The important message the market wants to give - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

The important message the market wants to give 

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In this issue:
» Why this is no world for savers
» A prominent brokerage downgrades India
» Fed should not goof up on its unwinding
» The most misused phrase in investing
» ....and more!

When it comes to mentioning the best books on investing ever written, there's hardly any successful value investor who doesn't mention 'The Intelligent Investor'. As a matter of fact, if there's just one book Warren Buffett thinks investors should read in their entire lifetime, it is this tome by Benjamin Graham. Forget Buffett, even Graham himself believes it is 'The Intelligent Investor' that an investor should lay more emphasis on than his other classic 'Security Analysis'.

Well, with such glowing reviews, one would expect the book to be choc-a-bloc with dense texts of how one should go about picking the next stock market winner. Let us warn you that if you approach the book with this frame of mind, you are bound to be disappointed. Simply because it has no material of this kind. As a matter of fact, we won't be too off the mark if we say that the book is more about behavioural investing than the actual process of investing per se. And Buffett only helps make our case stronger by highlighting the two most important chapters in this book that are behavioural to the core.

Now, is there a reason why some of the most successful investors in the world consider investing to be a more behavioural rather than a cerebral discipline? There certainly is. And it is the markets like the ones that we are into currently, drive home the importance of this aspect more than anything else.

You see, if there's one reason why people like Buffett, Lynch, and Graham etc have succeeded in investing is because they have stuck steadfastly to their discipline. And this is irrespective of what the markets around them were doing. Therefore, if one was a growth investor, one continued to be a growth investor and if one was a value investor, he continued to stick to the discipline of value investing.

However, this is what most of us lesser mortals find difficult to follow. Usually, we start off with a certain orientation. And then when the situation around us changes, we panic or we give into greed and deviate from our path. But this is not how long term fortunes are made. They are made by staying true to one's discipline and buying when the process says so and also selling as per the process, devoid of any emotions.

Therefore, what better time than now to emphasise the importance of this aspect we believe. We are sure a lot of investors are tempted to BUY stocks now especially those who've missed the rally. And there are similarly others who would be tempted to SELL because the stock prices have run up too fast too soon. Our only advice to these people would be to continue sticking to their philosophies and processes and not to change course mid way. This is a recipe for disaster according to us. And by the way if you don't have a proper process in place yet, it is time you create that first.

And by the way, those of you who are musically inclined can get the same message delivered in the form of this brilliant, highly addictive music video, Patanga, which our sister concerns Quantum Mutual Fund and the National Streets for the Performing Arts have helped sponsor.

As the song says, the world is full of distractions, conspiring to pull you away from your long term objectives. And you'll need all the emotional strength you can come up with to stay on the right path.

Do you think investing is more about your emotional strength than a matter of intellect? If yes, how do you overcome the emotional biases that you often encounter? Let us know in the Equitymaster Club or share your comments below.

01:37  Chart of the day
If someone tells you to start investing in the markets only when things start looking rosy, you could well show him our chart of the day today. As the chart highlights, nearly one third of the gains that the major indices have got over the last one year has come in the last one month itself. And this is why most people argue that if a person is trying to time the market, he is living in a fool's paradise, especially when it comes to Mid & Small Caps where the gains are more non-linear than even large caps. As a result, whenever you find an undervalued stock, the right time to invest is then and there itself rather than wait for sentiments to improve.

Here's why timing the markets is a risky strategy

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Those hoping for inflation adjusted returns from safe investments have been punished over the last 5 years. In the West, despite no inflation, savers have been robbed of any return on surplus liquidity. On the other hand those who have borrowed at dirt cheap rates have been better off. In India, steep consumer inflation has negated the reasonable fixed income return. Thus the odds have certainly been in favour of borrowers than savers over the past few years. One would imagine that economists would opine against the principle of disincentivising savers. This is because in the absence of savings, only higher and higher amount of debt can fuel growth.

And that is certainly not sustainable! However, it appears that even renowned financial journalists like Martin Wolf have resigned to the 'new normal' of low interest rates. As per a blog by Mark Thornton, Wolf does not see interest rates in the West rising anytime soon. Well, while we cannot blame him for the Fed's decisions, his advice for savers certainly warrants criticism! Wolf has argued that the world should get used to the cheap money policy of central banks. Mr. Wolf agrees with the Fed's view that cheap money policies can stoke stock prices and facilitate growth in investment, consumer spending and aggregate demand. While our own central bank, the RBI, has rubbished such claims, it is time that the savers ask for their due.

In an environment where most brokerages have doled out optimistic Sensex targets following a clear decisive majority at the centre, we saw some sanity return to the street at last. One noted brokerage recently cut down the Sensex to neutral weight citing valuation concerns. It may help to note that we have been recommending our investors to remain cautious ever since market registered a sharp bounce back after election results. The reason being during such events, valuations run ahead of fundamentals as stock prices are driven by sentiments. And it is during these times, emotions overweigh investing decisions, ignoring fundamentals. While we agree that a reformist approach of the new government can revive the economy and thus markets, it is the valuation that determines upside potential. Hence, it is of utmost importance that investors do not get carried away in this hysteria. Any investment decision should be based on fundamentals and valuations. If not, investors who buy now will become subject to greater fool theory.

After injecting massive doses of liquidity into the financial system and running up a huge debt burden, the Fed last year announced its intention to trim bond purchases. So far it has cut down these purchases to US$ 45 bn a month. This stood at around US$ 85 bn last year. But the Fed has a huge task on its hands. This is because it has a balance sheet of more than US$ 4 trillion to unwind. There are also expectations that once these bond purchases are reduced, interest rates will also rise. However, the CEO of Oppenheimer Funds is of the view that if the Fed goofs up in exiting its QE program, it will have serious repercussions for the global economy. But he believes that the Fed has done a good job of handling things so far.

We are not so sure. We believe that the Fed made a mistake printing so much money in the first place. This has completely distorted the global financial markets and caused headaches especially to the central bankers of the emerging countries. The Fed itself has indicated that interest rates will stay low for some more time. Clearly, the current Fed policies are hazy at best. And there is no visibility in terms of how these policies will improve the fortunes of the economy.

Man seldom learns from history. Emotions like fear and greed are too compelling to focus on the facts and rationale. No wonder human beings end up making the same mistakes again and again. And one of the most common used phrases that has been misused and misinterpreted in this context is ''This time it's different" . And this applies quite well to the investing world as suggested in an article in The Washington Post. The bubble period, be it the dotcom mania or sub prime credit boom, throughout history has been marked by greed, causing valuations to run way ahead of fundamentals and historical averages. However, sooner or later, the reality always catches up, marking the onset of financial crises of which global economies have enough experiences. In the same way, in the times of crisis, the prime motive is fear. Despite the correction and growth potential ahead, the same holds back investors from participating in the market rally.

So how can investors avoid being victims to investing biases and stop making the same mistakes? The only answer lies in focusing on facts, fundamentals and valuations. What investors need to analyze is whether the economic environment along with fundamentals and valuations is really different. Strong portfolios are built on discipline and rationale; investors should never let emotions and mass psychology override them.

Meanwhile, majority of the stock markets across the world continued to trade in the positive territory in the week gone by. Positive economic data from both China and US kept the markets upbeat. As per survey, China's factory sector registered its best performance for the first five months of 2014. Even the US factory output during this period grew at the fastest pace since February 2011. The US housing market showed positive signs of recovery as home re-sales rose in April.

Among Asian indices, Japan was the biggest gainer registering a rise of 2.6% aided by a weak yen. The Indian markets continued to revel in the newfound optimism and hopes of a stable and reform-centric government at the centre. The Indian index shot up by 2.4%. Even Hong King recorded a strong gain of 1.1% but Singapore and China markets registered marginal gains of up to 0.5% each. The US markets were up by 0.7% for the week. In the European markets, Germany and France ended the week on a strong note. But UK market was down by 0.6%.

Performance during the week ended May 23th, 2014
Source: Yahoo Finance, Kitco

04:55  Weekend investing mantra
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful." - Warren Buffett
Today being a Saturday, there is no Premium edition being published. But you can always read our most recent issue here...
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1 Responses to "The important message the market wants to give"

K Bengani,

May 24, 2014

Please keep it short and to the point. It is too long with useless information. Stop promoting unknown people and advertising their books. Also stop giving moral and social lectures. I rarely read the full text.

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