The Good, the Bad & the Ugly – September 22, 2011

Over a dinner party last weekend, a friend of mine argued that the only way to invest in Indian equities is buying for long term. When I asked, define “long term”, he was clueless.  Many Indian investors have burned their hands in trading equities and derivatives. Now a new born idea of SIP (Systematic Investment Planning) is creating huge wealth for Financial Institutions and Financial Advisors instead of retail investors. It sounds unrealistic when we review current quarterly mutual fund review, where more than 50% of equity funds underperformed Benchmark Index in last 3 years.

UGLY Phase - Sensex plunges 700 points in a single day on US woes. This was the biggest loss in more than 2 years; IT stocks plunged amid the rupee falling to over two-year low against the US Dollar. Indian IT Industry secures more than 80% of revenue from North American and European markets. World stocks as measured by MSCI fell more than 2.4% to a new year low, making for a 10% year-to-date loss. Reserve Bank of India as raised rates last week for the 12^th time in 18 months and warned fighting high inflation remained its top priority.

As George Soros once mentioned “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.”

Pi Square FUNDTECH Ratio:

At Pi Square we advise retail investors to follow a simple 80:20 rule mixing fundamental valuations with Technical outlook. Invest 80% of your portfolio in Equities only when markets are above 50 WMA (Week moving average) with 20% of assets in long-term debt. Convert your portfolio in 80% debt and 20% equity once market closes below 50 WMA. 50 Week moving average will deduct human emotions and market psychology out of the play. As one can review all major falls (at least 3%) in equity markets have occurred below 50WMA (8 out of 10).

In May 2008 (Point 1) Nifty closed above 50 WMA proving a wide window of opportunity to long term investors. From May 2008 NIFTY never closed a week below 50WMA till January 2011 (Point 3). For Equity portfolio, look for companies with growing revenues above industry average with improving profit margins and lower Debt-Equity ratio. In this period a growing company like Tata Motors provided more than 300% return in less than 2 years to retail investors. In May 2010 (Point 2) market witnessed a huge support and provided another strong entry point. Since April 2011 (Point 4) markets have not closed above 50 WMA – providing a huge relief to our clients keeping 80% of their portfolios in debt instrument and less than 20% in equities. 

Chart 1.A (NIFTY Weekly Prices)

(Note: Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or "noise” that can confuse interpretation. 50 Week Simple Moving average is an average price of last 50 weeks where equal weighting is given to each weekly price.)

One word solution for the long term capital appreciation is “Patience”. Pi Square research has been recommending retail investors to hold more than 70% of their portfolio in debt instruments since May 2011 and keeping less than 30% of their portfolio in equities (looking for companies with strong growth and quality financial statements). We recommend companies with low debt-equity ratio and ROCE (Return on Capital Employed) above 15 in this market.  Pi Square research recommended Tata Coffee in February 2011 with more than 50% upside target; Investors locked 60% gains in less than few months.

“Let the storm pass by, as people who venture with their boats in the storm are not brave but are crazy”

For further information on equity research and valuations please email us at vpathak@pisquareinvestments.com or call us at +91-9925001805.

Thanks,

Vishrut Pathak

Pi Square Investments