Author: shyam

Gold vs. Jewelry

Today’s collapse in Gold took down gold jewelers like Titan (-5.05%), Gitanjali (-2.98%) along with gold lenders like Muthoot (-12.71%) and Manappuram (-9.84%). I understand why gold loan companies might be in trouble if the downtrend continues. The biggest question being whether their customers can top up their LTV given that the collateral is down -13.81% this year? However, unless the jewelry guys got into some nasty hedging bets, isn’t falling gold prices a net positive to them?

Women secretly know that gold jewelry is a bad investment. Trinkets falls 30% in value the minute you take it out of the showroom. The investment angle was something that they use to make men feel better about blowing away money. The drop in gold prices actually makes it more affordable so I would expect foot traffic to retail jewelers would actually increase.

As price decreases, consumers will buy more of the good.

There are significant headwinds affecting gold. Chief among them the ECB’s pressurization of Cyprus’ central bank to sell its gold reserves to help pay for the country’s bailout. That has raised expectations that other distressed euro-zone members might be forced to sell gold as well. Other factors include bearish forecasts such as from Goldman Sachs, the slow improvement in the U.S. economy, and the perception that gold is no longer needed as a safe haven.

However, if you are with me on the thesis that, in reality, jewelry buyers are not buying gold for investment but for consumption, then the drop in gold prices are a net positive to jewelry companies.

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[stockquote]GITANJALI[/stockquote] [stockquote]MUTHOOTFIN[/stockquote] [stockquote]MANAPPURAM[/stockquote] [stockquote]TITAN[/stockquote] [stockquote]GOLDBEES[/stockquote]

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Why I don’t watch CNBC or NDTV Profit or…

I don’t watch CNBC, or NDTV Profit, or ET Now, or… Let me just bunch all of these together and refer to them as CNBC – the pioneer in real-time financial entertainment.

CNBC’s goal is not to make you money, but to sell advertising. In fact, if you use any website or TV channel or magazine that shows you ads, you should understand that the product that they are selling is YOU (to their advertisers.)

The structure of CNBC is to keep you on the edge of your seat. To keep you dependent on them for information on what to do next. They want you to live in fear and react to every little hiccup in the market. The ugly truth is that by the time any news hits CNBC, you, as an individual investor, is far behind the eight ball.

Market timing is nearly impossible. It may be blindingly obvious in hindsight, but at that very moment, even the good lord Brahma cannot tell you whether something has bottomed or topped.

How can you predict where the NIFTY is going to be in a year’s time when cannot even state with certainty that are you are not going to be hit by a truck while crossing the road?

How many of their “experts” are actually accountable to you? How many times have you heard anyone of them say “I don’t know” as an answer to a question?

Does knowing what the CEO had for lunch that day make you an expert in that company?

Does it matter what Ganesha predicts?

Watch CNBC for entertainment value, not for investment advice.

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Thoughts on Inertia

It’s always easier to do nothing (new).

Change is difficult to start.

Fear of making a decision > Benefit of making a decision.

The strong desire to keep things the same.

Listening to the same advice from the same people telling you the same things.

 

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On why passive investing is a risky strategy

If you are buying an investment fund, there are two main strategies you’ll encounter – active management and passive management. Passive investing is essentially the replication of an index or benchmark. For example, buying the NIFTYBEES ETF that replicates the Nifty 50 index. The aim of active investing is to deliver returns that are superior to the stock market that the companies sit within. An actively managed fund can offer you the potential for much higher returns than what a particular market is already providing. The debate as to which of these strategies is better has been raging on for the better part of the last 20 years. Whenever stock-market indices recover from a crash, the debate re-emerges.

The problem with passive investment is that passive management is only theoretically possible.

any evaluation of passive investment funds to be complete should include withdrawal activity during draw-downs, something that can be viewed as active management by the part of the investor imposed on the passive fund.

Also, most funds that call themselves “active” are actually “passive.”

the representation of closet index funds and traditional index funds have risen to the point where they now represent approximately 40% of the active universe—making the exercise of differentiating them from true active managers more important than ever.

Traditional passive investing, using indices weighted according to market capitalisation, works best in the kind of long bull markets that ignore fundamentals, because at the end of the day, you effectively end up buying high and selling low.

Investors should be careful of simplistic arguments and biased data while allocating capital. While I remain a fan of ETFs to get broad-market exposure, it is by no means the be-all-end-all of investment choices.

Sources:
Passive Investing in Stock Indices Involves Substantial Risks
Re-thinking the Active vs. Passive Debate

 

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52-Week High Investing

Investing in stocks that have hit 52-week highs is a form of momentum investing. The rationale is that traders are slow to react, or overreact, to good news. A stock whose price is at or near its 52-week high is a stock for which good news has recently arrived. This may be the time when biases in how traders react to news, and hence profits to momentum investing, are at their peaks. The psychological underpinning is traders’ reluctance to revise their reference point is price-level dependent.

Unlike straight-up momentum investing that looks at the top decile of stocks in terms of 200-day performance, the 52-week high model only gets activated when there are stocks hitting 52-week highs. In that sense, momentum investing is a continuous model whereas the 52-week high model is sporadic.

52-week high

How does this sporadic model compare during volatile markets? If you look at the Feb 2013 returns (above) that was picked right before volatility hit and the broad indices tanked, the model outperformed the CNX 100 by over 7 points. The out-performance is largely due to the immunity that these stocks enjoy in terms of positive news flow. It follows that this model is ideal for short- to medium-term investors who like to time their entry into the market. The image below is the performance of the portfolio picked on Feb 2012 to give you a longer-term perspective.

52-week high feb 2012

Check out our 52-Week High Theme and give us a call. Investing without emotions was never simpler.

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