Investment Strategy October 2008 Onward
This knol tries to argue that investment in equities is proper at this point in time for long term portfolio purposes. In many countries, the equity indexes may have gone below fair values due to lack of purchasing power in the hands of security market intermediaries.
Authors
Authority and Disclaimer
I am not a registered investment advisor.
I teach investment analysis courses and hence thinking about investment is incidental to my profession of teaching.
17th October 2008, Mumbai
Everybody is an investor.
But everybody is not a trader. Trading is a specialised activity in every asset or commodity. It is a specialised activity in shares, bonds and currency also.
This knol is for investors. It is not for traders. Traders are smart and intelligent persons and their information needs are certainly more complex.
According to me everybody is an investor in various types of assets. Most of the people invest in financial assets. Even holding cash itself is investment in financial assets.
Investment strategy is an issue for many people at various points of time. Like in any other activity, there can be a change in strategic direction.
Unwarranted Asset Inflation in India
I personally felt in India the runaway rise in share prices from sensex level of 2800 to 21000 was unwarranted and it was to the detriment of people with genuine savings. Asset inflation was created by governments and central bankers and people who buy assets at inflated prices have to repent later on. But as the might of the government and central banks was behind the asset inflation, there was huge publicity and advertisement and many must have got trapped in the asset price bubble.
Do You have the Savings
For people who avoided asset price bubbles and kept their savings with them, an opportunity is on the horizon for investing in assets at more reasonable levels.
Fair Value and Limit of Downturn
What is limit of downturn. People say Dow will test its 2001-02 lows of around 7200. Indian market one still does not know. People started talking levels of 9000. The levels may be decreased if foreign capital goes out still.
What is the fair value level. We do not have a rigorous fair value level because broking companies who are the purveyors of research and analysis in the country are not consistent in their fair value thinking.
A rough calculation that I did some time back gave me a level of 6000 an year or so back. From that level if I add 12% return the value may come to a level betwee 6700 to 7500. But will the market touch the fair value level in this downturn? Will it breach and still go down? At this stage the answers are not clear.
Investment Strategy
Can somebody have a strict policy of buying very close to or below the fair value? If the market does not come close to the fair value but goes up once again they may miss the investment opportunity once again. Investors may have to start buying small quantities in this downturn to acquire some equity component in the downturn. If the market goes to fair value levels they can invest bulk of their resource. They may keep small amount of money to invest further if the market breaches fair value levels.
They have to be ready for a disappointment if market goes to lower levels after their investment. Benjamin Graham, the dean of security analysis, guru of Warren Buffett said Mr. Market is very funny player to play with. He will sometimes quote you 21,000 and some times 2000. So you have to take a well thoughtout decision and stick to the decision as Mr. Market throws challenges at you and makes fun of your decision.
Do I follow the policy that I am advocating. Yes I made my purchase of international fund scheme when Dow was less than 11000 and now I increased my commitment further as Dow has gone below 9000.
Buffett gives the call
I wrote this piece in the afternoon. In the evening on TV, I saw a spot on Buffett, Buy America. You make money if you can buy when everybody is selling. Buffett bought a stake in Goldman Sachs and GE.
Important News and Comments in Chronological Order
18th October 2008
Yesterday evening I watched two programs on CNBC and Profit.
In one, Jyoti Jaipuria of DSP Merrill Lynch, C K Narayan of ICICI Securities and a Foreign expert were there. Jyoti felt that there is a strong downward momentum, and typically after the downward momentum, there will be range bound movements for three to four months. C K Narayan said, no support level is holding and hence it is difficult to advise traders to go long. So it is a market where traders have no clues to buy. This is what Benjamin Graham said. Investors have to buy when traders are afraid to buy. Moderator said that analysts are finally out of denial mode. They accept that fundamental and technical analysts now agree that things are bad at the moment.
Madhu Kela of Reliace Mutual Fund was on Profit channel. He also said that yes market may go down by another 10 percent or so. Let us accept for a moment that this is a bear market.
Should you buy now. May be 8000 is proper level to buy and if you buy at that level you expect 12% return on shares which includes a 6% inflation estimate. That means every year you can make 9.6 rupees return on 80 rupees investment now. What will happen if you buy at 10,000 level. The 9.6 rupees on Rs. 100 investment means you get 9.6 per cent return. Not a bad bargain because no body can assure you that market will go 8000 and will allow you the full chance to buy what ever you want to buy at 8000 level.
Accumulating a portfolio is a transaction tactics exercise. So take a decision to accumulate the portfolio with an upper transaction limit of sensex level 10,000. See how efficiently you can time your decision so that your acquisition price is as close to 8000 level as possible provided Sensex goes down 8000.
30th October 2008
Share prices have rebounded in various countries. What is to be done? The present thinking seems to be there is a bear market all over. Even China declared: We are slowing rapidly. Markets are headed down. You will see lower prices. This idea means you need not buy on rallies. You can buy during declines. But don't change your stategic stance. We are in buy mode now. Question is when? On which day?
An opinion on FTSE
FTSE may go back to between 4550 and 4900, which at most would also equate to about 38.2% of the decline from 6754 to 3808.1. The charts suggest this would probably be a pre-cursor to further declines in 2009 back to test the lows seen last week and then 3277. (http://uk.biz.yahoo.com/081021/214/i9537.html).
On Indian TV channel, Shanker Sharma, Sameer Arora, and Rakesh Jhunjhunwala had panel discussion. Shanker Sharma said there will be a rally up to around 12,000 at least once in the near term before another down trend. Sameer Arora thought it may be a three month window that stocks are in down trend. Then things will improve in Indian market.
15 November 2008
Mint on page 8 carried a piece by Manas Chakravarty on outflow from mutual funds in India in October 2008.
Net outflows from income funds were Rs. 52,820 crore. Net outflows from equity funds totalled Rs.704 cr.
Gilt funds saw a lot of inflows during October. Investors are betting on RBI cutting rates. I pesonally also moved to some money in to Gilt funds.
The article reported that, there was net outflow from gold ETFs. Investors realized the contrarian gold call was not paying dividends. Yesterday, I heard in the local train a discussion between two small business men. One person said that gold can go down to Rs.10,500 and at worst to Rs.10,000. The other person argued that in the market, people were talking of Rs.8000 to 8500. So there is a bear market talk in gold in India also.
23.4.2009
IMF came out with a forecast that says 2009 will be the worst year for the world economy. People who have savings with them have the chance still to invest in equities during the worst downturn year of the world economy. It is not a trading decision. But an investment decision to stay with the portfolio till it delivers the expected return. Time horizon is not the forecast. It is a judgment that equities have gone properly below their fair value in many countries. Why they have gone below fair value? There is no purchasing power with security market intermediaries.
For a glimpse of IMF forecast
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My knols on investment analysis
Fundamental Analysis – Graham–Rao Method
http://knol.google.com/k/narayana-rao-kvss/fundamental-analysis-grahamrao-method/2utb2lsm2k7a/7
Target Prices of Equity Shares – Concept and Utility
http://knol.google.com/k/narayana-rao-kvss/-/2utb2lsm2k7a/147
Charles on Dow on Trading and Speculation - Dow Theory
http://knol.google.com/k/narayana-rao-kvss/charles-on-dow-on-trading-and/2utb2lsm2k7a/148
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