Which stocks will you buy if the markets shut down?
(Jul 1, 2015)
|A A A
In this issue:
» Debt levels across various nations
» Is the global credit bubble on its last legs?
» How private banks have grabbed market share from PSU banks
» ...and more!
Unless you are living far away from civilization, you would have heard all about the crisis in Greece by now. The country is bankrupt, it could be thrown out of the Euro zone, the banking system has shut down and citizens can't withdraw their money from ATMs. In the middle of all this came news that the stock markets too would be shut down for a week. While one feels for the ordinary Greek citizen, this crisis also got us thinking. What would happen if the Indian markets shut down for a week or more? No doubt most traders would be in a state of panic! But what about long term investors? Think about this question. If you knew that markets will be closed for a long time, which stocks will you buy?
Here is one of our favorite Warren Buffett quotes - "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years" . Now don't get us wrong. We are not hoping for a 5 year shut down of the BSE and NSE! But we are interested in finding those stocks that we would love to own even in such an unlikely situation.
You see, even though it is easy to forget sometimes, a stock represents ownership in a business. In the long run, you can only hope to make as much money in a stock as the returns from the underlying business. Great businesses will compound their value year after year. This would be true even if daily stock quotes were not available.
So which stocks should you buy in such a situation? The simple answer is, 'buy the best businesses'. You can then sleep peacefully knowing they will be worth a lot more when the markets reopen after 5 years! How do you identify the best businesses? It is not as easy as it seems. Broadly, you will need to find a company which:
While this is not an exhaustive list, these are certainly the most important points. Consider these two historical examples of a largecap and a midcap; Hindustan Unilever and Page Industries. Shareholders of these businesses have compounded their wealth by 27.5% and 73.9% CAGR respectively over the last five years (excluding dividends)! Would they really have been worried about daily stock quotes? Please note we are not making recommendations here. Rather, we offer the following advice.
- Has a business model that is protected by a strong moat (entry barriers, pricing power, switching costs, etc).
- Possesses a strong balance sheet (little or no debt, good liquidity position, etc).
- Generates tons of cash internally (which can be paid out as dividends).
- Earns returns on capital that is far higher than its cost of capital.
- Is run by a management that is competent, ethical and shareholder friendly.
- Is trading at a discount to its intrinsic value in the market.
Stop studying the markets. Instead, assume that the stock exchanges will shut down for 5 years after you make your purchase. Take the time and effort to study great businesses that you can understand. Finally, buy them when Mr. Market offers you these gems at a discount. The stock price will take care of itself.
Now if all this seems like too much hard work, we have good news for you! Our ValuePro portfolio recommendation service does a fine job of identifying just these types of stocks. Here, you will never find stocks belonging to value destroying sectors like aviation, real estate or telecom. Only the best businesses make it into our two readymade ValuePro portfolios. If you find appealing the idea of compounding your wealth by owning the best businesses, then we believe ValuePro is for you.
Which stocks would you buy assuming the markets will shut down for the next 5 years?
Let us know your comments or share your views in the Equitymaster Club.
--- Advertisement ---
These Investors Made Good Returns From A Different Kind Of Stocks...
A lot of investors think that investing in well-known companies can make them good returns.
But what if we told you that there are some investors who have booked good returns investing in almost unknown small caps?
Yes, even we agree that small caps are relatively riskier.
But if you find the reliable ones among them, you could earn returns like 288% in 2 years and 5 months, 124% in just 7 months, 250% in 2 years, 123% in 3 months and more... just like our subscribers have done.
So click here for full details...
Since the onset of the global financial crisis in 2008, large central banks and governments around the world have taken the easy route to recovery. Starting from the qualitative easing program by the US Fed, followed by the bailout packages in the Euro zone and huge stimulus packages by Japan and China, all the measures of pumping money have failed to rein in the slowdown. On the contrary, such unbridled money printing has led to a steep jump in the debt levels of these economies.
The world is awash with debt
Recently, Greece whose debt levels stand at a whopping 300% of GDP, defaulted on its Euro 1.6 bn loan repayment to the IMF. This default, a first by a developed economy, has raised fears of Greece's exit from the 19-nation euro common currency. The ballooning debt levels and near zero interest rates in most advanced economies have put a question mark on the monetary measures available in future if the global recovery falters. India, on the other hand, has been conservative in cutting interest rates to spur the economy. This is also reflected in its debt levels which stand just below 120% of GDP.
From the chart above, it is clear that the world is awash with debt. Far more than it can handle. In fact there is so much of it, that the developed economies have become addicted to it. Even worse, all this debt has been made available at historically low interest rates by central bankers. This has helped to boost not economic growth but asset prices. This party has been going on for the last six years. During this time the total debt in the US economy has risen by a staggering US$ 10 trillion! The prime beneficiary has been the US stock markets.
But now though we believe the party could be coming to an end. The US Fed is planning to raise interest rates later this year. Nobody can predict with any confidence what will happen at that time. Credit will be re-priced for sure. But by how much? Will individuals, corporates and even governments be able to handle the higher interest burden? Greece may be an extreme example. But in a rising interest rate scenario many developed nations are in a precarious position we believe.
Back home, there seems to be no end to the woes of public sector banks (PSBs). At the end of March 2015, the bad loans as measured by the net non-performing advances (NPAs) to total advances stood at 3.2% for PSBs as compared to 0.9% for private banks. Even the credit growth of PSB's slowed down to 7.1% in March 2015. Private Banks, on the other hand, reported a strong credit growth of 18.7% in the same period.
Piling bad loans and increased provisioning on restructured assets has also adversely impacted the sturdiness of the balance sheets of PSBs. Thus if PSBs have to tide over the present crisis, they will require additional capital infusion. But the government's decision to recapitalize only the better performing banks is likely to leave behind the smaller PSBs fending themselves. What seems more appalling is that the government has been frittering away precious capital resources under the guise of populist measures. The all-women Bhartiya Mahila Bank that was started by the UPA government around two years ago at an initial capital of Rs 10 bn has not been able to make a mark and is likely to be merged with SBI. There is no doubt that such initiatives are necessary for providing economic empowerment to women. However, the government needs to first work towards making PSBs financially sound and efficient before venturing into new areas that can act as drain on already deficient capital resources.
The Indian stock markets opened the day in green and continued to trade higher on the back of growth in the core sector index. At the time of writing, the BSE-Sensex was trading higher by 291 points (up 1.1%). Barring FMCG, all the sectoral indices were trading on a strong positive footing.
"Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a fly epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497". - Warren Buffett
|| Today's investing mantra
Today's Premium Edition|
Is your money with LIC safe?
Are the investment management practices at LIC sound?
| Get Access
|This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst).
|DISCLOSURES UNDER SEBI (RESEARCH ANALYSTS) REGULATIONS, 2014
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.
An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.
There are no outstanding litigations against the Company, it subsidiaries and its Directors.
GENERAL TERMS AND CONDITIONS FOR RESEARCH REPORT:
For the terms and conditions for research reports click here.
DETAILS OF ASSOCIATES:
Details of Associates are available here.
DISCLOSURE WITH REGARDS TO OWNERSHIP AND MATERIAL CONFLICTS OF INTEREST:
DISCLOSURE WITH REGARDS TO RECEIPT OF COMPENSATION:
- 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any financial interest in the subject company.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
- Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
- Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
- Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
Definitions of Terms Used:
- The Research Analyst has not served as an officer, director or employee of the subject company.
- Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
- Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
- Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
- Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
- Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringementDisclosure & Disclaimer:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. The Author does not hold any shares in the company/ies discussed in this document. Equitymaster may hold shares in the company/ies discussed in this document under any of its other services.
This document is confidential and is supplied to you for information purposes only. It should not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever, without the consent of Equitymaster.
This document is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity, who is a citizen or resident or located in any locality, state, country or other jurisdiction, where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Equitymaster or its affiliates to any registration or licensing requirement within such jurisdiction. If this document is sent or has reached any individual in such country, especially, USA, the same may be ignored.
This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Our research recommendations are general in nature and available electronically to all kind of subscribers irrespective of subscribers' investment objectives and financial situation/risk profile. Before acting on any recommendation in this document, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the securities referred to in this material and the income from them may go down as well as up, and subscribers may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur. Information herein is believed to be reliable but Equitymaster and its affiliates do not warrant its completeness or accuracy. The views/opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. This document should not be construed as an offer to sell or solicitation of an offer to buy any security or asset in any jurisdiction. Equitymaster and its affiliates, its directors, analyst and employees will not be responsible for any loss or liability incurred to any person as a consequence of his or any other person on his behalf taking any decisions based on this document.
As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use
, available here. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407