Archive for August, 2007
Weekend Reading
- Value Investors Only Care About Bear Markets
A value-oriented investment approach in the style of Graham and Buffett does not focus on bull market performance. In fact, by definition, true value investing always focuses on weathering the bear market storms and coming out relatively unscathed.
- Most overpriced real estate markets
They’re culture-rich and scenically stunning. But invest in a home in any of these 10 cities and your balance sheet might take a beating.
- Stocks of brokerages catch investors’ fancy
Betting on new product offerings, spread of online broking
- Worst seems to be over, for the time being: Raamdeo Agarwal
Raamdeo Agarwal of Motilal Oswal feels that we have seen the worst of the correction and the worst seems to be over, at least for the time being. He adds that there has been an improvement in both the factors that led to the markets’ dismal performance.
- Stockmarkets: Beauty Or The Beast
Debates surrounding which stockmarket index is better do not include a discussion about their quality
- Prepare for an awesome autumn
Those blinded by the summer correction into believing bad times and a bear market are ahead will miss this autumn’s rally. Don’t be among them. The correction could last a bit longer – and many do a W-like-bottom, bringing a whole additional roller-coaster ride before the rally. But there is a good up-move coming.
India growth story to continue, despite odds: Rakesh Jhunjhunwala
Super broker Rakesh Jhunjhunwala sounded optimistic while talking about the Indian market weighed against its US counterpart at a recent meeting organised by Shailesh J Mehta School of Management, IIT, Bombay. While analysing the Indian market weighed against its US counterpart, Jhunjhunwala quoted the former US Federal Reserve Chairman Alan Greenspan: “History has not dealt kindly with the aftermath of protracted periods of low-risk premiums.” The super broker feels the going will get tough for the Indian markets for the next few months. This is sad, he said as India has all the ingredients that markets value.
Click here for the full story.
Growth versus value stocks
by Manas Chakravarty and Mobis Philipose
Periods of market turbulence lead to a flight to quality, or a flight to value.
When the markets are making new highs every day, solid large-cap value stocks are nobody’s favourite, as everybody is busy chasing growth stocks. It’s only when investors start having doubts about growth that attention shifts back to value investing.
Investors have for long been divided into two camps—those who believe in growth stocks, in the belief that their superior earnings growth justifies the price, and those who believe in hunting for under-priced stocks that offer value.
Growth investors believe in buying stocks with above-average earnings growth, no matter what the price. Value investors look exclusively for “bargains”, or stocks that are trading at a discount to their usual valuation.
Of course, the growth versus value debate is also a caricature—most investors opt for a mix of growth and value stocks. But many funds have sprung up to take advantage of the distinction between these two investing styles.
Which of them have done better during the recent sell-off?
MSCI Barra has a set of indices that distinguish between growth and value stocks and they show that while the world growth index has fallen 1.09% in August (till the 24th), the index of world value stocks is down 0.59%. That’s exactly as expected, since investors flock to value stocks during sell-offs. The MSCI US value index is up 2.33% this month, while the growth index is up 0.89%.
Emerging markets, however, are a sub-set of the growth stock universe, which is why both the emerging market growth stocks as well as the value stocks have been hammered. The EM growth stocks in the MSCI Barra universe are down 6.59% this month, while EM value stocks are down 6.53%. So the sell-off hasn’t spared EM value stocks.
Year to date, emerging market value stocks are up 14.9%, compared with EM growth stocks being up 13%. The MSCI India value index is down 9.4% this month, while the India growth index is lower by 10.02%—only a marginal difference.
Proponents of value investing claim that value stocks do better over the longer term. That appears to be true for the US, where the MSCI Value index has given annualized returns of 4.82% over the last ten years, while the growth index has grown 4.10%.
But in India, value stocks have scored over growth stocks this year, over a one-year period, over the last two years and over the last five years. That’s surprising, because India is supposed to be a growth story. It’s only over a 10-year period that the MSCI India growth index has delivered higher annualized returns than the value index.
Random Readings
- The hitchhiker’s guide to mega bucks
Egrets fly from one bank of a river to the other, in search of prey. But sometimes, even they opt for a free ride across the riverbed, sitting on the back of a submerged hippo. Wildlife enthusiasts may be familiar with this scene. However, the phenomenon of ‘riding on the hippo’s back’ need not be limited only to the nature’s galleria. After all, who doesn’t want to generate some gains from the hard work of others…?
- The magic potion revealed
Banking, capital goods, media and fertiliser stocks will do well in future, while IT, auto and real estate sectors may see a slowdown.
- Don’t worry, look at the brighter side
As the dark clouds of the US sub-prime crisis and yen carry trade gather over the horizon, the silver lining will come from select emerging markets like India.
- Home Safe Home
Stocks may plunge because of the crisis in global markets and political moves back home. But the India growth story is still tenable and promises gains for the patient investor.
- Ignorance is not bliss
The discounted cash flow is not an effective valuation tool for commodity (capital-intensive) industries.
- Indian markets have outperform EMs: HSBC
Read HSBC Global Research’s report on how Indian markets have performed against other EM benchmarks in the current correction, in contrast to previous episodes.
Random Tidbits
- Huff, Puff The House Is Down
Subprime mortgages crash, then the global markets fall. There’s a cautionary tale in it. - 15000 Penny Punters
Small investors with wily strategies brave the vagaries of the stockmarket
- Making sense of Sensex moves
Sensational headlines such as “Sensex in free fall”, “Bloodbath on D-Street” and “Market faces mayhem” would have surely stirred up a storm in your teacup as you read the morning newspaper in recent weeks
- Taking stock after the correction
In the sweeping correction that has caused global stock markets to tumble like nine-pins, the BSE Sensex has shed 9-10 per cent off its peak value. Stocks in sectors such as telecom, steel and construction have plummeted 15-30 per cent the past
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Time to get into secular high-growth stocks’
Set aside funds to buy telecom, engineering as these sectors have great potential and are not related to politics in the longer term.
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‘16,000 looks difficult for Sensex this year’
With political troubles within the country and global uncertainties, investors are naturally reluctant to buy. But better value may emerge in the next couple of months.
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Markets seem to be on their way down. The analyst community is still guessing the next day’s index move. Gap down opening are leaving the traders clueless and volatility is the order of the day. Newspapers are agog with the description of the market plunge. However, there are stray incidences where the stocks have bucked the trend.
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The Indian initial public offering (IPO) market is under the microscope again with the recent re-pricing of the South-based real estate major Puravankara Projects IPO. The initial price band of Rs 500-525 had to be scaled down to a much lesser range of Rs 400-450. The re-pricing has pointed towards three important facts.
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It is estimated that in the last 12 months, 23 real estate companies have raised a whopping $4.4 billion through IPOs, FPOs, GDRs and other avenues. And with reports that few more companies are going to hit the markets, the magnitude of real estate’s share in the already exceeding liquidity, is increasing exponentially. Also, it seems that investors’s exposure to real estate IPOs have been increasing like never before.
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Who’s the real villain? CDOs or sub-prime mart?
If I could be born again, and I had a head for big numbers, I’d like to be an investment banker in New York. Look at what I would do for a living. First, I would play in the collateralised debt obligation market. What this is, is not relevant, except to understand that CDOs are a more important cause of the financial crisis sweeping the western world than the infamous sub-prime mortgage market in the US.
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Long & Short Term Capital Gains Issues
Calculating tax is a rather difficult exercise for individuals. More so, when it comes to mutual funds. This is because there are several calculations required for this purpose before arriving at the appropriate figure. Also, there is a need to do some segregation to remove any confusion. Here are some calculations where we use the basic tax rate on these investments excluding education cess for better understanding.
Investment Nuggets by Benjamin Graham
“The individual investor should act consistently as an investor and not as a speculator. This means….. that he should be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that sati sfies him that he is getting more than his money’s worth for his purchase.”
“An investment operation is one which, upon thorough analysis promises safety of principal and adequate return. Operations not meeting these requirements are speculative.”“Most of the time common stocks are subject to irra tional and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble… to give way to hope, fear and greed.”
“You are neither right nor wrong because the crowd disagrees with you. You are right (or wrong) because your data and reasoning are right (or wrong).”
“The one principle that applies to nearly all these so-called ‘technical approaches’ is that one should buy because a stock or the market has gone up and one should sell because it has declined. This is the exact opposite of sound business sense everywhere else, and it is most unlikely that it can lead to lasting success in Wall Street. In our own stock market experience and observation, extending over 50 years, we have not known a single person who has consistently or lastingly made money by thus ‘following the market’. “We do not hesitate to declare that this approach is as fallacious as it is popular.”
“While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.”
“Stocks will fluctuate substantially in value. For a true investor, the only significant meaning of price fluctuations is that they offer … an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.”
“To have a true investment, there must be a true margin of safety. And a true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by reference to a body of actual experience.”
“Strangely enough we shall suggest as one of our chief requirements… that our readers limit themselves to issues selling not far above their tangible-asset value.”
A Growing Subprime Web
Source: BusinessWeek
Random Gleanings
The Subprime Lending Saga
- How a Panicky Day Led the Fed to Act – WSJ
Freezing of Credit Drives Sudden Shift; Shoving to Make Trades
- Lessons of Past May Offer Clues To Market’s Fate – WSJ
- In Asia, It’s a World of Extremes – WSJ
China’s Insular Markets Defy Slump in Shares; Other Trends Pose Worry
- Asian Traders Brace For More Instability; Feng Shui Consultations – WSJ
- Crises Counsel – Fortune
Will the subprime lending meltdown and credit crunch send us into a financial free fall? We asked the sharpest minds in business to share their reactions to the downturn, and their insights on the road ahead.
