Jumping into the Gold Rush? Think again!

Undoubtedly, if there were anything like a God of Investments in Greek or Indian Mythology, it would look like a wizened 70 year old man with plastic framed glasses and an old worn out black suit or simply stated -Warren Buffett . If he says something, you’d better listen hard, because 1) he says very little and 2) he says it publicly only once a year (through his letter to the shareholders) and 3) whatever he says seems to make helluva lotta money!

His latest letter to shareholders has some candid confessions (Read Page 4 and 5), amazing insights and importantly some fascinating metaphors which will make you stop and think. Here’s a link to the actual 22 page letter and one among the many things that caught my attention is Warren Buffett’s take on Gold Investments.

He says (and I quote verbatim from Page 19 of his letter )

“Today the world's gold stock is about 170,000 metric tons. If all of this gold were melted together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be about $9.6 trillion. Call this cube Pile A.

Let's now create a Pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. Buyers -- whether jewelry and industrial users, frightened individuals, or speculators -- must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

My Take
What motivates most gold purchasers (including you and me) is the belief that our worst fears may just prove correct. An economic meltdown of catastrophic proportions will rip through our curreny holdings and we’ll be left with nothing but a sack full of paper worth zilch (al la Zimbabwe). If you are to go by what Buffet says, and also if you're sitting pretty on gold right now, I would also advise you to rebalance your portfolio by selling some gold off and book profits. However, If you’re thinking of investing in Gold right now, looking at the bull run, my advise –Don’t let greed overtake you; stay wise; invest elsewhere...for "what a wise man does in the beginning, a fool does in the end"

Happy Alpha hunting!

Conquering the next frontier in Investment Data Analytics/ mining

All of us in the portfolio/fund management technology world keep wondering, what’s the next technological wave which will sweep and change the tech landscape. The prime reason for this keen interest is because, there is very little innovation and change which happens in the fundamental operations of these businesses. A Fund is a Fund since the birth of the concept and a portfolio is a portfolio, and there are only so many ways in which it can be looked and analyzed, and we've got multiple systems which do it in today's times.

In the early 2000s, everyone wanted an STP front to back office operation, after a few years they wanted to move from thick client architecture to thin client architecture and by 2009-10 the buzz word was outsourced middle and back office operations (a mix of man and machine technology); so the question everyone seems to be asking is what more can technology deliver to us?

I was reading this fascinating article on “Big data” on the WSJ. It spoke about how a handful of cutting edge companies were helping firms comb through terabytes and pentabytes of data with intelligent algos to aggregate and identify hidden pockets of brilliance. I strongly believe this could potentially be a trend if harnessed properly by Fund/ portfolio management firms also.

Specific to the Middle East, and when the topic of discussion is large AUM asset managers, most of the back office operations systems have now been in place for a good decade+ in several organizations. Every year, several thousand transactions go into the back office database from the transaction side. From the CRM side, wealth management pumps into the database another few thousand disjointed demographic information points. Then there’s of historical prices, exchange rates, research notes etc which go into the system from a multitude of sources and reside unused except for the occasional historical unrealized gain loss report which is requested by the CEO or COO.

Here are a few thoughts which I could figure out from the limited reading that I did over the holiday season on self learning and programmable Algorithms.

There are several types of algos which are used by data analytics firms, and some of them could also find use in the asset management industry. There are “Anomaly detection algos” (in simple terms, a string which could be used by companies to identify “Is this investment transaction in pattern, or out of pattern; does it match typical portfolio manager/ trader behaviour, or not?”) and then there are Classification algos (Is this out-of-pattern activity fraudulent, or not?). The potentials are endless. From a no-brainer idea of trying to avoid an "Adobili scandal" , to analyzing your past data to help understand why loss making deals were done in the past , and maybe even learn from the mistakes and avoid such mistakes in the present and future. Now imagine if you could insert such a string into your pre/ post-trade analyses and they could be used by your middle office to comb through fewer transactions thereby reducing your workforce in the middle office compliance function.

Then there are “Clustering algorithms”, these could be used by asset management firms to better understand client behaviour from all the disjointed demographic information stored in the databases. Eg: What other people is this fund investor of yours most like? If you were to mix a Clustering algo with a recommendation algos (k+nearest neighbor algo) you could arrive at even better intelligent decisions like, What fund or ETF would this customer be most likely to accept!

I strongly believe this is the next big leap which all large cap asset/ fund managers would want to make. The technology systems are already out there. They are being cleverly used by firms in the retail FMCG industry,  credit card fraud management industry, automotive industry etc. It is only a matter of intelligently adapting these technologies to suit into our industry.

The fundamental building blocks to reaching this state start with having a strong back office and single book of records. Having multiple back office systems is not a major impediment (as long as you have the money to spend in integration), however a single book of records ensures that these systems can be easily slipped into place when the time is right. 

Ladies and gentlemen, This is our next frontier in the buy side space ...to borrow a phrase from Star Trek "to explore strange new worlds of (unstructured Data), to seek out new (alpha)and new (client needs), to boldly go where no man has gone before"