Buy insurance. - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
Buy insurance. A  A  A
28 FEBRUARY 2008

You have two choices.

Buy gold.
Or don't buy gold.

Believe the lies you hear spoken and see printed all around you.
Or recognise the signs for what they are: a global economic system under the stress and strain of its own greed.

I think of gold as an insurance policy.
An insurance policy for my equity portfolio.
I think of gold as a "hedge".

This is what I have done.

I have invested in units of Quantum Long Term Equity Fund.
Because I believe that over the next 5 to 10 years Indian companies will earn higher profits and that will result in higher share prices and, I would expect, an increase in the NAV of the Quantum Long Term Equity Fund.
That means an opportunity to make some good returns in the stock market.

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And I bought units of Quantum Gold Fund at its launch. It is now listed on the NSE under the symbol QGOLDHALF.

This investment in QGOLDHALF is my insurance, my "hedge".

What if I am wrong on my assumption that Indian companies will make profits for the next 10 years?
What if the financial system in the world is so messed up that the US economy and the European economy slip into a low growth sputter? And inflation stays stubbornly high because the central bankers need to pump in money to rescue their banks?

That low-growth, high inflation scenario would hurt the Indian economy to some extent and that would hurt the Indian companies.
And the profits that I think these Indian companies will make, will not be as good as I had expected.
My investment in Quantum Long Term Equity Fund will suffer.

In that environment: gold could go up. By 50%, by 100% - I don't know.
But it could act as a counter-balance to the decline in the value of my investment in Quantum Long Term Equity Fund.

Since August, gold is up some +42% and the Indian stock markets have gained +15%.

Table 1: Gold could be a good insurance policy.
  Value of current investment Hypothetical change in value if global economy messed up New Value of this portfolio: GLOOMY scenario Hypothetical change in value if everything is fine and the global economy recovers New Value of this portfolio: BRIGHT scenario
Quantum Long Term Equity Fund Rs 150 -20% loss Rs 120 +20% gain Rs 180
Quantum Gold Fund Rs 30 +50% gain Rs 45 -50% loss Rs 15
Quantum Liquid Fund Rs 5 No change,
some interest
Rs 5 No change,
some interest
Rs 5
Cash in bank Rs 15 No change,
some interest
Rs 15 No change,
some interest
Rs 15
Total value Rs 200,
base value
  Rs 185,
loss of – 7%
  Rs 215,
gain of +7%
The above table is given purely as an Illustration and is not to be treated as a forecast.

These numbers are my assumptions based on what I think could happen.
If the world is in trouble, the portfolio in the table is down -7%.
If the world recovers to normalcy, the portfolio in the table gains +7%.
I have reduced my upside return.
But I have also reduced my downside risk.
That is a "hedge".
That is my insurance policy.
Against "global cues".
Against the uncertain actions of global central bankers.

I still want to keep my optimistic view on the Quantum Long Term Equity Fund but, I have QGOLDHALF. Just in case.

Take out your calculator and make your own assumptions for your portfolio.
How exposed is your portfolio to the effects of policy made by global central bankers?

But, why do I worry about the actions of the global central bankers?

Because some of the largest global financial banks have not acted as prudent bankers, but as brash gamblers. And they are being rescued. Money is being printed to rescue them.

Over the past few years, many of the world's largest banks lent money to individuals in USA pretty freely. These loans were at low rates of interest backed by the security of the homes the individuals lived in.
The aggressive lending by the banks made every company and every citizen feels rich.
The folks in USA used that money to buy toys made in China.
Or to buy more homes. Or larger homes.
In the hope that someone else would buy the home from them at a higher price.
That money fuelled a consumption boom that was illusory.

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Borrowing money you cannot really afford to pay back, in order to buy something you don't really want is a global phenomenon. It is a human weakness.
India just had the experience of 4 million people queue up to buy the Reliance Power IPO. An illusion of guaranteed profits was created. Greed took care of the rest.

The bankers did not say, "Enough! No more lending. The borrowers cannot afford to pay."
They said, "Here take some more money. And don't even pay any interest on it for 2 years."

How many shares of an IPO would you buy if your banker gave you a no-interest loan?
How many homes would you buy in Gurgaon, Pune, Bangalore, and Chennai?

The consumers in USA did what they were supposed to do: consume.
The bankers in USA did what any brash banker would do: lend more.

Every time a loan was given, the bank booked a profit on the expected repayment of that real loan. The share price of that bank rose. The CEO got a great fat bonus and cashed out on stock options.

But the music stopped.
The IPO never opened at Rs. 900.
Similarly, the houses that the Jones and Smiths bought for investment stopped increasing in price.
Then there were no buyers – even at lower prices.

And all hell has broken loose.
No one knows what those homes are really worth today.
No one knows what the loans against the homes are worth.

The Jones and Smiths, who did borrow, have no money to pay for their extra homes or their rampant consumption.
So they cannot consume anymore.
The economic engine of US consumption is at a standstill.

The CEO of the banks got fired. But they still got their millions of dollars in bonuses and parachute payments.
The banks that were imprudent and brash will be rescued.
The central banks will pump in money to save them.

Like they have done in the recent past.
In 1997.
In 1998.
In 2000.

Printing money to rescue those in trouble seems like a national sport in USA.

But it is a sport that encourages laxity.
It punishes prudence.

Printing money reduces the value of paper currencies.
And increases the price of gold.

The dollar is at its lowest against the Euro.
Oil is at its peak, priced in most currencies.
Gold is at its peak, priced in most currencies.

I have no "target" price for gold, as such.
It could surge from USD 950 an ounce to USD 2,000 – a gain of over 100%. I have read some reports saying that it could surge to USD 5,000 – more than 500% from today.
It may. It may not.

I had the same choices as you do: heed the warning signs or ignore them.
I decided to buy an insurance policy for my portfolio.
The same way one buys an insurance policy for one's life.
Just in case….

So I bought gold.
In the Quantum Gold Fund, just listed on the NSE.
The symbol is QGOLDHALF.

I suggest you click here to read more about the Quantum Gold Fund.
Then call your NSE broker.
Or log on to your internet broking account.

And buy your insurance.

Note: Ajit Dayal, the author is a Director in Quantum Information Services Private Limited and Quantum Asset Management Company Private Limited. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited or Quantum Information Services Private Limited.

Mutual Fund Investments are subject to market risks. Please read the offer documents of the respective schemes before making any investments.

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