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Sunday, March 31, 2013

Notes from the USA – a guest post

Many investors – specially new entrants to the stock market – get caught up in the exciting but vicious cycle of daily market movements, quarterly results, lure of quick profits, and chasing mythical small and mid-cap multibaggers. They look at a few trees, and think they know all about forests.

For successful wealth-building over the long-term, investors not only need knowledge, patience and discipline, they also need to be aware of the macro trends that are likely to shape the growth of global economies and stock markets. In this month’s guest post, KKP – a successful long-term investor – points out some macro trends that many are aware of but choose to ignore in their rush for short-term profits.

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Build a Portfolio to Capture the Rise of Asia

Investors all over the world are getting tons of unsolicited and solicited input (a.k.a advice) to get in and out of positions. It is a self-fulfilling prophecy that we are dealing with today, since the more people trade, the more it proves to be the right thing to do. The few long-term investors that are left who like to observe ocean-like macro waves of the market, economic weather patterns of planet earth, and review management styles to invest, are starting to question themselves.

Now recall Y2K…..Did we all not get sucked into the markets thinking that investments in information and related technologies are all going to the sky? We moved in with the herd, and what happened then? We all got crushed with this thinking that trees rise to the sky and markets are going to Dow 36000 and Sensex 25000 (at that time in year 2000). Yet, it did not happen. Once everyone is on one side of the thought process, markets prove the ‘majority’ wrong.

So, are we wrong about the short-term trading mentality that has set into most of us? With computers taking over to do the trading for us, are we setting ourselves up for the doom and gloom that can happen with one ‘error trade’, or a group of computers thinking alike and giving out massive buy signals or sell signals?

Looking at the macro trends for a moment, which is clearly the camp I belong to, I see the following unfolding (source Boston Consulting Group). If 3500 more “billion dollar” companies are coming up in 2020, then think where mid-cap mutual funds will trade by that time, even with all of the short-term selling/trading/buying. Earnings (a.k.a making money) always win when it comes to any business environment, and stock markets are primarily driven by EPS growth.

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With 670 Mn working class people under age 30 entering the job market, this is going to give a tremendous boost to productivity, consumption, technology demand, and therefore GDP. These are the people that will power the companies forward and make them the billion dollar enterprises within the next 5-7 years (2020 is NOT that far away). Imagine everything that today’s 30 year old lower, lower-middle, middle and upper-middle income earner buys - from food, technology, mobility, housing, consumables, and capital goods. If the world GDP can sustain, and give this group of working class folks a job, then we know they will need all of the above to operate their lives. And, that is just going to happen……Therefore, here comes Sensex 45000 as predicted by some. It might take us until 2021-2025 but even those dates are not too far away from today.

Investing in ‘this’ macro trend is where the money will be made by patient investors. Sure, when people see stocks plummeting, it is tough not to feel discouraged and bearish, but that is the right time to buy with a view of 2020. Suzlon, BHEL, HDIL, Jain Irrign, RelCap, Opto Circ, DLF and many others have been crushed from their 2008 highs, but we should be careful about what we buy when the overall market PE is hanging above 20, and there is a bull-mania in progress. The key trends identified by Boston Consulting Group will unfold for India, China, Brazil, Russia, Africa, and some of the Frontier Markets.

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I am sure none of my readers were exempt from getting sucked into the bull-mania in some way, shape or form, but those are life-long learning lessons from which we become better investors. So, right now, keep your powder dry, do not rush out to sell, and hold on for the bumpy ride. If and when the market corrects further, pounce on some of the good mid-cap buys and hold on for a while. Buy in SIP mode, and sell some to feel good when it doubles, but then hold on the majority for a long time.

That is what I am going to do, and I am definitely putting my money where my mouth is and waiting for the next bull run to begin. Pre-election years are good years for investors, and this year might be no different, unless we get hit with a macro event from EU or NA (North America). Stay focussed and keep your eye on the 2020 ball…

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KKP (Kiran Patel) is a long time investor in the US, investing in US, Indian and Chinese markets for the last 25 years. Investing is a passion, and most recently he has ventured into real estate in the US and also a bit in India. Running user groups, teaching kids at local high school, moderating a group in the US and running Investment Clubs are his current hobbies. He also works full time for a Fortune 100 corporation.

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