Timing – Is it worth doing?

This is a very important topic to debate. There are two camps in the market, one who believe in timing & the other one who does not. We believe that for a Long term investor time spent in the market is more important than timing the market. The recent market move i.e last ten days is the best lesson for those who believe in timing the market. In last 10 days Sensex is up 9.5% in spite of high crude oil prices, Libyan crisis, risk of sovereign default in Portugal, Japanese Tsunami followed by nuclear radiations, Indian political uncertainty due to fresh wikileaks videos etc. This shows that market knows something which we don’t know. Market has its own wisdom of valuing stocks. Investors who tried to time the market and stayed in cash in anticipation of positive news flows would have missed the best ten days i.e 9.5% return. Market may have discounted all the bad news & started building up on pure fundamentals and fair valuations. This shows that market is bigger than individuals and we should respect it. Market makes opinions, opinions don’t make Markets.

Imagine if we could become rich instantly without making any serious effort – things would be really simple. But it’s just a wish. All of us know the laws of nature. A mango tree takes 12 years to give delicious mangoes (Gujarati Saying – Utavale Aamba na pake). If it bears the fruits before, these would be sour or rotten or both. Similarly, making money is a time-consuming process. Remember, if there was an easy way to make money, everyone would have followed it till it became irrelevant.

Many investors say that they will invest when bad news goes away but does not realize that with bad news even cheap prices would go away. Best time to invest is when news is adverse and nobody is buying. Below are some of famous quotes from legendary fund managers.

"After nearly 50 years in this business, I do not know anybody who has done it (market timing) successfully and consistently." (John C. Bogle in Common Sense on Mutual Funds)

"No one--not the pundits from the big brokerage firms, not the newsletter writers, not the mutual fund managers, and certainly no TV analyst--can predict where the market will go tomorrow or next year." (Wm Bernstein in The Four Pillars of Investing)

“There's something in people, you might even call it a little bit of a gambling instinct ... I tell people [investing] should be dull. It shouldn't be exciting. Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas Casino.” (Paul Samuelson in The Ultimate Guide to Indexing)

"Timing the market is for losers. Time in the market will get you to the winner's circle, and you'll sleep a lot better at night." (Michael LeBoeuf in The Millionaire in You)

Bihar – Winds of Change

Last month, I came across a report from CLSA on Bihar. Two research guys Anirudha Dutta & Srinivas Radhakrishan visited Bihar for five days. They covered Patna, Muzaffarpur, Vaishali, Hajipur & Nalanda. So research was done at “Grass Root” level. There were some sensational facts that came out during their visit to Bihar. Some of them are as under:

·         In 2010, Bihar attracted more tourists than Goa.

·         Mobile subscribers growing at 62% CAGR which is fastest in India.

·         Kidnapping was the fastest growing industry before 6 years. After Mr. Nitish Kumar came to power, he has appointed 5000 SAP (Special Auxiliary Police) to catch criminals and put them behind bars.

·          A speedy trial of criminal cases in courts has resulted in nearly 50000 criminals being put behind bars.

·         Shops used to shut before sunset, now remain open till 9.00 pm.

·         Cleanliness around the city streets caught their eyes.

·         There were many sites of highway construction. Two-way lane with no potholes.

·         Government recruited 2.5 lakh teachers. Ratio is now 1 teacher per 100 students. Just imagine what would have been the ratio before?

·         New bicycles were visible in school parking area. Bicycles were directly distributed to students.

·         In last election 30% of Muslims voted for BJP. This shows people want Growth over Religion.

·         Tax collections have increased 23% CAGR over last 5 years.

·         NREGA (National Rural Employment Guarantee Act) has been a big success. No problem of labour availability in Bihar.

·          Land & real-estate prices have shot up in last 6 years.

·         ICICI Prudential Life Insurance collected highest premium in east India.

·         Maruti sold 300 cars in 2005. Now they sell minimum 500 cars in any month.

·         Advertisement of tuition classes, computer coaching etc visible on banners & billboards. Finally people of Bihar are getting aware of importance of education.

·         Toyota opened showroom in Patna last year & Honda is going to open soon.

·         Patna & Muzzaffarpur enjoyed 20-22 hours of power supply. Invertors & generators sales have gone down substantially.

·         20-25% growth of HDFC Bank in Bihar is no challenge.

·         Demographic Dividend – 58% of population is below the age of 25.

Crystal Ball – Crude oil & Monsoon

Budget is over and so are the eventful days. Market did like budget and so was up around 4.5% in last week. The key positives which came as a positive surprise is 4.6% fiscal deficit target for FY12 along with government borrowing figure of Rs 3.43 lakh crore which was assumpted to be above Rs 4 lakh crore. No change in excise duty & disinvestment of Rs 40,000 crore for FY12 cheered the markets. UID & disbursement of cash subsidy directly to the end user would be a game changer for India in coming years. Execution of budget will be closely monitored by markets in coming months.

Budget optimism has ended & from now onwards two things will determine the trend of the market in 2011, which is Crude oil & Monsoon. Brent crude is currently trading at $117 which is not tolerable as we are more sensitive to oil prices. Upside seems capped till oil comes down. But in next 3-6 months it seems unlikely even if Libya crisis diminish. Financial speculation is playing very large part in oil prices along with uncertainty in middle-east. Saudi Arabia’s market is down 24% on the perception that something wrong is going to happen. So there will be risk premium for the next 3-6 months on oil prices even if nothing happens. As India is an agricultural country, monsoon plays a big role. So from 2^nd half of the year focus would shift on progress of monsoon.

On the positive note we are still in a secular bull market which started in 2003 & will continue for many many years to come. Recently Citigroup came out with a report that India would become the largest economy of the world by 2050. Even Mr. Mukesh D. Ambani in his recent conference said that India would become $5 trillion economy by 2022-25.

In my next blog I will touch upon how Bihar is changing.