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The Greediest Thing an Investor Can Do

Aug 19, 2016

In this issue:
» Emerging Markets in favour after three years of dry spell
» The 3,000x impact of India's urbanization
» ...and more!
00:00
Tanushree Banerjee, Co-Head of Research

Investing smartly is not so different from keeping a balanced diet. I often urge readers to follow an investing diet that will never make them feel sick.

Unfortunately, the idea of a healthy, balanced diet does not arouse a great appetite. Similarly, a safe balanced portfolio approach to buying stocks does not get investors excited.

What draws attention is greed.

So let's talk about the best ways to get greedy. I'm reminded of the saying 'fast before the feast'. Or how we save to buy something expensive. Greed can indeed be good. Provided we prepare for it.

Warrant Buffett has long encouraged greed...'when everyone is fearful'. But that just helps us time greed. How does one prepare for it?

To answer that question, let's look back to the times the Indian stock markets have benefited greedy investors the most. If you're thinking the market crashes of 2002, 2004, 2008, and 2013 - you are right. But only partially. For the only people who benefitted during those opportune times were the investors who not only got greedy but had surplus investible cash.

That's right. Without the cash to buy the best stocks at the best possible valuations, even the best investors will miss out. But that's why the best investors - Buffett is a good example - accumulate cash when they're not finding opportunities to buy. Only cash can provide the option to buy anything, anytime. If you find a cheap stock and you have cash, the stock is as good as yours.

One might think that holding cash may not be a good hedge against inflation. If you're talking about holding cash for ten years and doing nothing with it, I agree. But I would never recommend that. In fact, a good investor can handily beat inflation over time. Even sideways markets contain multiple bottoms where great bargains can be found. Using cash to buy the best stocks during such times will more than preserve your purchasing power.

The problem is most people don't have the patience to wait to buy the best businesses at their best possible valuations. Which is why they fall into the trap of overpaying for growth.

The greedy-but-patient investor knows holding cash will allow him to take advantage of the bargains. Most don't see it this way. But successful investors see cash as 'returns waiting to happen'.

Holding cash in anticipation of stock bargains is one of the greediest...and smartest...things an investor can do.

Indeed, the most successful fund managers vouch for this approach. Here's Prem Watsa of Fairfax Financial Holdings on holding cash:

  • My overriding opinion is that cash is a terrible long-term investment, as it's almost certain to lose value over time. However, an opportunistic investor can take advantage of what some call the 'optionality' of cash. As Buffett has said, 'A call option on (future) cheap securities with no strike price and no expiration.'

Do you hold cash when stocks are expensive or do you stay fully invested at all times? Let us know your views or post them on Equitymaster Club.

02:40 Chart of the day

The MSCI Emerging Markets Index is considered as a good benchmark to gauge the global view on the indices of emerging markets (EMs). And if one were to go by their performance, investors across the world have again reposed confidence in EMs after three years of dry spell.

Investors Turn Bullish on Emerging Markets


The biggest spoilers in the EM rally of late have been a slowing China, the collapse in commodities, and the depreciation of emerging market currencies versus the US dollar. So what has once again got global investors hooked to EMs?

An article on Mint offers some answers. Brexit led to funds moving out of the UK. Further, commodity prices have too moved up from their lows. China has shown some signs of recovery. Plus a recent International Monetary Fund report talks about possibility of higher GDP growth in the EMs even as the developed world languishes. Speaking about India, the MSCI India Index (in dollar terms), is up 6.1% so far this year. This is lower than both the MSCI Emerging Markets Index and the MSCI Asia ex-Japan Index. So how will Indian markets perform going forward?

We believe that the Indian stock markets are at an interesting juncture. In March 2016, Rahul Shah's predicted the possibility of Sensex 40,000 in three to four years. And here is Rahul's rationale behind it.

  • The aggregate data we have pulled for Nifty companies suggests that profit margins were at a ten-year low at the end of FY15. Even if they were to rise to the average of the last ten years, not immediately, but three years out, the upside would close to 70%.

    Put differently, markets will go up 70% over the next three years if profit margins revert to the mean.

So apart from the fact that emerging markets could do well in coming months, India particularly could be a sweet spot for few years. Investors who do not want to miss the opportunity this time, could scoop up some strong blue chips that will ride the journey to Sensex 40,000.

03:40

Urbanisation is like flipping a switch: it doesn't stop, it doesn't go back, it just goes on year after year- Jonathan Woetzel

Indian economic growth has been highly dependent on rural consumption. But the trend seems to be reversing quite rapidly. In fact India seems to be surpassing the pace and scale of urbanisation than most other developing nations.

According to an article on Mint; Jonathan Woetzel a senior partner and director at McKinsey, is well known for his research on urbanisation.

Interestingly, Mr Jonathan likens India's pace of urbanisation to an asteroid hitting a planet. Here's why...

During UK's industrial revolution (people moving from farm to factory), the economy took about 150 years to double per capita income. The countries like North America and Europe took as much as 100 years to double the incomes. And Germany took 50 years. But for India, as it urbanises, it is taking about 10-15 years to double income levels. Not to forget, we are not talking about 10 million people but we are talking about a billion people.

India is moving 10 times faster with 300 times as many people. So, 3,000 times the impact...

No doubt that there will be challenges too. However the prospects are very promising.

Readers would recall that we have spoken of urbanisation as one of the signs of the megatrend that could boost corporate profits. In fact, such trends have been witnessed not just in India but also in countries like the US, Japan, Korea and China. But it is very important for investors to take the right cues and keep an eye on the key triggers of what we call the Golden Decade of Megatrend. The India Letter can certainly help you do this.

04:45

In the meanwhile, after opening the day on a flattish note, the Indian indices have slipped into red. Sectoral indices are trading on a mixed note with stocks from the infrastructure & metal sectors witnessing buying interest whereas auto & realty stocks are bearing the maximum brunt. The BSE Sensex is trading lower by 74 points (down 0.3%) while the NSE Nifty is trading lower by 18 points (down 0.2%). Both the BSE Mid Cap and BSE Small Cap indices are trading up by 0.2% each.

04:50 Investing mantra

"I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy" - Peter Lynch.

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Bhavita Nagrani (Research Analyst).

Today's Premium Edition.

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What would be the fallout if India fails to live up to its promise?
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Equitymaster requests your view! Post a comment on "The Greediest Thing an Investor Can Do". Click here!

4 Responses to "The Greediest Thing an Investor Can Do"

foo

Aug 22, 2016

Holding cash at any time is stupid. You are telling people to time the market basically. If you think one of your stock is too expensive, may be switch to a cheaper stock but there are studies which say that if you missed the best 10% days of market, your returns would be poor even though you remained invested for the other 90% of times.

Like 

RAJKUMAR S D

Aug 21, 2016

Mam,
Holding cash is absolutely necessary to take advantage of fluctuations in stock market. It is as good as emergency fund with an individual. Hence when market fall sick, you must have medicine i.e cash to take advantage of that sickness. I believe that opportunity cost of holding cash for a longer time will certainly be rewarded with best returns in future.. Fully invested in market means you are always stomach full so when tasty food will be placed before you, you may not like it.

Thanks with regards
RAJKUMAR S D 9323486534

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Vivek V. Malekar

Aug 20, 2016

Fully agree with the approach to cash levels. It really pays to hold cash till attractive opportunity comes to plunge.

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Swapan Nandi

Aug 20, 2016

I agree with the essence of this article and myself experienced it many times - became inpatient while holding cash for sometime then landed up buying stock above intrinsic value and then get locked! and finally after few years exited at invested price without making a single penny.

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Equitymaster requests your view! Post a comment on "The Greediest Thing an Investor Can Do". Click here!
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