How to protect your portfolio - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

How to protect your portfolio 

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In this issue:
» Can the target for private investment in infra be met?
» Central Banks are under a spell?
» Is the Eurozone stabilizing?
» China returns to the metal markets
» and more....

In recent times there have been quite a few negative news articles related to some noted companies. The result of these articles was a substantial fall in the stock prices of these companies. The stock of India Cements tanked by over 20% when there was a negative report related to a match fixing scandal. Ranbaxy's stock was penalized for a report related to falsifying drug related data by the company. Even history has seen examples of stocks coming under pressure when negative news broke out. The ones that suffer the most during such times are the small investors. In the bloodbath subsequent to the news reports, the stock crash wipes out a substantial portion of the investors' wealth. The question is - is there any way in which investors can protect themselves against such crashes?

An article in Economic Times has tried to answer this question. It has spelled out a few safety measures that investors could adopt to protect their investments against such bloodbaths. The foremost is to analyse the company's corporate governance practices. This means investors should only invest in companies whose managements have a strong track record. For this it is not just essential to read all news related to the company's management personnel but also to read the company's corporate governance reports. The second and in our opinion the most important step is to do your homework before investing in a company. This is something we stress on a lot. It is crucial to check the management's capital allocation skills, whether its actions have hurt the interests of minority shareholders etc. An in depth study of the company's financials and fundamentals more often than not bring to light questionable dealings. If there are any red flags then it is best to avoid such companies.

The most important thing that investors need to remember is to get their asset allocation to equities right. One immediate step that investors can take is to restrict their holdings in stocks in such a way that no single stock forms a large part of their total stock portfolio. This will ensure that even if a couple of stocks are down 70%-80%, it does not do a lot of damage to the total portfolio.

Essentially stock markets should be viewed as a playground for both fundamentals and emotions. Stock prices could go up or down depending on a combination of these two factors. What investors have to do is to understand whether the decline or rise in prices is driven purely by fundamentals or is it just an emotional reaction. This can be understood by review the fundamentals which include studying the management's track record. If the fall is purely for emotional reasons, then it is best to ignore it. Because eventually the price of the company will catch up with its fundamental value. But if the fall is for fundamental reasons, its best to leave the stock alone.

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01:15  Chart of the day
Manpower Group recently conducted a survey. It surveyed employers across 42 countries to gauge what percentage of them were facing a talent shortage. The results are interesting. India ranks high on this survey. In fact it ranked 3rd with nearly 65% of the employers stating that they were facing a talent shortage in the country. The problem is more pronounced in the technology and finance sectors. A key reason for this talent shortage is the lack of quality education. Though there are several institutions the process of admission as well as the standard of education needs to be raised. Otherwise India's ranking will only improve on this scale.

Source: Financial Express

That the state of infrastructure in India leaves a lot to be desired is a fact well known. Time and again it has been pointed out how crucial it is to ramp up infrastructure if GDP growth has to go to the next level. But while the government has realised the importance of this, on the execution front it is sorely lacking. Take the infrastructure investment target for the 12th Five Year Plan (2012-17) for instance. The government has envisaged a total investment of US$ 1 trillion in this space. Of this 50% is expected to come from the private sector. This is through the public-private partnership (PPP) route. But herein lies the problem. Once again it appears that this target will not be met. And this is because investment from the private sector is most likely to fall short.

Given the slowdown in the economy, most of the companies in the private sector have put investments on hold. The fact that they are stressed on the financial front have only made matters worse. The sector is plagued by issues relating to land acquisition and cumbersome clearance processes. Unless these are addressed on a priority basis, the current state of affairs would continue. Further, the US$ 1 trillion target was based on the assumption that the Indian economy would grow by 9% on an average which now seems quite unlikely. Hence, as has been the case in the past, this will be another classic case of targets set by the government not being met.

Whatever goes up has to come down. This is perhaps one of the truisms of life and is applicable across most disciplines including finance. Little wonder, the Bank of International Settlements (BIS), a representative of the world's central banks is worried about the possible coming down of stock markets after their strong ascent over the past few months. BIS is of the view that markets are under a spell of monetary easing. So much so that no amount of negative news has been able to stop the markets from going up. Interest rates are so low and there has been so much stimulus that investors are unwilling to fight the central banks. In fact, any negative development or uncertainty is being promptly shrugged off on account of the fact that central banks will at all times come to rescue. However, the party cannot last forever. At some point or the other, there will be something that will make the interest rates go up. And when this happens, each and every investor, big and small has to make sure that his finances are strong enough to withstand the losses that could come from higher interest rates.

ECB chief Mario Draghi is an optimistic man. He has managed to see the silver lining even while the fortunes of European economy remains clouded. Also Mr Draghi seems to be rather paradoxical in his own views. As per Bloomberg, Draghi has expressed enthusiasm over the signs of stability in Europe. Yet, he believes that the economic outlook remains 'challenging'. The drivers of such a gradual recovery, according to him, are cheap interest rates and booming stock markets. Draghi views seem to be completely incoherent given that the problems created by excessive monetary easing have led the Eurozone closer to a financial ruin. Unemployment in the 17-member euro area reached a fresh high in April 2013. Moreover, the recession has deepened in the first quarter of 2013. Yet, Draghi has defended the ECB's potentially unlimited bond buying program. He believes that the government should not shy away from bailing out more troubled banks if needed. We wonder if Mr Draghi lives in a make believe world or if he refuses to reconcile with reality. Either ways having regulators like him is an extremely risky proposition for Eurozone.

Today China is the biggest global consumer of several primary commodities. Chinese demand has a significant impact on global commodity prices. As a result, the slowing Chinese economy has been the biggest reason for the drop in commodity prices. Prices of metals such as aluminium, copper and nickel have touched multi-year lows in recent times. But here is a recent development that could boost commodity prices. As per the Financial Times, State Reserves Bureau (SRB), the Chinese stockpiling agency has purchased base metals on the international market. This too, for the first time since metal prices crashed during the global financial crisis. It is worth noting that SRB is one of the most influential participants in the global metals market. Taking advantage of the lower prices, it recently purchased nickel and enquired about copper as well. Many are seeing this development as a bullish sign for commodity prices. But isn't it a bit too early to make such predictions? Overall, we believe that the years of heavy investment-driven gravity-defying growth rate are behind China. From here on, the dragon nation is expected to grow at a moderate pace driven by domestic consumption. But this transition may not be smooth. There are likely to be shocks and surprises from time to time. And this will keep commodity prices highly volatile. As such, investors should not read too much into such short term data.

In the meanwhile after opening the day on a positive note, Indian equity markets slipped below the dotted line. At the time of writing, the Sensex was down by about 167 points (0.9%). The other major Asian markets have closed the day on a negative note as well with Japan and Indonesia leading the pack of losers in the region.

04:55  Today's investing mantra
"Value investing is the discipline of buying securities at a significant discount from their current underlying values and holding them until more of their value is realized. The element of a bargain is the key to the process." - Seth Klarman
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1 Responses to "How to protect your portfolio"

parimal shah

Jun 3, 2013

Where do you find company's corporate governance reports on the internet?

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