Category Archives: Black Swan

You must be Joking, Mr. Nath!

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Ok, so there are aliens, so what?

I mean, is that so hard to believe? Which law says that Earth is the centre of activity in this universe?

Look around you. The horizon is full of scams. An honest management is most difficult to find. Honesty and integrity have become alien virtues. Scarce, don’t bump into them in normal life, and you might read an odd story about them in the papers.

So where does this leave you as an investor?

In a dishonest world, one needs to think in a warped manner to make money. You know, “two steps away from the norm” kinda thinking. So if the norm is to buy on a dip, in Kalyuga one waits to buy on a mega-dip. And these have started occuring more often than they used to. 10-Sigma or Black Swan events happen every now and then.

The thing I like about scams is that eventually, they explode. The one scam that is exposed (against the 20 that go unexposed) is enough to hit mass psychology. The common investor starts selling everything, even stuff that’s not affected by the scam. The market as a whole falls, sometimes cracking big.

Since we’re mostly down to buying scam-artist run corporations as investors, above-mentioned crack is the time to buy them, i.e. when they are hit badly. That’s when you are getting good value for your money. That’s when you are getting your margin of safety.

So, wait for the explosion. Buy in its aftermath. The interim period between explosions is to be used to pinpoint what you want to buy with a margin of safety, whenever that margin of safety abounds.

It is entirely within the realm of possibilities to live at peace with aliens. And it is equally possible for an investor to learn to live honestly but lucratively in a world full of corporate criminals.

Of Kalyuga and the Skewed Nature of Growth

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Once or twice a day, I need to remind myself that this is Kalyuga. Gone are the times when people were honest in general, and the human mind was not corruptible. In Kalyuga, one refers to the price at which a human mind is corruptible. That it is corruptible in the first place is a given.

One of the economic characteristics of Kalyuga is the fact that wherever there is growth, it is skewed in nature, and not uniform. Nations claiming uniform growth are often surprised by a black swan event which nullifies years of financial penance by the founding fathers of such nations. Few examples are the Iceland bankruptcy, the sub-prime crisis, a near default by Greece on its sovereign debt, with possible defaults brewing in Portugal, Spain and Ireland in the near financial future of world economics. Even 9/11 was an event that was triggered due to skewed growth. Of course that is no justification for such an event.

What meets the naked eye in developed nations on the surface is – development. Showers, telephones, infrastructure, emergency services – everything functions. So where are the anomalies that skew the path of uniform growth in such nations? These anomalies are found beneath the surface, in the corruptible minds of those in power. Whether it is the nexus between high-level politicians and bankers, or that between the former and the armed forces, such examples successfully dupe the low-level but honestly functioning majority of the population in developed countries. Ask the pensioner in Greece, who suddenly finds his pension reduced by half due to no fault of his. Or the 9/11 rescue worker, who then contracted complications and died a dog’s death because he wasn’t entitled to healthcare due to no health insurance, which he couldn’t afford. These are example of growth going skewed, that very growth that first seemed uniform in nature.

Emerging nations have never boasted uniform growth. The definition of an emerging market that you won’t find in the text-books speaks of high economic growth at the cost of a segment of the population or a culture. In India for example, 500 million citizens are enjoying growth at the cost of 645 million others, who a UN study has found to be devoid of the very basics in life. Here, corruption from the top has sickered through to the bottom, and the 500 million concerned are able to grow at about 9 % per annum. The crafters of this growth plan believe that the growing millions will pull up the stagnant and deteriorating millions ultimately; i.e. growth will sicker through. Of course that can only happen if it is allowed to by the corruptible minds in-charge.

In Russia, high growth is enjoyed by those who’ve joined hands with the Mafia. Those who take the plunge commit all kinds of crimes from murder to child pornography. Those who choose not to, lead endangered, poor and suffocating lives in their efforts to stay clean.

China has a labour portion of its population and an entrepreneur portion of its population that are growing economically. The former has no time to enjoy the USD 750 – 1000 salary per month because of a 12 hour working day and perhaps 2 or 3 free days a month. Mostly, man and woman both are working, and due to non-overlap in free days, they rarely see each other. Their economic growth will be enjoyed by their children perhaps. The entrepreneur portion is of course splurging. What of the farmers? They haven’t really grown economically. And the vast and spiritual Chinese culture of olden days, i.e. the Mandarin essence of China? Gone into hiding, where it cannot be prosecuted or finished off by the mad-men in-charge. And what of Tibet? Suppressed and destroyed. Some parts of it filled with nuclear waste. And what of freedom of speech and expression? Never existed, and when it started to exist, was finished off from the root in the Tiananmen Square massacre. Heights of skewed growth.

So where does one put one’s money to work? After all, there are problems everywhere. Good question, and one that needs to be sorted out by everyone on a personal level. One thing is certain though. These are times of uncertainty, and in such times, Gold gives superlative returns. So, one needs to get into Gold on dips. There’s no point leaving money in fixed deposits, because inflation will eat it up. Also, one can start identifying debt-free companies with idealistic and economically capable managements, who can boast of uniform and clean growth within their companies (yes, there are encapsulated exceptions to skewed growth on the micro-level). It’s these exceptions one needs to be invested in.

Playing Around with the Axis of Time

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You’re seated in an exam, and the examiner just announces that the time allocated for completion has been shortened by 1 hour. Sweat sweat, your exam just became more difficult to pass. 5 minutes later, the ruthless examiner again announces that time allocated has been shortened by another hour. Now, making passing grade seems impossible to you. Instead of passing, you pass out.

Shorten the time-frame for almost anything in life, and doing that particular activity properly and well becomes more and more difficult. What if time was taken out of the equation for the above examination? Well, chances of making passing grade just got a huge fillip, because over infinite time, everyone would eventually clear the exam!

Now substitute “examination” with “investment”. Hmmmm, what do we have here? Is it easier to make money from an investment, if time were taken out of the equation?

After the great depression, those businesses that actually recovered, took 20 years or more to do so. Many never recovered. In investing, a 20 year time-frame is definitely taking time out of the equation. So here we have an example where the answer to the question asked is a most definite no. But, that was then. I mean, pre computer-age, pre internet, pre everything. What’s the world like now? Information flows at the speed of thought. Business cycles are much, much shorter. The Fed creates bubbles, and after they pop, crises happen. So, now we rephrase the question, pertaining to today’s scenario. Today, is a 20 year investment horizon going to give you better odds of making money?

One thing is clear, if your horizon is long enough, today you are going to see the underlying going through at least a few cycles. A buy low – sell high strategy has the best chances today of rewarding you very much within your lifetime.

But, what is low, and what is high? Is 1226 dollars an ounce too high a price to enter gold? Or, should one wait for Bharati Airtel to fall to Rs. 250 before making a contrarian purchase, or is the current Rs. 300 the bottom for Bharati? Nobody knows the answers to these questions.

With a long enough investment horizon where you’ve taken time out of the equation, you’ve simultaneously removed these questions from the equation too, or have you? Let’s say you go ahead with your contrarian purchase of Bharati at Rs. 300 and the scrip plunges to 150. Business cycle is short, remember? Today, realistically speaking, telecom could take maximum 5 years to hit a high in the cycle, so you could tank up on another load of Bharati at Rs. 150 and wait for the cycle to hit a high before offloading. Needless to say, before making any contrarian purchase, you should be convinced that the company won’t go bust in the current low of the business cycle. That’s one risk that looms while making contrarian purchases, but if you do your research properly, perhaps one in ten of your contrarian picks will be so unlucky, and those are perfectly acceptable odds.

What about the other end of the barrel? Gold is at an all-time high, and nobody knows where it is going from here. The whole world is confused. What if you take the plunge and enter gold at 1226 dollars an ounce? Now, two things can happen. If gold rises further you make money immediately. Let’s say gold peaks at 2000 dollars an ounce, and then the cycle in gold starts going towards the lower side. In this case, one could keep booking profit all the way up, and hopefully one could be out fully before or even at the peak. In the other scenario, gold peaks where it currently is, and starts going down. You start losing money on your investment. Let’s say it bottoms at 800 dollars an ounce in one year’s time. You’ve been sitting it out. What are the chances of you making money on your investment, and that too soon, let’s say within another year? Based on sheer gut feel, I’d say your chances are high. What’s my rationale for saying this?

Over the last 100 years, gold has given returns in spurts, only to fall back to lows again. It’s 100 year return has been pathetic, only just about in the black. It’s the time it begins to spurt that one needs to look out for. That occurs in times of uncertainty, which is now. If one allows gold leeway on the time-axis in uncertain times, one new high could be taken out after the other till stability and certainty return. So, if your entry into gold crashes on your face immediately, just keep sitting it out if uncertainty on the world currency of choice front keeps looming, and eventually, you’ll have recovered your principal and perhaps made a little money. The worst-case scenario for you here could be that the world suddenly discovers a currency of choice other than gold, gold crashes to god knows what level, and remains there for another 20 years. That would be a black swan event which looks unlikely currently, because the world is far away from finding a currency of choice, and till it does, one can keep stretching the time axis of a gold investment.

If your picks are solid, the market will reward you for patience more often than it will not. So couple patience with excellent research, and then sit back and relax!