Investment cycle rising since 2016-17, to last till 2022-23: RBI paper
Investment activity, which plays a major role in boosting the country's current and medium-term growth prospects, has seen an upturn since 2016-17 and is likely to last till 2022-23, a working paper by the Reserve Bank of India (RBI) said on Tuesday.
 
"The upturn in the current investment cycle, which began in 2016-17, is estimated to last up to 2022-23 when the investment rate is estimated to increase up to 33 per cent from the current level of 31.4 per cent," the RBI study said.
 
For a domestic demand driven Indian economy, consumption and investment play key roles in growth dynamics, the paper titled 'India's Investment Cycle: An Empirical Investigation' said.
 
"Investment activity, in particular, is significant as it not only plays an important role in shaping the current growth rate of the economy, but also in boosting the country's medium-term growth prospects," it said. 
 
The RBI study by Janak Raj, Satyananda Sahoo and Shiv Shankar examines the duration of the investment cycle and the major determinants of investment activity in the Indian context. It tries to find whether the current upturn is sustainable and how long this investment cycle would last. 
 
The authors say "there is hardly any study at the aggregate level on investment cycle either in advanced or emerging economies, including India".
 
The real investment rate in India generally trended upwards to peak at 36.7 per cent in 2007-08 before declining to 30.3 per cent by 2015-16 due to factors such as the global financial crisis, twin balance sheet problem -- high leverage by the corporate sector and high non-performing assets (NPAs) of the banking sector -- and subdued domestic capital market conditions, it said.
 
"The slowdown in the investment rate was one of the major factors, which pulled down India's growth rate from a high of 9.3 per cent in 2007-08 to a low of 6.7 per cent in 2017-18."
 
The study said the challenge is to reverse the declining trend component of investment activity which will require policy efforts on multiple fronts like ease of doing business, distressed assets, NPAs and stalled projects.
 
"These measures will help ride the current phase of the investment cycle to its peak and boost medium-term prospects of investment activity. However, uncertainties on the global front and financial market volatility need to be guarded against," it said.
 
The study finds average duration of investment cycle in India was three years and while the average duration of speed-up (from trough to peak) was 1.6 years (seven quarters), the average duration of slowdown (from peak to trough) was 1.4 years (five quarters). 
 
Four phases of downturn in the post-liberalisation period (first half of 1990s, early 2000s, 2007-08 to 2009-10 and 2011-12 to 2015-16) have been of severe magnitude, it said.
 
The paper observed that investment activity in India is affected by several macro-financial factors -- real GDP growth, real interest rate, bank credit growth, global GDP growth and gross fiscal deficit (GFD).
 
"Domestic economic activity turned out to be the main determinant of investment activity in India. The real interest rate had a negative impact on investment activity. Non-food bank credit growth positively impacts investment activity. The GFD crowds out investment demand," it noted.
 
A one percentage point increase in the real lending rate reduces the real investment rate in the range of 0.29-0.40 percentage points, it added.
 
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Common Stocks, Common Mistakes
    It is difficult to be happy and easy to be sad. If you don’t believe me, then try being happy when you do not invest in the stock market and it goes up; or when you invest in the stock markets and the markets go down. Money is a very strange thing. Human beings make rational decisions while dealing with most aspects of life but make serious errors of judgement when it comes to dealing with money—be it saving, investing, borrowing or spending. Probably none of these errors is as glaring as those that pertain to investment in equities. 
     
    Completely rational investors take totally irrational decisions when they are part of a crowd—their own individual rational minds come down many levels—to the irrational level of the crowd. Many a times, rational intelligent persons commit simple mistakes while making investment decisions in common stocks. And the market has its own method of finding and exploiting human weaknesses. I will explain the 10 most common mistakes that investors commit while investing in common stocks.     
     
    Mistake 1: Trying To Catch the Top and Bottom
     
    This is one of the most common mistakes—trying to catch the top and the bottom, little realising that only fools or liars can catch the top or the bottom. No one knows what will be the exact top or bottom of any stock; then how does a common investor get to believe that he/she will be able to catch the top or bottom? Instead of that, investors should determine the value and target price of any stock in which they intend to invest by whatever method they follow—fundamental, technical or any other—and then buy it within 5% to 10% range of that ‘buy price’. Remember, if you wait too long to buy, until every uncertainty is removed and every doubt is lifted at the bottom of a market cycle, you may keep waiting and waiting. The same rule will apply while selling.
     
    Mistake 2: It Will Come Back Up
     
    This is another common mistake which most investors commit—whether on the buying or the selling side. If they see a certain price for a certain stock and they miss buying/selling at that price, they keep waiting for that price to come back, irrespective of market or individual stock considerations. The lesson is: If the price of the stock has gone up/down for a change in the prospects of that company or sector, there is no point harbouring the illusion that the ‘price will come back’. 
     
    Mistake 3: Already Fallen So Much—Can’t Fall Further
     
    This is another serious mistake. A stock might have fallen ‘considerably’; hence, they believe that it cannot fall further. Nothing can be farther from the truth; this is one of the grave mistakes which results in multiplication of investor losses. Unless the stock becomes attractive on a stand-alone basis on fundamentals or technical or whatever analysis you may believe in, there is simply no logic in believing that “because it has already fallen so much, therefore, it can’t fall further.”
     
    Mistake 4: Already Risen So Much—Can’t Rise Further
     
    This is the opposite of mistake number 3. Often, investors believe that, since the stock has risen so much, it cannot rise further. Unless the stock becomes expensive on valuation basis/future growth expectations basis or any other ‘price determination’ parameter which you might be successfully applying, simply because the stock has risen so much does not make it a sufficient reason to sell. 
     
    Mistake 5: Protect Your Profits or Cut Your Losses
     
    Many readers might not agree with me on this point. Unless you are a short-term trader or investing on costly leveraged funds, there is no point in simply trying to ‘protect the profits’ or ‘cut losses’. Unless the stock becomes costly on valuation basis or its fundamentals deteriorate on a long-term basis or because of some other ‘price determination’ parameter which you might be using, just because a stock on which you are making money corrects, it should not make you panic and sell out to ‘protect your profits’. 
     
    The same principle would apply for cutting losses; you might be cutting your losses just before the stock is on the verge of embarking on its dream run. On the fallacy of ‘cutting your losses’, the stock might be liquidated just before it might be getting ready for its next dream run which should ideally lead to substantial price appreciation over the medium to long term. Hence, remember that, after doing your analysis, if you feel that the price is right for selling only then sell the stock and not on the misleading notion of protecting your profits because, in fact, by doing that, you might be cutting any probability of serious wealth creation in the future. The same would apply to ‘cut your losses’ fallacy also. 
     
    Mistake 6: Price Averaging
     
    This is another grave mistake investors make which takes them deeper and deeper down the loss lane. There is a wrong notion that averaging brings down the purchase cost and, hence, you would be able to sell it at a marginal profit or at least closer to its cost price. One caveat: sometimes, an investor might get an opportunity to exit in the averaged stock at close to the ‘average cost’ but those opportunities are rare and only for a short period. Therefore it is very difficult to capitalise at that point of time. And, finally, if you would not otherwise want to buy a particular stock at a particular price, then what is the logic for averaging it, if you already own that stock? Remember; never throw good money after bad money. If you have made a mistake in selecting a wrong stock, humbly accept your mistake, sell it and book your loss and move ahead. Utilise the proceeds from the sale to buy better investments that have a potential of price appreciation in future. 
     
    Mistake 7: Attributing Market Action to Individual Action
     
    Ego and lack of self-confidence are negative qualities of both, a human being and an investor. If you buy a stock and it goes up for no real reason but for market abnormalities, then be smart enough to sell it and get out of it instead of pampering your ego that you are an astute investor or a great stock-picker. Don’t forget that the market is a great deflator of egos. The same can be true when you might have invested in a stock at a decent price after all your analysis and the stock falls for no deterioration in the company’s performance but for some uncontrollable market reasons. Don’t lose self-confidence and start believing that you are wrong. Remember; market can be wrong and is in fact wrong most of the times. So try to take advantage of it abnormalities by using your knowledge, experience and judgement instead of getting swayed by it and losing your self-confidence.    
     
    Mistake 8: Efficient Market Theory
     
    Don’t blindly believe in the efficient market theory—in fact remember that market is inefficient for almost 95% of the time. Like a pendulum’s movement from one side (over-valuation) to the other side (under-valuation), it is just by chance that it passes through the middle (fair valuation). If the market were, indeed, always efficient, it would simply be impossible for so many investment gurus and fund managers to claim that they can beat the market. Having said that, over the long term, the pendulum does move in the direction of what is right—if the country, economy, sector and the individual stock does perform well, then, over the longer term, the pendulum does put its weight behind it, otherwise not.       
     
    Mistake 9: Blindly Follow the Guru
     
    Either you completely trust your judgement or the judgement of another person. And the other person in the market may be the investment guru or fund managers, etc. Kindly note that you may trust any investment guru of your choice and some investor gurus will beat the market at certain points of time, but all the investor gurus cannot beat the whole market on a continuous basis. Simply put, everybody can’t beat everybody—for there to be a winner, there has to be a loser also. And please note, the buyer and seller are always on the opposite side of the trade and both, mysteriously, believe that they are right. But one of them is wrong! So don’t trust any of the so-called gurus or take them at face value. 
     
     
    Mistake 10: Buying Penny Stocks
     
    This is another common mistake of the investors—buying into penny stocks thinking that the price is already ‘so low’, most probably in single-digit, little realising their own folly. The amount of loss which can happen in common stock investing is reported in percentage terms and measured in rupee terms, whether it be a penny stock of Re1 or a high-priced stock of Rs1,000. Therefore, if a Re1 stock falls to 10 paise or a Rs1,000 stock falls to Rs100, the loss is 90%. And, most importantly, if you invest, say, Rs1,000 in either of the above-mentioned stocks and suppose both of them become zero, you lose your full investment of Rs1,000, irrespective of the initial price of the stock. 
     
    So, remember the old saying “penny-wise, pound-foolish”; the stock price is just a quote in the market and, on its own, does not have any significance whatsoever. It has to be measured in conjunction with the company’s performance, earnings, book value, dividends, etc. A high-priced stock may actually be cheap on a valuation basis, while a low-priced penny stock may actually be very costly, if the underlying business does not support even that price.
     
    To conclude, there are many simple and avoidable mistakes which investors commit while investing in common stocks. I have tried to explain some of the most common ones. Kindly note that simple, logical things work far better in the marketplace rather than complex algorithms, theorems, valuations principles, DCF (discounted cash flows), etc. And there is no other place to test your virtues than the market—be it common sense, logical thinking, patience, perseverance, mental balance, emotional intelligence, performing under stress, etc. All the qualities which make a successful human being will be tested by the market –it has its own method of finding and exploiting human weaknesses. 
     
    Why fight with the market and try to conquer the stock prices? He, who masters himself, through himself, will obtain true happiness and ultimate success in the stock markets. 
     
    Investing is not about beating the market or anybody else, it’s simply beating your own self, your own negative traits. Once you are able to master your own self and become a complete human being, only then would you also become a successful investor. Avoid the common mistakes while investing in common stocks and embark on becoming a successful investor and a complete human being. All the very best! 
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    COMMENTS

    Ravi Bandakkanavar

    1 year ago

    Nicely explained..!!

    Krishnan Hariharan

    1 year ago

    Mehrab has opened many eyes! The article clearly articulates the pitfalls in the stock market, exactly the same mistakes I have made many a time before becoming somewhat realistic with market sentiments. The article is well written and worthy of emulation! Expect Mehrab to contribute more such enlightening articles on stocks.

    Sanjeev Patil

    1 year ago

    Thank you Sir

    ajaybabu1

    1 year ago

    Wonderful 101. Thank you, Mr. Irani. Now, could you also guide us on a comprehensive list on the fundamentals of investing viz., the parameters. Everyone gives us the standard ratios to check. But if you can give us the what-to, the how-to and the where-to - that would be a huge help. Congrats again on a wonderful write-up, and hoping for more such from you and the MoneyLife team.

    sunildatta prabhune

    1 year ago

    An eye opener Thanks

    Suketu Shah

    1 year ago

    Very insightful article to help us wisely invest without falling into these traps/mistakes.

    archana_rahatade

    1 year ago

    WOW. Very nicely written. Helpful article. Thanks for sharing

    R Balakrishnan

    1 year ago

    Excellent observations and advice. Except that we forget this when we actually pull the trigger to buy or sell.

    The 9 Lies of Financial Life
    Whether one accepts the answer to this question or not: What is the single most important thing in this world, which will shape your dreams, your time, your freedom and your identity? It’s money. And what is the most misunderstood, under-explained, mis-explained concept? That is also money. So, let us dissect the biggest financial lies which you may hear, probably, about money.   
     
    Lie 1: School Education Is Important for Getting Rich
    You may not hear a bigger lie than this because, if this were true, the world would not be full of educated drifters and school-dropout millionaires. You may be academically smart but, in life, to survive and succeed, you need to be financially smart. In school and college, children learn subjects like science, math, history, geography, medicine, engineering, accountancy, law, etc, but not something which they will have to continuously deal with, throughout their lives and at every point of their life—money. There is a gap in the education system. 
     
    Today’s education teaches us to be slaves of money and not its masters. In school, one is taught and made ready to work for money. In the real world, one has to learn to make money work for oneself. Unless we educate our people in the ways of dealing with money, very soon, there will be a revolution where the school educated people will revolt against the financially educated people.
     
    You may be a topper in your school but, when a bank sanctions you a loan, it will not ask for your school mark-sheet but your balance sheet. The education system is based on the system of elimination—the focus is not on advancing the stronger ones but on holding back the weaker ones. We get taught by both, teachers and life. The difference is that a teacher first teaches and then takes tests while life first takes tests and then teaches.
     
    Lie 2: Insurance Should Provide You Returns
    This is perhaps the most convincing of all the lies which you may hear. Because it deals with human psychology, the expectation is to get something in return for everything. But life and insurance do not operate that way. Remember, insurance is either getting everything or nothing for something. Therefore, don’t expect something in return for your money except the protection which it intends to provide you with. Also, never combine investment with insurance, since insurance is always bad investment. After the lofty expenses, the returns which you get on your insurance policy are dismal and investments should not provide you with insurance.
     
     
    Lie 3: Savers Are Winners 
    This is perhaps the most confusing lie which you will ever hear—that savers are winners. The truth of the matter is that, in today’s fast changing modern banking and technological currency age, savers are losers. Savers are losers if they save in terms of money, which keeps on getting devalued and loses value to inflation. Instead, invest in assets like equities or real estate which actually benefit with inflation and also give you tax-breaks. 
     
    Lie 4: Professional Investors Are Better Stock-pickers than Common Man 
    You probably will not hear a more blatant lie than this one. Professional investors simply have no real edge and right to believe that they can consistently beat the man on the street who has hands-on experience and understanding of specific aspects which affect investments. 
     
    It may be an unrealistically ambitious task for a fund manager to consistently beat the passively constructed stock indices after the expenses and peer pressure of following the herd. It’s actually the common man who has great advantage over the professional investor, since he is not bound by the limitations of professional fund management industry.  
     
    Lie 5: Income-tax Is Fair and Rational 
    Another myth is that income-taxes are rational. The government has made tax laws very discriminating. The rich know it and take advantage of it while the poor and middle-class become its victims. The government’s regressive tax system puts maximum taxes on ‘earned income’—the income that you work hard for, like, say, salary. At the same time, it exempts, or taxes at a lower rate, certain other forms of income, such as dividends, long-term capital gains, rental income, etc, which constitute all passive and portfolio income—the income derived from your investment assets whether it be from shares, real estate, etc. 
     
    The tax is also regressive because it taxes the rich at a much lower rate, if at all. For example, the ‘net marginal tax rate’ after deductions is much lower on a business than it is on salary. 
     
    A salaried employee hardly gets any deductions and most of his earned income is almost fully taxed, while a businessman gets all kinds of expenses—whether he actually spends or not—as deduction and the net taxed money is lower. 
     
    I say ‘whether he spends or not’ because there are certain expenses which the businessman actually spends money on, like staff salaries, telephone bills, electricity bills, etc, which are allowed as a deduction from income but there are certain other items, such as depreciation which is not a cash expense but is still a deductible business expense. 
     
    That is why the tax system is regressive and favours the rich. The middle-class people buy assets in their individual names while the rich buy assets in their businesses; typically, the companies which they own buy the assets for them but they enjoy all the legally allowed benefits on them. Thus, income-tax is seldom fair and rational.
     
    Lie 6: Debt Is Always Bad
    Contrary to popular opinion, debt or leverage is not risky if you know how to harness the power of positive leverage. In fact, lack of proper leverage might hinder your goal of achieving financial independence. Positive leverage is that debt which multiplies your money by putting money into your pocket while negative leverage is that debt which reduces your money by taking money out of your pocket. Debt taken for buying assets which yield income is positive leverage, while loans taken for expenses, like consumer durables, foreign vacations, etc, are negative leverage. Never fall into a debt trap because, be it an individual, corporation or government, it is really difficult to come out of it. 
     
    To unleash the ultimate power of positive leverage, you have to aim to reach the stage of net positive cash flow after tax because, once you have reached this stage, you start making ‘money for nothing’. You should never leverage for portfolio income, i.e., capital gains, but only for passive income, i.e., regular income in the form of rent, dividend, interest, etc. Inflation is your partner with positive leverage simply because you borrow costlier money today and 
     
    pay back your loan in cheaper money in future, because of inflation. 
     
    Lie 7: Accounting Assets Are the Same as Investment Assets
    Recognise the difference between an accounting and an investment asset. Accounting asset is the term for any expense which cannot be written off in the same financial year, while investment asset is something which produces income and puts money into your pocket on a regular basis. For example, a car will be an accounting asset but actually it’s a cash-guzzling liability losing almost 20% of its value immediately as you touch its accelerator and drive out of the showroom and then continuously eats into your cash in the form of fuel charges, insurance costs, maintenance, driver’s salary, etc. 
     
    On the other hand, rental property or equity stock will be an investment asset that puts money into your pocket on a regular basis in the form of rent and dividends, respectively. Don’t fall prey to the lie of accounting 
    assets being the same as investment assets; otherwise, all your life you will, like a slave, keep working to gather accounting assets that continuously keep denting your pockets.
     
    Lie 8: Spending Can't Make You Rich 
    Just ponder, we spend money—often a lot of money—on our child’s education so that the child can earn money in future. Again, many companies spend millions of dollars on advertisement, publicity and sales promotion. Why? To increase their sales and profits. If you are a new investor, you would probably join some course related to investments and/or purchase some stock investment books. Why? Clearly, so that you can increase your knowledge and understanding and earn more profits through stock investing. In all of the above-mentioned cases, you are actually spending money in order to get rich. 
     
    Thus, often, you have to spend money to get rich! The test is that the money spent should give you some kind of benefit or advantage which can then be converted into tangible wealth. Knowing when to spend, to get rich, is a tricky question. Cutting back on the correct method of spending to get rich is like cutting the cost on your car fuel and hoping that the car will keep running on its own. Neither can the car run without fuel nor can you become rich, unless you know how to spend money on the right things. 
     
    Lie 9: Gold Is an Inflation Hedge
    Several, so-called, financial experts will tell you that gold is a hedge against inflation. However, that may not necessarily be the case. Gold is an international commodity whose price is quoted in US dollars and is not directly related to inflation but to ‘real interest rates’ (nominal interest rates minus inflation) of US dollar-denominated assets like US Treasury Bills (T-Bills). 
     
    When the real interest rate is down and close to inflation, gold is likely to appreciate in value because, to hold gold (which does not give any cash flow), the investor has to forego interest on his/her investments and, hence, real interest rates have to be low or negative to induce the investor to hold onto something which does not give real cash flow. 
     
    It is pertinent to note that gold is essentially an alternate currency which quotes in international markets in US dollar terms; hence, weaker the US dollar, the higher is the price of gold and vice versa.
     
    Either you control money or money controls you and then it controls your life, freedom, dreams, heart and soul. You may be told many financial lies throughout your life. These lies are bound to make you a financial slave. Know the real nature of money to free yourself from the shackles of financial slavery and move towards financial independence to achieve your higher self-actualisation goals. 
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    COMMENTS

    SNEHAL BHUPENDRABHAI TELI

    2 days ago

    One should must have to read Moneylife magazine n post ..Nice all Debashish ji and Sucheta ji..

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