Do you buy stocks to pay for your next vacation?

May 17, 2013

In this issue:
» Why the US central bank must be broken up?
» The IMF finally rings the alarm on central banks...
» Could this opportunity boost India's exports?
» Will China & India be the world's biggest investors by 2030?
» ...and more!

Something very strange came to our notice recently. A group of people had together decided to put money in a single stock based on some so-called 'hot tips'. They were assured that the stock price would double in just a few months. What an incredible, easy way to make quick bucks, isn't it?

So of course, they invested heavily in this stock. And more interestingly, they had all planned to take their families on a foreign trip from the profits earned through this trade.

What happened to that stock and whether they did go for a foreign trip is none of our business. But what really shocked us was their approach to investing.

We have been in the field of investing for over 17 years. We have seen stock markets going through various ups and downs. We know from our experience that investing is no cakewalk. There are no quick and easy windfall gains lying on the table.

Investing in stocks is a very serious business. It requires effort. It requires discipline. And lots of patience! We believe the long term value investing approach is the safest and most profitable way to invest in stocks.

So if somebody has lured you into stock markets with get-rich-quickly promises, we would like to caution you. People who have followed this short term approach have more often than not burnt their fingers. Sometimes very heavily!

We have one very important lesson to share. We believe that there is a need for a shift in the mindset of investors towards stock investing. Do not think of stock markets as place where you can earn quick profits and pay up for your near term expenditures.

Of course, we're not saying that you shouldn't go on a foreign trip. And in fact, stocks are a great way to earn the kind of money needed to support such a lifestyle. But never plan your near term expenditures and then invest in stocks. The way the above mentioned group of people did.

Do you think it is right to invest in stocks for quick gains and to meet near term expenses?Please share your comments or post them on our Facebook page / Google+ page

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 Chart of the day
The global stock markets are rising. The sentiments seem to be changing in Indian stock markets as well. The BSE-Sensex is at its highest level in over two years. And just 4% away from its all-time high! One positive factor has been the sub-5% inflation data for the month of April 2013. Investors are hoping that this would make room for an interest rate cut and help revive the Indian economy.

Moreover, as per an article in DNA Money, FII inflows (FIIs) in Indian equities are set to get wider. MSCI Inc, the global benchmark indices construction agency, has included four more companies in the MSCI India Index. With the addition of Apollo Hospitals, GlaxoSmithKline Consumer, Oil India and Wockhardt from the end of May 2013, the total number of stocks in the index will go to 76. It is worth noting that the MSCI India Index is used as a benchmark and asset allocation index by FIIs.

The current rally in Indian stocks has been largely driven by FII inflows. In fact, as of 31 March 2013, FII holding in BSE 500 stocks stood at 22.2%, the highest level in the last five years.

Now the question is, should FII flows influence your stock investing decisions? We completely believe against it. FIIs are known to be the most fickle lot amongst all investor classes. They tend to flee at the drop of a hat. And given their clout, they tend to make markets extremely volatile. So in our view, one should invest purely based on fundamental factors and not liquidity and FII flows.

Data source: Business Standard
*Data upto 15 May 2013

We may not have noticed it but everything around us is an intricate web of checks and balances. Trees can't grow to the sky. No living being can have populations that exceed infinity. It cannot rain or snow forever. Neither can there be unlimited supply of anything. Thus, if things go far from equilibrium, nature has its own way of lending the much needed balance.

We wonder how it can be any different in the corporate world. No firm can keep growing forever and if one does, we have to devise our own checks and balances to ensure that it does not pose any systemic risk. As per Moneynews, the US Fed is one such organisation that has perhaps become too big than the system can handle. And the arguments do indeed stack up pretty nicely. It has trillions of dollars worth of assets, is leveraged almost 60 times and its actions pose gigantic systemic risks. Therefore, there's every reason for the Fed to break itself up and save the financial markets from a disaster of epic proportions.

Unfortunately, there aren't too many supporters of the idea and most people seem to be harbouring the wrong notion that the Fed is actually helping the economy recover. For us though, there is no such evidence visible. And all that the Fed has ended up doing is create gigantic asset bubbles with no strong fundamentals supporting them. Thus, if the policymakers aren't too keen on breaking up the Fed, the iron rule of markets will ensure that one day it certainly does. However, the break up could come at a huge financial cost to the world.

Here's something more on central banks and their reckless money printing... Central banks have pumped trillions of dollars, euro and yen into the global economy. They bought bonds, slashed interest rates close to zero and made every effort to pump in easy money. But nobody seemed to complain. It seems international monetary bodies like the IMF are finally taking the blinkers off their eyes.

As per an article in Reuters, the IMF has finally acknowledged unprecedented risks from the ultra low interest rates. The risks do not just pertain to inflation and asset bubbles. But as per evidence collected by the IMF, the Fed, Bank of Japan (BOJ) and Bank of England (BOE) could face gargantuan balance sheet losses if the bonds are to be sold.

Each of the central bank has grown its balance sheet at an unsustainable pace. The Fed has tripled its balance sheet to more than US$3 trillion through three tranches of bond buying. And getting rid of the bonds could come at a huge loss to the central banks. In a worst-case scenario, IMF believes, the bond losses could top 7% of GDP for the BOJ, nearly 6% of GDP for the BOE, and more than 4% at the US Fed.

Will Iran come to the rescue of the beleaguered Indian auto industry? It might well be the case. As per an article in the Economic Times, Iran has agreed to source automobiles and pharmaceuticals from India. This is in exchange for payment of oil imports.

Prior to this, the trade balance was considerably skewed towards Iran. So while India exported goods worth US$ 3.4 bn in FY13, imports were much higher at US$ 11.6 bn. That is not all. India has also been having problems making dollar payments to Iran. This is on account of the sanctions imposed on the latter by the developed world. Hence, this form of barter appears to have found favour among both.

For Iran too, this is beneficial because so far they had been importing automobiles from the European Union (EU). Automobiles and pharmaceuticals were two of the bigger components of the export basket adding upto US$ 18.4 bn and US$ 14.6 bn respectively in FY13. How big an opportunity it is for the Indian auto and pharma industry remains to be seen.

India and China were the apple of the global investors' eyes during the period of crisis. This was because of the break neck pace at which these countries had grown. But things have changed in recent times. Both economies have been slowing down. Issues like policy reforms, etc have marred future forecasts as well. But despite these short comings, these countries have been touted to become the largest investors in the global markets by 2030. This prediction has been made by the World Bank.

The underlying reason for this is the savings and investment environment in these countries. If the world grows at an average of 2.6% to 3% and these countries manage to grow at 4.8% to 5.6% a year, then the possibility of this happening is very likely. As per the World Bank, if this scenario plays out, then China would make up around 30% of the investment activity. US and India would follow at around 11% and 7% respectively.

The caveat is the continued focus on reforms and investments in education. This has been narrowed down as one of the biggest driver for boosting both savings as well as investments. In our opinion, one needs to add policy reforms to this. For that would give a big boost to overall investments in the economy.

In the meanwhile, the Indian share markets were trading in red. At the time of writing, the BSE Sensex was down by 22 points (0.1%). Sectoral indices represented a mixed bag with consumer durables and healthcare stocks witnessing maximum selling. However, realty and power stocks were trading firm. Most Asian stock markets traded in the green with China and Indonesia leading the gains. The European markets have opened on a mixed note.

 Today's investing mantra
"The individual investor should act consistently as an investor and not as a speculator."- Benjamin Graham

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4 Responses to "Do you buy stocks to pay for your next vacation?"


May 27, 2013

Why not mathematically! Great Idea, it is a flexible goal. Say I invest 1 Lakh today for 10 years in equity at 11%, I would get 3.15 Lakh. I take capital and (7% average inflation) 2.25 Lakh not to jeopardize my retirement out and have 1.05 Lakh Vacation Money left over. Today's Vacation cost of around 50,000. I do take the equity risk though. Interesting idea but are we willing to wait for the equity cycles to play out?

How about buying the first product say a car from savings, and creating an imaginary loan with interest to invest for yourself for the next one, in MF, once the imaginary payments in MF are over, wait for the money to double (7+ year) assuming 10 year car usage, you can take out the half, buy a car and wait for 10 years again not paying for another car again though your life. 5 cars for the price of 1. Happy calculation on this one. :)



May 17, 2013

The first article about "I know it all... get rich quick" theory is a total fail. I have bought one such company and a few other guys too did that. We thought we knew it all... we had dreams to fulfill, some people wanted to buy a dream flat, some wanted a shortcut to richness but eventually we lost all the money that we had put into that company, everything. This company was not recommended by EquityMaster... it was before I had joined EQ. I now realize that had I joined EQM earlie I would have not only saved that much money, but my money would have grown too with the recommendations that came from EQM. But like in hindi we say -der aaye, durust aaye. I am with EQM now and I would wholeheartedly suggest everyone to go for the services. But I don't think that I would be valuing EQM's suggestion as much as I do now had I not lost so much money... we realize only when we lose. :)


Digambar Kulkarni

May 17, 2013

Market Sentiment is an important factor in deciding the market price of a stock. Sentiment has no unit and scale.

Again, stock price de3pends upon National as well as Inter continental and World Economic events!

Again, there are scams, thefts, and World mishaps....thesse are not planned.

Poor investor must hold his breath and feel optimistic about future growth which has taken place in the past for several centuries and decades ! He shpuld be willing to accept delays and less profit. Expertts in execution are ready to work for his investments and give him his share...take it !


Deepak Shamdasani

May 17, 2013

Actually it should be the other way around
Thst is if you have made windfall gains you could encash such gains to fund your Holiday Trip
That will be double fun and your holiday would truly be exotic

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