Do Bears always lose against the Bulls? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Do Bears always lose against the Bulls? 

A  A  A
In this issue:
» Supreme court gives its approval for FDI in retail
» Why are savers being punished?
» Is Unilever's gain, the loss of Indian shareholders?
» Are Chinese banks as resilient as they seem?
» ...and more!

Anyone who's read enough about Warren Buffett can't help but notice that he is a fairly optimistic guy. After all, how many investors we know of had the courage to commit billions of dollars in investments in the depths of the crisis back in 2008-09? Same holds for another investment legend Peter Lynch. His hatred for macroeconomic predictions, especially of the bearish variety is well known indeed. Back home, India's most famous investor has been given the title of 'The Big Bull'. For just as Buffett, he too is a believer in the long term India growth story.

Thus, the approach that these famous investors have towards investing brings a very pertinent question to our minds. Which is, does it pay to be more Bullish than Bearish in order to be successful at investing? Let's delve into history a bit in order to get an answer. As Buffett says, the US stock markets had a rather tumultuous 20th century. It went through two world wars and numerous other conflicts. It also witnessed depression and dozens of other recessions and financial panics. But despite all this it rose from a level of just 66 on the Dow to 11,497.

Worth pointing out that while the Indian stock markets have had a somewhat shorter journey, the difficulties it faced were no less than its US counterpart. And yet, Indian stocks have been one of the best performing asset classes over the long term. Therefore, if history is any indication, it does pay to be bullish than bearish from a long term perspective.

Now, a question that begs itself is that if it pays to be bullish, then why aren't all the investors who invest in the market always bullish? Well, we wish we knew the answer to that question. All we can say is that investing is not a natural science like physics or chemistry where X always results into Y. Each investor will have his own interpretation of reality. And when majority of them become bearish, it will reflect in the market prices which will also become pessimistic. This is where an investor who has his automatic setting as bullish can really make a killing we believe. It won't be wrong to say that most of the fortunes that investors like Buffett have made is due to their ability to stay bullish in the face of extreme crisis.

Of course there will be times when most investors will interpret the reality as being bullish and then this will also reflect in the market price. It is here that we need to control our default bullish settings a bit. The point is that one should neither be a perennial bull nor a perennial bear. But the tilt always has to be on the sides of being bullish we believe. For this is what makes us earn great money when times are really tough.

Do you think it makes sense to be more Bullish than Bearish on an average? Please share your comments or post them on our Facebook page / Google+ page

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01:34  Chart of the day
Consumer discretionary and financials. These are the two sectors that have performed the best in the US since the lows of March 2009. What about India? As today's chart of the day highlights, the scenario does not seem to be any different. Consumer durables and auto, both in a way consumer discretionary, have been the best performing sectors since 2009. Financials, in other words the banking index, hasn't done badly either, only narrowly losing to the third placed FMCG index. Before investors rush into buy stocks from these sectors, it would be worth mentioning that these may necessarily not be the best performing sectors over the next 3-4 years. In fact, principles of reversion to the mean point the exact opposite. In other words, the non performing sectors perhaps have a better shot at outperforming than the performing ones. It is not easy as it sounds though. Eventually, it should all be about individual stock and whether it has the business model and valuations to outperform the markets we believe.

Data Source: Ace Equity

Indians are culturally programmed to save money. We have all grown up with the idea that 'saving is a virtue'. But the developed economies have had a very different orientation. 'Borrow more and spend more' seems to have been their slogan. Princeton Professor Sheldon Garon has put forth the idea that in the US, consumer spending has often been promoted as a virtue. In fact, two week after the 9/11 terrorist attacks, then US President George W Bush urged his countrymen to spend and save the country from recession. It follows as a corollary that saving is almost like a sin.

The manner in which central bankers have responded to the financial crisis underscores this same mentality. What do measures such as excessive money printing and near-zero interest rates effectively do? Money printing leads to currency devaluation. This, in turn, lowers the value of savings. And through extremely low interest rates, the real yield on savings is negative after adjusting for inflation. The savers are forced to either invest in risky assets or watch the value of their savings diminish. In simple words, the axe is on savers. The axe is on prudence and rationality. And this is a very, very dangerous sign we believe.

Hindustan Unilever (HUL) has got it all right. The company has been consistently generating returns on equity well above 35% in the last 13 years. This has only improved with time. It has a fantastic track record of paying handsome dividends to its shareholders. And it is present in a market which has a strong growth potential. All of which have propelled its parent Unilever to take more interest in its Indian subsidiary. Hence, its offer to raise stake in HUL to 75%. Indeed, India is now Unilever's third-largest market, and this could go up soon.

That is not all. Cheap funds are amply available in the developed economies thanks to the expansionary monetary policies of central bankers. Thus, Unilever is looking to capitalise on the same. This is by raising funds at cheap rates and investing it in high growth assets such as India. Of course, the moment foreign companies raise stakes in their Indian subsidiaries, the possibility of a delisting cannot be entirely ruled out. While the parent has ruled it out, we agree with the views of a leading daily that even the reduction in the free float of HUL is a loss to Indian investors because of the sheer strength of its business model and its sound management.

The final hurdle on the policy allowing FDI in retail seems to have been removed. The Supreme Court of India has cleared the hurdles in the implementation of FDI in multi-brand retail. It has stated that the policy only aims to remove the middle men and thereby protects the interest of the consumers. It has further stated that the middlemen are actually a curse to the economy at large.

Opposition to FDI in retail has been heavy. The argument is that allowing foreign retailers will put the smaller retailers out of work. The local 'kirana' or the 'mom and pop stores' will suffer. This is why a Public Interest Litigation (PIL) was filed with the Supreme Court questioning the legality of the policy. The apex court has ruled that there is nothing unconstitutional about the policy. Furthermore it would be in the best interest of the consumers. We have welcomed the policy in retail as we feel that it would make the sector more competitive. It would also help in easing the supply side bottlenecks which have plagued the economy.

The problem of bad loans is not new to the Chinese banking sector. In fact every time the Indian government is criticized of ignoring asset quality of PSU banks fingers are pointed to China. In late 1980s and 1990s, most of the state-owned enterprises were loss-making. These were reliant on bank credit to continue financing their activities. As a result, the ratio of bad loans to total credit rose to as high as 30% by 1999. Even today the largest banks in China are government owned and have state orders to continue funding PSU growth. As per an article in Financial Times, China's ranking in terms of systemic risk in the banking sector is 4th in the world. Japan, US and France claim the top three positions.

However as a percentage of GDP, China's risk exposure appears hardly anything to worry about. While countries like Cyprus, UK and Greece seem to be most vulnerable, China's ranking is 17th! The disconnect is easy to fathom. Most of the bad loans in China today no more appear in the books of banks. Before the big Chinese banks got listed in Hong Kong exchanges, the bad loans were shifted to asset management companies or simply written off. Such shadow banking is the secret to Chinese banking sector's apparent resilience to economic downturn.

Meanwhile, indices in the Indian stock market have gone from strength to strength today with the BSE-Sensex higher by around 259 points at the time of writing. IT and realty stocks were seen attracting the maximum interest. While Asian indices closed mostly lower today, Europe too is trading in the negative currently.

04:56  Today's investing mantra
"In-depth information does not translate into in-depth profits." - David Dreman
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1 Responses to "Do Bears always lose against the Bulls?"


May 2, 2013

Do Bears always lose against the Bulls section is brilliantly written.
keep up the good work!!

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