In this issue:
??Will Japan be witness to a historic event?
??And now, a bailout for Indian banks
??Planning commission gets cold feet on India's GDP projections
??US economy will soon enter recession, feel most Americans
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Sad as it may seem, this is not the first of its kind event. Infact, retail investors in India are now notorious for their bad timing. As highlighted by one of India's leading fund managers, Indian investors have almost always wrongly timed their investments into stocks. He further points out that nearly 80-90% money over a cycle comes in when valuations are high. Not just that. Inflows are also hardly seen when P/Es are low and when markets begin to recover.
We would be wrong to blame Indian investors alone for their flawed appraisal of the market. Investors the world over suffer from this tendency. But why would investors commit this same mistake over and over again. The best answer perhaps lies in the realm of psychology.
You see, human brains have been evolved not to embrace danger and uncertainty but run away from it. These skills, while very useful in the hunter gatherer age, have proved to be our undoing in the financial world. For in the financial world, the best opportunities always come when there is fear and uncertainty all around. Not when there is euphoria all around and when the indices are scaling new highs.
Also, we are not very good at calculating compounded growth rates over a long term horizon. We can easily divide or multiply few numbers but to appreciate the enormity of sustained compounded growth is beyond us. Thus, this, coupled with our inability to defer gratification leads us to look at short term gains rather than long term benefits.
These tendencies are so ingrained that most of us find it difficult to break this pattern. Consequently, as the fund manager pointed out, we end up investing at precisely the wrong time. Little wonder then when it comes to investing, research skills do matter. But what matters equally, if not more, is the ability to think long term and also the ability to keep a calm head when there is fear and uncertainty all around.
Do you think it's possible for retail investors to make long term money in stocks? Do share your comments with us or post your views on our Facebook page / Google+ page
|01:26||?Chart of the day|
In order to achieve its macroeconomic goals, the state has two tools at its disposal. One is monetary policy. And the other one is fiscal policy. While monetary policy is used to control inflation and interest rates in the economy, the fiscal policy is used to increase the aggregate output of the economy. Currently, major central banks across the globe function as independent state entities. For instance, the Reserve Bank of India (RBI) operates independent of the Finance Ministry. Finance Minister P Chidambaram has been pressing for the need to ease interest rates to boost the economy. Of course, the burgeoning fiscal deficit is on his mind. But the RBI has refused to relent as inflation continues to remain high. Had the central bank given in to the government's pressures, it would have to sacrifice the returns on the savings of the people. As such, we believe the central bank's independence is important. Otherwise, the government would be tempted to manipulate the monetary tools to its own end.
But a worrying trend is emerging across some economies. For instance, the Bank of Japan is increasingly becoming a vehicle of the Japanese government. The Japanese government appears to be taking away the independence from the central bank to force the direct monetisation of its deficit spending. In other words, the government's fiscal deficit would be paid for by printing money by the Bank of Japan. It has been happening in the US too. The result of all this is that fiscal discipline goes down the drain. Eventually, this would result in high inflation and diminishing purchasing power of consumers.US$ 1.7 bn bailout. No this is not yet another life support sought by an American bank. Nor is it by a bank or economy in Europe. In fact, the financial sector in India itself may witness a bailout of this sort if things turn for the worst! At least that is the estimate of India Ratings, a subsidiary of Fitch Ratings, quoted by Firstpost. A stress test of Indian banks seems to have opened up a can of worms. The test takes into account economic downturn, exposure to infrastructure sector and concentration to single corporate houses.
And it seems, Indian banks, particularly the PSU banks, could fail miserably if they were to overcome each of the stress. These NPA risks in Indian banking sector is not unknown. Reports have already claimed that the restructured assets sitting on the books of several large PSU banks are ticking time bombs. But the government too is trying to keep the entities afloat by recapitalizing them. What that means is that the depositors of these banks will not be at risk even if the loans eventually become non-recoverable. But as far as shareholder profits are concerned, that will be elusive.What will India's growth forecast be for the 12th Five Year Plan? The Planning Commission appears to have already revised its estimates once before and now wants to pitch in for 8%. It must be noted that the initial estimate was pegged at 9% before the Commission revised it to 8.2%. And now Planning Commission Deputy Chairman Montek Singh Ahluwalia believes that 8% is more likely. So why the change in estimates? This is to reflect the changes in the global economic environment notably the ongoing recessionary trends in the US and Europe and persistent sluggishness in the domestic market.
Further, for FY13, which would be the first year of the 12th Plan, the growth rate has been estimated at 5.7-5.9%. This is the lowest in the last decade. An uncertain global environment aside, the need of the hour is to bolster growth in the domestic market. The government already has announced a slew of reforms. But has to now get going and focus on actually implementing them if growth has to pick up in the later years of the Five Year Plan.What does 2013 have in store for you? Well, according to most Americans the US economy is expected to slide into a recession next year. This is whether or not policy makers are able to steer clear of the fiscal cliff. The US political system continues to remain at odds over fiscal reforms. If an agreement isn't reached soon, next year could usher in a series of tax hikes and spend cuts. This is a deadly combination which could very well tip the country into another slowdown.
Seeing the deadlock in the parliament most businesses and households have put their spending plans on hold which could contract the economy. While a decision may not be reached by Jan 1st - economists believe that the government will scramble through and come to a conclusion on how to avoid major tax hikes and address spending cuts.Meanwhile, after spending the first half of the day in the green, Indian equity markets indices moved lower towards the dotted line and were trading flat at the time of writing. IT stocks were seen exerting the maximum pressure. While most Asian stock markets closed in the positive today, Europe too has opened on a positive note.
|04:52||?Today's Investing Mantra|