its own bonds! But there's more to the story. The bonds have to be repaid. The government would be hard pressed to repay the Fed, if not for all the money printing. Thus the Fed has no choice but to keep the printing press going if it wants to be paid back! Does this circular movement of money benefit the common man? Not really. We believe this activity adds no long term wealth to society and only ends up creating asset bubbles that will burst in the future.
The Indian markets were closed today on the occasion of Dr. Ambedkar Jayanti. Asian markets closed mixed today, with the Singapore markets leading the gainers and the markets in Hong Kong ending deep in the red. The European indices have opened on a negative note.
"The true investment objective of growth is not just to make gains but to avoid loss" - Philip Fisher
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|This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee.
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