Bull market or a Bear market rally?

Are we in a bear market or in a bull market? Frankly nobody has been able to answer this question when the market is on! 3 months or 6 months later everybody will tell you that “May 2008 to Oct. 2008” we were in a bear market, however now we are in a bull market. Bear markets present a challenge to all investors. Even the savviest investor who knows that bull markets and bear markets are sheer unavoidable phases feel the hurt of a bear market. It doesn’t matter if you have Rs.10,000 in the market or Rs.1 million, losing money hurts. It is during these declining markets your patience will be tested. If fear sets in, you might consider cashing out on your investment plan completely, which can do more damage than anything else.

Correct Asset Allocation

The key to making it through a bear market without losing sleep comes from the construction of your portfolio and your stomach. Many people think you require luck to make money – be that as it may, discipline of investing through the good times and bad times and proper asset allocation, can be a better goal. You have probably have a portfolio that consists of a number of mutual funds, exchange traded funds, shares, and bonds. Perhaps, this mix of investments is designed to achieve a certain goal. It may be part of a mutual fund to fund retirement or a children’s plan for your child’s education, but whatever its goal, you want to make sure your investments are doing what you intended.

If you have taken the time to create an investment mix that is suitable for your risk tolerance and investment objective, then a bear market shouldn’t concern you. For instance, if you have a few decades before needing the money, and are an aggressive investor, you might be invested completely in shares. There is nothing wrong with that, but you should only be invested this way if you understand, and are comfortable with the fact that with significant gains may come significant losses at times. That is just the nature of investing entirely in shares.

If you find yourself in a situation where you become uncomfortable with the losses in your portfolio – that is a sign that you probably aren’t invested according to your risk tolerance. If your portfolio keeps you and your advisor awake at 3am, you are not well balanced in your portfolio. This commonly happens when investors get overly aggressive in a bull market, and suddenly find themselves turning conservative once losses start to show up on statements. Avoid the temptation to alter your investments based on what the prevailing markets are doing. The worst counter action to investing at 21000 index is bailing out at 14000.

Take Advantage of SIP

Sip is a technique utilized by investors who invest in equity markets from their monthly income. A fixed amount is taken out of each salary monthly, and invested in. Since the same amount is invested on a regular basis, you’re making investment purchases when prices are high, low, and everywhere in-between.

This is an advantage to the average investor because it just means when the market is down, you’ll be buying more shares with that money. The more shares you have, the greater the increase in value when the market recovers. So, think of a bear market as a sale at your favorite store when you can buy things at a discount.

Consider Value Buying / Defensive Shares

Defensive shares refer to generally larger companies that are better suited to withstand a prolonged bear market. These are good shares which are currently out of fashion because nobody wants to buy them or because it is currently out of fashion. Common traits for defensive shares are companies with strong balance sheets that have been in business for a long time. Smaller and younger companies may not have the financial stability to weather a bear market, so you can minimize the impact of a declining market if you’re concentrated on larger and more stable companies. Examples of such shares are ITC, HUL, Tata Tea, Dabur, Coromandel fertilizer, eid parry, etc.

For a greater list look at the portfolio of value funds like Icici Prudential Discovery fund, Templeton India Growth fund, etc.

Bear Markets? Buyers should be happy!

Welcome the Bear Markets!

Although we saw a furious short-term rally last fortnight, we have entered into official bear markets territory as of early this month. (In the US bear markets are defined as a drop of 20% or more from a previous high.)

This is a good thing. Smart and Legendary investors understand this. Ordinary investors don’t.

If you haven’t spent much time buying stocks getting excited about a bear market doesn’t just sound counter-intuitive, it sounds nuts. After all, how can you feel appreciative watching the value of your life-savings grind lower? Life was so much fun when you were buying at 19000 and the index went to 21000 was it not?

However, if you are an investor, think a few months ahead. Or even years ahead. Think of Viswanathan Anand as you financial advisor! The kind of returns that you can get after a 30% fall in the market is phenomenal. Do not trust me. Ask your investor about a paper made by Mr. Prashant Jain of Hdfc mutual fund. That document is available on the Hdfc mutual fund site and in the inbox of your advisor. Since I was not sure about copyright issues, I did not reproduce it here.

Every stock investor knows that you’re supposed to buy low and sell high. Bull markets give you a chance to sell high. Bear markets give you a chance to buy low. So if you are 22 years of age and are planning to buy stocks for the next 45 years, you need more bear markets than bull markets J .

If you want to prosper during the next bull market – the one that will propel the averages to new highs in the years ahead – MAYBE now is your chance to pick up some bargains. This is not to suggest that the markets have finished their fall. Maybe they will fall further, but hey investors – Don’t Let Bear Markets Scare You

Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets. So they do just the opposite, buying high and selling low. In fact a friend calls it a family hobby – buying high and selling low!

Yes, the market has fallen sharply over the past eight months – Jan to Aug ‘08. And it may fall further in the weeks ahead. Still, this is an enormous opportunity for long-term investors. Too bad most of them don’t see it that way.

We give too much credit to the guys with white skin – and that is stupid. Indian banks have not leveraged 1: 30 times like a Bear Sterns had done. Or like Lehman brothers or like Citibank. Reddy of RBI has not put 91 Indian institutions on “watch”. However, we have beaten down our companies by a similar margin as the American companies!

Read Dr. Jeremy Siegel, author of “Stocks for the Long Run, Read John Templeton, ….see how Warren Buffet and Peter Lynch have celebrated bear markets.

• Remember 30% falls can be followed by 30% gains! However it can fall for some more time before it rises.
• Take any rolling 7-year period over the last 30 years, and stocks have outperformed bonds.
• Take any 10-year rolling period and shares have given a positive return even adjusted for inflation.

Bear in mind, no one when can tell you when the next bull market will begin, how long it will last, or how high the market will ultimately go.

At Berkshire Hathaway’s annual meeting in May, Warren Buffett said “I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month.” Why? He knows he owns great businesses. He would like to own them even cheaper.

During bull markets you hear “buy, they do not make stocks anymore” and in bear markets they tell you “sell, or at some time there will be no buyers”. Both are wrong. Completely wrong. Markets go up and go down. Do an SIP. That makes sense. Do it now. It makes more sense.

Trust vote and sensex, IAEA, Nuclear deal

About 20 days back 2 senior politicians told me the trust vote would go through comfortably. One was from Congress and the other from BJP. One senior journalist also told me that the trust vote would go through.

However, none of them were correct about the margin of votes. That is the problem about predictions – on TV you need to predict that “the markets will go down” – to make money you need to be far, far smarter than that. Simple, you need to get the direction, speed, intensity ALL correct every time. This is not just difficult, it is impossible.

If there are 542 Members of Parliament,  and they do represent the country, it is fair that some of them (most) of them will be  honest, some dishonest, some will have criminal intentions, and some of them will be actual criminals. If 5 of them are criminals – it is only being representative, is it not? The media however plays some much on our minds about the negative elements that it would like us to believe that all Parliamentarians are criminals. It is not so, not by a mile. The media should show some restraint and not chase TRP so desperately. It sucks.

Impact on the market because of the trust vote can at best be marginal – buy on rumors and sell on news – so today (23 July) the market may actually give up some of the gains that it built yesterday and earlier! That is the market. Also the market would surely have known that the congress would be returned safe.

The nuclear deal is of course a superb market story…if India sign the nuclear treaty TODAY, it will mean Indian companies can start talking about nuclear power. Then the government of India will have to come up with the guidelines – eligibility, criteria, locations, financial safeguards, physical safeguards etc. Given out track record this will take about 2 years. Once that is out, and say Tata Power, NTPC, National Nuclear Power Corporation are the 3 companies which are “eligible” for nuclear power. They will then scout for partners – the whole process will take 1 year to become a JV.

Then they will choose a location – remember Tatas could not put a car plant so easily, so a nuclear plant (thank you Green Peace) will not be the easiest thing in life! So add 5 years to set up the plant. Then that plant has to go critical – generate power. This will be then sold and the cost  (incurred in crores) will be now recovered from end users –  frankly I think the impact on the  EPS will be felt  after about  12 years, but we will buy now. What will we buy ? We will buy Areva, Tata Power, Esab, L&T, NTPC – because the nuclear deal is done….hoping that the next quarter will see an upsurge in earnings. God bless us.

Equity markets and President deaths

What events trigger a market to rise and what triggers a fall? Conventional wisdom tells us “good events” should trigger a rise and “bad” events should trigger a fall. Correct?

No. Wrong. The basic assumption that you can isolate “one” event to the day (or month)’s market performance is a media myth – necessary to make you watch tv and read such postings. Writers generally get a kick out of people reading their posts – never mind (like yours truly) we do not make money with our postings!

In 1945 when President Roosevelt died the American markets went UP by 36.44%, when in 1955 President Eisenhower fell ill the market went up by 31.56% and in 1963 when President Kennedy was shot dead the market went up 22.8%. QED.

Equity markets are like a yo-yo?

In my class I am normally asked “Is the equity market like a yo-yo?”, the other question is “Is the equity market like a roller coaster?”

My answer to both the questions …is NO. NO in capitals.

Both the yo-yo and the roller coaster have a predictable movement. You know the yo-yo will go down and up in exactly the same time. It will not stay down for 3 years and then be up for 22 days.

Similarly in a roller coaster the speed, the rate of rise, descent, the time taken, the number of gyrations is all fixed. You know that the whole ride will take “20 minutes” or “40 minutes” – and in a worst case scenario all you need to do is close your eyes! Once it stops you can get down.

If you close your eyes to your equity portfolio, you could wake up holding DSQ, Silverline, Lml, Patheja forging, Shaan Interval, Indiana dairy…etc. because you did not see what happened to the promoters of these companies.

PS: even on google you cannot find some of these companies – when some of them died they were burnt, and then their ashes were buried, hoping they do not rise again!!