I had a wonderful time reading Michael Lewis’ Big Short last week. Very contextual.
One of the fundamentals of investing, Warren Buffet emphasises, is never to invest in something that one doesn’t understand fully. This goes not only for retail investors, but for big banks, corporate, fund houses, hedge funds, whether they are from Wall Street or Timbuktoo. Unfortunately, very few investors are actually willing to admit that there is something about the market that they don’t understand. In fact, in some large mutual funds and hedge-funds, the complexity of the fund created is actually an index for intelligence. You only need to quiz the brokers to actually understand how shallow knowledge really is.
When one sways away from the basic rules of value investing, it is always a game of catching up. There are various techniques which are used, ‘averaging’, ‘straddling’, ‘investing on technicals’, ‘indexing to market volatility’, all of which are little more than finding words of solace to a wrong investment. After all, investment has been defined as ‘at best a bet where the odds are in assumed to be in favour’ and a long term investment is typically ‘a short-term investment gone bad’.
Michael Lewis explains colourfully that there is always a time lag between the first signals of a downturn and the actual crash in the market. Take the 'US Sub-prime', for instance. The first signals of failure of loans to sub-prime borrowers were there as early as in fall of 2006. However, the market actually caught cold only in late 2007 and the disease caught on in mid-2008. Then the US Government stepped in to help the collapsing Wall Street players and excusing them for their follies, in the hope that these guys will revive the financial system. Unfortunately, it’s now the Government’s turn to catch the virus, paying for their large heartedness back in 2009. Sovereign debts in major economies around the world are mounting with hitherto leading economies announcing that the worst is yet to come. George Soros had warned against this kind of capitulation more than a decade ago in his far-sighted book ‘The Crisis of Global Capitalism’. Ironically, the US economy seems to be pushing for more socialistic policies now, what with ‘taxing the rich’ and ‘incentivising the middle-class’ becoming buzzwords.
India seems to have remained relatively insulated even though the stock markets plummeted in 2008. At that time, the economic pundits had said India-centric policies and a hybrid protective economy were saviours for India. It’s difficult to believe that the situation remains similar in 2011. Insurance money gets invested in funds which are either Government bonds or blue chips, which have seen heavy volatility. Provident fund investments in long term projects and Government securities are under threat. FIIs have the freedom to get in and out of the stock markets and commodities - their flows take heavy toll on the domestic economy and forex markets. Capital borrowings are under severe pressure because of exchange rate volatility. Commodity prices have fallen sharply affecting the returns of the large blue chips and their stocks have tanked.
US and Europe which have been the main contributors to our economy and have paid top dollars to sons of our soil are now threatening to incentivize companies which create jobs from within. So, Information Technology sector is going to come under some pressure. The investments made by these NRIs in real estate in India are bound to suffer as a result. Already the sector is seeing several projects delayed and suffering for want of cash. Property market in cities like Hyderabad have taken a beating partly because of this - Telengana accounting for the balance. It doesn’t take much time for today's ‘prime’ borrowers to become ‘sub-prime’ – that is after all a factor of the cash in hand with the borrowers. Given high interest rates, high inflation and increase in gas prices, there’s going to be a clamour for more cash-based assets rather than long-term ones.
Folks, hold onto your cash - Looks like Big-Short- time in India is round the corner !
