Week in a nutshell (27June-1July)

Technical talks

NIFTY opened the week on 27th June at 15,926 and closed at 15,752 on 1st July. The lower Bollinger Band level of 15,370 might act as a support, while, on the upside, the 16,250 level might act as a resistance.

Among the sectoral indices, FMCG (+2.8%), REALTY (+1.6%), and HEALTHCARE (+1.1%) were the gainers during the week. OIL&GAS (-4.2%) was the only loser.

Weekly highlights

  • All of the major US indices ended the week on a volatile note as oil prices rose and fell throughout the week. S&P 500 closed the week marginally higher at 3,825 and Nasdaq at 11,129.
  • WTI crude oil and Brent crude closed flat at -0.3% after fears that the US economy would enter a recession, resulting in lower oil demand.
  • Accenture reported 3QFY22 earnings, with revenues exceeding expectations at US$16.2 billion. According to the leadership, cost optimization, along with growth, is now the focus area for clients. However, it lowered its fiscal forecast due to a negative foreign exchange impact and rising inflation.
  • According to official data released on June 30th, output in India’s eight core infrastructure sectors increased by 18.1% in May, compared to 16.4% the previous year. This suggests that the economy is gradually returning to normalcy.
  • Japan’s factory activity growth slowed in June, with the PMI falling from 53 to 52, as supply disruptions, exacerbated in part by China’s strict COVID-19 curbs, hurt manufacturers, keeping the economy underpowered and with few catalysts to spur a robust recovery in the short run.
  • US consumer spending data was released on June 30th, showing that US consumer spending rose less than expected in May as motor vehicles remained scarce and higher prices forced cutbacks on purchases of other goods, indicating that the early recovery in economic growth was a losings steam.
  • On June 29, India’s Cabinet approved a plan that would allow local crude producers to sell oil to private companies, boosting revenue for state-run producers such as ONGC and Oil India. The decision will take effect on Oct. 1, and existing conditions for selling crude oil to government-run companies will be waived, according to a government statement, adding that exports will be prohibited. Reliance Industries’ share price tanked more than 7% Friday after the government levied an additional tax on crude oil.
  • FII (Foreign Institutional Investors) net sold ₹ 68,350 mn and DII (Domestic Institutional Investors) were net buyers this week. DIIs bought shares worth ₹ 59,250 mn.

Things to watch out for the next week

  • On Monday the labor markets will be in the spotlight next week, with the June nonfarm payrolls report due on Friday.
  • The 1QFY23 result season kicks off with IT major TCS reporting earnings on Friday.
  • The International PMI surveys, which track business sentiment in the United Kingdom and the eurozone, will be released on Tuesday, while the meeting minutes from the FOMC’s most recent policy meeting, held in mid-June, will be available on Wednesday.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Monsoon – One of the key growth drivers of the Indian economy?

Southwest monsoon arrives early in the mainland of India and it covered many Indian states and union territories but many of those states have received deficit rainfall in early June.

But wait, why does it matter to us, how the excess or deficit rainfall is going to affect the Indian economy and Investors?  So, let’s discuss

In India, the monsoon season starts in June and lasts till September. India receives more than ~70% of rainfall in this period. India is an agrarian economy and more than half of the workforce is engaged in agriculture and the allied sector. The farm sector also has a double-digit contribution to India’s GDP.

*LPA – Long Period Average

Here is the equation – Good monsoon = Good farm output = Strong consumer demand and vice versa

The monsoon has a direct relationship with the agricultural and allied sectors. Approximately half of India’s total food output is contributed by Kharif crops that are largely dependent on monsoon. A good monsoon season accelerates the farm output and boosts the income of the farmer community. This improves the spending power of rural areas which leads to strong demand sentiments. There is a hidden part of the above equation which is “Inflation”. Normal monsoon and bountiful harvest keep inflation under control since food contributes ~45% in the consumer Price Index (CPI). That is why a normal monsoon is a crucial factor for the inflation.

If we record deficit and a drought-like situation, it will directly weaken the farm production and lowers the income of the farmers. This reduces the consumption demand. At the same time, we get a hit from inflation as lower food production accelerate the food inflation. The government may have to spend towards import of food and adversely impacts the overall economy.

Sectors that have a large exposure to monsoon –

  • Consumer –India’s rural market contributes a significant share of the revenue of the Indian companies. Many Indian consumer companies are expanding their reach and significantly stepping up direct distribution in rural markets. The normal monsoon will improve the purchasing power of the rural population and may revive the sluggish rural demand and drive revenue growth.
  • Automobiles and farm equipment – Tractor companies have a direct relationship with the monsoon. A good monsoon improves the farmers’ spending capacity for better farm equipment. This will effectively result in better crop yields. Major Indian 2W makers derive ~50% of their revenue from the rural areas. This demand is again dependent on the agricultural growth.
  • Agro chemicals and fertilizers – Agrochemicals and fertilizers business directly depends on farmers’ income and agricultural growth. Companies derive their major revenues during the monsoon period. As the good monsoon sentiments enable farmers to spend more on crop care protection chemicals and fertilizers.

In the short, we need a normal monsoon for the smooth economic activity, especially in rural areas, So, let’s hope and pray for a good and normal monsoon every year.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Money related fears and how to conquer them

 

Mr. Hemant Beniwal says that ‘fear’ is a constant emotion among people that is brought up by money. This emotion influences our financial decisions. Following are the 5 most common money related fears and how one can overcome them:

1) Fear of losing all the money: Many people work hard to earn money and save it. But some end up losing money due to bad investment decisions. Losing all of their money is something that people scared of. Instead of having irrational fears, it is better to take small steps toward managing money. One can take help from professionals to invest the money. By doing this, one can become more confident of the investment decisions and not make big mistakes/losses.

2) Fear of never having enough money: People are always worried of outliving their created wealth, and that they will never have enough money considering medical expenses of old age. One should make a financial plan for one’s retirement goals and also consider the money needed to sustain the lifestyle and other goals post retirement. One should then work on executing the financial plan and review it regularly so that enough money is retained.

3)  Fear of making mistakes while managing one’s money: People are very scared to lose their hard-earned money, and hence let it lie idle in the savings account to avoid making bad investment decisions and avoid losing money. One should take steps to increase one’s investment knowledge, and first start with zero or low-risk investments and then riskier (volatile) investments. Help from financial planners can be used to match investments with the risk-taking ability from an emotional and financial perspective.

4)  Fear of financial identity theft: A lot of money-based transactions are done using of debit, credit cards, etc. which leads to the fear of account getting hacked or credit card duplication. This is not irrational and cybercrime cases are increasing. Don’t share usernames and passwords of online accounts with others, regularly check financial statements, update your contact number and address with the bank, and don’t click suspicious links. This can help you control the security of online financial transactions.

5) Fear of talking about money: People fear of losing money if they talk about it. They may feel that others have too much or too less in their comparison. But it is important to talk about money with trustworthy people like one’s parents, life partner as they may have gone through many situations at different stages of life. It is important to have frank and open discussions with one’s financial planner as it will make the financial plan realistic and help in achieving financial objectives.

Source- 6 Common Money Fears and how to Conquer them by Hemant Beniwal (https://www.tflguide.com/)

1) Many times, we have our own mental picture about saving money and using it. We should discuss it with more experienced individuals, read more articles on money management that can help in getting a better clarity about the mental picture.

2) We must not accept the status quo, neither must we be under the impression that we already understand everything that is there to understand about managing money. Keeping an open mind and a learning attitude can help us in taking better monetary decisions.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

The Evolving Chemical Sector

The Indian Chemical Sector has developed well in the last 10 years wherein, the companies built their initial capabilities to cater to the demand in the domestic and the international markets. Stepping in the FY23, the sector has many opportunities and growth drivers, and a few headwinds. Let’s discuss them in detail:

Opportunities and Growth Drivers:

  • China plus one: Supply chain disruptions and raw material unavailability from China caused during the Covid-19 pandemic have made many countries re-think their strategies and their over dependence on China as a raw material supplier. These countries have started reducing their dependence on China and investing in India as a part of the strategy “China plus one”. The Indian Chemical companies will benefit from this arrangement, and due to relaxed policies regarding foreign investments in the companies in this sector.
  • Hydrogen based energy: The world is looking at hydrogen as a clean alternative for fossil fuels as they aim towards carbon neutrality. The Chemical sector can benefit from this opportunity by becoming key material suppliers (for electrodes, electrolysers), operating hydrogen production assets, distributing or selling hydrogen, and thereby engaging in the emerging hydrogen market.
  • PLI scheme: The Indian government may bring PLI (production linked incentive) scheme for the chemical sector to boost domestic production and exports. This will help in manufacturing all core chemicals and supplying them to domestic as well as global markets.
  • Indian opportunity: As India is pushing for green energy and mobility shift to EVs, the Indian specialty chemical companies are well positioned to use their capabilities to create chemicals for batteries, electrolysers and solar panels.
  • Other tailwinds: The Indian chemical sector is experiencing strong global tailwinds coming from demand for chemicals from pharmaceutical companies, chemicals required for batteries, EV batteries, etc. The companies are expanding their capabilities so as to meet these ever-growing requirements.

Headwinds:

  • Supply- side issues: Many chemical producers are still dependent on China for procuring their key raw materials. The supply side issues persist as many of the suppliers in China remain shut, or are functioning at little capacity. This has led to increased raw material costs and reduced margins.
  • High freight costs: As the world struggles to contain high ocean freight costs, many chemical producing companies have to either take a margin hit or have to pass on the costs to their customers.

Is it the right time to invest?

  • We believe that the headwinds faced by the industry are temporary in nature, and can be dealt with in few quarters. The long-term growth story of the industry remains intact with a growing demand for its products across geographies.
  • As the stocks remain affected by multiple issues including the Russia-Ukraine war, rising interest rates, high raw material costs, high freight costs, etc. this may be the right time to look at the listed chemical manufacturing companies from a longer-term perspective.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Week in a Nutshell (20-24 June)

Technical talks

NIFTY opened the week on 20th June at 15,334 and closed just below 15,700 on 24th June. The index is trading near the lower Bollinger Band level of 15,370 which might act as a support, although a weak one as the markets have been falling for the past three weeks. On the upside, the 16,200 level might act as a resistance, since a gap was made last week. The RSI (14) at 40 has been consistently coming down.

Among the sectoral indices, AUTO (+6.9%), CONSUMER DURABLES (+4.6%), and FMCG (+4.2%) were the gainers during the week. METAL (-2.7%) was the only loser.

Weekly highlights

  • All the major US indices have risen from 5.4% to 7.5%, a recovery after two weeks of continuous selling.
  • The WTI Crude oil fell 1.7% and Brent Crude closed flat for the week after worries about the US economy going into a recession, which means lower oil demand.
  • The minutes of the RBI MPC meeting got released this week. The rate-setting committee has indicated of further rate hikes are on their way as inflation has been consistently staying above the upper tolerance band of 6%. The RBI has the mandate to control inflation and let it stay at 4% +/- 2%. Hiking or lowering interest rates is one of the prominent tools to control inflation.
  • Another update related to RBI is the fall in forex reserves that the RBI maintains. The latest data released by the RBI report shows that the foreign currency reserves have fallen by USD 10 bn in the last two weeks as the RBI has stepped up intervention in the foreign exchange market. The RBI has been selling dollars to curb excessive volatility in the exchange rate and prevent runaway depreciation of the Indian rupee. The forex reserves with the RBI now stand at USD 590bn. The rupee has been depreciating against the dollar and now trades below ₹78.2/USD.
  • The government, from July 1 will ban 22 single-use plastic products such as plastic spoons, forks, plates, etc. Within that also falls plastic straws that come with tetra pack juices, milkshakes, and buttermilk. Manufacturers of such products including Amul, Parle Agro, Dabur, etc are pleading with the government to postpone the ban on straws as an alternative which is paper straws which are largely imported and they cannot be made available in a short span.
  • After a scare of a few electric two-wheelers catching fire, this week in Mumbai, a TATA Nexon EV car caught fire while parked. Now even though many EV manufacturers are saying that a small percentage of EVs catching fire is normal and is a global phenomenon, it will still create a negative sentiment in the minds of the prospective customers of electric vehicles.
  • However, good news for internal combustion engine (ICE) vehicles that run on traditional fuels like petrol, diesel, and CNG. Many manufacturers are about to launch their newer models and variants as we approach the monsoon and subsequently the festival season. Multiple test vehicles, covered in camouflage have been located by auto enthusiasts. This has always been a strong indication that upcoming launches are expected very soon.
  • FII (Foreign Institutional Investors) net sold ₹ 1,15,116 mn and DII (Domestic Institutional Investors) were net buyers this week. DIIs bought shares worth ₹ 1,16,704 mn.

Things to watch out for the next week

  • At the beginning of the month, economic data watchers will look for GST collection data, and in addition to that, stock market watchers will look for monthly automobile sales volume data. Automobile, a sector that contributes 7% to the GDP and creates big employment opportunities, a consecutive and steady recovery is essential for the economy.
  • The G7 Summit will be held in Germany on Monday. The leaders will likely discuss rising worldwide inflation and the post-war scenario in Russia, Ukraine, and the European Union.
  • The US economy had contracted 1.5% in the January to March 2022 quarter. A consecutive decline in the quarter ending June will officially make the US economy to enter into a recession. Hence, the quarterly GDP numbers to be released on June 29 will be keenly watched.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Navigating through the challenges of the IT industry

During the 4QFY22 result season, stocks of IT services companies plummeted due to managements’ comments on probable medium-term margin pressures. IT stocks have been in a slump since then and have been struggling to show some signs of reversal. How does one navigate through this sector?

Demand prospects for Digital and Cloud Services:

Digital services comprise of service and solution offerings of an IT company that enable clients to transform their businesses. These include offerings that enhance customer experience, leverage AI-based analytics, and big data, engineer digital products and IoT, modernize legacy technology systems, migrate to cloud applications and implement advanced cybersecurity systems. Most firms are transitioning through IT and cloud-based solutions to meet competition and cut costs. Global lockdowns and work from home (WFH) culture have accelerated the expansion of digital services.

The BFSI sector is the largest contributor to the revenues of many IT companies. Enterprise clients in the Financial Services sector have ramped up tech spending to enhance customer experience, digitize core systems, and leverage technology to strengthen risks and controls.

Source: Company quarterly update

Cloud migration has picked up pace in the last 3 years. The recent global lockdowns and WFH culture led by Covid-19 have acted as a trigger to accelerate this journey. Enterprise clients are looking to migrate to cloud-based operations, which act as a business continuity tool in times of uncertainty. The shift to hybrid working models has contributed to the demand for IT services. Cloud transformation helps clients deploy streamlined operational efficiencies, increased adaptability and scalability, data security, and cost management.

Supply-side constraints

The IT industry has been facing certain structural headwinds such as:

Attrition levels: Voluntary attrition is when employees leave an organization for better prospects in the industry. With a robust demand environment, IT services organizations have seen higher attrition, resulting in supply-side constraints since 2QFY22. These challenges are expected to put pressure on margins over the medium term. IT companies are taking measures to stabilize attrition levels by correcting compensations, faster career growth, skill development programs, and greater engagement with employees.

Source: Company quarterly update

Subcontracting costs: Subcontracting is the process of outsourcing partial obligations of a contract. Due to tight labor market conditions and the non-availability of talent in-house, IT firms have turned to subcontractors. Rising subcontracting costs have brought margins under pressure. Reduced dependency on these services through increased hiring programs and stabilization of attrition levels can subside margin pressures.

Higher retention, hiring costs, and travel costs: Wage increments, employee retention costs, and accelerated hiring are some of the key factors that could drive margin pressures. With the reopening of economies, we expect travel costs to normalize over the medium term.

Industry-wide outlook:

While the above-mentioned factors are expected to take a hit on the profitability of IT services companies, we expect demand prospects to be robust with digital transformation and cloud migration being a key area of focus for enterprise clients. We expect margin pressures to persist over the medium term.

Should one invest now?

We believe the favorable long-term outlook remains intact, driven by enterprise client demand for cloud and automation, improved utilization levels, as well as the normalization of inflationary pressures. Increased costs due to supply challenges are likely to be transient. This may be the right time for investors with a longer time frame for investing to look at the sector.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

The Fed Game!!

Fed raised interest rates and pledged a whatever-it-takes approach to fighting inflation. Let us understand the rationale behind this decision.

Around 2 years back the world was panicking due to the pandemic. Economists were worried as everyone was locked inside their houses, not purchasing things, not using many services, leading to spending going down. When spending goes down, companies’ profits go down. When profits go down, people lose their jobs. When jobs are lost, the economy slows down, people grow poorer which is not good for the economy.

A slowing economy is an economist’s nightmare. Central banks across the world were facing this problem. Business and spending are hugely driven by borrowed money that is paid back. One way central banks try to stimulate more spending is by making it easier to take loans by lowering interest rates. India did the same in CY20.

There’s one more option on top of this: print more money. India did not opt for this option but the US did. As we all know, the US is the world’s biggest economy, whatever the US does affects the rest of the globe. Low-interest rates coupled with an excess supply of money caused the effect they wanted to see.

People and businesses started borrowing money. The money supply increased leading to spending and the economy started seeing its effects. So, the question arises why don’t we just keep the rates low and keep money printing? When there’s too much money easily available to everyone, spending increases too much. This leads to too many buyers of goods and services and not enough goods suppliers and service providers. There’s a ton of demand, but not enough supply. This always leads to prices increasing, contracting the buying capacity of the consumers which leads to inflation. Low-interest rates and money printing for too long result in inflation.

The US central bank printed high amounts of money is now leading to record inflation. How do central banks deal with this situation now? The opposite of what they did to increase economic activity – increase interest rates and stop printing money.

The inflation the world is seeing right now is not just because of low-interest rates and money printing. The markets falling is also because of the inflation that we’re seeing. Due to disruptions during the pandemic, many items are in short supply. That is making this inflation worse. Oil is one such. Microchips that go in all sorts of gadgets and cars are another example.

Of course, this isn’t the first time we’re seeing inflation. It has happened in the past multiple times. Inflation isn’t hurting India as much as it is hurting the west so far.

As an investor, you should focus on real returns. Real returns are what you get once you subtract the inflation. If an investment is giving you 6% and inflation is 7%, you actually lost money at a rate of 1% per annum. If you’re able to make 15% and the inflation is, say, 9%, your real return is 6%. Needless to say, this doesn’t mean you simply invest only in high return (which are high-risk) investments. You need to diversify according to your risk-bearing capacity. But the point remains, as an investor, real returns are the only way you should think of returns.

The equity markets are impacted due to such economic activities and investors might benefit from such a situation in long term. Our team recommends value stocks and you can even benefit from these stocks which are available at cheap rates.

Happy investing!!

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

Week in a Nutshell (13-17 June)

Technical talks

NIFTY opened the week on 13th June at 15,878 and closed down 4% on 17th June at 15,294. The index is trading below the lower Bollinger band and the next support is likely at 15,183. The recent high of 16,794 might act as a resistance. The RSI (14) of 36 indicates the index is nearing the oversold levels.

During the week, METAL (-9.1%), IT (-8.2%), and PSU Bank (-7.7%) led the sectoral losers. There were no sectoral gainers.

Weekly highlights

  • High inflation has investors worried in recent weeks about a toll on corporate profits and economic growth. On Monday, the S&P 500 confirmed it’s in a bear market at is now down more than 20 percent from its most recent record closing high.
  • After a selloff triggered by a series of interest rate hikes by the Federal Reserve and other major central banks, all three US indices ended in the red this week. NASDAQ and Dow Jones were down 4.8% each while S&P 500 was down 5.8%. The cosmetics company Revlon Inc surged ~80% on Friday after reports suggested Reliance Industries may be considering buying out the company.
  • The Federal Reserve raised interest rates by three-quarters of a percentage point, the most since 1994. Officials have indicated that aggressive rate hikes will continue, with severe measures being used to combat rising inflation.
  • Crude oil prices were impacted as investors worried about the global economic outlook and markets were impacted post interest rate hikes around the world. Brent Oil was down 6.9% during the week and ended at USD 113.6/barrel while Crude oil ended 8.4% lower at USD 110.4/barrel on Friday.
  • The Indian Index of Industrial Production (IIP) climbed from 2.2% in March to 7.1% in April. The April industrial growth rate of 7.1 percent is the highest in eight months, notwithstanding the benefit of a favorable base effect.
  • Wholesale price inflation soared to a record high in May due to rising food and fuel prices, posing a challenge to authorities dealing with high inflation. Wholesale prices climbed to 15.9 percent in May vs 15.1 percent in April and was, according to economists, India’s highest since September 1991.
  • Retail inflation for May was 7.04% from April’s near-eight-year high of 7.79 percent due to a favorable base effect. The fall in inflation in May is unlikely to do much to slow down the Reserve Bank of India’s (RBI) rate hike cycle.
  • Foreign institutional investors (FIIs) continued to be sellers, selling equities worth Rs 232,740 mn. Domestic institutional investors (DIIs) continued to be buyers and bought equities worth Rs 172,270 mn.

Things to watch out for next week

  • Major central banks followed the US Federal Reserve in raising interest rates. Rising prices and tightening monetary policies have rattled investors which dragged the equities world over.
  • S&P Global will release the flash purchasing managers indices (PMI) data for June for major economies later next week. In addition, inflation, and consumer and business climate gauges will also be released. This will provide insights into the current state of the global economy.
  • With quarterly earnings season out of the way, investors will focus on macroeconomic activities and action would be stock specific. Indian investors’ attention will be on the progress of the monsoon across the country.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Short-Term Performance is Everything

Two years ago value investing was dead, now it is the obvious approach to adopt in the current environment. What has changed? Short-term performance. There are more captivating rationales but underlying it all is shifting performance patterns. These random and unpredictable movements in financial markets drive investors’ behavior and are the lifeblood of the asset management industry; but they are also a poison for investors, destroying long-term returns.

Narratives + extrapolation

Short-term performance in financial markets is chaotic and meaningless (insofar as investors can profitably trade based on it), but they don’t see this; instead, they construct stories of cause and effect.  Furthermore, because the stories are so compelling, investors are certain that they will go on forever. This is why when performance is strong absolutely anything goes. Extreme valuations, unsustainably high returns, and made-up currencies cannot be questioned – haven’t you seen the performance, surely that’s telling you something? Of course, what it is telling is not particularly useful. It is just that investors struggle to accept or acknowledge it. There must always be a justification.

Performance is not a process

Financial markets do not provide short-term rewards for efforts and hard work. Nor can any investment approach consistently outperform the market except by chance (unless someone can predict the near future). Many investors seem to accept this. If performance is good a fund manager can say almost anything and it will be accepted as credible. If performance is bad then everything said will be disregarded. The problem with lauding short-term performance as evidence of skill poses the question of what happens when conditions change. If the process leads to consistently good short-term outcomes, what does one say when short-term outcomes are consistently bad? When performance is strong it is because of ‘process’, when it’s weak it is because of ‘markets’.

Sustaining the industry

Not only do the uncertainties of markets give investors something to talk about, but they also give them something to sell. The sheer number of funds and indices available to investors is a direct result of the randomness of short-term performance. There will always be a new story or trend to exploit tomorrow. Judgments made based on short-term performance will make everyone look skillful some of the time.

Misaligned incentives

The obsession with short-term performance is a vicious circle. Everyone must care about it because everyone cares about it. This creates a harmful misalignment problem where professional investors aren’t incentivized to make prudent long-term decisions; they are incentivized to survive a succession of short-time periods. Irrespective of whether this leads to good long-term results.

Source: ‘Short-Term Performance is Everything’, by Joe Wiggins published on www.behaviouralinvestment.com

Asset Multiplier Comments:

  • If investors are concentrated on short-term success, long-term returns may be unsatisfactory.
  • Investors can avoid the chances of capital erosion and damaging outcomes by choosing to stay focused on their long-term investing approaches.
  • They should refrain from trying to make sense of short-term market fluctuations because doing so can be mentally taxing and lead to poor choices.
  • Long-term investing decisions can make one look foolish in the short term, but they are sustainable ways of achieving capital gains over the long run.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

Beginners’ guide to investing…

“Bro, suggest me some good stocks please.”

“Hey, I heard stock X is going to go up, should I buy it?”

“I want to start an SIP, how to do it?”

“So, like can you double my money?”

As a 20 somethings guy working in the financial advisory industry, I have had my fair share of interactions mentioned above. Somehow you become the de-facto person in your circle whom people confer for financial advice. In this series of articles, I’ll be sharing some of the very basics of Investing for any beginner who has very little information about how the system works. Be advised that this is a very generalised heavily simplified version and the actual actions may differ on a case-by-case basis. Let’s take a dive into the world of bulls and bears, shall we?

 

  • The Difference Between Saving and Investing: A common misconception amongst first-time investors is that both are the same. However, there’s a critical difference between the two. Savings, in essence, are any money that you don’t spend from your earnings. For eg. On a salary of Rs. 50,000/- per month, a person is left with around Rs. 20,000/- every month, those are their savings. Investing is when you allocate these savings with the expectation of generating income and wealth. An example, of the Rs. 20,000/- saved the person buys Mutual Funds of Rs 10,000/- and Rs. 10,000 in a bank FD, only then can it be considered investments.
  • Set Goals: It might feel like a boring and tedious task, but a lot of investment decisions are based on the person’s financial goals, their risk appetite. The first step before investing is asking questions, why am I doing this? when/how will I be using this money? To appropriately assess investment options.
  • Safety Cover: A critical aspect before starting the investment journey is deciding on an adequate safety cover. It is generally advised to have at least 6 months of your expenses stored away in a rainy-day fund; any unexpected setbacks should not deter an investor from their investing goals. Unexpected illnesses/ accidents or death are the biggest threats to an investor’s long-term investing goals as they can cause wealth erosion pretty quickly. Investors should adequately Insure themselves before investing.
  • Discipline: Investing has very little to do with markets and everything to do with behavioural impulses. It’s easy to start investing, it’s difficult to keep investing and it’s hardest to stay invested. Many first-time investors lack the discipline to consistently keep investing, but persistence is the only thing that generates wealth in the long term. Another trap most first-time investors fall for is consistently checking their portfolio for gains and losses, which is as unpredictable as the wind blowing and are tempted to cash in on their investments for short-term gains or stop investing altogether because of losses. Discipline wins in the end.
  • Uncertainty: Like all things in life, Investing too is unpredictable and difficult to understand at times. Not every investment will give an investor their desired returns, nor does an average investor have the time and skills to analyse their investments periodically to take corrective actions. In order to mitigate the risks, it is recommended that investors confer with SEBI registered Investment Advisors to guide them through their investing journey.

This is the 1st Part of the Introduction to Investing Series, which will discuss critical aspects of investing aimed at first time investors. Stay tuned for more.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”