The biggest flaw in short term investing - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The biggest flaw in short term investing 

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In this issue:
» Is the Indian economy out of the woods?
» A caution for investors who rely too much on Excel
» Will easing commodity prices budge RBI's hawkish stance?
» Will this be a big threat to the Indian IT industry?
» ...and more!

Most investors tend to look for immediate short term gains. A majority of analysts and so-called stock experts spend huge amounts of time and resources predicting quarterly earnings. Correspondingly, many company managements too tend to focus on near-term sales and profits.

Common sense will tell you that three months or even a year is a short period for any kind of business. Near-sighted decision-making often comes at the cost of long term growth and sustainability. In fact, many of the world's economic crises have been born out of such behaviour.

Some of the most important business factors can yield results only over the long term. Say a company is making substantial investments in improving product quality, customer service, etc. Will the impact of this reflect immediately in the next financial year? Most likely not! The immediate reported earnings may even be lower on account of such investments.

Some of the world's greatest businesses are those that are willing to sacrifice short term profits in order to build solid world-class organisations. An interesting article in the Business Insider reports the case of the world's largest online retailer, Inc. is known for its proactive investments in technology and customer services to create strong customer loyalty. This may have, on occasions, come at the cost of short term profits and irked short term investors. But in keeping with its long term value creation philosophy, the company has built a robust, sustainable and valuable enterprise.

On the other hand, many e-commerce ventures failed terribly because they focussed too much on near-term outcomes and were shy to make long term investments.

We believe value investors should look out for companies that are run by visionary promoters who do not give in to short term pressures. In fact, the best time to buy such companies is often when short term investors punish them for poor short term performance.

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01:05  Chart of the day
The Indian economy grew at a brisk rate during the latter half of the previous decade. But growth started faltering a couple of years ago on account of a slew of domestic as well as global factors. In fact, in the fiscal year 2012-13 (FY13) the country is estimated to have grown at the lowest pace in a decade. Will growth decelerate further? Or is the worst behind the Indian economy?

The Prime Minister's Economic Advisory Council (PMEAC) released its latest projections for the current financial year FY14 yesterday. During FY14, the economy is projected to grow by 6.4%. PMEAC Chairman C Rangarajan opined that the worst is over for the economy and that growth would accelerate going forward.

In our view, one should not assign too much importance to such macroeconomic forecasts. Such projections have often missed the mark by a wide margin. As such, one must not make investing decisions solely based on these projections.

Data source: The Hindu
*Revised estimates; ^Advance estimates; #Projections

Anyone whose job involves a bit of number crunching at work cannot imagine life without a little piece of software known as Microsoft Excel. We ourselves would vouch for the speed at which Excel gets the work done. However, the problem occurs when everything that the software cranks out is taken at face value. Like this famous pair of economists who came to know of Excel's dark side at the expense of great deal of damage to their reputation. It turns out that these economists erred in excluding a few data points from a sample. Consequently, the final result showed a significant divergence than what would have been the case. And policymakers who were entrusted with taking billions of dollars worth of decisions ended up relying on this erroneous calculation.

To be fair to these economists, they are not the only ones who suffered at the hands of Excel errors. There are many other cases where billions of dollars were lost due to blind reliance on Excel spreadsheets. It is worth noting that in all these cases, it was not the software that was at fault. The mistakes were all a result of either a formula gone wrong or wrong data entered. Thus, what was required was thorough testing, especially in cases where the sum involved is really huge. It would help to remember that applications like Excel can only aid human thinking. They can never substitute it.

Probably nobody is happier about the recent correction in commodity prices than the Indian government. Headwinds that clouded its fate in the upcoming elections are showing signs of withdrawal. That too with bare minimal policy efforts! To top it, besides the problems of inflation and current account deficit, even the worry over rating downgrade may subside.

In such a scenario, the government is rolling up its sleeves to pressurise the Reserve Bank of India (RBI) to lower interest rates. For the additional stimuli could give India's faint GDP growth prospects the much needed push. Well, as far as we know the RBI, the temporary blip in commodity prices is not meaningful enough. It hardly offers a basis for conviction on inflation trend. As we all know, the wholesale price index (WPI) is a flawed indicator! Moreover, the RBI does not believe in offering cheap liquidity to stimulate GDP growth. So unless and until the government takes some solid reform measures, its hope of lower interest rates may be wishful thinking!

The troubles for the Indian IT industry do not seem to be going away. The new US immigration bill is a major threat for the industry. To prevent domestic companies from outsourcing, the Bill plans to increase the visa fees. In addition to this, the Bill also mandates that onsite workers should be paid at levels equitable to the wage levels in US. Given that IT companies derive nearly half of the revenues through onsite work, such a provision will prove to be a costly one. If onsite wages are increased, the IT companies would see their margins come down. India has been trying to resolve the issue on a political level. However, this has not yielded the desirable results.

Let's face it. Indian IT industry provides employment to quite a few US citizens. The reason US companies look outside of home for outsourcing work is not just the cost arbitrage. As per Economic times, the companies look at outsourcing because they are unable to find the required talent and skill set in US. The unemployment rate in the US IT industry is just 4%. Therefore, the protectionist measures that the US is adopting will not really help the unemployment situation there. But since its policymakers do not agree with us, in all likelihood, things will continue to get tougher for the industry as a whole.

We do not always agree with doomsayers. But at times, the logic behind an impending crisis is strong enough for us to rethink. An article in Business Insider recently carried the views of Bank of America rates specialist David Woo. Mr Woo's latest report - The Impossible Trinity, it seems, has some compelling views. It explains why the global slowdown will be very painful. It will not just be about a major realignment in the markets. But the slowdown will also reflect the minimal probability of recovery that central banks and governments are betting on.

Economic recovery in China, booming stock markets in the US and cheap liquidity getting unleashed in Japan are currently being considered the elixirs for global economy. But according to Mr Woo neither is going to be successful enough. China will not be able to accelerate growth by offering stimuli. The US recovery is but temporary. And the Japanese money will not leave Japan until the country's trade balance is corrected. So, all in all, investors would do well to practice caution rather than to speculate on a quick turnaround in the world economy.

Indian equity markets were closed today on account of Mahavir Jayanti. All the Asian stock markets were in the green led by China and Hong Kong. A majority of European markets have also opened on a firm note.

04:30  Today's investing mantra
"Thousands of experts study overbought indicators, oversold indicators, head-and-shoulder patterns, put-call ratios, the Fed's policy on money supply, foreign investment, the movement of the constellations through the heavens, and the moss on oak trees, and they can't predict markets with any useful consistency, any more than the gizzard squeezers could tell the Roman emperors when the Huns would attack." - Peter Lynch
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1 Responses to "The biggest flaw in short term investing"


Apr 26, 2013

I earn around 176% on average per month from day trading. Don't tell me short term trading is all bull.

"The biggest flaw in short term investing"

There is no flaw, It is an art very few are willing to invest time in to.

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