Browse Category by Opinion

Covid Proof Investing

  1. The Economic destruction by pandemic
  2.  The immediate aftermath of COVID on various asset classes.The Great disconnect of the Stock Market with the reality- FOMO ( feeling of missing out)
  3. Cash & Gold
  4. Rational investors Strategy
  5. How should we go about investing in Equities?
  6. How should we look at fixed income investing?

The Economic destruction by pandemic

We find ourselves in this perfect storm, as the pandemic has hit us like Tsunami and caught us by surprise when we were bathing in the sunshine of global growth. Almost 14.6 million are infected and approx 608000 plus perished and the numbers rising by the day.

 The estimated economic losses run in trillions of dollars.  

Is there a technique to invest in these times and come out unscratched? What would a sane individual investor do in chaos in and Around?

No Asset Class is spared

No Asset class was spared when the pandemic unleashed its ugly teeth spitting venom in March we saw equity saw cut to the tune of 15-20%, Low-grade Bond/ credit Risk Funds have also been decimated with the Franklin Mutual fund unwinding 6 of its debt schemes in India, FD’s have lost the sheen.

My phone keeps on buzzing and folks inquire about the health of their Bank. Neither will I harp on the magnitude of the situation that we are in nor will I throw numbers to depress you.

The Great disconnect of the Stock Market with the reality-FOMO

When will the stock market correct? Is a question on everyone’s mind. The run up which is seen in Equities on the hope of a vaccine has just strengthened the feeling of being missed out/FOMO is very high 

In times like these, we see the stock market flying on its own and has not decided to stop moving unidirectionally northwards. In terms of valuations, we saw the lowest levels on Market Cap as a %GDP of 56 in March 2020 which has again risen to 68, long term average been 75 and high being 149.5.

So how would a rational investor react in these irrational times where we see the world economy is collapsing like ninepins and stock markets are not in sync with reality?  

Cash & Gold

Should one sell everything and move all assets to Gold?

#WarrenBuffet once famously said something about Gold that still resonates with me. You collect all the available Gold and dump it in a room it will continue to shine nicely, won’t produce a dime of dividend, can’t give you pennyworth of interest, and won’t be keen on paying any rent.

Yes, it can act as a good hedge against losing faith on USD but not for long and make no mistake a portion of allocation is a good prescription but one must refrain from an overdose.

I also saw the tendency of lot many longterm seasoned investors pulling the trigger and move a large portion of their holdings to cash, though might look like a prudent move to defend oneself from a crashing market, but in long term, the terminology of cash is thrash holds as inflation eats into returns every single day and purchasing power of each dollar goes down. Now many economies like India may face stagflation going forward.( A phase of high inflation and low growth)

Don’t get me wrong I am not defying both these asset classes nor am I advocating a disproportionate allocation to Gold and Cash. What point I am stressing on is sticking to consistent long term asset allocation. And these words might sound clich├ęd and at the cost of sounding like a broken record, this is the only thing that helps us achieve long term and consistent optimal returns.

Read More When Should one invest in Gold?

Rational investors Strategy

Now that beans are spilled and there is no magic portion for COVID proof Investing, let’s dig deep where should I spread my eggs:-  

I have developed a framework borrowed a bit from Charles Darwin himself based on the survival of the fittest theory.

No matter what vehicle or broader asset class( Common Stock or Bonds ) you use for investing it doesn’t matter, we eventually are owners in the business or lenders to them. ( This one sentence sums up the entire philosophy developed by, Buffet, Benjamin Graham, Howard Marks )

if you reread the above line it just forces every single brain cell in your mind to think #LongTerm. Coming back to the survival of fittest following business could survive the acid test of COVID.

How should we go about investing in Equities?

I will look at the following parameter for Equity investing:-

1. Business with Low/No or manageable debt. ( Interest is one fixed cost that can break the back of the camel no matter how cheap the cost be ).

2. Businesses whose products will have a strong demand and will continue to be consumed post-COVID era and should have products and services that are irreplaceable.

3. Strong balance sheets will survive better than weak ones as in the coming months the stress on Income statements would be extended to Balance sheets.

4. Businesses that have strong free cash flows. ( Money left covering fixed cost+ Taxes+ Capital expenditure etc. and adding back depreciation to shareholders kitty)

5. Good Managements that are efficient allocators of capital and not those who indulge in high cash burn. (High Return on Equity & Return on capital employed) .

6. Deploy capital in a staggered way don’t try heroics no one catches the bottom nor will you miss the bus, just stay put and average. ( SIP’s and STP’s are the right way to accumulate)

Read More on When should a long term Investor sell stocks?

How should we look at fixed income investing?

   Debt Investing I am clear I won’t be pennywise pound foolish, for extra bps won’t do the following things:-

1. Invest in High Credit Risk Funds. ( This is a big ticking time bomb which has imploded during IL&FS Crisis and can explode during COVID, Franklin was just a precursor)

2. But long-duration Govt Security Bond Funds. ( It might sound safe that you are buying sovereign debt, the real fact of the matter is COVID situation and extended lockdown can put pressure on Country’s finances and may lead to inching of long bond yields that may cause a lot of volatility.)  

3. Avoiding NBFC Fixed deposits ( Irrespective of good names we are better of avoiding this space as FD’s are very inefficient from a taxation perspective.

All in all the secret sauce for COVID lies in discipline, rationality, and staying put and calm. Remember Investments are just like Marathon you got to pace them!

Opinion, Timeless Musings

Gold Rush

One big question on everyone’s mind is should I go for Gold now? Has it run up too much? While everyone seeks for an answer we should ponder on the following thoughts:-

1)Historically during turbulent times when taps of money open how did the yellow metal perform?

2) Is the recession time to dig gold?

3)What dictates Gold prices Globally?

4)How does this commodity behave Vs other avenues?

5)Should we look at gold from a long term perspective what are various views?

The History of Gold:-

If we go back to the date when they started keeping records gold has always fascinated mankind whether it be stories narrated to kids or legends of lost treasure to the sea chased by voyager and pirates or the ultimate Gold Rush days when folks turned miners gave their lives for that elusive find which would catapult them to fame fortune and glory.    

If we look at the chart below we see how has the gold bullion performed Vs other asset classes like Treasury bills and cash.

YTD performance of Gold Vs other asset classes

We went 40 plus years back in time to see how does it has behaved over the years. We realized that whenever there was either period of high/hyperinflation or war-like situations have led to surge in Gold prices and during periods of economic stability the yellow metal also loses it sheen.

Historic performance of Gold

Is the recession time to dig gold?

The late ’70s saw a massive spurt in the demand on account of geopolitical tensions like the Russian invasion of Afghanistan, the political instability of Iran also accompanied by a period in the United States which had seen inflation rising to 13%. This was the classic stagflation era( Inflation accompanied by subdued growth). Mid 80’s was the era when we saw the emergence of the Uber class wall street bankers who made it big by leveraged buyouts and corporate raids and firms like KKR made it big in these times sadly this period ended with a burst of a bubble and again Gold shined then. We saw another rally post 9/11 and internet boom which lasted for a good part of a decade. Again now we see a spurt in prices.

So when Should we buy gold?

Simple question simple answer when the big guns chase it.

It’s interesting to note all the periods in which Gold did well either there were high inflation times or periods in which money taps opened by central banks( adoption of a loose monetary policy ), surprisingly central banks also tend to become buyers of the bullion. That can be considered as a loose indicator when to buy Gold.

A very interesting trend is that the Russians and the Chinese have been adding gold.  Historically the COVID hit nations of Germany and Italy have few of the highest Gold to Forex reserves.

Chinese and the Russians have been rushing for Gold

The above stat shows the European economies have believed a lot in Gold 

What is driving the prices and what are the trends?

 The data below clearly shows that the real or physical demand for Gold is on fall, maybe it has many reasons, mostly lockdowns across the globe can also be a cause. But the overall trend of paper gold as an investment avenue is on the rise. 

What do top investors think:-

Warren Buffet & Charlie Munger:-  The commodity doesn’t produce any rent, dividend, interest, or cash flows, it can just sit pretty neither does it grow in size on its own. Hence it may not be a prudent investment that they like.

Ray Dalio:-  Ever since the Breton wood system was abolished and we could print as many dollar bills and money became insanely cheap where almost 15plus trillion dollars of debt is in negative interest rate regime, gold is a better proxy to cash and should be held during uncertain times.

What should a rational investor do?

It is always advisable to have 5-10% exposure to the yellow metal as a part of asset allocation, just on grounds, it has a negative correlation to equities and can help portfolios hold ground in uncertain times.

Sources and references:-

1. ( Reserve Bank of India)

2. ( World Gold Council)