In this issue:
» The week that was
» Is Buffet a genius or plain lucky?
» RBI leaves rates unchanged
» ...and more!
This week was witness to absolute mayhem sending the Indian stockmarkets into a tizzy. While the credit crisis has been going on for some time now and markets all over the world including India were being consistently dragged down, the depth of the fall intensified this week or to be more precise on Friday.
||All in a day's work
Friday, the 24th of October, is not a day that anybody is likely to forget anytime soon. The BSE-Sensex closed lower by 1,071 points (11%), the third largest single-day fall in percentage terms, to 8,701. The NSE-Nifty closed 12% lower to 2,584. The day eerily coincided with the crash of 1929 and the ensuing Great Depression that plagued the world in the 1930s. The scenario globally was equally grim with the US, European and Asian indices registering steep losses. Further, while expecting a cut in interest rates, the RBI maintaining a status quo added to the markets' ire.
Given that the world's worst financial crisis emanated from the US, which prides itself on its free market policies, the erstwhile Fed chief Alan Greenspan's remarks in this regard was an eye opener. As published in the International Herald Tribune, he freely admitted his mistake of having put too much faith "in the self-correcting power of free markets" and had failed to anticipate the "self-destructive power of wanton mortgage lending". Meanwhile, OPEC decided to cut production by 1.5 m barrels a day, smaller than what was expected. Due to this, oil prices dropped to their lowest point since March 2007. A barrel now costs US$ 63.
Amidst this maelstrom, some facts stand out like a beacon in the sky. For instance, the price to earnings (P/E)* and the price to book value (P/BV)** of the Sensex (BSE 30 companies) stands at 3 year lows, meaning that this presents an attractive opportunity for long term investors to invest in blue chip stocks. The short term environment may be marred by uncertainty. But that should not deter investors who are in the markets for the longer term from viewing this pessimism as a blessing in disguise to invest in quality stocks at mouth watering prices. Though the expected GDP growth rates of emerging economies like China and India has been toned down, one should keep in mind the fact that compared to the developed world we are definitely much better off.
Given the turmoil that the markets are facing currently, fear is rampant and the falling Sensex is only aggravating the irrational behaviour of dumping stocks. Stocks with good fundamentals and strong managements are being beaten down as viciously as those with doubtful credentials. While it is easy to invest into equities when the Sensex is breaching new highs and there is a sense of euphoria all around you, your mettle is tested in times like these when it is important to be disciplined and not get carried away by all the 'noise' around. While this may sound unbelievable in the current scenario, if you are a long term investor seeking value, once the dust settles down, you will have the satisfaction of knowing that you purchased good quality stocks at bargain prices, which are sure to generate good returns in the longer term.
*P/E is the valuation which determines the stock price in relation to the earnings per share of companies.
**P/BV is a valuation which determines the stock price in relation to the book value per share (i.e. networth of the companies divided by the total number of shares) for the financial year.
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||The week's biggest news
RBI leaves rates unchanged
The RBI maintained status quo as far as policy rates are concerned. Although the central bank has been vocal about some of its key concerns on certain macro and micro issues, it chose to keep most of the policy rates unchanged, after having exercised a cumulative reduction of 2.5% in the CRR (cash reserve ratio) in the past month, accompanied by a 1% drop in repo rate. This was prompted by the focus of the central bank to bring down inflation to a tolerable level of below 5% at the earliest. Despite the central bank's assurances of the corporate balance sheets being healthy, leverage levels being within normal ranges and the financial indicators of commercial banks being robust, the markets were in no mood to be soothed in an environment of all pervading gloom.
Rupee breaches the 50/US$ mark
Defying the bleak scenario in the US, the dollar gained against most of the major currencies as conditions in the other countries deteriorated further. This meant that the Indian rupee was at the receiving end as well. As the FIIs intensified their activity of withdrawing money from Indian equities, the rupee went into a tailspin reaching an all-time low of 50/US$ mark before closing at 49.9/US$ levels on the back of heavy intervention by the RBI. As corporate results began to pour in this week, the sharp depreciation of the rupee against the dollar took its toll on the profits of corporates; especially those which relied considerably on imports and those which had considerable foreign currency borrowings.
...says a top-notch investment professional in an interview given to a leading Indian business magazine. He has termed Warren Buffett as an 'aberration'. "I think he is plain lucky and he has also bought a lot of rubbish," adds the gentleman.
||Best of this week's 5 Min. WrapUp - "Buffet is plain lucky!"
Throughout the decades, there have been many of these types who have argued that while Buffett may have been a great investor before, he is on the decline 'now'.
And there have been lots of such 'nows'...including the time in 1988 when Buffett made his bargain-buy of Coca-Cola (the stock is up 10 times since then). He was criticized again in the late 1990s on ignoring the Internet's 'bright' future. People said he simply didn't get it anymore. And they are saying it again.
So, is Buffett an aberration? Or is he plain lucky? A track record of 43 years does not seem to suggest so! His company Berkshire Hathaway has generated returns of 21.1% per annum over a 43-year period between 1964 and 2007, almost double compared to 10.3% annual returns generated by the S&P 500 Index.
Now, that is not an aberration.
For those who are acquainted with value investing literature, Buffett has shown us why those who criticize him are wrong, in his speech 'Superinvestors of Graham and Doddsville'. There are too many instances of investing success emerging from a common background for the phenomena to be mere fluke, says Buffett enumerating several investor profiles.
"My approach works not by making valid predictions but by allowing me to correct false ones" - George Soros
||Weekend investing mantra