Which do you prefer – Wall Street Blues or Vegas Blues?

A recent study attempted to evaluate the skills of amateur investors versus portfolio managers and investment pundits. To add zest to the exercise the savviest group of analysts were pitted against the sexiest porn stars. Thus ensued a battle of the libido’s. To the consternation of corporate America and to the amusement of the rest of us, our more desirable friends from Vegas beat the pants of the financial whiz kids 10 to 4 [1]. What’s their secret you wonder? Well, apart from plastic surgery, they stuck to the stocks they knew about i.e. the porn industry. The lesson here is that a portfolio limited to well known and understood industry/ environment at times is better than diversified picks. Even if these picks were based on thorough financial analysis. This is the basis of my recommendations.

What the !@#$ is BSE? And why should I care about it?

The Indian economy (GDP) grew at the rate of 7-8% 6.80% in the past year. As it has in the past few years. In comparison the American economy grew at a slower a measly rate of about 2% 3.70% per annum [2]. Is there a correlation between the stock markets and the GDP growth? I am no economist, but common sense dictates that the sum total of a country output has to have some co-relation with corporate earnings. The article “Does Sensex trace GDP growth?” explores this from an historical perspective. It concludes that at least in the long run there is a clear co-relation. That considered, investing in Indian markets seems to be a wiser bet than the S&P 500.

Let’s leave aside the macroeconomic argument, and simply compare how did the indices fare in the past one year – 31 Dec 2004 to 30 Dec 2005 [3]. The Bombay Stock Exchange (BSE) grew a whopping 42.33%, the S&P 500 posted a modest gain of 3.01%, the NASDAQ barely etched positive gains of 1.37% and the Dow Jones Industrial Average (DJI) slipped a little losing 0.6%. Do I need to say more? I certainly wish I had more money and more smarts last year. But we need to be careful here assumptions made on historical factors are mother of most if not all screw ups. So why am I really bullish on India and what about China? Surely similar arguments could be made for China.

Here is where I apply the porn insight, and no, I am not being a dick head. I am just going with what I know. I know India well. I know the stock markets, the pulse of the economy, the people who invest on a regular basis, the competitive advantage of Indian companies vis a vis the multinationals, the story of the burgeoning middle class, the outsourcing in the tech industry, the outsourcing in the back office jobs etc. etc. My gut tells me that the 42% growth of the BSE is not an aberration. I am by no means implying that the same is expected. But, that India has not yet peaked. There is more to come. If you are still with me and want a share of the Indian pie (or curry?) read on.

Prefer jogging for exercise?

For the more conservative among us the tickers IFN and IIF offer a diversified, professionally managed foray into the Indian markets. The India Fund, Inc. (IFN) is a closed-end management investment company that seeks long-term capital appreciation by investing primarily in Indian equity securities. The Fund is traded on the New York Stock Exchange under the trading symbol “IFN”. The details of IFN can be seen here [4]. The other option, India Investment Fund (IIF) is managed by Morgan Stanley. It is traded on the New York Stock Exchange under the trading symbol “IIF”. The details of IIF can be seen here. As expected, per our findings on BSE, both gave handsome returns in the calendar year 2004. The IFN stock went up 49.37% while IIF went up 33.73%. Although it beats me why the stock price of IFN grew more than IIF when the NAV of former grew by just 36.48% compared to 40.23% for the latter. I guess we attribute it to market sentiment – whatever that means.

Among the two, I like the portfolio of IFN – concentrated on Finance and IT – better than that of IIF – focused on Industrials and Consumer Discretionary. The former albeit more riskier is targeted for more aggressive growth than latter. I however don’t like the current premium [5] of 29.75% on IFN, as compared to a premium of 13.67% on IIF. One should note that IFN was selling at a premium of 13.94 at the end if the year 2005.

I wonder if the premium should be adjusted with the dividend yield. Since the dividends come out of the earnings of the fund they could have been re-invested thus boosting the NAV. Thus, perhaps, a true comparison metric should be (Premium – Dividend Yield) which is 29.75-9.07 = 20.67 for IFN and 13.67-0.88 = 12.79. Please let me know if you know better.

So how do we bed these? In my opinion the BSE is currently slightly overvalued resulting in higher NAV for both these funds. To avoid short term losses and to protect against volatility I would recommend buying the fund of your choice in 3 installments in Mar, Apr and May 2006. The reasoning being that the Indian financial year ends on Mar 31st and there is bound to be some adjustment as the annual results come out. This strategy would average out the pre and post result speculation and would set us up for long term gains.

How about kickboxing?

So much for sticking with the market. How about trying to beat the market? My plan here is to pick Infosys Technologies (INFY) and Cognizant Technology Solutions (CTSH). Again, I stick to the sector – Information Technology – I know, and the people – friends employed in both companies – whose opinion I trust.

Infosys Technologies (NASDAQ INFY) is clearly a popular growth choice in the Indian market. In fact, the ETF’s mentioned above have significant holdings of INFY in their portfolio. INFY constitutes 4.1% of IIF and 7.1% of IFN. The stock recently took a beating at the announcement of 3Q results. The results even though spectacular did not meet expectations. I think the market over reacted and I acquired INFY at 74.11. Its currently trading on 74.73 and is still at a good point to get in.

Cognizant Technology Solutions Corp. (CTSH) on the other hand with a P/E of 53.41 compared to INFY with a P/E of 78.66 is reasonably priced at this point. It’s 3Q results are expected sometime in early Feb making it a good buy for short term gains. Of course I expect the results to be better than expected. I intend to pick CTSH close to its currently traded value of 50.90 in the next few days.

Lastly, I would like to mention ICICI Bank Ltd. (IBN) and Citigroup Inc. (C) which I would have liked to pick if I had funds to spare.

Footnotes

[1] I read about it in an article on finance.yahoo.com, but was unable to google it at this time. You will have to take my word for it. Besides, if a bunch of monkeys throwing darts can beat our friends at the Wall Street – all of us have heard and some of us consider that to be a plausible story – then surely, its no mean feat for a few hard working, and good looking gals.

[2] Too lazy to look up the exact numbers, if you know better please point them to me.

I stand corrected. Gent pointed out that the US GDP grew by about 4.0% (it’s 3.70%) and he is correct. The exact numbers are mentioned below, they have been extracted from Economic Research Service, United States Department of Agriculture. The growth rates for US can also be seen here (Bureau Of Economic Analysis).

Note: The growth rates for 2005 are projections made from data till mid December. They are to be revised, but large variation is not likely.

Real GDP growth of US, India and China (Source)
Country 2001 2002 2003 2004 2005
US 0.75% 1.60% 2.70% 4.22% 3.70%
India 5.15% 4.09% 8.61% 6.90% 6.80%
China 7.50% 8.30% 9.29% 9.50% 9.00%

[3] All data from finance.yahoo.com. Give it a shot, I like it better than research data from my brokers, TD Waterhouse and Scottrade.

Name Symbol Closing 12/31/2004 Closing 12/31/2005 % Gained
Bombay Stock Exchange ^BSESN 6602.69 9397.93 42.33%
S&P 500 ^GSPC 1211.92 1248.29 3.01%
Dow Jones Industrial Average ^DJI 10,783.01 10,717.50 -0.6%
NASDAQ ^IXIC 2175.44 2205.32 1.37%

[4] In course of writing this I discovered the website http://www.etfconnect.com. It is a great resource for researching ETF’s.

[5] For closed end ETF’s, the Net Asset Value (NAV) can be computed based on their holdings. It is the dollar value per share if all the equities held by the fund were liquidated. The premium is the percentage of the stock price to the NAV i.e. how much more the stock is trading for compared to the market value of its assets.

About amit

I was born in Kanpur, India in 1977. I did my schooling partly in Kanpur, Surat and Udaipur. I spent most of my schooling years in Udaipur in a boarding school. This was the most enjoyable period of my life predominantly because I made a lot of friends and played a lot of football (my first love). My school years brought in a sinking realization that I was good in academics, average in football [even after my most sincere efforts :( ] and to put it euphemistically ‘artistically challenged’. Hence cool careers in photography, sports, art & design or music were all beyond me.

I took up what I could do best, and enrolled for engineering at Nagpur University. College brought its own pleasures, I had my share of beers, bunked classes, read the ‘Bhagvad Gita’, learned yoga and picked up love for traveling. After graduating I was one of the lucky few to get a great job at Infosys Technologies. The best thing I got from my first job – my Yamaha Rx 135. There were not many weekends when I did not explore places in and around Bangalore on it.

In two years though my desire to pursue further studies caught up with me and I enrolled for a M.S in Computer Networking at North Carolina State University. Here I picked up basketball, love for stand up comedy, liking for the ‘other football’ and offcourse a little bit of computer networking. I graduated in Dec 2002 and am currently working for /n Software.

I am slowly evolving into a die hard Linux and Open Source enthusiast, trying to pick up skydiving, biking, running and photography. Some might call that progress. :)

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One Response to Which do you prefer – Wall Street Blues or Vegas Blues?

  1. Japan says:

    Yes, I agree. This is very useful information. India is a great place for investments these days. I would like to understand the fees and front/end load of the funds you have mentioned. Also, P/E ratio of these funds would be helpful to understand if they are over valued. I had invested in a few Indian funds when I was in India last year. I still believe in diversification of the portfolio. My target allocation is not to invest more that 30% in international (outside US) funds. Other great fund that offer more diversification across the developing world is Vanguard Emerging Market Stock Index fund. It offers diversification across developign world including India and China. And its managed by investment Guru George Sauter (founder of index funds). It has a low fee of .45% with no load. I personally haven’t invested in it as I need to find some money to invest in that fund.

    I will investigate IFN and IIF and write what i think about those.

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