Investing in India - 5 Minute WrapUp by Equitymaster

Is your fund manager a good goalkeeper? 

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In this issue:
» Emerging markets shielded from fiscal cliff, feels Mobius
» Gold could nearly triple in 5 years
» India can grow faster than China this decade, says Jim O Neill
» Global stock markets have a good week
» ...and more!

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If you are into football and you see a goalkeeper readying himself to face a penalty kick, you nervously try to predict which way the goalkeeper would jump. Will it be to the right of the goalpost or will he take a leftward leap to stop the ball from crashing into the net? Honestly, even the goalkeeper would perhaps have no idea right until the time the penalty taker takes the shot. However, it is quite obvious that in order to increase his chances of saving the goal, the goalkeeper will have to jump towards either of the sides.

Well, that is not true though. As per a report published by Societe Generale, the optimal decision is not to leap into the air but to stay glued to one's position i.e. at the center of the goal. In other words, take no action at all. This is because it has been assessed that when the goalkeeper stays in the center of the goal, he saves some 60% of the kicks aimed at the center. This is significantly higher than what he would manage to save when he dives either left or right. But does the goalkeeper manage to do that? Certainly not. In the study that was conducted, the goalkeeper managed to stay in the center just 6.3% of the time.

Despite this revelation, why is it that a goalkeeper cannot resist the urge to jump either to his left or to his right? Well, it can be put down to the action bias we believe. By jumping, the goalkeepers are giving themselves the satisfaction of at least making an effort. No one would want to stand at the center and just watch the ball go swerving past them. Even if this is the best strategy.

Do you see any parallels to investing here? Certainly. Just as balls whiz past the goalkeepers, investors and asset managers are subjected to continuous bombardment of stock tickers and market opinions. And thus the tendency to succumb to the action bias, which in this case means frequent trading and getting in and out of stocks on a daily or monthly basis. But is this the optimal strategy? Of course not. Stocks are anything but price tickers moving up and down the TV screens. There is a business underlying each stock and hence, the idea should be to understand the fundamentals of the business and stay invested in them for the long term.

This is the goalkeeping equivalent of taking very little action and exiting only if the business is way overpriced or its fundamentals have deteriorated. Yes, the stock tickers will still crowd your screens and so called talking heads on TVs will still give their opinions at the drop of a hat. However, the solution is not to get influenced by them but to keep focusing on what matters i.e. business fundamentals and valuation. And taking as little action as possible just like a goalkeeper ought to do.

Do you think the goalkeeping strategy of seldom taking action works in the field of investing? Let us know your comments or post them on our Facebook page / Google+ page

01:45  Chart of the day
While India Inc could be a tad circumspect about committing to capex spends, around 17 of the biggest PSUs in India have decided to invest close to US$ 30 bn in FY13. Today's chart of the day highlights the capex commitment of some of the biggest PSUs in the country for the current financial year. It should be noted that these PSUs have total capital availability of around US$ 51 bn and hence, the capex can easily be taken care of without any debt burden. One may wonder why PSUs have announced such huge capex when the private sector has been cancelling or delaying capex plans. We believe the main reason for this is that PSUs were sent notices from the Finance Ministry to meet their planned investment targets. In case they failed to invest the surplus cash, they would be forced to declare special dividends. Finance Minister P Chidambaram is of the view that PSUs should not be sitting on a mountain of cash when the economy is struggling to grow. Hope other corporate firms too take cues from this and invest in capacities so that the long term India growth story is kept intact.

Source: Financial Express

When so much money is being printed, a lot of it is flowing into gold, thereby leading to a run up in its prices. The economic reason behind it is also equally significant. Cheap money led to a fall in dollar's value which in turn led to an appreciation in the value of gold given the negative correlation between the US dollar and gold. And now Mr Bernanke has announced another round of QE. Only this time around there is no limit to the QE. As a result the sky is the limit for gold. This is the opinion of Mr Peter Schiff who is the CEO of Euro Pacific Capital.

He states that the QE program will lead to unlimited money printing. This in turn will cause dollar to fall and gold to rise. Though it is impossible to be precise but Mr Schiff does expect gold prices to reach US$ 5,000 per ounce over the next 5 years. Though this looks a bit too optimistic, nevertheless we do feel that gold is already poised for another golden run. But would it reach US$ 5,000? Who knows? If the crisis continues to worsen and US continues to print money, then it just might.

Worries over United States' inability to steer away from the impending fiscal cliff have gripped the world markets. And naturally so. US is the world's largest economy. If the fiscal cliff materialises, deep spending cuts and tax rises could be on the cards. This could send US economy into recession. And this in turn could have huge repercussions on the world stock markets.

However, market guru, Mark Mobius is of the opinion that the emerging markets are relatively shielded from the after effects of the fiscal cliff. That's because the export dependence of these markets towards US has declined in the past decade. It has diversified to other European nations. Thus, to an extent, emerging markets have decoupled from US. However, he was quick to point out that this does not mean emerging markets, as a pack, could see a dream run. After all, US is the world's largest economy. Hence, a complete immunity is ruled out. Basically the bottomline is that the impact might get neutralised for diversified exporters in emerging markets. However, the ones that have higher US exposure may see some trouble.

If one looks at the slowdown which has bogged down the Indian economy in recent times, not many would have a favourable view on investing in the country. But Jim O'Neill, Chairman of Goldman Sachs has not written off the country entirely. He acknowledges that democracy in India is complex and sometimes questionable. But on the positive side, the country's demographics are very good. Indeed, India needs to get most of its things right. Because if it does, it has the potential grow more than China in this decade.

Further, as the developed world still grapples with recession, emerging markets such as India and China still present an attractive bet for investing in equities. One would do well to recall that in the years before the financial crisis, India's GDP grew at stupendous 9% plus. This was inspite of the usual problems - corruption, lack of infrastructure and so on. So there is no reason why the country cannot replicate this going forward as well. At the same time, one cannot entirely discount the fact that there needs to be more initiative shown by the government. Because it will go a long way in making things easier for the economy in the future.

All the stock markets across the world witnessed a week of gains. Most of the markets closed substantially higher than last week's closing levels. US stocks markets were up amidst early reports of improved consumer sentiments from major retailers at the start of the shopping season. Also, positive economic news from Germany regarding improvement in business climate index helped the markets end the best week of this year registering gains of more than 3%.

The Indian stock markets were up by almost 1%. Amongst the other markets, all displayed positive sentiments and moved considerably higher during the week. France (up by 5.6%) and Germany (up by 5.2%) were the top gainers. China although up by 0.6% was the worst performer.

Source: Yahoo finance, Kitco, cnnfn, Equitymaster

04:54  Weekend investing mantra
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely" - Warren Buffett

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    1 Responses to "Is your fund manager a good goalkeeper?"


    Nov 24, 2012

    Barring COAL INDIA, all the other IPO/FPO of PSU in the past 3 years destroyed the wealth of investors. Loss since listing of these companies are huge:
    MOIL LTD: -36%
    NHPC LTD: -36%
    NMDC LTD: -45%
    PUNJAB & SIND BANK: -44%

    Its better for the investors that these companies declare special dividends rather than ill-conceived capex since because they are being forced to spend the extra cash.

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