Look at the chart, when stock increases a lot, comparitively, gold does not drop as much. When stock decreases a lot, gold increases more. GLD is a savior for hedging folks.
gld,qqqq - Google Finance Search
gld,qqqq - Google Finance Search
Monday, May 19, 2008
Sunday, May 18, 2008
Investing - Demystified
Investing principles are very simple and yet following them requires the will and determination of a rock, yes a ROCK, sit where you like, stay there and not be a smart ass.
First, Definitions.
I want to make sure you know I am talking about investing and not speculation or betting or arbitrage. Speculation is buying something anticipating some other fool will buy it at a higher price. Betting is trying to beat a random walk market with your data analysis. Arbitrage is trying to cash information/market inefficiencies, buying low at one place, selling high at another place. Money can be made in speculation, betting and arbitrage but I beleive nobody can make that money consistently over long periods of time.
Investing is getting returns in the long run consistent with your risk level.
Now to Principles.
1. What to look for ?
I like Buffet's principle on this one. Its the business, the people and the price. The business prospects should look good in the long run. Here is a crazy thumrule that I use, if that business goes bust, the end of the world is nearing. Softdrinks, clothing, chewing gum, automobile, insurance are all examples. Next the people. I beleive its the people you are investing in, businesses encounter challenging problems all the time and its the people who make decisions to steer it in the right direction. Ofcourse they should be smart, but more importantly they should be honest. The thumb rule on this one - they should be people with whom you want your daughter to get married (not the Indian father, for him having money is one of the top criteria).
2. Diversification.
Sure but what is it ? The goal is to ninimize risk - If you want to diversify business risk (risk for a particular business) then owning a sector or multiple sectors is fine. If you want to diversify for market risk, you have to get into fixed income securities.
For diversification, as academics say, the goal is to select investments which are inversely correlated with each other. Turst me, it is going to be very hard to find such investments in an increasingly global interconnected economy (remember Chinese stock market crash causing US stock market crash ?)
Interestingly, the best investment I found which is has minimum correlation with the whole set financial instruments is investment in a utility (food, medicine etc) company. not stock of that company but as a limited partner, where I would get to take out the cash flows annually.
3. Invest in what you know
If you want to invest in individual stocks or comapanies, invest in what you know. If you know a sector but cannot pick individual stocks, ETFs are there for you.
My Ideal Portfolio
low tens % - ETFs of what I like (Green, Emerging markets, REIT and high yeilds)
low tens % - Stocks (big cap and small cap)
low tens % - Public company stocks that I like and admire
mid tens % - Ownership in a private companies that produce good cash flows
single digit % - Fixed income securities
First, Definitions.
I want to make sure you know I am talking about investing and not speculation or betting or arbitrage. Speculation is buying something anticipating some other fool will buy it at a higher price. Betting is trying to beat a random walk market with your data analysis. Arbitrage is trying to cash information/market inefficiencies, buying low at one place, selling high at another place. Money can be made in speculation, betting and arbitrage but I beleive nobody can make that money consistently over long periods of time.
Investing is getting returns in the long run consistent with your risk level.
Now to Principles.
1. What to look for ?
I like Buffet's principle on this one. Its the business, the people and the price. The business prospects should look good in the long run. Here is a crazy thumrule that I use, if that business goes bust, the end of the world is nearing. Softdrinks, clothing, chewing gum, automobile, insurance are all examples. Next the people. I beleive its the people you are investing in, businesses encounter challenging problems all the time and its the people who make decisions to steer it in the right direction. Ofcourse they should be smart, but more importantly they should be honest. The thumb rule on this one - they should be people with whom you want your daughter to get married (not the Indian father, for him having money is one of the top criteria).
2. Diversification.
Sure but what is it ? The goal is to ninimize risk - If you want to diversify business risk (risk for a particular business) then owning a sector or multiple sectors is fine. If you want to diversify for market risk, you have to get into fixed income securities.
For diversification, as academics say, the goal is to select investments which are inversely correlated with each other. Turst me, it is going to be very hard to find such investments in an increasingly global interconnected economy (remember Chinese stock market crash causing US stock market crash ?)
Interestingly, the best investment I found which is has minimum correlation with the whole set financial instruments is investment in a utility (food, medicine etc) company. not stock of that company but as a limited partner, where I would get to take out the cash flows annually.
3. Invest in what you know
If you want to invest in individual stocks or comapanies, invest in what you know. If you know a sector but cannot pick individual stocks, ETFs are there for you.
My Ideal Portfolio
low tens % - ETFs of what I like (Green, Emerging markets, REIT and high yeilds)
low tens % - Stocks (big cap and small cap)
low tens % - Public company stocks that I like and admire
mid tens % - Ownership in a private companies that produce good cash flows
single digit % - Fixed income securities
Investing Books
These are my favorite books on investing. These books give you solid foundation and a broad perspective on investing, they do not make you a over night prince.
The intelligent asset allocator (william bernstein)
A random walk down the wall street ((burton malkeil)
The intelligent investor (benjimin graham)
The four pillars of investing (william bernstein)
The essays of warren buffet (cunningham)
The intelligent asset allocator (william bernstein)
A random walk down the wall street ((burton malkeil)
The intelligent investor (benjimin graham)
The four pillars of investing (william bernstein)
The essays of warren buffet (cunningham)
Mr. Market - Sanest investment advice, made simple
You should imagine the market quotations coming from a remarkably accomodating fellow named Mr. Market, who is your partner in a private business. Without fail, he appears daily and names a price at which he will either buy your interest or sell your interest.
Even though the business that you two own may have economic characterestics that are stable, Mr. market's quotations are not. The poor fellow has incurable emotional problems. At times he feels euphoric and can see only favorable conditions affecting the business. WHen in that mood he names a very high buy price because he fears you will rob him of his interest. At other times, he feels nothing but trouble ahead and sees the end of the world. On those accations, he names a very low sell price since he is afraid you will unload your interest on him.
Mr. Market has another characterestic. He does not ming being ignored. He will come back again and again if you are not interested in his quote today.
Here is the advice.
In those conditions, the more depressed and maniacal Mr. market is, the beter for you. Mr. Market is there TO SERVE YOU AND NOT TO GUIDE YOU. Its is good to take advantage of him when he is in a foolish mood, but it will be DISASTROUS IF YOU FALL UNDER HIS INFLUENCE.
As they say in poker - "if you've been in the game for 30 mins and you dont know who the patsy is, YOU ARE the patsy.
Thanks to Ben Graham for this.
Even though the business that you two own may have economic characterestics that are stable, Mr. market's quotations are not. The poor fellow has incurable emotional problems. At times he feels euphoric and can see only favorable conditions affecting the business. WHen in that mood he names a very high buy price because he fears you will rob him of his interest. At other times, he feels nothing but trouble ahead and sees the end of the world. On those accations, he names a very low sell price since he is afraid you will unload your interest on him.
Mr. Market has another characterestic. He does not ming being ignored. He will come back again and again if you are not interested in his quote today.
Here is the advice.
In those conditions, the more depressed and maniacal Mr. market is, the beter for you. Mr. Market is there TO SERVE YOU AND NOT TO GUIDE YOU. Its is good to take advantage of him when he is in a foolish mood, but it will be DISASTROUS IF YOU FALL UNDER HIS INFLUENCE.
As they say in poker - "if you've been in the game for 30 mins and you dont know who the patsy is, YOU ARE the patsy.
Thanks to Ben Graham for this.
Saturday, May 17, 2008
Buffett gives nod to index funds over ETFs
Its official, buffet gives a nod to index funds.
He does not have anything against ETFs either, he thinks that ETFs would impose greater temptation to trade, which is a very very valid concern.
Investing has been split into people supporting indexing (ETFs) and cherry-picking stocks (aka buffet style), now buffet seems to acknowledge the advantages of index funds. The 2% management fund in index funds is huge that you have to hold a lot longer to get the desired %, the low fee ETFs therefore offer a good alternative, one disadvantage is the temptation to sell, that depends on you. Another disadvantage is ETFs are not cherry picked, but thats the point, it is proved to be hard to beat the index by cherry picking in the long run.
So, if you can resist the temptation to get swayed based on recent past, you would do good with ETFs. If you are a person who gets into ST buying and selling, you are screwed anyway :)
He does not have anything against ETFs either, he thinks that ETFs would impose greater temptation to trade, which is a very very valid concern.
Investing has been split into people supporting indexing (ETFs) and cherry-picking stocks (aka buffet style), now buffet seems to acknowledge the advantages of index funds. The 2% management fund in index funds is huge that you have to hold a lot longer to get the desired %, the low fee ETFs therefore offer a good alternative, one disadvantage is the temptation to sell, that depends on you. Another disadvantage is ETFs are not cherry picked, but thats the point, it is proved to be hard to beat the index by cherry picking in the long run.
So, if you can resist the temptation to get swayed based on recent past, you would do good with ETFs. If you are a person who gets into ST buying and selling, you are screwed anyway :)
Strategies for diversified portfolio
Having researched about it quite a bit, I think a good strategy for building a diversified portfolio is real estate (either REITs or apartments of condos or commercial) in foreign countries.
Stock markets in various countries tend to move together, but not their real estate markets. One reason for it is that real estate is not as liquid as the stock market and it has much harder accessibility. In the long run, the real estate is the definitive index to the prosperity of a country, but in real estate you can find local markets (such as NY) where the market has nothing to do with over all real estate or the economy or vacation/university markets.
The only watchout factor is a) you have to find a way to access those markets b) you have to find a way to reliably get back the investment :)
Stock markets in various countries tend to move together, but not their real estate markets. One reason for it is that real estate is not as liquid as the stock market and it has much harder accessibility. In the long run, the real estate is the definitive index to the prosperity of a country, but in real estate you can find local markets (such as NY) where the market has nothing to do with over all real estate or the economy or vacation/university markets.
The only watchout factor is a) you have to find a way to access those markets b) you have to find a way to reliably get back the investment :)
How to Look for Good Land
I was looking for land for a specific project and looking for the right set of land is not as trivial as it looks like. Here are some factors that you need to look at -
Size of the land
The size of the land should be inline with the potential future expansion of the project. The questions you need to answer are 1) what are the adjacent technologies or markets that you might enter ?
Resources
1. Water: The questions you need to look for answers are 1) what is the type of bores are present in the land ? 2) how well it had fared over the drought years ?
2. Availability of labor: How much labor is needed for the project ? What type of skill set does the project need ?
Proximity
What are the proximity needs of your project ? How much near to the city does it need to be ? What are the expenses that you might incur (or save) depending on the land being nearer to a city ? Does the land need to be accessed by a road ? How frequently do things need to go back and forth from the land and what size transportation do those things need ?
Quality of soil
Weather
Proximity of supporting industries
Price
Price is the most trickiest. People forget that you should not spend more money on land than you can make out of the project that you are going to put on the land. Do not include the potential increment of real estate prices into the project ROI calculations. Treat the land price and the corresponding spend as an expense.
Size of the land
The size of the land should be inline with the potential future expansion of the project. The questions you need to answer are 1) what are the adjacent technologies or markets that you might enter ?
Resources
1. Water: The questions you need to look for answers are 1) what is the type of bores are present in the land ? 2) how well it had fared over the drought years ?
2. Availability of labor: How much labor is needed for the project ? What type of skill set does the project need ?
Proximity
What are the proximity needs of your project ? How much near to the city does it need to be ? What are the expenses that you might incur (or save) depending on the land being nearer to a city ? Does the land need to be accessed by a road ? How frequently do things need to go back and forth from the land and what size transportation do those things need ?
Quality of soil
Weather
Proximity of supporting industries
Price
Price is the most trickiest. People forget that you should not spend more money on land than you can make out of the project that you are going to put on the land. Do not include the potential increment of real estate prices into the project ROI calculations. Treat the land price and the corresponding spend as an expense.
An Ideal ETF Portfolio
WSJ posted a portfolio that closely resembles mine. In a previous post, I blogged about having direct investment in a business (and not its stock) as a means of diversifying just because earnings( esp of small businesses) tend to be more stable than stocks. In a crude way, this can be achieved through private equity. You guessed it, there are ETFs for private equity too. Here is a snapshot of the portfolio -
Also, I made a mindmap of all the top level ETF categories that you need to consider to make it diversified. You can make it weighted more towards one level or the other depending on various factors (which is for another blog).
Friday, May 16, 2008
Gold will save you.
I found that Gold is the best player in a portfolio.
It is around 20% of my portfolio.
Here is what it did to my portfolio.
In bad times, like now, it grew like crazy while my other investments are not so ok. In good times, it did not drop that much while my other investments are going guns.
It is around 20% of my portfolio.
Here is what it did to my portfolio.
In bad times, like now, it grew like crazy while my other investments are not so ok. In good times, it did not drop that much while my other investments are going guns.
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