So did you miss the bus?

On 28 August 2009 Investorstreet suggested a BUY on Gold keeping in mind the Chinese Gold Cycle.

Had you invested in Gold as on that date, you would currently be sitting on a return of 39.72%, which by no means can be termed as an average return on any investment, even equity for that matter.

So did you miss the bus?

Sensex 16000? A New Bull Run....

A lot of people of late have asked me where are the markets headed. The recent run of15000+ has left many disappointed since they could not participate in the rally. So was it really such a big loss? Not really.

In terms of a risk reward approach, the chances of the Sensex moving beyond 15000 was a lot less than it testing 12000 levels. Mere quarterly improvements in the growth of key sectors and market sentiments fed by the Prime Minister's guidance are not enough to sustain the current market levels. The improvement in industrial production, sectoral growth and increased demand have to be consistent for at least 2 successive quarters in order to start a pegging point for a long term bull run. Another reason that is feeding the current frenzy is that amongst BRIC nations, India and China are still the most attractive investment destinations due to the slack in Europe and USA. As the global economy recovers from its lurid state, the BRICS will benefit the most due to the robust growth that they are capable of sustaining.

Investor street is of the opinion that if the Sensex rallies beyond 16000 then fresh positions can be taken since the rally is then expected to continue for a while. But until the market breaks the 16000 mark, fresh positions are very risky and the market might test 13000 levels again. We remain bullish on Power and Infrastructure.

What is Stock Rigging?

Stock rigging is a phenomenon that attempts to pump up a company's stock price by floating favorable news about the company's earnings or future prospects. It actually encompasses a number of activities rather than just one. So say that if an individual with enough contacts in the markets and resources wants to rig a stock X. he will first spread positive rumors about the stock, such as a huge merger or FDI investment or great future growth numbers etc. Then he would use analysts as a medium to extend positive recommendations about the stock. In the process he would create speculation in the market and the stock price would shoot up. This individual can be a part of a cartel of investors, may be a promoter or some other entity.

This is why you would notice that there are certain stocks which only move on news or at the end of every quarter when strong numbers are posted or a positive guidance is set by the management of the company.

Can Debt Improve the Bottom Line?

Academicians have long argued that Debt if used to its fullest can be a great source of cheap money and savings for an organizations but also say that most companies are not able to optimally use debt due to several limitations such as availability of cheap debt, lack of credibility or market conditions. Most companies see debt as something that has a fixed service obligation irrespective of cash flows and as such carries high risk.

So is it true that companies are cautious with debt? Historical trends for companies borrowing seem to prove otherwise. Over 97% of the companies listed in BSE have exposure to debt of which over 83% have a Debt Equity ratio of over 2.3:1

But this is not abnormal as long as the company sees the earnings derived from such borrowed capital as worthwhile. Lets see the kind of benefit that a company can derive from debt. Let us say that by investing a Rupee at a 10% return produces a 10paise profit. Now by borrowing an additional rupee at 5% interest, the profit can be boosted to 15paise which is a 50% increase.

Another aspect is the tax benefit due to the deduction on interest paid. For a company with no debt and thus no interest deductions, a one rupee earning might eventually shrink to 67paise due to corporate taxes, but if the company has a significant interest deduction then the earnings would correspond to almost a rupee. This means that the tax shield from interest buffers out the taxes paid in the long run.

Making Sense of Chaos

Chaos Theory has more to do with mathematics and quantum calculations in particular than finance. But in spite of this, its relevance to the field of investments is very deep. Let us try and understand how Chaos Theory helps understand why markets are unsystematic, irrational and volatile but still manage to excite millions who try to predict its behavior. The basic interrelationship for Chaos Theory and finance lies in understanding its connection with Law of Large Numbers. Chaos Theory in Capital Markets states that the market behavior is guided by complete randomness or the absence of any order. This is because the theory sees the universe and everything in it as forces acting in a random and order-less manner and as such everything in the universe has to follow the same pattern.

Now if we relate this theory with the Law of Large Numbers then it states that any random occurrence with a large number of repetitions tends to move towards normal distribution. So over a large observation of occurrences the chaotic and random events tend to form a rational picture and eliminate and noise. But because for this rationale to be visible, the events required to be observed might be close to infinity, any predictions made to judge the outcome are never accurate. But this does not mean that they cannot be close to accurate or actual. This is the main reason why future predictions on stock prices and earnings of companies are never accurate but several times close to it. The accuracy largely depends on how many factors acting in the chaos chain have been considered in the prediction.

Now let’s come to the key point. Why are we talking about this? Try and understand that because predictions rest on the principles of chaos and law of large numbers, they should never be unrealistic, especially when a very small duration of time is considered. So when an analyst tells you that he predicts a stock providing 20% returns in 6 months, ask yourself a question whether the time span taken into consideration is enough to identify a close to accurate trend and the success rate banked on such limited a short duration is too optimistic or not? Now add to this the assumptions made in the model used and you will see that the analyst could be off the mark by much more than 20%. Here is something else you probably don’t know. The target price of a stock is provided to you based on some model that uses estimated future earnings and cash flows. Now in doing so, there are at least 5 assumptions used in any model. Statistically, by making 5 assumptions that are correct 95% of the times, the overall prediction can only be correct 77% of the time.

The long and short of the post is that Capital Markets should be used to take advantage of Market Cycles over a long period (Usually greater than 5 years). Whenever you enter the market for short term gains, statistically there is a 73% chance that you would not meet the prediction. How much the deviation from the prediction will be, depends on how many assumptions you have taken and how many of them are wrong.

Auto Sector Outlook: SELL on Tata Motors

The Auto sector is perhaps one of the worst hit during the global economic downturn and the Maruti results were not encouraging with the company accepting that sales growth numbers of 20% would be impossible to achieve in the near future. The outlook for the sector remains negative and the sector will witness a growth of 5%-7% at the best. Keeping in line with the previous recommendation on Investor Street, we are still Bearish on the sector with the reassessment for the ranking due in April.


SELL call on Tata Motors due to a 34% fall yoy in sales to Rs 47,586 million on 31.7% yoy decline of volumes, mainly in the CV segment. The company incurred a huge net loss of Rs 2,633 million driven by a steep decline at operating levels and a forex loss of Rs 2265 million as compared to a net profit of Rs 4,991 million in Q3 FY08.

A Good Time to Buy

"A well positioned investor has real assets, usually in the form of real estate, for protection against inflation, cash for emergency purposes and living for at least six months without a job, fixed income, both short and long term, weighted for the investor's perspective on interest rates as well as need, and stocks, with stocks consistently providing the best return over a long period of time."

That's what Ted Allrich had to say about a practical diversified investment portfolio. An investor needs to understand that this portfolio is not built overnight but is a gradual process. And what contributes the maximum to this portfolio? STOCKS...stocks that are well analyzed and based on strong long term fundamentals and are held on to as a mode of investment for years. Not stocks that are bought to make a quick buck. So right now when the P/Es for quite a few good stocks are at record lows along with a discount to the book value, it is safe to say that this is the best time to buy stocks as a mode of long term investment. If you were to invest in an Index stock for at least 5 years, then your yearly average return would be at least 10% and if you think that stocks are a bit too much for you, then go for Systematic Periodic Investments in small sums in Mutual Funds.