Yet another eye opener for retail investors - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Yet another eye opener for retail investors 

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In this issue:
» The IPO market is heating up
» Chinese investors shun Shanghai equities
» 'Black Swan' author thinks the US fiscal cliff is a good thing
» Will Mr Mistry take Tata Group to the next level?
» ...and more!

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Sensex going past 19,000 levels seems to have brought in some cheer to Indian stock markets. An article in Economic Times refers to the optimistic claims made by brokers on the back of market revival. A rally in B group stocks is being seen as an indication of return of retail investors. Notwithstanding the fact that some of the B group stocks too are fundamentally sound, the rally is largely speculative. However, speculators are losing no time in convincing retail investors about the opportune time to invest. That blue chip stocks are not meant for small retail investors is long thriving fallacy in Indian markets. Yet investors continue to be drawn to false claims about 'get-rich-quick' potential of smaller stocks.

It is also untrue that retail investors are bound to make money whenever there is a strong momentum in broader markets. Financial Chronicle has published a study by Indian School of Business (ISB) vindicating this. As per the study, retail investors lost Rs 83.7 bn in the stock markets during January 2005 till June 2006. All this while the Sensex rose by as much as 61%! The number of investors who traded at least once during the 18 months was 2.46 m or 0.22% of the Indian population. Thus, 0.22% of the Indian population lost 0.77% of the total gross domestic savings during this period. Once again frequent churning of portfolios and speculative bets seem to have done the damage.

Buffett's analogy about buying goods when on sale applies effectively during such time. Investors should rather hunt for value instead of falling for the unwanted advice offered by commission hungry brokers. Again stocks' potential to create wealth over the long term has no negative correlation with their market capitalization. As long as the valuations offer some headroom for growth investors must buy or hold on to such stocks.

Last but not the least investors must ensure that their investments are backed by a thorough study of long term fundamentals. The Securities Exchange Board of India (SEBI) has yet to do enough to protect the rights of retail investors. Nevertheless that should not stop investors from exercising caution at their end. At least that will ensure that confidence of small investors in Indian stock markets is reinstated.

Do you buy into the get-rich-quick' potential of smaller stocks claimed by brokers? Share your comments with us or post your views on our Facebook page / Google+ page

01:30  Chart of the day
The adoption of Basle II norms required banks globally to recapitalize their balance sheets. This saw most banks approaching capital markets to raise Tier I and Tier II capital. Indian banks, both from the PSU and private sector have over the years equipped their capital adequacy ratios (CARs) to meet the Basel II threshold. As a result, most banks saw an improvement in CAR over the past 5 years. As data from Reserve Bank of India (RBI) Trends and Progress in Banking (2012) shows, banks globally, including those in the US and Europe, have CAR in excess of 12% in 2012.

Data source: RBI Trends and Progress in Banking 2012

The country's IPO (Initial Public Offering) market is about to heat up soon. India's largest telecom operator, Bharti Airtel, has announced the IPO for its tower arm Bharti Infratel. Expected to amount to Rs 40 bn, the issue is the largest to hit the markets in two years. But the question to ask is why does Bharti need to come out with an IPO at this time? The reason is simple. The incumbent operator needs funds for expanding and updating its network. The next question would be why did it not need funds before? Why now? The answer to this one is the government.

The government's policies on spectrum fee, spectrum charges, spectrum auction have all been targeted at one thing. To raise more money for the government itself. As a result the operator has had to resort to listing its tower arm for much needed funds. The parent company's funds would be used to pay the one time spectrum fees and fund the spectrum re-farming charges and auction money. But would the listing really help the operator? It is unlikely to help it in any way except for providing momentary relief. At least for a while it need not try and dig up more money for network expansion. The long term prospects of the company are still very much dependant on the government's policies. If the government continues with its humongous expectations of funds from the telecom sector, the need for funds by the operators would just keep growing. However if the government has learnt a lesson from the flop show of its recently held auction, then the telecom operators may see their fortunes reviving. Either ways it's not the listing that will decide the company's fortunes. But the government will.

India's defense firms may have lost out on investments of more than Rs 34 bn. According to a report by the Comptroller and Auditor General (CAG), foreign arms contractors have been allowed to flout a crucial government policy aimed at ramping up the domestic defense sector. The benefits of big arms deals are currently not flowing properly into India. The policy makes it compulsory for foreign vendors to invest at least 30% of every contract worth more than Rs 3 bn into the country. This is either through investments, transfer of technology and R&D. However, 5 contracts worth Rs 34 bn, signed between 2007 and 2011, brought in no value to the country. The offset policy, if implemented properly, is projected to generate commercial activity worth more than US$ 30 bn (Rs 1.65 trillion) in India from 2010-20. But, without a strong government monitoring mechanism these targets will just remain on paper. A proper system needs to be set in place.

When Group Chairman Mr Ratan Tata announced a relatively unknown Mr Cyrus Mistry as his successor a few eyebrows were raised. Not much of him was known either to the public or the financial community. And even now big questions remain as to how he will manage India's largest conglomerate with interest in varied sectors such as software, automobiles, steel, hotels and the like. Over the past many decades, under the venerable leadership of Mr Ratan Tata, the Group has enjoyed various successes. The best among them being TCS and followed by Tata Motors. But there have been worrying pockets too. Take Tata Steel for instance. Although the Indian operations are doing quite well, the ill timed acquisition of European steelmaker Corus has strained the balance sheet of the consolidated entity. Tata Communications suffers the ignominy of being in the telecom sector which is riddled with corruption and price wars. And Indian Hotels (with the famous brand name Taj) is struggling to maintain breakeven. All of which suggests that Mr Mistry has quite a lot of work on his hands if the overall performance of the Group has to go to the next level. The fact that most of these businesses are run almost independently may just harden the task for him. While it is almost impossible to completely step into Mr Tata's shoes, Mr Mistry would do better by establishing his own identity and run things a bit differently. What this will achieve remains to be seen.

China's benchmark equity index, Shanghai Composite, has been on a downward hill. It closed below the psychological mark of 2,000 points on Tuesday. This was the first time since January 2009 when the index closed below 2,000 points. And there are many reasons for this. For one, the Chinese economy is clearly showing signs of slowdown. The economy has slowed for the 7 straight quarters. Also, there are concerns that leadership transition may delay reforms. As such, many Chinese investors have shunned equities and moved their investments to gold, property and other avenues.

However, this is not as concerning as it sounds. Why? That's because the Chinese markets are segmented. The Shanghai market is largely closed for foreign investors. They can access only few shares in this market which are known as A Shares. Majority of the foreign investors take an exposure to China through Hong Kong listings. It is known as H share market. Thus, absence of foreign investors in the A share market does not give a true picture of the economic sentiments.

True, that corporate profitability drives the market. So, in that sense both the A and H share market should reflect the same trend which is not the case here. However, it is important to note that liquidity also plays an important role in driving markets. Since A share market is restrictive it is not a true gauge of China story. Hence, investors should not pay much heed to it.

Human beings have a tendency to delay prompt action unless pushed to the brink of a crisis. This pattern is so often seen among policymakers. This is the reason why 'Black Swan' author Nassim Taleb thinks the US fiscal cliff is a good thing from a long term perspective. You may recall that with the fiscal cliff, the Bush-era tax breaks and other benefits are set to expire. Simultaneously, automatic cuts to government spending are set to become effective. Taleb is of the opinion that the economy needs to be shaken up every once in a while. Such jolts tend to push out the complacency amongst policymakers and citizens, at large. He recalls the interesting analogy of forest fires. Did you now natural forest fires once in a while are actually good for the long term survival of forests? In fact, forestry experts have found that such fires tend to destroy vegetation that is the most susceptible to fire. This, in turn helps avert large-scale destructive fires. We completely agree with Mr Taleb's insights. But the question is-will US policymakers really let the fiscal cliff run its own correction? This, we really doubt.

Backed by strong gains in energy and banking stocks, the benchmark indices in Indian equity markets topped the pack of gainers in the Asian region today. The BSE Sensex was trading higher by around 134 points at the time of writing. Other major Asian markets closed higher today while Europe also opened on a positive note.

04:45  Today's Investing Mantra
"If you took our top fifteen decisions out, we'd have a pretty average record. It wasn't hyperactivity, but a hell of a lot of patience. You stuck to your principles and when opportunities came along, you pounced on them with vigor." - Charlie Munger

Click here to read our series on 'Lessons from Charlie Munger'
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1 Responses to "Yet another eye opener for retail investors"


Dec 2, 2012

In good old days when Harshad Mehta,and the like ruled the roost, many middle class onlookers were lured to the realm of Share Market. Here was success story,which was heady, drove many to enter the market. With no exposure to Market, this was purely speculative a behaviour. At that time not much of authentic information was available. People , I remember, depended upon a known broker whose credentials were unknown. Umpteen publications also disseminated information which had to be taken as gospel truth by the investing public.A number of Blade Runner companies were floated which looted the gullible public. The brokers would not entertain small time investors then. Those were the tumultous days when middle class was just entering the market and gladly lapped up whatever was offered.

Now the situation is different. Information is available on the net and from many unconnected source.
The people too have experienced the dynamics of the market and are aware of the pitfalls.

The middle class have a limited amount of money for investment after exhausting the investments u/s 80C.
As a rule group A shares are beyond reach for them.That is one reason why people tend to go in for B group shares. One can get a clear picture of the perspective from the investment pattern in the Rajiv Gandhi Investment Scheme unveiled during this F.Y. The days when investors were naive are over!

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