Wait before you buy this 'hot' investment product!

Apr 5, 2010

In this issue:
» Interesting aspects of a bull-market phase
» Jim Rogers prefers silver over gold
» What's worrying economists the most
» China warns of strong dollar, global inflation
» ...and more!!

One investment avenue that rears its head in a bull-market is the PMS, or portfolio management service. And this time it's no different! Fund houses and brokers are busy hard-selling their PMS to investors. And the only unique selling proposition of such schemes is - promise of high returns. Maybe you might've also heard a similar pitch from your fund house or broker. The question is - is PMS the right product for you?

Not really, we believe. As our founder Ajit Dayal recently spoke at the Equitymaster Investment Summit 2010, "PMS is actually a black-box, where the person running your PMS account doesn't tell you what exactly is in it. At the end of the month or a quarter or a year, you'll get a statement. And then you'll know whether you've made money or lost money. We think that's sort of dangerous as there is no transparency. And it's led to a lot of misuse."

Ajit explained that many of the people providing PMS are actually their own brokers. So they'll take a lac or 10 lac rupees from you and they may turn it over, maybe 5x...and that's making them commissions.

Ajit Dayal, Founder Equitymaster,
Speaking at the Investment Summit 2010

So, while PMS providers might come to you well-prepared with their sales pitch, ask them tough questions. Check their long term performance track record, their credibility in the market, portfolio turnover, and above all, their level of transparency.

After all, as Ajit says, most PMS work on this simple philosophy - "I gamble, and if I'm right I take money home. If I'm wrong, I disappear and your capital is gone!"

Anyways, for those who missed out on Ajit's wonderful presentation, now is the time to take advantage of this opportunity.

Apart from the flood of new investment avenues, there's another aspect of a bull-market. When things are going right for the markets, people start expecting even better times! Or what would explain that after a wonderful FY10 (April 2009 to March 2010), financial experts are expecting the current fiscal (FY11) to be even better for Indian equities?

Well, these very experts were sounding warning bells for stock prices just before the start of last year's bull-run! So, as they predict the best of times for stocks in the current year, we wonder if they're doing this with any regard to the already high valuations!

 Chart of the day
Today's chart shows how bank credit as a percentage of GDP has risen in India over the past 30 years. The spike, as the chart shows, has come since the start of this century i.e., the year 2000. In FY09, the ratio stood at 52%.

Data Source: RBI

Commodity guru Jim Rogers recently shared his view on why he would not buy gold anymore. While he does hold the commodity, he expects prices of the yellow metal to move horizontally. This is due to the price rise over the past year. His suggestion is that investors should stay away considering that speculators are rushing into commodities such as oil and gold.

Rogers believes there are opportunities in commodities such as silver and natural gas. His rationale for the same is simple - to invest in what's cheapest. Silver is cheaper than gold.

There is a reason for this view. Silver has lower demand. Gold on the other hand is considered a safe haven during uncertain times. Our founder Ajit Dayal recently opined that silver has industrial uses far in excess of gold. Thus, it is not only a precious metal but also an industrial metal like copper. In other words, silver is half copper and half gold.

Indian markets had a good day today. At the time of writing this, the BSE-Sensex was trading with gains of around 150 points (0.9%). This was helped by gains in stocks from the realty and auto sectors.

Other key Asian markets also closed strong today. The gainers list was led by the benchmark indices of Indonesia (up 1.9%) and Japan (up 0.5%).

The two things on top of most economists' mind are the high debt levels and whether asset prices have run ahead of economic fundamentals. Among them is MIT professor Simon Johnson. He believes the next big pull down in stock markets will start in the emerging economies. The boom that countries like China are going through is driven by money from exports, which is then lent out to countries like the US. But this is not sustainable forever. The next crisis, the next meltdown will be driven by emerging markets like China. Especially because everyone thinks it's going up.

In our view, India is a different case given that domestic consumption drives the economy to a much larger extent. Hence, investors who do not overpay in their buy prices can expect the long term growth story to come to their aid.

China has released a report on the outlook for the global financial markets and notably the US. And it does not have much to say in favour of its foe. China's central bank believes that the dollar is likely to strengthen this year. But two scenarios need to play out. First, the Fed raises interest rates. Second, problems in the Euro zone persist. However, even these gains in the US currency may not be much to talk about. The reason? The US is already running a very high deficit.

Further, the Chinese central bank opines that prospects of inflation in the global economy seem imminent. This is because central banks around the world have been pumping money into their respective economies to support them.

Interestingly, China will also have to deal with inflation sooner than most. After all, huge stimulus measures have been injected into the economy and bubbles have begun to form in the Chinese stockmarkets and real estate. Not just that, China of late has been facing relentless pressure from the US to appreciate the Yuan which has been artificially pegged to the US dollar. However, the Chinese may not bow down unless there are visible signs of a global recovery. This probably explains the rationale for coming out with this report!

 Today's investing mantra
"I constantly see people rise in life who are not the smartest -- sometimes not even the most diligent. But they are learning machines; they go to bed every night a little wiser than when they got up. And, boy, does that habit help, particularly when you have a long run ahead of you." - Charlie Munger

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4 Responses to "Wait before you buy this 'hot' investment product!"


Apr 24, 2010

I am a day trader & I want sure shot tips of intra-day , pls tell who can provide such 100 % sure shot intraday tips accurately.



Apr 9, 2010

How realistic and experience based is Charlie Munger's commemt?



Apr 6, 2010

Your frank comments on 'Portfolio Management Service' should serve as an eye-opener to many investors who fall an easy prey to the guiles and wiles of some clever brokers. As rightly pointed out,transparency is conspicuous by its absence in PMS.


Suresh Aithal

Apr 5, 2010

Interesting to invest in SILVER, but weather it is wise to invest in silver NOW?

Equitymaster requests your view! Post a comment on "Wait before you buy this 'hot' investment product!". Click here!