Red, and more red. - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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10 MARCH 2008

The markets are slipping and sliding.
No one knows where the bottom is.
Or when it will turn.
Or why it will turn.
The same people who queued up to buy USD 6 billion of stocks and took the Index from 15,500 in mid September to 19,500 in mid October are nowhere to be found.
They have vanished.
Like the vanishing paper profits we all had on our solid stocks.
Like the vanishing paper profits and capital that the large banks thought they had in their balance sheets.

“All that is solid”, wrote Marx and Engels, “melts into air; all that is holy profaned, and man is at last compelled to face with sober senses his real condition of life and his relations with his kind.”

The enemies of capitalism, the red communists, gave us the words to question the essence of our beliefs.

The stunning disclosures of financial losses by the largest financial companies in the world made me nervous.
The equally stunning decision by the central banks to print more money and bail these large groups out again made me even more nervous.
That is when I started getting more vocal about gold. (Please read The Alphabet Soup, The India Spice)
About buying gold as an investment against the decline in value of paper currencies – particularly the US Dollar.
Gold was then trading at USD 780 per troy ounce.

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Now I am a pretty rational person and don’t go around standing on rooftops shouting, “The world is coming to an end, buy gold”.
But I was still uncomfortable with the financial mess and garbage being swept out from the mouths of the million dollar CEOs. Sorry, multi-million dollar CEOs.
I went back in history and tried to get a sense of what inflation had done to the price of samosas – or property prices in South Bombay. (Please read Of Samosas and Gold...).
And what inflation had not yet done to the price of gold.
Buy more gold, was my suggestion.
Gold was then trading at USD 880 per troy ounce.

But nothing is absolute in the field of investments.
Everything is relative. Everything must be in some sort of balance.
A portfolio with only gold in it may be one with a better return, but not a well-balanced one.
What if we are wrong? What if the central bankers do wake up tomorrow and say, “Okay, folks, no more money is being printed to bail anyone out. Suffer for your sins of excessive borrowing and speculating. We are going to raise interest rates to make those tottering on the brink of bankruptcy fall off the cliff on their way to burning hell. No soft gloves and no parachutes and no helicopter Ben with sacks of US Dollars to bail everyone out. Repent ye sinners!”

A rational central bank is supposed to protect its currency just as a married woman preserves her modesty and protects her children.
But that was before Britney came along and redefined motherhood.
And Alan and Ben.

But these acts of profanity still do not warrant buying only gold.
There are companies in India that have good businesses. India is a growing economy. And there are profits to be had from rational investments in India’s equity markets. What if gold was seen not only as a pure investment but as an insurance policy? (Please read Buy Gold…an insurance. ). Gold was then trading at USD 972 per troy ounce.

We buy a life insurance policy to offset the financial loss that our families may incur on our death.
And one does get a modest return from a traditional life insurance policy, too (Don’t buy ULIPs, they are a scandal).

So, here it is: gold as an insurance policy and gold as an investment.

As an investment, gold has done well.
Assuming investors had bought gold in October 30, 2007 they have made a return of 27.9%.
Not bad when compared to a decline of -19.2% in the BSE-30 Index over the same time period.
And still better than the -8.2% decline in the NAV of the Quantum Long term Equity Fund. Please note that the Quantum Long Term Equity Fund did significantly better than the Index over this time period.

Table 1: Investing for returns?
BSE 30 Index Quantum Long Term Equity Fund Gold or Quantum Gold Fund
October 30, 2007 19,784 15.53 Rs. 30,827
March 7, 2008 15,976 14.25 Rs. 39,429
Change -19.2% -8.2% +27.9%

Now let’s put some money behind these returns.
If on October 30, 2007, an investor had Rs 100,000 to invest.
And he had chosen to invest Rs. 90,000 in the Quantum Long Term Equity Fund and 10,000 in gold (since the Quantum Gold Fund (An open-ended Exchange Traded Fund) was only listed on the NSE on February 28, 2008).
What would be the value of the portfolio today?

Table 2: Buying insurance for your equity portfolio?
Quantum Long Term Equity Fund Gold or Quantum Gold Fund Total Portfolio value
October 30, 2007 Rs. 90,000 Rs. 10,000 Rs. 100,000
March 7, 2008 Rs. 82,260 Rs. 12,790 Rs. 95,050
Gain/Loss -8.2% +27.9% -5.1%

Not bad. A loss of -5.1%.
Something to be happy about.
While all the other folks are losing their shirts and their sense of balance in these rocky times, your judicious exposure to the Quantum Long Term Equity Fund and gold allows you to get away with some minor scratches.

Now let us take the scenario that the world gets less gloomy and the markets - sometime in the unknown future - are at the 25,000 Index level and that the Quantum Long Term Equity Fund or any other fund you may invest in has a good return (which it may or it may not – we cannot and will not predict any future performance numbers, not only because it is against the law, but it is stupid to do so). In that scenario gold may collapse back to where it was in October 2007 – or below.

Table 3: For purely illustrative purposes, what could the future look like?
Quantum Long Term Equity Fund Gold or Quantum Gold Fund Total Portfolio value
March 7, 2008
your portfolio today
Rs. 82,260 Rs. 12,790 Rs. 95,050
The unknown future Rs. 106,938 Rs. 8,953 Rs. 115,891
Gain/Loss +30% -30% +21.9%

In this illustrative scenario, the gold holdings acted as a drag on the portfolio. But, still the return was +21.9% in total.

So in a bad market, the loss was -5.1% as shown in Table 2 and in a good period the gain was +21.9%.
For a person with no gold, and all mutual funds, the loss would have been -8.2% and the gain would have been +30%.
A wider band of returns: more potential losses and more potential gains.

Think about who you are and figure out your desire and ability to live with risk.
For even crossing the street is risky these days.

Be comfortable with your risk-taking abilities. Read up on our Quantum Funds and our investment philosophy. And then make your allocation between our stock market fund and our gold fund.
Then, enjoy your life a little more and leave the worrying to our fund managers – that is why they get a fee.

Maybe capitalism – played by the rules with no cheating – will be given a second chance.
All that is solid, will not melt into air.
And all that is holy, will not be profaned.

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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