Category: Your Money

Denial is not a Strategy

Caracalla ( 3D image available)

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I was reading an article by Gideon Rachman on the FT about how America must manage its decline and a line from with it stuck with me: “Denial is not a strategy.” What he meant was that by focusing on the dogma of “American Exceptionalism”, politicians across the aisle have swept the problems facing education, stagnating wages and hollowing out of the middle-class under the carpet.

I wonder if the Roman’s, when faced with the prospect of decline, had the same thoughts running thorough their heads: “We have the best logistics, a great army and a proud citizenry. What could go wrong?” And it did not, for a long time. It took nearly 320 years from the peak for the entire empire to disappear. However, things move faster now.

All the “decay” talk is not to take away America’s (or the North-Western countries’) stupendous achievements over the last century. An entire civilization has climbed up the Maslow’s hierarchy of needs in a very short period of time. However, once you reach the top, you are competing with everybody else who wants to get there too.

450px-Maslow's_Hierarchy_of_Needs.svg

Since the past decade, piss-poor Asian countries are slowly but steadily, bootstrapping their way out of the morass that they were trapped in for the bulk of the previous century. Its not that the West is declining, but the rest of the world is simply ascending faster than them.

At this point, the worst that America can do to themselves is to continue to neglect the core of the problems facing them. There’s something seriously wrong when factory jobs cannot be staffed because you don’t find qualified workers.

“If you go to our factories in Germany, the guys on the floor can read engineering drawings.” But in the U.S., most workers lack the education and training needed to “operate in a modern, competitive manufacturing environment.” –Siemens.

Or when physics PhD’s can make more money on Wall Street coding up HFT and CDO models than they can pursuing science. And when a doorman can get credit to lease a BMW.

Somewhere in the pursuit of happiness, the notion that it needs to be backed up with hard work seems to have been forgotten.

No wonder that some Senators are backing a bill that would grant a visa to anyone who buys an expensive house in the US. You know what? This is exactly what the Romans did: Caracalla granted Roman citizenship to all freemen throughout the Roman Empire for the purpose of increasing tax revenue. Are the Americans going to walk down the same path to irrelevance?

There is no easy cure or a magic bullet that can make all these problems go away. But as Churchill once said: “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.” Here’s to rooting for the home team to turn things around.

Physical vs. Paper Gold

A London Good Delivery bar, the standard for t...

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ETFs that allow investors to gain exposure to commodities on the stock-market instead of heading over to a futures exchange have seen tremendous growth over the last 5 years. In India, Gold ETFs, like Goldman Sachs’ GOLDBEES and Reliance Mutual’s RELGOLD are exceptionally popular. Given our gold-obsessed culture, it is not every surprising.

The advantages of holding gold in paper form are pretty obvious: no storage costs (save on safety deposit boxes), higher liquidity (sell/buy whenever) and consolidated statements (get your gold exposure along with your equity exposure from your broker).

But what is the catch? It really boils down to why you are buying gold. You definitely can’t wear the GOLDBEES around your neck. But other than for ornaments, people have always looked at gold as a store of value in uncertain times. i.e. disaster insurance. If everything else collapses, well, at least you have your gold that you could (theoretically) barter with. When disaster strikes, good luck trying to convince someone to trade your GOLDBEES.

But if you are not the type of guy who buys gold for insurance and is looking to track the price of gold at a reasonable expense, buy paper. In India, all gold ETFs must be backed by the physical underlying. They cannot stuff it with futures contracts or derivatives and call it a gold ETF. Presently, investment only in physical gold is allowed as per SEBI guidelines.

Gold ETFs, at least in India, are as good as gold.

IPOs: The Story So Far

2011 is definitely not turning out to be a year for IPO investors. IPOs have lost an average of 17% so far. The speed at which some of these have become penny stocks is truly amazing:

Ticker To-date performance
BGLOBAL -85%
ACROPETAL -85%
SHILPI -84%
CORAL-HUB -80%
SERVALL -79%
BROOKS -77%
SANGHVIFOR -72%
TELEMARINE -56%
SPYL -56%
SRSLTD -51%
DYNASYS -50%

Out of the 69 stocks that were analyzed, an opening day fizzle forebodes a dismal future for the stock: 48% of the IPOs had a down day on their first day and continue to perform poorly till date. 25% of the IPOs performed poorly in spite of spiking the first day – so there really is no magic forecasting too that can guide investors through the process.

I would take the side of Warren Buffett who once said:

It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors).

An IPO’ed stock just doesn’t have all the pieces of information that an astute investor considers before buying the stock. You cannot do technical analysis on a stock that has never traded, nor can you dig into its previous years’ balance-sheets to discover (or at least verify) strengths and weaknesses. It would be smart to check out the lead book-runner as well. If its some garage operation based out of Kalasipalya, then it would serve you well to stay away from the issue. For example: BGLOBAL, ACROPETAL, SHILPI, SERVALL were run by Almondz Global Securities, Saffron Capital Advisors, D&A Financial Services, Keynote Corporate Services respectively. The next time you see issues brought out by these guys, tread carefully!

Here’s the chart you’ve been waiting for:

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Making P/E work for you

common (image) aspect ratio found in video and...

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The general rule with Price-Earnings ratios (P/E) is that the lower a stock’s p/e, the better. And a P/E of less than, say, 10, represents excellent value. A low P/E implies more profit for every dollar you invest. However, P/E is only the starting point in researching stocks. Here are some gotchas that you should be aware of:

  1. One-time gains can artificially inflate a company’s P/E: When a company sells assets, it enjoys a one-time bump in earnings that might make the P/E ratio artificially low. And similarly when there are one-time write-offs, P/Es get high. In either of the two cases, P/E is not a gauge of the company’s true ongoing operating earnings.
  2. A low P/E can be a danger sign: Low P/Es may come about because well-informed investors are selling the stock and pushing the price down, regardless of earnings. In other words, unusually low p/e’s can be a sign of danger rather than a clue to a bargain. For example, the 2.73 PE of Aarvee Denims
  3. Don’t ignore stocks with high P/E: Growth stocks have naturally high P/Es. You should expect to pay more for companies with long-term earnings potential. However, stocks with high P/Es tend to be more vulnerable during periods of broad market setbacks. For example, the nearly 205 PE of Adani Enterprises that has a 50-day volatility close to 80%.

Happy investing!

Gold getting fingered

One Rupee coin (dated 1285 AH), 12 ounce silve...

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Gold is down 6.4% to $1,552 an ounce, taking its losses over the past 4 days to 13.8%. It has shed 19% since hitting its intraday high of $1,920 just three weeks ago. Silver is also getting hammered. The metal is down 13% on Monday to $26.95 an ounce, taking its 4-day slump to 32%. Both metals were even lower into the Asian market close.

Investors are scrambling to raise cash across markets and asset classes as traders fret that a lack of progress in finding a solution to contain the euro-zone fiscal crisis threatens the health of the global economy.

Source.

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