Living in La-La Land - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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7 MAY 2009

Vacations are a great time to do nothing.
To recharge the batteries; to let the mind slip away into a state of dull nothingness.

And there we were in heavenly Florida - for 10 mostly magical days; swimming; lounging; doing nothing.

Well, that is a half-truth.
While it is true that this was probably one of the longest times in recent memory when I was not constantly on the phone with investors, colleagues at work, or well-wishers - I was still "in touch".
The analyst in me can never really switch off completely.
And the internet and sms allowed me to keep in touch from varied locations like the swimming pool or the beach.

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We were with old friends, good friends - and some happen to work with large investment management companies in USA. Invariably, the conversation moved over to work-related issues.
The wives were unhappy - they rearranged the seating so that we could talk "our stuff" and they could talk theirs.

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A service state
The east coast of Florida is truly amazing.
I suffer from asthma and find that the air there is the purest.

The winds that breeze across the state tend to begin somewhere in the sea between Africa and Latin America.
And as they race towards Florida they go over mostly open sea and some small islands - none of which are great manufacturing hubs.
When they make landfall, the air must be one of the purest - and warmest - in any part of the world.
And there are no factories, as such, in Florida.
It is a service state; so the air stays pretty pure.

The retired move down from colder climates to live their last few years in warmer and gentler weather.
They bring with them their life savings, their books, and their hobbies - which may include golf or just lounging by the pool.
They need people to look after them - mostly health care - so there is a large community of nurses and doctors.

And then the rich come down there to own a mansion on the beach; or a boat that they can use all year around. So they need another set of services: from young waitresses to staff the restaurants to captains and crew to look after their yachts and boats.

Mickey and Minnie are also headquartered in Orlando, in northern Florida. And the whole world wants to have breakfast with them in Disney.

For decades the immigrants from Latin America and Cuba fled persecution and sought better opportunities in Miami. Spanish is now the effective language of Miami - and the driving rules are certainly not what you would expect of mainland USA. I joke with my white-skinned, American friends: they need a visa to enter Miami.

Going ga-ga over La-La
But while Florida, in my opinion, is indeed La-La Land the world went ga-ga over property in Florida.
Just as we all went ga-ga over Indian stocks.
Good long term fundamentals - but silliness in what we are willing to pay for it.

People were willing to pay too much for property in Florida.
And Florida went into overbuild mode.
Just as Pune, Gurgaon, and many parts of India did.

Prices have fallen by -30% to -50% in Florida.
Speculators are devastated.
Foreclosures have risen to all-time highs as mortgage payments cannot be met. Across the US, about 1.5 million homes have ended up in foreclosure: California, Florida, Nevada, and Michigan dominate the list.

The typical US consumer has seen his savings rate reach 5% of income - in the year 2007, it was negative -0.8%; because they were spending more than they were earning.
One would expect a war-zone with people huddled up at home; not going out to eat; not spending money.

Malls that were packed with stores now bear "Space Available for Rent" signs on them.

Puzzling
And there is the paradox.

Every restaurant chain we went to had a waiting list of 30 to 45 minutes. California Pizza Kitchen; P. F. Chang's; Cheesecake Factory - all packed.
In some cases we had to circle the parking lot to find a place to park.

The malls were not full - but there were no bargains, and no sales worth talking about.
We went to Linens and Things to look around for stuff for the house. They were closed - in bankruptcy, we were told. So we went across to Bed Bath and Beyond - still in business - and no cut in prices.

We went to Circuit City - also closed and in bankruptcy. So we went to Best Buy - still in business with some special offers on electronic items and household gadgets.

A visitor from Wisconsin told me that flights were full. He took his kids to Disney and they had to shut down the gates to the park - there were too many people. The theme parks were full to capacity.

Maybe the problem was that we were in Florida: it was a tourist state.
Not only were there tourists from within USA but also from outside - like us.
Our flight was full, too. And the fares were not cheap.

Maybe the problem was that all these stores and malls built too much - too fast. Their rate of expansion of square feet constructed was more than what people could afford - at that time, at that price.
Again like the developers in India: building too much, too soon, at the wrong prices.

Or maybe the real problem is restricted to the people employed in finance companies and in the real estate business. They are the people who had a terrible year and are in "recession".
As are the speculators - who don't' deserve any bail out.

General Motors was anyway headed towards bankruptcy; for years they had lost market share to the Japanese, Germans, and Koreans - this slowdown only accelerated the disaster.

The airlines had bought too many planes - this slowdown and the rising price of oil in CY 2008 forced them to knock off many extra routes, reduce their headcount, and focus their flights to the more profitable routes. Now their flights are full.

Maybe this is all about saving the salaries and bonuses of 200,000 MBAs running the financial world.
And saving the financial geniuses who have friends in government.

Just as the real estate barons in India have their friendships and connections - sometimes cemented with partnerships with the families of the politicians.

I don't have answers to any of these questions.
I was supposed to be on holiday.
In La-La Land.
Breathing the fresh pure air and enjoying the warm pool.

And sometimes allowing my mind wander to uncomfortable truths.

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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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5 Responses to "Living in La-La Land"

Ajit Dayal

May 17, 2009

Dear Mr. Murl1:
I have not made a pile over the past 2 years- we h ave been busy trying to build the foundations of an hon est business which takes time when you are doing so in an environment populated by those with other bel ief systems - but, yes, I am lamenting the decline of my investmen ts.
Though I would hope the investment soar a gain by June/July 2010.
Taking a holiday from my savings is not in bad taste taking a holiday paid for by some mut ual fund to distributors to mis-sell products may be in bad taste.
I have often asked investor to keep aside the money that they need to maintain a minimum lifestyle. And that is the savings used to pay for this h oliday of mine.
But, yes, if my earnings power - and the investments of my clients - don''t start heading nor thwards, there will be gloo m in the year 2010.
But in case that happens, I have also bought gold -you should also buy the Quantum Gold Fund listed on the NSE - because if the world is still messy in the year 2010 gold is likely to do ver y well from here. And I may still have enough money to pay for anot

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Bharat Vaidya

May 11, 2009

This may be slightly out of context, however it talks about my thoughts on EquityRE Markets. Its an attempt to understand the current behaviour of these markets, especially when even Mr. Dayal (whose thought I respect beyond comprehension) is slightly clueless......... The joyhappiness of Living in a certain place takes precedence over every consideration while choosing a place to settle in for lifea considerable part of it. This is my beliefis sure most of you share it. Each individual though may have his own definition which depends on – Family, Career, Extended familySocial avenues - in short a 360 view towards life. For first time buyers what should matter most is meeting these criteria to go ahead with a decision. br
Having said that though in this case y ou can have emotion as the overriding fact or, as heart easily scores over mind when we start talking of personal choices. To avoi d this pitfall do a thorough assessment o f your choice based on all the parameters of t he VFM (Value for Money) criteriathen ta ke the p lu nge. Is this the right time (mean as of t oday). Well, those who don’t have an immediat e needwho haven’t done the above exerci se may wait but others shouldn’tinvestors in RE should completely avoid now. Rather for those who are looking for a personal dwel ling I think this is the best time, here’s t he Why a nd How Why Uncertainty, Fear, GluttonyW ishful thinking drives any risk-driven invest ments. Economics used broadly as a te rm for everything else forms the background t o this playing field of emotions. It is the f ear of the UNKNOWN that leads to unimag inable bottoms. Once anything that is unknown comes to the forethere is nothing signi ficant left to unfold everyoneeverythin g gets back to NORMAL. It looks like we are i n that phase. This is truer about Equity market s than RE as it’s definitely more knit ted to employmentGDP. But even then we are behind the unknown, irrespective of the means employed by the entire world, especial ly US. This will lead to excessive inflation et c, etcall that crap but does it really mat ter to us so much in our decision to buy a hou se. We are not IMF economists here, leave that to the theorists. We are simple salary e arning professionalsbusinessmenall others who are looking to balance happiness and risk. We can keep talking about it as a pas t-time but execution is th e key. How Once you have made up your mindfin alized on a property – apartment, plot, bun galow, anything you likedecided what YOU think is a fair price make an offer. Your own offer irrespective of what the counterp arty’s expectations aream sure you will b e able to close the deal at your pricea 5 – 10 % premium (considering your quote will b e much lower than current market rates). This i s more applicable for cities like Bangalore, Ch ennai, NCRPune than to Mumbai in the c urrent market. I think there is still a ro om for correction in Mumbai after which you can apply the same prin

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Murli Krishnam

May 8, 2009

Hello there... I thought you folks from the stock markets having made a pile during the last two years, were lamenting the decline in your fortues in 2008. To be able to afford a holiday in florida while your clinets have wiped out 50% of their net worth is not in great taste!!! Cheers!!

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Vinayak Kanvinde

May 8, 2009

Hi Ajit, I remember clearly having met you in the equitymaster office in late winter of 2002 (early 2003). I was an employee of just two months before I moved, but the impact you made on me by your thinking has been tremendous. I follow your coloumn 'The honest Truth' regularlyits a must read. In this week subject you mentioned about your trip in the U.S. where u saw everything packed business as usual there. Just that the speculators have been crushed in the meelee. I am kind of preplexed at what your conclusion really is. Sorry, I may have missed a point two. Are you saying that the part in U.S (southeast) is seeing signs of 'business as usual'that in general is true for America? Also, if we were to exclude the messy part (financials/realtors) we still will have a good latent demandlife will return to normal pretty soon? b r
Sorry if I feel confused to you. Hope u got what am trying t o say. Re g ards.

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SATHYAMURTHY SRINIVASAN

May 7, 2009

Yr. holiday musings make me envy yr. posn.Ajit,Sir. May be I could afford such a holiday in an exotic locale- of course with smart money earned from investing the Equitymaster way.

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