Approach gold the traditional way!

Gold finds place in an Indian’s asset basket with or without a conscious asset allocation strategy that might be in place. This tradition of having some of it stashed away for the rainy day or for a family function (mainly children’s marriage) need not be elaborated at all. However, in today’s context gold find place in an individual’s asset basket as a result of more formal means of inclusion. This has happened over the past 15 years with India getting more closely knit globally, proliferation of advisors and knowledge transfer on currencies and resultant need to hold real assets.




As a result, gold is now held more in an sophisticated form (ETF’s) or more complex to understand ‘Gold funds’ (a quasi form of holding gold through long position on gold mining stocks). The need to hold an alternative or real asset is now fulfilled by allocating 5%-8% of an individual’s portfolio by exposure through these means. In addition, positives like liquidity, ease of transacting and low/no storage costs make the case stronger taking exposure via this route.

The question then arises is should exposure to gold move completely to holding it in these forms. The answer to this question lies in looking at both pros & cons of holding it in the traditional (physical) form and making a choice according to personal needs and goals.

• Amongst the biggest advantage of holding gold in physical form is its absence of daily valuation which is evident in holding it as an ETF. This sets the stage for increasing the holding period as a result of absence of mark-to-market.

• Secondly, the notion of liquidity might be misunderstood when holding it in physical form; since in the ETF mode it would still take t+2 days to realise cash, while in the physical for its just over the counter (at least in the Indian context). This normally acts as a liquidity booster during emergencies and a last line of defence for any household.

• Third, unlike other asset class which require constant monitoring and periodic re-allocation depending upon investor’s asset allocation, gold can continue to be held for pre-specified goals such as daughter marriage (since it would be cost neutral when jewellery purchases are to be made under anytime horizon).

Amongst the disadvantages could remain its cost of holding and security, both of which are a big hurdle for today’s investor.
The need to propagate and communicate benefits of gold investment to his/her client’s asset basket lies ultimately with the advisor. More often than not gold investment is either too little or too much and depends upon investor’s psyche and outlook towards holding it. Advisor’s role in maintaining the appropriate level (ideally between 5%-8% of the asset basket) will have its advantages in the long run.

After a long haitus!

Whao! what a decade it has been. Hello, where were we all this while, you might ask. We made a promise some time ago that we are value investors and would be out there to help you guys understand investing the simple way. Blah blah blah.....

We broke that promise. Were we plain lousy? Yes and maybe no. Why no? Well we needed to pause (for one long year?, we hear you grumble) and collect ourselves and re-check the world around us. We have learnt very very valuable lessons over the past 12 months or so.

These can be summarised into:

• Look around you, pause to think and never ever take things for granted. Axes fell, people lost jobs (including our collegues); took paycuts and basically are happier than before (paradox?). Now that we have opened the can or worms, lets keep chatting over the next few years
• Spend time with your family. Don't ask why, just spend time with your spouse/girl friend/ kids (your own or your neighbours'). These are high quality things in life. And yes all this is free
• Understand and appreciate the work people are doing around you. Including that of the tea vendor in the street corner, understand the business model very very deeply
• This world seems like an unfair place. All the rich guys do look dumb. They probably are. Look within yourselves, you are far more happier than 90% of the people around you
• THIS IS NOT PHILOSOPHY; you will understand ways to better investing if you just be more emphathetic to yourselves and other around you. Easier said than done.
• Lastly, very basic understanding of things and application of discipline will give you an investment idea that was obvious but no one ever saw. Own that business. The key words here are 'basic' and 'disclipine'

So we are back with the ranting. Some interesting stuff, some foolish ideas, some philosophy throw in and a trillion ton worth of enthusiasm. So u ready for the 'Decade Next-->"

P.S: The enthusiasm bit above needed that scale, cause in today's world even trillons aint enough :-)

Welcome 2009!

At the outset a very Happy New Year to one and all. 2008 has been one forgetful year from all perspectives. Globally, we witnessed the biggest and the strongest disappear from the world stage (Bear & Lehman) and these were, for all we knew legacies of 75 year or more. Then nearer home we saw giants like China facing massive job losses and decline in GDP growth (though officially no ones dare talk about it in the mainland) and hoping that the storm passes quickly.

Closer home in India, we saw our worst nightmares come true. Stock markets crumbling, loan rates spiking, EMI’s getting out of hand, negative home equities, job insecurities and not the least terror attacks. And we definitely know deep inside that the terror attacks were not the last one we will see. And we also know that we have not done enough so far to bring the perpetrators to book (but lets not get into that debate right now).

Time to get serious about that asset allocation decision

Why an asset allocation decision important and is it easy to implement it in the current environment? First, we have no doubt that in this environment (which we expect will continue in 2009) it is extremely important to know when and where we need to invest our hard earned money. Second, despite it not being easy to have a strong asset allocation strategy, which will be fool proof, it can be the only way to capital preservation if not earn some positive return on the money.

It also becomes imperative because, with all the volatility in asset classes witnessed in 2008 (remember gold which has never been so volatile in the past has seen amazing swings during 2008) we need to put our money in a diversified basket of assets; distributed of which is on the basis of weights that are likely to make a meaningful hedge and an opportunity to earn a return when asset classes perform.

What does the crystal ball tell us!

If we had one, we wouldn’t have told the world what it told us. But jokes apart, we continue to believe that individuals should take all the opportunity to invest and lock the returns the fixed income markets presents us. These are truly golden times and we might not see double digit returns on fixed income instruments, fixed deposits and term notes after 2009 and therefore people should not waste time in thinking of locking in at rates provided by banks on FD’s.

More importantly, this is also a great time to SIP your way through the cream available in the stock market. We mean that though it is quite early to make a selective stock bets and it would be akin to finding ‘needle in the haystack’, it is truly a time to broad base your investments in the stock market. Great gems are all dispersed on the floor and let’s not waste time to pick one individually and painfully. Let’s sweep the floor.

It’s a great time to invest in systematic investments plans (SIP’s) of select mutual funds. For one you get to participate in the broad market, second it is a classic buy at lows and more units over a longer period in time.

Go for Gold!

Why gold and that too at top you might ask. Gold is an excellent hedge against inflation (which is going to come down over the near future) but that’s not the precise reason to buy into it now. It’s our classic Indian trait of saving for a rainy day, is what we mean. Try to collect it in physical form and in low quantities. For one, it will remain illiquid and mostly locked in the vault, second it will build over time and you will tend to forget about it (which is the classic case of long term investing-Buy and hold).

We are sure that when the unforeseen time does come (God forbid), you can reach for the vault instantaneously.  

Halleluiah!

But for now, its time to pop up the Champaign, celebrate our existence and pray for people who laid lives defending our country so that we may live another day. And yes, hope that almost definitely 2009 will be much better year as compared with 2008. Let’s start this year by thinking forward, learning from our mistakes and remember that the collective forces that drive the markets can make the most seasoned of fund manager/investor a very humble / helpless of persons within a short span of time.

Until then. Keep the faith.

Prepare for a smooth take off!

Wow! What a year it has been. We started at the 21000 (or thereabouts) on the Sensex in January 2008 and now we stare with questions such – Is there a bottom? It can’t pierce 8000 levels and of course the all familiar; how low can it go?

We are absolutely awed by the way things can turn in the stock markets and yes, we must admit, it can be a humbling experiance to us. We also believe strong in the idiom – keep it simple stupid (the KISS principle) cause no matter where you enter in a stock, if you enter the right stock (right business model, strong franchise and transparent management), it will all come back one day.

Meaning, imagine you invest a company at its 52 week high and the stock tanks 50% or even 70%, what would you do? If the answer to the question we put before (Is the business model right…) is affirmative, believe it will all come back one day. You will need to be patient. The fact of the matter should be that if you had the courage to buy it at the levels you bought it, you should be buying it even more at the current price.

At this moment all we can quote is what Peter Lynch said “If you believe that this business will be around after the next 20-25 years you shouldn't bother what is the current stock price is.

Its Déjà vu all over again!!

That’s what Yogi Berra, famous for his often very subtle quotes (on second thoughts of course) had said no so long ago. Now we don’t profess and don’t want to beat our drums with a trademark “we told you so” attitude, but nevertheless it does not stop us from just drawing your attention to what we wrote just few months ago in our earlier post.

We had a definitive feeling that this would happen (the Bond rally) and was the only way stocks could rally. Only, as mentioned in the post, we thought the government could be a little lethargic (as always) to step in and help the market. We were wrong.

The Bonds have rallied and how. It’s been an incredible 30% on the gilt funds in only two months! Wow, we say with a dazed look. But if what we said is indeed coming true, what is in store in the next coming months?

Happy New Year 2009?

At the outset, we can certainly tell you that it’s going to get a little rough as we head into 2009. What does that mean? That the situation is not going to turn around (for equities) like a bond rally for sure. Buyers are not going to return in droves to buy real estate, nor will car buyers flood showrooms. People will continue to stash their cash into bank vaults and “saving for the rainy day” will remain the mantra for the next few months.

We believe it will not be until there is any meaningful turnaround happens in the corporate earnings. But the first indications could come from decline in interest payouts of corporates over the next 2-3 quarters.

Next could be the outperformance of the "safety net" stocks or the ones like high dividend yield, stable cash flows - consumer staples and pharma/healthcare and finally growth stocks. Within the growth bandwagon too, we could see the last coach (realty sector) of the train not coming good until 2 years from now.

To summarise:-

• we are indeed in the middle or the last leg of the bond rally
• typically it has been witnessed that stock rally starts 6-9 months after the bond rally completes
• the cycle normally upturns with the value picks / absolute bargains starting to outperform

While we go into 2009, if you are thinking of entering the stock market, it would be akin to coming to the airport 3 hours before you flight takes off. For one there will be no one around, second you could end up first in the que, you could end up with the choicest of seats (we hate tele-check in) and yes when you know that its a large aircraft (like the A-380) you would be sure that you will almost certainly enjoy the flight and it will be a smooth and a perfect take off!


So stay tuned...