Should I invest, should I book profit or should I wait for correction and then invest?

This doubt is in the minds of many normal investors w.r.t investment in equity (direct stock or through equity mutual fund). I am referring here to long term investors and not day traders.

The cause of this doubt is market indices are very high, good return has come last 1 and 2 years so confusion is will market go further up or correction is round the corner?

The concern is more on downside risk. So, let’s talk of action on possibility of that.

Two factors can affect this downside risk: economic and market. Economic factors seem in control and no negative triggers or indication there. Government and its policies are toward growth so no risk is visible from that side as of now. Market risk is always there. Market is dominated by greed and fear. Market moves as per dominant participants behaviour which looks bullish as of now. How long it will remain bullish, difficult to say. When can suddenly it turn into profit booking mode difficult to say? One should know that long term trend of economy and market are positively correlated (behave same way) but short term it can vary. Concern today is of short term and not long term. So tomorrow if for some days or even few months correction happens (downward risk) it might be due to market behaviour in all probability and not economic reasons.

Now what one should do in such scenario.

If anyone requires money in next 1 year and has already reaped a good 1 to 2 years return then better to book profit, move to safer asset (debt). Strategy is protecting your growth.

If anyone wants money in next 1 year onward to say 3 years, Then, correction if happens might leave him with a low return. Maybe he can book profit on 20% of holding, put that in debt. Be watchful and put some limit order range (in percentage terms or price terms) on either side (rise or fall) and keep booking profit of 20% subsequently. Ultimately correction will happen but no one knows, when? If he finds sudden big dip then can move all in one go. Remember the proverb, “There no use of crying over spilt milk”.

If anyone wants money say after 3 years to 7 years then for him correction can put some notional loss but strong economy can help to bounce back and recover this notional loss. Same strategy as above but instead of 20% can have 10% of holding to book profit. In case big dip then value protected but if economic factors remain strong then market will bounce back and might go to greater heights. Can put back money in equity after big dip and restart of next upward trend. Strategy is protecting the growth and getting back to growth path after normalcy.

If someone wants more than 7 years then in my view should not book profit but have patience, stay invested. Be mentally prepared for notional loss if any in short term.

Two things might be coming in the mind of some readers: (1) If for short term need one has ensured through existing debt investment then why to redeem equity as debt is there (2) why there is conviction of correction anytime in next some months.

Let me address first one. Even if you have debt which might have given you say 7% return, in case you liquidate that then that becomes 0 as no investment left and God forbid if loss on equity, then your loss looks more. If you keep that 7% return generating debt intact and book profit for some holding (10% or 20%) from equity then irrespective of indices or price of security/fund move in any direction you gain only vis a vis debt redemption situation.

To 2^nd query it has been observed that historically whenever market indices have given very high return in last 1 or 2 years there has been correction in following year. Higher the return more is the probability of short- term correction. Long term average return is somewhere between 12% to 14% p.a. Any huge swing or deviation from long term average corrects at same stage in short-term.

Some might be thinking Nifty is already above 17500 and may go to 19000 or 21000 or….. Yes, possibility is there but whatever level it goes (say 20000) probability of correction in short term will always be there.

The only thing is, should you wait to repent later or take calculated risk now? Choice is yours.

 Lowering of interest rate and impact on retirees

Last some years many retirees are witnessing lesser money in their pocket in an economy where cost of living is increasing. It has created financial distress to those people. But same is not the case for all retirees. Lets examine in detail why it has happened and what is the solution.

This problem has been faced mainly by those retirees who have invested all or bulk of their money in bank FD. It’s the first mistake done by them.

RBI borrows through issuance of various government securities for meeting deficit (revenue minus expenditure) and also for funding long term government projects. RBI through their various policy measure (CRR, SLR. Credit policy etc) from time to time gives direction to all participants what should be interest rate level within economy. Its natural that any borrower (loan taker) will always want to pay low interest rate and not high. So, its natural that RBI will also like interest rate to be low as RBI is the biggest borrower within economy. Government earns revenue through various taxes. So, if corporates or individuals who take loans from bank if they have to pay lesser interest then they have more profit or surplus. More profit at corporate end means more tax and revenue for government. More surplus in the hand of individual translates into more consumption and spending (helping corporates) or investment. So low interest rate is beneficial for all.

Now why bank interest rate has been reducing? It’s because bank earn from lending and not from deposits. Deposits gives money to bank for lending. But bank earning is basically from margin (lending rate minus deposit rate) so when they reduce lending rate (beneficial for all borrowers) they reduce deposit rate also (depositors suffer). As bank volume of lending increases with a small margin also they gain.

What will be trend ahead? In long term all interest rate within economy will reduce and it short term it can fluctuate.  Facts are before us since 1980s till date. As there will be more and more revenue for government through taxation lesser need for RBI to borrow. Trends again since 1980s point towards that only in long term. Short term again will fluctuate. On cost of living (inflation) as there will be more money in economy and in people pocket (domination of those still earning) this cost will grow which will impact all and more negatively to retirees. Facts are before all to judge. A simple fact is Rs 1 lakh today was worth Rs 386968 some 20 years back. The same 1 lakh of today will be worth Rs 31180.00 after 20 years from now. The above calculation has been taken on past and present inflation rate. So, one can judge how the value of money is getting eroded.

Someone retiring at say 60 years invests for 3- or 5-years bank FD. He gets an interest rate and at maturity he again deposits for similar period but at a lesser rate. He has forgotten that his life and dependence on this money will be till he survives ( till age of 80 or 85 or even 90). So never put all money in bank FD.

What to do now? The first choice of any retiree should be investing in Senior Citizen Savings Scheme and LIC PM Vyay Vandana Yojna. Both giving interest rate @7.4% per annum as of today. This return is guaranteed for next 8 years and 10 years respectively. Maximum limit is 15 lakhs in each under a single name. If spouse has been also working and over 60 years age then she can also invest her retirement money. So, it can be maximum 60 lakh if combined together (subject to what stated). Then one can put 9 lakh (4.5 +4.5) in name of both husband and wife in Post Office MIS. Once this exhausted then some amount can be put in bank account.

Also, some left over amount should be put in mutual fund (debt, hybrid and equity).

Rule should be simple: fixed, regular expense have to be met from fixed regular income (Pension, Interest income from Senior Citizen Saving Scheme, PM Vyay Vandana Yojna, regular and fixed income generating investment etc).

Since one can survives beyond 70 years (longevity has increased) some money should be in equity mutual fund (large cap, large and mid cap, multicap fund) as equity gives best return in long term (> 7 years). This growth can help retirement corpus not to deplete.

Have a withdrawal rate that equals growth rate. So, if 7% is growth then have 7% as withdrawal (you are not eating your capital).

Have bucket strategy. From immediate to short term to mid term to long term requirements investment product choice should be accordingly.

 

Dividend distribution restriction required in equities.

 

Dividend distribution restriction required in equities.

SEBI should come with some restrictive norm for dividend distribution in Equities.

Dividend policy is laid down by company board and management. Generally mid and small companies do not pay dividend but there is no rigid regulation that they can not pay.

Dividend is taken as marketing tools by some companies as many people think any dividend paying company is a good one. They flock for it which encourages more buying activities for such shares and in turn helps the price rise in secondary market.

SEBI should have two norms: (1) Any company which is highly leveraged i.e., has more debt and high interest pay-out cannot give dividend till it is crosses a minimum level of interest coverage ratio (may be 3 times). This level has to be maintained whenever dividend is decided.  (2) Any company should have enough revenue reserves accumulated in their balance sheet which should be some multiple of the annual interest pay-out (may be 3 times). This level has to be maintained whenever dividend is decided.

These steps will help in ensuring lesser NPAs in the books of banks. Companies will also have enough cushion to tide over bad year if any (like this year). It will also ensure the promoters with mala fide intention will not gain at the cost of lenders. It will also help normal investors to stay away from such companies who are getting investors only because of dividend. They will have safer ,more stable and profitable companies to invest. The price discovery in stock market will be with some logics (at least there will be some improvement).

The biggest risk in India is not business risk or economic risk or market risk but integrity risk of Promoters and Bankers.  Common savers in debt (Bank FD) or common investors in equity needs to be safeguarded from any future causality done intentionally to due to mis adventurism of promoters and bankers.   

Zee Business Program 01 Dec 2020, Prakash Ranjan Sinha, Director, Nurtu...

Zee Business Program 01 Dec 2020, Prakash Ranjan Sinha, Director, Nurtu...

Irrational behaviour is dominating the Stock market

Irrational behavior is dominating the Stock market

Stock market touching indices new heights every day. Sensex touched 46000 a all time high level. People are very happy at the gains they are making. Many experts and analysts  in various business channels are  projected as a life time opportunity.  No one is talking of risk which many investors might face at some stage.

Let me explain you with a very logical and practical example.

Whenever you buy anything you pay a price. Two things you always evaluate. Price and Benefit. If you are buying anything at Rs 100 you know what benefit you are getting. Tomorrow if someone comes and ask you to pay Rs 150 will you pay? The first thing you will ask what benefit you have added that you are asking for higher price. If more benefit is explained that justify the higher price you might pay but if you feel benefit is not justifying the increased price you might not pay Rs 150. We prefer to pay only that price which is worth the benefit. We have this psychology in all our buying process but found missing when we are investing in stocks. We question for increase in price when we buy anything in the consumer market. We ask, “why you have increased the price” but how many of us have tried to find the answer in case of equity? How many of us have valid reason to believe that market upward movement is fully justified?

What is the benefit we get for which we are buying a particular stock or share of a company? It is the net profit (PAT) or earning per share (EPS). EPS is Profit after Tax/Nos of outstanding share. Are we aware what earnings we are going to get for the price which we are paying? Suppose there is a stock which was bought at a price of Rs.225 and gave an EPS (Earning per share) of say Rs.13. The historical Price Earning (PE) ratio is 17.30 (225/13). PE ratio means for every 1 rupee earning that person paid 17.30. Now if it is trading 277 how will you know it is worth buying at this price? It is worth buying only when you know it’s worth the benefit (earnings which you will get in future). Looking at Mr X purchased at 225 and got earning of 13 if you buy at 277 that does not mean you will also get earning of 13. You might get less or same or more. But do you know that? So what for you buying at 277?

We all know financial numbers of most businesses are very low due to lockdown and almost every reputed research company have predicted a gloomy picture for current year 2020-21. All are hoping numbers to be much better in 2020-21. But that is almost 6 months to a year from now ( if it happens). Are we ready to believe that market will keep moving upward till that results (growing earnings) are seen? What if the earning numbers fall below expectation? Will the market still move upward? Following anything blindly is the biggest risk.  

Why then market and stock prices are moving up now? Let me again explain with an example. There is a stock A.  It is trading at say 33 and at that time may be 500 people have interest in it. With bull run the prices moves up and becomes 45 in 1 month. it has given 33% return in 1 month (may be one of the best in that period). Now the number of people showing interest for that stock grows from 500 to 2000. As demand grows for that stock ( more people are chasing it) its market price goes up again. One action (price increase and higher return) catalyses another action (number of investors interest increases) which further leads to more demand of that stock and the cycle continues. Everyone investing looking at how in short term people who invested have got very high return. But people have forgotten that for all things their natural behavior is to pay the price which is worth the benefit.

Let me put one more word of caution. Historically whenever stock prices have jumped abnormally high in very short term then corrections have happened. Sometimes the corrections have been so massive that it has taken some years to bounce up. I don’t remember anytime in past when economic realities, business numbers are low and still market just shooting up.

This irrational behavior is beyond any logic. Hope after few months we don’t have many people repenting about losses than some who are rejoicing now at abnormal gain in short term.

 

Gold vs Equity

 

Gold vs Equity

If you hear any Investment expert he will always say Gold is not a true investment asset, Its an alternate asset, best hedge against uncertainty, one should not have allocation more than 5% to 8% of his total portfolio etc etc. About equity it is said, it is the best growth asset, will give you best return in long term, maximum allocation should be in equity etc etc.

All textbook theories do not work in today’s practical world which is becoming impure day by day. How long we will live, talk and believe in old concepts. Why not examine the things in realities of today life. Equity in textbook and in theory is same everywhere but the risk has increased more in India than many developed countries.

When I look at almost 100 years of gold price movement the maximum fall has been from 1962 to 1964 and then rise again ,1997 to 1998 and then rise again, There has been some more occasions where there has been year to year fall in price but marginal but that has risen quickly back to same old level. Only these are the two periods where it took sone 3-5 years to reach back same old price level. When I compare same with Equity (Sensex movement), year to year variability has been much more. The best of the companies index has been more volatile than Gold. In very long term Sensex might have given higher return that Gold but the same can not be said now in long term (10 years period).

My concern is not past but future now. Risk in Equity is increasing manifold times vis a vis Gold. The way integrity of Promoters and Management of many companies under doubt, the way Banks yet to learn lesson on proper due diligence on Corporate loans and above all the increasing number of corrupt politicians and their nexus with corrupt promoters clearly being visible I feel risk in equity is increasing. Text book and theoreticians will only talk of economic risk, business risk and market risk. Where some one is talking of integrity risk? This is the biggest risk. Facts and figures are being manipulated to portray as business and market risk. A profit-making company suddenly default where even the best of auditors have been found to have manipulated the financial statements of the company. The law is so weak that from a naked eye one can see company net-worth has depleted but at the same time promoter personal wealth has grown manifold times. Hire the most expensive lawyer, drag the case for decades in court and live king size life is the mantra what many default promoters are following. With universe of quality company reducing choice risk is increasing.

When I look at Gold there is no such risk as above. Today one has range of products to invest in. From Gold ETF, Gold Fund to Sovereign Gold Bond to Physical Gold to Gold saving schemes. The biggest risk is always of purity but now that is also resolved in whatever way you go. Physical gold is now duly certified one. Investment through financial route takes care of theft, storage etc. With respect to volatility or negative return Gold is less volatile and more stable than Equity. Gold has given stable to good return in mid to long term. Yes, may be if 15, 20 years and above period Equity has given better return but can that be said same going forward? Let’s look at the other risk aspects of Gold more from demand vs supply aspect. Demand has been growing considering existing customary norms (marriage, festivals, gifts etc) catalysed by growing population and their increasing personal income. On supply side it has not been supplemented by discovery of many new Gold mines. So growth in Demand exceeds growth in supply. Based on simple economics principle prices of Gold will have normal growth. It’s the uncertainty factor or flight for safety sentiment factor that accelerates the normal growth in short term ( as seen last 2 years ) which gets corrected later on. So stable return is what one has found in gold in mid to long term

One reason as to why there have been so many advocates of equity and not gold is simply because the fortune of many (Fund houses, Stock brokers) is correlated more with equity than Gold. Gold advertisement has always been passive as compared to equity.

Let’s relook this 5% to 8% allocation myth and need to think if allocation to be increased? As a investor one should look to the asset or investment product which is more suitable in mid to long term as an alternative to equity. In all probability there will be correction in Gold price as has appreciated phenomenally last 2 years but I am not saying to look for short term. May be after massive correction it can become an opportunity for investment with higher allocation.