The Yikes of March! - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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12 MARCH 2009

In Shakespeare’s classic "Julius Caesar", the Great Caesar asks a soothsayer what the future holds.

"I hear a tongue, shriller than all the music", says Caesar, "Cry ‘Caesar!' Speak. Caesar is turn'd to hear."

And the fortune teller says, in the simplest English that Shakespeare ever wrote: Beware the ides of March.

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Well, today is March 12th. The "ides" is the 15th day of the month - another 2 days to go.

Caesar, without the kind of Z security that our leaders have, was knocked out on that fateful day. Caesar, from my perspective, was a fool. He spent money on giving Romans the greatest universities and infrastructure. Our leaders are more enlightened: they spend the money on making sure they are safe and keeping our infrastructure in a mess. Hail, Caesar!

But Caesar is no more. Man, as any living creature, can go from "alive" to "dead". To a zero.

Luckily, markets cannot go to zero.
An individual stock can go to zero.
An investment in a specific company can go to zero.
But a "market" or a "marker Index" cannot collapse into a black hole of nothingness.

Because whenever a stock that is part of an Index heads towards zero, the committees that look after an Index make sure that they delete that stock from the "Index stocks". So it was with Satyam. And so it will be with some of the real estate companies.

But that is little consolation when most stocks are down over -60% and look like they are headed to zero.

If the soothsayer was around today and I went to him with a "Hey, dude, whassup?" he would probably turn around and say: "Beware the Yikes of March...possibly the ouch of April, May, and June. And", he would say with a sign of resignation, "I can’t see much beyond that."

Rewind - where were we?
So there it is - direct from the astrologers. The pain we have seen may not be over. Every surge in the market is seen as a "dead cat bounce" destined only to slip again into nothingness. And buyers are told to wait at the gate or, better still, go and sit it out at a Café Day - where anything can happen.

But neither am I an astrologer and nor am I a coffee drinker. Chocolates, ras malais, ras gullas, and the dessert sort of stuff are my weakness. And, yes, I am a believer in the fact that anything can happen.

Imagine that we are back in time to December 31, 2007. This is what the return charts for an investor looking back from April 28th, 2006 would have looked like. I chose April because the stock markets tanked by-30% through June 2006, and April was close to the peak month of May, 2006 - just like December 2007 was close to the peak month of January, 2008.

Up Up and Away
The Honesh Truth: Up Up and away
Source: Bloomberg

As you can see from the graph above, an investment in Quantum Long Term Equity Fund would have seen a gain of +66.76%; an investment in Quantum Liquid Fund would have seen a return of +12.50%; and an investment in gold would have returned +11.91%. (I could not give you the return for the Quantum Gold ETF as that was launched only in February 2008 - but consider this as a proxy for an investment in gold.)

Not bad, all three major asset classes were running. Real estate, too, was flying with property prices of apartments, office buildings, and malls all setting new highs.

Fast forward the graph to March 5th, 2009. And the picture changes completely.

The sky falls on our head but only for stocks
The Honesh Truth: The sky falls on our head but only for stocks
Source: Bloomberg

The Quantum Long Term Equity Fund has declined to a cumulative loss of -21.06% while gold has gained a stunning +64.33%. And the Quantum Liquid Fund remains that steady straight line and flags its job as a fixed income exposure giving you a return of +24.33%. And property prices are down a lot - there is no reliable index to measure how much property (not stocks, but the apartments and malls) are down, but you know they are down. And have more room to fall.

Lessons from the past
As always, we learn from our past mistakes. And hope not to repeat them. As an investor, we should have had exposure across asset classes. There is a table at the bottom of the Honest Truth which you probably overlook most of the time. Just as we ignore the sun rising every day. Or recognising the air that we breathe which keeps us alive.

We take it for granted.

And then we take up meditation when there is an event in our lives that shakes us up. We get a heart attack - and survive. We have a family shock - we survive. We seek sanctuary and calmness. We meditate.

If there is a message in these graphs, it is this: Checking to see where you have invested your money for the long term is important. Your goals change, your needs change, and where you put your money will also change over time.

But your overall returns are also a function of timing - when you began investing. An investor who began investing on April 28th 2006 would have looked really stupid by June 14th 2006 - the Index had lost -30% from its peak of May 2006. But, if he had stayed put and kept investments across the 3 asset classes of equity, fixed income, and gold even now - when the Indian stock markets are battered - he would be bruised but not beaten up.

You do the math. Use the table below to see how good or bad your overall return would have been.

Table 1: how much did I lose in this market collapse?
Asset class Your investment on April 28, 2006 Return till March 5, 2009 Multiply your investment with the return to get your gain or loss
Quantum Long Term Equity Fund   -21.06%  
Quantum Liquid Fund   +24.33%  
Gold   +64.33%  
Total Cannot exceed 100%   Add up to get your total return

Just to help you with the exercise, this is what some people had invested in.

Table 2: how much did I lose in this market collapse?
Asset class Your investment on April 28, 2006 Return till March 5, 2009 Multiply your investment with the return to get your gain or loss
Quantum Long Term Equity Fund 80% -21.06% -16.85%
Quantum Liquid Fund 15% +24.33% +3.65%
Gold 5% +64.33% +3.22%
Total 100%   -9.98%

So, while it is no fun losing money, having exposure to different asset classes helps over longer periods of time. When one asset (say, your investment in equities is not doing well), another asset class ends up doing better (like gold). And the liquid fund that invests in short-term debt instruments is your safer investment - steady returns across an economic cycle.

Meditate - but always breathe the air
When we meditate and do our deep breathing exercises, we don’t stop breathing when we finish the exercise. If we did stop breathing, we would die. We continue to breathe the air.

And so it is in when we invest our money for the long term. We have a long term investment plan, but we need to spend 5 minutes a day on checking that there is nothing in the air around us that makes us worried. We sniff; we have our antennae out - waiting to catch signals.

Is there some news floating around that can encourage us to change how we allocate our money across the asset classes? Is there some news that I need to keep an eye on that will make me change the way I invest?

Equitymaster has The 5 Minute Wrapup. It gives you a daily tour of the world and sniffs around - what are people saying, what is the current thinking out there? And it takes you around in 5 minutes. Check the time it takes you to read it. It is free. But very valuable.

For example, on March 9, 2009 the 5 minute wrap-up began with a lead story that Barton Biggs, a well known investment guru from the US said that the markets are cheap and present a wonderful buying opportunity. On March 10, the Dow jumped 5.8%. It may be a dead cat bounce - or it could be the end of the bleeding. There may still be a few drops of blood coming out of the wound, but the blood flow has receded. Maybe.

By the way, being called a "well known investment guru" is like being abused these days. These titles were given because gurus were right in the past. Few get to be right all the time. The trick is to be right most of the time!

And, honestly, at the end of the day where you put your money - and how much in each asset class is a function of what your needs are. Some people need to meditate for 30 minutes, some do it for hours.

But everyone needs to listen - whether to soothsayers or to The 5 Minute Wrapup.

Who knows, if immortal Caesar did not let pride get in his way, he would still be standing tall. And would get a ticket for the Indian elections.
Impossible?
Why?
We already have one Italian here - no harm in adding a Roman!

And, if elected, he would disband the Z security and use the money to build our infrastructure.
I know where my vote would go: Hail, Caesar!
Meanwhile, beware the Ides of March.

Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. 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.


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