Gold Jewellery as an Investment???

Gold Jewellery as an Investment???

Single word answer: Never!

If you're buying jewels for wearing, for enjoying, for showing off, for snob value, for fun, for pledging in an emergency, it is OK. It is your call, it is your decision.

However, if you believe that Gold is a good investment, make sure that you are buying Gold ETFs and never buy physical gold.

Don't delude yourself that physical gold jewellery is a good financial investment.

If you've got any doubts whatsoever, take a look at this wonderful 7-minute video:

• The Physical Gold Con Job!

Regards,

N

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Real Estate as an Investment - Part 1

Real Estate as an Investment - Part 1

The great Indian Middle Class has one major dream - Buy a house for posterity. This has further led to a logical extension: Real Estate, especially in our urban centres and growing cities, is a great investment.

While it is indeed a logical extension, is it a valid one? If real estate is bought for emotional reasons such as "A roof over my head", "A nice home to leave behind for my spouse and children after my time", etc., it is a different matter. If however, it is viewed as an investment, we must analyse the same from the point of total returns from the time of procurement till the time one exits the investment.

I decided to delve a bit deeper into the subject, and found something interesting.

Here are the details:

• I did a quick, completely unscientific random sample-based study. Checked out from a few of my friends about the price they paid for the flats that they bought 10, 15, 20 and 30 years ago in the cities of Chennai, Coimbatore, Bangalore & Hyderabad. I also asked them about the estimated present resale value of the very same flats.
• Without exception, the rental yield on each of the properties was much less than 1-2% per annum on an inflation adjusted basis for ALL the persons. And here, I'm talking about the official inflation figures rather than the real inflation faced by you and me when we go out to buy groceries, vegetables, toothpaste, movie tickets, etc.
• Taking into account the PRESENT resale value, the rental income accrued, and the interest cost incurred on Home Loans over the years, the effective annual yield on the original investment ranged from a low of around 7% to a high of 16%. The "16% per annum" yield had materialised for someone who had "Got lucky" by entering into a location which was completely undiscovered, which later on turned out to be a hot-spot due to the establishment of offices of several Infotech companies in that area.
• In almost all cases (except one instance, in fact), the net present value of the rent collected over the years was less than the corresponding net present value of interest cost incurred on home loans.
• In each and every case, Real Estate had proved to be better than stuff like fixed deposits and had also generated inflation-beating returns.
• In each and every case but one, the friends had not sold off the property that they had bought for "investment" purposes. In the solitary instance of the person who sold it, he did not regret the decision, as it had helped him to fund the professional education (including overseas education) for his children, without any loans.
• In each and every case, the returns generated from Real Estate was LESS than the returns generated from a hypothetical investment made in benchmark Indices / reasonably performing mutual funds

Moral of the story:

• Real Estate is an excellent investment for ordinary investors to beat inflation. It is much better than routine bank deposits
• Real Estate generates CONSISTENT returns
• Real Estate UNDERPERFORMS stocks and equity mutual funds

Theoretically, savvy investors ought to have a significant preference for Real Estate over Bank Deposits. At the same time, they must have a strong bias for investments in shares and equity mutual funds over real estate.

However, in practice, we've found that EVERY person who invested in real estate for investment purposes has done extremely well financially. In contrast, most stock market investors have ended up "burning their fingers" and ended up with ("At best") mediocre returns. This is based on anecdotal evidence that I gathered by interacting with several friends and relatives about their experience with their investment in shares and equity mutual funds.

Intuitively, our Middle Class Indians seem to have got the conviction about the validity of the above "Practical reality". This is corroborated by

• the limited number of persons who invest in shares as well as
• the limited percentage of their net worth being invested in shares and mutual funds.

Why? Why is it the case?

Why does Sensex outperform real estate consistently, but stock market investors underperform real estate investors?

For answers, please visit this blog again after a few days. There is a very interesting basket of reasons for this paradox!

Regards,

N

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Sixteen reasons why we'll get shares at Lower prices

Sixteen global and Eight local reasons why we'll get shares at Lower prices

Happened to come across a rather insightful piece on a favourite blog of mine - Generational Dynamics blog. Am reproducing the relevant portion below.

We must take it with a pinch of salt (as the Generational Dynamics blog has been predicting a bear market for Wall Street for at least a couple of years now). Nevertheless, many of the pointers are fairly valid pointers.

More importantly, when the US Markets falter, it is almost a certainty that other markets will follow suit.

Hence, be prepared to face a fairly significant crash in the weeks and months ahead. This is further corroborated in the Indian context by the following:

1. Scams - big and small
2. Political turmoil
3. Technically weak Nifty. We've been repeatedly approaching the 200 DMA too often for comfort. If we break it, hell can break loose.
4. Fundamentally, many major shares are quoting at unreasonably rich valuations (though not completely in the bubble territory - as yet)
5. Elections in many key states and the linked uncertainty
6. Problems with virtually all our neighbours (especially China - with stapled visas being issued to Indians from most parts of the country other than Delhi, Mumbai and Chennai!!!)
7. Internal violence increasing at a rapid pace (Jammu & Kashmir, Meghalaya, Telengana, Gorkhaland, Meghalaya, Maoists from WB, Orissa, Chattisgarh, etc.)
8. Inflation, especially food inflation

Many of us tend to perceive all this news as "Bad news". Instead, I would like to look at them as just news. While politically and socially all this stuff can indeed be "Bad news", as investors, if we are prepared and if we anticipate all these developments, it can actually be "Good news".

All that we need to do is to keep booking profits steadily in every rally and gradually increase our cash levels.

When the inevitable happens, there will be a "nice, good crash". This would result in blue chips being available at rock-bottom prices. Be prepared. You'll get all your Reliance, Infosys, Mahindra & Mahindra, BHEL, State Bank, HDFC Bank, Titan, Hindalco, Dr. Reddy, ITC, etc. at juicy levels. Grab them when the time comes.

After all, the long-term India story remains strong - as strong as ever, in fact.

Happy investing!

Now for the promised excerpts from the Generational Dynamics blog:

Original source: http://www.generationaldynamics.com/cgi-bin/D.PL?d=ww2010.weblog

Sixteen reasons why a Wall Street panic may be close

"Higgenbotham" in the Financial Topics thread of the Generational Dynamics forum was asked why he believes that a Wall Street panic could be near. Here are his reasons, from most important to least important:

1. US Muni bond indices collapsing
2. US State bankruptcy procedures being seriously discussed, indicating bankruptcies are imminent
3. Several US housing markets making new post bubble lows and the trend appears to be accelerating
4. Rising US, German and French bond yields, while at the same time PIIGS bond yields remain elevated
5. Recent Gallup spending survey shows a collapse in US consumer spending in January 2011
6. Leading Asian stock markets have been rolling over since November
7. Russell 2000 Index lost 3% last week while the Dow gained 1%
8. Many sentiment indicators near or at records
9. Recent speeches by top Fed officials indicate dissent and fear is building
10. Oil and gasoline prices moving into danger zone (subject to interpretation)
11. US Mutual Fund cash levels at record lows (this condition can persist for months)
12. NYSE and NASDAQ short interest at post 2007 lows (same here)
13. High NYSE margin debt (and here)
14. Silver prices starting to lag gold prices (probably not by enough yet to cause concern)
15. ECRI and CMI Indices lagging stock market (this could be interpreted as bullish)
16. US traffic volume still well under its 2007 high and not improving much (and here)

He adds that, "Low stock prices convince most people that lower stock prices are to follow. High stock prices convince most people that higher stock prices are to follow. And it will forever be thus."

In response, forum member "vincecate" pointed to one more sign: Zero Hedge is pointing out that, for the first time in years, and possibly for the first time ever, there were no insider purchases of stock last week. That is, insiders sold $163 million worth of stock, but not a one single purchase of stock by an insider.

Those insiders must be telling us something.

Sixteen reasons why a Wall Street panic may be close

"Higgenbotham" in the Financial Topics thread of the Generational Dynamics forum was asked why he believes that a Wall Street panic could be near. Here are his reasons, from most important to least important:

1. US Muni bond indices collapsing
2. US State bankruptcy procedures being seriously discussed, indicating bankruptcies are imminent
3. Several US housing markets making new post bubble lows and the trend appears to be accelerating
4. Rising US, German and French bond yields, while at the same time PIIGS bond yields remain elevated
5. Recent Gallup spending survey shows a collapse in US consumer spending in January 2011
6. Leading Asian stock markets have been rolling over since November
7. Russell 2000 Index lost 3% last week while the Dow gained 1%
8. Many sentiment indicators near or at records
9. Recent speeches by top Fed officials indicate dissent and fear is building
10. Oil and gasoline prices moving into danger zone (subject to interpretation)
11. US Mutual Fund cash levels at record lows (this condition can persist for months)
12. NYSE and NASDAQ short interest at post 2007 lows (same here)
13. High NYSE margin debt (and here)
14. Silver prices starting to lag gold prices (probably not by enough yet to cause concern)
15. ECRI and CMI Indices lagging stock market (this could be interpreted as bullish)
16. US traffic volume still well under its 2007 high and not improving much (and here)

He adds that, "Low stock prices convince most people that lower stock prices are to follow. High stock prices convince most people that higher stock prices are to follow. And it will forever be thus."

In response, forum member "vincecate" pointed to one more sign: Zero Hedge is pointing out that, for the first time in years, and possibly for the first time ever, there were no insider purchases of stock last week. That is, insiders sold $163 million worth of stock, but not a one single purchase of stock by an insider.

Those insiders must be telling us something.

Regards,

N

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Recovering Indian Loot @ Swiss Banks

Recovering Indian Loot @ Swiss Banks

We've been bombarded on all kinds of media - newspapers, magazines, websites, TV Channels. All of them. On almost a single topic: Recovering Indian Loot lying idle in Swiss Banks.

At a conceptual plane, it is a nice coffee-table talking topic. We can claim any figure that comes to our mind (as long as the number of digits exceeds a dozen!) to be the funds that "rightfully belongs" to our poor farmers which has found its way to those mysterious numbered accounts in Swiss Banks.

However, in practice, if someone has any realistic hope of bringing back to India some of those funds, perish the thought.

There's no way in which any of those funds are coming back any time soon.

Here are a few reasons:

• The guy with the money makes the rules. Today, the money is with the Swiss Bankers. If they say that "We can't violate the strict Banking Secrecy laws", it simply means: "Sorry buddy, try some other trick. We're not going to sing. Certainly we have no intention of giving the money so easily."
• Might is right. If USA managed to bull-doze UBS to reveal crucial info about account-holders, we must remember the genuine tilt in the power equations between US & Swiss authorities.

If, in spite of the above two points, if folks in Indian media houses, NGOs, Social Activists, RTI Activists, etc. still believe that we stand a chance of seeing all that money in our life-time, I'd like to emphasise a couple of additional points:

• The guy with the money makes the rules. The guys who deposited all those ill-gotten funds are not the typical "Aam Aadmi". They are all sophisticated, rich, well-connected, powerful money bags. They could be businessmen, politicians, movie stars, sportspersons, etc. But they are all VVIPs. Chances are bright that before sending all that money to those famed Swiss Banks, they would have used the able services of a small army of Chartered Accountants, Advocates, etc. Before we give a minor loan to a friend, we ask a thousand questions about the purpose, ability to repay, intention to repay, etc. They would have certainly asked even more questions before sending all that money to Swiss Banks. They are certainly likely to have used all legal loopholes available before sending such funds. And, they are likely to have created even more legally tenable loopholes to transfer money to the Swiss Banks.
• Might is right. Folks who "rightfully" own all those funds are certainly going to do all they can to keep it within their own control. Why would they try to indulge in activities that will result in losing control of the very same funds???

Considering all the above, we can

• Yell all we want
• Have all the panel discussions that we care to
• Write editorials in all newspapers
• To be followed up with letters to the editors
• And blog posts

Result: Lots of entertainment and noise, and little else.

For those of you who think that I'm cynical, I wish to admit that I am, indeed, realistic. If that also implies a healthy dose of cynicism, so be it! That's also why it is being posted on Multiple Shades of Grey!

For those of you who wonder as to why this is posted on the Financial Views of Mr. N in addition to Multiple Shades of Grey, please remember that this will be a good source of volatility in linked share prices once the names start tumbling out eventually. Use it to your advantage.

Regards,

N

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Unreliable anecdote about George Soros

Unreliable anecdote about George Soros

And lessons for you and me!

Happened to come across (either on TV or on the net) an anecdote about George Soros. Am not sure about the veracity. However, it is interesting enough to produce the gist over here.

Standard operating disclaimer - This anecdote may or may not have happened. Am merely reproducing something interesting that I heard ... ... ...

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Some time ago, George Soros was interacting with the Finance Minister of an Asian "Tiger" economy, about the true worth of their currency. The FM disagreed with George's perception of what the currency was worth. The FM further said, "We'll defend our currency till the last dollar of our Forex Reserves!"

George asked the FM: "OK, Sir, how comfortable is your Forex reserves position as on date?"

The FM replied that it was quite comfortable and was in the region of "xx billion dollars".

George Soros thanked the FM, came out of his meeting, rang up his assistants back at his office and barked: "Go short on so-and-so currency to the tune of XX BILLION DOLLARS, right away!"

The rest, as they say, was history.

____________________________________

While the anecdote may or may not have taken place, there is a crucial lesson for investors like you and me - Take a look at this quote from physics:

• "Give me a lever long enough, a fulcrum strong enough and I'll move the world" -Archimedes

People with deep pockets, like hedge funds, RBI, Federal Bank, large FIIs, Giants-sized Insurance companies, etc. can move the prices of an individual stock up or down almost to any extent through their own actions.

Small investors have a choice between:

• Getting caught on the wrong side of the trade (this can be through panic selling, panic buying or falling to the temptation of playing in the Futures & Options market)
• Making such volatility your friend. This can be by selling at unreasonably high prices (which are bound to be temporary) or buying at equally unreasonably low prices (which are also transient, though often last a bit longer)

Take care, and your wealth is bound to grow. 

Regards,

N

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And You Thought that Greece won't go Kaput!

And You Thought that Greece won't go Kaput!

I must give credit where it is due. I keep getting ideas on which articles to read from among the millions that keep cropping up on the web from the following sources:

• My favourite newspapers - Economic Times, Hindu, etc.
• My favourite blogs - Like Subramoney, Generational Dynamics, Parag Parikh, etc.
• My favourite web-sites like moneycontrol, ICICI Direct, Outlook Money, India Today, etc.
• My friends' emails
• My blog readers' emails

Sometimes, I give credit specifically, while at other times I don't - Not because I don't wish to, but because I genuinely forgot the original source.

Here's an excellent article that I was referred to by Subramoney Blog:

• Beware of Greeks Bearing Bonds!

It is indeed a long article, but even if you glance through it, you'll start wondering about when Greece will go bankrupt.

If you don't have the time or inclination to go through the whole of it, here are a few lines:

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In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn't take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece's rail passengers into taxicabs: it's still true. "We have a railroad company which is bankrupt beyond comprehension," Manos put it to me. "And yet there isn't a single private company in Greece with that kind of average pay."

The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland's. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something. There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses. The retirement age for Greek jobs classified as "arduous" is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on. The Greek public health-care system spends far more on supplies than the European average—and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.

_______________________________________________________

My own worries are:

• If Greece is going bankrupt, what is the REAL position of other countries?
• How do we know that there will be no contagion effect?
• If a simple Lehman can cause such global harm, imagine the impact of an entire nation (even a "small" one like Greece) going bankrupt!
• What will happen if some of our Communist friends go on a tour to Greece - The ideas that they will get on subsidies, social welfare expenses, pension commitments, etc. will go a long way to jeopardise the India Growth Story!

Guess that we must all have a very strong Plan B in place for the wellbeing of our portfolios. Here's a few suggestions:

• Increase your allocation to fixed income products as a percentage of your overall asset allocation - Give a preference to relatively safe stuff like those "quasi-guaranteed" by the Government (like fixed deposits with public sector banks).
• Stay away from Futures & Options, unless your portfolio is worth a few hundred crores (in which case you can affort to lose a couple of crores here and there)
• If possible, stay away from short-term investment in shares (for any period less than 6 months) - Unless of course, you happen to realise that your shares have gone up significantly within that period - in which case SELL and keep your profits with you. Not as paper profits which may evaporate if the share prices crash again.
• Have a core portfolio of blue chip shares and highly rated equity mutual funds which you're willing to hold for a decade and beyond, even if in the intervening period they plummet and crash like a house of cards and stay at low levels for a couple of years. The very real India Growth Story will take care that your investments reap a rich harvest by that time
• Have a "Satellite Portfolio" of shares which you use for medium-term (6 months to 3 years). This should be your "Trading portfolio". For this part of your portfolio, you must be nimble-footed, and keep booking profits regularly. More important, keep very strict stop losses to ensure that your capital does not get wiped out.
• Have a significant amount in cash and cash equivalents. This would come in handy to buy shares at ridiculously low levels as and when a sudden, violent and deep crash comes along due to local or global factors.

Stay safe with your hard-earned money!

Regards,

N

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Dhaka recovers, and how!

Dhaka recovers, and how!

Take a look at this short video clip:

• Reaction to the sharp recovery of 15% in a couple of hours - The Dhaka Scenario!

The scary thing is that a vast majority of all those millions of individual investors are:

• Borrowing money from the banks to "invest"
• Buy / Sell based on "Tips"
• Believe that the Government of Bangla Desh should and would actually go around ensuring "Good returns" in the stock market.

We all know only too well that money has never been made in the stock market by investors with such behaviour patterns. The sooner they realise, the better it is for them!

Regards,

N

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Violence in Dhaka due to Stock Market Crash

Violence in Dhaka due to Stock Market Crash

Interesting, indeed, though a bit ridiculous!

• Dhaka Stock Market crash results in violence in the streets!

Wonder when investors will realise that share prices can go up or down.

• Both due to fundamentals / technicals
• and due to speculative activities / scamsters.

You've got to be prepared for all that if you're interested in market returns.

After all, Dhaka market went up by around 80% in 2010, before crashing by 15-20% in the current crash.

Hence, an investor had invested $ 1000/= in late 2009, it would have become around $ 1800/= in 2010, before reducing to around $ 1500/= now. All numbers are, of course, approximations.

If the markets have been going up and down due to valid economic reasons - whether fundamental or technical, there is nothing much to complain and there ought to be no justification for such violence.

If, however, the markets have been manipulated, we must think of a few simple questions before coming to conclusions about any imagined justification for the violence:

• If you're worried about manipulations, who forced you to invest your hard-earned money in the supposedly manipulated stock markets?
• If indeed the markets are manipulated, they must have been manipulated on the way up and on the way down. If you were happy to keep quiet earlier, there's no reason to crib about it now!
• Even if markets have been manipulated, you've still generated far better returns than any fixed deposit in any bank - by miles. You have no reason to weep over the supposed opportunity loss.
• If you are a speculator trying to make a quick buck, obviously, you're "one of those speculators" and should be willing to lose money as much as you're happy when you're making super-normal profits
• If you're a long-term investor, you ought not to worry - What has gone down today will go up tomorrow. You should only be bothered about the kind of rates that prevail when you're eventually planning to sell your shares. In any case, a disciplined asset-allocation approach would have ensured that you would have booked at least partial profits when the markets went up by 80%. If you feel that the shares have fallen to unrealistically low levels, you can use that money now to buy back more of the same shares that you sold.

Moral of the story:

Any violence supposedly due to the stock market crash in Dhaka is certainly not due to the crash. It is only due to some other reasons, which I'm presently unaware of.

• Perhaps some kind of local politics.
• Or a desire to have a holiday.
• Or a desire to motivate the powers-that-be to intervene in the markets so as to get the bull run going.
• Or a wish to aggrevate the crash further so as to buy the very same shares at even lower prices!

Regards,

N

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Policy of "Variable Pay" For Denial of Insurance Claims

Policy of "Variable Pay" For Denial of Insurance Claims

For a change, I've got a query and am not expressing my thoughts and views in this post:

Do our Insurance companies (especially Life & Health Insurance providers) have a policy to reward their claim-processing employees, agents, etc. with any kind of variable pay, incentive, commission, etc. based on the number of / percentage of / value of claims that are actually denied / rejected / refused.

In other words, is there an incentive for the people processing insurance claims to actually refrain from settling those claims using some excuse or the other?

If anyone knows the answer to the above query, I'll be delighted to know.

Better still, if someone has already compiled a list of insurance-company-wise data on the above query, that would be of immense value both to me and to the regular readers of this blog.

Thanks in advance!

Regards,

N

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