Of course you can trust a big financial company as long as you can remember that:

MF Global misplaced US $ 633 Million (or was it Billion or Trillion – when it comes to US, these words lose their meaning)

Bernie Madoff ran a big company

Goldman Sachs is a big company which sold ‘garbage’ to clients and bet against the same bonds which made up YOUR portfolio

HSBC Bank is being prosecuted in UK

Arthur Anderson was one of the big 5…till it became big 4.

I am sure when the Gold bubble bursts one of the subsidiaries of a big company will confess that they did not check…and about 125kgs of bars are actually not gold…but an alloy with about 22% gold. L O L. They will say “our trustees depended on certificates issued by….”

Just Google about Citibank, HSBC, …and their run in with regulators around the world…read about Japan for starters

so these are the caveats…:-) L O L….

by the way do you want Indian examples? I am afraid some of them are still in business…:-)

and also read this please

http://timesofindia.indiatimes.com/city/bangalore/Bank-manager-held-for-stealing-Rs-1-3-crore/articleshow/11012141.cms

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Same is true for equity markets, but that is a different story.

Those of you who are sick of my real estate, gold and other sob stories should read the link provided below.

CAVEAT: do not even think of doing this exercise with Mumbai or Delhi prices unless you have a cardiologist somewhere near you….

http://www.fool.com/investing/general/2011/08/29/where-to-rent-where-to-buy.aspx

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It was Jan 2008 that the market was at 21000 – and then it kept slipping. I used to do a lot of training – and 2008 was really special. Many of them needed a ‘how to talk to the customer about a falling market’ kind of training!

I remember shocking the audience by saying ‘It COULD take 10 years for the market to cross the previous high. Now I have no clue whether what I said was right or wrong – I still do not know.

However I do know that in the last 3 years the market has really not gone anywhere. Yes there have been IPOs, scams, mutual fund churns, ulip sold, but the index has not gone up. Yes the market capitalisation of the country has gone up. Shares like Coal India have got listed…If you had done a SIP you would have got returns in the region of 1-2% over inflation i.e. about 10-11% p.a.

My take is we do not know whether we were in a bull market or a bear market over the past 3 years. How do I expect to know how it will be in the next 3 years? Well i do not know, and can only guess.

If you know what to do, great. I am just continuing my SIP (caveat – my mf portfolio is much smaller than my direct equity portfolio). Have sold some shares which I thought were overpriced, bought some shares which I thought were underpriced….but largely sitting on cash. Not wondering what to buy, but when to buy!!

Unfortunately money is in the  s.b. a/c earns poor returns. Happily contributing to the already high CASA ratio of the private sector bank….

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Over the last few decades the family portfolio which I control and my friends portfolio which I (I think at least!) influence has a huge domination by the Tata group, MNC – as a group, Birla, Murugappa, and a sprinkling of some brilliant companies like L&T, Reliance, Hero Honda, Oracle, Wipro,  etc.

In a serious reshuffle a few of us have been reducing the exposure to the Birla group – not as a design, but as a bottom up approach. Many of us are almost not there in Grasim, Ultratech, etc. The new forays into financial services, retail, telecom – none of it seems to be very inspiring. Will the high price earning ratios that old companies get (partly due to shareholder’s laziness, many shares still being in physical form, etc.) suddenly go away? Not too sure.

Only company on which a few of us have some consensus (as a buy) seems to be Hindalco. Why? We had a call at 200 in 2007 from our broker. He then said HOLD -on the way down. Then his chartists put a buy at 55. Then it went to 38, if I am not wrong. However from about 50 it has been a 3 bagger at least.

The reasons may not be far to seek – if you see the dollar slipping, turn to commodities theory. Copper and aluminium have a fantastic store value and a USE value. Unlike Gold which only has a PONZI value (you will always find a buyer at a higher price syndrome).

So if you are bullish on Gold and bearish on telecom, cement, retail, financial services, but are bullish on copper and aluminium (as a proxy for gold?)convert from Idea, …and other companies to Hindalco.

Ps: the past is not an indicator of the future. I have made millions of mistakes in my previous calls. Like I have said in the past, this is not a predicting blog, it is a blog which FORCES you to think. Of course you can navigate away if you do not like this ‘what I have done’ kind of tone…neither should you copy what i have done. At my stage of portfolio holding some experiments are allowed – some have paid some have failed.

PS: names thrown about as ‘brilliant companies’ are BACKWARD LOOKING – and personally I have no clue whether to hold on to such companies for the future. Currently most of them appear in the above mentioned portfolios, and even as we speak some of my friends may be buying puts on these very scrips, so beware. Like they say caveat emptor.

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Fund managers also come in various shapes and sizes….but clearly HDFC as a group is there at the top. Not to say mistakes do not happen, but it is contained. Action is taken against the guilty and the systems strengthened. This is true for Hdfc ltd., Hdfc securities, Hdfc bank and surely the same culture must be there at Hdfc Amc and Hdfc Standard life insurance. Mr. Deepak Parekh – and therefore all his CEOs set very high standards…

However one equity dealer (employee) has played dirty. He must have taken a lot of precautions. He just forgot that ‘there is no right way of doing a wrong thing’. Basic fundamental rule which thieves forget.  This is not uncommon – after all these are kids in the ‘Greed is Good’ times when Wall Street has gone beserk. If Grasso could justify a $ 140 Million bonus…what is a few crore Indian rupees.

Kapadia seems to have done ‘front running’. Front running is buying the shares in your personal account before you buy for the fund. This allows you to profit quite handsomely – because the fund’s buying takes the share up….and then you sell. That is what Kapadia and his friends have done. Or seems to have done.

What SEBI has done is a good investigation against Kapadia, Sanghvi and Mehta regarding transactions done in the year 2007 and has asked the AMC to do more detailed investigations.

One MNC for whom I used to do internal audit had the power to ask the employee to give a declaration about all his bank accounts (demat was not yet in and this was an engineering giant). In one case we did find payments from dealers in the employee’s father’s account. However sacking the employee was the only solution.

One group in the south has sacked people for traveling 2nd class and claiming 1st class…

One brokerage house sacked a few top executives for doing transactions without completing K Y C formalities – there are millions of instances. As a CA you get to hear some stories, as a broker you get to hear some stories…however nothing really comes out. Or it is killed before it comes out.

This incident must be a complete nightmare not only for the management of hdfc and its associates but also the trustees, custodian, internal auditor, outside directors, and the top management which would just be answering calls. This wake up call is for others who also manage money in a pool – be it a pms, a mutual fund, or a life insurance company.  Too much is at stake.

For people like us who have trusted this brand since 1980 as a shareholder, as a fixed deposit holder, bank account holder, demat account holder, fixed deposit holder, brokerage account holder, as a mutual fund unit holder, as a life insurance policy holder,….this is quite a hit. Since the news broke (yesterday evening for lesser mortals like me) at least 4 people have asked…’Is my money safe…’. Last week my voice would have had more conviction. Now I am waiting to see what the trustees have to say. Remember it is their responsibility to ensure that the back end processes are robust and keep the industry free of risk.

Hopefully the management will improve the internal controls (I am sure the simple things like no cell phone in the dealing room, daily portfolio declarations, etc. must already be in place).

I have no clue what new tricks employees will find and what new steps companies will take….best of luck Hdfc.

anyway the sebi order against nilesh kapadia, rajiv ramniklal sanghvi,…is worth reading..here are the details…orderhdfc

Page 1 of 12
WTM/KMA/IVD/267/06/2010
SECURITIES AND EXCHANGE BOARD OF INDIA
ORDER
DIRECTIONS UNDER SECTIONS 11(1), 11(4) AND 11B OF THE SECURITIES AND
EXCHANGE BOARD OF INDIA ACT, 1992 AGAINST MR. NILESH KAPADIA, MR.
RAJIV RAMNIKLAL SANGHVI, RAJIV RAMNIKLAL SANGHVI (HUF), MR.
CHANDRAKANT P. MEHTA AND MS. DIPTI PARAS MEHTA

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Well I am not against gold, and neither against real estate. However what do you call a market which is completely dependent on new investors bringing their fresh money. Well some people call it a Ponzi scheme. I would call it a Madoff scheme.

What drives the gold market is difficult to say – insecurity? Spain? Korean war? – and periods of extremely long price stagnation are scary. Similarly for gold to come down – just shrinking of demand (which is driven by prosperity?) can spook prices.

Real estate again has many myths. ‘Prices in Mumbai do not come down’. Look at the lucky people whose parents bought flats in Santacruz, Ghatkopar, Bandra, Khar…..the list is endless. However this is just 8% return !!

I still insist that you should have gold and real estate in your portfolio – but stop thinking of them as growth assets. They are not. They are Savings assets. You will see some steady appreciation – or a spike – but on a 10 year rolling basis you would have got about 1-2 % of real return.

FOR MOST PEOPLE I KNOW, THIS IS A FANTASTIC RETURN – they let a few million sleep in their savings bank account. So on a comparative basis they are better off doing a SIP in a gold etf – but stop expecting to get 24% return. Just not possible – the market has enough people who will buy put options soon…and there will be enough WRITERS.

Whowever thinks he / she has got good returns in real estate over say 30 years, please put it in an excel sheet..and see the IRR – very likely that you will get a number like 7 or 8% p.a. Not very impressive, no?

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The monkey agreed to play the arbitrator. He breaks the bread into two pieces – then he finds one is bigger than the other – so he eats a little from that slice. That makes this piece smaller, so he eats a little from the other bread…..you can now guess what happened!

The monkey eats the whole bread!

For the mutual fund distributor there is a commission called the ‘TRAIL commission‘ – which comes from the N A V of the scheme. So it is the investor who is paying the trail commission to the DISTRIBUTOR. Today amfi has come out with a notification /clarification on who should get the trail in case of a ‘transfer of aum’ from one distributor to another. Many banks and other big distributors were supposed to be playing tricks to get Aum transferred.

So I have been SCREAMING that for a direct investor and for an investor who invests through a distributor there should be separate NAV. However this is not likely to happen. What happens to the TRAIL commission of the ‘Direct’ investor? Well the investor PAYS the trail…but it is kept by the mutual fund. Any accountant here, please help, I may be wrong..not sure.

However there was a new problem – if a distributor changed in the interim period what to do? AMFI has come out with a brilliant solution – the AMC pays not trail. Which means the AMC gets to charge the trail (remember all of us get the same N A V?). Why did this happen?

Simply because AMFI is not an industry body, it is a Manufacturer’s club. As a young A M C’s MD told me ‘a typical British Club with various classes of membership – Platinum, Gold, Silver, Earthen,…..

So now the old distributor and the new distributor both do not get the trail, even though the client pays it through the NAV, and the AMC gets to ‘spend it on investor education’. Congrats A M F I. I hope S E B I takes this with all seriousness and creates a fund into which this amount should be deposited AND GETS MONITORED BY N I  S M.

I hope you still remember where we started…the cats and the monkey story!

http://www.dnaindia.com/money/report_no-trail-commission-if-distributor-changed-amfi_1380296

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Psychological Impact of inflation is quite harsh on the investors and savers. Economic theory says when inflation is high, people will tend to spend more – because there is no incentive to save. This is true to a very limited extent. Most people get so scared that they start saving more and reducing their expenses. Let us look at a person who is targeting a post retirement income of Rs. 120,000 per annum. If the retiree is told that this will not be enough, he saves more – instead of looking for an asset class which gives a positive real return over longer periods of time.

It is inflation which makes even ‘evergreen’ schemes like Public Provident Fund look like a bad scheme in the long run!

Ronald Reagan warned us to be ever vigilant of a threat “as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.”
Just what was he talking about?
It wasn’t Iranian terrorists… A Russian nuclear sub… Or Osama!
No. Reagan was talking about the thief that robs us all… Inflation!

What impact inflation has on your portfolio is a function of the type of portfolio that you have created. The savings portfolio (bank fixed deposits, national savings certificate, public provident fund, kisan vikas patra, postal schemes, company fixed deposits, gold, etc) will be eroded by inflation. If returns remain constant, and inflation is positive (which always happens in a growing economy) the returns and the principal are both not keeping up to your requirements in ‘real’ terms.

Investing in shares and trading in real estate are perhaps the only assets which gives you a protection against inflation. Buying one house and living in the same house for a long period of time is a good saving asset, but not a great investment asset. However, if you buy and sell real estate, give it on rent, leverage against the forthcoming cash-flows etc. you will be able to get returns in excess of inflation.

Investing in equity shares – either in direct equities or through mutual funds – protect themselves against inflation.

This happens because in the longer term at least a company’s sales and profits after tax should increase at least at the same rate of inflation. The skill for an investor is to realize that inflation is relentless but equity growth can happen in fits and start – this can test a new investor as well as an impatient investor. The other worry about the income of a company is the income gets overstated during inflationary times. It is important for the investor to know the difference between nominal growth and real growth. Estimating the income of a Information Technology company and seeing whether it is doing well should be done without the impact of exchange rate. Similarly it is necessary to find out the impact of inflation in the results of a company –especially over a long period of  time.

Another problem that inflation creates is that it increases costs – and this slows down the economic development. Higher interest costs increases higher expected returns on the riskier assets. This makes it difficult for entrepreneurs to raise capital – and slows down the capital formation too. Sometimes this leads to a financial contraction – leading to a supply side inflation too.

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Let us look at the dollar – it looks like the dotcom boom – when we were all sure that the tech stocks can only go up. Or the real estate boom of 2007 when we were all sure that Indian real estate can only go up – and then we know what happened. Now let us see something about the dollar:

- it has been beaten, battered and bruised. It could be very close to the bottom if not the bottom.

- US has a massive deficit, very close to zero interest rates (Ok not zero your money will double in 7200 years if you invest in it!!)

- huge social security deficit – social security may default in 2020 if not in 2019?

-countries like India dumped dollars (to acquire gold) – poor signaling for the big holders

- Bernanke grilled at the recent hearings – he got butchered by the senators.

Wait…how can the dollar go up? All that I have said are against the dollar..have I not?

Well read ahead:

the dollar’s bad news is already priced in? Perhaps the market has overdone the pessimism in hammering down the price. The bad news is really over done?

- Asian companies will pick up distressed assets and create some demand for the dollar – apart from Asian tourists finding it cheaper to travel to and tour US.

- the demand for American dollars will slow down in Afghanistan and Iraq

- Japan, Eurozone, and UK are not doing too great either – and the world does not trust the balance sheets from those companies at all compared to the US.

All this could see the dollar strengthening – remember Citibank, Pepsi, Coke, McDonalds are big beneficiaries of the Asia growth stories – and they all remit huge profits back home…

so a strong dollar in 2010 …and the tech doing well…possible, correct? Well, it is at least a view!

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1. According to one expert I was speaking to, the total world gold production is decreasing. I was surprised – increasing selling prices make it attractive to search so production should increase. This is what happens in theory, but it is getting to be more difficult to prospect, mine and produce gold.

2. The gestation period even for gold which is spotted is quite long. According to some experts it is as high as 10 years. Hence gold mining companies prices go up over long periods and in a lumpy kind of a fashion. If gold is found it goes up, if mining starts prices go up, if production starts – prices go up. So be careful while buying a gold mining company.

3. Chinese demand (Oh my God!) is likely to go through the roof. Very few people understand the Chinese economy. If the populace does not trust its currency, they are likely to keep their money in gold! The Chinese government had banned the population from owning gold for a very long time. Obviously once the ban gets lifted buying will start (it happened in US if you remember). It may take 2-4 years by which time the retail network to sell gold to the whole Chinese population is set up. Once it is set up, prices will boom.

4. Indian demand is difficult to predict. However there is some talk of Jewelers suicide in Kerala (with prices rising, consumption is going down, so shopkeepers are dying). However there is a huge ‘wannabe’ population which will keep buying and chase prices! Be that as it may, selling may not be enough to exceed demand – another cause for prices to go up.

5. Investment demand is high: All fresh bankers are busy selling gold mutual funds. This is a funny situation where the price is going up because the fund is buying. People are buying gold etf / regular funds which is causing gold prices to go up! Case of tiger chasing its tail.

6. Governments attitude towards gold can be foolish and slow. The rich countries which have a lot of gold (including IMF) have a pact wherein they will not sell more than 400 Tonnes a year (not sure about the figure, but it is right there somewhere). This will restrict supply on the one hand, but mutual fund demand will drive the prices.

7. Currently it is tied to the US $. Nobody n the world knows how the decoupling between the Chinese currency, dollar and the gold will happen. It will gain against other currencies – this will hurt the dollar. At some stage it will break off from the currencies and go on a secular bull run, and the trade will be guaranteed by BIS.

8. Bank relationship managers are pushing gold mutual funds, websites are screaming that gold is a good buy, people without understanding of interest, compounding, etc. think this is a great ideal This almost blind and noisy screaming will push prices high. Most fund managers are buying with a vengance !

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