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The only 2 things you need to know to make big money in the markets

Jul 14, 2015

In this issue:
» Emerging technologies pose threat for the IT industry
» What does the Greece bailout package mean?
» Is China beginning to lose its mojo?
» ...and more!


00:00
We would like to start this edition of the 5 Minute WrapUp by asking you a few questions. Have you been frustrated by the markets over the last few months? Have you bought stocks recently which ran up only to come crashing down quickly? Or perhaps a stock after a huge run up has remained flat since you bought it? If you can relate to such experiences, then don't worry. You are not alone.

The benchmark indices have gone nowhere since around September last year. Some stocks and sectors have done well since then. Many others have languished. Last year's euphoria around the Modi government has receded. Investors are thinking about other things these days. Earnings growth, capex recovery, RBI's rate cuts, US Fed policy, Chinese markets and of course the crisis in Greece. No wonder things seemed much simpler in 2014!

So what should you do now? If you ask us, we are quite clear with our answer. We believe there are only two simple things you need to know. They are so fundamental to investing success; it is well worth re-visiting them during uncertain times like these. What are we talking about? The timeless wisdom of Warren Buffett of course! The legendary investor once said the only two courses that investors needed to take were:

  • How to value a business
  • How to think about stock prices
That's it! This is not an over simplification. This really is the key to making big money in the stock markets. During uncertain times like these, we believe investors, new or experienced, should reflect on this.

A stock represents ownership in a business. The value of a business does not change on a day to day basis. But the stock price does. If you knew how to find the intrinsic value of a business, your job is nearly done. You need only wait for Mr. Market to do something silly. When the stock trades at a discount you buy and when it trades at a premium you sell. Honestly, there's not much more to investing than this!

Unfortunately, putting this into practice is not as easy as it seems. After all, there is Greece to worry about. China could be going into recession. The US Fed could start raising interest rates this September. Do you see where we are going with this? None of this matters in the long term. When it comes to making money in the markets the sky will be the limit if you put the two simple concepts above into practice. Now we understand that many of you may not wish to invest the time to find out intrinsic values of businesses. That is why we created two readymade portfolios of stocks, carefully selected after thorough evaluation; in our ValuePro service. These stocks are the ones we believe even Warren Buffett would love to buy, if he were to invest in India. If like us, you have a long term approach towards the markets, ValuePro is for you.

What do you think? Are these two simple concepts enough to make big money in stocks? Let us know your comments or share your views in the Equitymaster Club.

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02:30
 Chart of the day
The Indian IT industry has built its fortunes on the back of outsourcing of services to the developed economies of the US and Europe. Aided by a cheaper but technologically efficient workforce, IT companies in India have managed to clock superlative growths in the past two decades. But the advent of the cloud computing technology can act as a potent disruptor, impacting the outsourcing models of Indian IT companies. The cloud computing technology enables companies to access servers and software through automated code writing on the Internet. This helps them in saving costs of maintaining local networks and personal computers. Therefore instead of employing large technology firms to run their back-end systems, companies are increasingly opting for pay as per service on the cloud.

Is cloud computing a potent threat for Indian IT?
Data Source: KPMG

The shift towards cloud computing by companies worldwide is being further initiated by increasing competition and shrinking budgets for information technology. Moreover companies are also demanding new technologies such as data analytics that help them analyze and optimize their business. The growing threat of new technologies is reflected in the value of the global outsourcing deals that fell from $206.8 bn in 2010 to $120.4 bn in 2014. Indian IT companies, that earn a substantial share of their earnings from outsourcing, are beginning to feel the heat. Tata Consultancy Services (TCS) is increasing spends on emerging digital technologies such as big data, mobile application development and cloud computing. But the share of revenues from this segment is still small. Therefore unless IT companies focus on embracing new technologies, the road ahead is likely to remain tough for them in future.

03:40
In a last ditch effort to avert a Grexit, the Greece Prime Minister reached an agreement on a third bailout package of $96 bn. With this, the cumulative bailout loans to the country reached $263 bn since 2010. But the bailout package is based on strong austerity measures and quick passage of reforms by Greece. The package provides for a debt rescheduling viz extension of the repayment period if need be but the debt will not be written off. In exchange, Greece would be required to adopt reforms immediately for streamlining the pension system, boosting tax revenues and liberalizing the labour market. Greece, whose debt levels have ballooned to alarming levels, found itself devoid of any leverage to resist the punitive measures suggested in bailout package in order to save its skin.

04:05
The Chinese markets have been in turmoil recently. The crisis in Greece has grabbed the headlines but from the point of view of the markets, the situation in China is more worrisome. It's not just about the markets. The Chinese economic growth engine has begun to run out of steam. Exports have been the mainstay of the economy. Weak global demand, rising wages and a strengthening currency have all combined to derail China's competitive advantage. So much so that Morgan Stanley believes that the next recession could be made in China!

They say numbers don't lie. Well the numbers certainly don't look good for China. Exports fell 2.8% YoY in May 2015. If export growth were to remain in the low single digits this year then what could support the economy? Domestic investment has been acknowledged to be wasteful and the real estate boom has begun to burst. Consumption has also not picked up. Imports too are down. All in all, we see dark days ahead for China.

04:40
The Indian stock markets opened the day on a weak note and continued to trade below the dotted line. At the time of writing, the BSE-Sensex was trading lower by 48 points (down 0.2%). Barring banking, auto and FMCG, all sectoral indices are trading in the positive territory.

04:50
 Today's investing mantra
"The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago."- Warren Buffett

This edition of The 5 Minute WrapUp is authored by Madhu Gupta (Research Analyst).

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2 Responses to "The only 2 things you need to know to make big money in the markets"

Krishna

Jul 14, 2015

Today's (14th July 2015) Quote by Warren Buffet is not fitting the times we are in or even the articles above that.

{ "The best business returns are usually achieved by companies that are doing something quite similar today to what they were doing five or ten years ago."- Warren Buffett }

IT Services companies cannot survive with what they did a decade ago.....Today's business is all about learning new things while unlearning many of the old practises and wisdom along the way.

Like 

Arup

Jul 14, 2015

In this type of volatile market, one can trade to make money. Apurva Seth's articles are quite helpful in this regard. He has demonstrated with example in one of his article what to do when a particular stock is not heading in any direction for quite a long time but fluctuating. In such cases, greater the volatility,actually greater is the opportunity. In fact, as per him, he has helped a lot many Mutual Fund houses & Institution in this type of situation. One need to use all tools & tackles available and need not get frustrated.

Like 
  
Equitymaster requests your view! Post a comment on "The only 2 things you need to know to make big money in the markets". Click here!
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