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Podcast: The Investor Wants to Know (Episode-7)



Host Deepak Shenoy (CEO) and Aditya Jaiswal (Analyst) discuss investor queries in a new show- The Investor Wants to Know.

Topics discussed include passive investing, current NBFC scenario, slowdown in the auto sector, cooking up of books by companies, fundamental analysis, global recession, gold prices, aviation industry.

Here’s the podcast: (See more episodes at The Capitalmind Podcast.)

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How do you see the investment horizon for different categories of MFs?

If you are looking for a horizon for investing, then it’s not investing, it’s a trade! Asset allocation metrics (large, mid and small caps) can shift, but horizon should be long term. Stay invested as long as you don’t need the money!

What are your views on passive investing? Is it advisable to invest in small cap index funds as most of good performing stocks will become mid-caps and non-performing mid-caps will become large caps which might pull the returns down?

In India, one should look at the large-caps because that is where the index funds will benefit the most. If you invest in small-cap index, your best stocks are going to move out. Rather, one may look at the stocks which are actually moving out of the small-cap index!

How bad is the NBFC scenario?

Many of the NBFC’s may lose their current structure- few will be taken over, few will be cut up into pieces and sold. Global P/E players are also keen on buying assets on discounts. None of NBFCs will go bust, since they have valuable assets. It will take another year for clarity to emerge.

How to find out if a company is cooking up it’s books?

It is very difficult for a retail investor to dig up gold plated numbers, there is no one way. Retail investors should diversify, do not put more than 5-10% in one stock. It’s not worth losing sleep over your investments!

What are your views on auto sector?

We are going through a time when people are not buying cars, at the same time, India is not at a stage where people who aspire to buy cars or bikes, have bought enough of them. China sells 16x more vehicles than India. This is not an unending cycle or death of auto industry.

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Deepak: This is the Capitalmind Podcast and welcome to another edition. Today I have my colleague with me Aditya Jaiswal, he will introduce the format of this podcast and it’s been great doing this podcast. Let’s hope this one which is a new format will be quite exciting for you to listen to as well. Hi Aditya.

Aditya: Hi Deepak. Thanks a lot. Today we are going to do something different, something which we have never done on Capitalmind Podcast, it’s called the investor wants to know. Recently we asked Deepak’s followers if they had any questions for Deepak and we got a overwhelming response. Therefore we decided to answer those questions through a podcast. Thanks a lot Deepak for taking out time and doing this, I know you have been very busy so, shall we start Deepak?

Deepak: Yes, yes. Let’s go ahead and remember of course, none of the questions are going to be stock-specific so I’m not going to give you any recommendations, but please look at this as not investment advice, it’s just opinion from my side.

Aditya: Sure, sure, sure. The first question is from Dharmistha Patel. He asks, how do you see investment horizon for different categories of mutual funds? A large cap, large and mid cap, small caps, thematic?

Deepak: Interesting question. I think we’ve talked about investments for a long time, what typically I would say, if you’re looking at a horizon foreign investment, it should be a trade. If you’re looking at a short term trade, you’ll say, maybe I’ll hold this for two days or three days or whatever. I mean the time linkage of an investment is not necessarily done for a longterm investment, it’s done for shorter term investments.

But, when you are investing in equity markets, you typically have horizon of really, really long term. If you’re buying a stock, you might actually have a view that this will turn around in three years or four years and give it a timeframe. But really you’re buying a mutual fund, you’re trusting the fund manager to make all those decisions for you.

Therefore I feel large, larger mid cap, small, I’ll just… asset allocation metrics, barrier investment horizon should we listen whenever I want the money I’ll get it back. Your decision to shift between an asset allocation category saying, “I’ll move some money from large to small or small to large is based on either a timing decision saying Oh now small cap should do well, or it will be based on the fact that you have too much money in large cabinet you want an allocation to increase in small cap, that is when you kind of do a shift.

But otherwise your a horizon of investment is literally, I’ll invest… I’ll stay in restaurant as long as I don’t need the money. The one difference being thematic. If you’re taking a bet on a theme, let’s say it’s far more, let’s say it’s somebody who benefits from an income tax law or a gold fund for instance, these are shorter term themes and you want to have a timeframe in mind saying, “Listen, this team better work within the next three years, otherwise I want to get out of it.”

That is my view. It may differ from people, person to person but largely I think, if you follow this philosophy, it’ll give you less heartburn when things go wrong and you feel like I shouldn’t have been in this asset class. That time frame is really longer term than that.

Aditya: Absolutely. Deepak, and as you said it differs from person to person, and correct me if I’m wrong, but mutual funds should be looked at as more of a forced investment vehicle which locks me in. And the moment I’m locked, it takes out the process of thinking from the investment process. The moment I stop thinking, it also takes away a lot of associated biases. The behavioral biases that comes into play when we start churning a lot.

We’ll move onto the next question Deepak. The next question is from Tej. His question is, what are you views on passive investing? Is it advisable to invest in Small Cap Index funds, as most of the good performing stocks will become mid-caps and non-performing mid caps will become large caps, which might pull the returns down? This is interesting Deepak.

Deepak: Yes. I mean that we’ve had a ton of research on this topic about our own research and of course, research from abroad. Passive investing has actually started to beat a lot of the managed funds in those categories. In India I think the most important thing to look at is the large cap category because that’s where I think the index funds will benefit the most. Because you have the strongest stocks sitting in the index, if they become weak like has happened recently with our Tata motors or specifically I guess within Indiabulls Housing where the stock became weaker, Nestle is stronger, so they go to replace Indiabulls Housing with Nestle.

Now, regardless of why this was removed, this was not removed because the financial performance was bad. It was because the price itself had fallen and Nestle continued to retain a good price. Nestle, continues to being… moves up into the index and the other stocks move away.

The important thing over here is you’re always invested in the top 100 stocks or top 50 stocks if you may. With small cap, I think the problem is that if you invest in the Small Cap Index, your best stocks are going to move to the other index. You’re going to see the stocks go to mid caps but judge finance was a small cap stock. It became a MidCap stock. Now it’s a large cap stock. It’s sitting in the NIFTY 50. If you consider that you had bought it and you at some point in time owned a part of a judge finance, because you’ve left the index, you are forced to have to sell it, especially when it was going up. So, maybe more useful to look at stocks that are actually leaving the Small Cap Index and going into the MidCap Indexes than to actually invest in the Small Cap Index per se.

A more mature economy like the U.S. has a Russell 2000 which is a middle and small-cap index where those companies specifically do well. Those are I think timed… they should timed investments in the sense, you should tie it to at a point when the large caps are done, they are bid and then the mid caps hound year turn up. You’ve got a small timeframe that you can do this small trading, not investing, but I don’t think other than that this small-cap index is in India are worth investing in.

It’s better to invest in large-cap indexes and small caps choose a multi-capish kind of approach on a fund rather than just a small-cap on a mid-cap.

Aditya: The next question is from Shiram, he wants to know, how bad is the NBFC scenario? It has been close to a year, but things haven’t improved. Do you think some prominent NBFCs like DHFL, Indiabulls, Reliance Home Finance might go bust?

Deepak: This is an interesting question because ILFS technically sort of went bus last year, and it’s still, around in the sense that there are still operational assets that they have. They’re still managing roads and tunnels and highways and power projects. These are being run by another management, not the original ILFS management, but they still continue to run. I believe many of the other NBFCs that you’ve mentioned, might fall into the same kind of a situation where the management is likely or could change or the structure would change.

One of the NBFCs is looking to merge into a bank. They might lose their name, become a bank and straight out of the bank Medico or that process. One of the other NBFCs is looking at being sold to somebody else. Somebody else might actually take over their assets, the loans and the liabilities and then down it from there. A third may actually be, cut up into many pieces and sold, which is what has happened in case of say Reliance, where you’ve seen Reliance Capital hive off Reliance asset management which was the mutual fund EMC, and now Nippon has bought that from Reliance Capital.

Effectively now Nippon owns that piece of Reliance Capital and therefore Reliance Capital doesn’t have that business anymore. You can carve-out, you can sell or you can merge into other entities. I don’t think we will see a situation where the entire thing goes bust because all of these companies actually have very large amount of assets. They are likely to just go down without a trace. But also that some of these assets are very valuable. If you have a 100,000 gross worth of home loans and about 16 or 20,000 gross worth of problem loans, then you can isolate the problem loans and still sell the $100,000 worth of home loan.

I think this is not going to just be a disastrous, we will stop here, but I think it will take another six to eight months before any clarity emerges. We haven’t even seen the resolution of ILFS yet so, if things go really bad, expect a long ride ahead for these a NBFCs and the system might actually see all their business move to other companies rather than to those companies themselves.

Aditya: And there’s one more thing that I wonder to discuss, they’re also big PE players globally that are coming to India and they are eager to take assets on discount, like Bain capital enter India is… would you like to add something to this?

Deepak: Yeah. Bain capital and a bunch of others have looked at investing. I think there’s a bunch of road assets in India that had been looked at carefully by CDPQ, which is a Canadian pension fund and by ADAI which is from Abu Dhabi and Temasek which is Singapore, they all manage pension assets or manage assets that are supposed to be… can be deployed in a fixed income where the fixed income returns in the U.S. or in most of the Western economies are yielding less than 1% in some cases that are yielding negative returns. Therefore, I think a lot of the debt that is being sold as assets in India, they’re essentially cashflow instruments either from NHAI or from tolls fairly good and strong structures.

I think the foreign investors that are coming in to buy this debt will actually priced them out. The problem really is, the resolutions aren’t happening fast enough. They’re sales are not going through fast enough. ILFS has a bunch of assets on sale that haven’t yet been auctioned off, at least the bidding hasn’t finished and we don’t know how long this process will take. The faster it is, the better it is for resolution. But till then we’ll have to wait and see how things are.

Aditya: Anil is asking, how do we judge the results declared by companies? How can we figure out if the results are genuine or cooked up? Well, Deepak this is a really interesting because recently we are seeing cases, many companies have been found to have fudged their numbers.

Deepak: Interesting here is when auditors can’t be trusted and their management can’t be trusted and lenders can be trusted. How do you actually do this outside, from the outside? People who are from the inside can be trusted? Therefore it’s very difficult to sit on the outside and say, “How do I know?” There’s no one answer. What may work for one company saying, “Oh, they giving to me royalties to the parent.” Will be perfectly fine for some other company, like say a Hindustan Unilever which pays royalties to its parents.

At what point do you say that the same practice, which is legal in one company is actually bad in the other company? The intricacies of it are now highlighted by multiple factors. Some of them are hidden so deeply in the books, we don’t even realize how difficult it is to find them. For instance, you might… there was an article recently about a company that has spent one crore 50 crore or something on some computers and say for every one crore it bought only five computers. It’s 20 lakh rupees per computer now.

We’ve come from a computing background. I have actually in my life seen computers worth 20 lakhs, but they no longer exist in our world. And for the kind of company this was, it didn’t seem like it would ever need a lot of 20 lakh rupee computer. It’s most likely that they’ve gold plated that number. When you can see this in the balance sheet, you’d actually go through the annual report, find the fixed income schedule, find the number of computers they had last year, find the number of computers they have this year, find the CAPIC, the amount they have for those computers last year, find the amount they are the computers this year, subtract, find their depreciation, remove the depreciation element of this.

And by the time you figure this out, you’re already a fairly smart accountant if you may. But for most normal people, this would all be gibberish because it would be like, “I don’t know how to find this out. It’s too difficult to go through a hundred company’s balance sheets to find out which one isn’t rigged. And if they haven’t rigged that number, they’ll rig some other number.”

We did a series on capital wine premium. Then we talked about different shenanigans that company promoters pull off, but that’s not an exhaustive list. They will come out with new and interesting mechanisms to rapidly find or change the accounts to their needs. The only difference now is that there has been a tremendous amount of effort by the government to pinpoint the auditors and say, “Listen, if you guys are found lacking in performance, I’m going to ban you.” They’ve banned a couple of the top four and I think they’re going to ban almost all of them now because the auditors are in the limelight, they’re now not willing to sign bad accounts. Many of them are resigning from companies, to the extent that if any companies sees a recent designation of an auditor, you consider it a bad company.

It’s a very interesting time and I think hopefully we will get more laws that deter people from making fraud rather than trying to discover all of them ourselves.

Aditya: Absolutely true Deepak and frankly speaking, if a retail investor is fighting against promoters, auditors, creating agencies, independent directors who are generally hand in glove whenever there is a fraud, then finding out fudge numbers is completely out of a retail investors circle of competence. In that case, do you agree that diversification is a good friend? 10% loss or a 20% loss on a 10% allocation is just 2% hit on your capital. I believe diversification in such cases is a very good hedge against fraud.

Deepak: Absolutely. I think the point about being a retail investor is that you will not know all of this stuff, so diversify. Diversification is your friend because, you don’t have the time to go through all of this stuff. You don’t have the time to go find their customers, find the suppliers, talk to them, get a lot of insights and only then invest. You want to hope that most people are actually honest and diversify a way so that any one particular instance will not hurt you too badly. Less than 5% in a company, great idea.

Aditya: Absolutely. That’s fantastic Deepak. Dinesh asks, when a price of a fundamentally strong company starts to fall, how do you decide whether it’s a normal correction or if you might be missing something in your fundamental analysis?

Deepak: I think I Aditya you’ll always miss something in your fundamental analysis. Your problem really is that, you don’t have enough information. No matter how hard you try, there is no level of information that you can have that is actually going to be more than, say the promoters or the company itself has. And at some point you will find that there’s something that’s gone wrong and the price may actually give you a hint and saying that, something is going wrong over here. Let’s go and find out why. If the reasons after you’ve discovered whatever you have, and you say, “Okay.” The other reasons, I still think this is a great play for the long term, I’m fine. A lot of players also have liquidity issues in the sense that in some cases a large holder of a stock has to exit, because maybe his fund has reached end of life or he needs to generate the cash to pay back his investors.

Many hedge funds have a fixed lives, and when they come towards the end of that life, they try to find other players to give their shares too. When they can’t, they will go and sell in the market. Some of these funds are bought very, very long ago at prices that are one 10th of current prices. They don’t mind that the stock falls 20, 25% because they’re like, “listen, I want to get out and I’ll get out price it doesn’t matter what the fundamentals of the company are.” And at this point for instance in the markets when there’s no interest in buying, if you create a large block to sell of course the price is going to crate.

If you find out that’s the reason why your stock is falling, that’s very good because that’s sort of fundamental reason and that’s a better price. Maybe you can add more points, however, there’ll be points where you will find that something is wrong. You might read a couple of quarters, say that, “Listen, if the company’s actually good, then it will fight this adversity and go get better.” Wait for those. Reduce your position to the point where you’re comfortable and then maybe you can add it back even at a higher price. That’s fine. Just don’t lose sleep over investments. It’s never worth losing sleep over investments.

Aditya: That’s something to tweet about today. Don’t lose your sleep over investment. Abhi is asking, is there a super safe debt? Like the government securities investment option that is also tax friendly. Direct gilt interest start at 30%. Gilt funds have interest rates fluctuations, and that is the risk fluctuation, so your views on this Deepak?

Deepak: Yeah. Interest rates when they fluctuate it affects a mutual funds which have a larger duration, a longer delay. Any fund that is invested on a three year gilt people, government security people will you get impacted by changes in industry. If it was three months people, will not get them back quite as much. What you really want to hear is of a short term gilt fund, ultra-short term gilt fund, something that’s invested in people that’s three months to six months and that’s only in government security. This unfortunately, there is no fund. They either have an ultra short term fund which has the mandate to invest in other things. All their gilt fund which typically have longer duration.

Your choices are, either go to overnight funds, which is very safe because the investment in one night instruments, instruments that if you put the money in today you will get back the money tomorrow. This is an overnight market managed by the RBI. We’ve seen that in other RBIs, what are the issues happening in this market and they will not allow any defaults to occur in this market. I think this is quite safe, reasonably secure from an investment perspective, the overnight funds. There is also the likes of the PPA phase, sort of Quantum Liquid Fund, which have till now, only invested in very high grade securities.

They were mostly in government securities till a while back. Now they’ve added some high quality corporate names as well. That may actually be a problem because you don’t want any corporate date no matter how high quality anybody decides there is. But, in that context then overnight would be your best bet. The next best bet would be a PPFs or a Quantum Liquid Fund or if you don’t mind the time that you want to stay within, you’ll find a short-term fund with a fairly large amount of government securities. Unfortunately, not many of those exist and they will change their portfolio every month. I don’t have really a recommendation on that beyond the overnight funds.

Aditya: That’s great Deepak. Paresh is asking, do you still code? Do you use algos? It’ll be great if you can throw some light. He wants to know the tools and techniques that you use.

Deepak: This is interesting because I barely code for any reasonable amount and all these technologies have gone so far I really don’t understand half of them anymore. But I do write a lot of code in terms of stuff that I really know, well about as we’ve stored the security database and a data in a database that SQL runs I’ve done a lot of SQL to generate queries out of it. There’s a bit of Python, a little bit of R, websites to get data that can be dumbed into files and databases so that’s in Python some of it, is analyzed through R. There are a bunch of other things that we do with this data as well. But largely coding has become a very scripted task rather than as writing large programs per se or other me writing last programs. I’d write scripts to kind of automate certain tasks, but not much more.

There is AmiBroker which is used for technical analysts that has scripting language of its own. There’s NinjaTrader where you can write little portfolio management or assessment ideas using C#. You massage the data in a way that a number of data sources can be scraped through and mashed together as a CSV, import that into a tool like a NinjaTrader for some trading D time in ports. You can test for portfolio strategies on that as well. That would be kind of where my data and coding knowledge kind of ends. I have not done much more than that. We don’t do any short term ultra short term trading anymore so I don’t think that is the most convenient thing for us to… that’s not something that I’m coding anymore. I have coded in the last three or four years.

Aditya: Awesome Deepak. Arun is asking, the infrastructure has historically not created wealth except currently. Now with the government plan of hundred crore capex over the next five years, what do you think? Should one bet on infrastructs knowing that the poor ROC and shareholder dons?

Deepak: We’ve had a very distinct time with these infrastructs because they’re so dependent on the government. Unfortunately, the government right now has no money and it’s backing off from even NHIA project. I don’t think we will have a lot of NHIA payments for new work that may come in the next few years until delay reformed this policy. It is a very government dependent piece. What I would say, pirate sector capex is also important. Look at the capital goods industry rather than just infrastructure, so people not just making roads but also private capex, heavy electricals, electrical goods, capital goods of multiple other sorts. I think those might be the beneficiaries of a capex cycle going forward.

And as interest rates come down, that might become attractive. But again, this is a cyclical so you’ll see three or four years of it at max. Maybe two or three years of it, and then you’ll see a five year lull. As debt levels struck to recede, I think in the longer term we will see much better interest or much more interest in capex. You want to look at a space LND, which does both private sector and public sector capex, but also not some of the pure info players because they going to be cashflow issues of the government as cash trap.

Aditya: Even the infra companies are like the… they are very debt laden and when we talk about GMR and GVK so, leverage is also one thing that one has to look into when they are betting on infra stocks. Isn’t that correct Deepak?

Deepak: That’s true. We have to be careful because some of these companies like GVK, Suzlon, GMR they’ve been bogged down so much by debt that if they don’t get paid on time, then life is going to be very, very complicated for them. Keep the player specific entries only into companies which have no debt levels.

Aditya: Great. Great. Deepak. Deepak, Ankita wants to know your views and auto sector. She’s asking, are the evaluations good enough to start accumulating or should one wait for 20% less than fair value as margin of safety in the down cycle Mr linger on?

Deepak: No, that’s very interesting question Aditya. I think the problem with auto is that we’re going through a portion of time when people are just not buying vehicles. But at the same time, I don’t think India is at a stage where you can say there are people who deserve or want cars or bikes, have bought enough of them. I think at best we sell about three or four lakh cars per month. Then, competitively China volition is about 16 times what we sell and we are roughly the same population. Of course we are a lot lower GDP per capita, but at some point we will start having a people who are coming into the system requiring cars just for transportation.

I don’t think this is an ending cycle of debt for the car industry. Yes, things are going to go to electric cars in the eventual time, but even when you have electric cars you’re going to still need distribution to take care of them. You need, things will go wrong maybe not in the engine, but definitely on other parts. The batteries, the servicing of all the other parts of the car as well. It’s going to need good solid distribution.

I don’t think these car companies or some of the ancillaries involved in the business are completely going to go out of business. There will be demand that’ll come back. The point is when. If you think that you’re creating it, then you might as well wait for an up cycle. If you’re thinking it’s a longterm investment, then it’s a great time to pick up stocks whether they’ve fallen 30, 40% or their PEs have come down to maybe 10 or 11 or maybe even in single digits now, because that gives you a margin of safety to pick it up. If you’re looking at it from a five year perspective, maybe yes, the stocks may go down or more 10 or 15, 20% from here, but the upside is probably a much higher number from going from here.

Take a risk assessed call, you don’t have to panic and I say, just take it a little at a time and add more when you get more confidence. It’s not something that says, “Okay, if I don’t buy it now, I can never buy it again.”

Aditya: That’s interesting Deepak. Akash is asking your views on the talks of global recession.

Deepak: That’s interesting. because we’ve got a global recession talk for a long time now. I mean, we’ve… people have predicted 11 out of the 10 of the last three recessions, because at some point it’s fashionable to call a recession. Because if you’re right, there’s a lot of benefit. If you’re wrong, nobody remembers you. There is a lot of talk of recessions. Recession never happen when you start talking of a recession, you know? The issue is that, if everyone is looking at recessions, and the recessionary impact, is there ever going to be one? Because all you’re doing is essentially forcing people to think of not increasing demand.

However, demand is increasing in the West, at least in the U.S. We’ve seen some problems in Europe, but large by and large… we’ve seen no issues that says that we’re going to have a consistent drop or negative GDP growth for a long time. India on the other hand is probably in a different situation, but worldwide we do have a much contracted economy in the last… well from 10 years ago for a few years there was contraction, but by and large we’ve seeing that at least in the U.S. there’s no sort of recession at all. There is some indicators that perhaps in two or three years there may be a recession, but that is not good enough really.

And honestly speaking, technology improvements have come to a point where I think the biggest worry that we’re going to have in the next few years is not about recession but essentially about employment. The U.S. is reaching full employment. Places like India are seeing less employment. We are going to have to change that structure worldwide and they’ll be maybe a reset of some other assumptions that are made for world trade for world trade, for world dynamics, the dollar itself being an element of a strength for the world leading market and perhaps the relative positions of the U.S, China, Russia and India and so on in these, this seems right. I don’t think there’s a worldwide recession happening.

Aditya: If we talk about India, the Quarterly GDP numbers, starting from Q1 2018, we had four back to back consecutive quarters where the GDP growth actually decelerated, well, technically three decelerating consecutive quarters are termed as growth recession. If not recession, are we having a growth recession as such in India?

Deepak: That so… you know a different Tom perhaps than I’m used to, but there’s the growth recession’s in the sense of they’re decelerating rate. We’re actually going forward but not going forward at the same pace. If you’re in a car and you’re accelerating, your push up pedal down and your going to go from 30 kilometers an hour to 60 kilometers an hour. If you take your foot off the pedal, you’re going to come down from 60 to 30 but you’re still going forward, right? In the vest of the recession would be when your car is actually going backwards. India isn’t actually in that position. We will slow on some part of that, slowness comes from the fact that we are getting rid of the excesses of the past. Inflation has dropped substantially, so that means people whose incomes were going up due to inflation are no longer seeing their kind of ops uptick in their incomes.

We are going to see them hunker down and say, “Listen, I won’t spend.” After a while they’re going to realize that almost nothing else seems to be inflating high enough for them to need a higher income. They want to go back to spending. During this time we’re going to have a slow down. We’re going to have a slow down that’s tough or requires adjustment, require some help perhaps for the weaker sections to be able to deal or cope with this layer of lack of income and eventually it’s going to happen that the population that slowly and steadily coming out of poverty by itself has no help or is the economy in the meantime, this air time frame of… that is accelerated by global events like the U.S-China trade issues or their lack of apathy towards immigration or however it is, is going to create avenues where I think will slow and our longterm I think, all the medium term, at least I think we will recover. We recovered despite our hormones, not because of them.

It’s going to probably take some time, but India is going to slow, but I don’t think that it’s going to actual recession.

Aditya: Absolutely agree with you on that point Deepak. Jotak wants to know your view on gold. Do you think gold is a must have in Indian portfolio considering the boat current buying interest in gold and weakness in ruby. I would like to add a point to this question Deepak, as you know that right now there is fear mongering in the market about recession and global trade war and we have a mountain of negative yielding debt around 16 or 17 trillion U.S dollars. Do you think if things go out of hand, people will flock to safety and gold is already making new highs?

Deepak: The world debt impact is probably minimal. If there’s a default on this debt, even gold won’t be safe to be honest. But there is going to be… I think gold is an interesting commodity to own in a short cycle. It typically for a 20 year period has grown only 2%, but there are times in the middle, when gold spot’s 25, 30 sometimes doubles results. In a short period of one year or two year, we’re in one of those periods right now where we’ve already seen a 20% increase in the price of gold. It’s not yet crossed its previous high, I believe it couldn’t give us those fantastic returns that it sees once in say 10 years. But I would not say buy and hold this. It’s easier to buy gold for a small period of time, ride that big run and then let it go, because after that, when gold goes up, then stocks go down.

And stocks go down there are a great time to buy stocks, get out of gold, buy stocks and then you’ll see that the gold kind of stagnates from that. Stocks go back up. One of course way to participate in the longer term is to buy actual physical gold. If you feel that the world is going to end tomorrow, like a global recession, a global war or something like that then you’d want physical gold, you want to keep this gold in your cupboard, in your safe. You want to buy dogs and guns to protect that gold and therefore keep yourself completely immune from the rest of the world.

But that’s not going to fly for most people. If you think that you are… the world’s not going to come to an end, but I want to ride this spike in the gold price. You could consider buying a sovereign gold bonds in India where the government actually shows you the gold price plus pays you say two, two a half percent interest per year on the gold. You can buy it and then after five or six years, give back the gold bond and take money and go to the jeweler and buy gold. You might want runaway gold for your children’s marriages. You want to buy them for your own, maybe usage. You want to buy yourself a necklace or a pendant and I’m assuming here that you might want to actually convert that gold into something usable, low variable, not just keep it as a showpiece.

But in order to do that, you can buy a piece of small pieces gold not in physical form but as a sovereign gold bond. Maybe as a gold ETF that would be my second alternative because that has costs. Lastly, you could even buy gold futures, but that’s a leveraged trade on the exchange. Those are not as useful to think about. But lastly, buying gold should be considered an investment that is going to be for a spiky period of time, when the world is in panic and fear, like it seems to be right now.

Aditya: Absolutely amazing Deepak. So your preference for retail investors, your suggestion would be first sovereign in bonds, then ETF, and then the third person should be gold futures. Is that correct Deepak?

Deepak: Yes. The fourth one would be actually buying physical gold, but that has its own set of challenges. There aren’t any other places you can actually buy. The physical goal has a problem and you don’t know the purity, you don’t know how much it’s going to cost to sell it back. Typically they’re are tens percent spread between the buying price, which could be 35,000. If you want to sell it right back to the jeweler every… even five seconds after you bought it, he’ll pay you 30,000, that’s a 12 to 13% spread in pay, no matter what. There are disadvantages of actual physical gold, but in the long term, I think the appreciation has to come from demand on a speculative basis because people don’t use gold quite as much.

Aditya: That’s correct Deepak. The last question is from Arjun and this is interesting. Crude has lost its glory, as automobiles will move to electric vehicles. Does that make aviation sector attractive given the fact that crude is 50% of their costs?

Deepak: This is a question that I would say, would you really think crude is going to be attractive and attractively priced? Do you say if it will go down to $20 a barrel? At $20 a barrel, very few places that actually extract crude will make money. They will shut down and the price of gold will go back up because supply will come off and demand will exist. Even electric vehicles, they will coexist for at least 10 or 15 years alongside internal combustion engines and you will have diesel power generators. You’re not going to be able to get electric batteries of the size that can actually power massive industrial complexes or even massive apartment buildings and lifts and all of that stuff.

It’s great for driving. It may not exactly work for those kinds of uses. A lot of the industry losers will still require crude. I don’t think crude price will fall to that extent. Maybe they’ll be barrel $40 to 60-$70, because the upside beyond that is limited, since the supply sources are quite a lot.

The downside below that is a point where a lot of them start to shut down. I think the downside is protected. You’re look at crude privately as a play that will stay within this range. The issue with their lenses, the are a one way bet on crude prices in the sense of crude prices go up, LN profits come down. We’ve seen even the best of India’s airlines like IndiGo see a 90% drop in the profit simply because crude went up 10 or 20% in that quarter. If they’re so dependent on the crude price, they haven’t hedged any of it, then why would you consider them as a great company? Because a great company should have the pricing power to be able to generate profits even if crude prices went higher up.

The other problem is that we’ve seen the cycle play out time and time again. We’ve seen in the 90s. We’ve seen, I think a Sahara light or Sahara airlines in the early 2000 were bought by Jet-

Aditya: And they merged it with JetLite.

Deepak: That’s correct. Then we saw Air Deccan first and then Kingfisher bought out Air Deccan, listed itself went bankrupt in the early 2010s. Then you heard Jet Airways which went up and then Jet Airways went bankrupt and we had SpiceJet having trouble in the past but SpiceJet is one of the two survivors, so they’re going to have great quarters until Air Vistara comes along or AirAsia increases operations or another industrialists decides that he will spend as hard earned money buying another airline, make a name of himself, cause a price war and everybody loses money and then somebody goes bankrupt and everybody is traced with money for two quarters. You know, in all of the cycle, the airline is a value destructing economy, but some airlines will stand out.

Southwest in the U.S. stands out. It’s not really expensive, but it stands out. I just read that IndiGo is probably the priciest airline that’s surviving right now. However, this growth, so hopefully that pricey has been the norm on a price to earnings ratios, 30 X or something like that, versus a much smaller 12 X for South West, 8 X for some other airlines. I think these environments have been good for a lot of airlines primarily because debt costs are very very low right now. It’s… they’re able to finance aircraft’s through a substantially lower interest component of that cost, but the crude prices have been fluctuating so that it hurts their profits as well. But longer term, I think the bet on aviation has to be player specific. You can bet on the industry because the industry has forever lost money.

Aditya: According to you, even the consolidation that is happening right now in the industry after the fall of Jet doesn’t makes the case more interesting because now Jet has gone, Vistara will come and then as you mentioned, this price war will go on, correct?

Deepak: Yes. In fact, the only way to grow the market now is to say that India will actually grow beyond its current geography of their aircraft in the sense that the aircraft actually travel… Most of them, of you look at the map of the Indian airlines, they travel primarily across this triangle of Bombay, Delhi and they twins airports of Bangalore and Chennai. If you take all these two sectors or these three areas and Hyderabad fall somewhere along this triangle, we will see that very few airlines, very few flights are made outside of these within India, unless those areas improve their airports, their connectivity, their people’s desire to travel on airlines rather than on trains and otherwise, I think Indian… the aviation sector is going to be rather stunted and it will take a lot more players to come in and perhaps die to or build up these sectors as well.

The bet on aviation is a multi-pronged one, but I’d say just go with the player as well than going for the industry as a whole.

Aditya: Thanks. Thanks Deepak. That was the last question for the show, and thanks a lot Deepak for taking our time and doing this and we really appreciate our listeners as well for asking the questions to the book.

Deepak: I hope you all enjoyed the show. I think this is the first time we’re tying this format of the questions where India wants to know, hopefully India now knows a little more than it used to before this podcast. Let’s hope that we can get a lot more questions. Please ask us questions. We are at @Capitalmind_in on Twitter. I am also @deepakshenoy on Twitter, so please ping me, tweet me, ask me what you want me to say. Tell us what you want us to speak about and I hope we have a lot more on this podcast along with Aditya who is doing his first one with us. Thanks Aditya, it’s been a wonderful one.

Aditya: It was my pleasure. Thanks Deepak. Thanks a lot.




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