Charting the course - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Charting the course A  A  A

History, said Henry Ford, is more or less bunk.

And so we stand here looking at the charts of the BSE-30 Index and wondering what will happen next.

A few weeks ago, the Index was at 12,000.
On its way - said the technical chartists - to 9,000.
Well, it may have missed a few turns and misread the signs - the Index now stands at the 15,000 levels.
For today; for now.
The chartists may be right. The Index could head south and break through the 12,000 barrier and slip to 9,000.
Maybe. Maybe not.
There is nothing in the rule book that says share prices must fall in a straight line.

Festival season approaching. A better way to buy gold.
Click here to know more

We turned to our review of the fundamentals of a company. The things that tell us what businesses are worth, how much the businesses can earn, what are the various costs of the various raw materials, and what sort of selling prices a business can get for its products or services.

The fundamentals tell us that the companies are undervalued. Not all the companies are in the Index. But many companies are undervalued.

According to the fundamental analysis the share prices of these companies should be higher. Should be. Could be.

There is nothing in the rule book that says share prices go up in straight line.

Obsessed with the future, we turn to history.
Can the past be a guide for the future?

And there is only one other topic - like finance - that is regularly broadcast on TV stations. Where sound bytes are constantly bombarded which, ultimately, may not tell us much.
And that topic is the art of the weather forecast.

Predicting the direction of the stock markets is probably as difficult - and embarrassing - as predicting the weather for tomorrow in many parts of the world.

Sunny Florida
Florida is one state in the USA where forecasting weather patterns is a challenge. The state is less than 150 miles wide in most places. It has the Atlantic Ocean on its eastern coast and the Gulf of Mexico on the western coast.

While India has its monsoons, Florida has its hurricane season. Winds are formed somewhere between the continents of Africa and South America. These winds move in a north-westerly direction towards Florida. As they pass over the warm ocean waters, they gain in strength and can form a Tropical Storm (wind speeds of 39 to 73 miles per hour). These storms can turn nasty and become hurricanes with wind speeds of 74 miles per hour (a category 1 hurricane) to wind speeds of 156 miles per hour (a category 5 hurricane).

A US$ 65 billion Opportunity.
Here's How You Can Benefit From It. Read On....

The good thing about hurricanes is that you know they are coming.

Earthquakes just happen - you can't really do much about it. You can plan for an evacuation long before a hurricane comes your way.

An earthquake? Just stay in a safe place and pray.

So tropical storm Hanna is on its way to Florida. The National Hurricane Center has projected a path of where the storm is likely to make landfall. The colour of the hurricane "dot" indicates the speed of the winds.

Tropical Storm Five Day Forecast Map

By the looks of this map, Hanna will make landfall somewhere in South Carolina. Then turn north east towards New York before it heads over to Canada and back into the cooler waters near the North Pole where it will fade.

This map was prepared at 11 pm USA time on September 3.

What did the projected path of Hanna look like before this update? On September 2nd it was a different story.

Oops, it was coming straight for Florida with a whack right in the centre for the Sunshine State. But the forces of nature have given the weather forecasters another sleepless night. Another embarrassing moment. Hanna's course has drifted a bit to the right; outward and upward - towards the South Carolina coast.

Changing forces
In 24 hours things change. Weather patterns, winds, and sea temperatures move around a lot.

Like the flows of money into the stock market. Sometimes the FIIs are buying; sometimes they sell. One day the Dow will surge 150 points because investors are confident about the future. The next day it will lose those 150 points - and more. Trying to make money from the buying and selling of shares on a daily basis is like weather forecasting. I am sure there are people who get it right. Some people. Most, I presume, get it wrong.

There are so many factors that change the "daily outlook". Global cues. Local politics. A new RBI governor. A new SEBI chairman. Some events will change the direction of the stock markets over the long run. Some will not really matter - but people will act as if those inconsequential things do matter!

Where will Hanna be in 24 hours - we don't know until it gets there, to be honest. It could be anywhere. Take a look at this chart which shows what storms like Hanna have done in the past. This chart looks back in history and plots the path taken by different hurricanes and storms which originated in the same area as Hanna.

Tropical Storm Historical Tracking Map

Some storms squeezed through the narrow gap between Florida and Cuba and went over to the western coast of Florida in the Gulf of Mexico.
Some storms went right out to sea and did no harm.
Notably - not one of these storms made landfall in South Carolina.
But Hanna is forecasted to make land in South Carolina.

When the Index declined from 12,500 in May 2006 to 9,000 in June 2006 - the chartists said it would head south to 6,000. It did not go anywhere near there. When the Index declined from 21,000 in January 2008 to 12,000 in July 2008 the chartists said that 9,000 was the next level. It has not gone there - as yet.

It may never get to 9,000 - so should you buy now or wait?

Hanna may or may not make it to South Carolina.

But everyone says it will get there. History has shown that no hurricane that had an origination like Hanna has made it to South Carolina so far.
But history is bunkum, said Henry Ford.

Experience is a better teacher though. We know hurricanes can cause severe damage.
We know they may head in our direction.
We should be prepared.
The Index may not slip further - it may just bounce along for a while going nowhere.
Or the Index may surge upward again.
Or head to the 9,000 level.

Plan your investment strategy well. And keep your eyes on the lesson that Hanna and other storms have taught us: Be prepared to duck the strong winds of a direct hit. But be equally prepared to surf the waves that are caused by a rising tide of a hurricane that makes landfall somewhere else.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.

Other Views on News:

» Realty: Demand woes
In the previous article, we had discussed the impact of rising interest rates and cost of capital on the fortunes of realty companies. In this article, we will discuss how the sluggish demand has led to the outlook for the real estate developers to get bleaker. Read on...

» All you need to know about ETFs
Thanks to the launch of a number of gold ETFs (exchange traded funds) in the recent past, ETFs as investment avenues have gained a fair bit of popularity as well. Increasingly, ETFs are finding themselves on the investor's 'to invest' list. Read on...

Read our Privacy Policy and Terms Of Use.
Get The Honest Truth directly
in your mail box.
Just enter your e-mail address» 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Charting the course". Click here!