I, Ankur Sharda, started investing in stock markets at the age of 17 residing in the financial capital city of

India called ‘Mumbai’. Holding a Bachelor’s degree of Commerce from Mumbai University, studied
several books on economics and fundamental and technical analysis, but build an own skill set on
investments in stock markets. Greatly influenced by the Dow Theory, the Elliot Wave Theory and the
book called ‘A Random Walk Down Wall Street’ by Burton Malkiel, I would like state that many active
qualified and knowledgeable investors with good grasping power in finance and economics, are those
who still under perform the stock markets because there are psychological reasons involved in it. There
is a need of discipline and stillness while news and information flows in which can distract the investors.
There is a thin line between investor and speculator where there are few investors in the markets in
comparison to speculators though claiming to be investors. Only way to outperform market is to sell at
near peak and buy at pessimism which needs psychological edge to make the decision to sell and
fundamental compulsion to buy cheap.

There are 2 important parts in investing:

1. FUNDAMENTAL ANALYSIS
2. TECHNICAL ANALYSIS (PSYCHOLOGICAL)

Both parts are good in investing as it works together where fundamentals initiate the inclination to
invest and technical/ psychological analysis to help in decision making of selling the investment. There is
no benchmark to decide on timing to buy or sell in certain asset classes. Financial markets move in
trends caused by the changing attitudes and expectations of investors with regard to the business cycle.
Every person investing in stock market should know the Dow Theory. First is intermediate trend A move,
second is B move price correction, third is intermediate trend C move, fourth is D move price correction
and last is intermediate trend E move which is fastest and strongest of all with high volumes.

For discerning investors, it is always that they tend to miss the first leg of bull rally (intermediate rally –
A) but there are still better ways to judge on next leg of bull rally which is generally the strongest run.
The first leg of bull rally is entry of strong hands those who have acumen and exceptional knowledge of
foresightedness, and are deep pocketed investors. This is how technical analysis help in knowing the
first wave up and second wave of correction (B) which is generally having a gestation period of 1 year
approximately. It is the time when fundamental analysis should be done on macro analysis of a
particular sector of the economy then to select companies to invest in either doing micro analysis by
oneself or getting reports done by brokerage houses. The companies with higher Price Earning (PE) Ratio
in a particular sector with bigger capacities tend to do well in the next Bull Run as high PE ratio indicates
good confidence of investors in the company. The third wave (intermediate rally – C) is generally the
strongest and returns on investment could be multi fold because this the time when fundamentals
improve and reflection on profitability is revealed. The capacities built up in earlier periods are growing
towards higher optimum level and nearing full capacity utilization. The companies with good balance
sheets, higher capacities and the good management shall give the highest returns or outperform the
sector as a whole but not necessary to outperform the other sectors in the stock markets. Then comes
the fourth wave of sharp correction (D) and there is higher volatility in the sector or any asset class
when the bull market is maturing and retail investors enter the markets (directly or indirectly) with full
confidence. The final leg up (intermediate rally – E) is fastest and strongest of all rallies where the future
capacity expansion of the companies is discounted with justification to highest PE ratios. Here the media
channels and all sorts of communication means are of the only news with a view of bull markets where
the belief becomes that markets shall never die. That is how irrational exuberance occurs at the peak of
prices and gives birth to new BEAR market. So, the explained theory can be applied to sector of the
economy, stock markets or any other asset classes having its own definition of fundamental analysis.

Once John Templeton said that “Bull markets are born on pessimism, grow on skepticism, mature on
optimism and die on euphoria”.

The bear markets usually last for 3 years having first is intermediate downtrend A move, second is B up
move price correction and third is intermediate downtrend C move which is the dullest and the longest.
The first downtrend of bear market is the strongest and the fastest where prices erode with greater
magnitude and volatility is high. The volatility persists from the fourth wave of bull market till the end of
first intermediate downtrend of the bear market. The period of first intermediate downtrend lasts from
12 to 15 months. The price correction – B is 50% to 85% of the entire fall where the breadth of the rally
is narrow and only companies with large market capitalisation tend to go up; in short good fundamental
companies perform well. The period of correction is short (less than 1 year), and then the intermediate
downward (C) move begins. This is the time when recession is reflected in the economy and adverse
profit is reflected in the Balance Sheets of the companies. In the last bear phase – C, the breadth of the
market participates to its full where weaker companies may erode the wealth of the investors and the
strong companies may go lower or form double bottom formation (tend to reach the last low of first
intermediate downtrend). It is the longest and the dullest part of the stock market where nobody is
interested and pessimism is at its peak. Here the investors are “stranded decision-less.”

There are many instances were technical analysis failed. The results reveal that past movements in stock
prices cannot be used reliably to foretell future movements. Where the index is performing well over a
period of decade but the leadership in index will change in every rally. While the market does exhibit
some momentum from time to time, it does not occur dependably and there is not enough persistence
in stock prices to overwhelm the substantial transactions costs involved in undertaking trend-following
strategies. Yes, history does tend to repeat itself in the stock market, but in an infinitely surprising variety
of ways that confound any attempts to profit from knowledge of past price patterns. The leadership of
sector or stocks shall change in every new bull market.

Any systematic relationships that exist are so small that they are not useful for an investor. Not one has
consistently outperformed the market of a buy-and-hold strategy. Alone technical methods cannot be
used to make useful investment strategies.

Chartists recommend trades – almost every technical system involves some degree of in-and-out
trading. Trading generates commissions and commissions are the lifeblood of the brokerage business.
The fundamental analysts do not help produce golden egg laying Goose for the customers, but they do
help generate the trading that provides golden egg laying Goose for the brokers.
Even if markets were dominated during certain periods by irrational crowd behaviour, the stock market
might find its own level. No technical scheme whatever could work for any length of time. Any regularity
in the stock market that can be discovered and acted upon profitably is bound to destroy itself. This is
the fundamental reason why I am convinced that no one will be successful in using technical methods
alone to get above average returns in the stock market. Using technical analysis for market timing is
dangerous in short run. The point is that market timers risk missing the infrequent large sprints that are
the big contributors to performance. Whether the correction is over for upside or downside can be
known only after the price break out on the either side. So it is uncertain before it really shows a trend.

There are various ways of doing fundamental analysis where discerning investors may follow:

1. PE Ratio,
2. Price to Book Value and
3. Cash Flow Discounting.

“Logic itself is illogical as logic changes with growing rationality to irrationality.” The PE ratio, Price to
Book Value and Cash Flow discounting are ever changing and tend to expand and contract from time to
time depending upon the times of optimism and pessimism, so it is not a benchmark to rely on. In the
growth story where profits may or may not expand but the topline (sales) grow, so does the PE ratio. It
is the confidence of the investors at large who want to buy the more stakes by paying the higher price
that is how PE ratios expand at the time of higher expectation of growth in topline but not necessary for
bottomline (profits), example TESLA, Amazon and Alphabet listed on NASDAQ (March 2018). There are
many cases where price to book value variation can be seen in the companies being the price quoted in
the same sector or business, so it cannot be relied upon. Cash flow discounting of the company due to
increase in Sales or decrease in cost, is the price paid today for the future cash flow generated. The real
fundamental is the price paid today for the expectation of the profit tomorrow. So the growth in Sales
and Profits in the future and its magnitude of growth derives the PE ratio of the stock where psychology
plays an important role with intent is to sell at higher price in future. It is the trust and investors’
confidence on growth to pay higher price for the stock that is how the PE ratio is arrived at which can
change from time to time.

Fundamental analyst’s most important job is to estimate the company’s future stream of earnings and
dividends. To do this, one must estimate the company’s sales level, operating costs, corporate tax rates,
expansion, integrations, organic and inorganic growth, depreciation policies and the sources and costs
of its capital requirements. Because the general prospects of a company are strongly influenced by the
economic position of its industry, the obvious starting point for the security analyst is a study of industry
prospects. Indeed, in almost all professional investment firms, security analysts specialized in particular
industry groups.

There are potential flaws in this type of analysis.

First, the information and analysis may be incorrect. Second, the security analyst’s estimate of value
may be faulty. Third, the market may not correct its “mistake” and the stock price might not converge to
its value estimate. To make matters even worse, the security analyst may be unable to translate correct
facts into accurate estimates of earnings for several years into the future. Even if the security analyst’s
estimates of growth are correct, this information may already be reflected accurately by the market and
any difference between a stock price and value may result simply from an incorrect estimate of value.
The final problem is that even with correct information and value estimates, the stock you buy might
still go down. Not only can the average multiple change rapidly for stocks in general but the market can
also dramatically change the premium assigned to growth. One should not take the success of
fundamental analysis for granted.

There are two opposing views about the efficiency of fundamental analysis. Investors feel that
fundamental analysis is becoming more powerful and skillful at the time. People in academic community
have argued that fund managers and their fundamental analysts can do no better at picking stocks than
an amateur.

CURRENT SCENARIO FOR PRECIOUS METALS, US STOCK MARKETS AND INDIAN STOCK MARKETS
(March 2018)
US S&P 500 and Indian Nifty are trading almost at 26 PE multiples of trailing twelve months EPS but at
the same time there is less volatility in the markets which is a good indicator of continuation of a trend.
26 PE multiple is high and looked at as markets are trading at high valuations so the decision should be
to sell as per the fundamental analysis but at the same time there is optimism and less volatility.
Technically, markets have matured on optimism but there is not yet euphoria. Going forward we may
see high volatility and PE ratio will expand with the growing euphoria. Every time there is new theme or
mantra in the markets where old theories are defied and new rationality theme is identified, and made
popular through media and knowledge resources. Stock markets may consolidate with upward bias but
at the same time commodity and mining stocks shall outperform the broader market as they are
entering into third wave of intermediate uptrend. Indicators for commodity stocks are stock markets of
Russia, Brazil, Canada and Australia where there is good weightage of oil, gold, mining and such stocks in
their indexes.

Precious metals (Gold and Silver) had bottomed out in December 2015 and there was first leg up till
October 2016 which we can say is first intermediate trend. Since then, there is correction which is
continuing till date (18 months). The next intermediate trend is expected anytime from now which
should be powerful for long period. So is the case with base metals and other commodities.

Whether there is for Quantitative easing or tightening, it shall not affect the prices of Gold and Silver as
they are like safe haven than a hedge. There shall be systemic failure in financial markets due to high
circulation of money by the big nations in the world. US government and European nations shall be
responsible for the mess created by paying debts through increasing money supply by printing and
Quantitative easing. Since 2000, keeping interest rates low and increasing money supply to nullify the
effect of recession due to bubble burst from the beginning of NASDAQ crash in 2000 to Sub Prime
Mortgage crisis in 2008, which has resulted into a giant bubble and it shall be a matter of sovereign
financial crisis. There is approximately amount of USD 21 trillion of debt on US Government with
increasing trade deficit and fiscal deficit. The question is how will US government pay the debts if it is
not able to raise more money by issuing Treasury Bonds? It is evident that debt is paid by borrowing
more debt. This vicious circle shall end and it will end very badly because here the point is failure of
sovereign debt. Increasing interest rates and Quantitative tightening shall lead to depression in the
economy as the debt amount to bring down to even US$ 10 trillion would mean financial crisis where
several banks would fail in Europe and US. It shall take a decade to bring normalcy in US economy as the
mess created is gigantic since the year 2000.

Value of precious metals have to go up at some point as every government is trying to keep their
currency weak so that they do not suffer trade imbalance, so the opportunity is looking at an alternative
fiat currency. BITCOIN is on such example where the money poured into big time and historical bubble is
created. There shall be domino effect of bubble burst in US Treasury Bonds and Crypto Currency,
simultaneously weakening US$, that money will flow into hard assets like Crude Oil, Gold, Silver, Copper,
Steel and such other commodities. Gold and silver are such precious metals where historically at the
times when there is no confidence in the economy, they are the saviors of wealth. Once everybody
starts realizing the importance of precious metals to protect the wealth from depletion due to imminent
rising inflation, that will be the time Gold and Silver will explode while we shall experience the gigantic
US debt collapse may be before US elections by 2020.

Problem still persists and it is not yet addressed that how the governments of developed nations would
reduce the huge debt, so turmoil in future is obvious, hence rally in precious metals and commodities.
Make hay while the sun shines because the new bubble to unfold and burst shall take 3 more years (say
by 2020) as the 1st intermediate upward got completed along with the 2nd wave of correction in crude
oil, base metals and such other commodities where at the same time precious metals like Gold, Silver
and others have not yet participated with any kind of up move.

The upward bias performance in emerging stock markets since more than one year, gave a foundation
of stronger rally ahead. From 1st quarter of the year 2016 to the end of 2017, the performance of most
of the stock markets remained upwards with least volatility as well as for base metals and crude oil.
After the long up move with periodic corrections for 12 to 18 months, majority of stock markets
remained sideways with upward bias since middle of 2016. The year 2017 was thoroughly sideways for
Gold, Silver and other precious metals. Gold looks like completing its final time-correction and shall be
ready for strongest historical rally which is justified to back the currencies in the world especially
Germany and USA, where the worth of currency shall be backed by strong Gold value and all the
investors and hedge funds would have no choice but to invest in gold. Correction in Gold price from
historical peak of USD 1940 in 2011, after 9 year bull rally from the level of 280, has completed its price
and time correction. Base metals shall move upward gradually in comparison to precious metals so
would be emerging stock markets. US treasury bonds at the time of low interest rates have gone to
historical low levels where bubble can burst when there shall be no confidence in powerful currencies as
well as increase of interest rates from mid-2018 as indicated by US Fed Reserve. Interest rates in US are
kept artificially low as well as increase in money supply which shall help inflation to go up by the means
of higher commodity prices. US government would be left with no choice but to increase interest rates
for curbing inflation which may happen in coming months.
Higher commodity prices and inflation in the economy generally augur well for India because
government gets increased revenue by way of indirect taxes. The other part of the economy is not
matured enough to offset the lower or falling commodity prices so the economy is affected badly when
commodity prices go down. India produces and mines almost every commodity except small amount of
crude oil which had been always a problem for the country. The performance of Indian stock markets
had always been good when prices of commodities go up. The increased revenue is spent on capital
expenditure by the government, which in turn increase money supply in the economy. It is also brings
disparity in rich and poor. It is acceptable phenomenon in the emerging economies with injustice to
poor citizens. BRICS nations are going to outperform the western stock markets in coming years due to
inflationary environment and better sovereign debt management by some nations.

The financial year 2018, shall be flushed with money and limited opportunities to invest, which would
result into inflating commodity prices, eventually leading to hyper-inflation in most of the economies of
the world. Situation will be vulnerable where adverse news shall keep on flowing during the year as well
as bull-run in commodities. Coming 2 years would bring more political crisis, geo-political problems
would arise, change to high interest rates, collapse of US treasury bonds, nation debt crisis, may be war
and any other new crisis in a new form shall emerge where the time shall tell. In scenario like this once
again safe haven would be Gold, silver and other physical hard assets.

By Ankur Sharda released on March 15, 2018