The favorite pastime that most investors indulge in – index gazing. Investors spend months watching one number for that elusive signal. Often, years pass by simply watching the Index and staying gloriously inactive. The idea of one number guiding decision making is irresistible to the investor who is struggling to simplify decision making. Investors find it compulsive to rely solely on the index to guide their decisions. But, numbers don’t tell the whole story and the index is no exception. For instance, index composition is transitory and the number certainly fails to explain changes in its composition. It also fails to explain how the corporate actions of a few companies can distort the big picture. The power that one number wields over the mind space of the entire community can be both fascinating and frustrating to the analytical lot. For example, in an index of fifty stocks, six stocks make up for most of the movement it makes. In recent weeks, the index surged and investors clammed up after concluding it was expensive. The buyback of HUL coupled with the continued overvaluation of ITC, HDFC, HDFC BANK, TCS, and RIL distorted the index significantly. Outside of these six stocks, the index multiple is closer to its historic lows. But, the index tells a different story.
The twin killers of success are impatience and greed. ~ Jim Rohn.
The current account deficits of the world’s fastest-growing economy and the world’s second-fastest-growing economy presents a tale of contrasts. China has a huge surplus as it exports significantly more than it imports. India, on the other hand, is generating a huge deficit with little emphasis on changing course. Being a hugely surplus generator gave China the leeway to merrily shop for global commodities in a way that no nation has in recent history. China went berserk buying huge inventories of different commodities. The prices went into a tizzy as the China bull wrecked the global commodity shop. But, China may well reverse gears realizing that it can’t buy too much more. This will send the global commodity markets back into a phase of price tumult. Commodity prices hold the key to India’s economic recovery.
Time to freeze both debt and equity strategies.