Wednesday, January 13, 2010

The New Decade heralds

The term dead cat bounce is derived from the idea that even a dead cat will bounce if it falls from a great height. This phrase has been used in Stock Markets to describe a downward move followed by a significant price increase. The price fails to continue upward and instead falls again downwards, and exceeds the prior low. A very secretive investor whom I met recently used this phrase to describe the current recovery of the stock markets. He was speaking about an impending correction which many pundits believe is in the offing. Like all great investors believe, it is not wise to time the market and wait. At the same time it may be worthwhile to study independent companies with in a sector and research thoroughly before investing. It would be advisable to invest gradually in small proportions over 4 to 6 months to take advantage of cost averaging. Infrastructure as many know is an area where the government is spending. Infrastructure bottlenecks, have long been a drag on Asia's third-largest economy, knocking an estimated 2 percentage points off its growth. The country requires $500 billion investments in infrastructure till 2012. The bulk of the government spending, 85 per cent to be precise is in power, water and urban infrastructure. Companies that operate in this area are very well poised to return value to investors.

Most stock investors do not get better than average results and are in a way not entitled to it as they base their investments on hot tips and general news in the media. They are not being provided by a specialist who charges for his service. I know a lot of people have the anxiety of waiting for a correction, specially the ones who are sitting on cash. Market tests the patience and as Warren Buffet termed it, markets can be irrational longer than man can remain solvent. That summarizes everything aptly. For a long term fundamental investor, stock indices are incidental and stock prices can be best ignored. As Warren states it, the period for holding a good company is lifelong. There is a lot of meaning in this which needs to be elaborated. The human mind is wired in a manner that we react to the market sentiments. The brain is fused to buy high and sell low. An intelligent investor is the one who can get out of this psyche. If your horizon is 20 years, the most practical thing would be to invest in well researched company every month automatically. For a life long holding, the best choice would be to buy into total stock market index funds. What keeps people from succeeding in the markets is the attention that they pay to what market is doing currently. We have to exercise our right to ignore the markets and the value of our shares on a continual basis to succeed.

This decade is significant. At the turn of last decade, India per capita income crossed USD 500 and we saw the way economy and markets moved in the last decade. At the turn of this decade. India has crossed another significant mark, per capita income of USD 1000 and there is going to be a new wave of consumption and consumerism. Many companies are focusing on the emerging trends to ensure they don't miss this wave. For us as intelligent investors, it is of paramount importance to identify those growth areas and be invested.

Wishing you a very happy Makara Sankranthi.