Worried about volatile stock prices? Try this instead... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Worried about volatile stock prices? Try this instead... 

A  A  A
In this issue:
» Sell bonds, buy precious metals, suggests Jim Rogers
» Indian PSUs caught on the wrong foot
» Is shale gas a remedy for India's gas problem?
» Dennis Gartman on the big risk facing global markets
» ...and more!!

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00:00  Chart of the day
We are living in extraordinary times as far as stock market investing is concerned. From the bubble of 2007, to the crash of 2008, then the rise of 2009, and now the volatility of 2010, so much has traversed in such a short span of time. It just seems like it all happened yesterday.

Amidst all this, what can you really do? How can you deal with volatility in stock prices while at the same time investing continuously for the long term?

One answer is to invest in companies that have a good dividend paying record. And we are not saying this without reason. While Indian markets have surged and crashed over the past ten years, dividends of top Indian companies have grown at an average annual rate of 18% (between FY01 and FY09)! See this chart.

Note: Data is for 78 of BSE-100 companies that have paid out
dividends between FY01 and FY09 years, FY10 data is excluded as only
30 companies have updated their audited numbers so far; Source: CMIE Prowess

Anyways, it is not safe to assume that every dividend paying company is a good investment option. When following dividend investing, you also need to make sure that the quality of dividends paid is also good. When we say quality, we mean that you need to see where the dividends are coming from. Are these coming from excess operational cash flows? Or is the company raising external funds just to meet its dividend commitments.

Overall, we believe that good quality companies that have a decent dividend paying record can serve as good anchors when markets are volatile. The best part is that you need not pay any tax on this excess income you earn!

Do you consider dividends as an important parameter before investing in stocks? Share with us.

We have heard this before. Legendry commodity investor Jim Rogers has been advocating commodities over stocks for quite a while now. But this time he is more specific. Rogers has cited his preference for gold even in the past. But interestingly this time he suggests two other commodities for investors to take 'refuge' in. That is if they wish to safeguard their portfolio from the correction that global markets are yet to witness.

In a recent conference in Malaysia, Rogers directed investors to silver and rice. The supply shortage of these commodities seems to be key reason for his recommendation. Also that the prices for precious metals as well as agri-commodities are nowhere close to their historical highs. In fact Rogers cited the example of sugar which is as much as 75% cheaper than what it was 36 years ago. All said, investors would be better off investing in these commodities only to 'hedge' their portfolio, as Rogers suggests. And not risk taking a large exposure to them.

Large Indian PSUs have been striving to make their mark in international markets for some time now. But they seem to have ended up making their mark in a rather undesirable way!

As per reports, the US Department of Justice has revealed that officials of BHEL and NTPC were among those who were bribed by a California based valve company. One of the bribes was allegedly paid for securing a contract related to NTPC's Sipat thermal power plant. NTPC and BHEL have outright denied the allegations. The allegations may or may not be true, but India's infamous reputation for corruption seems to have preceded it into international markets.

Conventional sources of oil & gas are getting increasingly difficult to find. Hence, there has been a search for these in such areas as oil sands, coal beds and shale gas. Increasingly, it seems that shale gas could be the most promising new source of energy.

Shale is a common rock found across the world. Experts have known for a long time that hydrocarbon deposits are trapped in shale formations. But production was considered impossible due to the solid nature of shale that prevented hydrocarbons to flow up. However, newer drilling techniques have now been developed which has removed the hurdle. In fact, shale gas production has gone through the roof in the US. India's very own Reliance Industries is already in the US to acquire the skills. Closer home though, policy makers are working at a slow pace as usual.

A new policy and auction of shale gas is likely to come up in two years. ONGC and Oil India have begun pilot projects. However, it will take several years for data gathering and feasibility to be over. At a time when India depends on foreign sources for more than 70% of its oil needs, we must explore all domestic possibilities keenly, especially in such a promising area as shale gas. Our fear is that the powers that be will work at their own sluggish pace.

People have devised all sorts of ways to find out where stock prices would move next. Certainly, legendary trader and author of the famous Gartman Letters, Dennis Gartman has also one such method up his sleeve. And it is this method that has led him to believe that we could be in a period of decline for stocks.

Gartman has argued in an interview that whenever the Yen strengthens against the US dollar and Euro, like it has done recently, weaker stock prices follow. Our understanding of this is that Gartman is suggesting about the reversal of the yen carry trade (Japanese buying cheaper Yen to shore up stock prices globally), that can take stock prices lower. If history is any example, there seems to be some merit in Gartman's idea.

Anyways, Indian markets had a pretty strong outing today. The BSE-Sensex was trading with gains of around 240 points (1.4%) at the time of writing this. These gains were led by stocks from the realty and metal sectors. As for other key Asian markets, with the exception of China (down 0.3%), all others were trading strong. Markets in Japan and Hong Kong were up 2.8% and 0.9% respectively.

US may throw brickbats at China, but it cannot deny that China remains one of its biggest creditors. After all, it has vast holdings of US government debt. And concerns were beginning to arise that China could use its US$ 2.45 trillion stockpile of reserves as a 'nuclear weapon' on the US. But, the Chinese central bank has doused all such fears.

It instead maintains that China has no intentions of dumping its huge dollar reserves. However, it has called upon the US government to be more responsible as far as the dollar is concerned. This would mean withdrawing the stimulus measures gradually and cutting back on deficit spending. All this to ensure that the US dollar does not lose its value.

At the end of the day, the status of the dollar is determined in relation to other currencies. At this moment, its main rival i.e., Euro is struggling to remain in existence. And so for the time being at least, the US dollar will continue to form a large chunk of China's foreign holdings.

04:54  Today's investing mantra
"If you have only a little capital and are young today, there are fewer opportunities than when I was young. Back then, we had just come out of a depression. Capitalism was a bad word. There had been abuses in the 1920s. A joke going around then was the guy who said, 'I bought stock for my old age and it worked - in six months, I feel like an old man!' It's tougher for you, but that doesn't mean you won't do well - it just may take more time. But what the heck, you may live longer" - Charlie Munger
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20 Responses to "Worried about volatile stock prices? Try this instead..."


Jul 27, 2010

Dividend is a part of company earnings and the same is distributed from surplus and reserves account.I look for companies with decent surplus and low equity with good payout ratios in my fundamental analysis.Just having reserves does not serve purpose it has to be distributed to the rightful owners i.e us equity holders.Net-net I avoid managements with conservative mindset.

Like (1)


Jul 16, 2010

Yes,It proves that generally the Company is making actual profit.

Like (1)

pallavi b pingale

Jul 13, 2010


Like (1)

Vishnu M Avula

Jul 12, 2010


Like (1)


Jul 9, 2010

Definitely.I expect around 6% PA return on investment in way of dividends.

Like (1)

Vinod Narayanan

Jul 9, 2010

Even if Company is not declaring dividend investor can create dividend by selling the stocks in market. See dividend payment track record of Microsoft.. still it is good company to invest.. if company is not declaring dividend it can reinvest and there by increase its profits there by increase the share price which investor can encash in market. So I am independent on whether company is declaring div or not.. but what is important is companies ability to multiply its profit.

Like (1)

Jagdish Sanghvi

Jul 9, 2010

No. I dont consider dividends as an important factor in making my decision of buying a particular stock. I look for growth stocks, where in the returns are much higher and hence dividend yields dont matter so much. More over, depending on the dividend income makes one complacent/dull. I dont mean that one has to trade every day. I myself is not a trader but I am an investor. I have hardly 20-25 transactions a year.

Like (1)

Manish Kapoor

Jul 9, 2010

I would rather prefer company do buyback shares with the same amount then pay dividend and div. dis. tax. with the share capital getting reduced PE would come down and over a long term people would get tax free returns. ( New tax code is going to change this though :(

Like (1)

Ramchandra Naik

Jul 9, 2010

Dividend is one of the most important investing parameter I would consider for any company. A consistency and growing DPS speaks very well about a company's management and its capabilities. Dividends from the Operations is the most preferred option.
Further, dividends payout also makes the management of a company more prudent in managing its finances. The reinvestment of dividends in the company's stock would further enhance the returns over the long term.
Altia and P&G had delivered at return of over 18% including dividend re-investment over the last 35 years in the US and that is a fantastic return for any shareholder.
This just corroborates the views expressed in Equitymaster!

Like (1)

Prem Khamesra

Jul 8, 2010

A bird in hand is better than two in bush - that's an old adage - time tested and good. The same applies to dividends insofar as small investors are concerned. Dividends are to small shareholders the proverbial bird in hand. All promises of a promising future are those two in the bush. Dividend policy of Indian corporates is driven by a feeling that dividends are cost of servicing outside capital and not as sharing of profits with stakeholders. Dividend rates guided by a consistent pay-out ratio tweaked only in exceptional circumstances should set apart a fair and good management from an unfair bad management.

Like (2)
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