Last week i saw following comments from Mark Faber (allegedly called investment guru))on moneycontrol . He is expecting a 30-40% drop in Indian equities from current levels
"According to Investment Guru, Marc Faber, the emerging markets may get oversold in the next six months and then see a rally. New highs are pretty much out of question, he told CNBC-TV18. Some EMs can still drop 30-40% from the current levels, he added.
Precious metals are still relatively attractive, Faber said. The Sensex may test 14,000 before slipping to 12,000 levels he said "
(http://www.moneycontrol.com/india/news/fii-view/sensex-
may-test-14k-then-slip-to-12k-marc-faber/14/24/327434)
I want to share some of his previous comments here .
On June 13, 2006 he gave a sell recommendation on Indian equities and expected a 30% fall from that levels which never happened on the contrary equities gone up by more than 50% in that year " http://www.ameinfo.com/88675.html "
On march 15, 2007 he came with another sell recommendation on Indian as well as Chinese equities and in that year Indian equities were gone up over 50% and Chinese equities were up more than 100% " http://www.ameinfo.com/113715.html "
He gave 5000-6000 target for Sensex in 2006 and 9000 in 2007 and Sensex has beaten his predictions with a margin of over 100% in both cases . I cant understand the wisdom calling a person who is giving such a poor predictions a investment guru , and publishing his comments in headlines.
One thing he consistently advices was to invest in gold . Gold as a asset class historically given least returns. From $850 per ounce in 80's it has fallen to $300 in 2000 . It rallied from then to above $900 at present . If you add inflation to this from last 30 years gold in fact has given -ve returns.
RK
Sunday, 24 February 2008
Wednesday, 20 February 2008
Warren Buffett Quotes
The first rule is not to lose. The second rule is not to forget the first rule.
When you combine ignorance with leverage you get some pretty interesting results.
The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.
You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
Diversification may preserve wealth, but concentration builds wealth.
With each investment you make, you should have the courage and the conviction to place at least ten per cent of your net worth in that stock.
John Maynard Keynes essentially said, don't try and figure out what the market is doing. Figure out a business you understand, and concentrate.If the business does well, the stock eventually follows.
Full-time professionals in other fields, let's say dentists, bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers.
Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.
Many corporate managers deplore governmental allocation of the taxpayer's dollar but embrace enthusiastically their own allocation of the shareholder's dollar [to charities of their own choosing]. We've yet to find a CEO who believes he should personally fund the charities favored by his shareholders. Why, then should they foot the bill for his picks?
The professors who taught Efficient Market Theory said that someone throwing darts at the stock tables could select stock portfolio having prospects just as good as one selected by the brightest, most hard-working securities analyst. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient.
A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons.
Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
When you combine ignorance with leverage you get some pretty interesting results.
The market, like the Lord, helps those who help themselves. But, unlike the Lord, the market does not forgive those who know not what they do.
You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
For some reason people take their cues from price action rather than from values. Price is what you pay. Value is what you get.
Diversification may preserve wealth, but concentration builds wealth.
With each investment you make, you should have the courage and the conviction to place at least ten per cent of your net worth in that stock.
John Maynard Keynes essentially said, don't try and figure out what the market is doing. Figure out a business you understand, and concentrate.If the business does well, the stock eventually follows.
Full-time professionals in other fields, let's say dentists, bring a lot to the layman. But in aggregate, people get nothing for their money from professional money managers.
Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.
Many corporate managers deplore governmental allocation of the taxpayer's dollar but embrace enthusiastically their own allocation of the shareholder's dollar [to charities of their own choosing]. We've yet to find a CEO who believes he should personally fund the charities favored by his shareholders. Why, then should they foot the bill for his picks?
The professors who taught Efficient Market Theory said that someone throwing darts at the stock tables could select stock portfolio having prospects just as good as one selected by the brightest, most hard-working securities analyst. Observing correctly that the market was frequently efficient, they went on to conclude incorrectly that it was always efficient.
A pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons.
Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Tuesday, 12 February 2008
Be fearful when others are greedy
...and Be greedy when others are fearful.
This is what world's wisest investor warren buffett say about investing.People who are extremly greedy one month before have become over cautious and fearful now a days and taking their money out of stock market . Now almost all the analysts are coming out with crazy predictions upto what extent sensex can fall. Yesterday in CNBC first global Shankar Sharma predicting sensex would go back to 4 digits(http://www.moneycontrol.com/india/news/market-outlook/sensex-may-fall-another-20-by-yr-end-first-global/01/56/325643).I dont know what the analysis he has done but historically sensex has never traded below 13PE even in bear markets.If we can predict 975-1000 EPS for sensex for 09 . Even in bear market situations we may not go below 14000.
Because of these kind of opinions which didn't hold any rationality all the investors are going into panic selling. In the last 3 weeks whatever happend whether it is up or down doesn't really matter as the volumes are quite low in these days, and market may take time to pickup volumes and settle and start its journey.
At that time again same analyst will come and tell you to buy shares at 20K levels.So Beware of the analysts.
As all the analysts are predicting the market would fall deeply , we can safely assume that it is right to buy stocks.
RK
This is what world's wisest investor warren buffett say about investing.People who are extremly greedy one month before have become over cautious and fearful now a days and taking their money out of stock market . Now almost all the analysts are coming out with crazy predictions upto what extent sensex can fall. Yesterday in CNBC first global Shankar Sharma predicting sensex would go back to 4 digits(http://www.moneycontrol.com/india/news/market-outlook/sensex-may-fall-another-20-by-yr-end-first-global/01/56/325643).I dont know what the analysis he has done but historically sensex has never traded below 13PE even in bear markets.If we can predict 975-1000 EPS for sensex for 09 . Even in bear market situations we may not go below 14000.
Because of these kind of opinions which didn't hold any rationality all the investors are going into panic selling. In the last 3 weeks whatever happend whether it is up or down doesn't really matter as the volumes are quite low in these days, and market may take time to pickup volumes and settle and start its journey.
At that time again same analyst will come and tell you to buy shares at 20K levels.So Beware of the analysts.
As all the analysts are predicting the market would fall deeply , we can safely assume that it is right to buy stocks.
RK
Sunday, 10 February 2008
Growth Vs Value Investing
Growth and value are two fundamental approaches in equity investing. Investing in companies whose potential for growth in sales and earnings are better compared to peers or sectors generally called growth investing.
Growth companies usually pay little or no dividends and re-invest their profits in their business for further expansion .These companies generally have high Price to earnings ratios and price to book ratios.Generally growth companies will have very less assets compared to the price of the stock. Companies like RCOM ,Educom,pantaloon etc will come into this category.
In contrast Value stocks are generally fallen out of favour in the market place and are considered bargain-priced compared with book value, replacement value, or liquidation value. Typically, value stocks are priced much lower than stocks of similar companies in the same industry. This lower price may reflect investor reaction to recent company problems, such as disappointing earnings, negative publicity, or legal problems, all of which may raise doubts about the companies’ long-term prospects. These stocks will have relatively low price-to-earnings and price-to-book ratios. These companies generally have huge assets like real estate , inventories,subsidaries etc.Companies like MTNL,Aravind Mills,Hindustan motors etc will come in to this category
Which strategy — growth or value — is likely to have higher return potential over the long term? We cann't conclude any thing but generally growth stocks will have high volatility compared to value stocks and potential to give high returns . In value stocks we can get good returns in some kind of cyclical business like commodities etc .
RK
Growth companies usually pay little or no dividends and re-invest their profits in their business for further expansion .These companies generally have high Price to earnings ratios and price to book ratios.Generally growth companies will have very less assets compared to the price of the stock. Companies like RCOM ,Educom,pantaloon etc will come into this category.
In contrast Value stocks are generally fallen out of favour in the market place and are considered bargain-priced compared with book value, replacement value, or liquidation value. Typically, value stocks are priced much lower than stocks of similar companies in the same industry. This lower price may reflect investor reaction to recent company problems, such as disappointing earnings, negative publicity, or legal problems, all of which may raise doubts about the companies’ long-term prospects. These stocks will have relatively low price-to-earnings and price-to-book ratios. These companies generally have huge assets like real estate , inventories,subsidaries etc.Companies like MTNL,Aravind Mills,Hindustan motors etc will come in to this category
Which strategy — growth or value — is likely to have higher return potential over the long term? We cann't conclude any thing but generally growth stocks will have high volatility compared to value stocks and potential to give high returns . In value stocks we can get good returns in some kind of cyclical business like commodities etc .
RK
Why we should invest in equity market?
Equity is the only investment which gives inflation adjusted tax free high returns over a long period.
For example a person who invests 10000 today in stock market will have 67000 in 20 years assuming a 10% average annual return, where as the same investment in bonds at 6% a year will have about 32000 ,if you consider a 4% average annual inflation he will have less than 15000.That is the irony of so-called conservative investment strategy.
If you consider indian equity returns. Key indices Sensex and nifty had given over 17% annual returns over a period of 20 years (not to mention the 40% annual returns in last 5 years), where as you might have got a maximum of 9% taxable return in fixed deposites.If you consider a inflation of 4-6% people who invested in FD or savings account had really lost a lot of money.
So when any one says investing in equity is risky i feel very awkward , according to the above statistics avoiding equity is a lot more risky and recklessness.
It is quite evedent that just to avoid regret aversion which might happen in short term perople are losing long term potentially high returns in equity markets .
RK
For example a person who invests 10000 today in stock market will have 67000 in 20 years assuming a 10% average annual return, where as the same investment in bonds at 6% a year will have about 32000 ,if you consider a 4% average annual inflation he will have less than 15000.That is the irony of so-called conservative investment strategy.
If you consider indian equity returns. Key indices Sensex and nifty had given over 17% annual returns over a period of 20 years (not to mention the 40% annual returns in last 5 years), where as you might have got a maximum of 9% taxable return in fixed deposites.If you consider a inflation of 4-6% people who invested in FD or savings account had really lost a lot of money.
So when any one says investing in equity is risky i feel very awkward , according to the above statistics avoiding equity is a lot more risky and recklessness.
It is quite evedent that just to avoid regret aversion which might happen in short term perople are losing long term potentially high returns in equity markets .
RK
Deciding not to Decide is a Decision
Decision Paralysis... Status Quo Bias ... Endowment Effect ...Regret Aversion
This explains how human tendencies can lead us to avoid or delay action.
Decision paralysis is the main effect of human tendency to resist change . That is people are almost preternaturally predisposed to the familiar , to keeping things much as they have been. Behavioral economics call this status quo bias.
1)Imagine you are a serious reader of financial times but until recently you have had little money to invest .Now a great-uncle has bequeathed to you a large sum of money. Will you invest in equity?
2)Now imagine that you have got shares of some XYZ company (instead of money)from your uncle . Will you sell the shares?
Most probably in first situation you will hesitate to invest in equity while in the second situation you most probably keep the equity investment.
The above example explains status quo bias. Similarly endowment effect expalins that people place un-realistically high price for which they are holding compared to the things they are not holding ( this is why retailers offer trail periods and money-back guarantees).
The other reason people hesitate to invest in equity is regret aversion ,which means people want to avoid the pain of regret and the responsibility for negative outcomes.And to that extent the desicions to act impart a higher level of responsibility than decisions to do nothing.
But remember Deciding not to Decide is a Decision.
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
This explains how human tendencies can lead us to avoid or delay action.
Decision paralysis is the main effect of human tendency to resist change . That is people are almost preternaturally predisposed to the familiar , to keeping things much as they have been. Behavioral economics call this status quo bias.
1)Imagine you are a serious reader of financial times but until recently you have had little money to invest .Now a great-uncle has bequeathed to you a large sum of money. Will you invest in equity?
2)Now imagine that you have got shares of some XYZ company (instead of money)from your uncle . Will you sell the shares?
Most probably in first situation you will hesitate to invest in equity while in the second situation you most probably keep the equity investment.
The above example explains status quo bias. Similarly endowment effect expalins that people place un-realistically high price for which they are holding compared to the things they are not holding ( this is why retailers offer trail periods and money-back guarantees).
The other reason people hesitate to invest in equity is regret aversion ,which means people want to avoid the pain of regret and the responsibility for negative outcomes.And to that extent the desicions to act impart a higher level of responsibility than decisions to do nothing.
But remember Deciding not to Decide is a Decision.
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
Sunday, 3 February 2008
How Interest Rates Affect The Stock Market ?
The interest rates generally will have inverse effect on the stock market i.e. if the interest rates comes down stock market will go up and vice versa.
The central banks decide the interst rate as part of monetary policy , to maintain inflantation and growth .
Reducing interest rates will have following effects ...
1) Increase in liquidity in the system , and increase in inflantation also as too much liquidity chasing few assets like real estate or equity .
2) Companies earning will increase as the interest burden will come down(considering most of the companies will have considerable part of debt in their books).
3) Companies can look for expansion as they can raise debt with less interest,thus potential increase in earnings.
In the same way increase in interest will control inflantaion and hamper the growth of the companies thus the growth of the country.
Apart from this increase in interest will potentially appritiate the currency too.
Banking , Auto and Real estate are the sectors which are directly effected by interest rates and export sensitives like IT and Textile are indirectly effected by the interest rates.
While allocating capital we should take trend of interest rates into account.
RK
The central banks decide the interst rate as part of monetary policy , to maintain inflantation and growth .
Reducing interest rates will have following effects ...
1) Increase in liquidity in the system , and increase in inflantation also as too much liquidity chasing few assets like real estate or equity .
2) Companies earning will increase as the interest burden will come down(considering most of the companies will have considerable part of debt in their books).
3) Companies can look for expansion as they can raise debt with less interest,thus potential increase in earnings.
In the same way increase in interest will control inflantaion and hamper the growth of the companies thus the growth of the country.
Apart from this increase in interest will potentially appritiate the currency too.
Banking , Auto and Real estate are the sectors which are directly effected by interest rates and export sensitives like IT and Textile are indirectly effected by the interest rates.
While allocating capital we should take trend of interest rates into account.
RK
Sunk Cost Fallacy
This is another form of Loss Aversion by which people tend to take future decissions depending on the money already spent .
In a research for Ohio University theater's 1982-83 season one group of buyers paid normal ticket price $15; another group received $2 discount per ticket and another group received $7 discount per ticket. Logically there should not be any difference in attendance but the result shows that the attandance is directly proportional to the money spent.
This is another psychological trap in which we can easily fall in stock market. Many times we will hold or average stocks which we think fundamentally strungling just because we have bought them at high price even the stock continues to fall. At any time if we think the stock is not worth a buy at current price then it is better to book loss and move on to better counter.
While taking any investment decisions we should concentrate on the bussiness independent to the price performance of the stock.If the underlying bussiness is going to do well then the stock is most probably do well in the future irrespective of it's prformance in the past .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
In a research for Ohio University theater's 1982-83 season one group of buyers paid normal ticket price $15; another group received $2 discount per ticket and another group received $7 discount per ticket. Logically there should not be any difference in attendance but the result shows that the attandance is directly proportional to the money spent.
This is another psychological trap in which we can easily fall in stock market. Many times we will hold or average stocks which we think fundamentally strungling just because we have bought them at high price even the stock continues to fall. At any time if we think the stock is not worth a buy at current price then it is better to book loss and move on to better counter.
While taking any investment decisions we should concentrate on the bussiness independent to the price performance of the stock.If the underlying bussiness is going to do well then the stock is most probably do well in the future irrespective of it's prformance in the past .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
Saturday, 2 February 2008
Loss Aversion
" Prospect Theory: An Analysis of Decision under Risk "
This theory will explain how people feel about loss called "loss aversion"
1)Imagine that you have been given $1000 and have been asked to choose between A) guaranteed to win additional $500 B) a chance to flip a coin if it heads , you receive another $1000; tails you get nothing more..
2) Now Imagine that you have been given a $2000 and asked to choose between A) guaranteed to lose $500 B) a chance to flip a coin if it heads you lose nothing ; tails you lose $1000 .
Even though in both cases the outcome is exactly same for both options ( option A you will leave with $1500 and option B you will get either $1000 or $2000 depending on the coin) the research suggests more likely you will choose option A in 1st case while option B in 2nd case.
This explains why many investors sell their profit making shares more quickly compared to loss making shares. According to one research which studied thousands of patterns the stocks that investors sold outperformed the stocks they hold by 3.4% .
So in stock market it is better to sell the stocks which are making losses ( over a long period ) compared to selling the shares which are in profits . It will not only improve you returns in long term , but also offset that losses to other gains which reduces TAX burden .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
This theory will explain how people feel about loss called "loss aversion"
1)Imagine that you have been given $1000 and have been asked to choose between A) guaranteed to win additional $500 B) a chance to flip a coin if it heads , you receive another $1000; tails you get nothing more..
2) Now Imagine that you have been given a $2000 and asked to choose between A) guaranteed to lose $500 B) a chance to flip a coin if it heads you lose nothing ; tails you lose $1000 .
Even though in both cases the outcome is exactly same for both options ( option A you will leave with $1500 and option B you will get either $1000 or $2000 depending on the coin) the research suggests more likely you will choose option A in 1st case while option B in 2nd case.
This explains why many investors sell their profit making shares more quickly compared to loss making shares. According to one research which studied thousands of patterns the stocks that investors sold outperformed the stocks they hold by 3.4% .
So in stock market it is better to sell the stocks which are making losses ( over a long period ) compared to selling the shares which are in profits . It will not only improve you returns in long term , but also offset that losses to other gains which reduces TAX burden .
"Why Smart People Make Big Money Mistakes" - Gary Belskey & Thomas Gilovich
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