Island of Sanity. - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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17 MARCH 2008

Email your friends, cousins, children in USA.
Ask them to walk around their homes and make a list of all the things that they own.
Request them to note down in which country that item was made.
And what that item cost them.
Add it up, get a total for all the "things" they have in their homes: the beds, the tables, the sofa, the chairs, the kitchen appliances, the TV, the stereo, their clothes, their shoes.

Now ask them: how much of these "things" they own have a "Made in India" tag.

If the people you sent the email to are of Indian origin, chances are that they have some Indian furniture, the pressure cooker to make rice, and a few Indian paintings on the wall.

The total value of "Made in India" products may be 5% of the value of all the things they have in their home.

If the people you sent the email to are not of Indian origin, the chances are that the total value of "Made in India" products is likely to be zero.

India, as a country, is not an export-led economy.
India had nothing to benefit from the massive build out in new home construction in USA.
India should have nothing to lose from the massive decline in new home construction.

A recession in USA should have little impact on India's economy.

Yet, the Indian stock market swoons and twists to every piece of news on the condition and health of the US economy.

Blame our lust to Dance with the Devil for that. (Please read "Dance with the Devil")

India could have - and should have - been an island of sanity in an insane world.
But we chose to Dance with the Devils, we chose to be seen with the beautiful people.

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As a thoughtful individual, would you build a house by borrowing short term money? Would you take a loan for this house from people you do not know, even if they were willing to give it to you? Even if they queued up at your door with a bucket of cash?

India needs to build - for a long time.
We have to find homes for some 500 million people. And improve the quality of life for maybe another 400 million people.
We need schools, colleges, hospitals, roads, power plants, airports, ports - the list is endless. The number of people to be helped in some way or the other seems countless. There is so much to do. So much building to be done.

It will take one generation of sacrifice and hard work for a future generation to enjoy the fruits.
All this building needs capital. A lot of capital. A lot of patient capital.
Long term capital that supports this sort of long term building.

But India took the easy way out.
India opened the door for the people in the queue.
The people willing to give us money while the going was good.
Now they want their money back. The times are not so good anymore.
And things will remain difficult for some time.

The world was overwhelmed by greed. Everyone was out there looking for the next free lunch. And they had a lot of free lunches. But nothing is really "free". There is always a price to be paid. The bill finds its way to you - eventually.
Bear Stearns just got their bill. It is a big one.

One of Wall Street's most well known firms has been hit by a series of write-offs. It was trouble at one of the funds of Bear Stearns that caused the August, 2007 sell-off in global stock markets.
The world got its first whiff of trouble that something was wrong with the business of lending money to people who can't really afford to repay the loans they take. The sub-prime business had provided a free lunch to all the distributors and investment bankers who lived off the fees they got from creating these loans. Now the bills were coming home.

In October 2007 the Chinese stepped in to help.
China's largest broking company, Citic Securities, agreed to buy a 6% equity stake in Bear Stearns for USD 1 billion. And Bear agreed to buy a 2% equity stake in CITIC for USD 1 billion. Since then, the share price of Bear Stearns has declined by 75% and the share price of Citic has declined by 45%.

The Indian stock markets should have been oblivious to all these events.
Yes, the Indian economy is influenced by the events in the US and the developed world.
The recession in USA and slowdown in Europe will mean less consumers shop. There will be less credit card activity and banking activity. There will be fewer bills to be processed. Not good for the call centre business.
Maybe tourism will be hit a bit.
Maybe fund inflows from persons of Indian origin will decline a bit.
Nothing dramatic.
Nothing scary.

Yet, the Indian markets are spooked by all these events and we wait like slaves for "global cues".

The short term capital was the terrible bridge that India built.
We are paying the price for it.
An island of sanity surrendered to the temptation of the P-Notes.

India's economy is not coupled to the US or the developed world but the Indian stock markets are very much coupled.
We are stuck in their insanity.

Stay calm. Stay sane.
Keep on investing, methodically, carefully.
There is money to be made on a one year view.

Table 1: Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold ETF Quantum Liquid Fund
Why you should own it: An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 15% 5%

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

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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