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QE3: Time to revisit your stock strategy

Sep 14, 2012

Will he, won't he? That was the million dollar question on everybody's mind. The question has now been answered and quite convincingly at that. The US Fed's third round of quantitative easing, popularly known as QE3, is finally out of the bag. And from the looks of it, is all set to leave its previous two avatars far behind. Infact, it will be fair to say that the current QE does not have any predefined limit. It will continue until its objectives, most importantly an improvement in labour market, are met.

Thus, besides the news of rise in diesel prices, this was the news that has got the Indian stock markets excited. The last time we checked, the BSE-Sensex was trading higher by a whopping 380 points. And hardly any of its constituents were trading in the red.

This euphoria is certainly not without reason. The US Fed has effectively opened up the cash spigot and would inject billions of dollar bills into its economy over the next few months. Needless to say, some of this money would find its way into India, thus boosting its stocks.

However, investors would do well to check their enthusiasm. Just as a rising tide lifts all boats so will a flush of liquidity try to lift stocks of all kinds. In other words, chances are that not just the fundamentally good stocks will go up. But even companies with bad business models and leveraged balance sheets will tend to find a lot of takers. This is not all. There will be a tendency for even good quality stocks to run way ahead of its fundamentals.

Thus, now more than any time before, utmost caution has to be exercised while investing in stocks. The virtues of a strong track record, existence of some form of competitive advantage and good quality management, need to be present in every stock that you are considering for an investment. And not just that, one will have to ensure that the stock is available at attractive enough valuations.

Stick to these principles and you would sail through the current period of turmoil without any significant damage we believe. However, stray from them and the results may not be very good. Do remember that stock markets are not the place to make a quick buck. One's aim at all times has to be to invest in fundamentally strong companies at attractive prices and stay invested for the long term.

A word or two for gold as well. With QE3 now out in the open, gold is also likely to go higher in the medium term as it is the only safe currency round and unlike paper currencies, cannot be printed at will. Thus, the more printing is done, the higher the value of gold goes. In view of this, it will not be a bad idea to have a part of one's portfolio say 10%-15% invested in the yellow metal as well. We would however advise against investors going overboard with it.

Rahul Shah

Rahul Shah (Research Analyst), Managing Editor, Microcap Millionaires has led the team from the front in developing some of our most stringent and rewarding research processes. As per his own admission, the turning point in Rahul's life as a financial analyst came a few years back when he got introduced to the works of Warren Buffett and Charlie Munger. From Buffett, he understood the value of investing in good quality business with powerful moats and strong management teams. Charlie Munger on the other hand inspired him to be a lifelong learner and use mental models in order to arrive at the crux of matters across most disciplines. Rahul firmly believes that in order to be successful at investing, you have to do the big things right and possess a great temperament and a contrarian streak.

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