Important! Read this before our upcoming stock recommendation... - The 5 Minute WrapUp by Equitymaster
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Important! Read this before our upcoming stock recommendation...

Nov 10, 2014

In this issue:
» How expensive are the Indian markets now?
» FII attitude has a strong correlation with market movements
» Are lower interest rates finally here?
» and more....

For a while, our smallcap stock recommendation service Hidden Treasure has been receiving some congratulatory emails from of our subscribers, like the ones below.

"Kudos to your research team... Keep up the good work."

"Thank you for the excellent recommendations. Looking forward to your next one..."

It is indeed very encouraging and reassuring to receive such words of praise from our subscribers.

We took a step back and looked at the smallcap stock recommendations we made in the last 12-18 months. Interestingly, all of them have delivered positive returns. Even the very recent ones...

We saw that some stocks had gone up as high as 217%, 172%, 95%, 87% (as of 7 November 2014)... and so on...

In fact, if you had invested equal amounts in each of our Hidden Treasure Buy recommendations over the last one and a half year, your portfolio would have been up 71%. This does not include dividends.

This does explain the enthusiasm of our subscribers and the reason they have been awaiting our next recommendation, which is due for release later during this week.

But let us tell you, our research team is in no celebratory mood. What you are about to read is likely to surprise you...

After we saw the performance of our smallcap recommendations, we shared the result with the rest of our team. We received a long, candid response from our mentor and Co-Head of Research Rahul Shah. It did not surprise us. But it did reinforce our sense of pride for the Equitymaster way of investing.

Here is what he wrote to us:

Rahul Shah: "Dear Research team members, it is heartening to see that our recommendations have done well. But let us not allow this to get into our head. Stock price movements in the medium term could be influenced by factors other than fundamentals such as liquidity and sentiments. And we are certainly not in the business of predicting stock price movements.

Our job, as research analysts, is to analyse the long term fundamentals of a business the durability of its earnings... the health of its balance sheet... the attractiveness of its valuations... and so on...

Our true success lies in getting these key factors right. Trust me, if you keep your focus firmly on business fundamentals, the stock prices will certainly reflect them... sometimes sooner, sometimes later...

You may be surprised why I am saying these things now. Let me explain.

I have been around in the equity markets way longer than most of you. I have seen the best and the worst of times. I have seen times when markets haven't been as rewarding as they seem now.

I remember some of our earlier recommendations wherein the markets took way longer to reflect their true intrinsic value. We were able to patiently hold on because believed in our long term investing philosophy.

So here is my key lesson to you all: Do not rely on short to medium term stock price appreciation to validate the success of your recommendations. Ben Graham has taught us about how Mr Market is. He is moody and fickle. Tomorrow he may be depressed and push stock prices lower. That should not change what you believe in and stand for!"

The story does not end here. This is what Rahul Shah did next. He asked each one of us to send our failed stock recommendations.

"Let's carry out a post mortem of all our unsuccessful recommendations. We should try and understand where we might have gone wrong. Were there any signals that would have helped us identify the mistake earlier? Do think and share what we could have done better in order to avoid such mistakes."

So our research team has already started doing a "post mortem" of our not-so-successful recommendations. Let us tell you that it is turning out to be a great learning exercise.

Our Hidden Treasure team would like to carry out the same exercise with you. Name three smallcap stocks that have been your biggest mistakes. Tell us, what according to you, went wrong with their businesses. And what will you do to avoid such mistakes in future? Let us know your comments or share your views in the Equitymaster Club.

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Excited? Click here for full details...

 Chart of the day
Recently, the S&P BSE-Sensex hit a new intraday high to breach the 28,000 mark. As the Indian markets continue their ascent, investors may be wondering if the markets are too expensive already. And whether a correction appears imminent. Here is some interesting piece of data that we came across in a financial daily that we would like to share with you. Among all major global stock indices, the Indian markets have been the biggest gainers in the year so far. The Sensex is up 31.6% as of November 7, 2014. The second biggest gainer has been the Shanghai index (China) which is up 14.3%.

Now here is the more intriguing part. Despite the Sensex being the biggest gainer this year, it doesn't appear to be the most expensive in terms of the price to earnings (P/E) ratio. The chart of the day shows that India has the sixth highest P/E ratio among major global indices.

In our view, the Indian markets are certainly not cheap at the moment. But they don't appear irrationally expensive either. In any case, a bottom-up approach to stock picking with a focus on fundamentally sound companies can be quite rewarding for long term investors.

Which are the most expensive global markets?

Some more tidbits on the stock markets. Investors will agree that the middle of last year was a fantastic time to invest in Indian stocks. Many of those who invested then are sitting on huge capital gains. Those who missed out the bus may be a little disappointed. And they may be wondering whether there could have been a way to know that Indian markets were set for a major bull rally.

Is there an indicator that could tell us where the overall market is heading? For this, we must look at the key factors that influence market movements. Some of the major factors that influence markets are GDP growth rates, corporate earnings, interest rates, money supply, forex rates, global economic conditions, and so on...

While GDP growth rates and corporate earnings trends do influence market movements, there tends to be a lead-lag relationship. However, there is one factor which tends to have an immediate influence of stock prices. Any guesses? The answer is FII attitude. It is worth noting that given the lack of depth in the Indian markets, FII flows tend to have a huge impact. In short, if you could guess what is on the minds of FIIs, you would be making money most of the time. But this is easier said than done. FIIs are, in general, a fickle lot. A multitude of global and domestic factors tend to influence their investing actions.

In our view, it is risky proposition to try to ape the FIIs. In our experience, good businesses do tend to get rewarded sooner or later and vice versa. So it is way more rewarding to focus on buying good businesses than trying to second guess what the FIIs will buy.

By the way, here is one development in the bond market that stock investors should not miss. There has been a rally in Indian bonds. This is noteworthy because bond prices have an inverse correlation with interest rates. Does this mean lower interest rates are finally here? It seems so...

Now here is why the RBI Governor should feel relieved. All this while, the markets were expecting him to lower the benchmark interest rates, which would then provide the necessary cue for banks to lower interest rates. But with the inflation rate showing signs of easing, the bond yields have declined even without Raghuram Rajan giving any hint of a rate cut. India's largest lender, State Bank of India, reduced its deposits rates last week. Will lending rates also be cut? There are good reasons to believe they will be.

Lower interest rates and easing inflation levels could very well be the harbingers of India's economic revival.

Meanwhile, benchmark indices were trading below the dotted line after initially opening on a positive note. The Sensex is trading lower by 68 points at the time of writing. Stocks from the oil and gas and capital goods space were the major losers. Both Asian as well as European markets were mainly trading in the green.

 Today's investing mantra
"Only when the tide goes out do you discover who's been swimming naked." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Ankit Shah and Richa Agarwal.

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Equitymaster requests your view! Post a comment on "Important! Read this before our upcoming stock recommendation...". Click here!

11 Responses to "Important! Read this before our upcoming stock recommendation..."


Nov 20, 2014

Appreciate getting direct mail/s. Will provide another mail Id to exchange views.

My Philosophy:

If U r in the market U must be making profits. But nobody can make profit without other man loosing. Particularly in derivatives & leveraged trading.

In the market majority looses.

Best Wishes. Looking for response.




Nov 20, 2014

My post to a trading Member:

"Without complete understanding of platform for trading I shall not move forward. My primary exposure since 1972-73. secondary market 2001 on wards. Still testing many things.
A young lad, with whom I am in touch, in US after making initial losses in 2010-12, in 2013 made 200% profit on borrowed money. Made a tax payment of $+33K to IRS. .
During 2001 to 2012 I would have made payment to Indian IRS IRs;2200K. But alas my gains vanished.
I would like to trade in;
!. Derivatives.
2. MCX. Currency trading I would like to understand.
3. All stocks traded in NSE/BSE. May be in any other exchange.

All regulation must be clearly understood. To start with I shall bring stocks around IRs;500K. In a short time increase it to 5000K in different accounts. No cash.

If, open platform provided, algorithmic trading testing permitted, many more accounts can be opened. It will obviously need interaction with Ur S/W team. I am in touch with 'FSF' in US.

If Ur policy do not permit calling me, interaction through mail only. Only at senior level. Otherwise it will be only wasting of Ur time.

Happy trading. Rgds."

If any body can advise how to create linkage. I shall greatly appreciate.

I have tested many brokers. Every where good points & short comings. Indian market is radically different than US & may be Europe markets. One has to exercise caution. I am in touch with 'SEBI'. They have power. But they pass the issues to lower level. There investor care is least. As indicative in the above mail, had there been no failure on the part of 'Bro-king Member/s' my profits would have been IRs;+5000K in the last 12 years.

Thanks to EQM. I am regular reader of there mail since last 4 years. Interaction now only.



Nov 17, 2014

Hi,I am reader of 5 min wrapup from last Two years and recently subscribed The India Letter. I am investing from last 5 years.
My biggest loss was in Opto circuit India ltd. Beside the great moat company is not going as per expectations due to lack of working capital and management also not replying for situation.
Equitymaster has given me proper way of thinking. Thank you



Nov 12, 2014

Comments by Rahul Shah are worth reading and show his honest and practical attitude towards investing. In these very very hot markets, he does not want to give big promises to the subscribers and has also rightly INDIRECTLY cautioned that the markets may react. I personally feel that investors do have good liquidity even now and some of them like me must be waiting for a better opportunity to invest more. No doubt I am eagerly awaiting the next recommendation keeping in mind the cautious view of Rahul Shah.



Nov 12, 2014

innovative ind, Maharastra seamless


R Tayal

Nov 11, 2014

I purchased Shri Lakshmi Cotsyn in Oct.2005 at Rs.99 per share. Despite good Co. results year after year, it never went beyond Rs.200 at a PE of less than 5. I felt it should get PE of 8-9 at some point of time. But that did not happen and I stopped monitoring it. However in the last couple of years the stock has fallen to just Rs.4.70. Another case is that of TANLA which I bought at Rs.132 in Jan.2007 and which is now languishing at Rs.17.



Nov 11, 2014



shine abraham

Nov 10, 2014

mic electronics
3 i infotech


Murali Mohan

Nov 10, 2014

Small Caps which are purchased in post June 2012 still did not
Take Solutions did not reach even 50% of the Target Price

Mirza Interantional & Navneet Publications have reached close to 80% after 2 Years.


Sujinder Singh

Nov 10, 2014

1) Padmini politech
2) Deecan Chronicle
3) Zylog systems

Equitymaster requests your view! Post a comment on "Important! Read this before our upcoming stock recommendation...". Click here!