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"

Wake me up when its over!

Here’s a limerick written by a hotshot asset management company boss that I met recently, which he emailed to his prospective clients

As markets continue to sink,

The end could be here in a blink,

All I ask you, is to stop and think

Do your portfolio managers stink?

Quite relevant, don’t you think? Sometimes having the right portfolio manager, handling your money is probably the best medicine to ensure that you have wonderful night of sleep, but sadly most of the times they just seem to stink.

Here’s a couple of half baked common man questions to test your portfolio manager’s intelligence:


-->Portfolio manager tells me to invest in Gold, but am wondering why he is not investing in Platinum, since its rarer than Gold and has more industrial/ commercial use. Is it because Fort Knox has stocked up Gold that I should also be holding Gold instead of Platinum. Ask your portfolio manager for a convincing answer and see if he doest freeze in front of these headlights.


-->Portfolio Manager explains to me how important asset allocation into Emerging markets is; however can you explain to me why you have not invested any part of my money into rice or wheat futures. With almost 7 Billion in population, am sure feeding them something would be the most valuable commodity in the world ultimately, unless of course you have an explanation that now we’re going to start wheat and rice farms on the moon?


-->The Portfolio Manager told me in the late 80s to buy and hold for long term “Motorola”, Result-Kaput! then in the early nineties you asked me to buy “Nokia” , Result – Kaput! in the turn of the new century he asked me to buy RIM – Result – Kaput! Should I trust him on his Apple stock hold decision or should I sell it?


-->Explain to me why I should not invest in Oil? When the Libyan Oil went away from the market Oil spiked, How long will we have Iran (the second largest supplier of Oil available in the market) before they go the Kim Jong ll route or the Iraq route? Unless you think Obama is going to ask back publicly for his spy drone from Iran/ Syria/ China/ Putin&Co.

Preserving wealth is not all Fun,

Who knows what’s in store in the long run,

Tomorrow there may be a Bank Run,

And then all you’ll need is a Gun!!!!

Happy 2012 everyone! :)

Microsoft Excel on Steroids!

Black has white, bull has bear ..Any guesses on what could be the antithesis of a enterprise wide portfolio management system? well, my take is Microsoft excel. I’m not trying to take credit from excel, its probably the greatest system devised ever for number crunchers and its contribution to the development of world financial markets is probably an untold story.

However what happens when you feed steroids to Microsoft Excel, you get products (Resolver Systems Inc) like there. I was having a discussion with a friend of mine, who was partially responsible for the set up of this start up firm, and the kind of fascinating stuff they have been able to do with excel, is something beyond the realms of reality. In some ways, products like these seem to distort reality. The best systems in the world sometimes fail to help a portfolio manager calculate VaR, Black-Scholes, risk ratios, attribution analysis etc, and here was a lowly excel sheet throwing out all these numbers completely accurately.

I’m not a big fan of systems like these and believe they will always live in the fringe of the financial world, and will always only have some cowboy customers (P.S: I have nothing against the good ol folks at Resolver).

Risk is a risky subject today more than ever, people put serious money based on risk numbers which are computed; would you bet a Million George Washington's on the VaR number from an excel file or would you rather bet it based on the  numbers that come from a proven system.

I'm not trying to sell you a system here, I'm just asking you guys to give it a thought. Accuracy of data, audit issue, a bad case of fat fingers..just be aware of your risks while taking the dose of Microsoft on Steroids..you may just end up with a bad case of BenJohnsonitis!

:)

An Idiot's guide to Greece & Euro Crisis

I must admit, every day I look at the papers, the greek/ euro economic crisis seems to get more confusing. I'm tired of seeing Sarkozy and Merkel smiling, winking and shaking hands, trying to explain how the ECB is this seemingly endless supply of money. I'm tired of them trying to explain to me math which even a 5th grader knows does not tally up!!!

I chanced upon this this blog post floating around in cyberspace, read on, I assure you, it is one of the best metaphorical explanations of the Greek/ Euro economic crisis.

Here Goes...
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Greek Economy Illustration :)

Let’s pretend for a moment that Greece is a human being. I’ll call him George.

George is a hairdresser and makes $40,000 per year. George has limited assets. He has zero savings, no precious metals, and is way underwater on his mortgage. His credit card debt is over $100,000, and his bare minimum living expenses are $45,000 annually, over 10% more than he makes. George’s credit is pitiful, and he cannot obtain any more new loans.

George’s neighbor Hans has a big family. All the kids work hard and contribute to the family savings. Hans sees George’s plight and decides the neighborhood has to stick together; he starts loaning George some money out of his family’s savings, and eventually begins to take on more and more of George’s personal debts.

Many of the other neighbors– Luciano, Seamus, and Juan– are in the same boat as George: drowning in debt with massive personal expenses and no hope to pay them back.

Everyone is looking to Hans for help.  He’s the responsible one in the neighborhood. Now, Hans doesn’t want them all to go bust because he knows it would be bad for the neighborhood property values… but Hans’s children are balking at the prospect of working hard on their newspaper routes just so that George can keep his plasma screen TV.

Very soon, George is going to run out of options and will have to have a difficult conversation with his credit card companies. In the real world, there is no other choice.

In the pretend world of politics, however, European leaders have been able to convince everyone that it’s all under control. Never mind that the whole situation has completely fractured capital markets; traditional valuation metrics have taken a back seat to rumors of secret meetings and loud talk of bailout plans.

Think about it: Dexia passed summer bank stress tests with flying colors. A couple of months later it’s going bust. How can markets function without confidence in balance sheet accuracy? Or whether a government will even be around tomorrow? 

Do yourself a favor and stop watching their lips move. These ‘plans’ are nothing more than lies and misdirection. Just like our friend George, a Greek default has to happen.  Politicians can pretend whatever they want, but in the real world where we live, financial deadbeats have no other options.

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Brilliant! huh..well I didnt write it, though I saw this blog post (copied) on several websites. I think the original owner deserves his due for this super simple explanation on the Euro zone Financial situation. For the source blog on this article visit this link

In a Topsy turvy world...Apple rules!

Over the last last few weeks, we have seen so many topsy turvy things going on across the globe; It started off with some fireworks by a Christian Fundamentalist in Norway, then we had AAA go down to AA+, the Italians and the Galics gave markets a panic attack and now we've got some Mogadishu style rioting happening right in the middle of London!!!

But here's something for the stock market junkie; in this upside down world of slipping valuations, guess what , we passed a historic milestone in which a toy maker just surpassed in market cap valuations, a company extracting and processing the most valuable product for the modern industrial economy !!! Beat that!

Yes sir, you heard me right, in the post lunch trading session on 09th August 2011, Apple (AAPL) , the toy maker, surpassed Exxon Mobil (XOM) as the most valuable company in the US stock market with a whooping valuation of 341.9 Bn.

I'm not stupid enough to try and guess where the stock market is headed or where AAPL is headed, but one thing I can assure you is that this is one heck of a topsy turvy world, so hold on to your seat belts...and keep calm through the ride.

A word from a comment I found on Seekingalpha.com on Why Apple; "Apple is not a tech company or a Internet company or a dot.com type of investment. It is a powerful and unique business enterprise that has no equivalent precedent. We are not aware of any company that has integrated so many synergistic and successful businesses into a successful enterprise system under one management roof, an ecosystem that has unprecedented customer friendliness and stickiness. In the past no one company has been able to pull this kind of thing off."

Maybe that's the logic behind Wall Street's valuations on Apple...what say?

P.S: A big Thank you to Ali Shahin for the graph from Thomson Reuters Eikon :)

The "excel" germ cell !!

I was having this intense discussion with a friend of mine, trying to convince him to upgrade himself from a $30 Microsoft Excel to a sophisticated (more expensive than $30) system, when he stopped me in mid sentence and said, “you know what Anup, for the last two decades I have taken my core business decisions on numbers popping out from an excel file and I’ve never had a problem. The only times I ever had a problem all I had to do was re-boot my machine and lo! Everything was back to normal”.

I had heard this so many times in my life, I knew I had to get some quantified data regarding the perils of Microsoft Excel to convince my friend, and last week bumped into an outstanding Spreadsheet Risk Management presentation done by Protiviti.

Based on their analysis, here’s what could happen to my friend with his excel sheets, if his guardian angel takes a nap

Honest Mistakes can happen: like …S#*t happens!
• Fidelity : A Missing Minus sign caused Fidelity Magellen Fund to overstate projected earnings by USD 2.6 Bn and miss a promised dividend

• Fannie Mae : After releasing Q3 earnings figures , Fannie Mae had to restate its unrealized gains by USD 1.2 Bn. This was a result of “honest mistakes made in a spreadsheet used in the implementation of a new accounting standard”

• Provident Financial : Provident earnings for 1997 to 2002 had to be restated by USD 70 Mn, due to an error in a spreadsheet model calculating the debt amortization

And if you have a rotten apple around : S#it will definitely happen!
• Allfirst : US Subsidiary of Allied Irsih Banks : A currency Trader John Rusnak began losing money in trades in 1997. He used a series of Spreadsheet entries to hide his losses, which continued to increase. When the fraud was discovered, his losses amounted to USD 691. 2 Mn. Turns out, AIB ended up selling off All first Subsidiary all because of our helpful little Excel spreadsheets.

Anyone who’s got a Dog named “Macro”, or who gets into an elevator and double clicks the button for the floor he wants, may find all the examples mentioned above as “doomsday” predictions; but for the average Joe who believes in safe sex, I think the examples above and a read through of the Protiviti report are good enough to stop misusing excel and making it a replacement for your core business applications.

Ok, so don’t you guys want to know what happened to the guy who told me he’d re-boot his machine? I went back to office and sent him an email “The term reboot comes from the middle ages. Horses which stopped in mid-stride required a boot to the rear to start again. Thus the term to rear-boot, later abbreviated into reboot!!!! Wake up buddy, we’re no longer in the middle ages”

On a more serious note "Guys, Wake up"?