Category: Opinion

Gold has had the worst day today in 30 years as it tumbled 8.7% in a single day. There are several things that you need to consider about gold, but before you read any further, you need to consider how bad my record with gold price predictions has been. I said that you should stay away from gold as early as March 2009 but if you had stayed away from gold for the last 4 years as I did that would have been bad for you as gold has grown quite a bit in that time.

GOLDBEES which is a popular Indian Gold ETF has grown almost 109% in the last 5 years, and at a CAGR of almost 16% that’s not bad at all.

2013 hasn’t been good for it though as it has gone down by 13.5% so far this calendar year, and it has gone down by 8% in the last 12 months or so, and it also looks like 2013 can be the first calendar year where gold returns could be negative when priced in INR.

I won’t be surprised by this and in fact if you read what I have written earlier it will be quite consistent with what I have been saying about gold over the past few years.

The main reason I’m not too bought into the gold theme is that every one is harping on the same story, and people are buying it because of all the same reasons. Everyone talks about central banks printing money, currencies getting debased and gold rising as a result. There is too much consensus and too many people talking the same language. That’s usually not a good sign, and portends bad days ahead. That’s what happened before when real estate stocks came down, same thing happened with infrastructure stocks, IT stocks, and perhaps even Tulips.

More than anything else this seems like a greater fool play where everyone is buying gold with the hope that someone else will be willing to buy it at a higher price a few months down the line. That has worked in the past, but I can’t see how that can work forever.

I’ve seen some very influential investors, and bloggers write about how they have the bulk of their portfolio in gold but I haven’t seen many updates from them to see what they are doing now that gold is trading down?

If you really had 40 – 50% of your portfolio in gold, you’re surely looking at tough times, and with the margin for gold and silver increased in the international markets, it should see some tough times going ahead as well.

I personally don’t feel that this is a good time to buy gold, and on the contrary, if you are sitting on big profits from your gold trade that has worked for the past few years, I’d say it is a good idea to book some of those profits, so that if the fall continues, not all of your profits are nullified.

Most importantly, view gold as any other asset, it’s not a hedge against inflation, and it is certainly not a safe haven, it’s just another asset that goes up and goes down, and if you have too much of your money tied into it – then you are well advised to diversify and reduce your exposure to it.

Also, I see some parallels here for the Indian real estate market. People say that real estate won’t go down because it has never gone down in the past, and guess where you have heard that argument before?

I probably don’t need to repeat this to regular readers, but it’s my duty to remind you that you shouldn’t take investment advice from random bloggers on the internet – your’s truly included.

I recently came across Warren Buffett’s 1988 letter to shareholders and came across an excellent excerpt on the Efficient Market Hypothesis, which I think everyone who invests in stocks or mutual funds should read and understand.

The EMH says that the markets are efficient as they price in all available information about a stock, and as a result it is not possible to consistently beat the market. I’ve never believed in this theory  and have suffered low grades in finance papers (among other things) as a result of that belief. But the way I’ve always looked at this is the volatility in the price of stocks, and the great difference between the prices that stocks exhibit in any 52 week period.

I’ve excerpted this from The Intelligent Investor before, and I think it explains my point well here as well.

A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

The swings are not signs of a rational market.

Now, on to the excerpt from the letter itself. (Emphasis mine)

Efficient Market Theory

The preceding discussion about arbitrage makes a small 
discussion of “efficient market theory” (EMT) also seem relevant.  
This doctrine became highly fashionable - indeed, almost holy 
scripture in academic circles during the 1970s.  Essentially, it 
said that analyzing stocks was useless because all public 
information about them was appropriately reflected in their 
prices.  In other words, the market always knew everything.  As a 
corollary, the professors who taught EMT said that someone 
throwing darts at the stock tables could select a stock portfolio 
having prospects just as good as one selected by the brightest, 
most hard-working security analyst.  Amazingly, EMT was embraced 
not only by academics, but by many investment professionals and 
corporate managers as well.  Observing correctly that the market 
was frequently efficient, they went on to conclude incorrectly 
that it was always efficient.  The difference between these 
propositions is night and day.

     In my opinion, the continuous 63-year arbitrage experience 
of Graham-Newman Corp. Buffett Partnership, and Berkshire 
illustrates just how foolish EMT is. (There’s plenty of other 
evidence, also.) While at Graham-Newman, I made a study of its 
earnings from arbitrage during the entire 1926-1956 lifespan of 
the company.  Unleveraged returns averaged 20% per year.  
Starting in 1956, I applied Ben Graham’s arbitrage principles, 
first at Buffett Partnership and then Berkshire.  Though I’ve not 
made an exact calculation, I have done enough work to know that 
the 1956-1988 returns averaged well over 20%. (Of course, I 
operated in an environment far more favorable than Ben’s; he had 
1929-1932 to contend with.)

     All of the conditions are present that are required for a 
fair test of portfolio performance: (1) the three organizations 
traded hundreds of different securities while building this 63-
year record; (2) the results are not skewed by a few fortunate 
experiences; (3) we did not have to dig for obscure facts or 
develop keen insights about products or managements - we simply 
acted on highly-publicized events; and (4) our arbitrage 
positions were a clearly identified universe - they have not been 
selected by hindsight.

     Over the 63 years, the general market delivered just under a 
10% annual return, including dividends.  That means $1,000 would 
have grown to $405,000 if all income had been reinvested.  A 20% 
rate of return, however, would have produced $97 million.  That 
strikes us as a statistically-significant differential that 
might, conceivably, arouse one’s curiosity.

     Yet proponents of the theory have never seemed interested in 
discordant evidence of this type.  True, they don’t talk quite as 
much about their theory today as they used to.  But no one, to my 
knowledge, has ever said he was wrong, no matter how many 
thousands of students he has sent forth misinstructed.  EMT, 
moreover, continues to be an integral part of the investment 
curriculum at major business schools.  Apparently, a reluctance 
to recant, and thereby to demystify the priesthood, is not 
limited to theologians.

     Naturally the disservice done students and gullible 
investment professionals who have swallowed EMT has been an 
extraordinary service to us and other followers of Graham.  In 
any sort of a contest - financial, mental, or physical - it’s an 
enormous advantage to have opponents who have been taught that 
it’s useless to even try.  From a selfish point of view, 
Grahamites should probably endow chairs to ensure the perpetual 
teaching of EMT.

     All this said, a warning is appropriate.  Arbitrage has 
looked easy recently.  But this is not a form of investing that 
guarantees profits of 20% a year or, for that matter, profits of 
any kind.  As noted, the market is reasonably efficient much of 
the time: For every arbitrage opportunity we seized in that 63-
year period, many more were foregone because they seemed 
properly-priced.

     An investor cannot obtain superior profits from stocks by 
simply committing to a specific investment category or style.  He 
can earn them only by carefully evaluating facts and continuously 
exercising discipline.  Investing in arbitrage situations, per 
se, is no better a strategy than selecting a portfolio by 
throwing darts.

With the budget only a few days away, the media is buzzing with articles about what is expected out of the budget, and how things might shape up.

One of the recurring topics I see is raising the 80C investment limit from Rs. 1 lakh to Rs. 2 lakhs. Obviously a lot of people are hoping that this change comes to be, and the cap is raised to Rs. 2 lakhs or even higher.

This is a far cry from a few years ago when Direct Tax Code was supposed to be implemented and all of 80C exemptions were going to be eliminated.

Quite a few people used to write in comments at the time wondering about the fate of ELSS funds, and whether they should invest in them given that very soon they will not even be in existence any more. These were obviously valid concerns and if someone didn’t invest in ELSS funds because of this and next year they double the limit – that person has got to feel duped.

Then there is the whole question of the rationale of the DTC and how it was supposed to simplify tax structure and reduce rates. Instead all we have seen are things like RGESS which does a lot more to complicate the already hard to understand tax structure, and now if they raise the 80C limit, I’m sure there will be some tinkering with elements within that as well and that will add to the complicated structure as well.

If this continues to happen, then I think they can just stop pretending that DTC will eventually be implemented because the uncertainty does no good, and the introduction of RGESS shows that we aren’t going to move to a simple tax structure any time soon.

It is probably too late to do anything about it now, but I would much rather have a simple tax structure with lower tax rates instead of all these exemptions with their sub-limits and complexities.

Related articles

• Budget 2013: What to Expect, What Not to Expect
• Modified DTC soon, says Shome
• RGESS Savings Scheme and the tail wagging the dog

The CSO released GDP growth estimates for 2012 – 13 today, and they estimate the growth for 2012 – 13 to be 5%.  This is lower than any their own earlier estimates and also from RBI’s 5.8% which was released a few days ago.

There were several articles today that discussed whether these estimates are pessimistic or not and whether the actual growth could be higher. No one can really say whether growth will be 5% or higher but at this point the chances of being 4 point something are much much higher than the possibility of being 6 point something. And if you spoke about 8% which is the 12th plan target then you will be laughed out of the room.

This is quite unfortunate, mostly self inflicted and quite in contrast to the euphoria that existed a few years ago.

Does anyone remember the time when Sensex hit two upper circuits on the same day?

Here is an excerpt from an ET article from May 2009.

Markets have stopped trading for the day as the benchmarks hit another upper circuit Monday as soon as the trade resumed after 2 hour break. Investors are euphoric after the United Progressive Alliance emerged victorious in the 2009 general elections.

Bombay Stock Exchange’s Sensex was locked at 14272.62 up 2099.21 points or 17.24 per cent. National Stock Exchange’s Nifty was locked at 4308.05, up 636.40 points or 17.33 per cent. According to media reports turnover including cash and F&O was less than Rs 1000 crore.

High inflation and low economic growth is a very sorry state of affairs for all retail investors. The high inflation of the past few years has meant that the real rate of returns on fixed products have been negative, and the low stock market return has meant that even the damned nominal return has been negative!

There are three things that immediately come to mind when thinking about this.

1. Savings are the only thing in your control: You can’t control government policies and you can’t control the nature of inflation or the returns of the stock market, but you can control how much you save, and in this kind of environment saving more becomes very important. That’s the only thing you can control, and you can still build a big education fund, or retirement fund or accumulate wealth for any other purpose if you have disciplined savings.

2. Avoiding financial mistakes is in your control: If you lose money by punting penny stocks, trading heavily, pay a lot of money in credit card interest then these are mistakes that are committed by millions of people before you and you should be learning from their mistakes, and not repeating them.

To quote Eleanor Roosevelt

Learn from the mistakes of others. You can’t live long enough to make them all yourself. 

3. Reality check: The quick run up in the market has made many forget how brutal downfalls can be but more importantly how some of the long standing problems facing the economy have not really been tackled. The Rupee is well over 50 to the USD, the deficit is very high, inflation is still quite high, and growth is low. While the market can certainly go up and down over a few years time, in order to have a long term upwards trend, the economy has to strengthen and the country has to resolve the economic issues it faces.

While this post may sound a tad too pessimistic, there are always things we can do to take control of our finances and be prepared for facing situations that await us.

A few days ago I came across an article about SEBI recommending color coding mutual funds so investors can associate risk with different shades of color and be warned that red denotes equity which means loss of principal possible and green means conservative debt so capital is relatively safe (just an example).

I’m not too enthusiastic about this idea because it seems to oversimplify things and if they do decide red as a color for equity mutual funds that will deter at least new comers who don’t really understand the market well from investigating equity further, and it can also imply to people that a fund with a green shade is safe to go into and will never incur losses which won’t always be true.

I am sure there are arguments to be made that this is useful and the best way to find out the reaction is to do a pilot and measure results. That will really tell us what effect color coding has on mutual funds, and then implement it full scale.

Explain the rationale behind fund name

I think there is another thing that’s more important and can add more value as far as making investors smarter is concerned, and it will be good if SEBI looks at that sometime as well.

This is having a small section somewhere in the mutual fund that describes why the mutual fund has been named in a certain way, and in some cases not allowing mutual funds to have names that have a certain connotation but the underlying investment don’t fit the connotation.

For example, I was going through the page for HDFC’s Children’s Gift Fund and to me this looks like a simple equity mutual fund, how is this a gift for your children?

If there were a section that explained the rationale behind this name in 140 characters or less that would be great, and I think a very useful service for investors.

IRDA can look at such guidelines as well – what does that Tata AIA Mahalife Gold have to do with gold? I can’t see anything that ties it back to gold as an investment.

These are a couple of examples that are perhaps a bit extreme but even with funds like SBI Dynamic Bond Fund it will be useful to know in a few characters what ‘Dynamic’ implies? In this case I believe it means that the fund is not tied to investing in bonds with a maturity of a certain kind, and if that’s the case then that is useful information for the investors.

Some food for thought, what do you think?

Sanjay posted the following comment a few days ago, and I’ll try to pen down some thoughts that I have on this.

Sanjay January 17, 2013 at 1:26 pm [edit]

I’ll be really surprised if anyone still remembers what my New Year resolution for this year was but even if I didn’t carry it out fully, I still did a lot about it this year, and was very glad to have made it.

I did a post last year on New Year Resolutions in which I asked a few people what their New Year resolution would be and also shared my own.

Here is what my new year resolution was:

Zero impulse purchases in 2012.

Now here is how I fared and what I learned from this resolution.

1. Avoided buying a lot of junk: I have had far from zero impulse purchases in 2012 (See also: 5 Factors that cause Impulse Buying), but I did avoid buying a lot of stuff that I would’ve bought in previous years. Just having the thought that you have to avoid impulse purchases helps you unbelievably well. That’s all I did really, just thought about cutting clutter and not buying anything that I wouldn’t need after a few weeks, and the idea helped.

2. Not on impulse but wasteful? A few times I’ve experienced this urge to buy something, and resisted it for a couple of weeks or so, and even then I felt like buying that thing. I’ve usually gone ahead and bought that thing and in my mind it doesn’t count as an impulse, but I’m not so sure if it isn’t wasteful. How many watches should someone own? What type of a car should you own? How many shirts?

I certainly don’t mind these type of expenses, but the focus on impulse has given me a perspective that I didn’t have before, which is what percentage of your wants are frivolous wants and what percentage are justified in order to just function properly in this materialistic society?

3. Grocery and food shopping is when you’re most prone to impulses: You see a bag of chips and you want to buy it, you just have a little ice cream left, and want to replenish the stock, a third type of juice won’t hurt, eggs don’t really expire. In my experience, impulse on food items are just the hardest to control, and are the most wasteful as far as I’m concerned. I haven’t done a good job on them so far, but hope to do so in the coming year by being really conscious about this.

4. Impulse on books didn’t harm me: I’m so used to buying books, getting through them quickly and moving on to the next one quickly that I made an exception to the impulse rule in mind for books. I think that didn’t harm me at all as almost every book I read was worth the time and money and the effort it would have taken me to screen these books before purchase wouldn’t have justified the money or time I saved on them.

5. What about time? I had an epiphany about a month ago when I realized that I was spending so much attention avoiding impulse purchases but what about my impulses that lead to wasted time?

At some point during the last year I started tracking the minutes it took to complete tasks and I was always surprised by how quickly each task got completed in comparison with how long I expected it to take.

For example, posts that I thought would easily take two hours (because they usually do) actually took 45 minutes, and the remaining time was frittered away wastefully by me.  I wish I wasn’t so easily distracted, but in reality I get distracted every few minutes and feel the urge to check Twitter, Facebook, a news site or anything other than the current task at hand. I think this is perhaps the worst habit I’m currently suffering from (among countless others) and I’d like to do something about it.

I’m not quite sure how I will deal with this or measure it but it’s an important thing for me right now, and in 2013, I want to be a lot more productive than I was ever in my life.

Finally, this is the first time I’ve taken a New Year resolution seriously, and I’m amazed at the results. I feel that they must have started off or at least became popular because they were really useful but somewhere along the line became nothing more than pastimes and intentions that are never serious.

But taken seriously, they can benefit you.

Why don’t you give this a try as well? Think of the one thing that you would really like to change this New Year, create a resolution and leave a comment here, writing it down will ensure a lot higher chance of success than just having it in your head.

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

A few days back I was watching CNBC-TV18 in the morning when the markets were about to start trading. Udayan Mukherjee and Mitali Mukherjee were talking to Prashant Jain about his expectations from the stock markets in 2013. Let me tell you Prashant Jain is the Chief Investment Officer of HDFC Mutual Fund and the fund manager of two of HDFC MF’s most popular schemes, HDFC Top 200 and HDFC Equity Fund, among others.

Let me also tell you that I try to regularly follow Prashant’s thoughts on investment environment and earnings expectations.

He shared his views that the markets are trading at a forward Price/Earnings (P/E) multiple of 13.5 to 14.5 times, based on the FY14 Sensex earnings per share (EPS) of Rs. 1350 to Rs. 1450, which is below the average P/E multiple of 17 times. As per him, the retail investors always lose money in the stock markets because of their poor timings of entering and exiting the stock markets.

He further said that it is unfortunate but the stock markets always get retail investors’ investments when the P/E multiples are on a higher side, say above 17-18 times and they always cut their holdings when the markets just start their journey to newer highs and the P/E multiples are on a lower side, say around 13-14 times.

If you analyse the current markets scenario when the Sensex has risen past 19000 levels, many of the investors are doing exactly the same what Prashant is suggesting. On the one side, they are either redeeming their mutual funds or surrendering the mis-sold ULIPs or cutting their holdings in stocks/booking profits too early. On the other side, they are increasing their asset allocation towards the debt/gold instruments like fixed deposits, tax-free bonds, NCDs, Gold ETFs etc.

Some investors think that if the markets have risen from 16000-17000 levels to 19000-19500 levels, it is better to sell their investments in mutual funds or shares as the markets will again fall to sub-17000 levels due to some reason and these stocks will again take 2-3 years to reach these levels.

Is this a prudent investment strategy to earn above average market returns? Definitely Not. It is next to impossible to predict the definite direction of stock markets. A common investor should invest in the markets when the markets are cheap and continue investing till the markets remain cheap. When to sell? The answer is very simple – when the markets are expensive or the P/E multiples are above reasonable levels, say above 20-22 times.

But honestly speaking, it is very difficult to follow it practically because when the markets become expensive, the growth in EPS is very strong and we get driven away by some rosy pictures getting published daily in the newspapers. Also, our greed grips us so strongly that we are just not able to book profits.

So, when the markets are down, it offers a very good opportunity for the investors to invest in direct equity or equity linked investment products. Moreover, if any of these instruments provide you an additional tax benefit u/s. 80C also along with completely tax-free returns on maturity/redemption, I think it makes it a perfect investment for most of the investors.

As per a CRISIL report published earlier this year, it showed that Equity Linked Savings Schemes (ELSS) have been better investment options than PPF, NSC etc. It showed that these schemes delivered an average annualised returns of around 22% in the last 10 years. PPF at present earns 8.80% per annum for you and that is also tax free at maturity.

The table below shows a comparison between ELSS and PPF. With similar returns of 8.80% and 22%, your Rs. 1 lakh invested today in PPF and ELSS would become Rs.2,32,428 and Rs. 7,30,463 respectively after 10 years.

Some good performing ELSS have delivered very good returns in the past 1 year period. But, I think investors should also observe their long-term performances. The table below shows the list of five such schemes with their 3-year and 1-year performances.

With a lock-in period of 3 years, I think tax saving mutual funds (ELSS) as a category should outperform all other tax saving products in the next 3-5 years. But, for that, the corporate profitability should improve and the government should start taking steps in the right direction. Lets see how these funds deliver in the times to come.