Category Archives: Strategy

Asset Management is as important as ABC, or Multiplication, or Calculus for that matter…

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Imagine having lunch with a legendary investor like Warren Buffett. The first think he’ll talk to you about is the power of compounding. And when you say “Huh, what’s that?”, he’ll ask “Did nobody teach you about money management?”

And that’s the whole conundrum. Nobody teaches us how to manage money in school. Nor is this subject taught in college. We are left high and dry to face the big bad world without having the faintest clue about how to make our assets grow into something substantial.

Now why is this so? Is it that parents, teachers and professors worldwide have decided that no, we are, under no circumstances, going to teach our children how to manage their assets. No, that’s not the case. What is far truer is the fact that most parents, teachers and professors don’t know how to manage their own assets in the first place, so there’s no scope of teaching this art to others.

And do you know why that’s sad? Because youth is a prime time to sow seeds of investment that will grow into mountains later. When one is young, time is on one’s side. Salting away pennies at this stage puts into motion the power of compounding, a prime accelerator of growth. The time factor gives one tremendous leverage to deal with meltdowns, crises, calamities, catastrophes, recessions, depressions and what have you. As one grows up, one’s intelligently invested money has a very high chance of coming away unscathed and compounded into a substantial amount.

Don’t take my word for it. Just look around you. If you’ve been invested in the indices in India since 1980, your assets have grown 180 times in 30 years. That’s so huge that one is lost for words. This is despite all issues Indian and world markets have faced in these 30 years. All political crises, all wars, all scams, all corruption, everything. And, these returns are being generated by a simple index strategy. More advanced mid- and small-cap investment strategies have yielded many times more than these returns over this 30 year period. So just forget about meltdowns and crises, invest for the long-term, invest for your children, do it intelligently, and involve them in your investment process. Teach your children how to invest rather than making them cram tables or rut chemical formulae. Get them to take charge of their financial futures. Make them financially independent.

God has given the human being brains, and the power to think rationally. Let’s use these assets while investing. We’re looking for quality managements. We want their human capital to be working for us while we do other things with our time. We want them to figure a way around inflation, so that our investment doesn’t get eaten into by this monster. We don’t want them to involve our money in any scams. We want them to create value for us, year upon year. We want them to pay out regular dividends. Let’s inscribe this into our heads: we are looking for QUALITY MANAGEMENTS.

We are not looking for debt. The company we are investing into needs to be as debt-free as possible. During bad times, and they will come, mountains of debt can make companies go bust. There are many, many companies available for investment with debt to equity ratios which are lesser than 1.0. These are the companies we want to invest into.

We are also looking for a lucrative entry price. Basically, we want to buy debt-free quality scrips, and we want to buy them cheap. For that, we need to possess the virtue of patience. We just can’t get into such investments at any given time, but must learn to patiently wait for them. Also, we must learn to be liquid when such investments become available. Patience and timely liquidity are virtues that more than 99% of investors do not possess.

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 🙂

Wake up Uday!

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Wake up Uday!

It’s a whole new world out there. Correction. It’s a whole new financial world out there.

Institutions Finshtitutions. As a retail investor, you have unprecedented rights today, man, so wake up. Nobody can bully you any more. And no one can sell you crap anymore. But only if you wake up to your rights and possibilities.

Gosh, look at the information flow available to you. It’s the same as to your banker, or to your financial analyst. In real time. Whooaahhh. Butterfly flutters wings in New York, you get the resulting price fluctuation on your currency live feed.

And private investment opportunities, they’re available to you now, on a chicken-shit ticket size. And you don’t have to go through any bankers for such investments, you can deal one on one with the private equity house concerned, who’ll gladly reimburse you 2% mobilization fees on your investment, because you’re doing it yourself. Man, times have changed. This is amazing.

Not so long ago, such private investments were available only upon invitation, through some hot-shot banker, for a multi-crore ticket-size. The banker cashed in on a huge deal fees. So, the more the banker sold, the more his bank account burgeoned. Thus, the banker began to sell only for the sake of selling, not for the sake of your portfolio, or for its further diversification, or what have you. Basically, the banker lost focus on you, and increased focus on himself. He didn’t care anymore if what he was selling to you was a bullshit investment. If you weren’t waking up, you were going to get slaughtered because of a weedy portfolio.

Well, you didn’t wake up in time, this time. It took a financial crisis to wake you up. But you’re awake now.

And you’re still lucky, for time is on your side. Not so for the retirees who woke up alongside of you. They don’t have any time left to win their money back and then some. Their financial game is over. And they’ve lost. Badly. Butchered.

Also, when the going gets tough, the tough get going.

The financial crisis was one thing, but there have emerged tremendous opportunities in its aftermath. People with liquidity have made a killing. Those who weren’t liquid but simply reallocated their portfolios have recuperated their losses of 2008. And those who have learnt their lessons have started to use their common-sense again while investing their money. And they’re not listening to bankers anymore.

But, alas, human nature is numan nature. People will forget 2008. There will be more financial crises. But for you, these will be opportunities. Because you will not forget 2008. Never. Because you are awake now!

Managing an Equity Portfolio

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1). Before getting into equity, pinpoint exactly your appetite for risk.

2). Buy with a margin of safety.

3). Buy with rationale.

4). Spread your buying over time.

5). Hold performance. Reward it with repeated buying, when markets are down.

6). Punish non-performance. Sell your losers when markets are up. Weed them out. Throw them away.

7). Let winners unfold. Be patient with them.

8). When a winner becomes a superstar, ride it till it shows signs of sloth and underperformance.

9). Learn to sit on cash when there’s no value or margin of safety available. VERY IMPORTANT.

10). Know your weaknesses. Be disciplined. Make mistakes, but don’t repeat them. Filter all information, using your common sense. Don’t listen to anyone. Learn to trust yourself.

11). What is your eventual goal? Identify it. I’ll share my goal with you. I would like to hold 20 multibaggers in my portfolio 20 years from now. It’s a tall order. But I’m gonna try anyways. Remember, 1 multibagger is enough to strike it big. I’ll give you 2 examples : Wipro multiplied 300,000 times between 1979 and 2006. Cisco Systems – 75,000 times in I think 12-15 years leading up to the dot-com boom and bust. Before the bust, it gave ample hints of slowing down, so one had enough time to get rid of it. Wipro still hasn’t shown signs of underperformance.

So best of luck, whatever your goals are, but please, know your goals exactly before you play.

The Difference between Investment & Speculation

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Investment is the low to medium risk art of conserving capital and protecting it against inflation, such that in the long run, capital appreciates. Speculation is the high risk art of trying to turn a small amount of money into a large amount.

Investment banks upon the power of compounding. It is an amalgamation of human, monetary and product capital, a combination that favours appreciation in the long run, not linear, but exponential appreciation, owing to the power of compounding. The key requirements are intelligence during scrip selection, patience and tolerance to allow multi-baggers to develop and blossom, and common-sense in handling one’s portfolio. Also, one needs to weed one’s portfolio at times, to remove poisonous scrips.

Speculation banks upon the power of leverage. This construct of finance is a double-edged sword. It can compound one’s profits, but also one’s losses. The speculator tries to cut losses and let profits run. This is easier said than done, because it goes against our natural instincts.

In the end, there are both successful and unsuccessful investors and speculators.

The key to deciding what line one should pursue here is a recognition of one’s own risk profile and appetite. What gives one sleepless nights? What is one’s pain threshold? How much loss can one bear without any effect on family life?

Such questions need to be answered before embarking upon either investment or speculation.