Saturday, 30 March 2019

Do Elections Matter for the Stock Market?

With the Lok Sabha elections just around the corner, one set of data is doing the rounds. Some data crunchers have compiled market returns during various governments. The outcome is that elections don’t matter for the stock market. As the data suggests, the market has given healthy returns even during coalition governments and majority governments don’t directly imply good stock-market returns. 

In an interview in a business newspaper, Kumar Mangalam Birla, Chairman of Aditya Birla Group, said, “A coalition will have its own pulls and pressures and can never be the same as the situation today. I think the government has a role to play in taking that 7% (growth) to 9.5-10%. Therefore, the shape and composition of the government is important. We haven't reached a point where politics and economics have been totally divorced from each other.”

Now that’s a view coming from a businessman rather than analysts and data crunchers. Data is a manipulative object. You can find any data to suit your beliefs. It is not the belief that flows out of data, but the analyst finds the suitable data to match his beliefs. Hence, you can’t really trust data. That’s counterintuitive because data is generally considered to be unbiased and non-partial. It’s the opinion that’s colored. But data can have many underlying determinants and conditions which are generally not visible. That’s what makes relying completely on data dangerous. Data does nothing more than give a false sense of certainty and control. 

So, what to do? Combine data with common sense. Data devoid of common sense is worthless. It can only deceive you. To me, common sense suggests that governments are absolutely crucial for businesses and hence the stock market. Imagine a cabinet that rolls out one anti-business, populist decision after another, without worrying about the economics. Imagine a government that is engaged in corrupt practices. What will happen to the stock market?

Sometimes the effects can be so distanced from the primary cause that the data doesn’t capture them as one entity. For instance, if a policy decision produces its effects in two years, you won’t find the impact on this year’s stock-market returns. A case in point is the state of government-run banks. Before the ongoing clean-up, they were virtually zombie banks. But the stock-market-return data didn’t capture it. During the clean-up, their stocks fell, so the data would show negative market returns. Now once clean-up has been done, their stocks will likely soar. But when this happens, the government will have changed. If it’s a coalition once again, the data will show the market racing, thus implying that the market can race during coalition governments as well. That’s farcical.

In the stock market, as also in elections and most other matters, common sense is your best friend. Don’t ever trade it with data. Data should just be a tool, not your master.

Saturday, 16 March 2019

Why Investors Should Beware of the Media

Analysts and investors pride themselves in being genuine about their thinking and research. But that’s not always the case. At a subconscious level, they are not just influenced but driven by the media. Many of them will shake their heads on reading this, but as I said, it happens at the subconscious level, so you don’t know that you are being controlled.

The media feeds on our fears, anxieties and the tendency to pay attention to what’s abnormal. That’s why it seldom reports what’s normal. If it’s normal, nobody wants to hear it. That’s why, there is so much importance given to “breaking news” or being the first to break a story. The recent Union Budget again saw the media trying to outguess the budget provisions. When a couple of them proved to be right, the media patted itself on the back. With the general election scheduled in a month, the media is again try to predict the future.    

What’s the need for all this? Why can’t we wait for the event to conclude and wait for the outcome? The media then can do the reporting. But then there will be no thrill, perhaps. 

The latest news flow in a couple of stocks is another example of how the media controls the narrative. A leading housing-finance company is the latest prey of media monsters. Nothing that has been said against the company has been proved yet, but the effect is visible in the company’s stock price. Analysts are falling over themselves to find problems with the company. The same analysts were earlier recommending the stock on TV.

The real problem is not the unfettered criticism by the media. To some extent, it’s essential to ensure transparency and check corruption. The problem is that this rebuke can cascade into reality. The same housing-finance company has seen its bonds downgraded and its stock dumped by institutions. After all, who wants to take the risk? This itself can cause substantial damage to the business and shareholders.

What’s the solution then? Take the media to task. It shouldn’t be allowed to escape after making false allegations that result in loss of money or reputation. The media company should be made to pay the damages if its report turns out to be wrong. This will also make the media more accountable. 

It doesn’t take much to malign a company or an entrepreneur; any idiot can do that. But it does take a lot of effort and years of toil to build a company, on which many people depend for their livelihood.

Friday, 1 March 2019

Mistakes Investors Make in the Stock Market #1: Being Penny Wise and Pound Foolish

No one wants to lose money. Yet many investors make losses in the market. While it’s not abnormal to make losses per se, many investors increase their losses due to their own behaviour. They do so by hinging themselves to their buying prices. If a company has started to perform poorly, investors still want to somehow get back their buying price, which may or may not come. 

Even if the stock hovers about their buying price, they don’t want to sell the stock so that they don’t make any loss at all. Often they find that after coming close to their buying price, the stock moves several percentage points down. You can imagine the frustration. Eventually, they decide to sell at a much larger loss. That’s being penny wise and pound foolish.

The stock price is a dynamic element. It changes every second. You can’t rely on it to act in your favour. The solution to the problem is to be comfortable with small losses. Consider them as insurance against a sudden fall in the stock. If you must exit a stock and Mr Market offers you a price a few points lower than your buying price, don’t hesitate to accept it. Mr Market may not offer you the same price tomorrow.

Another useful tactic is to sell in tranches. For instance, if you are down 20 percent, sell half of your holdings. If the stock appreciates and you are down just 10 per cent, sell the rest. Your overall loss will be less as compared to if you had sold out entirely when you were down 20 per cent.

Losses in the market are perfectly okay. You can’t expect to make money on all your stocks. Some will indeed go sour. In such cases, formulate a loss-containment strategy and don’t be too finicky about getting back your buying price.