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Thursday, November 17, 2011

Spreading some good cheer in a gloom and doom market

You haven’t misread the title. I do intend to spread some good cheer on a day when the Nifty fell by nearly 100 points and the Sensex tanked by more than 300 points. Many large-cap stocks are sliding, which means the correction in the indices are not yet over. 

Many readers may think – specially after reading my recent posts and comments - that I am a perennial bear who advises caution during bull phases and staying away during bear phases. They won’t be too far off the mark in their assessment. Over the past five years, I have been a net seller in the markets.

But that doesn’t make me a bear – more a realist. After 25 years of investing in the stock market, I have learned from experience that a bullish stance causes more losses than a bearish stance. Warren Buffett’s two investment rules should always be remembered:

  • Rule No. 1: Never lose money
  • Rule No. 2: Never forget Rule No. 1

The trick to long-term wealth building is not to try and make a lot of money in a short time, but to ensure that your losses are taken quickly and kept to a minimum (through appropriate use of stop-loss levels) and profits should be allowed to run.

OK, enough pontification for today. Now, to the subject matter of today’s post. In a recent article in MoneyWeek,  author Cris Sholto Heaton made the following comments that may sound like music to the ears of small investors:

  • India's inflation is too high. That's been caused by growth running too rapidly for the amount of spare capacity in the economy. So if you want to bring prices under control, you're going to have to curb growth for a bit.
  • Ultimately, if EM governments are willing to act to slow their growth at this stage of the cycle, it's healthier for their economies in the long run.
  • This is the normal cycle. Growth peaks amid rising inflation, slows as interest rates rise, and then can begin to pick up again as the central bank loosens policy.
  • EM policymakers are likely to be able to declare inflation beaten for this cycle over the next three months or so. Most can then begin loosening policy. And as long as Europe avoids the very worst outcomes (a bad outcome is a foregone conclusion at this stage), EM growth is likely to pick up again within the year.
  • It's been a tough five years for EMs. We've seen the global financial crisis and the eurozone crisis, both of which have encouraged investors to flee to safer assets. Yet over this period, the MSCI Asia ex-Japan is still handily ahead of the S&P 500.
  • EMs wobble more when inflation gets high and interest rates start to bite. And they certainly sell off harder during a panic. That's what we've seen in 2011.
  • But the other side of this is that they perform much better when growth is strong and they're likely to do better over the course of the economic cycle. So while the news is unlikely to get any cheerier in the next few months, it should be setting EM investors up for a much better 2012-2013.

I thoroughly endorse the authors views.

1 comment:

Jasi said...

Super words! Let us all buy ourselves a box of sweets (or any sugar free alternative) and eat to our heart's content :)
On a serious note, thanks for sharing this Sir!