Investment for the future

My friend Sam and I were talking yesterday about the prognosis for the stock markets and economies in general. Both Sam and I have been investing in the Indian market for quite a few years now, and I have also been into the rest of the world markets over the last 6 to 7 years.
I had quit the European REIT maket in 2007 , the very same day the first hedge fund of Bear Stearns collapsed, because I thought trouble was brewing. It runed out to be a very timely call, in hindsight. Over the next 2 to 3 months, I had virtually withdrawn from the rest of the markets, including India. By end of 2007 , I was completely in cash, save for some token investments in Reliance and L&T in India. Again, in hindsight, this has turned out to be a fortuitous move.

We know the mess we are in right now. I am reminded of an episode in the Mahabharatha, where Yudhistira, after a hard day's fight in Kuruskshetra , is brooding over the thousands who had been left dead. In walks sage Vyasa, and Yudhistira, the righteous one that he is, tells him that he just feels like running away from the battlefiled, jsut does not want to fight anymore and wants to take Sanyasa.

Vyasa replies " no way, my son! In fact, this battle will not move on without you, and will be fought with you right in the centre, and you, like any of us, is unfotrunately destined to oversee this bloodbath haplessly, that is is your fate".

Fast forward to 2008 - I put myself ( and the rest of us poor denizens of the world) in the place of Yudhistira, and US Treasury Secy Hank Paulson in the place of sage Vyasa!!! I am awed at the uncanny similarities!!!!

Perhaps we too can do nothing but to see the financial world around us collapse.
Into the future now. I have observed that historically, the India index in a bear market has fallen to about 2/3rds of it's peak value before fighting back over 2/3 years. Going by this precendent, given that the Sensex had hit 21000+ not so long ago, my logic above would lead us to a 7000+ figure for the sensex as a worst case scenario. Of course no one seems to know what had happened to the Bombay market during the 1929 days.

People say that this round of recession is going to be long and deep. I think so too, but do not know, frankly speaking. Given that the Sensex had dropped close to 50% already and given that no one really knows how far it could, I am mulling the RSP or SIP strategy, to invest in, say Rs10,000 every week for the next 1 year in just Reliance and L&T shares, possibly in equal measure.

L&T has closed around Rs.1000 last weekend. Assuming 1.5% drop in the share value, on an average , over the next 52 weeks, the average of cost of possession would be Rs. 687, with a low value of Rs.456 ... to me, this could possibly be the worst case scenario ( another drop in the index by about 50% from where it is today)... which then means my avg cost would be at a 50% premium... but then, I would have had a big chunk of investment over this period on one of the best possible stocks in India... and given that indices tned to rise over 300% in a 5 to 7 year period in India, my invests could still yield me more than 200% in that period... in a fool-proof way....

Any thoughts on this? - and any loopholes in this logic.. over and above uncertainty that exists today, and the vagaries of the stock market.

My personal pick in terms of sector right now is the Sugar sector - completely contrarian... but I believe that over the next 3 to 5 years, this sector could get excellent returns... my pick would be Shree Renuka Sugars and Bajaj Hindustan. I plan to take positions in this sector gradually over time.

Fast Money

"Fast Money" is the name of a popular program in CNBC channel, where they discuss what stock to trade ( buy or sell) to make quick money.

However, what most people do not realize is that Fast Money policyis followed by many FIIs in many developing countries... need proof? Look at the Russian Stock Index, which has fallen 20% yet agian today... the graph actually is not updated... the sigure should show 886.

Point is, when things get difficult in emerging economies, hot money that came in and whipped up the markets, as the int eh case of Russia, when the going was good, can flow out even faster!!! Poor investors locally are left in the lurch... what we are witnessing in Russsia is PANIC... nothing more.
China and India are not too far behind, in this phenomenon.

Stephen Hawking and the Brihadaranyaka Upanishad

Right now I am reading some snippts of the Brihadaranyaka Upanishad, one of the 10 most popular ones. I was immediately reminded of the book The Theory of Everything by Stephen Hawking. I am sure many of you would have read the latter.
http://www.rlslog.net/stephen-hawking-and-the-theory-of-everything-s01e01-02-dvdrip-xvid-nosegment/
In the first chapter there, Hawking acknolwledges that God MAY have created the Universe in the first instance, after which the big bang happened. He clearly has no scientific explanations to a period before the Big Bang.. I rememebr many other top scientists admitting the same. To be, this is postulation that God MAY have createdthe Universe... the Believers believe that it was God's handiwork, and the scientists seem to agree " we do not have any other science to either prove or disprove this- yet; and so it may well be the case" . Maybe they really dont care.. so it be.
When I read the section in the Brihadaryanaka Upanishad where there is a conversation between Sage Yagnavalkya and Gargi, and I reproduce it below. It is astounding to find that Yagnavalkya comes to the same conclusion as Stephen Hawkins ( or rather the other way around!!) . Yagnavalkya is clearly unable to explain what the Origin of Everything is or was- in fact in chapter IV, where he as a conversation with Maitryi, she admits, at the end of the conversation, and I quote " Then Maitreyi said: "Just here you have bewildered me, venerable Sir, by saying that after attaining oneness the self has no more consciousness." Yajnavalkya replied: "Certainly I am not saying anything bewildering, my dear. This Reality is enough for knowledge, O Maitreyi." "
Nett of it, the philosophical angle to explain the Origin of Everything is to ascribe it to Brahmam, or Holy Spirit or Allah, or whatever it is, depending on the individual's faith ( of course, explainations to substantiate this would differ from religion to religion, but that is understandable). And as for Scientists, they merely seem to shrug their shoulders and say " sorry we can't explain this anymore bassed on evidence available, may it is created by God, or may not, we dont really know" ....
I found this fascinating - how could an ascetic, sitting on the Himalayas with no Hubble Telescope or nothing, have seemingly come to the same conclusion as modern scientists, thousands of years back?


.... Read on


Chapter VI—Yajnavalkya and Gargi (I) 1. Then Gargi, the daughter of Vachaknu, questioned him. "Yajnavalkya ," said she, "if all this is pervaded by water, by what, pray, is water pervaded?" "By air, O Gargi." "By what, pray, is air pervaded?" "By the sky, O Gargi." "By what is the sky pervaded?" "By the world of the gandharvas, O Gargi." "By what is the world of the gandharvas pervaded?" "By the world of the sun, O Gargi. "By what is the world of the sun pervaded?" "By the world of the moon, O Gargi." "By what is the world of the moon pervaded?" "By the world of the stars, O Gargi." "By what is the world of the stars pervaded?" "By the world of the gods, O Gargi." "By what is the world of the gods pervaded?" "By the world of Indra, O Gargi. "By what is the world of Indra pervaded?" "By the World of Virij, O Gargi. "By what is the World of Virij pervaded?" "By the World of Hiranyagarbha, O Gargi." "By what, pray, is the World of Hiranyagarbha pervaded?" "Do not, O Gargi," said he, "question too much, lest your head should fall off. You are questioning too much about a deity about whom we should not ask too much. Do not ask too much, O Gargi." Thereupon Gargi, the daughter of Vachaknu, held her peace.

Warren Hastings and the Gita

I stumbled upon this article. I do not believe that the Bhagwat Gita needs recognition and acknowledgement of anyone in particular- it has survived at least a few thousand years, inspite of numerous cultural and military invasions- but it was interessting to note that the first Governor General of India was deeply interested in this Oriental Holy Book and the philosophies that it offered, so much so that he commissioned a translatory exercise.
http://www.sscnet.ucla.edu/southasia/History/British/Hastings.html

On a more philosophical note, all the major religions of the world preach the same Utlimate Reality - the Brahmam, the Holy Spirit or Allah. None of these have a form or shape, per the individual definitions in the religous texts. And all of them have representatives to take humanity closer to this Ultimate Reality. I wonder why then we are perpetually fighting with each other, saying " my religion is better than yours" ... I think our energies are better spent going after this Ultimately Reality, or taking care of worldly matters in a peacful and happy life, as long as each one of us is alive for the 80 or 90 years ( on an average).
I would go one step further - it is even OK to be an Atheist or an Agnostic, as long as one feels peacful and happy while on this earth. Because, according to me, all religons are dessigned only with this end purpose in mind- stay peacful and happy as long as you are alive.
Cheers... Dilip

Fiasco at SEC

An interesting article that appeared in NY Times on 3rd of Cot, reproduced in CNBC, that I wish to reproduce here.

Of key interest could be the following points:

1.Lobbying at unimaginably high levels by the "investments Banks" to remove regulations, one among them being Henry Paulsson, who had gone on to become the treasury secy.
2.Looser rules leading to obscene levels of leveraging - - 33:1 in teh case of Bear.
3.Bringing in a regime of Voluntary controls, in the name of Deregulation - something that was doomed to fail from the word go.

Read on ...
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The SEC Rule that Let Banks Pile on Debt
BUSINESS BIZ COMPANIES MARKETS
The New York Times
03 Oct 2008 06:18 AM ET
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“We have a good deal of comfort about the capital cushions at these firms at the moment.” — Christopher Cox, chairman of the Securities and Exchange Commission, March 11, 2008.
As rumors swirled that Bear Stearns faced imminent collapse in early March, Christopher Cox was told by his staff that Bear Stearns had $17 billion in cash and other assets — more than enough to weather the storm.
Drained of most of its cash three days later, Bear Stearns was forced into a hastily arranged marriage with JPMorgan Chase — backed by a $29 billion taxpayer dowry.
Within six months, other lions of Wall Street would also either disappear or transform themselves to survive the financial maelstrom — Merrill Lynch sold itself to Bank of America, Lehman Brothers filed for bankruptcy protection, and Goldman Sachs and Morgan Stanley converted to commercial banks.
How could Mr. Cox have been so wrong?
Many events in Washington, on Wall Street and elsewhere around the country have led to what has been called the most serious financial crisis since the 1930s. But decisions made at a brief meeting on April 28, 2004, explain why the problems could spin out of control. The agency’s failure to follow through on those decisions also explains why Washington regulators did not see what was coming.
On that bright spring afternoon, the five members of the Securities and Exchange Commission met in a basement hearing room to consider an urgent plea by the big investment banks.
They wanted an exemption for their brokerage units from an old regulation that limited the amount of debt they could take on. The exemption would unshackle billions of dollars held in reserve as a cushion against losses on their investments. Those funds could then flow up to the parent company, enabling it to invest in the fast-growing but opaque world of mortgage-backed securities; credit derivatives, a form of insurance for bond holders; and other exotic instruments.
The five investment banks led the charge, including Goldman Sachs, which was headed by Henry M. Paulson Jr. Two years later, he left to become Treasury secretary.
A lone dissenter — a software consultant and expert on risk management — weighed in from Indiana with a two-page letter to warn the commission that the move was a grave mistake. He never heard back from Washington.
One commissioner, Harvey J. Goldschmid, questioned the staff about the consequences of the proposed exemption. It would only be available for the largest firms, he was reassuringly told — those with assets greater than $5 billion.
“We’ve said these are the big guys,” Mr. Goldschmid said, provoking nervous laughter, “but that means if anything goes wrong, it’s going to be an awfully big mess.”
Mr. Goldschmid, an authority on securities law from Columbia, was a behind-the-scenes adviser in 2002 to Senator Paul S. Sarbanes when he rewrote the nation’s corporate laws after a wave of accounting scandals. “Do we feel secure if there are these drops in capital we really will have investor protection?” Mr. Goldschmid asked. A senior staff member said the commission would hire the best minds, including people with strong quantitative skills to parse the banks’ balance sheets.
Annette L. Nazareth, the head of market regulation, reassured the commission that under the new rules, the companies for the first time could be restricted by the commission from excessively risky activity. She was later appointed a commissioner and served until January 2008.
“I’m very happy to support it,” said Commissioner Roel C. Campos, a former federal prosecutor and owner of a small radio broadcasting company from Houston, who then deadpanned: “And I keep my fingers crossed for the future.”
The proceeding was sparsely attended. None of the major media outlets, including The New York Times, covered it.
After 55 minutes of discussion, which can now be heard on the Web sites of the agency and The Times, the chairman, William H. Donaldson, a veteran Wall Street executive, called for a vote. It was unanimous. The decision, changing what was known as the net capital rule, was completed and published in The Federal Register a few months later.
With that, the five big independent investment firms were unleashed.
In loosening the capital rules, which are supposed to provide a buffer in turbulent times, the agency also decided to rely on the firms’ own computer models for determining the riskiness of investments, essentially outsourcing the job of monitoring risk to the banks themselves.
Over the following months and years, each of the firms would take advantage of the looser rules. At Bear Stearns, the leverage ratio — a measurement of how much the firm was borrowing compared to its total assets — rose sharply, to 33 to 1. In other words, for every dollar in equity, it had $33 of debt. The ratios at the other firms also rose significantly.
The 2004 decision for the first time gave the S.E.C. a window on the banks’ increasingly risky investments in mortgage-related securities.
But the agency never took true advantage of that part of the bargain. The supervisory program under Mr. Cox, who arrived at the agency a year later, was a low priority.
The commission assigned seven people to examine the parent companies — which last year controlled financial empires with combined assets of more than $4 trillion. Since March 2007, the office has not had a director. And as of last month, the office had not completed a single inspection since it was reshuffled by Mr. Cox more than a year and a half ago.
The few problems the examiners preliminarily uncovered about the riskiness of the firms’ investments and their increased reliance on debt — clear signs of trouble — were all but ignored.
The commission’s division of trading and markets “became aware of numerous potential red flags prior to Bear Stearns’s collapse, regarding its concentration of mortgage securities, high leverage, shortcomings of risk management in mortgage-backed securities and lack of compliance with the spirit of certain” capital standards, said an inspector general’s report issued last Friday. But the division “did not take actions to limit these risk factors.”
Drive to Deregulate
The commission’s decision effectively to outsource its oversight to the firms themselves fit squarely in the broader Washington culture of the last eight years under President Bush.
A similar closeness to industry and laissez-faire philosophy has driven a push for deregulation throughout the government, from the Consumer Product Safety Commission and the Environmental Protection Agency to worker safety and transportation agencies.
“It’s a fair criticism of the Bush administration that regulators have relied on many voluntary regulatory programs,” said Roderick M. Hills, a Republican who was chairman of the S.E.C. under President Gerald R. Ford. “The problem with such voluntary programs is that, as we’ve seen throughout history, they often don’t work.”
As was the case with other agencies, the commission’s decision was motivated by industry complaints of excessive regulation at a time of growing competition from overseas. The 2004 decision was aimed at easing regulatory burdens that the European Union was about to impose on the foreign operations of United States investment banks.
The Europeans said they would agree not to regulate the foreign subsidiaries of the investment banks on one condition — that the commission regulate the parent companies, along with the brokerage units that the S.E.C. already oversaw.
A 1999 law, however, had left a gap that did not give the commission explicit oversight of the parent companies. To get around that problem, and in exchange for the relaxed capital rules, the banks volunteered to let the commission examine the books of their parent companies and subsidiaries.
The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.
“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).
“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.
In letters to the commissioners, senior executives at the five investment banks complained about what they called unnecessary regulation and oversight by both American and European authorities. A lone voice of dissent in the 2004 proceeding came from a software consultant from Valparaiso, Ind., who said the computer models run by the firms — which the regulators would be relying on — could not anticipate moments of severe market turbulence.
“With the stroke of a pen, capital requirements are removed!” the consultant, Leonard D. Bole, wrote to the commission on Jan. 22, 2004. “Has the trading environment changed sufficiently since 1997, when the current requirements were enacted, that the commission is confident that current requirements in examples such as these can be disregarded?”
He said that similar computer standards had failed to protect Long-Term Capital Management, the hedge fund that collapsed in 1998, and could not protect companies from the market plunge of October 1987.
Mr. Bole, who earned a master’s degree in business administration at the University of Chicago, helps write computer programs that financial institutions use to meet capital requirements.
He said in a recent interview that he was never called by anyone from the commission.
“I’m a little guy in the land of giants,” he said. “I thought that the reduction in capital was rather dramatic.”
Policing Wall Street
A once-proud agency with a rich history at the intersection of Washington and Wall Street, the Securities and Exchange Commission was created during the Great Depression as part of the broader effort to restore confidence to battered investors. It was led in its formative years by heavyweight New Dealers, including James Landis and William O. Douglas. When President Franklin D. Roosevelt was asked in 1934 why he appointed Joseph P. Kennedy, a spectacularly successful stock speculator, as the agency’s first chairman, Roosevelt replied: “Set a thief to catch a thief.”
The commission’s most public role in policing Wall Street is its enforcement efforts. But critics say that in recent years it has failed to deter market problems. “It seems to me the enforcement effort in recent years has fallen short of what one Supreme Court justice once called the fear of the shotgun behind the door,” said Arthur Levitt Jr., who was S.E.C. chairman in the Clinton administration. “With this commission, the shotgun too rarely came out from behind the door.”
Christopher Cox had been a close ally of business groups in his 17 years as a House member from one of the most conservative districts in Southern California. Mr. Cox had led the effort to rewrite securities laws to make investor lawsuits harder to file. He also fought against accounting rules that would give less favorable treatment to executive stock options.
Under Mr. Cox, the commission responded to complaints by some businesses by making it more difficult for the enforcement staff to investigate and bring cases against companies. The commission has repeatedly reversed or reduced proposed settlements that companies had tentatively agreed upon. While the number of enforcement cases has risen, the number of cases involving significant players or large amounts of money has declined.
Mr. Cox dismantled a risk management office created by Mr. Donaldson that was assigned to watch for future problems. While other financial regulatory agencies criticized a blueprint by Mr. Paulson, the Treasury secretary, that proposed to reduce their stature — and that of the S.E.C. — Mr. Cox did not challenge the plan, leaving it to three former Democratic and Republican commission chairmen to complain that the blueprint would neuter the agency.
In the process, Mr. Cox has surrounded himself with conservative lawyers, economists and accountants who, before the market turmoil of recent months, had embraced a far more limited vision for the commission than many of his predecessors.
‘Stakes in the Ground’
Last Friday, the commission formally ended the 2004 program, acknowledging that it had failed to anticipate the problems at Bear Stearns and the four other major investment banks.
“The last six months have made it abundantly clear that voluntary regulation does not work,” Mr. Cox said.
The decision to shutter the program came after Mr. Cox was blamed by Senator John McCain, the Republican presidential candidate, for the crisis. Mr. McCain has demanded Mr. Cox’s resignation.
Mr. Cox has said that the 2004 program was flawed from its inception. But former officials as well as the inspector general’s report have suggested that a major reason for its failure was Mr. Cox’s use of it.
“In retrospect, the tragedy is that the 2004 rule making gave us the ability to get information that would have been critical to sensible monitoring, and yet the S.E.C. didn’t oversee well enough,” Mr. Goldschmid said in an interview. He and Mr. Donaldson left the commission in 2005.
Mr. Cox declined requests for an interview. In response to written questions, including whether he or the commission had made any mistakes over the last three years that contributed to the current crisis, he said, “There will be no shortage of retrospective analyses about what happened and what should have happened.” He said that by last March he had concluded that the monitoring program’s “metrics were inadequate.”
He said that because the commission did not have the authority to curtail the heavy borrowing at Bear Stearns and the other firms, he and the commission were powerless to stop it.
“Implementing a purely voluntary program was very difficult because the commission’s regulations shouldn’t be suggestions,” he said. “The fact these companies could withdraw from voluntary supervision at their discretion diminished the mandate of the program and weakened its effectiveness. Experience has shown that the S.E.C. could not bootstrap itself into authority it didn’t have.”
But critics say that the commission could have done more, and that the agency’s effectiveness comes from the tone set at the top by the chairman, or what Mr. Levitt, the longest-serving S.E.C. chairman in history, calls “stakes in the ground.”
“If you go back to the chairmen in recent years, you will see that each spoke about a variety of issues that were important to them,” Mr. Levitt said. “This commission placed very few stakes in the ground.”
Copyright © 2008 The New York Times
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Singur

For quite some time, I was watching with interest, the developments in Singur on the Tata Nano project. Of particular interest to me was, will Ratan Tata the patriot win over Ratan Tata the businessman.
Today's news that the Tatas have finally pulled the plug off Singur has convinced me that that the Patriot has won. And in the more-long term sense of it, the Businessman, and by deduction, Indian businesss, has won, too.
Let me explain why I think so. Let us assume, for a moment, that that Tatas had relented to the "comrpomise formula" and decided to hand out a host of freebies to all and sundry. This, after the Govt had given all necessary permissions to acquire land legally, and after the Tatas had paid market rate for the land, and , on top of it, offered jobs to at least one member of each affected family of farmers, in the same plant, irrespective of their skills levels. After doing all this, if reckless politicians start hijacking the project in the name of " fighting for farmers", I would expect a ressponsible businessman and a true Indian like Ratan, to call the bluff, and walk out. If he had not done that, he would have ended up ssending a few wrong messages to many sets of people:
To politicians - any project that generates thousands of jobs to the localss can eb hijacked at will, in the name of fighting for the poor.
To the poor and afflicted - one can perinnially depend on politicians to scuttle any project that usurps their precious land- this after full market compensation, and more.
To Other Business houses - that no State Govt's word can be taken for granted any more when it comes to land acquisition, and therefore, other than the vast wastelands of Rajasthan or the high peaks of the Himalayas. where no human will be willing to relocate and work, it is impossible to put up a viable big project.
To the international community - India is NOT dependable when it comes to the Govt's backing to make sure that all investments are taken to fruition.

Thank God - nothing of this has happened -yet.
Now, I am not pro-business or anti-farmer or any such rubbish. My sole point is - once committed, stick to it, and let not dirty politicians scuttle it. Ratan Tata has made it clear, that there are at least 4 other states vying with each other to offer land for the project and that they are considering that. The message to politicians is - dont try to hijack things; those days clearly are gone. I hope the Mamtas of the world realize this new reality.

My personal opinion is - it is wrong to snatch cultivable land from farmers, for industrial production, in the first place. But once an agreement has been reached, it should be adhered to, and people should not be made to dance to the lewd tunes of Netas.
However, one also has to look at it practically. Assume that the set of farmers that managed not to sell out to factories, and continue farming. How long do you think they can realistically continue that, what with the neighbourhood air and water getting polluted like never before? Is it not then wiser to accept the package of compensation at market rates, plus jobs to ensure continuation fo livelihood? Why do they resist this change? I simply dont understand. Maybe I would never, perhaps I have never been a farmer myself.
The fundamental question is - why should industrialization be portrayed as BAD per se? Is it really THAT bad? Will the economic lot of the Indians be any better off if we continue as farmers rather than industrial workers? Are we, as a nation, seeking to refute the historical imprints of Europe, which gained all the economic clout in the world through the Industrial Revolution. Or more recently, the case of China? Are we trying to bring in a new paradigm that it is still possible to continue farming, and still become an economic Superpower of the future?