"Investing shouldn’t keep you busy"

From an interesting article by Yogesh Chabria in MoneyControl:

I’m sure most of you might be wondering if it is really possible to get rich by doing nothing. Some of you might even be thinking that I have surely lost it. That is what one of my close friends, who was taking my advice, thought. She had received a sizeable amount of money after selling some ancestral property around a year ago, and wanted me to help her out with it. It was the first time she was investing in the stock markets, and like most other people, thought that she would spend hours a day, carrying a laptop, trading in stocks and watching business channels. She wanted to be busy with the stock markets.

Fortunately for her, I didn’t allow her to do any of that. I asked her to pursue a hobby, go on a holiday, meet her family, start a business, perform community service or do anything else to keep herself occupied. The stock markets aren’t a great place to be “busy.” I strongly believe that investments aren’t meant to keep you busy; they are meant to make you rich.

Based on my advice, she invested her money in a few companies that had strong fundamentals and a visible growth. I told her to stop looking at the prices everyday and tracking daily upward and downward movements. Just staring at stock prices would not magically make them rise.By doing nothing, she didn’t get scared of temporary falls in stock prices. She didn’t get nervous and sell her stock when it fell by 10%. When the stock rose by 30%, she didn’t feel greedy and sell it either. She didn’t even know about such minor falls or rises.

"Flee the bear but miss the bull?"

Well known indexing-focused US mutual fund Vanguard, points out using an interactive illustration, how of the nine US bear markets between 1950 and 2003, in all but one case, the market snapped back dramatically within one year of "hitting bottom."

At Vanguard, we're confident that the market will recover, and we're equally resolute in our belief that investing in stocks can be the best option for building wealth over the long run. And being out of the market when a recovery occurs can be costly, as history shows.

..."Historical data can't be used to predict the future, but they do tell us that the stock market has been remarkably resilient over long stretches of time," (Vanguard's chief investment officer Gus Sauter) said. "Investors who were patient during periods of stress and dislocation were ultimately rewarded for their willingness to bear market risk."

..."In the past, bear markets have been buying opportunities," Mr. Sauter said. "Although we certainly don't know when market or economic conditions will improve, and we'd be foolish to try to pinpoint the 'trough' of the current bear market, the historical implications for investors are pretty clear."

The bottom line: If you react to a sharp decline in your portfolio by fleeing the stock market and abandoning your long-term investing strategy, you'll surrender any chance of benefiting from the market's recovery when it occurs.

"The Five Investment Essentials"

Harish Rao has a column in The Mint on investments that are "a must for anyone in today's investment climate".

1. Term insurance : Aggressive life insurance is possible only through Term products. For example a 30 year old can get a Rs. 1 crore cover over the next 25 years at just Rs. 3000 per month. Definitely a must-do.

2. Health insurance : An unquestionable necessity. Again, for less than Rs. 1000 a month, a whole family can be adequately insured with a floater plan. And there are tax benefits to this.

3. PPF : the # 1 Fixed Income investment vehicle. Truly EEE (Exempt from Income Tax at every stage, plus, eligible for tax benefit under Sec 80C). No bank can match the post-tax returns of PPF.

4. Retire Debt : Want the best returns? Then retire all debt, be it credit card or personal loan. This also sets your cash free in the future. Cut spending now if you have to, but just pay off your creditors.

5. Start a SIP : Systematic Investment Plans (SIPs) are the best way to create wealth for the long term. Start one in 2-3 good diversified equity schemes. Start with a 3 year time frame and review the performance once a year. If the funds are still in the top quartile, then persist for the next 3 years. With the markets at a depressing low, there has never been a better time to get into equities.

Equities anyone? Part 2

Harish Rao has a scenario analysis, backed with data, on returns from equity mutual funds based on different entry points.

What are the lessons?:
1. Investing when the market is at the peak is profitable only when time is given for the market to recover and deliver.
2. Investing in a good mutual fund multiplies the returns. Look for MF schemes with a LONG TERM track-record (atleast 5 years +)
3. Investing when the market is down is the best recipe for long term success. (And the market is down over 55% from its peak).

What you need to do?
a. Define long term horizon. Ideal : 10 years. Acceptable : 5 years +
b. Assess your asset allocation. If you're underweight on equities, start buying it now.
c. Identify 3 superior equity mutual fund schemes : Start a Systematic Investment Plan (SIP). It is the ONLY way to benefit from volatility.
d. Get a grip on your emotions. If you are there for the long term, better see it through everything, irrespective of whether the following happens : failed monsoons, hung parliament, oil @ $ 150 or inflation @ 15%, terrorist strikes.
e. Get yourself an investment advisor, who is concerned more with your returns than his/her commissions.

Signals to buy low and sell high

In an article for Business Standard, Devangshu Datta highlights key financial indicators for stock investors to watch: Index growth rate, Dividend Yield, Price-to-Earnings and Price-to-Book Value.

The average PE of the Sensex has been about 17 since 1996. The market has rarely been able to sustain PEs ranging beyond 20 and it has rarely seen dips below the 13 PE levels. Single-digit PEs have been rare. Every time the market has dropped below 13 PE, it has been a good buy. It's trading at around 12 PE now.

Similar number-crunching with respect to price book value leads to the conclusion that the market is a good buy whenever the PBV is below 2.5. It's hovering around 2.5 levels right now. Similarly, a dividend yield of over 1.5 per cent is usually a reliable buy signal. The current yield is at 1.9 per cent.

...Another interesting thing is that it is equally easy to build a set of sell signals from this basic data. You get a sell signal if the CAGR is over 19 per cent. You get a sell signal if the dividend yield is below 1 per cent. You get a sell signal if the PE ratio is over 20. You get a sell signal if the PBV is over 4.5. In combination, these sell signals have been correct an overwhelming majority of the time.

Equities Anyone?

At a time when serious questions are being raised about the performance of equities as an asset class globally (see here and here), Economic Times provides a primer on why investors should bother with this asset class in the Indian context.

Though its risky and volatile in the short-run, all kinds of long-term gains from equity, including capital returns and dividend income, are tax-free . In fact, as the investing period gets longer, dividend becomes a significant part of gains from the equity investment and it provides investors with a consistent flow of tax-free income.

...Equity outdoes other asset classes not only because of the lower tax incidence, but also due to much higher pre-tax returns. To ascertain the extent of the out-performance, let us say, an individual had invested Rs 100 each in the Sensex, bank deposit, commodity index and gold on January 1, 1991. The sum of Rs 100 invested in equities must have swelled to Rs 965.4 on December 31, 2008. During the same time period, the investment in bank deposit, commodity index and gold would have swelled to Rs 499, Rs 158.7 and Rs 225.7, respectively. This shows that equity has outperformed other asset classes by leaps and bounds. Not only that, at the peak of equity market, the value of Rs. 100 would have swelled to Rs 2,031.6.

...The combination of high pre-tax returns and lower-tax incidence make equity perhaps the best asset class to invest in. However, there is a caveat here as the equity investments are subject to much higher fluctuations, hence, only on a longterm basis that an investor should expect high returns.

(Emphasis mine)

“This time it’s different”. Really?

Amit Trivedi has a philosophical take on the stock market crash of 2008 in this Moneycontrol.com article:

The market crash was inevitable. It was destined. The reasons that we hear are only the instruments of a much bigger force, called the market. Some of the justifications that we hear today from many experts seem so logical and obvious that sometimes we wonder why we did not see it coming. If this thought has ever crossed your mind, please do not worry. You are not alone. The same experts that give the reasons today were silent then. Unlike the medical profession, in securities markets, there are a lot of experts who can do post-mortem, but very few who can do a correct diagnosis. We get perfect knowledge of the disease after the patient is dead.

The bull market, which may come in the future, is also destined. We will once again come out with the stories justifying why the market started to go up. And those stories will seem very logical and obvious.

But do we learn from the episodes of the past? My understanding is that years from now, once again all the lessons of the current crash will remain of academic interest only. The practitioners will start to take risks once again as there will be pressure to increase return on capital. There will once again be some new instruments, new markets, and new phenomenon that will catch the investor's fancy. The euphoria will be justified with the age old words, “This time it’s different” – the four words described as the most dangerous in financial markets by legendary investor Sir John Templeton.

(All emphasis mine)