Financial thoughts just completed the performance assessment of 2011. Overall the portfolio went up although both US and Indian markets where we are active went down. Our strategies, including Futures &Options, paid off despite significant market volatility in 2011. Notable volatility was in early 2011 when the markets rushed down. NSE Nifty was about 6000 level during early 2011 but declined rapidly as there were predictions that Indian economy won't do well in 2011, which in fact came true. US markets were grappling with unemployment issues and in Aug 2011 there was a fight between President and the Congress on the debt ceiling. This added to the volatility and George Soros announced semi-retirement and liquidation of most of his funds.
Unlike Soros, Warren Buffet went on to pick stocks leisurely. (Financial thoughts salute him for providing a wonderful example to follow in investing. No wonder he is considered as the Guru of Gurus). Then towards the end of 2011 another round of volatility hit, as Itlay dropped a bombshell and Italian prime minister had to resign. Financial thoughts just wonder how did Italy manage to accumulate the 4th largest debt in the world. Of course, volatility, triggered by Euro zone crisis, hit Indian markets too - aggravated by RBI policies and utterances, which resulted in rupee going for topspin. US markets had offered many metal stocks such as ArecelorMittal, FCX at deep discounts.
The outlook for 2012 seems more positive. Our portfolio is positioned to take advantage of the moderately bullish phase expected in India and US. Overall, the markets are expected to do better than 2011 and our portfolio ought to do better (touch wood). The main risk to this dream is of course Euro and Eurozone.
Naturally, Financial Thoughts got interested to understand how others investing strategies fared in 2011. We turned to FT and ET and similar financial newspapers and got the pleasure to know that our relative performance was impressive.
Let us see the major investment strategic thoughts during the past half a century:
1950s and early 1960s:
During this period, the financial asset class was mainly broken down into Equity and Debt and varying mix was followed by the investment strategists. Options and futures were not very popular. As a young man Warren Buffet got introduced to Ben Graham's style of investing during this period. Ben Graham also advocated a mix of equity and debt as espoused in his published books.
Late 1960s and 1970s
The main idea of diversification of stock portfolio caught fire. The popularity of Modern Portfolio Theory advocated by Markowitz increased and followed religiously by investment community - from retail investors to mega financial institutions. William Sharpe made some additional contributions to theTheory making it more use friendly. However, there were lot of assumptions, which might have worried a scary investor. Basically, the Theory drew lot from mathematics and said combining two negatively correlated stocks eliminate risk - why bother about risk free debt? In 1973 Black Scholes formula provided another break through with the help of mathematics and opened up the glorious era of Options markets.
1980s and 1990s
The theory of diversification and derivatives (options) began to get more popular in credit, commodity, forex, interest rate and debt, besides equity markets. More and more mathematicians and scientists were attracted to the world of finance. The financial innovations that originated in the USA began to spread all over the world. Hedge funds, private equity and other alternate investments began to get popular. JP Morgan introduced value at risk (Var) concepts while LTCM was created by the Nobel laureates. LTCM had a meteoritic rise and fall, worrying at least some of the discerning investors about the 'assumptions' part of the modern financial theories.
2000s
Everything that happened during this period is eclipsed by the 2008 Financial Crisis. It showed that the diversification does not work always. Even the highly experienced Professional Financial Analysts failed to protect the decline in the value of their investments. The theories they learnt hard seemed no longer valid!. However it is remarkable that Warren Buffet made a few excellent investments at the peak of the crisis. Examples are GS, GE, Wrigley’s, etc.
The crisis showed that the investors diversified into asset classes that fundamentally behave in similar ways. Many thought they are adequately diversified when took exposure to different vehicles such as hedge funds with different specialisations - say in Global Macro, Events, Convertible Arb, etc or private equity or mutual funds, etc. Overall it seems that the only real diversification lies not in negative correlation of different asset classes but in zero correlation where risks must be low.
At the end of the day, risk is more important than return. Warren Buffet's two rules of investing shined through the crisis. The two eternal principles are (1) Never lose money (2) Always remember the first rule.
Unlike Soros, Warren Buffet went on to pick stocks leisurely. (Financial thoughts salute him for providing a wonderful example to follow in investing. No wonder he is considered as the Guru of Gurus). Then towards the end of 2011 another round of volatility hit, as Itlay dropped a bombshell and Italian prime minister had to resign. Financial thoughts just wonder how did Italy manage to accumulate the 4th largest debt in the world. Of course, volatility, triggered by Euro zone crisis, hit Indian markets too - aggravated by RBI policies and utterances, which resulted in rupee going for topspin. US markets had offered many metal stocks such as ArecelorMittal, FCX at deep discounts.
The outlook for 2012 seems more positive. Our portfolio is positioned to take advantage of the moderately bullish phase expected in India and US. Overall, the markets are expected to do better than 2011 and our portfolio ought to do better (touch wood). The main risk to this dream is of course Euro and Eurozone.
Naturally, Financial Thoughts got interested to understand how others investing strategies fared in 2011. We turned to FT and ET and similar financial newspapers and got the pleasure to know that our relative performance was impressive.
Let us see the major investment strategic thoughts during the past half a century:
1950s and early 1960s:
During this period, the financial asset class was mainly broken down into Equity and Debt and varying mix was followed by the investment strategists. Options and futures were not very popular. As a young man Warren Buffet got introduced to Ben Graham's style of investing during this period. Ben Graham also advocated a mix of equity and debt as espoused in his published books.
Late 1960s and 1970s
The main idea of diversification of stock portfolio caught fire. The popularity of Modern Portfolio Theory advocated by Markowitz increased and followed religiously by investment community - from retail investors to mega financial institutions. William Sharpe made some additional contributions to theTheory making it more use friendly. However, there were lot of assumptions, which might have worried a scary investor. Basically, the Theory drew lot from mathematics and said combining two negatively correlated stocks eliminate risk - why bother about risk free debt? In 1973 Black Scholes formula provided another break through with the help of mathematics and opened up the glorious era of Options markets.
1980s and 1990s
The theory of diversification and derivatives (options) began to get more popular in credit, commodity, forex, interest rate and debt, besides equity markets. More and more mathematicians and scientists were attracted to the world of finance. The financial innovations that originated in the USA began to spread all over the world. Hedge funds, private equity and other alternate investments began to get popular. JP Morgan introduced value at risk (Var) concepts while LTCM was created by the Nobel laureates. LTCM had a meteoritic rise and fall, worrying at least some of the discerning investors about the 'assumptions' part of the modern financial theories.
2000s
Everything that happened during this period is eclipsed by the 2008 Financial Crisis. It showed that the diversification does not work always. Even the highly experienced Professional Financial Analysts failed to protect the decline in the value of their investments. The theories they learnt hard seemed no longer valid!. However it is remarkable that Warren Buffet made a few excellent investments at the peak of the crisis. Examples are GS, GE, Wrigley’s, etc.
The crisis showed that the investors diversified into asset classes that fundamentally behave in similar ways. Many thought they are adequately diversified when took exposure to different vehicles such as hedge funds with different specialisations - say in Global Macro, Events, Convertible Arb, etc or private equity or mutual funds, etc. Overall it seems that the only real diversification lies not in negative correlation of different asset classes but in zero correlation where risks must be low.
At the end of the day, risk is more important than return. Warren Buffet's two rules of investing shined through the crisis. The two eternal principles are (1) Never lose money (2) Always remember the first rule.
