(an edited version appeared in today’s Asian Age/Deccan Chrnomicle) GETTING BULLISH I do not know if we are in a bear market in the ‘technical’ sense of the word. However, it does seem that people think so. In the last two to three years, post the Lehman crisis, retail participation in stock markets has been diminishing and there is a marked shift of new money to gold, fixed deposits, bonds etc., Stocks and real estate seem to have been pushed to the corner. We tend to ignore equity investing and resume only after the market appears visibly to be in a bull orbit. By then, we would have missed many opportunities. It is said that bear markets correct not only stock prices, but also attitudes and philosophies. People always want to ‘get rich’ NOW. Stock markets used to be the favourite place for attempting this. People are now looking for the next Holy Grail, having burnt fingers in real estate and stocks. The boom in silver followed by a sharp correction shook off a lot of hangers on. Gold has its faithful, but is more a repository for capital protection and an insurance against a shrinking economic globe. As Indians, in addition to the loss of any viable investment options (that can help us to ‘get rich quick”) we are also socked in the gut by inflation which hits us each time we open our wallet. Recognising that, the government has reduced the size of the new one rupee coin so much that you mistake it for a fifty paise coin. It is symbolic of the erosion in the purchasing power of the rupee over the last three years or so. So, having resigned ourselves to below inflation returns from bonds or fixed deposits, we have now turned our attention to our spending habits. We look at where we can cut or totally eliminate expenditure. We are either worried about preserving our money or, sadly, in many cases, reconciling ourselves to a diminished lifestyle. Many are also sceptical about “SIP” in equities, not having seen much return or simply because of the phase of investments they are in. On top it, the wall of worries is brick-lined with falling political and economic stability. Some people I talk to seem to be smug about the stock markets not having ‘bottomed’ yet. I wonder if these people hear someone ringing a bell at the bottom. Everyone seems to be an expert at timing the market. If you are one of those, then read no further. You know when to buy and when to sell and I am sure you are sitting with a pile of money to invest at the right moment. This is for those of us who want to build a ‘core’ portfolio of high quality equity shares for the long term. By long term I mean anything beyond ten years. Does it matter when you buy, if you are going to hold it for ten years? I think it does. For example, if I buy something at Rs.100 and it becomes Rs.1000 in ten years, it is great. I think it is even greater if I could buy it at Rs.60 or Rs.80. At Rs.80, I can buy 25% extra shares in the company as opposed to a price of Rs.100!! Similarly, if we measure the performance of mutual fund schemes from, say, 1996 to date, they have surely done better than the broad indices. So, let us not waste much time wondering whether the markets have bottomed out or if there is a long way to go. Maybe when this decade is over, the Sensex may still be at 22000 or so. We just have to check the prices of some quality stock like Hindustan Unilever or Cummins or Colgate etc a couple of years ago when the markets were at 21000 and today when the markets are at 16000. For example, Hindustan Unilever was Rs.214 when the Sensex was 20,325 in end January 2008. At the point of writing this, the Sensex is around 16,000 and Hindustan Unilever is around Rs.390. Do the math yourself. Please do not think that Hindustan Unilever is my top pick or that I own the stock. I am giving a couple of names of what I think are high quality stocks, with consistently high return on equity (ROE). I am sure that you can give me a list of stocks that have also destroyed wealth over time. The thing is that equities are the only asset class that can deliver long term value. Real estate or gold give far lower long term average returns. What happens in gold or real estate is that we see sudden spikes of sharp appreciation and very long periods of stagnation. If we take the long term averages (let me say thirty years as an example), stocks would definitely have given the best returns. In a bull market, we trade prices and our chances of success are fifty percent. In markets like these, we can actually ‘invest’ in stocks of companies we believe we like and will remain profitable over the next decade or more. Even if the economy grows at five percent and inflation remains at ten, there is every reason to believe that domestic spending grows at fifteen percent. Consequently, companies that cater to this demand should grow at this pace. Do not shy away from this asset class. R. Balakrishnan (balakrishnanr@gmail.com) November 22, 2011

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