Category Archives: Investing

The Power of Compounding

Posted on by
Reply

At first, the power of compounding is a slow and steady trickle. Then, it starts gathering momentum. Finally, after a long time, it reaches epic proportions.

If you make the power of compounding work for you from as early an age as possible, you could well achieve financial freedom in your early- to mid- 40s. How does that sound?

Let’s say that your investment gives you a steady 8% per annum compounded. In 25 years, it us up almost 7 fold.

If the investment is giving 12% per annum compounded, in 25 years it will be up 17 fold.

15% per annum compounded – will be up almost 33 fold in 25 years.

20% per annum compounded – 95 fold.

27% (Warren Buffett’s average lifetime return per annum compounded, calculated some years before he donated his fortune to charity) – almost 394 fold.

42% (Rakesh Jhunjhunwala’s average lifetime return per annum compounded, that’s what they say) – 6415 fold.

What do you say to that? Don’t the figures speak for themselves and prove to you the power of compounding? Wouldn’t you like to start harnessing this power from like right now?

Let’s do another exercise. We are now looking at an investment term of 30 years. Other conditions remain the same.

An investment yielding 8% per annum compounded, in 30 years, will be up 10 fold, or a 1000%.

If the investment is giving 12% per annum compounded, in 30 years it will be up almost 30 fold.

15% per annum compounded – will be up 66 fold in 30 years.

20% per annum compounded – up 237 fold in 30 years.

27% – 1300 fold.

42% – 37038 fold.

Don’t the figures just blow you away? (They are so startling, that I have to ask myself if I’ve made some mathematical error. Why don’t you check these figures for me and inform me if there is an error).

The harnessing of this power of compounding is primarily the domain of the long-term investor. Nevertheless, the prudent trader uses it too. Such a trader ties up vast sums of money in fixed income investments for long periods of time, and then just trades on part of the yielded income, using the rest to live well and reinvesting what is still left.

It’s really time you start making use of the power of compounding. If not for yourself, then at least harness it for the futures of your children.

What are We, Really?

Posted on by
Reply

One bout of torrential rainfall and our infrastructure comes to a stand-still.

What are we, really?

Is India a golden investment?

Not with the current state of governance.

Is India an investment?

Yes, but only at single-digit price to earnings ratios.

Why?

Because while investing in India, one needs to factor in very bad governance, terrorism, and fragile infrastructure. That’s why the margin of safety required is huge.

Is India a good trade?

Yes.

Why?

Because of the pull and push between the shining private sector versus the apathetic government sector. This contrast causes big moves, both up and down. Ideal for trading.

So how should one play India?

Again, up to you. Invest in it at single digit PEs. Cash out when PEs hit the early 20s. Or, just sheer trade it. Suit yourself.

Is it Over for the Long-Term Investor?

Posted on by
Reply

Long-term portfolios are getting bludgeoned.

I can feel the pain of the long-term investor.

Is it over for this niche segment?

I really wouldn’t say that.

It’s not over till the fat lady sings, as somebody said.

What if someone trained hard so as to not allow the fat lady from starting her performance in the first place?

Well, for this breed, it’s not over by a long way. In fact, things are just getting started.

And what are the areas of training?

First and foremost, for the millionth time, one needs to understand what margin of safety is. In this era of black swans, one can fine-tune this area with the word “large”. So, simple and straight-forward: the long-term investor needs to buy with a large margin of safety.

This is a game of PATIENCE. Patiently wait for entry. Entry is the most important act while investing. If you cannot learn to be patient, change your line. Be a trader instead.

However scarce the virtues of honesty and integrity have become, keep looking. When you finally find them in a company, ear-mark the company for a buy. For you, managements need to be intelligent and shareholder-friendly too. They need to be evolved enough to take you into account as a shareholder. Keep looking for such managements, and you’ll be amazed at the unfolding potential of diligent human capital.

Before you enter this arena, answer another question please? Have you learnt to sit? If you don’t even know what this question means, you are by no means ready for the game.

So, when is one capable of sitting through some serious knocks, like now? If the money you’ve put on the line is not required for the next 5 to 10 years, you’ve totally helped your cause. Then, your risk-profile should fit the pattern. If a knock causes you an ulcer, just forget about the game and look for another game that doesn’t cause you an ulcer. Your margin of safety will help you take the knock. Knowing that your money has bought a stake with honest and diligent people who can work their way around inflation will help your cause even more.

If you are taking a very serious hit right now, you need to decide something. Are you gonna sit it out? Can you afford to, age-wise and health-wise? Yes? Fine, go ahead. I sat it out in 2008. If I could do it, so can you. It did take a lot. Taught me a lot too. I now know so much more about myself. Was a rough ride, is all I can say. Nevertheless, it’s a good option if age and health support you. If you decide to sit it out, please train yourself, from this point onwards, to do it right. Needless to say, don’t make the same mistakes again. Let’s be very clear about this point. If you are feeling pain at this point, it’s because you have made one or more investing mistakes. Don’t blame the market, or the times. This is your pain, because of your mistakes. Take responsibity for your actions. Do it right from here onwards.

If you can’t take the hit anymore, age-wise or health-wise, then you need to reflect. It’s none of my business to tell you to sell out. That would be inappropriate. All the same, as a friend, I would like you to ask yourself if you feel you are cut out for this niche segment. There are other very successful niche-segments. I know highly successful traders who started out as miserable long-term investors. So, just this one thing, get the questioning process started. Now. Then, listen to your inner voice and decide what you want to do.

There’s this one other point. Some people feel they can focus on both these segments simutaneously. You know, trade in one portfolio and maintain another long-term portfolio. Possible. People are doing it. I’m not about to start a discussion on focus versus diversification just now, because I’m leaving it for another day. Not because I don’t possess the mettle, but because I’m a little tired just now.

Wish you safe investing! 🙂

US Treasury Bonds, Anyone?

Posted on by
Reply

Panic is something I felt during 2008.

It was actually good that I did, because now I know what it feels like.

Meaning that if a similar situation starts to arise again, now there are internal warning signals in my system.

Investors learn from mistakes. That’s the good thing about mistakes.

It will not take a Moody’s rating agency to tell even an average investor that US treasury bonds don’t deserve a AAA rating. Most investors I know have shunned any investment product with US treasury bond exposure since 2008.

Didn’t such ratings agencies give CDOs a AAA rating? Frankly, I don’t even feel like acknowledging the existence of ratings agencies. I’d much rather just use my common sense.

So, one’s learning curve freed one up from dangerous exposure after 2008. Are one’s investments still going to be unaffected from the ongoing and critical developments in the US?

Globalization is in. Decoupling seems to be out for the moment. If the US economy crumbles, investments worldwide are going to be affected for the worse. To lessen such shocks, God created hedges.

The best known hedge to mankind over the last 100 years has been Gold. After 2008, central banks worldwide started scrambling to find an alternative to the USD to hold their wealth in. Only Gold is standing their test. More and more central banks have started converting their USD holding to Gold.

Much as I don’t feel like acknowledging the existence of ratings agencies, unfortunately, I have to. If there’s a ratings downgrade in the US, Gold purchases by central banks are going to escalate. The astute investor will need to position him- or herself accordingly if he or she has not done so yet, starting right now.

As we bathe in the glory of Gold, let’s not forget that it is just a safe haven, a crisis-hedge. If economic stability returns to the world this or next decade (or whenever), Gold is going right back to where it came from.

Something else used to enjoy the safe-haven status till a few years ago. I think one calls them US treasury bonds.

Seasons change. If Gold is the flavour now, it’s possibly a temporary flavour.

Keep your eyes open, and keep using your common sense.

Wishing you safe investing.

Face-Off

Posted on by
Reply

Markets are about returns.

Just as many roads lead to Rome, so do multiple paths lead to returns.

The two basic approaches in this game are investing and trading. We are keeping things basic, and are not even going to talk about scalping, arbitrage etc. We are looking at paths taken by most players.

So who has got it better, the investor or the trader?

Markets have this characteristic of collapsing. Unless the investor has bought with a decent margin of safety, he or she can be sitting on a huge loss. This can lead to irritability, sleepless nights, ill-health and family problems. An investor needs to slay these demons before-hand. Allowed to grow, these demons can wreck havoc.

The nimble trader on the other hand treads lightly. Technicals alert him or her well before a collapse, and when the collapse comes, the trader is ideally already fully in cash. Such a trader has no professional reason for a sleepless night.

However, when the bulls roar, the investor’s entire portfolio adds to the roar, and very soon the investor is sitting on huge gains. The trader on the other hands builds up positions slowly, and might miss a large portion of the up-move during the staggered entry process. To be fair, the investor’s exposure (risk) has been large in comparison to the trader, and thus the reward in good times will be proportionately large too. Given a choice, I’d personally take the comfortable nights throughout the year.

Then there’s active and passive playing. Investing is a passive play. One doesn’t need to man one’s portfolio on a daily basis, and can focus on other things instead. Trading, on the other hand, is very much an active play, and needs to be attended to on a daily basis.

So, unless the investor likes action, this is a favourable scenario. Unfortunately, the majority of long-term investors mess up their long-term portfolios owing to the need for action.

Trading can lead to action overload. A bad day’s result can cause mood swings. The trader needs to be in control of emotional machinery and ready to withstand a pre-determined level of loss. Unfortunately, most traders fail badly in the emotional and stop-loss department. On the whole, I feel this particular round is won the by the investor. So, it’s 1 round each.

The last round in today’s discussion is about life-style. The bored investor can either use the spare time for constructive activities, which is a great scenario, or for useless ones, like surfing adult sites. The point I’m trying to make is that a bored investor is a prime candidate for sowing wild oats.

The sensible trader uses non-market hours to finish research for the next day and then to give the mind and body relaxation and rest. However, all the action makes most traders less sensible and more flambuoyant, and equally likely candidates for sowing wild-oats during non-market hours. I think this round is a tie.

So who’s got it better, the trader or the investor?

This is actually a trick question.

What’s the proper answer?

The answer is that YOU have got it better if you fit into the profile of a sensible trader or a balanced investor, and that YOU have got it bad if you fit into the profile of a reckless / flambuoyant trader or a bored and thus trigger-happy investor.

Both investing and trading are about YOU.

You need to see how good or bad YOU have it, and forget about the rest.

Financial Academia and the Street – A Comprehensive Disconnect

Posted on by
Reply

1994 AD.

My friends in the Physics Department of the University of Konstanz, Germany, were busy trying to increase the number of holes on a silicon strip.

This was nanotech research in its advanced stage.

Nanotech saw successful implementation in the real world, though the explosion is yet to come. Nevertheless, the key words here are successful implementation.

Successful implementation on the street is only possible when a research model is practical.

Financial academia time and again delivers impractical models and is then surprised when they meet with failure on the street.

Let’s take the case of the Long Term Capital Management hedge fund. Nobel laureates ran it. They did not incorporate the possibility of a sovereign debt default in their model. So sure were they of themselves, that they went on to buy billions of dollars worth of derivatives, leveraging themselves to the hilt. Their total leverage in the end stood at 250:1. The sovereign debt default by the Russian government in 1998 triggered the LTCM fund to go belly up, and with it disappeared the life-savings of thousands of trusting investors. The ripple effects of this disaster almost knocked the world’s financial system off its platform. Talk about disconnect.

Currently, we are seeing the effects of another disconnect in action.

The Euro was conceived on the basis of hundreds of PhD theses and tons of post-doctoral research. What the researchers couldn’t possibly incorporate in their models were some basic human and emotional facts.

For starters, let’s try the Greeks. They like to retire early and work lesser than their Eurozone colleagues. Their bankers are gullible and not too street-smart, and have made some really bad bets.

Italians like to take short-cuts. They like to over-price and under-cut.

Germans like to go the whole hog. They are punctual and more environment-conscious. They do not like subsidizing those who don’t work for it.

French farmers want to sell their milk for its proper price. They and the majority of their nation dislikes subsidizing others who might not deserve subsidy.

One could go on. The list is endless.

How does one incorporate such realistic “human” stuff in mathematical models?

One can’t.

Mathematics doesn’t possess the language to reflect such human and emotional factors.

So what do these theses contain, upon which the Euro has been built. Other, disconnected stuff, no realistic, street-related emotional / human factors of value.

What we’re seeing is real disconnect in action. Financial academia is way out of its depth on the European street or for that matter on any other street. It should lay off from the street so that further disasters are prevented.

Let’s hope and pray that the Euro-chapter does not meet with a harmful end.

A Balancing Act Called Time

Posted on by
1

Why am I so obsessed with the phenomenon called time?

Because time is the long-term investor’s secret weapon.

I believe that a portfolio comes into its own after 7 years of being built drop by drop.

In this initial period, the portfolio tries to find balance. Losers get established, but so do winners.

Once it has been established that a scrip is a loser, the portolio tells you to get rid of it every time you look at the portfolio. It’s the red ink on the losing portion of the porfolio that speaks to you. And the passage of time can even give you the opportunity to sell a loser for a lucrative price.

Eventually, winners stand out. Their black ink on the winning side of the portfolio asks you to buy into them again. And once again your dear friend time gives you the opportunity to buy into a winner at a reasonable price.

Finally, the portfolio has excreted all losers and now consists of candidates you’d consider rebuying into at the right price during the passage of time.

This is called a balanced winning portfolio. It is balanced because some winners are cheaply priced in it and some are expensive. You currently want to be buying into the cheap winners.

The moment your criteria point out that a winner is turning into a loser, you look for the next exit opportunity for this scrip. And time will give you this, i.e. a chance to sell this scrip at a great price.

So, use your secret weapon. Everyone knows about time but almost nobody uses it like a weapon. That’s why it’s a secret weapon. Use it.

While building up your portfolio and navigating it through, take your time.

Is the Middle-person History?

Posted on by
Reply

Motivations…

are the propellors of life.

One can’t be an expert at everything. So one hires others to do stuff for one.

Of course one has to make it worth the other person’s while.

And the person you’ve hired needs to do the best possible job for you.

This used to be the pattern in the business of money. After the turn of the century, things started going haywire.

The middle-person in the business of money used to be a long-term wealth enhancer. His or her primary motivation was the creation and appreciation of your wealth.

Now, his or her focus is on the commissions generated by maximal short-term churning of your portfolio. This is dangerous for you.

I don’t know any wealth-manager who will share your loss with you. If earlier the loss would be felt only emotionally / morally by your wealth manager, even that is gone. So now, there’s nothing that’s stopping investment advice from becoming a function of the commission offered to the wealth manager. If a product offers more commission, that’s the product being recommended.

Where does that leave you?

Frankly, I feel that one is better off without an investment advisor. The web offers enough information on any and every investment product in existence. All you need to do is invest your time.

No time, you say? Who’s money is it? Yours, right? Then you need to jolly well take out the time. Only you can do justice to the proper, balanced and judicious investment of your funds.

So come on, snap out of any laziness. One hour a day to carve out a trajectory for your hard-earned money is all that’s required. If for nothing else, do it for your kids.

Are you a Pig?

Posted on by
Reply

Pigs get slaughtered.

Are you a pig?

Don’t know the answer?

See if you fit into what the market defines as a pig. Be honest to yourself.

A pig is a crowd-follower. He (for convenience purposes, I’m using “he”) doesn’t use his God-given brain. A pig generally enters into an investment in the late stages of a trend. What pushes him into entering is that nagging feeling of missing the bus.

The pig is most interested in knowing what others are doing, and gets swayed by flashy headlines. He doesn’t have a market outlook and blindly follows tips. He panics at the bottom and sells for maximum loss. The pig doesn’t exercise any holding power, even if he might possess it.

If you find yourself fitting into any of these patterns, please get a grip on the situation before it’s too late. Slow down. Start getting to know yourself. Do your own research. Slowly build a market-view. And then invest according to this newly found but solid perspective.

There are many ways to limit risk. The stop-loss and the systematic investment plan are two, for starters. Incorporate such risk-limiting factors into your trading style. Slowly build up an indestructable approach through trial and error.

Yes, make mistakes, because they are the only teachers in this game. Make mistakes with small amounts. A mistake should not be able to slaughter you, because now you are not a pig anymore.

Enemies of the State

Posted on by
Reply

What’s with me?

Why am I coming up with titles of songs or movies as headings for my blogposts?

Well, I need to grab your attention. It’s the age of minute attention-spans. I need to catch whatever window I have to make u interested in reading this stuff.

If investing is your territory, then hurry (which spoils the curry) is the enemy of your state. Innately, you will feel an urge to get into a winning investment. If you can overcome this urge, you’ll have come a long way. You’ll actually make proper investments, at pivotal points on the price versus time axis.

If trading is your territory, the enemy of your state is to be found within too. Here, it’s the lack of willingness to get out of a losing trade. If you can train yourself to cut a losing trade after a stop is hit, again you’ll have come a long way, and your account will reflect good trading profits soon enough.

Slowly, it’s becoming clear that trading and investing are two ends of a spectrum, mirror images with opposite domain rules.

Please don’t mix trading with investing, or vice-versa, or you’ll ruin whatever you are doing.

I’m not saying don’t do both. It’s a free world. Do both. Fine. But confined within separate portfolios please, both physically and in the mind. And slowly, one after the other, till you can handle both ends of the spectrum simultaneously.

Or do you think that you can build Rome in one day?

Investing in the Times of Pseudo-Mathematics

Posted on by
Reply

First, there was Mathematics.

Slowly, Physics started expressing itself in the language of Mathematics with great success. Chemistry and Biology followed suit.

The subject of Economics was feeling left out. Its proponents wanted the world to start recognizing their line of study as a natural science. So they started expressing their research results in the language of Mathematics too.

Thousands of research papers later, it was pointed out that what mathematical Economics was describing was an ideal world without any anomalies factored in.

The high priests of Economics reacted by churning out a barrage of research papers which factored in all kinds of anomalies in an effort to describe the real world.

Where there’s money, there’s emotion. The average human being is emotionally coupled to money.

Either Economics didn’t bother to factor in the anomaly called emotion, or it couldn’t find the corresponding matrix in which it could fit human emotions like greed and fear.

And Economics started getting it wrong in the real world, big time. The Long-Term Capital Management Fund (run by Economics Nobel laureates as per their pansy and sedantry office-table cum computer-programmed understanding of finance) collapsed in 1998, with billions of investor dollars evaporating and the world’s financial system coming to a grinding halt but just about managing to keep its head above water. It was a close brush with comprehensive disaster.

The human being forgets.

The last leg of the surge in dotcoms in 1999 and the first quarter of 2000 did just that. It made people forget their investing follies.

What people did remember though was the high of the surge. Investors wanted that feeling again. They wanted to make a killing again. Greed never dies.

And Economics rose to the occasion. This time it was not only pseudo, but it had gotten dirty. Its proponents were not researchers anymore, they were investment bankers, who had hired researchers to develop investment products based on complex pseudo-mathematical models that would lure the public.

Enter CDOs.

For just a few percentage points more of interest payout, investors worldwide were willing to buy this toxic debt with no underlying and a shady payout source. People got fooled by the marketing, with ratings agencies joining the bandwagon of crookedness and giving a AAA rating to the poisonous products in question.

All along, the Fed (with the blessing of the White House) had been encouraging citizens to “tap their home equity”, i.e. to take loans against their homes and then to invest the funds in the market. (The Fed creates bubbles, that’s what its real job is). And the Fed, the White House, the leading investment banks, the ratings agencies and the toxic researchers were all joint at the hip, a very powerful conglomerate creating financial weather.

So, from 2003 to 2007, there was liquidity in the world’s financial system, and a lot of good money was invested in CDOs. Nobody really understood these products properly, except for the researchers who came up with them. Common sense would have said that something with no base or underlying will eventually collapse as the load on top increases. And there was no dearth of load, because the same investment banks that sold the CDOs to the public were busy shorting those very CDOs (!!!!!), with Goldman Sachs taking the lead. So a collapse is exactly what happened.

This time around, the now pseudo and very, very dirty economics (almost)finished off the world’s financial system as it stood. It was revived from death through frantic financial-mathematical jugglery and a non-stop note-printing-press, with the Fed looking desperately to bury the damage by creating the next bubble which would lure good money from new investors in other parts of the world which were less affected for whatever reason.

That’s where we stand now. Certain portions of the world’s finance system are still on the respirator. Portions are off it, and are trying to act as if nothing happened, shamelessly getting back to their old tricks again.

I get calls reguarly from Merrill Lynch, Credit Suisse, StanChart and other investment banks. The only reason why Goldman hasn’t called is probably because my networth is below their cold-call limit. Anyways, it doesn’t matter who let the dogs out. Point is, they are out. And they are trying to sell you swaps, structures, forwards, principal protected products, what-have-yous, you name it. I remain polite, but tell them in no uncertain terms to lay off.

As a thumb rule, I don’t invest in products I don’t understand.

As another thumb rule, I don’t even invest in products which I might eventually understand after making the required effort.

As the mother of all thumb rules, I only invest in products that I understand effortlessly.

That’s the learning I got in the 2000s, and I’m happy to share it with you.

Uncharted Territory : The Tough get Going

Posted on by
Reply

These are unprecedented times.

I mean, you’ve got 10-Sigma events occuring at a frequency that’s nobody’s business.

It’s time for the tough to get going.

All other investors are gonna get slaughtered.

So what makes one a tough investor, someone who can take hits and still remain standing?

Firstly, there’s holding power. If you don’t possess holding power, don’t enter the markets.

Then there’s patience. A rare commodity.

Discipline. Play to a strategy. Pick a strategy that’s in sync with your risk profile.

That brings us to the most important point. Know yourself. Know your risk profile. Your strengths and weaknesses. Invest accordingly. This one might take a while.

With time comes the power to pinpoint buying opportunities. Just as the exit strategy is crucial for the trader, the entry point is all-important for the investor.

Wins give confidence to double up on one’s position size.

Sight of one’s goal keeps one away from noise and a dangerous thing called tips.

An otherwise balanced life keeps one occupied elsewhere so that one’s not tempted to try other stunts in the market.

You can complete this list. It’s really not rocket-science.

It’s time for the tough to get going.

Pieces of the Pie

Posted on by
Reply

When profits are made, everybody involved wants a piece of the pie.

That’s ok, human nature.

And what’s wrong in distributing profits proportional to efforts?

Well, it’s not an ideal world. In today’s real world, investment banks have started billing clients for research and have used the money for prostitution and other recreation instead (see the docufilm “Inside Job”).

Your private equity executive will travel business or first class. He or she will stay in the executive suite. Hmmm, borderline, but still bearable if the fund generates an above market-average profit for you.

What’s unbearable is the high-roller life exhibited by disgraced Lehman ex CEO Fuld for example. You know, as in fool the public, eat their pie, and pull out personal funds before the ship sinks with an overload of public stake. Inexcusable behaviour. Deserving of extremely deterring punishment.

If a listed company regularly raises its dividend and generates steady capital gains for its share-holders, I frankly couldn’t care less if the CEO zips around in a company jet, pitches his tent in the presidential suite and orders in from the most expensive restaurant in town.

On the other hand, I do take serious exception to above behaviour on company expense if the company dishes out a meagre dividend and generates no capital gains. If I’m invested in such a company by mistake, with above CEO behaviour, I’d seriously look to exit at the next opportunity. If I see the CEO downsizing on lifestyle and if I still believe in the prospects of the company, I might still stay invested, but first I want to see some humility in the CEO’s living habits.

An exit is an ultimate thumbs-down a long-term investor can give to a loser CEO and his listed company. If a business is not generating profits and the management is living it up, such a business deserves the boot from its investors.

Learning to Sit

Posted on by
Reply

One of the first things a baby learns is to sit.

And sitting is probably the last thing that an investor learns. Some investors never learn to sit. Their long-term returns are disastrous.

Wanna make a killing? All right, first learn to sit.

To be able to sit, one needs to create proper conditions. One needs to take “jumpiness”, or volatility, out of the equation. This is done by buying with a margin of safety.

Having bought with a margin of safety, market blow-ups affect your bottom-line lesser. You can sit thru them.

And that’s all you need to do, to allow a multi-bagger to unfold.

Wish you lucrative investing!

Noose Just Tightened

Posted on by
Reply

Petrol’s up 5 bucks.

This is gonna pinch the public.

Are we now clear on the fact that a beast is on the loose? And the fact that this beast has been active to hyper-active since World War I ?

This beast is called inflation. The number 1 infectious disease that inflicts modern financial society.

We are going to have to live with inflation. Period.

What is required is long-term policy-making that will minimize the affliction. That’s not happening.

Modern financial policy seeks to avoid an existence where inflation becomes hyper. That would be when food on the table costs more that a cart-load of cash. See Argentina during its currency collapse, or Germany after the first World War.

Let’s assume that human-kind is not capable of making better policies, ones that minimize (let alone eradicate) the disease. Where does that leave us?

What do we do with our money, that’s being eaten away at 8 to 9%, year upon year?

Avenues like fixed deposits pay out lesser after tax than what inflation eats away. The 100 year return in Gold has been 1% per annum compunded, after tax. Only two investment avenues have yielded more after tax than what inflation has consumed over the very long term. These are 1). Property, and 2). Equity.

The writing on the wall becomes clear. To immunize one’s money against the disease, one needs to be invested in one or both these avenues over the long-term. Both avenues come with pitfalls, where one can lose much more than what inflation eats away.

So, one first learns how to deal with the pitfalls, and perhaps one can specialize in either of these avenues, since it is not easy to focus on both.

Then, after having learnt the ropes, one can slowly start salting one’s money away.

A Fall to Remember

Posted on by
Reply

Ok, these are big drops in the values of commodities. Especially Silver.

Actually, I’m liking it.

No, I am not short Silver, or short Oil, or short Gold.

As far as commodities go, I don’t trade in them, I invest in them.

And as Silver falls big time, I am buying shares of Silver mining companies. Small amounts, nothing big. One needs to tread carefully. Because one doesn’t know when prices will stabilize.

Prices were way too high earlier to go ahead with these purchases. But, as Silver falls, one starts getting a margin of safety in Silver mining companies. I feel this has just started happening. Which is not to say that Silver won’t fall more.

Which is when I’ll buy more.

This is long-term investing. Here, the ideology is the complete opposite of trading.

You must be Joking, Mr. Nath!

Posted on by
1

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.

The Dark Side of Private Equity

Posted on by
6

Greed is the investor’s nemesis.

I’ve been guilty of greed at times.

Luck has been on my side, and I’ve been saved from losing money. I’d like to tell you about it.

In my experiences with private equity over the last four years, the one thing that stood out was the pitch of each scheme proposed. The average pitch just sucked one in by describing a world that would appear utopic to somebody in a balanced frame of mind. When greed sets in, balance and common sense go out the window. One gets taken in by the pitch, and without doing any due diligence, one is willing to bet the farm.

The private equity teams of today have a tool up their sleeve that creates pressure on the investor, and leaves little time for due diligence. It’s called the time-window. Most schemes are proposed to the investor with a very short time-window. Either the investor is in within the window, or he or she can sit out. Lesson learnt: if one’s due diligence is taking longer than the time-window, then the scheme can go out the window rather than putting one’s hard-earned money on the line.

One of the worst starts a newbie investor can make is a good one. This happened to me as a newbie private equity investor. I got involved with the Milestone group in the middle of the financial crisis, and I invested in their REITs (Real Estate Investment Trusts). These people were honest, and the investments have yielded steady quarterly dividends since, apart from the property appreciation. I started thinking private equity was the holy grail, and that all forthcoming institutions and schemes would be like Milestone.

Big mistake. When Edelweiss knocked on my door with an 8 year lock-in real-estate scheme, I was lapping it up. One thing kept going around in my mind – the 8 year cycle they were trying to make me believe in. Wasn’t convincing, but I wanted the profits they were promising. Before signing on, it occured to me to do at least some due diligence. I insisted on a conference call with the management. During the concall, I became aware of one wrongful disclosure. The pitch had spoken of a large sum of money from overseas, already invested in the scheme. In the concall, it became apparent that these funds were tentative and had not arrived yet.

A wrongful disclosure is a big alarm bell for me. I have programmed myself in such a way that when I come across wrongful disclosure during due diligence, I axe the investment. Luckily, the mind was not totally taken in, and I stuck to this rule.

Then came Unitech. Second generation real-estate magnate. Big money. Big leverage. In a joint venture with CIG, Unitech was redeveloping the slums of Mumbai, we were told in the pitch. Each slum-dweller would be relocated with ample compensation, we were told. The scheme had a multi-page disclaimer protecting the promoters against anything and everything. Alone that should have been an alarm bell. Of course I wasn’t thinking straight when I signed the documents.

In the next few months this scheme got a few investors interested, but its corpus wasn’t enough for the first leg of investments planned. Then, Adarsh exploded. I’m talking about the Adarsh real-estate scam. CIG / Unitech could not find a single new investor for their scheme. Everyone was scared of real-estate. Then there was another explosion: the 2G scam. Sanjay Chandra, CEO of Unitech, was one of the prime accused. What would happen to my money? Was it gone?

I got together with my bankers, and for more than a month, we steam-rolled the CIG / Unitech office in Delhi with emails and phone-calls, asking for the money to be returned with interest, since the scheme had not gotten off the ground. Luck was on our side, and after a thorough documentation process from their end, I received my entire amount with interest, one day before Sanjay Chandra was sent to jail.

Moral of the story: double your due diligence when you feel greed setting in. Don’t get taken in by fancy pitches. Don’t get pressurized into time-windows. Tackle the dark-side of private equity with a clear mind and full focus.

A Strong Case for Equity (Part 3)

Posted on by
Reply

What intrigues me most about the asset-class “Equity” can be described in two words.

Human Capital.

The human being: capable of the highest but also the lowest.

So, while pinpointing which scrip to purchase, one avoids flawed human capital.

Humans have many flaws which one’s antennae are scanning for here. Some are corrupt. Some are bad planners. Some lack management skills. It’s a big list.

What one’s looking for is integrity. Also the power to anticipate in advance. Alone this trait in the management of a company can make it grow beyond inflation and slow-down. Managers with good anticipatory powers hedge against loss in the future. For example, a company that uses Silver in its manufacturing process could use up its yearly profit to buy Silver in bulk @ 40 $ an ounce rather than buy it one year later @ 80 $ an ounce.

Honest human capital is transparent. Share-holder friendly. And if you can see any intelligence along with such characteristics, just go for the scrip at a decent valuation.

Outperformers know how to Focus

Posted on by
Reply

Want to outperform the markets?

Then learn to focus.

Outstanding returns are the domain of focus investors.

If one is not a focus investor, then one is a diversified investor.

Diversification is not a negative trait.

It gives an average result. Over time, one’s performance matches the market average.

There’s nothing wrong in getting an average result.

It’s just that if you want something extra, here’s what you need to do.

You need to identify one or max two baskets.

And then you need to watch these baskets.