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Here's How You Should Prepare for a Post Brexit & Rexit World

Jun 23, 2016

In this issue:
» The sharp spurt in shares of PSU Banks
» The big reason why PSU banks saddled with huge NPAs
» ...and more!
00:00
Rahul Shah, Co-Head of Research

Do you pay attention to the commercial activities around you as you go about your daily life? I do. And I find it amazing that they never stop or slow down irrespective of the headlines in the newspapers.

So what if the parliament failed to pass a few crucial bills? Business at fast food restaurants remains as brisk as ever. Then there's all this speculation about our entry into the elite Nuclear Suppliers' Group. It is important that we get it. However, if we don't, it won't dim the enthusiasm of shoppers at the neighbourhood grocery store.

And the news around Raghuram Rajan's exit? Well, it did send shockwaves. But guess what, the ticket counters at the multiplexes were as crowded as ever.

The list could go on and on. The point I am making is simple...

If I were to sum up the big secret to investment success in just one sentence, I wouldn't talk about process or technique. Neither would I talk about cheap valuations, moats, or trailing stop losses. And I wouldn't refer to the practice of being fearful when others are greedy and greedy when others are fearful.

No doubt, these help. However, above all of these rules and strategies, there exists an even bigger truism.

The big secret is this...

To be a successful investor, you must believe that trade and commerce will always take precedence over politics.

In other words, what's happening in the business world is more important than what's happening in the parliament or at the central bank.

I know this might sound rubbish and illogical at first and the following thought will likely cross your mind:

These guys have lost it. If we don't have capable prime ministers and central bank governors, we would be in shambles. How can politics not matter at all?

In my defense, here's a provocative Whatsapp message I got yesterday:

25 Years ago on this day 21st June 1991, PV Narsimha Rao took oath as Prime Minister along with Manmohan Singh as FM. Sensex on that day was 1,361 and today @ 26,800. Growth of 20 times in 25 years.

Now try and recall this 25-year period.

The Babri Masjid demolition and subsequent riots...the worst foreign exchange crisis...nuclear tests...Kargil war...stock market scams...the IT bubble...the 2008 collapse...droughts...

Any of these events by themselves would have been enough to scare the hell out of investors. But wouldn't you have made a lot of money forgetting about them and believing in the power of trade and commerce instead?

Despite all the terrible things that have happened in the last 25 years, the stock markets have gone up 20 times. Go back ten more years to when the Sensex was rebased to 100, and it has returned a whopping 27,000% over 35 years.

So if there's one idea that can help you make enormous money from stocks when everyone around you is terrified of investing, this is the one. Politics is overrated. What matters is whether the wheels of trade and commerce are chugging along at a good pace.

For the readers who've written to us asking for stock strategies based on macro events like Brexit and Rexit, I guess you've got your answer.

There will always be something that bothers the world. Let the herd worry about it. If you want to have success as a long-term investor, you have to look past these worries and invest in great companies that are available cheap and will be around 10, 15, 20 years from now.

Finding such companies is far more important to you as a long-term investor than events like the Brexit or the Rexit.

People will continue to buy a Bajaj motorcycle or a Maruti car as long as the prices are reasonable. They will continue to paint their homes with Asian Paints and consume HUL or Nestle products.

This is why we recommend these world-class franchises to our subscribers just as other investors are fretting over some big political upheaval.

We know many readers out there don't want to venture into stocks because of the various macro risks they see on the horizon. And we won't deny that there are problems that could lead to temporary disruptions. But will they cause trade and commerce to come to grinding halt? We don't think so.

If history is any indication, the marketplace will always take precedence over macro issues.

Do you believe in the idea that trade and commerce win over politics when it comes to successful long term investing? Let us know your comments or share your views in the Equitymaster Club.

03:00 Chart of the day

The last one month has seen a lot of action as far as public sector banks (PSBs) are concerned. As today's chart highlights, most PSB stocks have seen large jumps, with the stock of Indian Bank topping the gainers with a 50% appreciation.

Perhaps this is to do with RBI's new scheme of loan restructuring. Announced earlier this month, it splits the lending exposure of banks to a borrower into sustainable and unsustainable. The unsustainable portion (upto half of the total) could be converted into equity or quasi equity instruments. Banks can then make provisions of 20% of the total loan or 40% of the unsustainable portion.

This would give them a reprieve from 100% provisioning required for bad loans.

However, this could not be the only reason. A mere change in sentiment or liquidity could be other factors driving the rally. Whatever may be the case, PSB bank shares are still a far cry from their peak prices of 2014.

Public Sector Bank Stocks See Big Jump Over the Last Month


03:45

Over the years, we've often scratched our heads in wonder at the debt levels of some companies. Many of them, with a business that is clearly not capable of servicing debt levels even half of what they had, managed to borrow such huge amounts from banks.

Then something even more amazing would happen. Not only would these companies continue to be in business, they would manage to borrow even more!

And the fact that the lenders to such companies tended mostly to be public sector banks raised our eyebrows even more. Something was certainly amiss, we though to ourselves. How were these companies managing to get banks to lend to them?

RBI governor Raghuram Rajan offered a clue recently. He pointed out that large corporates with unviable loans managed to stay afloat by playing one bank against the other. They managed to do this by milking banks' fears of bad loans to get even more debt.

PSBs not doing their homework on their own while lending, and instead relying on due diligence done by the promoter hired investment brokers has been a big contributor to the problem. The governor has also made the case for increasing the tenure of bank managers. Their short tenure has often meant that they have been slow to recognize problem loans and tended to push such problems for their successor to handle.

With the spotlight on PSBs is like never before, we hope all the scrutiny leads to them cleaning up their act with long term rather than short term solutions to their problems.

04:45

The stock markets were trading listless today with the BSE Sensex showing a marginal decline of 10 points at the time of writing. Pharma and banking stocks led the list of gainers while stocks from the realty and power sectors were at the receiving end.

04:55Today's Investment mantra of the day

"Microeconomics is what we do, and macroeconomics is what we put up with." - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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3 Responses to "Here's How You Should Prepare for a Post Brexit & Rexit World"

SJ

Jun 24, 2016

Very true.

Like 

Rajesh

Jun 24, 2016

Very well put across Rahul. This definitely would settle the dust around investing in these seemingly turbulent times......

Like 

Ramaswamy Iyer

Jun 23, 2016

21st June 1991 - Sensex @ 1,361. 21st June 2016 - Sensex @ 26,800. Growth of 20 times in 25 years.

29th Dec 1989 - Nikkei-225 @ 38,916. 21st June 2016 - Nikkei-225 @ 16,065. Growth of 0.41 times in 27 years.

Trade & commerce will always take precedence over politics - really???

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