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What the Trump Shocker Tells You about Your Stocks

Nov 10, 2016

In this issue:
» Why bank employees are a worried lot
» India set for a sovereign rating upgrade?
» ...and more!
00:00
Rahul Shah, Co-Head of Research

We're overly fascinated and obsessed with the future. And the result is we're overwhelmingly preoccupied with predicting it.

So obsessed are we, in fact, that we spend an inordinate amount of time and brain power on getting a firm grip on it. Knowing comforts us. 'Not' knowing makes us very uncomfortable indeed.

Take the US elections for example. In the months leading up to D-day, just think about the amount of time and mental energy Americans spent on predicting who will win. The journalists, pollsters, columnist, magazines, bloggers, news channels... the list goes on. And now, armed with the internet, powerful computing technology, big data and elaborate models, they felt ever more confident of their abilities to 'get it right'. And they spent significant resources on doing that.

The net result? This large mass of smart people with their fancy tech etc., all put together, got it wrong. The clear consensus was Hillary Clinton had the final edge. The future though, as we now know, was to be very different.

Situations are often more complex, and much more fluid than we think them to be. They're ever evolving mish-mash of variables that swish around constantly as we go along.

And whether it is politics or investing, it is our arrogance in our capacity to successfully analyse the heck out of a situation that gets us into trouble.

Investors have many parallel with how people behaved with respect to the presidential race. We sit down and spend an outrageous amount of time trying to predict (with a lot of accuracy) exactly which companies will win the business race. Which will do well, and which won't. Which will see their margins expand, and by how much. Which will see business grow, and at what percentage. And at the end of the day, where their stocks will go.

And ever so often, here too, the expected and unexpected change places in a blink. All our analysis goes out the window. All our intelligence counts for nothing.

Here's my point. Wisdom in investing lies not in having supreme confidence in our ability to 'get it right'. Rather, it lies in having confidence in our ability to 'get it wrong'. And thus, making decisions that are prepared for both possibilities.

This philosophy is central to the strategies we follow over at our service Microcap Millionaires. We lay a lot of emphasis on 'getting it wrong' here. We do this on two levels. One, we know that we will not get it right on all of our stock picks. So we build that into our purchase prices of stocks. We pick up stocks only at a price where even if the business doesn't do too well, we don't lose much. And if it does, we make a lot of money.

Second, we know that we will not get it right on where the share market will go tomorrow. So we keep a strategically changing proportion of our money in cash. And we use it as a potent weapon to pounce on stocks if the market falls, and increase it (by exiting stocks) if the market rises. And let me tell you, this strategy has yielded great results for our subscribers since the inception of this service a little under three years back.

I strongly recommend you try out this service.

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02:33 Chart of the day

There's a reason bank employees are a worried lot after the demonetization move by the Government. As today's chart of the day highlights, if each and every Rs 500 and Rs 1,000 note in circulation is returned by its holder, a total volume of a whopping 22 bn notes will be taken out of the system over the next month and a half.

As the chart highlights, the volume of higher denomination notes in circulation has only increased over the years. While the 500 Rs banknotes in circulation have gone up a whopping 38% between FY14 and FY16, those of 100 Rs denomination are up 25%. One reason is the persistently high inflation. Haven't you witnessed that you now need to take out the 500 Rs and 1000 Rs notes more often than before. After all, what does a 100 Rs note buy these days? And secondly, since the logistics of transferring higher denomination notes are way better than lower ones, banks have also preferred dispensing higher denomination notes. We hope the entire Government machinery is up to the task of replacing the old notes. Else, it will end up inconveniencing the common man.

The Curious Case of Rise in 500 and 1,000 Rs notes


03:45

Is there a case for a sovereign upgrade for India in view of the demonetization drive? Well, this event is certainly well within the realms of possibility. You see, the two major grudges that ratings agencies have consistently had against an upgrade in India's ratings is our high debt to GDP ratio and the fact that our tax collections as a percentage of GDP is quite low.

Now, what the demonetization move is likely to do is bring about an improvement in both of these indicators. And not to forget that the possibility of a timely roll out of GST looks very real now. And therefore, with these reforms measures in place, there's no reason why both our fiscal position as well as tax collections shouldn't improve.

Also worth highlighting is the fact that with the parallel economy being considerably weakened now, inflation in the country should also come down in a significant manner. So, with things looking up on the major economic indicators front, a ratings upgrade should ideally follow.

04:48

Meanwhile, markets seems to have shrugged off the uncertainty around both demonetization and Trump as the Sensex was higher by around 372 points (up 1.4%) at the time of writing. BSE Mid and Small Cap indices were even higher, up by 2% each. Amongst sectors, metals and banking stocks were seen attracting the maximum buying interest.

04:56 Investment mantra of the day

"Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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