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Excerpts

Warren Buffett on Banks

Hat Tip Sanjay Bakshi
[gview file=”https://alphaideas.in/wp-content/uploads/2014/02/Buffett-on-Banks.pdf”]

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Excerpts

Fed Monetary Policy Report:India is Economically Vulnerable

Many emerging market economies (EMEs) have
experienced heightened financial stresses since April
of last year. EME–dedicated international bond and
equity funds sustained substantial outflows, and
many EME currencies depreciated sharply against the
dollar (figure A). At the same time, EME government
bond yields rose abruptly and by much more than
U.S. Treasury bond yields. Financial conditions in
the EMEs generally stabilized after September, but
financial stresses have flared up again in recent
weeks, with many currencies experiencing another
bout of depreciation.

The stresses that arose in the middle of last year
appeared to be triggered to a significant degree by
Federal Reserve communications indicating that
the Federal Reserve would likely start reducing its
large-scale asset purchases later in the year. Some
of the selloff in EME assets may have been due to
the unwinding of carry trades that investors had
entered into earlier to take advantage of higher EME
interest rates than those prevailing in the advanced
economies. These trades appeared profitable so long
as EME currencies remained stable or were expected
to appreciate. But when anticipations of a slowing
in the pace of Federal Reserve asset purchases led
to higher U.S. interest rates as well as higher market
volatility, these trades may have been quickly
reversed, engendering sharper declines in EME
currencies and asset prices.

In December, when the Federal Reserve actually
announced a reduction in asset purchases, the
reaction of financial markets in the EMEs was
relatively muted. Then, in late January, volatility
in these markets returned. Unlike last summer,
there was little change in expectations regarding
U.S. monetary policy during this time. Rather, a
few adverse developments—including a weakerthan-
expected reading on Chinese manufacturing,
a devaluation of the Argentine peso, and Turkey’s
intervention to support its currency—triggered the
renewed turbulence in the EME financial markets.

This turbulence appeared to spill over to bond and
equity markets in advanced economies, as market
participants pulled back from risky assets.
Both last year and more recently, the deterioration
in financial conditions varied across the EMEs,suggesting that, even as the selloff of EME assets
was in part driven by common factors, investors
nonetheless were also responding to differences in
these economies’ situations. Brazil, India, Indonesia,
South Africa, and Turkey are among the economies
that appear to have been the most affected. For
example, the currencies of Brazil, India, and Turkey
dropped sharply in the middle of last year, whereas
the currencies of Korea and Taiwan were more
resilient (as shown in figure A). And in recent weeks,
although EME currencies sold off broadly, EME bond
yields tended to increase the most in economies that
saw the largest rises during 2013.
To a considerable extent, investors appear to
have been differentiating among EMEs based on
their economic vulnerabilities.-from US FED Monetary Policy Report

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Anecdotes Excerpts

Why one should avoid investing in public sector banks

“I had sanctioned a hefty loan to a large business group. A week later the owner of that group called me up saying that he had got a call from an influential  politician’s office to pay up a certain amount, which would then be adjusted against his dues to the bank… under the NPA head, of course. I called up the politician and made it clear that my bank would support no such deal. A few days later I got a call from a senior ministry official asking me if I would interested in taking charge of another PSU bank. I knew this time I had over reached myself, and my days in the current job were numbered. So I agreed to the offer. But there was no word from the finance ministry after that. A few weeks later, I called that person and asked if there was some progress on the earlier conversation. I was told that post could be mine if I was willing to shell out money.

“Do you know what the going rate for a PSU bank chairman’s post is? Take a wild guess,” he said.

“Rs 10 crore,” I replied.

“It can go up to as much as Rs 40 crore, depending on the importance of the bank. I told him that I don’t have even Rs 4 crore on me, leave alone Rs 40 crore. I never heard from him again,” R said.-from FirstBiz

Categories
Excerpts Realty

Investing in Property in 2014

In view of the slowdown, property is a poor sector for investment. Long term investors looking to buy property for post retirement self use or for holding periods of over 10 years can enter in select locations, cities and segments and look for bargains.
Certain general rules for real estate investment in a slowdown can be kept in mind.

1. In a bear market, one should select property in prime locations and not in peripheral locations, since prime locations will be the first to reverse price direction and will give the most sustained returns once the bull market returns
2. In a bear market, one should invest for the long term. For property, a time frame of 15 years or more is ideal.
3. Short term flipping for quick gains on leverage should not be attempted in bear markets. This technique is reserved for bull markets.
4. The most depressed prices in distress sales will be in luxury property and in plots. These will rise the most when the market turns. Deep pocketed investors with the ability to pick up the distress sale and holding through the uncertainties of the bear market will reap the maximal rewards. Deep pockets and lack of leverage will amplify returns in bear markets – thus bear markets make the rich even richer because they alone can afford to buy and hold. This is in contrast to bull markets where short term holding and leverage amplifies returns and risk takers benefit rather than long term holders.
5. The safest investment for middle class investors in a bear market is already built ready to register flats in the affordable segment in the main central areas of the city with existing infrastructure
Luxury property as a whole is better avoided for the year 2014. This is because prices are already high and it is better to wait for lower prices and for bargains to emerge. As the luxury flats booked by investors slowly get completed, investors will be ready to negotiate with bargain hunters.
Plots are also avoidable because of the existing high prices and the lack of performance in plots in the central areas of Gurgaon even during the bull market of 2010-2012. The higher prices for construction of builder floors on plots has made them expensive and out of reach for many. Buyers are also preferring to live in apartment complexes due to better security and amenities. As such, a changing preference of people over time makes it difficult to extrapolate previous price behavior of plots in the past 50 years. Waiting for better bargains but also actively looking for bargains would be prudent for property investors.

Property in the affordable range of 2500 to 5000 psf range will be the best segment for entry, for both end users and investors, due to limited downside.

The main requirement for a boom in property market is a recovery from the current industrial recession. Until the industrial revival generates more well paying jobs, the real estate market cannot revive. The industrial revival is likely to happen in the next 2 years based on cyclical factors, however the strength of the industrial revival is crucially dependent on the general elections of 2014. A strong decisive pro-industry government will cause a dramatic improvement in the industrial climate and a sustained stock market performance followed by an equally sustained real estate market performance will follow. A fractured mandate will cause a weak revival but consequent turbulence in exchange rates can have unpredictable results on real estate price inflation. High imported inflation, escalation of raw material prices, escalation of capital cost etc can have paradoxical results in the real estate market by making the cost of new construction prohibitive. Existing property which is registered may therefore become more valuable while under construction projects might be abandoned.

-from Indian RealEstateForum

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Excerpts

On Trading,Balls and Brains

There’s a trading culture out there that encourages risk-taking. A lot of this culture is tied up with the culture of masculinity. To be willing to take big risks is to have “balls”. Taleb himself has encouraged this idea, writing that “Those with brains but no balls often become mathematicians; those with balls but not brains join the mafia; and those with no brains and no balls become economists.” When asked who has “both brains and balls”, he replied that it was “traders”.
Sadly, this culture of testosterone-fueled risk-taking overconfidence is terrible for the average investor, as Brad Barber and Terry Odean have documented. Balls interfere with brains. They make you you believe you have better information than you have – in other words, they make you ignore risks. That’s probably why women, on average, make better traders than men. (And overconfidence is only exacerbated if, out of testosterone-fueled aggression, you angrily defend every single trade you ever made.)-from NoahOpinion