How avoiding 'wide deliveries' can improve your investment record
(May 20, 2015)
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In this issue:
» Citigroup believes there's more upside left in US stocks!
» Will the monetization scheme reduce gold imports?
» Weak global demand puts pressure on India's exports
» and more....
Last Saturday, my family and I had gone to the charming Brabourne stadium to watch the Indian Primer League match between the Rajasthan Royals (RR) and Kolkata Knight Riders (KKR). It was a crucial match for both the teams as the loser would have been knocked out of the tournament.
While the weather was not as pleasant as I would have liked it to be, the match pretty much made up for it as it was a very high scoring and entertaining game - RR put up a mighty 199 in the first innings.
KKR did well too! But fell short by 10 runs. However, there was a point in time when the match was pretty much in its favour; then a couple of wickets fell quickly and turned the match in favour of the team from Rajasthan.
What was interesting to note was that out of 190 that KKR scored, about 26 runs (or 13.7% of the total) were just given away to them by the bowlers of RR. This was in the form of extras. 18 wides, 5 no balls, and 2 leg bys. The number of runs given away due to the free hits was extra.
And if the match had been won by KKR, this stat would have come under the lens as the key reason for RR losing the match.
Extras (wides and no balls in particular) essentially would be equivalents to an 'unforced error', a term used in the sport of tennis.
As defined on Wikipedia - an unforced error is "an error in a service or return shot that cannot be attributed to any factor other than poor judgement and execution by the player."
So now, let's make a small tweak to this. An unforced error is 'an error in a
service or return shot buying decision that cannot be attributed to any factor other than poor judgement and execution by the player investor.'
And... Voila! We have a very apt investing lesson here...
So the key question that comes to mind is how can an investor avoid 'unforced errors' when it comes to his investing track record?
Here are some simple ideas that come to mind:
Warren Buffett has infact claimed that one of his greatest errors is the 'error of omission' rather than the 'error of commission'. This means that he could have made far more money with investments he avoided as compared to the money he lost in his bad investments. But here we are talking about a man who has his emotions very much under control!
- Avoid buying something you don't understand or know anything about - Know why you are buying a stock; have a good understanding of the business; and where the company stands in the overall scheme of things.
- Avoid paying up for lack of quality
- Avoid buying into businesses with questionable managements - No rocket science here.
- Avoid over exposure - While a concentrated portfolio is one that has its pros, diversification is a way to go about things for the risk-averse investors.
- Avoid being fully invested - Not having enough cash to make most of market follies can be quite frustrating.
- Avoid relying on short-term data for making investment decisions - Rather it would be advisable for one to look at how companies have performed over an economic cycle - about a decade - to gauge whether they would be able to weather through difficult times going ahead.
- Avoid buying value destroyers - Why would one want to buy into a company which earns returns less than its cost of capital? As simple...
For investors who are not able to manage the same, it would be wise of them to avoid not making the 'error of omission' as they could easily get swayed by the 'hot' money making opportunities that are presented to them.
In short, the risk-reward ratio should be well understood.
What other points come to mind when you talk about reducing 'unforced errors' in investing? Let us know your comments or share your views in the Equitymaster Club.
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An interesting article has been making the rounds on the Internet. It talks about a valuation metric that is known as the 'Q ratio'. And what it is indicating is that American stocks are valued at 10% above the cost of replacing their underlying assets. This is highest figure seen ever - apart from the Internet bubble and the 1929 bubble phases. The opening line from the article on Bloomberg describes this well - "If you sold every share of every company in the U.S. and used the money to buy up all the factories, machines and inventory, you'd have some cash left over. That, in a nutshell, is the math behind a bear case on equities that says prices have outrun reality."
It was only a few weeks ago that Fed Chairperson Janet Yellen's comment of US stocks being "quite high" did not go well with the people on Wall street. However, if the guys over at Citigroup are to be believed, it would take more than just her comments to diffuse this market run up that is happening in the US. And in fact, the trigger point would be more than three interest rates hikes - as per them. The authors came to this conclusion after gauging through some historical data points such as the internet bubble or the run up in stocks in Japan during the 80s. And with interest rates hikes in the US seemingly far away, it is assumed that the market run up would continue till then.
We believe that such conclusions should be taken with a pinch of salt and essentially would be aimed at those who can seemingly 'time the market' to perfection - something which is next to impossible.
One of the biggest reasons why India's current account deficit has been under so much pressure is because of oil and gold imports. The erstwhile UPA government chose to resolve this issue by placing curbs on gold imports. But this did not really achieve much and instead heightened the chances of smuggling. Once the Modi government came into power, these curbs were lifted. However, the problem of rising gold imports exerting pressure on the current account balance exists. As can be seen from the chart, barring a few months, gold imports have largely been on the higher side.
Will the monetization scheme reduce gold imports?
The government is serious about reducing the deficit. And so one idea that it intends to follow up on is the monetization of gold. As reported in the Hindi Business Line, Around 20,000 tonnes of gold are lying idle. This is neither traded nor monetized and is lying in lockers.
The government intends to monetize this by offering interest on gold deposits made with banks. This interest will be exempt from income-tax and capital gains tax. Now such a scheme had been introduced in the past as well but did not meet with much success because of the low interest rate offered. So, it will be interesting to see how the government intends to make this scheme attractive this time around.
Further, the gold that the government collects though this scheme will be lent to jewelers, thus alleviating the latter's need to import the same. However, here again, jewelers will borrow gold from the government depending on how favourable the terms of lending are. Thus, while the efforts of the government are in the right direction, executing this scheme well will be the key.
While the government is trying to find ways of bringing imports under control, it also faces the challenging task of bolstering exports. As reported in the Business Standard, India's merchandise exports were down 14% in dollar terms last month. This is the fourth consecutive month of export contraction. Given that goods and services exports account for a quarter of the country's GDP, a slowdown in the former is bound to impact economic growth as well.
In the last two decades, India has grown twice that of world GDP growth on an average. Bloomberg expects world GDP to average at around 3% in the next 3 years, which pegs India's GDP growth rate at 6% plus in the same period. This growth rate will be higher if one assumes that world GDP will get a shot in the arm and will grow faster than what has been predicted.
But so far, the outlook for the world economy looks subdued. If one looks at the scenario before the 2008 global crisis, exports played a significant role in boosting India's GDP. Indeed, for five years between 2002 and 2006, goods and services exports from India expanded at the rate of 21% a year in constant currency terms.
But the global environment is very different now. Recovery in the US has been tepid and the Eurozone continues to remain sluggish. China is also slowing down. All of this has led to demand considerably weakening. And this does not bode well for a healthy growth in India's exports.
The Indian stock markets were trading firm today. At the time of writing, the Sensex was trading higher by about 150 points or 0.54%. Barring stocks from the auto, capital goods and metal spaces, gains were seen across the board. Further, the BSE-Midcap index was trading marginally lower while the BSE-Smallcap index was up by about 0.3%.
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom". - Peter Lynch
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