Make this your most important goal for investing success
(Jul 2, 2015)
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In this issue:
» How Indian markets are placed based on Buffett's favourite indicator?
» An interesting anecdote from TCS' AGM
» An update on markets
» ...and more!
We all know how TV commercials are all about mindless consumerism. Most of these play on people's insecurities and social disabilities and then project the different products they promote as the ultimate panacea. However, there are some that have tried to move beyond this Dark Art of marketing. So while the underlying product is same, these commercials don't exploit people's insecurities and fear. Instead, they talk about the higher purpose of life. The good virtues like compassion, hope and inspiration if you will.
One of the few ones with these latest qualities built in I believe is that famous tagline 'Darr Ke Aage Jeet Hain'. While I am not sure of the virtues of the product the commercial is trying to sell, the tag line does pack quite a punch according to me. And the visuals and the celebrities further add to its overall appeal.
Now, why do I find it inspirational? Well, to me, it signifies how important it is to get out of your comfort zone. There's like this huge chasm of fear between where you are and what you want to achieve. And once you make up your mind to cross this chasm, nothing but success awaits you, irrespective of the activity you want to engage in.
Does 'Darr Ke Aage Jeet Hain' work in investing too? Of course it does. What else do you think Warren Buffett implied when he said the following:
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
I hope you realise what the operative word is. It is Darr or fear indeed.
I am of the view that there isn't any other emotion that will harm your returns while investing as much as fear will. It will cause you to avoid buying at the most opportune time and force you to sell at the worst possible times. And trust me, no amount of in depth research can help you get out of the woods if you give into fear and get your most important move wrong.
Therefore, if you need to really make a big difference to your eventual wealth from stocks, you have to learn to banish this all important emotion from your system while investing.
So, what is the way out? Well, the way we go about giving our recommendations here at Equitymaster is a perfect example of how this fear can be overcome.
You see, as we've highlighted numerous times, we have a track record of being right around 60%-80% of the times across our recommendation services. And anyone who has been investing for a long time can vouch for the fact that this is a very good number.
Now, we would be naive to assume that most of this track record is because of the fact that we've had some sort of analytical edge over others. That's certainly not the case. I am of the view that quite a lot of this has to do with how we've managed to tame the demons of fear within us. In other words, it is our behavioural edge that has helped us a lot in compiling our track record so far.
Please note when we say a track record of 60%-80%, this is not something that we've been consistent with year after year. As a matter of fact there have been years when these numbers have fallen to 30%-40%. However, these have been compensated by having years where we have gone as high as 80%-90%.
And what is it that we have done differently during these years? Well, we have not given into fear and have instead gone ahead and recommended plenty of stocks that we felt had strong fundamentals and attractive valuations. And the big reason we have got a good leg up over the rest of the competition is because of this perhaps.
Therefore, the idea is not to get paralysed by fear but instead switch the rational brain on and do a proper assessment of what the risk to reward ratio tells us. It is precisely during fearful times that this ratio is significantly in favour of the investor. He will therefore do his track record a world of good if he looks beyond the thick fog of fear that tends to envelope the markets during times of crisis.
Can you highlight the times you've not been fearful like the majority and have got heavily rewarded for it? Let us know your comments or share your views in the Equitymaster Club.
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When it comes to analyzing the risk reward ratio some metrics are really helpful. For example, the market cap to GDP ratio, widely popularized by Warren Buffett, is perhaps the best gauge to judge the relative attractiveness of stock markets. The ratio is calculated by dividing the market cap of all the listed securities on an exchange with the GDP of that country. If the ratio is greater than 1x (or 100%) markets are overvalued and vice versa. A ratio of close to 1x indicates markets are fairly valued.
As seen in today's chart the market cap to GDP ratio of the US markets is highest at 143% while India ranks last in the list at 77%. This indicates that the Indian markets are cheapest at this juncture based on the market cap to GDP metric.
Indian markets attractive on Buffett's favourite indicator
Data Source: Bloomberg, World Bank
SK$= South Korea
An interesting case in point over here is the rivalry between two Asian nations namely India and China. Until recently China was more attractive than India with a lower ratio. However, since March 2014 the Shanghai stock market is up 150% as against a 27% odd rise in the BSE-Sensex during the same period. As a result, the market cap to GDP ratio of China has risen considerably.
While this metric gives a reasonable indication whether a market is over/under valued there are other parameters (P/E ratio etc) that investors must consider to get a sense of market valuations. Cash levels of noted investors, general activity in IPO markets etc are other indicators that can help gauge market sentiments. However, investors should remember that money is not made by simply buying the markets (read index). Real money is made by buying companies at attractive prices and hence the ultimate focus should be on indentifying fundamentally sound companies at cheap valuations.
Apart from valuations, management quality is another factor that investors should pay attention to while buying stocks. But gauging the same is a difficult task as it involves trying to assess intentions of the person. However, there are subtle hints in the offing if one has the eye for detail.
Recently, Tata Consultancy Services (TCS) concluded its annual general meeting (AGM) and something really striking came across. While the board members thronged the venue with plush cars like Audi, Mercedes etc, the chairman of the Tata conglomerate, Cyrus Mistry, arrived in a dull Tata SUV! You may say - what is the big deal about it? What has car that he drove to the venue got anything to do with the organization, its management or for that matter you as the shareholder of the company?
We reckon such frugal mentality speaks a lot about the way management thinks and acts. Your personality and your thoughts heavily influence your actions. Think of Warren Buffett. He is a billionaire but he still follows a very simple lifestyle. Nothing changed even after he amassed huge wealth. Basically what we are trying to say is that over indulgence or extravagance is a worrying sign. Take the example of Vijay Mallya. Lifestyle traits give us subtle hints of management behaviour.
Please note we are not saying that management's with luxurious lifestyle should be viewed with suspicion. It's only that showcasing splendour does not rank highly in our list. If management is frugal by nature it will most probably act in a similar way. This is most beneficial to the shareholders. So, while Mr Mistry may have arrived at the AGM in an SUV, the chance that you as a shareholder come in Jaguar increases if management has such a mindset!
The Indian stock markets were trading in the green at the time of writing. While the BSE Sensex was up by 2 points, NSE-Nifty was up by 6 points. Even the Asian markets were trading in the green at the time of writing. European stock markets also opened strong today.
"You pay a very high price in the stock market for a cheery consensus." - Warren Buffett
|| Today's investing mantra
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|This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst) and Jinesh Joshi (Research Analyst).
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