Monday, January 16, 2012

Reserved Bank of India

The RBI has demonstrated that it can poke its dirty nose in to any corner. For years, the RBI has been making the PSU bankers as corrupt as possible, by keeping their salaries below what an equity research analyst would get at a brokerage firm. You rarely see the kind of competence in a PSU bank that you see in a private sector bank. RBI has now issued the most devastating circular yet. (RBI/2011-12/349 DBOD No.BC.72/29.67.001/2011-12- dated 13 January 2012) Soon we will reach a time when even the salaries of the clerks in a private bank will be decided by the RBI. It is also a funny circular in the sense that it contains so many homilies like: • Compensation must be adjusted for all types of risk. • Compensation outcomes must be symmetric with risk outcomes. • Compensation payout schedules must be sensitive to the time horizon of risks. • The mix of cash, equity and other forms of compensation must be consistent with risk alignment • Supervisory review of compensation practices must be rigorous and sustained, and deficiencies must be addressed promptly with supervisory action. • Firms must disclose clear, comprehensive and timely information about their compensation practices to facilitate constructive engagement by all stakeholders. Each sentence is a gem. If the spirit of this circular has to be followed by private sector banks, the best thing is to have a dummy CEO for the sake of compliance and RBI monitoring and have a CEO who is designated outside the various positions covered by the circular. RBI is interfering in internal things of a business. I can understand that they screw up the PSU banks, since they are part of the same gang that give targets to the banks to fritter money on political causes and bosses. The hand of a frustrated government employee is visible across the circular. Frustration and envy about someone far more competent getting a higher salary.

Monday, January 2, 2012

Stocks vs Mutual Funds vs Gold vs Silver

(This appears in the recent issue of Moneylife. The magazine does not carry the table, which I have given here for easy reference) PRESERVING WEALTH I have made an attempt to have a look at various asset classes and how they have delivered. I did not include real estate as it would vary too widely even within the same city. In equities, I have given the index values (to indicate passive investing) and also taken an actively managed equity fund. I have chosen HDFC Top 200 as has history and size. Also, it is not purely large cap or mid cap oriented, though given its present size, surely finding new stocks to invest in meaningful sizes would be extremely tough. Yes, the choice of funds would make a difference to the performance, since nearly half the existing mutual funds in equities, underperform the index. I have added gold and silver as the other assets that are commonly being encouraged and talked about. Of course, statistics can be presented in many ways and for different time periods. The timelines can make a huge difference to the conclusions that we wish to draw and a writer’s bias can always be introduced. I have tried to minimize this by taking data measurement at multiple reference points during a ten year span. Hopefully, I have ironed out most of the biases, though a glance at the table does tell me that I have managed to avoid the highs and the lows of the stock markets. To this extent, I have no case to argue with anyone who says (with a glance at the rearview mirror) that investing at the highest or the lowest level of the indices could have different conclusions. I have of course stuck to domestic investment options only. Today, with freedom to remit and invest up to two lakh dollars each year, the available asset classes expand dramatically. We can also play on the foreign exchange risk rewards. Surely, that is an important asset class (for the real HNI and not for mere mortals) and Indians will seek to keep assets overseas to diversify wealth. Of course, a lot of Indians do have unaccounted wealth overseas and they could perhaps tell us better about the performance of that asset class. Also, it was difficult to get reliable or authentic data on prices of gold and silver going back to ten years, so I have used multiple sources from the internet to get data. However, I think that the prices are fairly accurate and sufficient for this exercise. My key takeaways are: i) Next to direct equities (specific company stocks), a well managed diversified equity fund delivers the best results over time; ii) Timing makes a big difference to the returns. Someone who got in to the markets in the beginning of 2002 has more money on December 1st, 2011 as compared to the person who started off in the beginning of 2000. So, paying attention to market moods and valuations is as important as committing money to an asset class; iii) Gold and silver have delivered far better returns than the index, but lag the chosen fund; iv) Gold has given consistently positive returns since 2002, but it is debatable whether this run will continue. So long as the world has problems and worries, gold will do well as it is simply an alternate to the dollar or the Euro; v) Silver has been highly erratic and is surely much more speculative than gold; vi) Passive investing in ETF’s may not be the best strategy to pursue equities; vii) The most important lesson is that it takes a long time to create serious wealth. Patience is important; viii) There will be very good years, very bad years and some uninteresting years; ix) Traders will find it extremely tough to consistently make money in our stock markets; and x) Pray that when we need the money, the markets are in a bull phase so that we can exit high. Perhaps we should think of taking off some part of our money away from equities whenever there is a spectacular year. Or more important, keep a constant balance between equities and fixed income. For instance, keep equities plus fixed income at a constant percentage, so that when equities rise, part of it automatically gets converted in to fixed income and vice versa. A balanced fund will not work because it can never get returns like equities, in a bull market. Table given below (If anyone cannot decipher this, please email me at balakrishnanr@gmail.com for a copy in excel format) PRESERVING WEALTH I have made an attempt to have a look at various asset classes and how they have delivered. I did not include real estate as it would vary too widely even within the same city. In equities, I have given the index values (to indicate passive investing) and also taken an actively managed equity fund. I have chosen HDFC Top 200 as has history and size. Also, it is not purely large cap or mid cap oriented, though given its present size, surely finding new stocks to invest in meaningful sizes would be extremely tough. Yes, the choice of funds would make a difference to the performance, since nearly half the existing mutual funds in equities, underperform the index. I have added gold and silver as the other assets that are commonly being encouraged and talked about. Of course, statistics can be presented in many ways and for different time periods. The timelines can make a huge difference to the conclusions that we wish to draw and a writer’s bias can always be introduced. I have tried to minimize this by taking data measurement at multiple reference points during a ten year span. Hopefully, I have ironed out most of the biases, though a glance at the table does tell me that I have managed to avoid the highs and the lows of the stock markets. To this extent, I have no case to argue with anyone who says (with a glance at the rearview mirror) that investing at the highest or the lowest level of the indices could have different conclusions. I have of course stuck to domestic investment options only. Today, with freedom to remit and invest up to two lakh dollars each year, the available asset classes expand dramatically. We can also play on the foreign exchange risk rewards. Surely, that is an important asset class (for the real HNI and not for mere mortals) and Indians will seek to keep assets overseas to diversify wealth. Of course, a lot of Indians do have unaccounted wealth overseas and they could perhaps tell us better about the performance of that asset class. Also, it was difficult to get reliable or authentic data on prices of gold and silver going back to ten years, so I have used multiple sources from the internet to get data. However, I think that the prices are fairly accurate and sufficient for this exercise. My key takeaways are: i) Next to direct equities (specific company stocks), a well managed diversified equity fund delivers the best results over time; ii) Timing makes a big difference to the returns. Someone who got in to the markets in the beginning of 2002 has more money on December 1st, 2011 as compared to the person who started off in the beginning of 2000. So, paying attention to market moods and valuations is as important as committing money to an asset class; iii) Gold and silver have delivered far better returns than the index, but lag the chosen fund; iv) Gold has given consistently positive returns since 2002, but it is debatable whether this run will continue. So long as the world has problems and worries, gold will do well as it is simply an alternate to the dollar or the Euro; v) Silver has been highly erratic and is surely much more speculative than gold; vi) Passive investing in ETF’s may not be the best strategy to pursue equities; vii) The most important lesson is that it takes a long time to create serious wealth. Patience is important; viii) There will be very good years, very bad years and some uninteresting years; ix) Traders will find it extremely tough to consistently make money in our stock markets; and x) Pray that when we need the money, the markets are in a bull phase so that we can exit high. Perhaps we should think of taking off some part of our money away from equities whenever there is a spectacular year. Or more important, keep a constant balance between equities and fixed income. For instance, keep equities plus fixed income at a constant percentage, so that when equities rise, part of it automatically gets converted in to fixed income and vice versa. A balanced fund will not work because it can never get returns like equities, in a bull market. Table given below (If anyone cannot decipher this, please email me at balakrishnanr@gmail.com for a copy in excel format) HDFC Top 200 BSE Sensex Gold(10gms) Silver(1kg) NAV Returns Value Returns (Rs) Returns (Rs) Returns 01-01-2000 20.380 5,005.82 4508 8455 01-01-2001 15.260 -25% 3,972.12 -21% 4512 0% 7820 -8% 01-01-2002 13.570 -11% 3,262.33 -18% 4630 3% 7770 -1% 01-01-2003 17.360 28% 3,377.28 4% 5590 21% 8040 3% 01-01-2004 41.043 136% 5,838.96 73% 6235 12% 9575 19% 01-01-2005 51.517 26% 6,602.69 13% 6300 1% 10170 6% 01-01-2006 79.982 55% 9,397.93 42% 7705 22% 13770 35% 01-01-2007 109.925 37% 13,786.91 47% 8835 15% 17975 31% 01-01-2008 170.241 55% 20,286.99 47% 10170 15% 19100 6% 01-01-2009 94.479 -45% 9,647.31 -52% 13450 32% 17958 -6% 01-01-2010 180.456 91% 17,464.81 81% 16665 24% 26700 49% 01-01-2011 225.661 25% 20,509.09 17% 20688 24% 46016 72% 01-12-2011 183.153 -19% 16,805.33 -18% 28880 40% 56652 23% Value of one rupee HDFC Top200 Sensex Gold Silver invested on 01-01-2000 8.99 3.36 6.41 6.70 01-01-2001 12.00 4.23 6.40 7.24 01-01-2002 13.50 5.15 6.24 7.29 01-01-2003 10.55 4.98 5.17 7.05 01-01-2004 4.46 2.88 4.63 5.92 01-01-2005 3.56 2.55 4.58 5.57 01-01-2006 2.29 1.79 3.75 4.11 01-01-2007 1.67 1.22 3.27 3.15 01-01-2008 1.08 0.83 2.84 2.97 01-01-2009 1.94 1.74 2.15 3.15 01-01-2010 1.01 0.96 1.73 2.12 01-01-2011 0.81 0.82 1.40 1.23 PRESERVING WEALTH I have made an attempt to have a look at various asset classes and how they have delivered. I did not include real estate as it would vary too widely even within the same city. In equities, I have given the index values (to indicate passive investing) and also taken an actively managed equity fund. I have chosen HDFC Top 200 as has history and size. Also, it is not purely large cap or mid cap oriented, though given its present size, surely finding new stocks to invest in meaningful sizes would be extremely tough. Yes, the choice of funds would make a difference to the performance, since nearly half the existing mutual funds in equities, underperform the index. I have added gold and silver as the other assets that are commonly being encouraged and talked about. Of course, statistics can be presented in many ways and for different time periods. The timelines can make a huge difference to the conclusions that we wish to draw and a writer’s bias can always be introduced. I have tried to minimize this by taking data measurement at multiple reference points during a ten year span. Hopefully, I have ironed out most of the biases, though a glance at the table does tell me that I have managed to avoid the highs and the lows of the stock markets. To this extent, I have no case to argue with anyone who says (with a glance at the rearview mirror) that investing at the highest or the lowest level of the indices could have different conclusions. I have of course stuck to domestic investment options only. Today, with freedom to remit and invest up to two lakh dollars each year, the available asset classes expand dramatically. We can also play on the foreign exchange risk rewards. Surely, that is an important asset class (for the real HNI and not for mere mortals) and Indians will seek to keep assets overseas to diversify wealth. Of course, a lot of Indians do have unaccounted wealth overseas and they could perhaps tell us better about the performance of that asset class. Also, it was difficult to get reliable or authentic data on prices of gold and silver going back to ten years, so I have used multiple sources from the internet to get data. However, I think that the prices are fairly accurate and sufficient for this exercise. My key takeaways are: i) Next to direct equities (specific company stocks), a well managed diversified equity fund delivers the best results over time; ii) Timing makes a big difference to the returns. Someone who got in to the markets in the beginning of 2002 has more money on December 1st, 2011 as compared to the person who started off in the beginning of 2000. So, paying attention to market moods and valuations is as important as committing money to an asset class; iii) Gold and silver have delivered far better returns than the index, but lag the chosen fund; iv) Gold has given consistently positive returns since 2002, but it is debatable whether this run will continue. So long as the world has problems and worries, gold will do well as it is simply an alternate to the dollar or the Euro; v) Silver has been highly erratic and is surely much more speculative than gold; vi) Passive investing in ETF’s may not be the best strategy to pursue equities; vii) The most important lesson is that it takes a long time to create serious wealth. Patience is important; viii) There will be very good years, very bad years and some uninteresting years; ix) Traders will find it extremely tough to consistently make money in our stock markets; and x) Pray that when we need the money, the markets are in a bull phase so that we can exit high. Perhaps we should think of taking off some part of our money away from equities whenever there is a spectacular year. Or more important, keep a constant balance between equities and fixed income. For instance, keep equities plus fixed income at a constant percentage, so that when equities rise, part of it automatically gets converted in to fixed income and vice versa. A balanced fund will not work because it can never get returns like equities, in a bull market. Table given below (If anyone cannot decipher this, please email me at balakrishnanr@gmail.com for a copy in excel format) HDFC Top 200 BSE Sensex Gold(10gms) Silver(1kg) NAV Returns Value Returns (Rs) Returns (Rs) Returns 01-01-2000 20.380 5,005.82 4508 8455 01-01-2001 15.260 -25% 3,972.12 -21% 4512 0% 7820 -8% 01-01-2002 13.570 -11% 3,262.33 -18% 4630 3% 7770 -1% 01-01-2003 17.360 28% 3,377.28 4% 5590 21% 8040 3% 01-01-2004 41.043 136% 5,838.96 73% 6235 12% 9575 19% 01-01-2005 51.517 26% 6,602.69 13% 6300 1% 10170 6% 01-01-2006 79.982 55% 9,397.93 42% 7705 22% 13770 35% 01-01-2007 109.925 37% 13,786.91 47% 8835 15% 17975 31% 01-01-2008 170.241 55% 20,286.99 47% 10170 15% 19100 6% 01-01-2009 94.479 -45% 9,647.31 -52% 13450 32% 17958 -6% 01-01-2010 180.456 91% 17,464.81 81% 16665 24% 26700 49% 01-01-2011 225.661 25% 20,509.09 17% 20688 24% 46016 72% 01-12-2011 183.153 -19% 16,805.33 -18% 28880 40% 56652 23% Value of one rupee HDFC Top200 Sensex Gold Silver invested on 01-01-2000 8.99 3.36 6.41 6.70 01-01-2001 12.00 4.23 6.40 7.24 01-01-2002 13.50 5.15 6.24 7.29 01-01-2003 10.55 4.98 5.17 7.05 01-01-2004 4.46 2.88 4.63 5.92 01-01-2005 3.56 2.55 4.58 5.57 01-01-2006 2.29 1.79 3.75 4.11 01-01-2007 1.67 1.22 3.27 3.15 01-01-2008 1.08 0.83 2.84 2.97 01-01-2009 1.94 1.74 2.15 3.15 01-01-2010 1.01 0.96 1.73 2.12 01-01-2011 0.81 0.82 1.40 1.23