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How to Navigate through Uncertainty and Discover Impenetrable Moats

Dec 16, 2015

In this issue:
» Is the oil price trend set for a reversal?
» A slowdown in exports jeopardizes economic recovery
» ...and more!
00.00
Ankit Shah, Research analyst

Today is a big day. If there is one thing the entire financial world is waiting for, it is the US Federal Reserve's interest rate hike decision. Much has been said, debated, and speculated on how the US interest rate hike could impact the global economy and emerging markets. Very soon, we will know the outcome of the Fed meeting and we will get to see how the world markets react.

Until then, let me share one insight I had while I was participating in a game during an experiential learning and human behaviour workshop in Pune last weekend.

We were 30 participants. The instructor asked us to divide into three groups of ten each.

  • I am going to place some objects in the room. Each team has to pick up the objects and drop them in the basket. The team that baskets the maximum objects, wins. You will have only five minutes to do the task.

    But here are three important conditions that must be fulfilled. First, each team will form a human train to move around in the room. Second, all team members will be blind-folded, except the last person in the human train. Third, no verbal communication would be allowed once each team enters the room.

    You have five minutes to discuss with your team members what strategy you will follow. Your time starts now...

We rushed out of the room. Since all team members except the last person in the human train were going to be blind-folded, it meant that we had to find to way to create a non-verbal communication chain through which the last person's message could reach the first person in the team. The first person would then lead the team in the direction of the goal.

So, we created a set of five non-verbal signals to build the communication chain. By tapping the person in front of us in different ways, we devised a way to communicate 'stop', 'walk', 'take left', 'take right', and 'bend to lift object'.

Five minutes later, we were asked to put on the blindfolds, except the last person. We were then guided back into the room. Then the game started...

For the next five minutes, we found ourselves moving right and left...walking around the room...stopping at times. While I followed the signals I received from people behind me, I was waiting to receive the signal for 'bend to lift object'. Without that critical signal, how were we to complete the task and win the game?

The game came to an end and we took off our blind-folds. We were not at all surprised that our team had not been able to basket even a single object.

Why? We realised that we had made a wrong presumption. We had taken for granted that the objects would be placed on the floor of the room for us to bend down and pick up. The game facilitators trapped us by placing the objects at a height.

We hadn't set any signal for such a situation. So, while the last person tried to communicate that through some gestures and movements, the message was not passed ahead correctly.

What was my biggest learning?

From this experience, I learned that we had developed a strategy based on a specific scenario. We thought that the actual game setting would be exactly the way we had imagined it. When something unexpected happened, we were clueless about how to deal with it.

In short, I felt that we failed because our strategy was inept at dealing with an uncertain scenario.

In my view, the game was quite analogous to the stock markets. Investors enter the markets with a certain story, thesis, or a game plan.

For instance, many investors jumped onto the stock market bandwagon when the Modi-led BJP came to power at the Centre in May 2014. They strongly believed Modi would replicate the success of the Gujarat development model on a pan-India level. But several global and domestic developments adversely impacted India's economic recovery. And investors who entered the bull rally at high valuation levels have seen their investments dented.

Winners in stock investing are those who come well-prepared to deal intelligently with uncertain situations.

What is the best approach to deal with uncertainty in the stock markets? My answer is value Investing , with an emphasis on economic moats and margins of safety. The process of analyzing financial statements, arriving at an intrinsic value and buying the stock if there is a margin of safety between the current price and intrinsic value, could be the best insurance against the vagaries of the stock markets.

What, according to you, is the best approach to deal with uncertainty in the stock markets? Let us know your comments or share your views in the Equitymaster Club.


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------------------------------

02:25 Chart of the day

It is not just the corporate earnings! The story of economic recovery is not getting any support from the export data. As the chart of the day shows, exports have shown a consistent decline every month this year. In the month of November 2015, at 24.4% YoY, the decline was the steepest in past few years. Currency devaluations in export destinations and lackluster global demand continue to drag economic recovery. Considering that exports now account for around a fourth of GDP, this is indeed a matter of concern.

The only relief in this regard is a similar trend in imports that has kept fiscal deficit in check. But one must note that lower import bill has a lot to do with decline in oil prices. If oil prices go up, policy makers will face a tough time.

As per an article in Firstpost, currently, 50% of India's export goods focus only on Asian economies. This suggests how vulnerable the export based economy is and highlights the need for further diversification. To address that, the Government needs to clear structural bottlenecks in the Indian economy.

Slowdown in Exports Drags Global Recovery

03.45

Oil price trend has taken by surprise one and all. The ones, who predicted high oil prices based on oil being a non renewable source, and the resultant energy crisis, have been silenced. Oil is already below the US$ 40 per barrel mark. The new and unprecedented lows have even raised speculations that oil may touch US$ 20 per barrel.

With multiple factors having a bearing on crude oil price, prediction is a game we would like to stay away from. However, one does get tempted to listen to such talks when it comes from none other than Abdalla Salem El-Badri, the secretary general of OPEC - the cartel responsible for slide in oil price. As a witness to six oil cycles, Mr. Badri suggests that the slide will not continue.

Given the history, OPEC members' words can hardly be taken at face value. However, keeping all speculations aside, logic suggests that the trend is unlikely to sustain. While high oil supply has already impacted non OPEC production, it is hurting OPEC economies as well (oil being their major source of revenue). As per an article in Firstpost, the fiscal deficit in Saudi Arabia, one of the most influential OPEC members, has touched 20% of the GDP. Political risks surrounding oil producing economies do not support a lower price trend either. Last but not the least, most of the oil exploration is unviable at current prices. The lower oil price does not impact the demand in the same way. Hence, the laws of economics and demand supply dynamics suggest that sooner or later, oil prices will rebound.

04.45

At the time of writing, the Indian equity markets were trading on a firm note with the Sensex up by about 184 points. Stocks from the mid and small cap segments were also trading in the green, up by about 0.2% and 0.3% respectively. While consumer durables and oil and gas stocks were favoured, those belonging to the power and telecom spaces were least in demand.

04.51 Today's investing Mantra

"Price is what you pay. Value is what you get." - Warren Buffett

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

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Equitymaster requests your view! Post a comment on "How to Navigate through Uncertainty and Discover Impenetrable Moats". Click here!

2 Responses to "How to Navigate through Uncertainty and Discover Impenetrable Moats"

T Shridhara Shetty

Dec 17, 2015

Best time to invest is when most of the investors are confused and many are fearful. You buy shares which are benefited in the prevailing economic, business cycle(it can be low interest rate, and or low commodity price).

Like 

S R Ravichandran

Dec 16, 2015

1. Read reports of equitymaster
2. Select scrips with remarks BUY
3. Buy when share price is low
4. Have patience if share price goes down
5. Fix your target price
6. Sell when target price is reached
7. Re-enter following the same principle

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Equitymaster requests your view! Post a comment on "How to Navigate through Uncertainty and Discover Impenetrable Moats". Click here!
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