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Questioning Investment Rationales

December 30, 2008

I recently happened to talk to an Indian investor, who was sitting on huge losses over his stock assets. His portfolio had all types of stocks but more noticeable was his inclination towards stocks of realty and banks. Which incidentally were the flavours of the last Indian bull run, and unfortunately for our investor might not be the flavour of the next. Furthermore, not only the investor is clinging to his pet idea of ‘realty making a comeback’ but also a wishful thinking that it will resume anytime soon. I am no one to question his belief, but this might be a knave move, if buy and hold alone is considered to be the most profitable strategy. I firmly believe that bull runs are loved by everybody because it pays back even the biggest fools of the market. A mere buy and hold on even the most dud stocks, the most defensive plays, the most unlikeliest sector will also lead upto a sizeable chunk of profits. And add to it, falling volatility [a hallmark of bull run] , falling commodity rates, falling interest rates, market participants become the most complacent.

But the king of one time, becomes the pauper of another era. If bull run rewarded even the knavest then bear run punishes even the cleverest. And what consolation will a mere buy and hold investor might have when he is in bear run like this. Instead of earning money he lost it. And when you consider the recovery of bear markets to bull ones in matured globalised economies the picture becomes even clearer. It took, 4 years to recover from the highs of 29′ crash in US. Similarly it took almost better half of a decade to recover from the bear market of 70s, again in US. In India itself, we got to see a year and a half of bull run, merge into almost half a decade of bear market after 92-93 crash[It recovered again in 1998-99]. Again after 2000 crash it took, almost little less than half decade[3 years] to come back and exceed the previous highs . So in effect this bear run might end anytime soon[ I believe this has more probability of happening] on the other hand this might stretch into protracted pain.

Traditional buy and hold investment strategy might not be able to cope up with this market. Thus effectively losing a multiyear time period of building value in the portfolio. Hence, as India becomes more financially sophisticated we will see a healthy diversion from passive investment to active investment. This in effect might become the bulwark of the next bull run.

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3 Comments leave one →
  1. December 30, 2008 6:26 pm

    Very nice article … thanks a lot … I guess it’s kind of naïve clinging on to stocks of realty … since they certainly will not achieve their previous peak values … so I guess someone with liquidity issues, should better sell them and pay up existing debts. But what would you have to say about bank stocks ?

  2. December 30, 2008 8:03 pm

    Hi Gilmour.
    First of all, the best of seasons greetings.

    Its unfortunate, that often the lack of sophistication leads retail investors to liquidate their portfolio which was already built on tips,rumors and news headlines.

    Banking as such is a mixed story. In US, On one hand you have traditional banks with ‘almost’ zero leverage, focussing on plain vanilla banking whose balance sheet is still intact, while you have gung-ho banks who love sexy investments like swaps and leverages.
    A hint in finding those gems out will be to look inside the US mainland. US mainland has hidden lots of otherwise well performing banks.

    In India, on the other hand, I am extremely bullish on banking and financial services sector, because the next decade and half will require Indians graduating from ‘mom and pop’ savings to financially savvy service seekers. Credit card penetration is one of the lowest. Participation in financial markets is also low and more impotantly as Indian markets develop, so will the IDRs . Which in turn calls for financial service.

    In effect, I am pretty bullish on that sector, but this bullishness doesnt justify the absolute lack of sophistication found in investors in the subcontinent. People have bought banking shares with PE of around 33-40 and held them till they reached 8-12.
    This is atrocious!

  3. December 31, 2008 1:27 am

    Well … my best of seasons greetings to you too Soham Das …

    I figured that realty assets, which were not rented or leased, given county taxes, maintainance costs and so forth, would be the first choice when in need of liquidity … but I guess, financial and bank stocks should be converted first, before plunging too low …

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