Category Archives: Risk

A Balancing Act Called Time

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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?

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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?

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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.

Investing in the Times of Pseudo-Mathematics

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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

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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.

Learning to Sit

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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

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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.

Anatomy of a Ponzi Scheme

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Charles Ponzi came up with the brilliant idea of paying early investors dividends from the investment money put in by later investors.

It’s as simple as that, and it’s called a Ponzi scheme.

After the first few dividends, promoter disappears, having lured many investors into a fake scheme with no underlying business.

Latest famous example of a Ponzi schemer – Bernie Maddoff.

Or, if you’ve not seen Damages – Season III, that’s about a Ponzi scheme too.

So what lures the common investor into a Ponzi scheme?

Simple. It’s called greed.

What triggers the greed?

The Ponzi schemer concocts a scheme that promises a rather too lucrative return. This return does not look unrealistic, so the average investor’s alarm signals don’t go off. Nevertheless, it’s more than high enough to make the average investor’s mouth water.

And what’s normally promised is a quick return, mind you. The average investor buys smoothly into the idea of doubling his or her money fast.

Then there’s lots of advertisment. Billboards everywhere. The Ponzi schemer wants to hit the public with ads about the tremendous returns.

The sales-people who sell the scheme are glib-talkers. They are smart, wear expensive stuff, basically exuding sophistication. They want to rub it in that they’ve made it big in life.

A Ponzi scheme’s documentation generally cracks under close scrutiny. I mean, when something is being sold to you without any underlying business, all you have to do is your dose of due diligence. Just pick up the phone and start asking questions.

What works for the Ponzi schemer is human nature. The first investors (who get paid dividends from newbie investor money) start talking. Actually, they start bragging. The human being likes to show off. And, the human being hates missing the boat, even if the boatman is a disciple of Charles Ponzi.

The Dark Side of Private Equity

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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.

Just why is Embracing Risk so difficult?

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Sir Issac Newton : mathematics and physics genius.

Let’s cast a glance at his market record.

Bought 20,000 Pounds worth of shares in the South Sea Co. around the year 1720, when the scrip was at its peak. Company went bust.

After having bought into this company at a ridiculous valuation, Sir Issac chose to sit on his investment rather than embrace a small loss in the first leg of the decline. The loss became bigger and bigger, till all was lost.

In our society today, parents push their kids to emulate Newton as far as brain-power goes. Newton has been a classic winner in the eyes of society. Kids are taught to win from the beginning. Losing is taboo.

When a straight A candidate enters the market, he or she gets a rude shock. Here is a world where losing is bread and butter. The straight A candidate is likely to get hammered.

A winner in the markets knows how to lose. He or she loses many times. But loses small. Then come the wins. They are not booked small. They are allowed to run.

This concept goes against our basic programming. When we show a small profit, we want to book it and run. It is an ingrained reflex.

When we are losing, we wait to catch up and start winning instead of embracing the small loss and moving on. Also a natural reflex.

Thus, embracing risk is a very difficult thing to learn.

If one can’t do it after many losses, one should leave the markets alone.

The Willingness to Embrace Risk

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Any given market-play can only prove successful if one particular state of mind exists.

I’m talking about one’s willingness to embrace risk.

I mean, one can define risk all one wants, and one can understand it to the nth level.

But is one willing to embrace it?

The answer to this question is the singular deciding factor between a losing market player and a winning market player.

And what does embracing market risk mean?

Setting a stop is a physical act. One can do it mindlessly, without the actual willingness to accept a loss when it occurs.

Embracing risk means the attunement of every cell in the body towards accepting a loss when it occurs.

Accepting the loss and then moving on to the next market-play.
No psychological entanglements, no what-if scenarios, no why’s, no energy drainage due to mourning. Just sheer acceptance of loss. Period.

That’s the state of mind required.

Then, over time, as the sample-size grows, one starts winning.

That’s because one only plays the market with an edge.

The Meaning of Risk

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Market play revolves around one central factor.

It’s called risk.

Whether we want to deal with risk or not is up to us.

If we do not want to deal with risk, we should not participate in any market. Period. Let inflation eat our money away in the bank.

Don’t like that option?

Then deal with risk.

In my opinion, there are two ways of understanding risk.

One way is practical, and simple to understand and implement. I like this particular way.

The other way is complicated and mathematical. This method utilizes software to perform mathematical operations using calculus, and expresses risk in terms of greek alphabets. The software spits out an abstract expression of risk, which is then implemented in the trading strategy. I don’t like this method. It’s just a personal choice.

So let me just talk about the practical method of understanding risk.

For me, risk is the money that one can potentially lose in a trade at any given point of time, expressed in percentage terms of one’s total portfolio value.  Period.

Once the underlying risk has been clearly defined and understood, the management of this risk is implemented through a stop-loss which is outlined after considering total portfolio-size and after eye-balling relevant chart-patterns at hand.

This strategy makes risk something tangible, something one can deal with, in Rupee or Dollar terms. It makes market-play a matter of addition and subtraction. It’s practical, simple to understand and easy to implement.

Then, this understanding of risk needs to be coupled with a market-edge to constitute a complete market strategy.

Same story. An edge can be simple. Or complicated. Choice is yours.

Are u a Whiner?

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2 quick questions:

Do u play the markets? And r u a whiner?

If your answer to both questions is yes, third question: Do u want to change this condition?

If your answer to this third question is yes, please read on.

Whiners whine. They complain when things don’t go as planned. Also they don’t have any backup strategies. Mostly, they don’t have any front-up strategies either.

So, before moving into any market, formulate your strategy thoroughly. Define acceptable levels of loss. Define a strategy to implement if these levels are hit.

Also define a profit-taking strategy.
Define the tenure of investment.

Basically, define yourself. Have a very clear idea about what your risk-profile looks like.

Play it small initially, till you gain confidence.

And stop whining. 🙂

Holy Grail, Anyone?

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What’s the big secret, anyways?

Secret to what?

You know, making big bucks and all…!

Why are you asking me?

You look like you know things, and you talk the talk, so I presumed you walk the walk too.

Well, now don’t be surprised, but there’s no secret.

What?

You wanna make big bucks?

Yes, yes, of course I do.

Ok, then first define your risk profile. Know how much loss you can stomach.

Oh.

Then trade.

That’s it?

When you trade, your money goes on the line. And that’s a game-changer.

Why?

Coz when your money’s on the line, your emotional framework switches on.

So?

That’s when you get to know yourself. That’s when you can define your risk-profile.

And then?

Just manage your trades properly, according to the rules of your trading system.

That’s it?

Yup, just stick to your system. Cut losses when they are small. Let profits run.

I’ve heard that one.

Then have you also heard that it’s very easy to say, and most dificult to follow?

Why’s that?

Because when your money’s on the line, it is most difficult to take any loss.

Right!

And when you show a small profit, you badly want to book it.

True!

Our natural instincts go against what we need to do to succeed as a trader.

I see now.

That’s why most traders are unsuccessful, and they eventually go bust, or quit.

Hmmm, dunno if I want to be a trader.

You could try your hand at investing, though. There, one proceeds in an opposite manner.

Hey, why don’t you tell me about it, like right now?

Maybe some other day. First digest all of this, ok?

A Time for Things

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You don’t normally have dinner at breakfast time, do you?

Of course not.

Similarly, you don’t buy into a State Bank of India with a 5 year horizon when 6 years of earnings growth has already been factored into the price.

There’s a time for things.

You do buy into the same State Bank of India with a 2 week horizon when it’s shooting off the table and giving clear-cut up-moves as it makes its way into no-resistance territory.

And that’s about it. You’re in it for the short-term because that’s how the environment has defined itself. It’s a trading environment, not really meant for investors, whether conservative or unconservative. Thus, you have a stop-loss mechanism in place, in case there’s a down-swing, because up-moves can go hand in hand with down-moves. Where there’s a big money to be made, there’s chances of making a big loss too.

Oh, are you asking why you can’t enter into such stocks at this time with a long-term perspective? I see. Do you fly first class? No? Why not? Because it’s expensive, right? Similarly, such stocks are expensive just now. That’s not to say they won’t rise further. What you need to understand is that when you wake up five years from now, such a stock will have peaked and could possibly be heading for its trough. So your net returns over the long-term could even be negative.

Really wanna be a successful investor? Then you need to learn to buy cheap, with a margin of safety. You need to be patient enough to wait for lucrative entry levels.

Not getting your margins of safety anywhere in the markets just now?

Ok, just trade till you get them. Then you can stop trading, and start investing. Fine?

A Beautiful Concept called Margin of Safety

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The most beautiful, genius things in life are simple.

And therefore, they are difficult to implement.

We like complications. Sophistication. When something appears simple, our first impulse is that of rejection.

We get our families insured, our car insured, house, properties etc. etc. all insured, in fact, we are busy buying protection everywhere. During winter we wear protective clothing. Our children swim with protective gear. Our cars have seat-belts and airbags. The list of how mankind protects itself is endless.

Then why is it that when it comes to putting one’s hard-earned money on the line, all thoughts of protection go out the window, and one becomes malleable enough to jump into the next hot story at even seventy or eighty times earnings?

Why is it that here we are not clinging on to protection? Basic question – are there any protective measures prevalent in the world of investing? The answer is yes, and many. In this article, I’ll name two and address one.

There’s the protective stop-loss (to be differentiated from the trigger-stop). Let’s talk about this one some other day. Right now, let’s focus on the other major avenue for protection, called margin of safety.

Basically, what margin of safety says is “Buy Cheap”. Period. What it’s not saying is that one should buy any odd-ball, cheap stock. It’s referring to quality stocks and telling us to buy them as cheaply as we can. The result will be a buffer price-band, which in case of a major market-crash will still limit our losses and save us from the urge to abandon our investment at rock-bottom prices. So, this concept asks us to have patience and wait for opportunity, and not to be impulsive and plunge blindly.

Margin of safety is applicable while trading also. One can buy into market leaders upon dips. The dip gives one a short-term margin of safety.

The primary advocate of margin of safety is none other than Warren Buffett himself, from an investment point of view.

So, to implement this simple and beautiful concept, one requires the virtues of patience and discipline.

Wishing for you safe and lucrative investing!

Cheers!

Wanna Derisk? It’s REALLY up to you…

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Risk profiling is an essential exercise that most of us skip before plunging into the markets. I mean, do we ever ask ourselves questions like “What makes me tick?” or “What gives me a kick?” or “When am I licked?” Frankly, no. Hmmm, maybe we do actually ask such questions, but not before receiving a solid pasting in the markets. You know, portfolio down 40%, world swimming before one’s eyes, that’s when such soul-searching questions start to pop up. Can’t they appear before we take the plunge? As in, can’t we sort ourselves out before going into the matrix? People, this is 2010, and the human being is trigger-happy. He or she does not learn without pain.

So, after suffering some real big-time knocks, we start to profile our risk-taking ability. Or we don’t, and take a few more knocks. If not knocked out by then, and still willing to play the game, we stumble upon some holy grail questions. Why is this happening? Why are the markets hammering the daylights out of us? Why are those grinning individuals over there almost always winning? Why are we such losers?

The holy grail answer, friends, is something I found out the hard way. I’m sharing it with you because, generally speaking, my philanthropic levels have overshot a certain critical mass for the day and I’m not able to contain the goodness (kidding :-), actually my trading software has encountered a glitch and while it auto-corrects itself online, I figured that instead of twiddling my thumbs, I could, maybe, write something).

So, where was I? Oh yes, I found out the hard way that unless one recognizes one’s appetite for risk-taking and then fine-tunes one’s investment strategy as per one’s risk profile, one is generally going to lose in the markets. Luckily, I didn’t get fully knocked out before this recognition. And, having survived to experience more market time while implementing above tenet, I can only reiterate that even if it takes you five to seven years to fully recognize your risk taking ability, invest the time and effort. You will not regret it.

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.

From Crisis to Crisis : Who said Investing was for the faint-hearted?

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The central focus while investing is on returns. Over the last 100 years, adjusted for inflation and tax-deductions, fixed deposits have given negative returns. And, over this period of time, the asset class of equity has yielded around 6 % compounded per annum (adjusted for inflation), which is more than 5 times what gold has yielded. There’s human capital behind equity, which strives to give returns despite inflation, and goes around taxes through legal loopholes. Gold is gold, there is no brain behind gold. It cannot evade the forces of inflation and taxation. Thus, equity is a higher yielding asset class. For those who don’t realize the value of a 6% compounded return per annum over the long run after adjusting for inflation, let me give you an example which might boggle your mind. Had the Red Indians who sold Manhattan Island to the Americans in 1626 invested their 60 Gilders (= sale proceeds, with the purchasing power of USD 1000 today) @ 6 % per annum compounded after adjusting for inflation, their principle would have been many times the total value of entire Manhattan today. See? In the world of long-term investing, one needs to be clear about the fact that the power of compounding can move mountains.

At the same time, drawdowns in the asset class equity are also the largest. During the 2008 meltdown, the likes of a Rakesh Jhunjhunwala saw his portfolio shrink by 60%. He took it without blinking, by the way. Why? Because equity is not for the faint-hearted. Steadfast investors know inside out that equity has given these returns despite two world wars, one great depression and many recessions / meltdowns. Today, there’s a crisis, and then there’s another crisis. One’s portfolio gets walloped from crisis to crisis, and needs to survive all crises to get to the good times. A potential USD 184 billion debt default looming in Dubai doesn’t shake the long-term investor. Why not? What if the potential debt default becomes larger, let’s say USD 1 trillion. Still nada. What’s the deal?

When a long-term investor puts money on the line, he’s willing to risk 100% of it. Why? That’s because in such an investor’s portfolio, there’s a whole range of scrips. Some go bust, others don’t do well, some remain at par, and a few outperform. Those scrips that go bust or yield below par have a loss limit of 100% of the principal. And the long-term investor has already termed this loss as acceptable as per the dynamics of his risk-appetite. What’s the outperformance limit on those of his scrips that outperform? None. They can double, triple, multiply even a 100-fold, or a 1000-fold or more over the long-run. 2 examples come to mind, a Wipro multiplying 300,000 times in 25 years and a Cisco Systems multiplying 75,000 times in 15 years. A steadfast long-term investor will strive to pick quality scrips with an edge, and will go into the investment at an opportune moment, such that the chances of these manifold multipliers residing in his portfolio are high. And, if 20% of one’s picks multiply manifold over the long-run, one doesn’t need to bother about even a 100% loss in the other 80% of the scrips. Not that there is going to be that 100% loss in this 80%, because these scrips too have been picked intelligently and at opportune moments.

So, what’s the best opportune moment to pick up a scrip? The aftermath of a crisis, of course. Such a time-period has something for all. Those who like buying at dips can pick up almost anything they like. Those who like buying at all-time highs can pick up the scrips that have been eluding them because these too will dip during a crisis. A crisis is not a crisis for the long-term investor. It is an opportunity.

The Pros and Cons of Digging for Gold – a just-like-that guide for the lay-person

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For starters, many have not been part of the rally in gold. And, many of these many secretly wish that they were. People want to ride a winner. It’s human nature. Before these individuals wager their life-savings on what is being touted as a winner, they need to understand the how-to and the flip-side portion. Investing is as much about human nature and psychology as it is about salting one’s money away. So, people, win half the battle of investing by attuning your investing style to fit your personality and risk-profile. One doesn’t define one’s risk profile, one discovers it over time. Anything that gives one a sleepless night is outside of one’s risk appetite. Don’t put any money in any such product. And, of course, you are not selling your family silver to get your portfolio going, nor are you putting your daughter’s education money on the line. You invest funds that are extra, i.e. funds that you don’t need over x amount of time, and you decide what this x is. Investing is about you, it’s not about fund managers or financial institutions.

Many like to see their gold in physical form. It’s like when you have a girl-friend. You want her physically around you, and not as some long-distance vibration in the ether. The flip-side is, that there is storage risk (gold, not girl-friend, silly). Gold can get stolen, pal. Also, at the time of purchase, there is contamination risk. If you buy coins, you pay about 20% premium for craftsmanship, which you totally lose out on when you try and sell the coins. And there’s tension when there’s gold lying around, just as there’s tension when there’s a girl-friend lying around…

For those who have the ability to connect to long-distance vibrations in the ether, holding gold in non-physical form is a beautiful option. No contamination risk at time of purchase. No storage risk at the end of the investor. It’s just that there’s no gold to hold onto, just a paper-certificate. If that’s ok with you, go ahead and buy into a gold ETF (exchange traded fund). In India, these are still quite illiquid, so there’s a huge bid-ask difference while buying and again while selling, causing massive slippage on both transactions, so for Indians, this is not a good option. On the plus side, the gold units are puchased in demat form and rest in your demat account until you decide to sell them, just like equity, and what’s more, you can transact online, giving you full power over your investment. Also, the unitary size is of half gram gold, so each unit is very affordable. Over time, as this avenue catches on, the illiquidity will go away. There’s a small management fee of about 1% per annum that’s deducted to compensate for storage of the actual gold and to insure it. A remote flip-side could be that if the fund-house promoting the investment is shady, they could hold spurious metal, and if a scam ensues and the fund-house goes under…….actually this has never happened, so let’s not talk about it. In an ETF investment like this, there is no leverage. If gold gains some, your investment gains a corresponding some. If gold loses some, you lose some. A 1:1 win-loss correlation to gold.

There’s another avenue which offers indirect leverage while investing in gold. We’re talking about gold mutual funds. These buy equity of gold mining companies. When gold moves x units in either direction, the NAV of such a fund moves x + y in the same direction, because the underlying gold mining companies have a huge inventory of gold in their corpus, and are also hugely hedged into the future. I’ve actually seen such an NAV jump 60% when gold had moved up 35%. Careful, same goes for the down-side. Leverage is a double-edged sword. On the plus side, if there’s a mad rush for gold, gold mining companies are going to be quoting off the charts on the upside because of this leveraged correlation. For those who are comfortable with leverage, this is a great option. In India, selling one’s gold mutual fund holding for profit within 1 year of investing can result in a 30% short-term capital gains tax though for this asset class, since the underlying assets are held overseas.

And then there are some who’d prefer to buy equity of specific gold-mining companies, not a whole mutual fund. Here, one needs to differentiate between companies holding mines which yield gold, and companies holding mines where gold has not yet been discovered or where operations will need lots of infrastructure to actually yield gold, but this is not an area for the lay-person, so let’s leave it at that.

Well, happy investing, and you’ll also need to identify whether you are comfortable putting your money on the line when an asset class is at an all-time high, or whether you prefer to wait for a dip. But that’s another discussion, for another time and another place. Bye 🙂