Long ago Money Today had asked me to do a book review of El-Erian’s book on risk. I have always liked his views which have been a little off beat, and willing to go the extra mile. He is also on the advisory panel of Obama’s Economic council..and here are some of the things that he says for THE AMERICAN INVESTORS…it is just as applicable to all of us. Yes, it is a lot of common sense, but reiteration is always useful. It may sound simple, but it is surely not very easy to do, so be careful.

“Be on the lookout for good  stocks trading at really cheap values.” This is something that you should always be doing. Cheap means inexpensive, and what is inexpensive is always known in retrospect. So when a Hdfc bank comes with awesome expense control and a fantastic book quality, it is actually better than a bank which has a much higher NPA. Last week heard about the NPA of an infra funding company – a huge 5% of the total advances! So please understand value.

  1. “Use the periodic bouts of sharp market rebounds to trade up in quality.” This again is a timeless piece of wisdom. If you have a good return from a high beta portfolio, it is always nice to reduce the risk in your portfolio, while trying to hold the returns at the same level. Fund managers usually do this where they use p/e as the risk measure. See some portions of your portfolio which has just gone past sensible valuation. FMCG for example, at least trade down and pick a little bit of infra stocks with good yield. In the short run you can look wrong, but it will stand you well in the long run (Hdfc Equity fund style).
  1. Use measured investing techniques . . . when taking on added exposure to fundamentally disrupted market segments that are subject to high mark-to-market risks.”: Like I said try using a proper well defined, measured tool like p/e, p/bv but ensure that you are looking at proper books of accounts. I actually trust NTPC much more than Reliance Power, but hey that could be bias..but I am sure you are getting the drift.
  1.  think of cash as part of the strategic (and not just tactical) allocation in a diversified portfolio. this could be attributed to his overall view that all assets are in a bubble because of the loose money policy of the US Fed. To a great extent this is true of Emerging Markets too, and the whole world is wondering what happens if the Fed goes to a more tight money policy. Clearly we are all clueless, but most of us recognise that it will be violent. Be careful, cash might help, but do not ignore the cost of missing out a rally.
  1. Continue to look for opportunities that have not been directly affected by central bank liquidity injections.” exactly the same explanation as the previous one!!
  1. Remember that obvious divergences in country fundamentals don’t always translate to commensurate financial market out-performance.” Even in India the infra sector which is seeing so much of activity is not really reacting…but one day infra and infra related stocks will go up..so be prepared. However be alert that GVK, Gmr, adag, JP, …the so called infra companies are reeling in red and soaked in YOUR blood too. Tread carefully..

The non darkened no italics is mine, the bold characters are from El-Erian’s blog.

http://www.subramoney.com/2009/03/when-markets-collide-a-book-review/

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