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Tuesday, October 11, 2011

Why long-term investors should look at the big picture

With the Sensex and Nifty indices stuck within trading ranges for more than a month, small investors are in a quandary. What to do next? Two days of sharp bounce from a bottom, and the urge to jump in and buy is almost uncontrollable. Three days of correction from a resistance level, and every one is worried about a 2008-like crash.

Getting worried and disturbed about short-term index gyrations only increases your blood pressure and clouds your decision making. Times like these are true tests of your investment mettle. In life, unplanned action is some times better than planned inaction. But, for building wealth through successful investing in the stock market, you should practice the discipline of planned inaction.

The inaction refers only to buying and selling of stocks. Reading annual reports, books and preparing buy/sell lists are part of the daily ritual of  long-term investors. What then is the big picture referred to in the headline? I’m not an economist, but here is my take on what is happening around us.

Thanks to the Internet and FIIs, our stock market is fully integrated with global markets. All the nonsense about decoupling because of our strong domestic market is just that – nonsense. So, keep an eye on what is happening in global markets. To keep readers updated, I regularly post about stock indices in the US, Europe and Asia. If you are not reading those posts, ask yourself: Why not?

Europe is in quite a mess due to a unified currency that is not helping profligate nations - like Greece, Italy, Spain, Portugal - that are deep in debt and have very little capabilities (or even intentions) of repaying that debt. They neither can print their own currencies, nor can they devalue their currencies. The only options are that a financially stronger economy like Germany, and perhaps the IMF, will bail them out to stop them from defaulting. But that is postponing the problem – not solving it.

Many Indian companies – particularly IT services companies – switched their export focus from the USA to Europe post the dot.com crash in 2001. Some have built up significant businesses in Europe, including acquisition of European companies. The economic mess in the Eurozone is going to affect their bottom lines for the next few years.

China is a wild card. For years, they have been far ahead of India in building world-class infrastructure and an export-led high-growth economy. But with global economies slowing down, China is desperately trying to re-focus on their domestic market. There is strong suspicion about their reported growth figures, and that is reflected in their sliding stock market. If they start cutting back on their commodity purchases, which has been sustaining the global commodities market and shipping businesses, a big crash in global stock markets may follow.

The USA is not on the verge of collapse – like they were three years back. The situation is grim, but not hopeless. There will be a lot of pain before their economy eventually turns around. But thanks to two rounds of quantitative easing, and significant belt-tightening, US corporations are sitting on a lot of cash. They haven’t curtailed spending on existing IT services, and there are signs that they may be spending more on new services. The strengthening dollar will add to the bottom lines of IT services and export companies.

Our over-dependence on oil imports will further add to our balance of payments problem. The government had introduced several populist measures to help the rural poor. Subsidies on diesel, kerosene, fertilisers have added to the fiscal deficit. Rampant corruption and scams, as well as high inflation are keeping FIIs away. Their inflows partly help in reducing the deficit.

However, our GDP continues to grow. Not at 8-9% but more like 6-7%, which is much better than almost every one else except China. That pretty much rules out a 2008-like crash in the Indian stock market. But it could take a while before we see new highs on the Sensex and Nifty.

The sensible approach will be to cut out the daily noise emanating from the business TV channels, and concentrate on companies that have capable and trustworthy managements, and have records of several years of good performances through bull and bear cycles. If they produce goods or services that find buyers regardless of the state of the economy, so much the better. Companies that sell toothpaste, cigarettes, soaps and detergents, biscuits, life-saving drugs, drugs for chronic diseases, tractors, power tillers, tea and coffee will continue to do well.

Just remember that the stocks that don’t fall much during a down trend, don’t rise much during the subsequent up trend. The ones that fall more, tend to rise more. Of course, this ‘rule’ works only for well-managed companies.

9 comments:

Piyush said...

Sir,
Great views expressed in a truly simplistic manner. Just to remind you of me ( Jubilant foodworks view seeker--through email).

Let not talk about JFWL as i hold similar views that their Pizzas & Pastas are not the best we have ever tasted :)

Let here talk about a solution to China's problem. It has to do away with their CHILD policy first. Had they had a policy similar to India, there demand would have not gone down for ages. Even if they change that, it would take a lot of time to reflect :)

Coming to your earlier posts on Baltic Dry Index. Now whats baffling me is if BDI is to be taken as a lead indicator of things to come. Then my god, it been signaling a happy picture for the indexes as well as economy. Its rallied closed to 80%+ in last 9-10 months(from its lows). Does BDI become redundant in the current context ( crisis situation in Europe).

Even if Europe was to devalue its currency, other smaller countries/economies would be hurt.

Subhankar said...

Thanks for your comments, Piyush.

Interesting point about China's one-child policy!

The BDI may be giving a hint that a big 2008-like crash in global stock markets may not happen.

VIPAN said...

Hi everybody,

Problem is that people so much focused on bad news and scare that they are not able to see big picture... To me we are already at 2008 level at broader level means bse 500 stocks. If you analyse stocks their price levels is already almost at 2009 march low just above 10-15% in some cases even lower than that .... why not buy some of these well managed companies with very low debt will reward handsomely return of 20- 30%in short span of time.... My view is that market will surprise everybody and move to atleast to 5250 level and small cap and mid cap stock will rally more....

Salil said...

Hi Subhankar,

Do you have any views on Jindal Poly films. Stock has been beaten down a lot. Will it be a good investment for long term?

Thanks
Salil

Subhankar said...

@VIPAN: Thanks for your comments. I endorse your view about studying individual stocks and not worry too much about index levels.

Whether you get quick returns in beaten down stocks is debatable. Chances of success are greater if you take longer-term (2-3 years) view.

@Salil: As a long-term investor, I look for companies that can provide steady returns over many years - like FMCG and Pharma companies.

I have very little interest in companies that provide spectacular returns in a short span of time, only to crash and burn. Jindal Polyfilms falls in the latter category.

Piyush said...

Why is the hole 'deepening'?

I am of the same view that know one can time the markets. I would love to look up the contract notes of these analyst who appear on TV and give big calls.
Anyways coming back to some of the news recently:
a) China has reported a lower GDP OF 9.1
B) There have already been a series of downgrades and its expected to continue with every billion dollar of rising debt in Europe.
c) European countries asking for emerging economies to chip in, in order to save the EU--this is a pretty bad signal. Can't bigger boys save Spain, Italy,France etc.???
Domestic factors
a) Indian Govt is getting sleepless nights fighting many a battles---cash for votes, Anna crusade, Inflation etc..
B) Although NSE India VIX has been cooling off lately, the American version of it CBOE VIX has moved up sharply. I think it will be really interesting tracking Indian VIX now. If it were to cool off another 5-7%, a big upmove could be on cards ( selling is advisable if this were to come true).

Would like to invite Subhankar Da to express his views....

Subhankar said...

The 'hole' was already deep, Piyush. It was superficially covered up with lots of leaves and branches - otherwise known as QE1 and QE2.

Now it is dawning on central bankers that they really need earth and rocks to cover up the big hole. So they need to dig another hole - also known as severe austerity measures, which is antithetical to an economic recovery.

I don't expect a big up move any time soon. If there is one, it will be a selling opportunity.

essentialassociate said...

I think that apart from a brilliant article about the bigger picture, the key take from the post is the last para.
Since you are a long term investor, I would request you to give your views on Noida Toll Bridge Company. I have done my own analysis at

http://essentialassociate.wordpress.com/2011/09/27/noida-toll-bridge-value-buy/

and would like to here about company's prospect as a good long term investment

Subhankar said...

Excellent analysis of Noida Toll Bridge, Dev. Enjoyed reading it.

The last time I was in the neighbourhood, which was three years ago when petrol prices were not so high, I avoided taking the toll bridge and crossed the river using a toll-free bridge. Most Indian drivers may prefer to avoid paying a toll if a 'free' alternative is available - which probably explains why the bridge is carrying only 50% of its capacity, and the stock is trading at a discount.