On Investing Despite Volatility; Why Buy China Now?; Avoiding Red Meat Reduces Inflammation!

From: aditya rana
Date: Sat, Jun 27, 2015 at 1:07 PM
Subject: On Investing Despite Volatility; Why Buy China Now?; Avoiding Red Meat Reduces Inflammation!


With global markets having a rather volatile June, buffeted by fears about a Greek default and Grexit and media frenzy about Chinese stocks entering a bear market, what do individual investors do? During uncertain times like this it is helpful to step-back and revisit timeless investment principles, and the investment advisory firm Wealthfront (with Burton Malkiel, the author of the investment classic “A Random Walk down Wall Street”, as their CIO and the well known financial advisor and investor Charles Ellis as an advisor) wrote a note titled “Invest Despite Volatility” which offers some helpful guidance. To summarise:

-Many facets of investing are counter intuitive, and strategies which seem right seldom are.

-An audience at an investment seminar was asked to vote on which of three different markets (all with the same end point – see below) they would prefer to invest annually with a 10 year perspective.

Market A – a steadily rising market.

Market B – a rising but volatile market.

Market C – a falling and then rising market.

-Market A garnered the most votes while Market C got the least. However, Market C was the clear winner in terms of performance.

-If an investor had invested $1,000 annually in the three different markets for 10 years, he would have had $23,275 from a rising market, $24,210 from a rising but volatile market, and $67,877 from a declining and then rising market.

-The point of the above example is to highlight that interim volatility does not matter, and works to your advantage if you are able to take advantage of it and buy on the dips. It is best to ignore market behaviour and not alter the majority of your portfolio for many years as markets generally rise over time.

-Data over the last 20 years show the importance of staying invested –staying out during just the best 10 days (i.e. 1/500th of the time) would reduce your total return by 50%, while staying out during the best 40 days would reduce a 9.4% average annual gain to a loss.

-Investors react very poorly to market corrections, and they sell on market declines out of fear that it may not come back. However, data shows that the market always comes back and a lot sooner than one might think.

-Over the last 50 years, there have been 14 market corrections (defined as a peak-to-trough fall of 10%, and 11 bear markets (a peak-to-trough decline of at least 20%).

-The average period for a market to recover from a correction is 107 days (which is the same as the average time taken for the market to decline) which is certainly not a long time to exercise patience. Studies have shown that individual investors run for the exit on market declines, which on average costs them 4% per annum.

-In their experience, amongst investors who sell when markets correct, only 5% initially state that they will not sell if the market drops 10% and almost 50% state that they will buy on corrections. The psychological impact of a market drop tends to override rational decisions.

-Bear markets take longer to recover, but they eventually do and therefore require more patience. On average it took 738 days , but this was heavily influenced by the 6 years it took to recover from the bear market of ’73 . Bear markets take twice as long on average to recover as they did to decline, suggesting that investors take a longer time to get over from big losses.

-Multiples studies show that current market conditions have little impact on long-term returns, what is important is making a schedule of regular investments and sticking to it.

-Despite the numerous corrections and bear markets of the last 50 years, an investor who started investing in 1965, would have earned a compounded return of 6.6% over the ensuing 50 years versus a compounded inflation rate of 3.6%.

Very useful advice which reaffirms the importance of having a longer term investment strategy and having the discipline to stick to it. As is usually the case, Buffet says it best (from his ’97 letter):

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?

Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices?

These questions, of course, answer themselves. But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

–Warren Buffett, chairman’s letter,Berkshire Hathaway annual report, 1997

Why Buy China now?

With the Shanghai composite index down 18.8% since its June 12 high, exacerbated by margin selling, it is worthwhile noting that the index is still up 30% year –to-date, and 104% over the last year. While the market may have more big down days in the coming weeks, they should be seen as opportunities to add exposure for investors with a longer-term positive view (see supporting reasons below). As noted in earlier newsletters, China is coming out of a 7 year bear market, and ensuing bull markets tend to last at least as long as the preceding bear market.

-As the research from 13 D points out in a recent note:

-A secular asset re-allocation away from savings deposits and the property market has just begun, and aggregate savings in China total 133 trillion yuan ($21 trillion) which is more than double the current capitalization of the market implying huge upside as more capital migrates towards equities.

-In addition, the above savings do not include investment in trust products (10 trillion yuan) and potential outflows from the property market which could be much larger (as it has traditionally served as a hedge against inflation but is currently bogged down by oversupply and inflation is well contained).

-Real interest rates are still positive implying further rate cuts by the PBOC, which bodes well for the stock market which correlates very strongly with real rates (see chart below).

-China has ample room to run a accommodative fiscal policy to support the economy for several more years, given the large accumulated fiscal surpluses of previous years.

-The accelerating transition of the Chinese economy from central planning to market-orientation, as evidenced by the significant reform of the state-owned enterprises (SOEs) which requires a bull market in equities to attract private investors and encourage competition amongst SOEs.

-The ongoing anti-corruption program, combined with steps to reduce income inequality and the wealth-gap, ensures that the Chinese leadership will continue to enjoy strong support from the public.

-The secular shift from bank and indirect financing to direct financing is a major national policy initiative and a secular bull market in equities will facilitate this transition.

-Lastly, valuations of the heavily-weighted stocks remains attractive despite the rally, with the Shanghai A-50 share index (which include banks, insurance companies and brokers) is at a P/E of 13x and a P/B of 2.0 – roughly equal with Japan’s P/B which is the lowest in the developed world. Additionally, current market valuations of the broader index (20.8) are far below the 2007 peak, when the P/E was 40.0 times and the P/B of over 5.

Avoiding Red Meat Improves Inflammation?

Chronic inflammation is considered to be one of the root causes of a multitude of chronic diseases from heart disease to cancer. Avoiding red meat is shown to reduce inflammation in a recent study:

PRCM, June 21, 2015:


-Women who avoid red meat are more likely to be at a healthier weight and have lower levels of chronic inflammation and oxidative stress, according to a study published in the British Journal of Nutrition.

-Researchers analyzed lifestyle and dietary information in an ethnically diverse group of 275 healthy premenopausal women and collected biomarkers of inflammation linked to cancer incidence. The World Cancer Research Fund (WCRF) and American Institute of Cancer Research (AICR) cancer prevention guidelines recommend eating a plant-based diet, limiting empty-calorie foods, red meat, and alcohol, avoiding tobacco, and increasing physical activity.

-Researchers scored participants as low, moderate, or high adherers to WCRF /AICR recommendations and found that those with the lowest scores had an almost two-fold increase in certain inflammatory markers than those who scored at the high end of adherence. Overweight and obese women had substantially higher levels of chronic inflammatory markers than normal weight women, including a five-fold increase in biomarkers associated with cancer risk.

-While previous research has established a link to lower cancer mortality with adherence to WCRF /AICR cancer prevention guidelines, this is the first study to analyze the association between these guidelines and inflammatory markers. Women who adhered the most to cancer prevention guidelines not only weighed less, but also consumed significantly more fiber, fruits and vegetables, and less red and processed meat, all of which may decrease inflammation and lower risk of certain cancers.

Here’s to avoiding (not reducing!) red meat totally!



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