Ahead of the G-20 Summit in London next week, the International Monetary Fund, on Friday urged the participating world leaders to make cleaning up the financial sector as their top priority and ensure that the stimulus money is available next year too.
Observing that the world is at a crossroads now as it faces the greatest economic crisis in 60 years, the IMF managing director Dominique Strauss-Kahn said at a news conference that the G-20 leaders have the opportunity to spur a recovery next year if they take the right action.
Asserting that cleaning up the balance sheets of banks and getting the financial sector working again was critical to reviving world growth, Strauss-Kahn said: "Countries can do it in different ways, but they have to do it and do it now."
Responding to questions from reporters in London, Paris and Washington through video conferencing, he said the governments around the world had done very well in announcing stimulus plans to counter the current downturn and create jobs.
But they now needed to ensure that efforts were sustained in 2010, he said.
Strauss-Kahn said though the crisis did not start with emerging markets, the collapse of trade finance and drying up of capital flows is hurting many emerging markets.
The IMF needs enough resources to assist emerging markets; otherwise a collapse in emerging economies would have a devastating impact on developed economies, reinforcing the crisis. He also called for aiding low-income countries.
Terming it a crucial meeting for resolving the world economic crisis, Strauss-Kahn said it is vitally important that the G-20 leaders reach agreement at the April 2 meeting in London. "If there's a big clash it will not be good for confidence," he declared.
Hoping that the meeting would show unity and leadership, the IMF chief said the changes agreed in London could amount to the same strategic shift that took place with the creation of the IMF and the World Bank at Bretton Woods, New Hampshire toward the end of World War II.
In addition to endorsing his five-point IMF agenda, he wanted to see steps agreed to start reforming the international financial system, including regulation of tax havens, rating agencies, and hedge funds. "I'm not expecting something very new. What I expect is the commitment of world leaders to take a step forward and to make it rapidly."
Global activity is now projected to contract by 0.5-1 per cent in 2009 on an annual average basis -- the first such fall in 60 years, the IMF has said.
Source
Showing posts with label Global financial meltdown. Show all posts
Showing posts with label Global financial meltdown. Show all posts
Sunday, March 29, 2009
Sunday, March 1, 2009
Bear market to end soon !!!
Did I catch you on that ? are you expecting someone would be able to predict that for everyone ?
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Source
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Source
Wednesday, February 25, 2009
Solving a global crisis
IMFRestarting the global economy through a widening of the US external deficit is not the best way forward.
The world saw a crisis coming. Just not this one. The widening US external deficit and the growing surpluses in China, Japan and other countries reflected major global imbalances that would eventually wreak havoc on the world. Some analysts predicted that the world would grow tired of funding the US deficit, causing the dollar to plunge, long-term rates on treasurys to skyrocket, and the US to go into a tailspin, bringing down the world.
A crisis did finally occur, but neither the dollar nor US treasurys tanked, yet things got really nasty anyway. The initial response to the crisis saw an unprecedented injection of liquidity by the Federal Reserve that was designed to normalize credit markets, but which others feared would cause inflation. Neither took place. Instead, things got worse.
So, what seems to be the problem? The best interpretation is that the 2008 aggravation of the crisis was triggered by major equity losses in key financial intermediaries, associated with a moderate correction in asset prices. These losses caused a rise in counter-party risk, triggering a major disintermediation process as investors fled towards safer assets. In the process, financial links were broken and spending collapsed precipitously.
During the previous boom years, the financial industry had become more concentrated (in terms of the number of players), more leveraged, and more globally diversified (in terms of assets), so that problems in the main players would be systemically large and have global impact.
So, what seems to be the game plan for dealing with the crisis? The investors’ flight to quality means that those issuing the safe assets are left as the sole remaining super-borrowers. These super-borrowers—the US and Japan, mainly—are the only ones left to re-establish financial links and rewire the system. Up to now, this has had two legs: propping up aggregate demand directly through fiscal reflation, and recapitalizing the banking system.
In the US, the recapitalization and reflation is planned mainly for the domestic economy. But the solution, to be effective, should also have a global character. Restarting the global economy through a widening of the US external deficit is not the best way forward.
A more sustainable alternative is to use the super-borrower capacity to reflate the global economy and to re-establish financial links globally. This can be done in several ways. First, multilateral development banks should be recapitalized—by issuing guarantees in the form of callable capital—allowing them to raise funds in global capital markets to lend to the developing world.
This would allow developing countries to compensate for the lost access to private markets. Loans should be disbursed quickly and conditional only on an ex- ante assessment of the soundness of their macro stance. They should be made in an amount sufficient to prevent the inefficient, pro-cyclical contractionary fiscal adjustment that is being caused by the lack of access to finance. Part of the capital raised could be invested in a diversified portfolio of private emerging market assets to provide for this asset class—what Ben Bernanke is doing to the US variety.
With this strategy, a global fiscal reflation can take place by preventing inefficient cutbacks in the countries shut out of finance because of the global crisis instead of relying solely on expansion in the structurally weak US fiscal position. Second, IMF should also be recapitalized so as to make sure that it has more than enough funds to help reconnect countries to finance.
The goal should be to convince countries that are currently hoarding large amounts of international reserves as insurance against future crisis that they need not sit on so much liquidity because they will have ample access to contingent funds if needed. This will allow countries to adopt policies that are more supportive of a global reflation effort.
If capital markets are impaired, the global and regional international institutions need to step up to a much bigger plate than is currently being envisioned.
Source
The world saw a crisis coming. Just not this one. The widening US external deficit and the growing surpluses in China, Japan and other countries reflected major global imbalances that would eventually wreak havoc on the world. Some analysts predicted that the world would grow tired of funding the US deficit, causing the dollar to plunge, long-term rates on treasurys to skyrocket, and the US to go into a tailspin, bringing down the world.
A crisis did finally occur, but neither the dollar nor US treasurys tanked, yet things got really nasty anyway. The initial response to the crisis saw an unprecedented injection of liquidity by the Federal Reserve that was designed to normalize credit markets, but which others feared would cause inflation. Neither took place. Instead, things got worse.
So, what seems to be the problem? The best interpretation is that the 2008 aggravation of the crisis was triggered by major equity losses in key financial intermediaries, associated with a moderate correction in asset prices. These losses caused a rise in counter-party risk, triggering a major disintermediation process as investors fled towards safer assets. In the process, financial links were broken and spending collapsed precipitously.
During the previous boom years, the financial industry had become more concentrated (in terms of the number of players), more leveraged, and more globally diversified (in terms of assets), so that problems in the main players would be systemically large and have global impact.
So, what seems to be the game plan for dealing with the crisis? The investors’ flight to quality means that those issuing the safe assets are left as the sole remaining super-borrowers. These super-borrowers—the US and Japan, mainly—are the only ones left to re-establish financial links and rewire the system. Up to now, this has had two legs: propping up aggregate demand directly through fiscal reflation, and recapitalizing the banking system.
In the US, the recapitalization and reflation is planned mainly for the domestic economy. But the solution, to be effective, should also have a global character. Restarting the global economy through a widening of the US external deficit is not the best way forward.
A more sustainable alternative is to use the super-borrower capacity to reflate the global economy and to re-establish financial links globally. This can be done in several ways. First, multilateral development banks should be recapitalized—by issuing guarantees in the form of callable capital—allowing them to raise funds in global capital markets to lend to the developing world.
This would allow developing countries to compensate for the lost access to private markets. Loans should be disbursed quickly and conditional only on an ex- ante assessment of the soundness of their macro stance. They should be made in an amount sufficient to prevent the inefficient, pro-cyclical contractionary fiscal adjustment that is being caused by the lack of access to finance. Part of the capital raised could be invested in a diversified portfolio of private emerging market assets to provide for this asset class—what Ben Bernanke is doing to the US variety.
With this strategy, a global fiscal reflation can take place by preventing inefficient cutbacks in the countries shut out of finance because of the global crisis instead of relying solely on expansion in the structurally weak US fiscal position. Second, IMF should also be recapitalized so as to make sure that it has more than enough funds to help reconnect countries to finance.
The goal should be to convince countries that are currently hoarding large amounts of international reserves as insurance against future crisis that they need not sit on so much liquidity because they will have ample access to contingent funds if needed. This will allow countries to adopt policies that are more supportive of a global reflation effort.
If capital markets are impaired, the global and regional international institutions need to step up to a much bigger plate than is currently being envisioned.
Source
Monday, February 23, 2009
Globalization 2.0 in peril
Statements by world leaders strongly advocating open trade every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic.
Several Italian towns ban the sale of kebabs and other foreign food in an attempt to make Italians eat Italian. British workers at their country’s third largest oil refinery go on strike because foreign labour is being used for new construction at the refinery site. Spain is promising to pay immigrants to pack up and head home.
And then there is the more well-known case of the US, where the new economic stimulus package announced by the Barack Obama administration has controversial provisions to buy and employ American.
The war of words between the US and China on how the latter manages its currency, the use of higher tariffs by many countries to protect powerful industries such as steel, bailouts of select companies, the rise in trade disputes—all point to the disturbing fact that protectionist pressures are welling up in many parts of a recession-stricken world.
Note that most of these cases are from the rich countries rather than the poor. Some 25 years after the US and its allies pulled most countries into the global trading system and brought in the second golden era of globalization—the first ended with World War I—it is the original proponents of Globalization 2.0 who are busy trying to protect domestic interests.
It is reassuring that most world leaders continue to swear by open trade. The finance ministers of the Group of Seven (G-7) nations met earlier this month and promised to fight the growing threat from economic nationalism. The larger group of 20 (G-20)—which includes India—made similar promises when it met in the middle of November.
However, that the world’s leaders see the need to make such statements every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic. Declining capital flows and the withdrawal of shaky global banks back to their home bases are other warning signs.
The theoretical case against protectionism is clear: Free trade allows countries to specialize in activities where they have a comparative advantage. For all their famed disagreements, most economists concur that open borders for the movements of goods and services are far better than tariff walls that protect inefficient producers.
If the US, for example, insists on the use of expensive American rather than cheap Chinese steel to build a bridge, it is short-changing one set of citizens to help another.
The empirical case is clear as well: Countries with open borders usually grow faster than those that build barriers to trade. Also, it is widely accepted that the protectionism of the 1930s worsened the Great Depression. It is unlikely that the old mistakes will be repeated, though we may see milder forms of the protectionist affliction in the coming months.
The problem now is slightly complicated. Say, country A decides to spend hundreds of billions of dollars to support a weak economy. A large part of this money will naturally go into the coffers of the companies and individuals who get this money. They spend part of it and that gets the economy rolling again—or at least that is what the fiscal stimulus crowd fervently hopes.
But not all the money that a government pours in stays in the country. Some of it leaks out when domestic companies and consumers import stuff from country B. So, the fiscal stimulus in country A partly helps prop up export demand in country B. It is also likely that the fiscal stimulus in the latter helps the former.
What if country B decides not to spend too much money, either out of conviction or because it already has high levels of deficits and public debt? It benefits from what the government of country A is spending, but does not return the favour.
It is in such cases that country A may be tempted to slip in trade-destroying policies that insist on local buying and employing.
Avoiding these traps will require international coordination, where countries agree to keep borders open and spend in unison.
But that will be easier said than done. Recession, unemployment and bankruptcies will almost inevitably make voters put pressure on politicians to protect domestic interests. Some of it could manifest in ugly xenophobia—do not eat kebabs, do not employ Indian techies. This is going to be a tug-of-war worth watching.
What about India? We have undoubtedly benefited from globalization. Growth picked up after the 1991 reforms and poverty levels have declined. The fear of the outside world has subsided as national confidence has grown. For all their posing while in opposition, no major political formation in India has tried to roll back economic reforms.
Yet, let us not be surprised if the old swadeshi warriors polish their armour and step into the battle with renewed vigour this election season.
Source
Several Italian towns ban the sale of kebabs and other foreign food in an attempt to make Italians eat Italian. British workers at their country’s third largest oil refinery go on strike because foreign labour is being used for new construction at the refinery site. Spain is promising to pay immigrants to pack up and head home.
And then there is the more well-known case of the US, where the new economic stimulus package announced by the Barack Obama administration has controversial provisions to buy and employ American.
The war of words between the US and China on how the latter manages its currency, the use of higher tariffs by many countries to protect powerful industries such as steel, bailouts of select companies, the rise in trade disputes—all point to the disturbing fact that protectionist pressures are welling up in many parts of a recession-stricken world.
Note that most of these cases are from the rich countries rather than the poor. Some 25 years after the US and its allies pulled most countries into the global trading system and brought in the second golden era of globalization—the first ended with World War I—it is the original proponents of Globalization 2.0 who are busy trying to protect domestic interests.
It is reassuring that most world leaders continue to swear by open trade. The finance ministers of the Group of Seven (G-7) nations met earlier this month and promised to fight the growing threat from economic nationalism. The larger group of 20 (G-20)—which includes India—made similar promises when it met in the middle of November.
However, that the world’s leaders see the need to make such statements every once in a while is perhaps proof they are worried that countries could close their borders in a moment of panic. Declining capital flows and the withdrawal of shaky global banks back to their home bases are other warning signs.
The theoretical case against protectionism is clear: Free trade allows countries to specialize in activities where they have a comparative advantage. For all their famed disagreements, most economists concur that open borders for the movements of goods and services are far better than tariff walls that protect inefficient producers.
If the US, for example, insists on the use of expensive American rather than cheap Chinese steel to build a bridge, it is short-changing one set of citizens to help another.
The empirical case is clear as well: Countries with open borders usually grow faster than those that build barriers to trade. Also, it is widely accepted that the protectionism of the 1930s worsened the Great Depression. It is unlikely that the old mistakes will be repeated, though we may see milder forms of the protectionist affliction in the coming months.
The problem now is slightly complicated. Say, country A decides to spend hundreds of billions of dollars to support a weak economy. A large part of this money will naturally go into the coffers of the companies and individuals who get this money. They spend part of it and that gets the economy rolling again—or at least that is what the fiscal stimulus crowd fervently hopes.
But not all the money that a government pours in stays in the country. Some of it leaks out when domestic companies and consumers import stuff from country B. So, the fiscal stimulus in country A partly helps prop up export demand in country B. It is also likely that the fiscal stimulus in the latter helps the former.
What if country B decides not to spend too much money, either out of conviction or because it already has high levels of deficits and public debt? It benefits from what the government of country A is spending, but does not return the favour.
It is in such cases that country A may be tempted to slip in trade-destroying policies that insist on local buying and employing.
Avoiding these traps will require international coordination, where countries agree to keep borders open and spend in unison.
But that will be easier said than done. Recession, unemployment and bankruptcies will almost inevitably make voters put pressure on politicians to protect domestic interests. Some of it could manifest in ugly xenophobia—do not eat kebabs, do not employ Indian techies. This is going to be a tug-of-war worth watching.
What about India? We have undoubtedly benefited from globalization. Growth picked up after the 1991 reforms and poverty levels have declined. The fear of the outside world has subsided as national confidence has grown. For all their posing while in opposition, no major political formation in India has tried to roll back economic reforms.
Yet, let us not be surprised if the old swadeshi warriors polish their armour and step into the battle with renewed vigour this election season.
Source
Wednesday, January 14, 2009
5 investing mistakes to avoid in 2009
For many investors, 2008 was a nightmare that came true. After four years of boom, when the tables turned, it wiped out lakhs of crores (trillions) of investors' wealth.
Last December, there would have been a smile on everyone's face. While the United States had started feeling the pinch of the sub prime crisis, many experts claimed that India was decoupled from what was happening there. Well, it took just one month to change the scenario.
On January 21, in a matter of hours the benchmark indices, Sensex and Nifty, hit the lower circuits. And in the next 11 months, there have been few moments of pleasure for the stock market investor.
Both the indices are down over 50 per cent. But depending on portfolio, some investors have even lost 80-85 per cent.
As the year-end approaches, let's look at some of the mistakes that many investors made during the last year and hopefully, refrain from making them again.
1. Over-leveraging
Buying stocks with borrowed money is leveraging. And it is a crime that many investors committed last year.
Typically, a broker either lends or allows the investor to have a larger position than the money that has been deposited. The interest rate on such lending is higher. Consider this, often an investor has Rs 1 lakh and has positions in the market four to five times of that.
When things are good and stock prices are rising to dizzying levels, everyone is happy. The return on investment outstrips the interest cost. But when the market falls, it is a complete disaster.
For instance, when Reliance Industries was trading at Rs 2,500, you bought stocks worth Rs 4 lakh (Rs 400,000) on an initial capital of Rs 1 lakh (Rs 100,000). If the stock moves to Rs 2,700, it has gone up by only 8 per cent, but the return on investment (Rs 1 lakh) is 32 per cent.
Now if the stock dips to Rs 2,000, down 20 per cent, you stand to lose 80 per cent. Now if you add the interest cost to the total capital loss, then the initial capital might have been wiped out.
Lesson: Multiplier effect has both sides. Use the loan facility very responsibly and with stringent limits to it.
2. Averaging effect
Whenever stock markets start falling, the initial reaction from investors is to buy more. The idea being that there would be cost averaging.
However, when a slide like this happens, this should be the last thing on your mind. It's because while you may have brought down the acquisition cost, a lot of money has gone into this process. It is almost like throwing good money after bad money.
Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time.
Lesson: Emotional attachment to a stock can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low.
3. Investing on tips or rumours
Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks.
There are hundreds of examples where tips are given for penny stocks or Z category stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal.
Lesson: Just ignore.
4. Derivatives play
For a lay investor, this is a definite no. As investing guru Warrant Buffet had once said, derivatives are 'financial weapons of mass destruction'.
A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium.
But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favour them.
No wonder, losses keep mounting and can really hurt sometimes. For example, it is better to buy futures at Rs 25 and book profits around 25.5 or 26 levels, effectively earning 10-20 per cent return on the margin amount. However, keeping the position open even while losing can be disastrous.
Lesson: Derivatives are not an investment tool but a hedging mechanism. So either don't use it or use only after you equip yourself with its pros and cons.
5. IPO investment
On an average, during boom times, initial public offerings (IPOs) of companies are oversubscribed by 40-50 times. As a result, investors use the IPO route to make quick money.
That is, on the day of listing they simply book profits. For many, it is a sure shot mantra for quick money.
But when the scrip lists lower than the offer price, getting stuck is very much possible. And if someone has taken a loan and applied for the IPO then things could get real bad. Investors who invested using IPO funding facility get hurt the most.
Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment.
Lesson: Invest in IPOs only when you believe in the company. Otherwise, just stay away.
Investors should realise that making money is a long-term process. However, in their attempt to make a quick buck, many suffer. In 2009, make sure that these mistakes will not be repeated.
Source
Last December, there would have been a smile on everyone's face. While the United States had started feeling the pinch of the sub prime crisis, many experts claimed that India was decoupled from what was happening there. Well, it took just one month to change the scenario.
On January 21, in a matter of hours the benchmark indices, Sensex and Nifty, hit the lower circuits. And in the next 11 months, there have been few moments of pleasure for the stock market investor.
Both the indices are down over 50 per cent. But depending on portfolio, some investors have even lost 80-85 per cent.
As the year-end approaches, let's look at some of the mistakes that many investors made during the last year and hopefully, refrain from making them again.
1. Over-leveraging
Buying stocks with borrowed money is leveraging. And it is a crime that many investors committed last year.
Typically, a broker either lends or allows the investor to have a larger position than the money that has been deposited. The interest rate on such lending is higher. Consider this, often an investor has Rs 1 lakh and has positions in the market four to five times of that.
When things are good and stock prices are rising to dizzying levels, everyone is happy. The return on investment outstrips the interest cost. But when the market falls, it is a complete disaster.
For instance, when Reliance Industries was trading at Rs 2,500, you bought stocks worth Rs 4 lakh (Rs 400,000) on an initial capital of Rs 1 lakh (Rs 100,000). If the stock moves to Rs 2,700, it has gone up by only 8 per cent, but the return on investment (Rs 1 lakh) is 32 per cent.
Now if the stock dips to Rs 2,000, down 20 per cent, you stand to lose 80 per cent. Now if you add the interest cost to the total capital loss, then the initial capital might have been wiped out.
Lesson: Multiplier effect has both sides. Use the loan facility very responsibly and with stringent limits to it.
2. Averaging effect
Whenever stock markets start falling, the initial reaction from investors is to buy more. The idea being that there would be cost averaging.
However, when a slide like this happens, this should be the last thing on your mind. It's because while you may have brought down the acquisition cost, a lot of money has gone into this process. It is almost like throwing good money after bad money.
Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time.
Lesson: Emotional attachment to a stock can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low.
3. Investing on tips or rumours
Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks.
There are hundreds of examples where tips are given for penny stocks or Z category stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal.
Lesson: Just ignore.
4. Derivatives play
For a lay investor, this is a definite no. As investing guru Warrant Buffet had once said, derivatives are 'financial weapons of mass destruction'.
A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium.
But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favour them.
No wonder, losses keep mounting and can really hurt sometimes. For example, it is better to buy futures at Rs 25 and book profits around 25.5 or 26 levels, effectively earning 10-20 per cent return on the margin amount. However, keeping the position open even while losing can be disastrous.
Lesson: Derivatives are not an investment tool but a hedging mechanism. So either don't use it or use only after you equip yourself with its pros and cons.
5. IPO investment
On an average, during boom times, initial public offerings (IPOs) of companies are oversubscribed by 40-50 times. As a result, investors use the IPO route to make quick money.
That is, on the day of listing they simply book profits. For many, it is a sure shot mantra for quick money.
But when the scrip lists lower than the offer price, getting stuck is very much possible. And if someone has taken a loan and applied for the IPO then things could get real bad. Investors who invested using IPO funding facility get hurt the most.
Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment.
Lesson: Invest in IPOs only when you believe in the company. Otherwise, just stay away.
Investors should realise that making money is a long-term process. However, in their attempt to make a quick buck, many suffer. In 2009, make sure that these mistakes will not be repeated.
Source
Thursday, December 18, 2008
Despite crisis, Indians high on spirits
Global meltdown, sky-high inflation rate and gloomy economic outlook were of little concern to Indians in 2008, as they chose to be high on spirits, thus propelling the alcoholic beverage industry to register a handsome double-digit growth--or was it the case of drowning sorrows in drink. You decide.
Nevertheless, in a year that saw inflation touching a 13-year high of 12.82 per cent in August, the 150 million cases beer market grew by 15 per cent, according to All India Breweries Association figures.
The wine segment, which has a total market size of around 1.5 million cases, posted an even higher growth rate of 30 per cent, as per International Wines and Spirits Record, while other alcoholic beverages, with a market size of 190 million cases, grew at 15 per cent.
And all this happened amid spiralling prices of spirits, which shot up by up to 30 per cent in some parts of the country. The average price of generally consumed liquors ranges between Rs 600 and Rs 1,500 per bottle of 750 ml. High prices of molasses, the basic raw material for producing alcohol, had sky-rocketed forcing companies to pass on the increased input costs to tipplers.
However, on the corporate front, it was a rather quiet year in terms of big-ticket mergers and acquisitions, but the domestic landscape did feel the ripples of take-overs in the global arena.
A case in point is the 7.8 billion pounds take-over of Scottish & Newcastle, which owned 37.5 per cent stake in United Breweries, by a consortium of Carlsberg and Heineken, resulting in conflict of interests in India. Heineken got the rights of the Indian market, among others, of S&N. While it was already the single largest shareholder with 42.5 per cent in Asia Pacific Breweries (APB) -- its joint venture with Fraser & Neave -- Heineken also became the largest single stakeholder in United Breweries too. APB wanted to bring its flagship Tiger beer to India, which the UB Group resisted, as it directly competed with Kingfisher. UB Group also opposed the entry of Heineken nominee on its board.
In a similar situation, Belgian brewer InBev acquired US-based Anheuser Busch for USD 52 billion. Both companies were already competing in India through separate joint ventures.
InBev has a joint venture with India's biggest Pepsi bottler, Ravi Jaipuria group, in which the Belgian beer maker had a minority 49 per cent stake and Anheuser Busch had operations in the country through its JV with Crown Beer International.
Post their merger on international turf, the two companies began negotiations for amicable solution for conducting business in India.
UB Group firm, United Spirits, was also in the news for its talks with world's number one liquor manufacturer, Diageo, for a possible stake sale. While the company admitted it had received certain 'unsolicited' proposals from a host of companies, it did not divulge the details.
The domestic liquor industry, nevertheless, witnessed some acquisitions mainly in the form of companies taking over brewers. UK-based Cobra Beer picked up 76 per cent stake in Bihar-based brewery Iceberg Industries Ltd and also acquired the Iceberg beer brand for an undisclosed sum.
United Spirits agreed to acquire its contract manufacturing unit Balaji Distilleries in Tamil Nadu in an all-stocks deal. The distillery has been contract manufacturing for UB Group ever since its inception in 1983. The only outbound acquisition came in the form of homegrown liquor firm Champagne Indage taking over the consolidated assets of UK-based Darlington Wines, which had an estimated revenue of 25 million in 2007.
The iconic liquor player Shaw Wallace & Company Ltd also faded into history in April when the shareholders of the company approved a scheme of amalgamation that sought to merge Shaw Wallace & Company with the UB Group company, United Spirits Ltd.
In terms of new brands making debut in India, the controversial Tiger beer by APB stood out, despite unhappiness expressed by the UB Group. German firm Radeberger Gruppe, along with Dalmia Continental, added fizz to teetotallers' night-outs with its non-alcoholic beer, Clausthaler.
The wines segment also saw new brands like Celesta by Baramati-based Nira Valley Grape Wines, while United Spirits also started selling its products in the country.
The stock market meltdown in the country took its toll on the liquor segment too. Delhi-based Globus Spirits Ltd's plan to raise Rs 68 crore from the public came crashing. Even after receiving market regulator SEBI's nod in early January, the company had to shelve its IPO indefinitely.
While everybody awaits an upturn in the economy, liquor makers do not seem to be unduly worried as tipplers drink anyway, be it for a happy occasion or to gulp down woes.
Nevertheless, in a year that saw inflation touching a 13-year high of 12.82 per cent in August, the 150 million cases beer market grew by 15 per cent, according to All India Breweries Association figures.
The wine segment, which has a total market size of around 1.5 million cases, posted an even higher growth rate of 30 per cent, as per International Wines and Spirits Record, while other alcoholic beverages, with a market size of 190 million cases, grew at 15 per cent.
And all this happened amid spiralling prices of spirits, which shot up by up to 30 per cent in some parts of the country. The average price of generally consumed liquors ranges between Rs 600 and Rs 1,500 per bottle of 750 ml. High prices of molasses, the basic raw material for producing alcohol, had sky-rocketed forcing companies to pass on the increased input costs to tipplers.
However, on the corporate front, it was a rather quiet year in terms of big-ticket mergers and acquisitions, but the domestic landscape did feel the ripples of take-overs in the global arena.
A case in point is the 7.8 billion pounds take-over of Scottish & Newcastle, which owned 37.5 per cent stake in United Breweries, by a consortium of Carlsberg and Heineken, resulting in conflict of interests in India. Heineken got the rights of the Indian market, among others, of S&N. While it was already the single largest shareholder with 42.5 per cent in Asia Pacific Breweries (APB) -- its joint venture with Fraser & Neave -- Heineken also became the largest single stakeholder in United Breweries too. APB wanted to bring its flagship Tiger beer to India, which the UB Group resisted, as it directly competed with Kingfisher. UB Group also opposed the entry of Heineken nominee on its board.
In a similar situation, Belgian brewer InBev acquired US-based Anheuser Busch for USD 52 billion. Both companies were already competing in India through separate joint ventures.
InBev has a joint venture with India's biggest Pepsi bottler, Ravi Jaipuria group, in which the Belgian beer maker had a minority 49 per cent stake and Anheuser Busch had operations in the country through its JV with Crown Beer International.
Post their merger on international turf, the two companies began negotiations for amicable solution for conducting business in India.
UB Group firm, United Spirits, was also in the news for its talks with world's number one liquor manufacturer, Diageo, for a possible stake sale. While the company admitted it had received certain 'unsolicited' proposals from a host of companies, it did not divulge the details.
The domestic liquor industry, nevertheless, witnessed some acquisitions mainly in the form of companies taking over brewers. UK-based Cobra Beer picked up 76 per cent stake in Bihar-based brewery Iceberg Industries Ltd and also acquired the Iceberg beer brand for an undisclosed sum.
United Spirits agreed to acquire its contract manufacturing unit Balaji Distilleries in Tamil Nadu in an all-stocks deal. The distillery has been contract manufacturing for UB Group ever since its inception in 1983. The only outbound acquisition came in the form of homegrown liquor firm Champagne Indage taking over the consolidated assets of UK-based Darlington Wines, which had an estimated revenue of 25 million in 2007.
The iconic liquor player Shaw Wallace & Company Ltd also faded into history in April when the shareholders of the company approved a scheme of amalgamation that sought to merge Shaw Wallace & Company with the UB Group company, United Spirits Ltd.
In terms of new brands making debut in India, the controversial Tiger beer by APB stood out, despite unhappiness expressed by the UB Group. German firm Radeberger Gruppe, along with Dalmia Continental, added fizz to teetotallers' night-outs with its non-alcoholic beer, Clausthaler.
The wines segment also saw new brands like Celesta by Baramati-based Nira Valley Grape Wines, while United Spirits also started selling its products in the country.
The stock market meltdown in the country took its toll on the liquor segment too. Delhi-based Globus Spirits Ltd's plan to raise Rs 68 crore from the public came crashing. Even after receiving market regulator SEBI's nod in early January, the company had to shelve its IPO indefinitely.
While everybody awaits an upturn in the economy, liquor makers do not seem to be unduly worried as tipplers drink anyway, be it for a happy occasion or to gulp down woes.
Wednesday, December 10, 2008
Thanks to Reddy for saving our banks: PNB chief
The country must thank God and the previous RBI Governor Y V Reddy for safeguarding the banking system here from the global financial meltdown, Punjab National Bank's CMD K C Chakrabarty said.
But he said the worst of the financial crisis was yet to be seen.
"We must thank our policy makers, our regulators, as they have insulated us and we are a little bit better. For that, we must give credit to earlier Governor of RBI. He has created so much flexibility in the monetary policy that we are able to roll down many measures.
"I always say that in... such critical situation, if we are not adversely affected - thank only God," he said exuding confidence that no bank was likely to fall in India.
"I give credit to the earlier regulator. He had given sufficient signal well in advance for the banks to be cautious. I don't think Indian banks are going to fail," he said.
Asked about the present RBI Governor D Subbarao, he said, "All regulators are doing a good job. But previous regulator was criticised a little bit, that's why I said this."
On which banks would suffer the most, he said, "Those who have become more adventurous, those who have over-leveraged, those who have shown more greed, they will suffer."
"We (PSU banks) have never been greedy. We have never over-leveraged. You have called us inefficient... So our inefficiency has saved us... Those who are less leveraged and less adventurous, are in a better position," he said.
Refusing to name any entity, he said: "The most leveraged banks were suffering the most. You know the name. Where you say the best banker award. You have given the best bank award.
You have given national titles like Padma Shree, Padma Bhushan... I don't know."
But he said the worst of the financial crisis was yet to be seen.
"We must thank our policy makers, our regulators, as they have insulated us and we are a little bit better. For that, we must give credit to earlier Governor of RBI. He has created so much flexibility in the monetary policy that we are able to roll down many measures.
"I always say that in... such critical situation, if we are not adversely affected - thank only God," he said exuding confidence that no bank was likely to fall in India.
"I give credit to the earlier regulator. He had given sufficient signal well in advance for the banks to be cautious. I don't think Indian banks are going to fail," he said.
Asked about the present RBI Governor D Subbarao, he said, "All regulators are doing a good job. But previous regulator was criticised a little bit, that's why I said this."
On which banks would suffer the most, he said, "Those who have become more adventurous, those who have over-leveraged, those who have shown more greed, they will suffer."
"We (PSU banks) have never been greedy. We have never over-leveraged. You have called us inefficient... So our inefficiency has saved us... Those who are less leveraged and less adventurous, are in a better position," he said.
Refusing to name any entity, he said: "The most leveraged banks were suffering the most. You know the name. Where you say the best banker award. You have given the best bank award.
You have given national titles like Padma Shree, Padma Bhushan... I don't know."
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