The Thing with Gold

Equity has a human face behind it. Gold does not.

The human face with its human mind is capable of the best and the worst, the highest and the lowest.

The intelligent investor selects Equity with benevolent and diligent human faces and minds behind it to garner multibagger returns.

Gold is a metal. Period. It doesn’t have a brain. It is not able to find a way around inflation. Its prices fluctuate as per demand and supply. In times of uncertainty, it goes up and up. In times of economic and financial stability, it goes down and down. The net result of Gold’s price fluctuations over the past 100 years has been a 1% annually compounded return, adjusted for inflation.

What you should not expect from Gold is more than a 2- or 3-bagger return over the medium term. If things go really sour for world economy, you might get a 5- or even a 10 bagger return (looking at a kind of a doomsday scenario). If you are hoping for anything more from Gold, dream on.

2-, 3-, 5- and even 10-bagger returns are quite common in Equity over the medium term, and over the long-term, there’s no limit. Wipro’s been a 300,000-bagger over 25 years. There are hundreds of examples of 1000-baggers, and thousands of examples of 20+-baggers in Equity. Meanwhile, over the long-term, Gold goes back to the median.

Why Equity behaves like this is because of the human capital behind Equity. We’ll go into the details of this some other time.

Bottomline remains that, realistically speaking, Gold functions best as a hedge. In case 80% of our portfolio goes for a toss, that 20% which is in Gold for example can save the portfolio with its 5-bagger return.

If we enter Gold with the desire to make a killing, we either have unrealistic expectations, or we need to play Gold futures or Gold Equity. These have their own nuances, about which, again, we’ll talk another day.

Investing is not about building a Consensus

We are what we eat, as an ancient proverb goes.

Another one says that we reap what we sow.

And from what little I’ve seen, eventually, we fall in line and invest as per the wiring of our mental framework. Till we don’t do this, we are following someone. Eventually there’s a clash of personalities. This is a clash between the one leading us and our own beliefs. We now have to make a choice to either go it alone, or to keep following the leader.

Each day after this clash has taken place, the rift deepens. More of our beliefs are being violated. That’s because the leader is investing according to his or her own beliefs. Investment is a projection of one’s personality. Such an evnironment full of conflict leads us to wrong decisions, which result in losses.

Investment isn’t about building a consensus. It’s really not about x number of people coming together, agreeing upon an opinion, putting money on the line and making a killing. That’s an approach that may be part of a trading strategy, but it is far removed from comfortable and healthy investing.

Investing 1.0.1 is about understanding one’s own personality, because this is going to interfere with every decision and thought process one will make in this line. The identification of any investment target needs to be in line with one’s personality, otherwise the acquired target will continue to disturb one’s thought process and everyday life. Who’s best suited to bring about an alignment between investment targets and personality? You are, not a third party. An outsider can only second guess how your mental framework functions. You know yourself much better than anybody else.

Once a basic alignment between personality and investment strategy has been achieved, things start to fall in place, with investments yielding satisfaction and profits.

One doesn’t need to form a consensus with anyone to identify a successful investment and make money in it.

A Beautiful Concept called Margin of Safety

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…

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.

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

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

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.

Why Bother with Fine-Tuning?

He eats his breakfast, but has that something on his mind. Doesn’t chew well, and since the mind is not on the food, he can forget about digesting the food well.

Later at work, something’s still bothering him. What is it?

The evening is spent with the family, but on the inside he’s still trying to pinpoint the root of his worry.

The night is restless. Couple of bad dreams. Nothing soothing about it.

Guess what?

His investment style doesn’t match his personality. The two entities are totally out of whack. His personality pulls him in one direction, but the way he’s invested his money pulls him in the other direction. He’s mentally uneasy because of this, and his investments are not going to do well in the long run, irrespective of market trend, because his opposing personality will make him take wrong decisions as far as the investment style is concerned.

Why didn’t he bother to fine-tune his personality with his investment style, and bring the two in sync?

Nobody told him to, and he was too dumb to realize it himself.

So he’s got 20% of his networth in futures, but he’s conservative on the inside. Hell.

And another 20% in penny stocks.

Make that the next 20 in small-caps.

And the next 20 in mid-caps.

The last 20 being in large-caps.

Pathetic. Obviously he’s not going to be at ease, after having put 80% of his money in relatively risky ventures, which are not in tune with his conservative nature. Till there’s a common meeting grounds between personality and investment style, this or any person who invests without taking basic nature and risk appetite into account is not going to breathe easy.

When I observe him, it gets me thinking.

What are the things that I don’t want from the markets?

Sleepless nights. A nasty visit from the tax authorities. Obsession to the point of not being able to focus on family. Deterioration of eye-sight. Losses. Low long term returns. These are the basics.

Ok, so I make a few rules for myself.

Like, for example, if an investment starts giving sleepless nights, get out of it.

Keep an account of everything. Play with clean, white money. No hanky panky, no money laundering, no nonsense. Thus any visit from the tax authorities will not turn nasty.

To keep the obsession angle out, and to keep vision intact, I can’t be day-trading. Even short-term trading requires too much market involvement. So, I need to formulate a medium to long term strategy.

Losses, well who likes losses. Thus I must be thorough in my research.

And I want high returns. The only conservative investors in History who have achieved high returns have all been focus investors, not diversified investors. Thus, I need to focus on a few areas while investing, and not diversify into many sectors.

See, it’s as simple as that. Identify your basic goals and formulate your basic strategy around these goals. And then breathe easy even when you play hard!

From Crisis to Crisis : The Concept of Pain-Threshold

Mid-flight, you hear a bang, and start going down. There’s panic everywhere, and the aircraft is starting to lurch one last time. The guy next to you is praying loudly. Before the last thud, you wake up. Bad dream. You wake up, because your pain-threshold is crossed, and your subconscious machinery notices this, thus pulling a trigger.

You are in a live poker game. Losing, of course. An hour gone, down a hundred dollars. Another hour goes by. Down three hundred. It’s starting to pinch you. Your mind is reporting to you that you are nearing your pain threshold, and is trying to make you leave the table. You ignore this report, and are down six hundred in the next few hands. Another pang. One last attempt from the mind. You ignore your pain threshold repeatedly. Now things really start to go wrong. When your opponent puts you all-in for fifteen hundred, you go with the move because you are making a set of nines, promptly ignoring the three heart cards lying on the table. Your opponent shows down the nut heart-flush to bust you completely. So, down US$ 2100, a hefty fine for ignoring your pain-threshold. Once it is crossed, you don’t feel any difference between losing US$ 600 and US$ 2100, until you lose that US$ 2100 and come to your senses. For the next seven nights you don’t sleep too well.

You work in a chemistry lab. Your absent neighbour in the overlooking cubicle is performing an experiment that springs a hydrogen sulphide gas-leak. The lab starts reeking of rotten eggs. You are at a crucial stage in your particular experiment. Can’t leave. Your mind is currently so focused on your experiment that it ignores all the warning bells being sent by your sense of smell. It forgets temporarily what it has learnt in safety class, that hydrogen sulfide lames the power to smell after a few minutes, and that of course the gas is poisonous, and because one can’t smell it after the first few minutes, one can drop unconscious, and then eventually die due to gas overdose. That’s almost exactly what happens, with the good fortune that just when you fall unconscious, your neighbour returns, and rescues you. In this example, because your sense of smell has been lamed, it cannot warn your system that your pain-threshold is soon going to be crossed.

When a market crashes, there’s pain amongst investors. Those with low thresholds bail out immediately. Those with high thresholds take time. Trending markets move fast, so almost always, they manage to cross the pain-thresholds of the majority of investors. These investors don’t feel the difference between being down 20% and being down 50% before they are actually down 50%, but by then half their equity corpus has been lost.

This is the age of crises. There’s one, and then there’s another. And so on and so forth. Having learnt from experience that markets are inefficient with the rider that the over-efficient media makes markets specifically over-efficient during a crisis, one learns that it is extremely lucrative to buy for the long-term in the aftermath of a crisis.

Needless to say, one is buying for the long-term in a market where there are good prospects for future growth. Crisis after crisis is triggered by markets where there are no prospects for future growth. Such markets take down even those markets with bright futures. During the first few crises, the dents in the market with growth prospects are big too. As crisis after crisis keeps coming, this particular market falls too, but lesser each time. Simultaneously, quarter after quarter reveals strengthening growth. Eventually, the nth crisis does not trigger a fall here, because a certain pain-threshold has been crossed amongst the investors of this growth market, who by now cannot ignore the quarter upon quarter net increase in sales and profits for the last numerous quarters as exhibited by this market, crisis or no crisis elsewhere. This particular market decouples, on the basis of its own strength, and its intrinsic and burgeoning growth. In this example, the pain is being caused by unhealthy markets, whereas the market where one is invested into is in good health. Here, crossing the pain-threshold makes the healthy market immune to the disorders that the other unhealthy markets are causing.

That Secret Ingredient called Gut-Feel

Birds fly. And, they fly in flocks. When a flock turns, it does so in unison. There seems to be a connection between each bird in the flock. It’s as if each can feel the others in its gut. Each bird is in the “Zone”.

Heard one about a famous artist. He was asked by a rich businessman to paint a rooster for a hefty fee. A year passed. Upon no word from the artist, the businessman got fed up and went to collect the painting. Seeing the artist basking in his lawn with not a care in this world, the businessman enquired about the painting. “Oh, you’ve come to collect your rooster, is it?” asked the artist casually. He then lay out his canvas, painted the perfect rooster, and handed the painting to the businessman, who was stunned and demanded an explanation. Which is when the artist took the businessman into his huge study, the walls of which were laden with hundreds of paintings of roosters, some not so perfect, some nearing perfection, and then, some perfect. In one year’s time, the artist had ingrained the rooster to such a degree into his brush-strokes, that he could dish out the perfect rooster at will.

Remember seeing the opening ceremony of the Beijing olympics. The performing masses were one unit. Such unison was drubbed into each cell of their bodies and minds. It came from practice, practice and more practice. Mind over body.

There’s a particular order of the Samurai where one passes the Master’s final test by first being blind-folded. The Master then stands behind the disciple with a sharp dagger, which he will bring down in a swoop upon the neck of the disciple when he (the Master) pleases. The disciple has to sense his movements, whenever they happen, and has to move out of danger in time. If the disciple succeeds in doing this without injury, he or she passes this ultimate test. And, if my information is correct, all those who have been allowed to take this test by the master have passed till date.

These are a few examples of gut feel. Although logically inexplicible, there’s a mechanism common in all the examples. It is the mechanism of how gut-feel functions at levels of perfection. First, there is repeated failure, whereby there is constant practice going on. Then there is practice, and further practice. Ultimately, the process gets ingrained, and comes naturally. By intuition. That’s gut-feel.

Knowledge is mud if it is not utilized. The battle-hardened market player has been through this process. He or she has seen repeated failure. By hanging on, and learning from mistakes, ultimately, market movements start striking a chord. The overall picture emerges as a whole. After even more practice and experience of market ups and downs, the player enters into the “Zone”, where he or she feels market movements in the gut. The player in the Zone has the capacity to turn with the market.

It’s true. It happens. As surely as the above stories. I’ve seen it happening.

So, be in the market. Fail, fail, and fail again. But do so with small amounts. Then pick yourselves up. Keep hanging on, till you get the hang of things and enter the Zone. And, after you’ve entered the Zone, there’s no better time and place to up your stake.

Playing Around with the Axis of Time

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

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

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

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

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

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

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

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

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

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

Here’s Trying to answer a Million Dollar Question

During the financial meltdown, my portfolio took a huge knock. It was the biggest eye-opener I had ever experienced. I contemplated quitting the markets, but survived the strong impulse. From then on, I only operate in the markets with a hedge. Early 2008, I identified gold as my hedge, and ever since, I have maintained a steady 10% of my portfolio in gold.

I am stating this here because of the one question that is going around in everybody’s minds – what to do with their gold investments???

By default, I have to answer this question for myself. If my answer benefits anyone, even better.

And my answer to the question – What to do with my gold investment? is – nothing.

Yup, I’m not touching it. It’s a hedge, man, protecting the other 90% of the portfolio, which is inversely correlated to gold more than 80% of the time.

What happens if 400 dollars an ounce get knocked off gold’s current price? Well, I’ll be partying in Vegas, because the other 90% in the portfolio will have done well in this scenario.

And what happens if gold goes on to touch 1500 dollars an ounce, or even 2000 dollars an ounce eventually. Again partying in Vegas, this time because of gold, but the other 90% will have taken a bit of a beating, so I might party at home. But the bottomline is, I’ll get to ride gold if it sky-rockets.

Now what would happen were I not using gold as a hedge, but as a sheer investment. To illustrate this, let me give you an example. My relationship manager in Singapore who’s handling my gold investment just called twenty minutes back, excited and eager and rattling on about the current level of the investment and about how we had to book gold right now. Told him the same thing. It’s a hedge for me. Let it ride to 5000 dollars an ounce, I’ll still ride it as a hedge. What becomes clear is that if one has approached gold as a sheer investment and not as a hedge, one is facing the dilemna today of whether or not to book profit.

Frankly, I don’t know the answer to that one.

I’m good either way, with a decline in gold as well as with a rise in gold. So would you be, if you hedged. Hedging is for safety, and it comes at a cost. My investment in gold is the cost of protecting my bulk investments. So, by no means am I getting rid of it, despite the lure of the price level.

Thus ends the lesson in hedging.

On Turning a ULIP into a TULIP

In sixteen hundred and something, the world went bananas about tulips. What ensued was an enormous boom in the tulip market, with species selling for thousands of gilders, and with futures quoted for shoots which were planted or even about to be planted. Murders were commited, all for tulips. Nobody knew this at the peak of the mania, but a virus had hit the tulip plantation industry, resulting in tulip species emerging in all kinds of exotic colour combinations, which were so intriguing, that it led to the mania. Now this virus was a one time thing, it didn’t happen after that. So, as the exotic species and their shoots died, it became apparent to the market that there would be no more exotic specie supply, and a bust followed. Fortunes got wiped out. Suicides resulted. Nevertheless, a tulip remains what it is, a serene flower, adding harmony to the environment, currently fairly priced.

Now what’s a ULIP, or a Unit-Linked Insurance Policy? As the name suggests, it’s an insurance policy, which is linked to units (of equity / debt). When I entered the world of investing, my office got swamped with ULIP salesmen, and I invariably ended up buying 4 ULIPs from various companies because of the excellent sales pitch, and because I didn’t know any better. The killer and sealing remark in the sales pitch was that what form of investment could not be confiscated by any authority, were one to land in trouble or jail? The answer – an insurance policy. And what better an insurance policy than one that is linked to the markets?

Each ULIP has a lock-in, typically 3 – 4 years. So there I was, locked-in with products I knew nothing much about. Hmmmm ULIP – sounded like tulip. I thought to myself – “What if I can find a way to get maximum benefit from these ULIPs? I’m stuck with them anyways.” And my mission statement became – “I’m gonna turn these ULIPs into tulips.” Later, when I had succeeded in this, I even concocted a new name for them, i.e. TUrbo cum Leveraged Insurance Products or TULIPs.

As I set about doing research on ULIPs, all the negatives came up first. Apart from the fee structure being irritating, each premium had a huge additional deduction to go with it. One ended up investing only 80 – 85% of what one paid as premium. The rest went to the insurance authorities. After all, they would charge for an insurance cover. Then, the salespeople held all my passwords in their hands, as per the power of attorney I had signed while investing. They switched in and out of equity at all the wrong times, and my investments were taking a hammering. Then, while switching, one could only catch the end of the day NAV etc. etc. etc.

Slowly, I invited each salesperson for tea in the office. This was much before the financial meltdown, and the merchant banker / investment sales agent was still king, whereby the investor was starved for new investment products. After boosting up their egos, I pulled each login ID and password out of their clutches, and immediately went online to effect a password change. OK, I was no longer under their control.

I noticed that switching between equity and debt was free of cost. What if I switched 50 times a year, not that I was going to, but what if I did? Free 24 times, Rs. 100 per switch after that. Hmmmm. Any direct equity investment would have resulted in brokerage generation, and in ULIPs, there was no brokerage generation. The fund house put up the money for whatever brokerage was generated by ULIP clients. They were probably their own brokers, so they didn’t end up losing much anyways. So, how much was I saving on brokerage per switch. Typically, 0.75% of the total investment if I looked at a complete buy and sell transaction, i.e. switch in to equity and switch out of equity. So, how much money would I save in brokerage if I switched a corpus of Rs. 1 million 50 times over? Rs. 3,75,000/-. Hmmm, sizable. A trader with a high turnover didn’t need to trade directly, he could do it through ULIPs. And the trader would be in and out of the market with one click, there was no need to sell or buy 20 or more different scrips. Still, one would only get the end of the day NAV. The bottom-line was that the trader would save huge amounts on brokerage with this kind of turbo ULIP switching.

What further made this avenue attractive for the trader was the fact that ULIPs did not require one to pay any short-term capital gains tax because of the lock-in. Wow. This was big. So, If I made a million on a million in less than one year, I got to keep all of it, and would not have to part with 15% as short-term capital gains tax. Such tax-saving leverages the portfolio, because one invests the tax-saving back into the market, and future gains are compounded owing to a larger initial investment corpus. In fact, the brokerage saving component was adding to this leverage too in the same way.

So there I was. I had put my investment philosphy regarding ULIPs together, and had actually turned them into TUrbo cum Leveraged Insurance Products, or TULIPs. After recovering my losses and gaining some, I soon got bored, and when the lock-ins ended, I got rid of the TULIPs.

What remains with me today is that this was my first victory in the world of investing, a feeling of harmony that never fails to energize me, just as the mere thought of a field of colourful tulips would energize / harmonize the mind

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

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.

My personal deal with Real Estate

I walk in to the “Tehsil”. People everywhere. Filth. Thick urine stench. Flies. Mosquitos. This is where all the real-estate deals in town are sealed. As soon as I walk in, I want to walk out. Nobody moves without being bribed. Pitch darkness in the registrar room. Five clerks smoking the same “Beedi”, drinking water from the same glass. They hate my face. The feeling is mutual. I dip eight fingers and two thumbs in stale and infected stamp ink to “sign” a few papers with my fingerprints. Next, the government photographer takes me into an inside room where the air is so thick and stinky, that one can barely breathe. Photographs are taken through a pathetic webcam (!) connected to a desktop donated by the red-cross!! The deal is sealed with a final round of bribes. I swear, never to get into a real-estate deal again.

As I walk out, the whole real-estate scenario in India is rushing through my head. More than 50% black money payments in all deals with very few exceptions. One gets jipped on the broker’s commision. Lots of running around and spade work. Payments take a long time to realize, after a lot of coaxing. If one doesn’t do one’s research properly, one can get stuck with a property under litigation. If the property is too far away from one’s eyes. there is danger of “kabzaa”, or the taking over of one’s property by nomads or vandals. This whole asset-class is seeming to be highly avoidable for a white-collared investment profile like mine. Or is it?

Fact remains that real-estate is an essential part of any balanced portfolio. I badly want to incorporate real-estate into my portfolio. Simultaneously, I don’t want to be part of any of the stone-age scenarios listed above. What’s the primary tenet of my investment philosophy? I want everything to be in white. All assets declared. All lines drawn, paper-work in order, all taxes paid, no ambiguity. Can one buy into real-estate under such a frame-work? I do extensive research. Today, the world is actually at your fingertips. And the bottom-line of my research is yes, one can.

I find that REITs (Real-Estate Investment Trusts) have come into India. These buy blocks of real-estate from the corpus collected from a pool of investors under the Private Equity asset class. If they rent out the real-estate, they pay their investors a quarterly dividend from these rentals, typically 10 – 12 % p.a. The real-estate remains locked-in for 4-6 years, after which it is sold, and the principal and profits are distribited to those who put up the money. Fees are on the high side, 2.5 % entry load and 20-30% of profits after yielding 11%, plus another 2.5% management fee p.a. Ticket size for entry is a minimum of Rs. 5 Lakhs. All transactions are in white through cheque or RTGS. Come to think of it, its not a bad deal. The rentals yield more than fixed deposits. I get to play real-estate in white. Expected returns after all deductions are typically 20-25% p.a. Come on, this is a good deal. Among others, Milestone Capital has five schemes going in this category.

What else is there? What’s quoted on the bourses? I’m familiar with stock markets. No lock-ins, full power over your investment, liquidity on the fourth day, no third party involvement, just purchase a scrip online and it will be automatically transferred to and stored in your demat account and will be visible to you at all times when you log into your savings account net-banking. But what scrips to buy? I find that there are plenty or real-estate stories being quoted on the bourses.

There are pure land-development plays, like Anant Raj Industries Limited. There are hidden real-estate plays, like Century Textiles, Indian Hotels, and yes, even Infosys. There are coupled plays like construction companies that also develop low to high category real-estate – Nagarjuna Construction is one. In fact, the stock market is loaded with real-estate plays. But how do these real-estate scrips behave? Are they more coupled to market behaviour, or do they swing in tandem with the real-estate cycle? What I find is this. When real-estate moves in a range, these scrips swing with the market. When real-estate breaks out, these scrips actually do break out. So yes, this is a real-estate play in the long run.

With that, I have my niche all sorted out, and go about incorporating real-estate into my portfolio. It takes about two years to do so, and gives my portfolio the only free luch available in the world of investing, i.e. that of diversification.

Both Sides of the Coin

What’s your personal style of investing, UDN?

Well, if you must know, and now that you ask, I like putting my money on the line when the underlying has hit an all-time high.

Um, isn’t that risky, a huge gamble, actually?

Well, what isn’t risky in life? Marriage is a gamble. So is business. And the farmer gambles on the weather when he sows his seeds.

You could invest in a more cautious fashion, like buying on a dip, you know.

Sonny, you asked about my personal style of investing, not the crowd’s personal style of investing. I’ve fine-tuned my personal style as per the threshold level of my personal risk-appetite, and risk-appetite is something one discovers after being in the market for a while, and after making mistakes and learning from them.

Fine. And what’s so good about investing at an all-time high?

Good, now you are asking some right questions. Ok, investing in something which has broken out and hit an all-time high, albeit risky, comes with a few advantages. First and foremost, there’s no resistance from top, i.e. there are no old sellers waiting to sell as the underlying heads higher and higher. This means that there is nobody stuck at these new levels waiting to off-load. There can be bouts of profit-booking of course, but a real resistance level doesn’t exist as yet, because the underlying has never entered these areas before.

Then, as the nay-sayers grow, and the crowd joins them to short-sell the underlying, there can be bouts of short-covering if the underlying’s climb is not stopped decisively by the bouts of short-selling. Any short-covering propels the underlying’s price even higher.

Before you go on, why is all this better than buying on a dip?

Oh, so you want to look at both sides of the coin, do you? Not bad, you learn fast. Well, buying on a dip offers a margin of safety to the investor, no doubt about that. Nevertheless, the main point is that a dip is happening. Supply is high, demand is less. The underlying’s price is falling as per the demand and supply equation. What’s to tell you that the fall will convert into a rise very soon? Nothing. Nothing at all. For all you know, the underlying might continue to fall another 20%, or 30, or 40 for that matter. It’s a fall, remember? People are off-loading. When something falls, professionals off-load huge chunks to the crowds waiting to buy on dips. If the dip persists, the crowd gets stuck at a particular entry level.

Not the case in the all-time high scenario. Here, there is demand, and supply can barely meet it. Something makes the underlying very interesting. Then, as the story spreads, demand grows, making the price surge further. Add to this short-covering – further surges. Interesting, right? You just need to make sure that your entry is done and over with soon after the all-time high is broken, and not later.

And what if you get burnt? I mean, what if the price doesn’t rise any further after the all-time high, but dips nefariously?

Well, one does get burnt quite often in the world of investing. Fear will make one freeze. I’ve devised a set of rules for this strategy, and then I just go ahead with the strategy, no second-guessing. No risk, no gain.

And what are your rules?

Firstly, I only put that money on the line which I don’t need for at least a few years. Then, I don’t put more than 10 % of my networth in any single underlying entity. Also, after entry, I don’t budge on the position for a few years. I only enter stories which have the potential to unfold over several years. And I only close the position when the reason for entry doesn’t exist anymore, irrespective of profit or loss. Over the long run, this works for me.

It can’t be that simple.

It’s not. I’ve come to these personal conclusions after making many, many blunders, and after losing a lot of money. This knowledge can’t be bought in a bookshop, nor can it be learnt in a university. It can only be learnt by doing, and by putting real money on the line.

Well, I’d much rather still buy on a dip.

Go ahead, a few people are making money while buying on dips. But they wait for the real big dips. They’ve got one big quality that qualifies them for this strategy, and separates them from the crowd. It’s called patience. Prime example is Warren Buffett.

Who’s the prime example of your strategy?

Fellow called Jesse Livermore.

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

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 🙂

Man, you’re such a phony!

You are such a phony, Uday!!!

What was all that talk about never owning a government company scrip, because of the inherent inefficiency in the way the government functions?

And then you go ahead and buy into a mutual fund that will only invest in PSUs! A mutual fund! One thought you were not getting into mutual funds at all, because on market highs they didn’t book proper profits owing to public investment demand, and because on market lows they didn’t invest all they had owing to public redemption requests.

Hold it right there, Mr. Holden Caulfield! Before calling me a phony, let me just point out to you the rationale here. Every investment has a rationale, okay, remember that.

Now listen carefully. Here the rationale is simple. India is opening up its Navratnas and extended Ratnas to the public for purchase for the first time. So the government is going to hype them up, to get a good price for them.

Then, 18 of such extended “gems” are practically debt free. They quote at a lower valuation than the market average currently. They pay out a huge dividend. They are going to be let upon the public soon. I want a piece of the pie.

After this disinvestment story is over, I will let go off this investment, mind you. I’m not going to be holding on to it for longer than 5 years. So let a fund manager have the headache of when to book profits. That’s why a mutual fund, do you understand? And that’s why the dividend payout option.

So I’m not such a phony after all, right? I mean this whole PSU mutual fund thing is a black-box approach. The fund manager does his thing during the disinvestment process, and hands me out about 3 or 4 dividend payouts and then the principal in 5 years. End of story.

I can see you nodding in comprehension, Holden, thanks for the dialogue.

Wake up Uday!

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!

And what’s so cool about Private Equity?

-> that it’s private, i.e. for example no masses prevalent that can dump stock to make a company sink.

-> that the underlying is not quoted on a stock market, so you are definitely not following your investment on a day to day basis, but only on a quarter to quarter basis.

-> that each deal is scanned and studied thoroughly, and its price negotiated extensively.

-> that deal exclusivity also leads to price exclusivity.

-> that deal anonymity leads to an unrealistically low Price/Earnings multiple at purchase.

-> that deal transformation and resale at IPO level can translate into huge Price/Earnings ratio differentials – in other words, when the public is allowed to purchase a company on the stock market that has been nurtured by a Private Equity house that has brought it to IPO level, the Private Equity house makes a killing, because it dumps all its shares on to the public in the first 2 days as the IPO opens.

-> that the high management fee, at least till now in India, buys quality professionalism that investigates and seals your investments for you. As of now, there’s less riff-raff in this field in India. Here’s my rating amongst the companies I have dealt with:

1). Milestone Capital – excellent corporate governance, sound real-estate deals, foraying into education and healthcare – the best.
2). ICICI Venture – a very close second. Happy with them. Good appreciation of 65% of deals.
3). Franklin Templeton Private Equity – good, a little slow, but steady.
4). Cinema Capital – ok, nothing unusual till now.
5). Edelweiss – avoid, lack of disclosure.

-> that for another 2-3 years, entry will still be exclusive, and after that the entry barriers will be too low to make the returns being generated currently.

-> that the inflow of foreign funds to India currently is still very small, and can grow exponentially if conditions here keep improving. And what are the bulk of these funds looking for? Private equity holdings.

Managing an Equity Portfolio

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.