No nukes, please - The Honest Truth By Ajit Dayal
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Investing in India - Honest Truth by Ajit Dayal
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26 NOVEMBER 2008

Addressing the Hindustan Times’ Leadership Summit over the weekend, Asif Ali Zardari - the newly elected President of Pakistan - made a wonderfully comforting statement: Pakistan will not use its nuclear weapons first.

Whew! After all the damage from the exit of the P-Note money, it is good to note that Pakistan won’t be sending missiles our way.

But a P-missile could do some "good". Given the fact that real estate projects are mostly lying vacant - any damage from a nuclear attack will merely hasten the reduction in real estate prices that Finance Minister Chidambaram wishes to see. Millions of Indians will finally be able to afford homes.

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Meanwhile, Aviation Minister Patel will also get what he wants - a decline in air fares from the stubborn private sector airlines.

But all those calls from our political leaders for reduction in selling prices will have to wait for a while. There are no nuclear warheads coming from across the border. And every real estate developer is hoping that some P-Notes find their way back to India.

But President Zardari did have a solid plan: India and Pakistan could be one economic bloc, just like the European Union. After all, he reportedly said, Benazir Bhutto - his late wife - remarked that there is a "little bit of Indian in every Pakistani and a little bit of Pakistani in every Indian".

True Both the countries have been to the IMF for help and both have governments that promise more than they deliver.
Actually, to be fair, all governments - globally - are in that same boat of failed promises.

Failed predictions
And to add to the list of failed promises, there is the list of failed expectations.
Or failed forecasts.
Like my views on the stock markets.

A subscriber and a colleague sent me an email with a link to an article by an investment magazine. "Why are they bashing you?" he asked. "You were not the only one who was wrong."

Curious, I clicked on the link and read the article including the reference to me. And sure enough, there I was: the TV star laid bare in print.
Of the 9 points, I occupied a fair share of point number 5. Here it is:

"5. Ignore false prophets, especially those on TV
The so-called experts, research analysts, fund managers and financial advisers - the market soothsayers - have called a bottom many times during this collapse. The usual suspects are all on TV. Watch out for the supposedly cerebral ones. Consider Ajit Dayal who runs a mutual fund company called Quantum. Dayal writes an e-letter called The Honest Truth where, apart from plugging his own funds including a gold fund, he routinely runs down every other fund manager, hedge funds, regulators and most Indian companies. While he was busy doing that, he was blind to the coming market tsunami, despite frequent trips between the US and India. At the beginning of the year, when the Sensex was above 20,000, he had suggested that you put 80% in equities, 15% in gold and 5% in liquid funds. He ‘felt‘ that the Sensex would not go below 15,000 (no basis for this feeling) but, by late October, the index was hitting 7,700. Writing in September, he was blissfully unaware of what the bankruptcy of Bear Sterns, Lehman Brothers and the takeover of Fannie Mae, Freddie Mac and AIG would mean for the world financial system! He wrote, "Announcements of losses of hundreds of millions of dollars and rescue packages of tens of billions of dollars seem like daily occurrences. But should you be worried? ... Do you work for any of these genius companies? Or did you get a big salary or bonus for doing very little except some financial engineering while you were employed with these genius financial companies? If the response to any of these questions is ‘Yes’ then you need to be worried... If you answered ‘no’ to both the above, you are in good shape." That was a fine piece of soothsaying. And wrong. Dayal now says stocks are cheap: "But, what worries me is the overall financial mess we are in. ‘We’ means anyone in the world. Even in economically-sheltered India."

If financial experts can be so wrong, the finance minister, the chiefs of SEBI (Securities and Exchange Board of India) and RBI (Reserve Bank of India), who simply don’t know enough about the markets, can hardly be expected to be right. The experts are at least managing money and, if they get it wrong on more occasions than their peers, investors would hopefully start ignoring them. But wrong-headed policy prescriptions come easier to officials and politicians because they do not pay a price for being wrong. "

There it is. In black and white: I am a TV star. And a false prophet. Or maybe the other way around: I am a false prophet. Who happens to be on TV.

But, it is true. The events of the year 2009 have not been my best in terms of figuring out where the world - or the Indian stock market - was headed.

I have confessed my guilt before (On the Edge) and will repeat again - I did not expect the market to fall below 15,000 levels. The 15,000 level was not based on something that I ‘felt’ but, rather, based on an assumption that the market would not go below 15x historic earnings.

India’s GDP would keep growing at 6.5% per annum (not the 8% that was then being spoken about) and that would mean that some companies would see their profit grow in a 15% to 20% band.
Indeed, I was "bullish" on many companies.
But I did not like real estate companies, capital good stocks, and ICICI Bank.

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But - in the end - I am to be judged by the "performance" of the predictions. And the numbers speak for themselves: the Quantum Long Term Equity Fund is down a lot (-45% from its January end NAV) and as a key member on the Board, I take the rap for that.

And, yes, in my repeated trips between India and USA, I failed to figure out that AIG, Lehman, or Bear Stearns would go bust.

Even my asset allocation (the break up between equities, cash, and gold) went for a toss. The bankruptcy of Lehman - and the freezing of the credit markets thereafter - made me nervous about money flows to businesses. Even the best companies can go bust if they have no lines of credit. In "Preparing a Buffer", I acknowledged that the impact of the Lehman failure on the global credit markets suggested that we were in some pretty abnormal times.

I am still not sure when this nightmare will end. As I write, Citibank is in trouble and in the process of being rescued.

One can either be adamant and assume that the forecasts I made at the start of the year were correct - and ignore the events since then.

Or one can suggest - admittedly 8 months later - that people should try and keep some more cash aside as a cushion for uncertain times.

Events beyond prediction
The decline in the Indian markets has been in two distinct step-downs:
1) the decline from 19,000 levels at the start of the year to 14,000 or so due to sales by the short term pools of money and the exit of the P-Note crowd. This sell-off took place because the prices of key commodities like oil, steel, wheat, rice were increasing. Higher inflation would see higher interest rates and this would slow down the economy;
2) the subsequent decline from 14,000 levels to 8,000 due to the fears of the Lehman bankruptcy and the freeze in the credit markets.

India’s economy, in my opinion (and, oh yes, some of my opinions have been very wrong this year) will still grow at 6.5% p.a. GDP over the next few years.

But times are weird out there - and there may be an indirect impact on your lifestyle and your salary levels for some time. I don’t know for how long.
Hence, the recommendation to keep a higher level of comfortable cash. But stay invested in equities and stay invested in gold as a hedge.

And am I ashamed or embarrassed of "plugging" my own funds?
Not at all. Sure, I wish we could have given you a better performance. We have lost money for investors, but - despite being fully invested in this declining market - we have done reasonably well against the peers and the BSE 30 Index on a 1 year and 2 year basis.

The Quantum family of mutual funds are built on integrity, low cost, and a disciplined investment and research process.
I have no hesitation in continuing to recommend them.

And do I "routinely runs down every other fund manager, hedge funds, regulators and most Indian companies" in this column? I will let you be the judge of that.

But, maybe I need to be more diplomatic in my approach. My colleague at work sent me a nice article some time ago. He is one of those good souls who send out the "goodness" kind of power points that do the rounds of the internet. An extract from Jeff Keller’s ‘Disagree without being Disagreeable’:

As you learn to tame the ego, you will find that you don't feel the need to express your disagreement as often as you did the past. When you are passionate about something and want to express yourself, you will. But there will be many instances when you realize there is nothing to be gained by voicing your view. You just let it go, without the need to respond. You don't need to prove anything to anyone....

In the end, it doesn't matter what other people do. You don't have to try to change other people, and in most cases, you can simply refuse to engage in discussions with those who are disagreeable.

Instead, focus only on yourself. Develop the ability to disagree without being disagreeable. Drop the ego games. You are then in a position to learn more about yourself, the other person, and the topic under discussion.

So, the topic under discussion was my role as one of the false prophets.

Yes, my judgements were incorrect: I need to make better use of my trips between USA and India.
Or face the terrible prospect of being ignored and punished by our followers.

Suggested allocation in Quantum Mutual Funds
Quantum Long Term Equity Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
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 (New)** 46% 12% 42%
Suggested allocation (old) 80% 15% 5%
** Assumes 2 years of expenses are kept in safe places like liquid funds.

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: 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.

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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