In this issue:
» John Bogle on stock investing
» Indian politics at its new low
» Is the Sun setting on the UK economy?
» Wealth has just, well...vanished!
» ...and more!!
This personal finance legend has long thought and preached that investors should not bother trying to pick individual stocks but should invest in low cost index funds. He is now saying that it is a very good time to put money into stocks " not for the short term but as part of a diversified portfolio that you can hold for the long term. And you should listen.
|| Father of Index Funds taking stock
Mr. John (Jack) Bogle, rated by Fortune as one of the four investment giants of the twentieth century is the founder of Vanguard, one of the world's largest and most respected mutual fund houses.
He said and the International Herald Tribune reported, "The probabilities for stock market investing right now are very compelling. The cataclysm in world financial markets has brought down valuations to fairly attractive levels. So this isn't the time to sell."
His views however come with a caveat - "If you cannot afford to lose another penny, then you simply have no recourse but to get out of the stock market. Stocks could easily fall further, and if you aren't in a position to absorb more losses, you must protect yourself."
What Bogle simply means is that for long-term investors who can afford to wait to create wealth for meeting their financial commitments (like education and marriage of children, and retirement), the probabilities are much better right now than a year ago.
Here is a simple analysis that shows the value that long term investing can create. And we are only talking about long term as being a period of last 5 years when Indian markets have been at their best, and now at their worst!
Of the 25 BSE-Sensex companies that were listed on April 1 2003, 18 have generated returns of more than 100% till date, i.e., minimum of 15% per annum. 11 out of these 18 stocks have generated more than 300% returns, i.e., minimum of 32% per annum. Can you ask for any more? Over this period, the broader Sensex has generated returns of 165%, i.e., 22% per annum.
"Despite an orgy of speculation that has hurt the global economy," Bogle says that he remains convinced that if long-term investors stick to the basics, and try to have strong stomachs, they can ride out the rough patches and ultimately prosper.
"If you were to put your money away and not look at it for many years, until you were ready for retirement, when you finally looked at it, you'd probably faint with amazement at how much money is in there," he quips.
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Stocks got even cheaper today. The BSE-Sensex declined a further 200 points, but not before scaring participants with nearly a 1,000 points fall. Since the beginning of Oh-ctober 2008, the index has shed almost 4,360 points, or 34%.
|| In the meanwhile...
Other Asian markets also took it on their chin, as the benchmark indices in Hong Kong, China and Japan closed with declines of 13%, 6% and 6% respectively. The Japanese Nikkei, at 7,160 is now at the same levels as it was in 1982, the fifth year of the rally that pushed the index to nearly 40,000 by the end of 1989. However, as reported in Bloomberg, the P/E of the index is now at 8.6 times compared to 70 times at the 1989 peak.
Fear is running the show right now. But that will not always be the case. As Franklin D. Roosevelt once said, "The main thing to be pessimistic about today is pessimism itself." And we have loads of this emotion floating around among investors these days. Sure, the current crisis is dire and might worsen before it gets better. But that is like taking a call on the future, which has always been so uncertain. Think about the present, which is 'presenting' such wonderful long-term investment opportunities.
The Diwali Sale is on. Are you buying?
Anyways, crude oil prices fell to US$ 63 a barrel, a 17-month low. The OPEC's (Organisation of the Petroleum Exporting Countries) 1.5 m barrels a day production cut has failed to impact prices as there is growing evidence of a severe global economic slowdown that would undermine crude demand. Mohammad Ali Khatibi, Iran's OPEC governor, said yesterday that OPEC might consider another cut in oil production in their meeting to be held in December this year, if prices continue falling. In the meanwhile, gold is currently at US$ 708 an ounce, a US$ 26 decline over last Friday's closing.
One of the barometers of the health of Indian banking sector, the State Bank of India, announced its June-September quarter results today. We attended the bank's analyst meet to hear out the management's views on the performance and the way forward for the bank in particular and the sector in general.
The management gave us enough evidence of the fact that roots of the Indian financial system are well penetrated and minimally disturbed by external catastrophes. This is because most of the risks taken by the Indian banks in their overseas operations are reasonably backed by enough capital and good quality assets in their domestic books. While SBI acknowledged some of its bad exposures in the international markets, including US$ 10 m to Lehman Brothers, it has provided for the same. Further, in the domestic market, its exposure to commercial real estate is well within the regulatory norm of 5% of total advances. Having said that, the bank foresees the monetary policy to be very unpredictable in the near term. It does not even rule out the risk of rise in delinquency levels of retail and small corporates.
Keeping the stock market turmoil aside, Indian politics also seems at its new low. All these years, opposition parties have attacked the ones in power and vice versa. These days, the attack is on the Speaker, the highest position in the Parliament. "I can tell you this is the worst period of my life, if it has any relevance for this House," Mr. Somnath Chaterjee was reported saying to the Lok Sabha members last Friday.
|| Indian politics at its new low!
"Every day, I am going back with a lot of pain and agony from this House, but I want this House to remain, this House to function and democracy should be strengthened," says the man who has been criticized by the parliamentarians both for taking strong and mild action to ensure the House is in order.
The last time Asian economies were in the midst of a financial crisis, the Western world did not spare too much of an effort blaming them for misguided exchange-rate policies, opaque financial systems, profligate spending and corrupt politics. The bail-outs by the International Monetary Fund (IMF) then demanded fiscal austerity at a time of economic hardship. But, since international institutions offered the only financial lifeline, most Asian governments were forced to suck up IMF orthodoxies. This time the tables have turned.
Although Asian economies are not resilient to the global financial meltdown, their positions are relatively safer. And yet they choose to see eye to eye with their European counterparts. Asian and European leaders have decided to take a broad consensus on an approach to the global financial meltdown to next month's crisis summit.
The leaders of both the geographies also wish to emphasise on the fact that the IMF must play a leading role this time around as well in aiding crisis stricken economies. Whether or not this will help solve the crisis is yet to be seen. But the Asians certainly seem to have shown some forethought.
Sometime back when the Sensex was reaching dizzying heights, the top honchos, including the likes of Ambani brothers, Lakshmi Mittal, Kumarmangalam Birla and Azim Premji were on cloud nine. Besides seeing their wealth take a quantum leap, many of them saw their names featured in the list of the richest Indians; these lists becoming a regular feature in various newspapers and magazines.
|| Wealth has just, well.....vanished!
Now that the plunge in the US markets has triggered the domino effect pulling down all the indices across the world including India, these biggies are now topping the list for a not so enthusing reason. Yes, an article in a leading business daily has listed the Indians who have seen the maximum wealth erosion. And guess who tops the list?
None other than the Ambani brothers. While there was always a tussle between them and Lakshmi Mittal as to who will emerge as the richest, as far as wealth erosion is concerned, it seems the former takes the cake. Since the market peaked in January, the groups led by 10 richest Indians have collectively lost over US$ 400 bn, with promoters accounting for more than the half. Does this mean that our billionaires will now turn into millionaires?
"The Sun never sets on the British Empire," was what the British unabashedly proclaimed during their colonisation of India. But on the 21st century version of the British Empire i.e., the economy of the country, the Sun seems to be setting and setting rather quickly. And if nothing is done soon enough, it is likely to plunge the nation into darkness for quite some time to come.
|| Is the Sun setting on the UK economy?
Newsflow from one of Europe's largest economies has not been good since the onset of the crisis and it seems to get worse with each passing day. The British pound has fallen to its lowest level in almost five years against the US dollar. Carmakers are indicating the return of the 1970s era where a three day week was the norm, and unemployment is rising fast.
In fact, one of the treasury ministers has even gone on to use the dreaded 'R-Word' (recession), the first bank official to do so. Although the UK government is doing everything it possibly can, ranging from injecting capital into the banks to boosting up spending, situation still appears quite dire.
Furthermore, the nation's currency does not have the 'halo' like reputation that the US dollar enjoys. This eventually ties up the government's hands on printing an indiscriminate amount of money and making available that much more funds for lending. It appears as though the Sun will have to set fully before it starts shining again.
"Investing isn't just about probabilities. It's about consequences, and you've got to be prepared for them." - John Bogle
|| Today's investing mantra