From Brash Speculator to Patient, Long-Term Investor
(Oct 5, 2015)
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In this issue:
» No recovery in manufacturing yet!
» Will the days of valuation upgrades return?
» Has India's start-up boom peaked?
» ...and more!
Over the long weekend, I happened to have a brief encounter with an acquaintance I hadn't seen in years. From my earlier impressions, I was expecting to have to dodge questions about my view on the stock markets, some 'hot' stock tips, and so on.
Instead, to my surprise, this is what he said midway through our conversation: 'I believe that real wealth can only be made in the long term.'
That's just common sense, you may say. Well, you're right. But I was amazed not by the statement, but by the person who said it.
Here's a little bit about this gentleman...
I first met him about a decade ago. I was taking baby steps in the world of investing then and devouring book after book on Warren Buffett and value investing. But the elderly gentlemen I overheard discussing the stock markets hardly talked about concepts I was studying. I was embarrassed to even talk about long-term investing. It seemed too old school.
The gentleman mocked at the idea of long-term investing. I remember him once saying, 'I don't want to become rich in old age. I have a simple target: Make 50,000 bucks every month.'
For a while, he actually managed to do that. The bull rally supported his ambitions. As he tasted more success, his interest in his own business declined significantly. He spent more and more time and resources speculating in the stock markets.
Then, as we all know, the party came to an end. The 2008 market crash and the bear market that followed wiped out a substantial chunk of his fortune:
This was the biggest lesson of my life. A series of successful trades made me think I was a smart investor...that I had tamed the markets...and found the way to quick riches...
The money was coming in so easily at that time. Everyone I knew was doing the same. I didn't want to miss the bus.
After the markets crashed, everything changed. Many people who eagerly hung around with me and sought my advice disappeared. Stock markets became an unpopular topic. I was so depressed.
But I made a resolve I wouldn't run away from the stock markets. I realised that people are speculative...it is people who gamble...you can't blame the stock markets for your blindness...
I didn't want my mistakes to go waste. I decided not to run away from the markets.
Over time, I changed my investing approach. I invested only in companies that had good fundamentals. I became more patient. And it paid off. Now I invest with a time horizon of at least five to ten years. I feel there is no other way to achieve multibagger returns.
And you know the best thing-I sleep peacefully.
The gentleman's confession moved me. And I felt compelled to share it with you.
It would be interesting to know your investing journey. How was it when you started? How has your investing style evolved over time? What are the biggest lessons you learnt from your investing mistakes? Let us know your comments or share your views in the Equitymaster Club.
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The Modi government came to power on the back of a promise of jobs. Job growth is crucial for India's youth. After many years of jobless growth, much was expected from the new government. If India is to reap the fruits of its demographic dividend, 13 million people need to find gainful employment every year. That is the yearly number of people entering the Indian workforce.
Sadly, we seem to be falling behind. As an article in Livemint has pointed out, manufacturing jobs have stagnated over the last year or so. The employment sub-index of the Manufacturing PMI brings this out clearly. The Purchasing Managers Index (PMI) measures expansion or contraction in business activity. A reading above 50 indicates expansion. A reading below 50 indicates contraction.
PMI data shows fall in manufacturing jobs
As is evident from the chart, manufacturing firms have been shedding jobs rather than adding them. The reason seems to be a weak increase in new business orders and a focus on cost control by manufacturing firms.
We hesitate to draw a long-term trend out of short-term data. However, the warning signs are there for all to see. We have all heard stories of PhD's working as clerks. Without rapid job creation, India's demographic dividend could turn into a demographic disaster.
There is one sector (if we can call it that) which has been on a hiring spree recently. That is the start-up sector. While a start up by definition does not employ many people, the sheer number of start-ups that have sprung up in India over the last few years has been overwhelming.
Unfortunately, this boom is largely funded by Venture Capital. It is what has kept loss making start-ups afloat so far. In 2014, VCs pumped in US$ 2.39 bn. In the first nine months of 2015, the amount has surged to US$ 4 bn. However, the flood of easy funds seems to be peaking out.
As per an article in the Economic Times, VCs are now demanding visibility in profits from start-up promoters especially the e-commerce ones. Hedge funds that were filling the gaps in VC funding last year also seem to have disappeared. This comes as no surprise to us. We have for long been warning investors not to get caught up in this craze.
It's not just start-ups that are feeling the pinch. Many listed firms are struggling to convince the markets that they deserve higher valuations. Equity fund raising has been dull this year despite quite a few IPOs hitting the street. This can largely be blamed on the sentiment of global investors.
In the long-term, the deciding factor for valuations will be the company fundamentals. However, in the short-term, FII sentiment can seriously affect valuations. This is what we are seeing right now. The year started with India as the darling of global investors.
A lack of reforms combined with the fears of a global slowdown, have put a lid on valuations of Indian stocks, at least for now. A lacklustre earnings performance has not helped things either. Without a robust earnings recovery, we believe it is hard for Indian stocks to command higher valuations. That said long-term investors would do well to ignore short-term noise surrounding FII sentiment.
At the time of writing, the Indian markets were trading in the green. The BSE Sensex was up by about 413 points or 1.6%. The biggest gainers were banking and engineering stocks. The Midcap and Smallcap indices were also trading well above 1% each.
Publisher note: We recently released a report to help 'crash-proof' your portfolio. We call it the "Crash Score" report. The good news is we've made this report available FREE to all. Do make sure you grab a copy today.
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|This edition of The 5 Minute WrapUp is authored by Ankit Shah (Research Analyst).
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