Similarly once upon a time Crisil had rated Lloyds Finance, Apple Finance and Sundaram Finance – briefly I think Cholamandalam also (not sure) as the AAA companies in the financial service sector apart from Hdfc, Icici, and such other biggies.

To us in the markets this was a joke because Lloyds and Apple would throw money at distributors – per application, contest, etc. At this stage you normally tell people who want to listen – ‘please stay away’. EVEN TODAY they have one product rated so high -but it is not Crisil, and no further comments please.

All this is funny because when you are watching the game – and the scorecard is lying you can only be amused. Then suddenly Apple, Lloyds and a few others got re-rated from AAA to Junk pretty fast – 6 months if I am not wrong, surely less than a year! Tata Finance did not get AAA -but every Amar, Akbar, Anthony and Soli was willing to invest in Tata Finance.

That much for rating agencies. Now banks which do not wish to keep transactions on their books, go to a company have its bonds rated, take it to the market, and then sell it off. The question is ‘Will the Rating stay till I sell the bonds’ – say 90 days? L O L.

A bank should do its own appraisal – there would be more committment.

What should be done with rating agencies? Let them just shut down. R I P. Amen.

see what Morgan Housel has to say about these agencies in the US …somewhat similar thoughts

http://www.fool.com/investing/general/2010/05/21/put-the-rating-agencies-out-of-their-misery-before.aspx?source=ihpsitth0000003

However, now I am being offered shares of Talwalkar (the fitness people) priced at a price-earning ratio of 44.

The logic?

Subra, itna gyan mat laga…simple theory hai. ‘The trend is your friend’. The trend that is being hawked to me is ‘These days (i guess it must be last few months) many shares are getting listed. Those companies which do not have any peer comparison are going up quite a bit.

Take a look at Mahindra Holiday Resorts, Cox and Kings, Jubilant Foods,….now Talwalkar which has no peer in the space will fall in the same line. So tal….will open at a premium.

Amazing sales technique. Am I applying? No idea. Have the forms, will decided on ASBA terms that is all…LOL.

Let me now share some broad themes that I have liked over the past 4-5 months. I have not been comfortable with the market levels nor the theories saying ‘Liquidity is driving the market’. So I started looking for companies which fell much more than what was warranted and had not yet recovered, companies which had made mistakes but corrected – but the market was refusing to accept the change in management stand. Fairly obvious these were not shares that were very visible to the media (thankfully).

The 3 companies that I found and bought were Essel packaging (bought at 41), Cholamandalam Investment and Finance (bought from 34 to 69), Themis Medicare (bought at 180). One more theory was to shift from auto to auto components – so went and added some Pricol (from 14 onwards), Shivam autotech (bought from Rs. 88)…funded partly by selling Ashok Leyland and Hero Honda. Why? Europe and US auto industry doing very well….

So far no regrets….!!

Companies where I have no clue what is happening but still in my portfolio (in somebody else’ s portfolio, I would have screamed!!), are Deccan Gold, Kerala Ayurveda, Crest Animation, Mukand Engineering, – however I keep selling these shares at a particular price and buying it back if it comes down. For example sold Kerala Ayurveda (partially) today ….may get a chance to buy it back.

Please note that at the time of writing I have all these shares in various quantities…but could sell, buy back, do delivery based ’shorting’…so please do not copy what I am doing. This is just a ‘vishesh tippani’ that I am doing. Could be completely wrong – have gone wrong ENOUGH  no. of times in the past.

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!

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 !

However the following are the reasons to own gold:

1. Global currencies are at an imbalance: US $ is not the only currency which is in bad shape. In fact currencies are today at quite an imbalance with each other. So if you do not know whether to hold your money in rupees, lira, yen, dollar, euro or pounds, choose gold. So clearly as much of cash you will keep in your portfolio is the amount of gold you should be having.

2. Investment demand for Gold is accelerating: yes too many people are touting this as a great hedge. And they prove this by doing a 3 year back testing. Fantastic. If you did a 10 year back testing, it will fail and fail badly. What is surprising is that bank relationship managers are now selling gold mutual funds – they will keep selling to keep their jobs. These mutual funds will keep buying gold…so it is a self fulfilling prophesy..

3. Ben Bernanke is converting all the forest in the US into currency! The Gold system having failed, most Central Bank heads are printing too much of currency. Thankfully they cannot create gold.

4. Huge supply and demand gap: India and China will continue to buy gold, as will many other users!

5. Interest rates are more likely to decline, than rise, internationally, adjusted to inflation.

Some day I will give you at least 5 convincing reasons not to buy gold.

Gold as a hedge in your portfolio works, but works over a very long period of time. If you buy gold because it has been going up it would be a wrong reason to buy. However, the fact is, it may still go up – but please stop expecting to get 36% CAGR, that will not happen, for sure.

What to do: Your home will not appreciate. It is not a wealth creating asset. It will not make you rich. Remember it is an important savings tool. It might just protect you against inflation.

If you met a real estate broker in 2007 he would have shown you a never ending spiral of rising real estate prices. From the year 2002 to 2007 the world went into an asset bubble. Unfortunately if you borrowed and bought a house in 2007 you have got into an asset which may take 10 years to touch those numbers again. You heard a lot near the top about how the market would have to “cool off” or “get back to normal” – the implication being that slow but steady appreciation was the future.

But the long-run data always told a different story. Yale University economist Robert Shiller’s research of home prices since 1890 he found that real estate appreciation has been unimpressive after figuring in inflation. Likewise, land has never been in short supply in most of the U.S. The Indian situation may be different – Indians are not as mobile as Americans and land is at a premium in most locations. However, technology may ensure that buildings last longer than the earlier construction.

Even while there is a boom going on, gains on real estate aren’t as dazzling as they look, once you account for expenses. Maintenance costs, Interest, insurance, and taxes are all ignored by most of the buyers. Also the ‘returns’ look good in a boom because of the leverage that is normally available. However if you price in the risk of the mortgage, returns just match inflation at best especially over long periods of time like 30 years.

Action plan: Renting is a good option only if you know to manage your money aggressively. This doesn’t mean you have to rent, just that you should have modest expectations for your house as a wealth creator. For many people who do not know how to invest and refuse to learn, housing is a good option. In a growing city it is a great option. Owning is a hedge against increasing rent. Second, a 25-year mortgage acts as what economists call a “commitment device,” or a tool that forces you to save. Note the usage of the word ‘save’ not invest. Instead of writing a cheque to a landlord, you gradually pay off the principal. You get deduction under section 80 C for the principal that you pay (reasonably attractive proposition) and section 24 for the interest paid (stupid deduction). So if you are planning to keep money in public provident fund, nsc, kisan vikas patra etc. you might as well buy a house.

At the end, you own a house.

Other than your Provident Fund there is no better discipline inducing asset!

In the years from 2002 to 2007 (when Mr. Risk was on leave) we took all sets of data and came to fantastic conclusions. We concluded that when the dollar gets weak commodity will go up. We concluded that Asia was de-coupled from US. We concluded that a weak dollar will see strong commodities like oil – without worrying about high oil prices derailing Asian economies. We thought keeping money in debt was for sissies. After all men invested in equities.

We forgot that when returns are climaxing, risk is lurking pretty close. We assumed that equity returns of 30% p.a. is ours by right. We forgot ‘Regression to the Mean’. We forgot that when standard deviation is high, arithmetic mean (arithmetic average) is a poor indicator regarding data reliability. If we had taken annual returns and seen the mean and median also we may have had better conclusion. Collectively we forgot ‘Statistics 101′. It reminds me of a Sindhi saying “When God wants you to have trouble, he takes away your brain”. Well He did it for the whole world perhaps!

What exactly happened in 2008? Well practically all investment categories moved in tandem with the S&P 500 Index. The index itself lost 37% in 2008—and everything else went down with it: the MSCI index of Europe, Asia and Australia tumbled 45%, the MSCI emerging markets index lost 55%, REITS gave up 37%, high-yield bonds lost 26% and commodities fell 37%. Only people with a portfolio of just put options would have made money!

Money managers need to treat U.S., emerging markets and international share markets as one in the same. They have to treat commodities as more closely aligned to shares than to inflation. When a commodity company cannot raise money in the equity market to repay its debt obligation, does it matter that you are invested in the commodity, the debt of the company or in the commodity in which it deals?

I cannot agree more with Warren Buffet when he says “Risk comes from doing something that you do not understand”. My life is really risky!!

“A majority of non-retired Americans now doubt they will have enough money to live comfortably once they retire, representing an 18-point drop from just five years ago.

According to the Gallup’s annual Economy and Personal Finance survey, conducted April 6-9, 52% of non-retired Americans believe they will not have enough saved for a comfortable retirement. Only 41% of say that they will have enough money, compared to 59% who said they did in 2002.

This is the first time since Gallup has conducted the survey that the majority of those not retired say they will not have enough money to retire comfortably. The negativity is a reflection of non-retirees lost confidence that their 401(k) and other tax-exempt plans will be able to provide a comfortable retirement.

When Gallup conducted its first survey in 2001, nearly 6 out of 10 non-retirees said that their 401(k), IRAs and Keogh plans would be a significant source of income for them. In the latest poll, only 42% now believe this to be true—the lowest reading that Gallup has measured. Despite the drop in confidence, however, Americans still put their 401(k) and other retirement savings plans at the top of the list of what they believe will be their major source of retirement income.

Not surprisingly, the perceived reliance on a work-sponsored pension plan has also dropped to the lowest measure since Gallup started tracking the market. Just 24% of those surveyed believe this will be a major source of income, compared to 34% in 2001 and 31% two years ago.

Complicating matters, only 30% of Americans say they will be able rely on Social security for a substantial amount of income. According to Gallup, this pessimism I likely owed to all the talk about Social Security eventually going bankrupt.”

Unfortunately there are no exhaustive polls conducted in India – the scenario may be just as bleak!

Assuming you can borrow in US at 3% and invest in India at 10% – it is a fantastic spread. RBI cannot allow this, so RBI has to hold interest rates low. However, the biggest borrower (who acts to keep the interest rates low) is a worry – government borrowing is likely to be quite high.

There is a feeling that industry which is worried about the slowdown is wary of borrowing and there is no great demand for money (again downward pressure). However industry may be wanting banks to lend to its end customers (auto and real estate in particular).

However Tata Motors, Indian Hotels, Tech Mahindra are all borrowing from the retail and institutional lenders at 10.5% + admin costs = say 11% p.a.

where do YOU think interest rates will settle?

My guess is as good as yours!

For me, principles are not negotiable. It does not change whether the index is at 21000 or 8000. You just have to live by them. If you went to a friend’s house and found Rs 50k lying unattended would you pick it up? That is the question you need to answer. You will not do certain things – immaterial of whether somebody is watching or not. However at 12am if you can take a ’short cut’ – which is a ‘no entry’ there is a good chance that you will take it. Hoping there is no policeman to see what you are doing. However, if you are speeding into that ‘no entry’ road…and there is a truck coming in from the other direction…..need I say more?

There was an interesting research in US regarding being ethical. There was no clear conclusion that ‘being unethical’ made more money.

So my conclusions are as follows:

If you are unethical in your dealings, one day you will be caught. If you are caught when youa re 22 years of age, you are lucky – you can re-think your career. If you are caught at 85 years you are lucky – your career is anyway over. However if you are caught at age 45 you are neither here nor there! Ketan Parikh, Harshad Mehta, Ramalinga Raju, R Subramaniam (Subhiksha) all of them are sufferring because they were caught at what they thought was the peak of their career. There are enough and more ‘Subhiksha’ stories on the net – right from his alumni members, his ex-employees, his current employees, vendors, customers, etc. have written about him!

Take the case of Ketan Parekh. He came from a family of good repute. His grandfather and father used to be consulted for settling disputes amongst brokers in their time. He was rich. Seriously rich. However his machinations made sure his father went to jail – at least for a day. I do not wish to name a few of his family members who are now not allowed to come into India – one of them was a kid when I was in school. His father in law had to plead with the court to go abroad for treatment for KP’s kids illness. If there is a riches to sadness story, here it is. KP was from a rich family, was qualified as a CA, could have earned enough without any of his fantasy plans. Many people may not know, but he has paid a very high price for all that he has done – and socially he is ruined. God bless him.