4 things to remember about Sensex at 21k! - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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4 things to remember about Sensex at 21k! 

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In this issue:
» Neuroscience explains the cause of bubbles and crashes
» Do developed countries trust Indian MNCs?
» Why the US Fed needs to focus on the big picture
» Will we see a Rs 5 hike in diesel prices?
» ...and more!


00:00
 
The benchmark BSE-Sensex is back at 21,000 levels. And suddenly there seems to be a rush of enthusiasm amongst market participants. Just to recall, the first time the Sensex had touched the 21k level was in January 2008. Then as we know, the markets crashed in response to the global financial crisis. Then again in November 2010, Sensex again hit the 21k level. And again the markets tanked after scaling that level...

So the one obvious question on everyone's mind is ' Where will the Sensex go from here? Will it tank? Will it scale new highs?

What is the answer? We beg to differ in our perspective of this entire situation. In our view, the question itself is flawed.

For one, the 21k level denotes nothing more than a mere psychological point. Investors have seen the Sensex scaling this level and then correcting sharply. So there is a collective memory associated with the 21k level and a resultant bias.

In reality, the current 21k level cannot be compared with the 21k mark attained in 2008. Or for that matter even 2010. An article in the Times of India rightly points out this fact. During these six years, inflation has gone up by 70%! So to make a fair comparison between the 2008 21k level and the current one, you have to adjust the current market level for inflation. In that sense, the Sensex is actually around 13k level relative to the 2008 level.

Secondly, it would be wrong to gauge the overall Indian stock markets purely by the Sensex level. Yes true, it is a benchmark index. But it comprises just 30 large cap companies. Moreover, the composition of the index and the weightage of its constituents also changes from time to time.

Thirdly, the performance across sectors and market caps remains highly skewed. Consider this statistic as reported in the said article- Just 133 stocks out of the BSE 500 index of 2008 have surpassed the peak levels achieved then. This means that while some stocks have scaled new highs, a majority of the stocks still continue to underperform.

Fourthly, the Sensex level alone says nothing about the value of the underlying stocks. It has to be seen in conjunction with earnings and other fundamentals factors. The point we are trying to drive across is that making investment decisions looking at the current Sensex level is a flawed approach to start with. This is the reason we do not assign too much importance to index levels.

Instead of focussing on stock prices and predicting their movements, we prefer to focus on finding value. And there is a reason why we see merit in this time-tested approach. Many proponents of this value investing approach, Warren Buffett being the foremost among them, have built immense wealth over the long term. The philosophy is simple but demands discipline. Find great businesses that are well-managed and are available at a fair price. Our experience says you are quite likely to see wealth accruing into your bank account, irrespective of where the Sensex is headed.

Do you think it is correct to base your investment decisions on the Sensex level? Let us know your comments or post them on our Facebook page / Google+ page

01:30  Chart of the day
 
One of the major challenges facing the Indian economy has been the high current account deficit (CAD). This has resulted in substantial downward pressure on the Indian rupee. Under pressure, policymakers turned hostile towards India's obsession with the precious yellow metal. Between January 2012 and August 2013, the import duty on gold was raised from 2% to 10%. Further the Reserve Bank of India imposed a ban on imports of gold coins and medallions in a bid to tame the rising CAD. This ban resulted in a substantial drop in gold imports.

As the chart of the days shows, from 140-160 tonnes during the months of April and May 2013, gold imports have fallen sharply to about 11-12 tonnes during the months of August and September. One important point to remember is that while legal gold imports have fallen, this has resulted in a significant rise in gold smuggling. This is a major challenge for policymakers as it makes the curbs on gold imports futile but also results in revenue losses for the exchequer.

Sharp fall in India's gold imports


----------- Should you be Buying Gold this Festive Season? -----------

Gold is going to be the hot topic as many people rush to buy this precious asset on the occasion of Dhanteras.

But with the BSE Sensex crossing the 21,000 mark, the price of gold near its all-time high...

You have to wonder what your investment strategy should be for this yellow metal.

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02:00
 
A new study is trying to throw some light on the link between asset bubbles and neuroscience. The answer to why bubbles happen, the study reckons, lies in the way our brains have evolved. You see, there's no separate area in the brain that makes financial decisions. It uses the very same framework that is used to make decisions in a lot of other areas. However, the irony is that the way financial markets operate is at odds with how these decisions are made by brains. The end result is therefore mispricing of assets which then give rise to booms and busts.

Although the study could be new, there is nothing new in its findings we believe. Booms and busts are indeed caused when our brains go on an irrational trip. And unfortunately, this happens quite often. However, there do exist ways to overcome this irrationality. And it involves training our brains to shut out noise and focus firmly on the fundamentals. While the process does take time, the end result in the form of higher wealth creation makes it well worth the effort according to us.

02:30
 
Indian companies have been busy expanding their footprints outside the country's borders. Some CEOs have even stated their preference to expand outside the country. However, are the developed countries welcoming them with open arms? As per a study conducted by public relations firm Edelman, the developed economies do not really trust the Indian MNCs. The study revealed that the global trust in India-based MNCs has actually come down. It has declined from 42% in 2011 to 33% in 2013. The reasons cited for this lack of trust are low brand awareness and low recall value of Indian CEOs.

However a study conducted by Transparency International earlier this year had revealed something different. It stated that Indian companies are one of the most transparent in the world. It had specifically commended the Tata Group companies for this. Given that transparency is a major factor for building trust; we do question the validity of the survey conducted by the public relations firm. Having said that, Indian MNCs could definitely work upon improving their image further. This could be done by improving the quality of disclosures, adopting socially responsive practices, etc. The government could help too by strengthening intellectual property laws, labor laws, etc.

03:10
 
Statistics are important. But how much of it is important to take some meaningful decisions? The steady inflow of data coming in from the US economy seems enamouring to many investors. The US Fed itself gives out a whole host of weekly, monthly and quarterly indicators. These again are based on statistics that the US central bank collects. So if investing is all about keeping oneself tuned to a whole host of short term data and updates, wouldn't computers do a better job of investing decision making?

As per an article on Bloomberg, this month's economic data will be the litmus test for the US Fed. Given the government's prolonged shutdown the economic data is bound to be distorted. So it is the best time for the Fed to take a look at the big picture for once instead of short term movements in statistics. And in doing so it could set a trend for central bankers and policymakers world over to look at long term trends. It could also help the Fed understand some critical faults in its assumptions and decision making. We wonder if such good sense will prevail.

03:45
 
The same old story seems to be playing out as far as fuel pricing is concerned. As reported in Reuters, a government panel has recommended that India raise diesel prices by Rs 5 a litre with immediate effect. The rationale behind this is to cut down the government's bloated subsidy bill which is wreaking havoc on its overall fiscal health. Should the government do so, the annual subsidy bill would see a cut of around Rs 400 bn.

India's fiscal deficit has worsened which means that expenditure needs to come down drastically. But that does not mean that productive expenditure should be slashed. It means that unproductive expenses such as subsidies need to be toned down. The real question is whether the government despite acknowledging this logic has the will to put it in practice. And the answer seems to veer towards a 'no'. Indeed, with elections just around the corner, most parties would not be willing to raise fuel prices at a time when inflation is already high. Who wants to lose those all important vote banks? So it does seem highly unlikely that recommendations made by the panel will find much favour. This could be just another issue that would be put on the backburner like many others.

04:30
 
In the meanwhile Indian stock markets are trading strong. At the time of writing, the benchmark BSE-Sensex was up by 54 points (0.26%). Consumer Durables and Metal stocks were the biggest winners. Most of the Asian stock markets were trading lower led by Japan and Singapore. The European markets opened on a negative note.

04:50  Today's investing mantra
"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it." - Warren Buffett
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3 Responses to "4 things to remember about Sensex at 21k!"

A. Pereira

Nov 1, 2013

Warren Buffett's value investing has succeeded in more mature markets in the west. Do you have any history of investors in India having consistently tasted the fruits of value investing over a long period, say more than 10 years? Then please present that fact. What I have seen is there is no method in the madness in Indian stock market behaviour. With so many underlying negatives, our markets are going high. Without much negativity in the past, they had gone down. Look at the PSU banks yesterday - SBI, Canara Bank, Union Bank etc all of which were lying low, suddenly there seems to be some action there. Same holds good for others too. The same sound scrips like L&T, ICICI, SBI, AXIS, Yesbank, HDFC etc still have 52 week lows at 50% of their respective Highs (whether they are on the way up or on the way down). So, where is the place for mature value investing?

Like (1)

shiv mohan pathak

Nov 1, 2013

Absolutely correct i am trusting in your view thanks 5miniute--pathak shiv mohan

Like (1)

S.Sridharan

Oct 31, 2013

Dear:
Seen your email and thank you for the same.
As stated in your email, the time now is very crucial.
We should not be carried away by the attraction of the
sensex passing the 21K.
At this stage, we should be very careful, since the global scenario is not in positive side. We should invest only in sound fundamental stocks and keep quiet.

I wish to tell that this is not the time for "Traders"
who know Tech. analysis half-handed.

Regards.

S. Sridharan
Chennai-600091.

Like (1)
  
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