Sunday, November 27, 2011

Heightened uncertainty

There was a time, sometime ago, a few years back actually, when things could be predicted "long term". Today, that word if used either tends to show your lack of knowledge on anything, or a surprise that he isnt already perished along with the dinosaurs.
Today, almost nothing can be predicted even for 5 years (or less). Not even govt. bonds. Not sure when a govt will topple and default on all the previous commitments/bonds. The existence of worldwide currencies (e.g:euro) is at stake. Gold, once upon a time long term investment is at peaks and nobody is entirely sure why its rising. Whether it is because it is supposed to be a hedge against inflation (as traditionally "they" say), or against currencies, or against a no growth scenario...?
Oil is also equally uncertain. the volatility in this commodity has been huge despite nowhere near corelation to its demand, which is more or less steady.
During the good olden days, assume maximum fluctuations where near 20% a year, meaning both the crest and the through. Today, just the crest or the through have a minimum movement of 20% a year, irrespective of whether it is currencies, gold or oil (or even interest rates in India).
Are all the companies factoring their worst case scenerios in reality in their business plans? I think not. They should ideally be more conservative and have more cushion for a negative surprise currently, and for the next few years. 
What does this entail for investing in particular? Previously, we used to bet for growth alone assuming all the above mentioned factors as constant or with a little movement. But today, these assumptions cannot be taken for granted. They entail enormous effect on the results and each of these are inter-co-related in many different known and unknown ways and levels. The effect of one can either neutralise the effect of the other or compound the effect of the other and this influence can change day to day. Today you need to better analyse more than one variable to get to the base and expected scenario.
There is some opportunity in all this afterall. The high volatility in everything obviously means there is more money to be made with the highs and the lows as there is to lose money also. The question is are you treating this as a cautious opportunity or as a complete threat?

Wednesday, November 16, 2011

What a conviction!

Goldman Sachs added Sintex Industries to the India conviction buy list on 6 September 2011 and on 16 November 2011, it has removed the company from this list "based on account of European exposure and FCCB concerns." Weren't these factors present even when the company were added to the list?
Conviction is when you trust something especially at hard times, not backing off and selling it at the sign of the first trouble (share price from ~Rs.150 to ~Rs.93)

Reduce tax on short term profits

Transactions work in a funny way when taxes are involved. Here's a demonstration:
Here's how to lower your average buy price of a share with tax benefits:
Assume you have bought a share of scrip A @ 700. Now the share has fallen to 600 within a week/month. Assume you buy 1 more share, this time @600 and also sell one share at the same price.
Looking from a layman's/superficial perspective, these 2 transactions are wasteful and costs are involved (brokerage and taxes on the transaction) as no useful purpose has been solved.

Now lets look at this from the tax perspective:
As shares sold is always in FIFO (First in first out) in India, your would have effectively sold the first share at a loss of 100(sell@600- buy@700). This gives rise to a short term loss of 100 which is adjustable against other short term profits. Assume you have made a 100 short term profits in some other transactions. Then, your net tax payable is 15% * (100-100) = 0. So you have effectively saved 15% taxes on the amount of losses if you have profits elsewhere in other transactions. Now, your effective by price of A is also 600 (the price of the second share you bought). The lower buy price will help you break even and make profit faster.

Lets extend the case. Assume that after a year of buying the second share, the price has reached to 630. If the 2 seemingly dummy transactions had been done, then you would have saved 15 in short term taxes by adjusting against other short term profits and when you sell this at 630, you make a long term profit of 30 (Sell@630 - Buy@600). And since long term equity capital gains is taxed at 0%, the total profit/loss you would have made is -100+15+30 = -55.
If these two dummy transactions had not taken place, your buy price would have been 700 and sell price would be 630, meaning a loss of 70. Note that long term losses are not adjustable against anything.
So, you can effectively reduce your losses or taxes and also make more profits by taking an immediate short term loss and entering into a counter transaction by buying an equivalent amount at the same price(assuming you have short term profits).
This is not only applicable for buying and selling at the same price, it is also very much applicable if you bought the second share at at a rate less than the selling of the first share.

Wednesday, November 9, 2011

London riots - Proof of Deindividuation - "Civil society": An oxymoron phrase

The London riots just prove that the innermost bad desires are inherent in every person irrespective of whether they are in the developed world or in the developing world, whether in a civil society or not. As a matter of fact, the phrase "civil society" seems to be an oxymoron phrase now. People are civil by intimidation or by force, it just doesn't seem normal. Greed, action, thrill, survival instincts are all part of true human nature. It is only by continuously conditioning that we stop doing it and think twice before burning down other's properties and looting others' things.

P.S: written long ago, but forgot to post it.

Gold & Investment poker

There is a nice game in town called "Predict the price of gold and win a jackpot". It is well known that a lot of cheap money has gone into commodities over the last few years (perhaps 2 years or so). And that means a lot of speculation has also gone into it. One of them is Gold. There are many theories floating around why Gold is rising and the theories predicting the immediate future of this shining metal. The most traditional theory says "Gold hedges inflation". Meaning, it can store the same value and you can get the same goods worth in gold irrespective of the depreciation of a currency which happens with high inflation. The second and a consequential theory says "Gold is an alternative currency in itself when other major currencies are as volatile as Molotov cocktails". The third theory says "When the world is headed for deflation, gold is a better investment as it will atleast hold value rather than depreciate". Another theory says "Gold is usually measured in USD and as Gold and USD are usually always negatively co-related to each other, hence, Gold prices can be predicted by the prediction in the USD strengthening/weakening against other currencies". The fifth and sixth reasons are speculating based on one of these theories and buying based on hearing the blind calls of others respectively. There is no one clear and present reason for putting money in Gold.
Now, coming to the poker side of things, it gets more interesting/confusing based on how you see it. It is a fact that Gold has run up so much because many people/institutions have bought/speculated loads and loads of it. Some of them have been satisfied with the returns and thought it was in an overbought region/overpriced at around USD 1800+ per troy ounce and had started selling it and realising profits. Now at around USD 1600+, when an organisation/person says it will reach higher, one has to understand if he is saying so to protect his own interest. He can make others buy by saying so while he himself is selling it to you. Without your invaluable buying support, it is very possible that more people would be selling and his realisation of profits would be that much lower. Now, considering all the talk about Gold, are you willing to buy Gold at this highest level? Arent the retail investors falling into the same trap of investing at the very highs and again burning their fingers for the sake of a best case 5 or 10% returns and the worse case of a huge downside? Now, thats a call you have to take. The answer looks simple enough to me, I hope it is for you too.

Tuesday, November 8, 2011

Its getting worse by the day

The Govt. of India's or rather India's problems are getting worse by the day. One of them being inflation.
If it was not enough that inflation has been high in double digits for so long is not enough and all the economic govt. authorities (Mr.Kaushik Basu, Chief economic adviser; Mr.Rangarajan, head, Prime Minister Economic Advisory Committee; Mr.Subbarao, Governor, RBI; and Mr.Montek, Planning Commission Deputy Chairman) have been shooting arrows in the dark about when the inflation would come even close to the target rate. They have (including Pranab da, Finance Minister) have been directly and indirectly saying that inflation will come down in the next few months for over a year. And yet, they have all been wrong or have been lying.
To make matters worse, they continue to say the same without looking at the ground realities.
1. Everybody says food inflation is due to supply side problems. Yet. there has been no major policy changes to increase production of goods that are needed. In an ironical step, Minimum Support Prices(MSP) have been raised drastically over the last two years which has increased the overall cost of buying all the grains for everyone. Whats very depressing is that some of the policies that have traditionally caused farmers to increase wheat/rice/pulses by having MSPs, have caused more grains to be grown than can be stored in warehouses leading to huge losses of grains. This subsidies/incentives are skewed in such a way that even if there is demand for vegetables/fruits, many farmers will continue to grow certain grains as it is more profitable because of the subsidies/incentives. Why is the govt. sleeping?
2. There is also a case that the MGNERA has given a lot of money to the villagers and this is increasing demand for goods which previously did not exist. A report I read says that there have been hardly any  productivity changes due to the scheme. Meaning, that most work is namesake and no real useful work has been accomplished with so much money being given.
3. Petrol prices are going up continuously and there are indications that even diesel prices may rise. If diesel price rise, the whole of India will undergo another level of price rise as most things in India are transported by trucks. A multiplier effect will increase inflation more.
4. Many coal power plants are running on 4 to 7 day stock of coal (norm:21 days) and are lacking coal. Many power plants in India were designed and viability studies assumed that they would import Indonesia's coal which used to sell it at a discount to international market at large. The recent law in Indonesia to sell its coal at an international rates has made the power plants unviable and the companies are asking the govt. to increase the rate at which they sell the power to the govts. 
5. The state electricity boards(SEBs) have run up losses of Rs.80,000 crore (and counting) as they have been inefficient and many have not increased electricity prices for years together. With the power ministry proposing to ask the state govts. to write off all the losses and start the SEBs with a clean slate, where are the state govts. to get so much money? Also, even after this is done, unless the SEBs increase the rates of electricity substantially (many times over in some states), the SEBs will again start going into losses.
6. There is a proposal of a food subsidy bill to be introduced. Where is the money for it? Unless the govt. starts saying things like 2 grains of rice per person per day is enough to fill hunger (like the Rs.32 a day is the Below Poverty Line), where is the money?
7. With the downgrade of the State Bank of India by Moody's, the govt. has shown some hurry to infuse ~8,000 crore into SBI with an overall of ~14,000 crore into all public sector banks, within this year. (Increased from the budgeted 6,000 Cr)
8. Oil prices are still high and any number of reports in the global arena do not predict oil prices to fall to any meaningful lower level in a permanent way. This means India's import bill is only going to rise in the coming years. And the govt. will need more money to buy the imports.
9. Some specific national liabilities like the Air India are contingent liabilities which will need more money in the future from the govt.
All the above imply only two things directly: Prices are going to stay up/rise and govt. is in need for a lot of unplanned money. If the govt. starts borrowing more, rates are further going to go up and would make further investments in new projects unviable (which are supposed to increase supply). The second would only reinforce the price inflation permanently.
Oh, and there is one more thing. Inflation measures prices year-on-year and even if the govt. claims victory over inflation once it reaches a target rate of say 5%, inflation has remained high for so long that these rates are year-on-year. Meaning that the price rises have become permanently embedded. Unless there is a price deflation, things are bad and permanently.
You don't need to be an economist of calibre to predict (wrongly again and again) that inflation is going down. The truth is prices are going to remain high and may further rise, irrespective of whatever the above  economists mentioned say/lie. In effect, the Govt. is screwing all its citizens very well.
P.S: The high impact of inflation is given here:

Sunday, November 6, 2011

Campari calender 2012

The Suicide knot

Ever wondered the misery of a poor fellow who has decided to commit suicide and on the selected day, at the time when he/she is alone in the room, and with the rope in hand, he/she gets frustrated that he/she is unable to tie the knot - the 'Suicide knot'.
Take an unrelated topic: we all have seen the lasso in many a cartoons and a few cowboy movies. It seems simple, but if I ask you to make me a simple lasso, do you know how to make it?
Ok, can you atleast tie a tie?
It may seem that most of us, the vast majority don't know how to do the first two, but may know the third, but in reality it is not so. It is just that you don't know that you know it already.
Here's the secret: If you know how to tie a tie, you know how to tie both the suicide knot and the lasso. Because it is all one and the same.
Lateral thinking...using a solution from one problem to solve another problem.