Monday 30 January 2012

Why BRICS economies are the future of the World!

Why BRICS economies are the future of the World!

Came across some dire predictions for the Americans in the following article:

The author claims that ALL Americans are likely to get an effective erosion of at least 50% in their real purchasing power in 2012. I'm not so sure about the timing, but the event appears quite likely.

And the reason is that USA, as well as the majority of the European Nations are likely to have to face their reality sooner than later - The reality of very low GDP Growth.

Likewise, the BRICS countries (Brazil, Russia, India, China & South Africa) are equally likely to enjoy a fairly significant boom period in the next decade and beyond.

Chances are bright that we'll have a two-paced growth around the world. Most of the so-called developed countries of today (primarily Europe & USA) will face huge challenges in even maintaining a very low GDP growth of 2-3% per annum. And the BRICS countries are likely to set a scorching pace of GDP growth of 8-10% per annum for several years - certainly at least till 2020.

The reasons for my above prediction is not very difficult to guess.

Over the past several decades, the presently "developed" countries have become highly consumerist societies. Consumption levels across a wide range of products have gone up manifold. The so-called "social welfare" schemes have ensured that much of the "Developed World" is now populated with an ever-aging population which, unfortunately, is suffering from some strategic disadvantages:

  • Thanks to a strong "Welfare State", laziness levels have increased in most of the "Developed World"
  • Thanks to ever-increasing consumerism, a very significant majority of the population already have all the goodies in life - Chances are very bright that in the coming decade and beyond, the "Developed World" is far less likely to consume virtually any incremental quanities of consumer durables or FMCG goods in comparison to the BRICS nations.
Take a look at the following statistics as an example:

Country-wise No. of Automobiles per 1000 population (without including Two-wheelers)
 
 
Germany
534
Greece
451
Iceland
724
Ireland
542
Italy
690
Portugal
509
Spain
608
United Kingdom
525
United States
828
 
 
Brazil
249
China
37
India
15
Russia
263
South Africa
159

Interestingly, Automobile penetration is very widely considered to be one of the most reliable and critical measures for identifying the current "developmental status" of a nation.

  • Thanks to their financial success of the past, most of the major "Developed World" currencies are extremely strong vis-a-vis currencies of the BRICS nations - Hence, exports from BRICS are far more competitive AND exports from "Developed World" are increasingly uncompetitive.
  • Thanks to the "easy life" that they've been used to for the past few decades, the "Developed World" children have not being showing the urge to excel in education, especially in comparison to those from China & India.

Hence, irrespective of the kind of challenges faced by the BRICS nations, those of us fortunate enough to be living here can confidently say:

We are the World!

Moral of the story for the majority of my readers based in India: Don't get conned by your financial advisors who ask you to go in for geographical diversification by investing in, for instance, US companies - Chances are bright that the returns you'll get here will be huge in comparison.

Regards,

N


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Tuesday 24 January 2012

"Buy & Hold" is Dead - A new Trading mentality is called for!

"Buy & Hold" is Dead - A new Trading mentality is called for!

Books, so-called experts and the biggest stock market guru of them all - Ben Graham, the Guru of Buffett - All of them have, for long, been vocal advocates of a "Buy-and-hold" strategy. In fact, they've often gone on to claim that the ideal holding period is "forever".

Taking into account a few developments of the past decade or thereabouts, I've begun to question this hypothesis. Here goes:

  • Folks like Eastman Kodak, Henry Ford, Tata, Bajaj, etc. believed in starting a business and running it for generations.
  • People like Graham or, for that matter, people like Buffett were brought up in those times. For them, it was perhaps justified to identify good managements running good businesses and adopt a buy & hold strategy.
  • The last 10 years have seen a completely new paradigm shift. The trend originally started a couple of decades back with "Neutron Jack" Welch, but became increasingly fashionable over the past decade. Businessmen are supposed to be "dispassionate" about their businesses. They are now supposed to be willing to quit a business (sell or close down) that doesn't do too well. They're supposed to "dump" everything that's not core.
  • Terms like "Serial Entrepreneur" have become a rage. There are entire groups of very smart people who start a business, take it up to a particular level, sell out, move on to start yet another. Almost like a relay-race.
  • Yet others get stuck with their own idea, take it to a particular level of financial success, but stagnate thereafter.
  • We actually have concepts like "Life-cycle CEOs" - Those who are fit for a start-up are not OK for a "Growth Business". Those who are "Growth" CEOs are not OK for "Turnaround" situations.
  • When nimble-footed "Entrepreneurs" wanna "sell & scoot", the biggies also seem to keep doing it all the while. Just look at GE (The global biggie) or Tatas (the Indian biggie) - Each of them must have started a dozen businesses and exited another dozen over the last few years.
  • A good number of these companies are in the listed space.
  • When a typical "long-term" investor buys a company, he looks at a few factors:
    • Quality of Promoters, their Corporate Governance standards
    • EPS, Likely EPS Growth
    • Industry and company prospects
    • PE levels and PEG levels
  • If the original promoter is going to be willing to "sell-out", he's certainly not going to be publicising the event well in advance, certainly not to minority shareholders - Except as mandated by the law of the land
  • And Increasingly, promoters do keep selling out either their entire stakes or very significant chunks of their businesses from time to time.

Taking into account all the above facts, does it still make sense to adopt a buy-and-hold strategy for your equity investments?

I think not.

Instead, I feel that we ought to adopt a "trading mentality" while investing in shares. Adopt your own basket of yardsticks, thumb rules, guidelines, strategies - anything goes. However, what we must do is:

  • Buy based on your own basket of investing rules
  • Identify BOTH a profit target and a "Time for review" target - as also a "stop loss" level based on your risk appetite. What's vital is to
    • Fix a reasonably large profit target (so that you don't become a day trader - a surefire way to enrich your broker at your expense AND
    • Fix a reasonably frequent "Time for review" - After all, business cycles are becoming shorter all the time
  • If the profit target is reached, do a review
  • If the "Time for review" is reached, do a review
  • In the review process, take a look at whether you will buy the very same share based on your very same basket of investing rules at the current prices.
    • If the Answer is "YES", either hold on to your shares or buy more - And fix a fresh profit target and a fresh "Time for review" target - as also a fresh "stop loss" level based on your risk appetite - And repeat the above process from time to time
    • If the Answer is "NO", sell and scoot. Don't hesitate. After all, the market consists of a few thousand shares, at least a 100 of which will, hopefully, be investment candidates at any given point of time.

Caveat

"Buy & Hold" still makes a lot of sense in a completely new avatar - To my mind, that is in the sense of an "Asset Allocation Strategy".

 

Once you identify the percentage of your overall assets that you wish to allocate to equity, it certainly makes sense to adopt a "Buy & Hold" strategy of ensuring that you do have the desired allocation to equity as an asset class. (Obviously, this also comes with the additional Caveat that you must review and re-balance your overall portfolio to ensure that the desired asset allocation is maintained 95% of the time)

 

Happy Trading!

Regards,

N


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Monday 23 January 2012

Doctors die peacefully. Shouldn't We?

Doctors die peacefully. Shouldn't We?

Death is a sensitive topic.

We all know that we'll eventually die. However, we're often to scared to talk about it. Especially about one's own death or about the prospective death of our near and dear ones.

I felt that this post ought to appear both in my finance blog and in my "Multiple Shades of Grey" blog.

Came across the following article:

Excellently written. Do read it - Especially if you are over 60 or if you have near and dear ones who are over 60.

There are too many reasons as to why doctors die a peaceful death, but patients don't. It is not always because of their propensity to make some extra buck. It is also due to other reasons like

  • Fear of litigation
  • Misplaced concern for the patient
  • Intention to preserve "success percentages"
  • Undue pressure from the family members of the patient, etc.

However, if I'm a decision-maker either about my own health-care when the time comes or for any of my own near and dear ones, I'll try to consciously think about the above article and think a hundred times before going in for artificial life-support systems in a typical ICU.

Reasons are many, including:

  • Improving the quality of life of the patient
  • Reducing the actual suffering of the patient
  • Enabling the patient to be with his / her family and friends in the last few hours / days, instead of being semi-conscious inside an ICU.
  • Reducing the eventual hospital bill (especially by avoiding some futile life-support interventions)

The last point, while appearing rather rude, crude and heartless, is very live, very real, very practical, and, probably the most crucial one for the surviving members of the family, especially in case of lower middle-class / poor / below-poverty-line families. Especially in an otherwise poor country like India.

Think about it.

Regards,

N


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Wednesday 11 January 2012

Want to have the cake and eat it? Learn from Mahindra Satyam!

Want to have the cake and eat it? Learn from Mahindra Satyam!

Mahindra Satyam has apparently filed a suit against the erstwhile promoters of the then "Satyam computers", the then auditors, etc. seeking damages.

Apparently, they claim that the erstwhile promoters, in collusion with (or due to the negligence of) the then auditors, have defrauded the company. And now they want to claim damages for the same.

Hmm... ... ... - Interesting, indeed. What's even more interesting is that Economic Times, one of the well-respected business papers of India, has chosen to editorially comment (Mahindra Satyam's suit to set a useful precedent) favourably on this development!

Strange, indeed. For once, I disagree strongly with Economic Times.

I can understand this if the Mahindras had taken over Satyam in the regular course of events, and subsequently had discovered such a huge fraud. Here was an instance where Mahindras had bought a listed company whose shares had gone into a free fall from well over a couple of hundred rupees to sub-20 levels in a matter of hours after the details of the fraud started coming out. If my guesstimate is right, taking into account the open market purchases and the final open offer made to then existing shareholders, Mahindras, with their eyes wide open, bought out a company at throw-away prices - After the company's value had depleted in the markets dramatically due to the fraud. I would call it an instance of "As is where is" sale/purchase transaction.

If at all anyone had really lost out due to the fraud, it is those shareholders who had bought the shares prior to the fraud coming to light. Perhaps at levels of over Rs. 200/= per share.

While in a strictly legal sense of the term Mahindras may have a case and may go on to win some kind of favourable judgement in the present suit, I would wonder if it is entirely fair??? While damages are indeed due, any such damage should NOT be given to either the present Mahindra Satyam or its shareholders.

Rightfully, such damages awarded should be given to those shareholders who were holding the shares of the erstwhile Satyam computers prior to the fraud coming to light. Obviously, that may not be a very practicable solution. In which case, perhaps, the damages levied may be deposited in a suitable "Investor Protection Fund" under the supervision of authorities like SEBI or the two premier stock exchanges. These funds can be used for suitable investor education programmes in the months and years ahead.

(Disclaimer: If Mahindra Satyam does get any damages awarded from the recently filed suits, I would be an indirect beneficiary. I happen to be holding a few shares of Mahindra Satyam, having bought them AFTER the free fall a couple of years back!)

Regards,

N


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Tuesday 10 January 2012

Negative Yield for German Treasury Bonds!

Negative Yield for German Treasury Bonds!

This one truly takes the cake (and perhaps the bakery):

To top it off, the demand for those bonds was for twice the total quantity being offered.

Please note, my dear readers, these bonds are not subscribed to by ordinary blokes like you and me. They are typically bought by savvy insitutional players who've got ivy-league professionals macro and micro "ground realities" before deciding where to park their funds.

This implies that:

  • Players who are far more savvy than most of our retail investors are so paranoid that they consider it better to lose a little bit of money by accepting negative yields in search of safety than to look for ANY other asset classes. That's the extent to which they have confidence in the short-term performance of ALL other asset classes.
  • All the talk by the political bosses about the European crisis nearing a solution is just a lot of hot air and nothing more.
  • If Europe is in such doldrums, can equity markets around the world outperform on a sustainable basis around the world?

My own suggestions for Indian equity investors remains unchanged:

  • Capital preservation should be of utmost importance
  • Any rallies should be used to regularly exit trading long positions
  • Any purchases must be made with very strict stop losses unless your time horizon happens to be at least 3-5 years
  • Even for your "long-term" portfolio, be prepared to use my old "Free shares" trading strategy (Accumulate Free Shares) to enhance your wealth.

Regards,

N


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