BEAT THE MARKET...INVESTORS MISTAKES...SERIES 1

 Investor behavior changes when the bull rally of the market begins. In my latest research I have found the various angles of the investor behavior which bring miseries and pains later on after plunging into the equity market syndrome of Beat the Market. I will be discussing the same in elaborate fashion in couple of series. I request my readers to read the same since it will be of great help to avoid the traps and temptation mistakes. I will explain you how we tend to become long term investors and end up with losses.

Investor appetite is back on the street where even the cobbler on the street is looking forward for parking his money into equity markets to make something more than the Piggy Bank or the savings account rate of interest. After a lackluster equity market over the last 3 year and a weak economic growth created a well strong hunger among investors to look for some better returns. The fact is that we are not looking forward for better return but we are looking for the investment options where we take more risk beyond the capacity and make over the opportunity lost returns over the last 3 years.

I hear that investors discuss that we lost the opportunity to become rich during 2004-2008 but this time we will not afford to repeat the same and hence plunge into the equity markets to become rich. Pledge your house, pledge your gold and redeem all your fixed deposits and savings and invest in Equity. This was the strategy played by the equity investors during 2004-2008.   Margin funding the best weapon of tempting investors to pledge everything and take over exposure over their risk taking capacity have been one of the most common devastation tools of the equity investments. When market falls investors don’t have water in their eyes to cry out. I have seen in my last 11 years of experience that many families got ruined due to the excessive greed and breaching too far from their risk taking capacity.

Risk taking capacity has two aspects one is the level to which one can bear the loss to his capitol and secondly how much one can absorb the same in real terms.  Taking over risk is not character of the Indian equity investors but it’s a GLOBAL phenomena. If we get back to 2008 we will remember the company name madoff which got bailed out. Investors burnt their fingers since they did not get into the details of the company and its operations and just invested as it was able to beat long term bonds and short term bonds from 2001 to 2007. The same story here that looking more from the safe investments and investing 100% into the same. We forget that there is word called Asset Allocation which needs to be maintained at every step. In my recent interaction with a group of investors I learnt that Asset Allocation is for bad times of the market and economy and when the economy and market looks like India currently then we need to invest 100% into equity to get maximum return out of the same.

Well I leave the above testimony to be justified by my fellow readers. What I am trying here is that we are again getting carried away and focusing aggressively on equity and forgetting the rules of asset allocation. In my 11 years I have found that emotions play a vital role behind the equity investments across the globe. Risk is always neglected and emotion takes 100% hold while doing investments. We love to hear to discussion where winning stories of profit making is being discussed. We stimulate our hormones through these success stories so that we breach our risk and plunge into 100% equity investments.

We need to figure out why we take these rational decisions for investing. Well we are all trying to beat the benchmark index and create  a separate investment return or rather I would put this that beat the market and common man risk taking capacity. Fund managers across the globe have been taking the same route as beat the common index and breach new height of risk taking capacity is the essence of the game. We share stories of profits where money has doubled but we never turn towards the losers. We investors follow a  pattern while doing investments. We start with good news but we end up with our lives,

Fixed Deposits and Bonds are the places where we find rate of interest of highly risk products around 11% to 14% carrying without any ratings. Whereas good rating FD products carry a rate of interest of around 9% to 10%. But we all know that we all prefer to invest in 11% to 14% based FD products. We never tend to understand why the company is paying so high and what business and what are their financial conditions. Now a argument would come where one will say that we are common man traveling in train and etc, how we will know the same. More over weak education over the last 3 decades has eroded the knowledge power of the investors hence it become quite dark for these investors to know such things. Brokers take the advantage of the same and play with the investors.  The best examples of these plays are the Insurance products which have been sold as miss-selling just by taking advantage of your low knowledge base.

Investors have adopted the same habit which they apply while going to a restaurant asking the waiter which food item is the best. We must know that as a lawyer, doctor require special knowledge for their own profession in the similar line you need to know about investments. The biggest mistake we do while doing investments is that with limited knowledge and intelligence and no special Information we try to play beat the game market. Our equity investments are just like surgeons who do surgery without knowledge of surgery.  

OVERSEAS MUTUAL FUNDS INVESTMENTS...LOOK BEFORE YOU LEAP.

In continuation to my previous article on Fixed Deposits today I will be sharing some insights on the Mutual Fund New Fund Offerings. The Indian market has set the tune of the market to create new historic highs and we will witness the same frequently in the coming days.  This is the time when NFO come into market to garner funds from investors and deploy the same based on various strategies in to the market through Mutual Fund.  There was time when infrastructure theme based mutual funds used to be sold. Investors made returns from these funds initially but once the concept became too much common the preference of the same started losing.  Infrastructure funds were later on identified as no less than to diversified equity fund.  After 2008 crisis we found that overseas based funds started coming into the market. The prime reasons behind such concepts are that we all know that Indian being an emerging economy FII’s and domestic investors have been aggressively investing. Further you can copy anyone but before you paste think twice.

Due to this overseas funds were unable to garner funds from their FII’s and Domestic investors (due to cash strapped and austerity measures). Hence they came up with Fund of Fund concept to garner funds. Slow down of Europe and weak growth of US has created a nightmare for the overseas fund managers. Now juts tell me you have invested in any Japan based FOF or theme based funds now with the current recession for Japan what type of return you expect. In another instance you did an investment in FOF or theme based fund in Europe, now with the current slowdown of the European economic growth what type of returns do you expect the market of Europe and the funds to provide. We need to understand that your money is  going to be invested in their country, in their company so we need to know who are buying their products based on which the sales numbers would come and profit would generate. If you don’t find the answer to this then simply drop the investment idea despite of how much training and spoon feeding have been done by the sales personal.
Absolute Returns of Overseas FOF or Theme Based Fund launched in India 

Among these entire overseas funds or concept based funds, few funds have managed to survive and provide decent returns in the long term. The reason behind is that the concept of the fund and theme of the fund was the game player. Credit goes to the fund manger too but performance of other funds has created big question mark on the overseas funds or theme based funds which are coming to India. Poor performance of these funds creates problems for the investors where goal planning has been married with the scheme for the investor. We should know that currently Indian economy is going to be one of the highest destinations of investment compared to other economies. When we do investments we need to understand the underline economic growth factors rather than trusting blindly on the market growths or equity earnings expectations. If I find that Indian corporate earnings would grow by 15-20% over the next 5 years then why should I bet on someone else? Greed is good but with limitations.

The thumb rule is simple if economy growth corporate profits would grow over the long term. Many argument would come for short term hiccups based investment double stories but remember they are short term and very few are fortunate to win the dice. Risk has to be taken but now playing dice but with full knowledge based investments. Many arguments would come that it’s time for diversification and we should move behind the borders of doing investments. Well in that case these investments need to be sold by saying that doing investments in Europe and the return from the same may take a decade to get. We all know and we can all remember about what is being told while these overseas FOF/or theme based funds are being sold.

 Try to understand the underline theme and imagine how the growth will come and from where. Numbers are easy to fool compared to logical reasoning. Stop doing investments based on rumors and herd based philosophy. The one who is sharing the success story of investments in these type of investments might have done the same when the recession of 2008 was ruling. We are today at 2014 and soon we will be in 2015 hence times and things both have changed. You can copy anyone but before you paste think twice.

INDIAN INVESTMENTS AND EQUITY MARKETS A OPPORTUNITY IN 2015

Predication is a part of analysis but it should be taken as the ground realty of unforeseen future. Indian economy has set the stage for a strong economic growth over the next 5 years. The initial affects are visible but a stronger picture would come out in 2015.We have already noticed and heard the Make In India is the new manufacturing music being heard across India and Globe . We are set to create a stupendous growth for the Indian economy. In relation to that I find the India stands to be one of the most favorable destinations of investments in terms of generating a higher return on Investments compared to developed economies. For equity markets I have tried to highlight only two of the few majors blows that’s will change the shape of the global investments.

Make In India is an opportunity for the Global Economy to Survive.

China is currently going through a slow down phase as exports have taken a hit and its economic policies are now focused towards internal consumption driven. Moreover china currently is going through high labour cost followed with gaining population in the middle class segment.  Hence china is no longer the cheap country in terms of manufacturing. Further to this there have some stringent measures of vigilance over the foreign companies which has also spooked the thought of shifting manufacturing base out of china. India is having low cost of production due to cheap labour cost followed with an abundant supply of young manpower compared to other economies. If we look at the chap cost comparison between china and India we find that in India manufacturing cost stands to $0.32 where as china stands to be $3.52 according to Boston research. Further in the research its being found that China’s estimated manufacturing-cost advantage over the U.S. has shrunk to less than 5 percent. Brazil is now estimated to be more expensive than much of Western Europe. Poland, the Czech Republic, and Russia have also seen their cost competitiveness deteriorate on a relative basis. China is going to loose many many manufacturing jobs since  in a research  it has been found that in2004, China’s average manufacturing costs were estimated to be 6 percent higher than Mexico’s, according to the BCG index. Mexico is currently around 4 percent cheaper on average. Chinese manufacturing wages have nearly quintupled since 2004, while Mexican wages have risen by less than 50 percent in U.S. dollar terms. 

 Make In India is going to be game changer for the world economy as manufacturing in India will result to more profitability particularly when there is slow down in the developed economies. Hence shifting manufacturing out of china on a gradual basis would be profitable for these companies who will set up their plants in India. Mr Modi’s dream of Make In India is based upon the success of story of Gujarat which contributes 13% of the manufacturing compared to the total of 21% In India during the tenure of his Chief Minister of Gujarat. Its time to take advantage and also make advantageous for the overseas investors to invest in India.

Equity market valuations and Short Term major Triggers…..

On the other hand an equity markets valuation is around PE of 18.5 and has huge potential to climb from these levels of 28000. The simple reason behind the same is that historic highs of PE were calculated when the revenue growth was around 20% whereas now the same is around 10-12%. Hence increase in revenue would push up the PE and hence the market of 28000 is very low. But this revenue growth will happen gradually as inflow of capital would increase.  Low commodity prices and crude prices are boons of the Indian economy but still they might be short lived, despite of that long term prospects of Returns on Investments are much higher compared to developed economies.

Indian government is already taking steps to simplify the labour rules and land acquisition rules which would make easy for outsider to create his manufacturing base. Infrastructure investments would find a clear way since it will get linked with Industrial development. We are in the rally of making India global hub of manufacturing. Slow down in Europe and US volatile economic recovery leaves less thrust for investments in these economies and also lucrative nature of the same. Europe is having huge young generation unemployment hence they are finding difficult to get jobs. Indian economy is open to all of them and that’s why Mr. Modi also asked the overseas communities to come to India and work for the country. Hence inflow of human capital is going to be another trigger which needs high attention.  India is going to be the next destination of work and island of technical knowhow’s.

The equity markets across the globe are also going to witness one of the radical changes in terms of investments and inflow of capital into the financial streets. These are few of the triggers which will happen and would create opportunities for the Indian market and economy to take a safe bet.

Basel III: This will change the game of the banks across the globe where liquidity system will take different shape DIRECTION. This regulation asks banks to hold more cash for payment of debt. Thys will have to invest in low interest rate bearing securities and risk free products. This leads to outflow of capital form risky assets and cooling down of asset bubbles across the globe. This will lead to  correction of the global markets across asset classes which will be an opportunity where toxins of the market would get flushed out. It raises billion questions about how the investment process of the banks would shape after the Basel III implementation begins.

Volcker Rule: This will be creating a big problem for the US merger & acquisition market as it restricts banks form betting on their own money. This includes hedge funds and private equity funds. The Volcker Rule proposal has two main components: a prohibition on proprietary trading by covered banking entities, and a prohibition on covered banking entities investing or sponsoring a hedge fund, or private equity fund, or other ‘similar fund’. This will be change the landscape of speculative investments ball game of the US economy and will flush the global economy from speculative hot money invested from 2008.This is going to be another opportunity for the Indian investors to find short term correction and invest in the same.

I restrict my self to these high powerful rules which will be implemented from 2015 and its effect on the global economy. Keeping the above rationales the best solution to get good return from investment is to invest in Indian economy. India have been loosing despite of low cost of production due to weak regulation and cumbersome business process. Mr. Modi is all set to remove the bottlenecks. He is indirectly asking global economy to come and join India to save the massive slow down of the global economy.

REPUBLICANS OR DEMOCRATS...ALL IN VAIN FOR U.S ECONOMY

Well I am no one to say about what’s going to be the election results of US but I find that Republicans has a strong point to come but that would not solve the economic problems of US. Since, the biggest debts in the history of the world have been created by joint share of the two.  We are back to the phase of listening promises but we failed to identify that these promises cost the economic growth in the long term.Who ever wins its a different ball game to run the economy.

Lest get into the details about the basic economic problems which have been created by the both of them over several decades. After the global economy took a rock bottom hit in 2008 the US federal debt swelled to $16.8 trillion growing up by $6-7 trillion.  The outflow of interest payments on that debt burden presents a formidable challenge for US taxpayers. Forget the principal, they have to pay $220 billion annually just in interest. According to the US National Debt Clock, the US government has a $16.8 trillion debt, which comes out to be over $53,000 for each US citizen.

 Aging population has swollen the government social pay packages which has no scope of being withdrawn in the future. Aging population also reduces the scope of inflow of funds for the government in form of individual taxes. Now let’s measure the volume of obligations of commitments and promises by the US governments over the decades.

According to the Boston University economics professor Laurence J. Kotlikoff, who served on President Ronald Reagan’s Council of Economic Advisers- spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. Don’t be shocked here. The US Department of Education approved $714 billion at the end of 2012, which is a significant jump from the $104 billion issued at the end of 2007.  But with the US economy failing to generate new jobs, many of these now college graduates lack the financial means to return their debt. 

Now lets come to the game of hopes used by Republicans to fight democrats where I find that democrats would find a win position either in this election or 2016. The social security bills and defense a bill which has been used historically by the US government has turned reverse on the economy itself that where Democrats have been cornered by the Republicans. Ebola and the late actions on ISIS have been one of the setbacks of the economy.  One of the biggest promises by the President directly and indirectly have been that he will get back the jobs of offshore into back in the country. In 2000, 30% of GE's business was overseas; today, 60% is. In 2000, 46% of GE employees were overseas; today, 54% are. Latest to the bandwagons- Boeing Coon  said it would move the majority of its defense services and support work out of Washington state to other U.S. cities, affecting the jobs of about 2,000 of its 5,200 defense employees in the Puget Sound region. Stringent labour laws forces the Americans to offshore the business and make their own business profitable. This proves that too much social security leads to a severe shock for the US economy. Further domestic taxation laws are so cruel that US offshore companies don’t want to pull back their funds into their own economy. Part time jobs don’t create employment but it indicates lag in policy reforms.  

The proof of the pudding is that the largest U.S.-based companies added $206 billion to their stockpiles of offshore profits last year. The multinational companies have accumulated $1.95 trillion outside the U.S., up 11.8 percent from a year earlier, according to securities filings from 307 corporations reviewed by Bloomberg News. Foreign profits held overseas by U.S. corporations to avoid taxes at home nearly doubled from 2008 to 2013 to top $2.1 trillion. Even as governments around the world cut tax rates and try to keep corporations from shifting profits to tax havens, the U.S. Congress remains paralyzed in its efforts. The response of U.S.-based companies over the past few years has been consistent: book profits offshore and leave them there. Well borrow at Zero and add numbers before the Zero. Hence Zero Interest rates were of less respite to the US economy and more to the offshore business. The corporate tax rate in the U.S. runs as high as 35 percent, but companies don’t pay U.S. taxes on profits earned abroad as long as that money remains offshore.  Another social benefit or an economic loss is the question of trillion dollars.

Congress hasn’t acted because of disagreements over whether to be tougher on U.S. companies operating abroad amid broader disputes over government spending and taxation. The stalemate has prevented the U.S. from tapping a pot of money that President Barack Obama and the top Republican tax writer in Congress have eyed for such projects as rebuilding highways.

Conclusion:

Whoever wins the most important decision to be taken by the government is not to hike interest rates and reduce the corporate tax so that circulation and flow of capital happens and there is no catastrophic affect on a sudden affect of economic factors. The government should not be biased for social benefits linking it with elections and powers. Stringent rules and regulations and simplifications in terms of labour and business laws are required so that US manufacturing gets back on its wheels. It has less to do with money and more with lenient policy reforms.   Whoever wins fiscal deficit, high outflow of interest cost and burden of social benefits are the legacy which will keep US economy to struggle over the decades. Part-time jobs don’t reduce unemployment as it’s the indication of the biggest instability of the policy reforms to create jobs and investments.