Thought for the day
“Markets don’t exist simply to enrich people.”
-
Seth Klarman (American, 1957 - )
Word for the day
Claptrap (n)
Any artifice or expedient for winning applause or
impressing the public.
(Source: Dictionary.com)
Teaser for the day
Why dissent is always a “big deal” in India?
Are we more conformist, feudal or hypocrites?
We stay put with our strategy
The sound of an angry text message on my hand phone woke me up
little early this morning. I knew it was angry because it was unusually long
(split in 5 SMS’) and untimely. It was serious reprimand from a dear friend who
is apparently feeling “left out”. The text shouted “while you were busy
dreaming your Utopia
markets have run up sharply to new all time high level”.
At first I found it particularly provocative and hence worthy of
an immediate reply. An hour later, however, I am feeling empathetic and
concerned. I feel my friend may not be alone in his restlessness. Traversing
through some blogs, I find the feeling is all pervasive. Though thankfully, not
many investors seems to have taken the plunge this time.
While, I do not deny that benchmark indices are ruling at their
all time high levels in nominal terms, in real terms these are substantially
lower. In real terms Sensex at 21K in 2007 (1yr forward EPS ~850) was much
higher than Sensex at 22K in 2014 (1yr forward EPS~1500).
I believe that the de-rating of Indian equities is real and will
likely sustain for couple of more years at the least. That is precisely the
argument in support of InvesTrekk strategy of constructing a forward looking
portfolio rather than trading short rallies.
Insofar as immediate skepticism is concerned, I would like to
make just three small points.
(a)
YTD gold has gained 14% and copper has lost 14%.
Historically, in past four decades this kind of divergence has been invariably
followed by serious correction in equity prices. For record, InvesTrekk
strategy of accumulating gold at lower prices has returned more than equities
since November. Our negative call on duration products and focus on accrual
products has also served well.
(b)
The primary function of capital market is to
help businesses raise capital for implementing their business ideas and growth
plans. I do not find an iota of evidence that would suggest that market is
ready for IPOs as yet. In fact most attractively priced government IPOs have
completely flopped in past few months. PE activity is focused mostly on
e-commerce, part of a global trend. Some aggressively priced e-tailing IPOs
would mark the end of current enthusiasm in market, in my view.
(c)
I visited Delhi and NCR region early this week,
searching for a home. I met a number of real estate developers, traders,
investors and brokers. The only sense I got was that they all, without
exception, are in deep distress. The situation in fact appears to be much worse
than late 1990s’. Payment defaults are wide spread and deals elusive.
Thus,
notwithstanding annoying messages that make me work harder early in the morning
– I remain committed to my strategy of high quality, low beta, gradual
construction of portfolio, no leverage and underweight investment and credit.
Exception could be made for an L&T and HDFC Bank.
I also feel like
sharing a recent blog
post of my favorite central banker Bob McTeer a former member of US Fed,
which I find quite relevant and soothing in the current context.
“The Federal Reserve recently reported that the net worth of
American households grew by $9.8 trillion, or 14 percent, last year. $5.6
trillion of this increase came from the stock market and $2.3 trillion came
from rising home prices. The increase in household net worth is also called an
increase in household wealth.
This increase is a good thing. Individual households, on
average, have a higher net worth or wealth, which, by spending it, can be
realized in the form of more goods and services consumed. However, households
as a group cannot realize more consumption of goods and services since the
quantity of goods and services available does not rise with stock or house
prices. The fallacy of composition is at work.
The most familiar example of the fallacy of composition is that you
can see better at a football game if you stand up. However, it doesn’t work if
everybody stands up. The advantage is real only if most people don’t try to
realize it.
The fallacy of composition is fairly obvious in monetary
economics. Give individuals more money and they are wealthier. They can buy
more stuff. However, giving the economy more money doesn’t, per se, make an
economy (all of us) wealthier. There is not immediately more stuff to be
bought. More money involves money illusion, except for those that win the race
to the store. The same is true of wealth that can easily be converted into
money for spending.
Does counterfeiting, which creates more money, albeit fake,
create wealth? Yes for the counterfeiters who get away with it. They can
exchange their fake money for real goods and services. However, since there are
not more goods and serves to be had, their benefit is at the expense of the
rest of us, who have the same amount of money and other wealth, but fewer goods
and services available to us.
There is a fundamental difference between income and wealth and
between wealth created by higher real incomes and saving and wealth created by
rising housing and equity prices. Higher income increases wealth both in money
terms and in real terms. The additions to wealth through income are matched by
an equal value of additional goods and/or services being produced.
I started by saying that the reported increase in household net
worth or wealth was a good thing. By making us feel better about our finances,
a “wealth effect” can increase our willingness to spend and thus create real
wealth if we have sufficient slack in the economy. But, if you want to cash in
some of that money wealth, you’d better beat your neighbors to the mall.”
For records, for the first time, I agree with Mr. Murthy. It
would indeed be difficult for Infosys to regain the lost leadership status.
I wish all our readers a very Happy Holi. Shall be back with you
coming Tuesday.
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