Alternative Investment Ideas - Learning from the ants

Alternative Investment Ideas - Learning from the ants 

Here's a story about the ants. If you put a food source some distance from the nest and offer the ants paths of various lengths to the source, they are highly efficient at identifying the shortest path. In other words, they are really good at exploiting resources efficiently.

But when the researchers studied the ants, they realised that some of them wandered off the trail from time to time. That didn't seem to make sense, especially if there was a good food source. As they studied it in greater depth, they realised there was a mathematical probability an ant would leave the trail, and that the probability was somewhat related to how likely it was that another food source would appear. So the colonies were adept at exploiting and exploring.

And the point of exploring is that it might be where the next great idea comes from. It's like corporate research and development.

In a similar manner, we must periodically allocate a small portion of our investible surplus for investing in completely offbeat ideas - Look around for investment opportunities based on ideas that emanate from the innards of your own mind which are entirely different from ideas that originate from:

• Blogs
• Websites
• Annual Reports
• Newspapers, magazines, books
• Interviews
• TV
• Friends
• Brokers
• Mutual Funds, Portfolio Managers, Investment Experts
• Telemarketing Calls

Some examples of the thinking process involved:

• You / your family & friends are consuming some product / service that is "New" (New restaurant chain, new super-hit movie, new type of food/clothing/shelter, temptation to go back to your old PSU bank for the benefit of their "Familiar services", etc.)
• Dramatic / drastic changes in the social / political environment that trigger new investment ideas (Increasing social unrest, thefts, etc.? Look for security companies.)
• Unexpected natural / man-made disasters that trigger new investment ideas (Earthquake in Gujarat? Sell holdings in Gujarat based companies with an intention of buying them back at lower levels. Swine flu? Look around for pharma companies with the right vaccine in their portfolio.)

Obviously, a couple of riders would be apt at this moment:

• Often, these investment ideas should be made for the really long term (5-10 years and beyond)
• Be aware that these are high-risk investments
• Put in money in a staggered manner
• While you must put in small amounts, it should be material in nature (While you should not put 90% of your portfolio in these investments, you must not put in 0.001% of your portfolio in these investments either.) Essentially, if the capital erodes by 95%, you must not suffer a heart attack. On the other hand, if it turns into a 100-bagger, it should make you richer in a materially siginificant manner.

Think about it. Enjoy safe & profitable investing!

Regards,

N

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Diversification - Warren Buffett's Thoughts on Diversification

Warren Buffett's Thoughts on Diversification

And why I disagree with him for a change!

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing" - Warren Buffett

Very interesting quote, indeed.

Specific Disclaimer: I'm not too sure whether this is an authentic quote nor am I aware of the context in which the quote was made.

However, for the limited purpose of this post, I'm assuming the authenticity of the quote and proceeding further.

Obviously, for a given time horizon, if we consider the universe of listed entities on the Bombay or National Stock Exchanges, a specific scrip, let's call it ABC Ltd., will produce the maximum returns and a specific scrip, let's call it XYZ Ltd.,  will destroy the maximum value for its investors. And all the other scrips will have performance levels somewhere within that range.

So, as rightly pointed out by Buffett, it ought to imply that all of us should sell all the rest of our portfolio of longs and go long on ABC Ltd., and, likewise, use our "Short" positions exclusively for XYZ Ltd.

I wish that life is so simple.

Unfortunately, it is not.

Here are a few reasons as to why I disagree with Warren Buffett (and why I prefer diversification any day):

• Nobody can predict the future that precisely.
• Any significant, material, price-sensitive event that has a positive / negative impact on either that stock or that sector or some other stock can swing the price of your stock wildly, thereby throwing your calculations out of the window. Examples abound:
• A sudden Lehman Brothers can deplete the value of some other Financial Giant vis-a-vis a Pharma major, for instance.
• An outbreak of Swine flu or a major Class Action Suit on an unanticipated side effect on a popular drug can impact the price of your favourite Pharma Major either positively or negatively
• Worms in your favourite chocolate or a sudden war in the middle-east can impact the share price of some other Chocolate company or that of an Oil Marketing major.
• If your single golden bullet misses its target, you're in doldrums.
• On the contrary, if you are diversified across sectors, across geographies, across market-caps, etc., chances are bright that no single event is likely to significantly impact your overall portfolio performance - Your portfolio performance is, in that case, more likely to be influenced by your own overall efficiency of analysis, stock picking skills, etc.

Hence do make it a point to keep your portfolio diversified.

At least on this matter, don't listen to Warren Buffett blindly!

Regards,

N

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Investing in other Emerging Economies

Investing in other Emerging Economies

Financial Experts have often advocated the merits of diversification across not only asset classes, but also across geographies.

However, it is never too easy for a small investor, however well-informed, to go around investing in shares of other countries, though he/she may well be conscious that it is worth taking an exposure to the huge growth prospects of companies based in China, Brazil, Russia, East European countries, Africa, etc.

We have literally thousands of mutual funds offering "so-called" diversification. However, we don't have too many schemes with a focussed play on specific geographies. Recently a fund house has launched a "China fund", which is probably worth exploring. However, it is a fund of funds, and the returns after taking into account expenses and taxes remains an unknown quanitity.

My own suggestion to the smarter fund houses:

1. Launch country-specific mutual fund schemes investing across market-caps in those specific geographies - DIRECTLY in shares of companies listed in those countries.
2. Appoint a small team of fund managers who are experts in those countries, but with an experience of not more than 5-6 years. My own guess is that this can't be too costly.
3. Offer these schemes as "Exchange Traded Funds", duly listed on BSE / NSE - This will provide liquidity to the retail investor while making the AUM relatively less volatile. This will also provide the added tax benefit due to applicability of STT.
4. Offer only a "Dividend Payout Option" - Follow a policy of taking out money off the table whenever you're sitting on profits beyond a cut-off level. This will probably mititgate the risk of entering a relatively unknown market to a certain extent.

The above suggestion would be of immense value to the retail investors and also add to the AUM kitty of the fund house considerably.

Let's see which fund house takes up my suggestion first!!!

Regards,

N

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BRIC Stocks Recommended by Forbes - October 2009

BRIC Stocks Recommended by Forbes - October 2009

I received through email a report from a highly reputed name - Forbes. Take a peek:

• BRIC Stocks Recommended by Forbes - October 2009

While I don't have a clue about other stocks mentioned in this report, I certainly know something about one of the recommended names - Infosys.

At the outset, let me declare in no uncertain terms the following:

• I'm a big fan of Infosys
• Do have investments in Infosys
• Do regard Infosys to be a great company
• Do hold its management in high esteem on parameters like Corporate Governance, Efficiency, Cost-consciousness, Customer-orientation, etc.

Having stated all the above, let me get to the main point - I'm deeply disappointed by Forbes recommending Infosys. Reasons are plenty. Some of them:

• Infosys is a highly discovered story - At least in India, virtually every Ram, Krish and Hari knows about Infosys
• Infosys is an extremely old story
• Infosys is a great company, but perhaps not a great stock, especially considering the kind of other opportunities available in the Indian stock markets.
• Infosys is quoting at a PE of around 23 - Its EPS is expected to grow at around 17% per annum in the next 5 years - How much more can its share prices zoom further?

Even more interestingly, if Forbes' top 5 BRIC Stocks recommended includes Infosys, one can very well imagine the quality of the other four shares recommended in this report.

Morals of the story:

• Infosys is a great name - I love the company
• Forbes is a great magazine - I respect the magazine
• But do I depend on Forbes to determine my stock picks??? Certainly, I wouldn't

On the contrary, I'll much rather prefer to do my own research and come to my own conclusions.

What about you?

Regards,

N

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Need for Retirement Planning

Need for Retirement Planning

Hear out the lament of a retired pensioner - not a rather impoverished, uneducated retired clerk from the back of beyond, but a senior management pro from a PSU giant:

• http://money.outlookindia.com/article.aspx?sid=10&cid=71&articleid=7762

Many of us tend to postpone financial planning for our post-retirement years till it is way too late. Just listen to Einstein's sermons on the "Power of Compounding" being the "Eighth wonder of the world".

The link referred to above is just one more reminder to those of you who are over the ripe old age of 25!

Regards,

N

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