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Sunday, January 2, 2011

Some Thoughts on Investments and Trading

  A New Year and New Hopes !!!
 

This is time of the year when the new year begets with lot of hopes and dreams ! This is the time of the year when people make all kinds of new year resolutions and forget about it later on !!  Let this author once again wish all the readers a very happy and prosperous new year !!  

And this is the time of the year when all analysts and traders publish their stock picks and trades for the new year, with very high levels of hope. However, this author is forced to add a small note of caution that investors and traders may remain careful, because many known and unknown roadblocks  may hinder the smooth flow of the Indian bull market at any time, especially in the shorter time frames. We are living in a world which has become so interconnected, as anything which happens at any part of the world may augment in to a financial tsunami of mass proportions. Even though the western and US equities are still cheap on a historical basis, even at their two year highs,  some analysts are still skeptical about the recovery, because of  the jobless growth and the impending reset of interest rates on a lot of mortgages in the second half of the year 2011.  Besides investor optimism seems to have risen to new highs. Some banks and even some countries may  be  required to be bailed out again. 

The Indian stock markets are still quoting at relatively higher historical  valuation levels due to the perceived growth potential. For an example of short term hindrances, at least six Indian banks have raised their interest rates over the new year weekend. The RBI, after falling behind the curve at least by an year, will be forced to raise interest rates further in to the new year.  The fundamentals of Indian stock markets may be affected by the tight liquidity, rising inflation and interest rates, political instabilities, the ever decreasing standards of governance both at the corporate and political spheres etc, albeit in phases.  

Let us end this post on a note of hope. Many analysts might be doling out big index targets at these times of the year like Nifty at 25,000 etc. Let this author make it clear that Nifty or for that matter, any other investment which earns a 15 % yearly compounded return can reach 24,800 from 6130, in just ten years. Similarly, Nifty can reach 9990, 15900 and 37950 at the yearly compounded returns of 5, 10 and 20 percents  respectively. But no stock market ever goes straight up and there will be many periodic obstacles at the stock and industry levels and the Indian and world economy  as a whole. These will  give good opportunities for knowledgeable and patient investors and traders alike. Let us hope that the best managed Indian companies can make a compounded return of 20 % p.a. in the new decade !  However, this is where all the caution is to be exercised by the investors. Many studies have shown that most investor portfolios do not make or match even the returns of broad stock indices. Investing in an exchange traded fund which tracks the Nifty index like 'Nifty Bees' or sticking to the best large caps of the Indian economy seems to be an ideal solution at present.  Let us also hope that the Indian stock market grows and delivers in the new decade ! But when it comes to trading and stock markets, it is always better to say  : " Hope for the best, but prepare for the worst  !!! "  Hence this note of caution.

Cheers and Prosperous Investing and Trading !!!  

Keywords : Large capstocks, ETF, Stock returns, Long term compounding etc.  

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