What will the Sensex fall to? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

What will the Sensex fall to? 

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In this issue:
» The number one reason not to worry about gold sell-off
» Chinese on a spending spree
» Is this the new normal for India?
» US, India seem to be on the verge of social revolution
» ...and more!

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Richard Feynman, one of the greatest theoretical physicists ever, once made a very interesting comment. He said that it does not matter how beautiful your theory is and it doesn't matter how smart you are. If the theory doesn't agree with experiment, it is wrong. In other words, every single time, the results of the experiment have to match with the theory that you so carefully constructed. If it fails even once, it is deemed useless.

In this small quote lies one the biggest lessons for investors we believe. Every day, we are swarmed with reports of how a certain market expert or a financial wizard has predicted gloomy days for the markets ahead. In fact, they don't just stop there. They also go ahead and predict the exact levels to which indices like the Sensex or Nifty will fall to. Should we give them the seriousness that these predictions deserve? Quite certainly if all of their predictions have proved to be 100% accurate. But we do know for sure that none of these so called gurus have proved to be correct all the time. Thus, their theories can hardly be considered as useful. Little wonder, Warren Buffett was forced to observe that market forecasts tell us more about the forecaster than of the future.

With markets in a free fall in the last few days, predictions about how low the indices can go have once again reached feverish levels. But investors fall for them at their own peril. As mentioned above, there is no theory yet that can accurately predict where the markets will head next. Hence, the best approach would be to completely ignore such theories and focus on fundamentally strong stocks trading well below their intrinsic values. History has shown that investors sticking to this philosophy religiously have tended to outperform the markets over a large period of time. Clearly, they did not spend their time trying to time the markets to perfection. They just bought what they felt was cheap irrespective of the market levels and this way, built a great performance track record over time.

Do you believe buying good, cheap stocks irrespective of the market environment gives good results in the long term? ? Share your views or you can also comment on our Facebook page / Google+ page.

01:27  Chart of the day
The rupee has once again gone into a free fall. It is being argued that the biggest reason for the same is India's rising trade deficit, which hit the 10% mark as a percentage of GDP in FY12. Today's chart of the day highlights how crude oil and gold imports, the two biggest villains behind India's trade deficit have moved over the years. While gold imports have gone up nearly three times over the last four years in dollar terms, crude imports are up 67% in the same period. Clearly, it is the direction that these two imports take in the coming months will determine the fate of India's deficit.

Source: Business Standard

They say that there is a silver lining to every cloud. But it seems the economic debt crisis has a golden lining to it! The European economic mess ensured that GDP growth rates across the world head south. Further, political flux and lack of coherent policy making worsened matters. As a result, the long term view of economic wellness and purchasing power has never been as negative as it is now. Add to that easy liquidity still available in some pockets of the world. Doesn't that make gold buying the most rational proposition? That is exactly what the Chinese are doing. Recently the central bank has curbed the speculations in Chinese property markets. Hence the Mandarins' interest in gold is understood. But as per Bloomberg the rate at which gold is being imported in China is noteworthy. It may lead to the Chinese soon toppling India as the largest consumers of the shiny metal! All we can say is there is nothing better than households and corporates in India and China holding small quantities of gold. This will at least keep most of Asia reasonably safe in the event of an economic collapse.

Ravi Batra is an American economist, professor and author of several bestsellers. His claim to fame was the prediction of the fall of the Soviet Union. He also predicted a social revolt in the United States around 2010. Both of these were spot on. His forecasts were derived from 'The Law of Social Cycle'. According to this law, society is divided into four distinct classes. These are warriors, intellectuals, acquisitors and labourers. Warriors include military, policemen etc. Intellections include teachers, scholars, etc. Acquisitors include landlords, businessmen bankers, etc. The unskilled workers constitute the labourers. Society is first dominated by each of the top three classes. Acquisitors eventually generate so much greed and materialism in the system that the other classes overthrow them in a social revolution.

If one looks at the US and India's recent political history one can see live examples of the same. The 'Occupy Wall Street' movement protested against the wealth concentration with a few. Movements started by Anna Hazare and Baba Ram Dev in India also reflected people's frustration with the corrupt. Now, Batra predicts that a new American revolution may occur by 2016-17. He believes that India's protest would occur by the turn of the decade. Well, one thing is for sure, things cannot continue the way they are now for too long. Are we ripe for a revolution?

India has done well in terms of economic growth for the past few years. Even in the peak of the crisis in 2008, the country managed to wow the world with a better than expected growth rate. But all good things do come to an end and the party for India appears to be over. We had to make do with less than 7% growth in the last fiscal year. Regulatory concerns, policy paralysis, high fiscal deficit were just some of the reasons for the same. Therefore the question now is was this subpar growth a temporary blip? Or should we expect India's growth rates to remain depressed in the years to come? As per JP Morgan, 7% growth rate is the new normal for India.

In their opinion, high fiscal deficit combined with high current account deficit would be the biggest concern for India in the months to come. Lack of corporate investments which in turn are a result of government and policy inaction are the root cause of evil. At the same time, thanks to the weird tax policies of the country, foreign investment too is expected to remain subdued. Therefore there is little that can be done to boost the growth from the 7% levels. Actually there is something that can be done. The government just has to get out of its state of inertia and start acting.

A lot of money has been floating around in China with high growth in consumer demand. This in an environment where the developed world has sunk into recession. Thus, the general opinion seems to be that Chinese people are genetically predisposed to gambling. But the CEO of a US based firm thinks differently. He has compared what we are seeing in China today to the scenario in the US back when the World War II ended. In that period, the generation of Americans had witnessed tough times in the Depression era and the break out of World War II. But in the post war period, America witnessed an unprecedented growth led by innovation and an entrepreneurial spirit of the Americans. Most earned their money really hard and if they chose to gamble it then or purchase various luxury goods, it was because the money belonged to them.

The same kind of scenario is playing out in China today. The Chinese hardly had any money 40 to 50 years back. But now that the economy has expanded at such a fast clip, disposable incomes have increased. As a result, China is witnessing an explosion of pent up demand for the good life. And this is not likely to end soon.

Meanwhile, indices in the Indian stock markets seem to be on a rollercoaster ride with the Sensex trading lower by around 90 points at the time of writing. Heavyweights like Reliance Industries Limited (RIL) and State bank of india (SBI) were seen driving most of the decline. All major Asian indices also closed in the red today. Europe too has opened on a weak note.

04:57  Today's Investing mantra
"Activity is the enemy of investment returns." - Warren Buffett

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    5 Responses to "What will the Sensex fall to?"


    May 10, 2012

    Ravi Batra has not aired anything new. Society was always divided into four classes. What he calls warriors are called in our Dharma as Kshatriyas. Intellectuals are none but Brahmins. Vysyas are referred to as acquisitors and lastly the labour class is referred to as Shudras. He has cleverly translated into new English terms. No share is trading at its real worth. As the stock market is mostly run by traders, speculators and operators, unless the sentiment changes to good the sensex going downhill cannot be stopped.



    May 9, 2012

    It is entirely true that the extent of the fall cannot be predicted reliably. 10 people will point out 10 unique levels, one of them ought to be right... yet it is of no use to the investor.

    However, blindly investing in cheap companies will not pay off. Need to select sound and popular companies which are currently "unpopular" but sound. Ones likely to attract investor attention in good times.



    May 9, 2012

    How about publishing a list of each company's INTRINSIC VALUE in The 5 Minute wrap at the rate of one company per day, because then, readers will be able to act on such concrete data, rather than just reading generalities like 'buy a company whose intrinsic value is higher than it's scrip quote'. Let's get real...not just theoretical!

    Like (1)

    sunilkumar tejwani

    May 9, 2012

    your view of value investing may be good but please try to respect technical analysts who stick with time tested theories, please note the time tested theories, may sometimes prove otherwise due to factors other than liquidity flows. At present charts are placed in a downward trend and the targets are pointing towards a further correction of five percent at least. Individual stocks may behave differently but the overall trend remains down in the short term.

    Like (1)


    May 9, 2012

    It would be a good idea for equity master to advise on 'which stocks are quoting much below their real worth & so has high potential in future to appreciate well'
    many may be inclined to buy that advice

    Like (1)
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