Do you possess this most critical investing virtue?
(Jul 16, 2015)
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In this issue:
» CPI and WPI data tell different tales....
» Could this be the biggest challenge for India to grow?
» Round up on the markets
» ...and more!
Which is the best time to invest in stocks? If you look back at the various cycles in the stock markets, you would easily be able to point out in retrospect that the best time to invest in stocks is when other investors are pessimistic and stock prices are depressed. On the other hand, when there is too much euphoria, it is best to tread with caution.
But how often have you done exactly the contrary? In the aftermath of the 2008 stock market crash and the following economic slowdown, many investors shunned the markets. Some pledged never to return back.
But the bull rally that accompanied Modi's coming to power saw investors return to stock markets by the droves. It is seen that as stock prices go higher and higher, retail investor participation tends to increase. So, many investors who were late entrants to the Modi rally are now sitting on either meagre gains or losses. What is worse is that many have little clue about what they have bought into... Ignorance and anxiety make quite a deadly combination and cause people to make truly irrational decisions.
At this point, it seems quite fitting to share the story of Warren Buffett's first stock investment when he was merely 11 years old. As a kid, Buffett often frequented his father's stock brokerage. He had been following this particular company called Cities Service. He figured that the stock was undervalued and decided to make his first investment. He pooled his savings along with his sister Doris and purchased six shares of the company for US$ 38 each.
What happened? During the first few months, the stock price of Cities Service tumbled as low as 30%. Upset with the stock performance, his sister would pester him about the loss. Finally, the stock reversed direction. When it hit US$ 40 per share, Buffett sold it off for a petty profit.
What happened after this? The stock kept inching higher and hit US$ 200!
What can investors learn from Buffett's first investment? In our view, it is the value of patience in investing. Had Buffett held onto the stock based on his original premise that the stock was undervalued he could have ridden a 5-bagger!
Many investors expect their stock investments to start showing results the minute they put their money in them. They panic when the stock price dips lower than their purchase price.
This, we believe, is surely a recipe for making losses. Impatience can cost you very dearly in the stock markets.
So while patience is a very vital virtue that every value investor must possess, it does not mean you become passive. It would be foolish to invest in a stock blindly and then becoming ‘patient' and not caring about where the stock price goes.
Knowing what you buy is very important. Even at 11, Buffett knew that he was investing in an undervalued company. And while it is noteworthy that he did not panic and sell off the stock when it was 30% down, he would have been better off had he patiently held on to his investment rationale.
In short, the key here is:
Understanding + Patience = Investment Success
Do you remember the first time you put your money in a stock? What was the basis of your investment? After you made the investment, how did the stock perform? Was it a success? How much money did you make on it? Did you sell it off prematurely? Or was it a failed investment? What are the lessons you have learnt from your experience as an investor? Let us know your comments or share your views in the Equitymaster Club.
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Economic polices and statistics have a very crucial relationship. While statistics reflect the real picture and suggest a direction in which policies should be set, they also serve as a feedback if the policy execution has been in the right direction.
It seems we are lagging behind when it comes to quality of the data. One of the most questionable data has been the data on inflation. And the latest statistics on WPI and CPI suggest that we seem to be becoming more irrelevant in terms of data mining over the passage of time. What else could explain the rising divergence between wholesale price inflation (WPI) and consumer price inflation (CPI) over the last 12 months?
As suggested in an article in Firstpost, the latest CPI data for June reflects that the retail inflation is up 5.4%, the second consecutive rise in many months. However, WPI at a negative 2.4% tells a different story. Especially keeping in mind that it is the eighth consecutive decline, implying a decline in the business demand. While some of this divergence could be attributed to the different years chosen as the base for the indices, it does not explain why these two data sets suggest inflation in opposite directions.
The weak WPI data is in line with the weak IIP (Index of Industrial Production) growth. The struggle to maintain and grow the demand is evident in weak corporate profit growth and round the year discounts. However, the new monetary policy agreement considers CPI as the guiding factor. So while the same may suggest the need for high interest rates, will it be in the best interests of the economy?
Inflation being one of the crucial guiding factors for the monetary policy, the authenticity and veracity of data is something that can hardly be over emphasized. In the absence of the same, the entire policy making can be summed up in four words - Garbage in Garbage out.
Key inflation indices remain out of sync
Talking of statistics, here is something that suggests a great future for India. Over 60% of the Indian population is said to be below the age of 35. Now that's a huge demographic dividend. However, the same could become a liability on the economy if employment opportunities for the young fail to match up.
As more and more youngsters join the work force, it is crucial to focus on measures to generate employment and growth. And it does not just translate into creation of more jobs, but an overhaul in the labour laws and education system to make it more relevant. Again, for jobs to be created, firms need to be productive. And for that, they need a conducive environment and efficient Government policies. If we can focus on this one issue of creating more and enough jobs for the youngsters, the economic growth is bound to happen. Unless this changes, the entire dream of ‘acche din' will continue to be just that.
The Indian stock markets opened the day on a firm note and continued to trade above the dotted line. At the time of writing, the BSE-Sensex was trading up 144 points (up 0.5%). All sectoral indices were trading in the green with stocks in the banking and oil and gas segment leading the gains.
"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."
- Warren Buffett
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