Sell Sensex!

India's benchmark stock index, SENSEX, created history on Monday, May 18th, 2009, by shooting up 17% in a single day after the re-election of the Congress party to power.

I don't think this rise is sustainable; we will see a big correction within a day or two when investors and speculators alike will start to book profits. I think it's best to sell all Indian stocks at this point; there will be opportunities to buy on the dips.

I sold mine today.

Equity Markets: Good News & Bad News

I think the recession is coming to an end. Most global stock indices have rallied over 20% since bottoming out in early March. Stock markets are leading indicators of the economy and they rally well before we get confirmation that the recession is indeed over. Similarly, the markets had started dropping well before we knew we were in a recession.

Among the BRIC (Brazil, Russia, India and China) nations, the Indian markets are the best performers with India's BSE Sensex Index clocking over a 40% gain since the early March low! Many of the blue chip stocks such as ICICI Bank and Tata Motors have more than doubled. I'm very pleased to have made some very significant investments in Indian equities when the markets were dropping like a rock.

The good news is that the recession is coming to an end; the bad news is that the market has already bottomed (in early March). So, all those investors who had been waiting for the market to bottom to start purchasing stocks - the market has already bottomed.

Having said that, I don't think it is too late to make long-term investments. Since the market has had a good rally, I wouldn't be surprised to see a small correction soon, and that, I think, will be a prudent time to make long-term investments by all those who had been waiting for the market to bottom.

If an investor keeps in mind that it is impossible to buy at the absolute bottom and sell at the absolute top, then I think (s)he will do well in the long-term. This is my Golden Rule, which I try to follow.

Please take the poll on the left-hand side of this page and vote 'yes' if you think the market has already bottomed, and 'no' otherwise.

Full Disclosure

Here are the securities that I currently hold, or have held in the past, in my personal investing portfolio as at Friday, June 15th, 2007.

Company Name	Country	Total Dividend Return (%)	Total Unrealized Return (%)	Annualized Return (%)
Canadian Imperial Bank of Commerce	Canada	7.01	47.73	18.38
China Petroleum & Chemical Corporation	China	6.95	165.76	53.23
ICICI Bank Ltd.	India	1.57	104.49	103.30
Telefonos de Mexico	Mexico	8.20	116.77	39.79
ING Group	Netherlands	10.54	53.79	20.65
Statoil	Norway	9.00	70.65	26.28
Allstate Corp.	USA	3.31	16.98	9.45
Hillenbrand Industries*	USA	1.90	7.38	8.40
Mattel Inc	USA	5.51	41.20	19.80
Morgan Stanley	USA	3.06	71.59	33.68
NewMarket Corporation*	USA	0.00	21.77	207.47
Weighted Average		4.33	58.60	49.07

* = sold security; all returns for sold securities are as of the sell date.

As you can tell, I am a fan of dividend paying companies. In some cases, a large percentage of my total return comes from dividends.

For those who don't know, 'unrealized return' is a gain/loss that does not include the effects of paying commissions and/or taxes. 'Annualized return' is the average compound annual return.

I'm looking to establish more positions in the emerging markets of India. However, the benchmark SENSEX index of the Bombay Stock Exchange is at or near all-time record highs. Unless there is a substantial correction, I do not feel comfortable buying at these levels.

India's last major correction was in June 2006 when the SENSEX index suddenly shed 30% of its value. Some parts of the country were even put on "suicide watch"! It gave me an opportunity to buy ICICI Bank for myself and Tata Motors for my dad.

I'm looking to establish fairly large (for me!) positions in India's automotive, pharmaceutical and media industry. Why? -the country's economy is booming and I want to be a part of it.

Until the next correction happens, and it surely will, I will have to wait and raise funds for my planned purchases (which is why I sold NewMarket Corp.).

A Tale of the Speculator and Technical Analysis

The Indian stock market is a classic example of what happens when speculation reaches its boiling point. After reaching an all-time high in May 2006, Bombay Stock Exchange's Sensex Index has fallen close to 30% in a month.

Neither the market nor the future can be predicted or controlled by the speculator, yet success is largely dependent upon them both.

To help make sense of the seemingly random behaviour of the stock market in the short-term, the speculator uses Technical Analysis. Technical Analysis gives a speculator the tools to "analyze" and "predict" the stock market - usually using trend lines, moving averages and other sophisticated statistical indicators.

Technical Analysis is popular with speculators because it is meant for people who want to make fast money. Unfortunately, like all things that are too good to be true, it does not work for the average person. But the lure of fast money (and a bull market!) is too strong for most to give up Technical Analysis.

Since mathematics and statistics is used in Technical Analysis, it appears as if the actions of the speculator are legitimate - after all, mathematics can't be wrong! Besides, what is wrong with using Technical Analysis to help you decide when to buy, when to hold and when to sell?

People also talk about meaningless "support levels" for individual stocks and market indices, below which all hell can break loose. Support levels, trend lines etc. are akin to lines on our palm that supposedly tell our future! These are all very interesting things but not very useful if one wants to make money in the stock market over the long-term (10 years or more).

There are a few fundamental problems with Technical Analysis that need to be brought to people's attention:

1. The speculator has no margin of safety. Since a proper margin of safety is lacking, the risk taken is often too high.

In Technical Analysis, there is no such thing as buying "undervalued" or "underpriced" securities. Technical indicators generate 'buy' and 'sell' signals. In a significant number of cases, a 'buy' signal is not generated until after a significant rise in the stock price - thus, a speculator misses some truly "golden opportunities". The idea is that a speculator is willing to give up some upside in return for little or no downside.

Speculators are in the market to make fast money. Generally speaking, speculators do not buy shares based on the company fundamentals (like profitability, debt load, book value etc.) or valuation, they instead buy shares based on technical indicators.

This means that the price paid is irrelevant as long as the technicals are good. For this reason alone Technical Analysis is dangerous because one could end up buying when the market is overheated.

2. Technical Analysis is an art/skill, rather than a science.

It cannot be learned from a book. Either you have the skill and intuition to be a successful technical analyst, or you don't. Being "average" at this will not make you rich and may yield disastrous results.

In the long run, most speculators end up making little or no money at all, or worse yet, losing money! In most cases, their few large speculative profits are fully offset by the many small losses.

3. Technical Analysis favours stockbrokers.

Brokerage houses and stockbrokers encourage using technical analysis because it is good for their business. Speculators buying and selling using technical indicators will be doing so often simply because these indicators are generated as the share price rises and falls.

Frequent trades mean more commissions for brokers and lower profits for speculators. Technical Analysis discourages long-term perspective and forces speculators to buy and sell on a weekly and even daily basis.

As a matter of fact, in Canada, the broker charges a "maintenance fee" on an account in which there has been no trading activity in the past twelve months! It's obvious they do not want us to simply buy and hold stocks - which is an intelligent way of building wealth.

Technical Analysis is good if one desires to become a sheep in the stock market - i.e. buying when everyone is buying and selling when everyone is selling. It sure is a great way of obtaining mediocre returns!

So, what should an investor with a long time horizon use to buy stocks? Balance Sheet analysis (i.e. value investing) ofcourse! Read more here.