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Mark Mobuis

Since 2005, India has been the destination of choice for institutional money mangers to invest their clients money. As a refresher, India was one of the 4 countries mentioned in the now famous 2003 report from Goldman Sachs titled “Dreaming with BRICs: The Path to 2050.”  The acronym BRIC stands for Brazil, Russia, India and China. It’s a report that many managers used as their investment thesis for entering the 4 countries mentioned and led one of the authors Roopa Purushothaman to land a gig with the largest retailer in India – The Future Group.

I’m all for research reports and believe it serves a purpose for investors that might not have a clue about certain markets and/or companies that are operate in those markets. These country reports are all very similar, they are super positive about the growth of a country and how big these markets are. However, what is really annoying is when foreign analysts, fund managers or super investors fly to India and tell Indians how their markets operate. It’s what I call “white on brown” – white guys telling brown people about their own markets.

Mark Mobius is the most recent fund manager to fall into this category. I have a lot of respect for Mark Mobius who is the emerging markets rockstar with Franklin Templeton where he oversees $50 billion in assets for them. In fact I got a chance to hear him speak in Bombay in October 2007 and was quite impressed. Recently in an interview with the Times of India he talked about his investment philosophy in India and was asked about corruption in India, he had the following view on corruption:

Corruption is rife everywhere in the world. It’s only when it really impacts the process of a business in a big way, you’ve got a problem. But that’s not the case here.

I read that quote and had to re-read it to see if he was talking about India or some other country. Mark, If you can’t speak the truth then don’t say anything but don’t insult my intelligence. Currently, India is embroiled in the largest corruption case involving one of the darling sectors for institutional fund managers – the telecom industry.

Ex-telecom minister A. Raja, industrialist Anil Ambani and heaven forbid Ratan Tata are being brought in for government questioning on how telecom licenses for the 2G mobile spectrum were allocated. If Ratan Tata who runs the Tata Group which is the largest business house in India and viewed as the most honest and above corruption is being questioned, it shows how wide the net of corruption is and it absolutely affects the process of a business in a big way. From what telecom insiders are saying the corruption is only going to get deeper and affect more individuals and companies.

Mark is correct, corruption is everywhere even in the US but happens at such a high level it doesn’t directly affect the average US citizen.  In India corruption starts at home, want to get a phone connection? want to get a gas connection? You better be ready to slip some cash to these service providers to get service or “your file” might get lost. Some say that’s not corruption but just paying for a speedier “value added service” but don’t fool yourself, the entire value chain is corrupt. I don’t fully blame Mark for his myopic view on corruption because when he visits a country like India, the red carpet is rolled out for him.  Government officials want his stamp of approval, companies want him to invest in their companies and the press wants something to print. Mark doesn’t have to really get his hands dirty when he comes to India, he gets to view everything through a rose colored lens and everything delivered on a silver platter.

Any fund manager that says corruption is not a major issue I offer you a challenge. Buy a flat in Thane and commute for 6 months to South Bombay for work.  Let’s see how you deal with the following:

• Getting your flat registered without paying a bribe
• Landline MTNL phone connection
• Gas cylinder or piped connection
• Power cuts (corrupt power grid)
• Water shortages
• Commuting by car (road infrastructure badly maintained)
• Commuting by local trains? Don’t even try it.

Staying at the Taj is not a proxy for how the majority of Indians live, work, play and learn (yes, that’s an old Cisco marketing campaign slogan).

NOTE: If you are interested in downloading the BRICs report “Dreaming with BRICs: The Path to 2050″ you can download it here.

The above article was syndicated on Huffington Post.

Recently, I was invited to speak at Reliance Industries’ (RIL) corporate campus located in Navi Mumbai. It’s ironic given that our office (MProfit)  is just a couple buildings away from where Mukesh Ambani works out of – Maker IV in Nariman Point.

The topic was about personal finance and the presentation was titled “The Road to Financial Freedom.” It was a 2 hour presentation and the slides were only part of the overall presentation. Many people commented they liked the personal stories that were sprinkled through out the presentation.  The presentation will be an ongoing event at the Reliance corporate campus which has over 40,000 employees. Below is the presentation that I gave:

Back in January 2007, Bloomberg Markets magazine did a piece (pdf article) on Peter Thiel (pronounced “teal”) who made his mark in the tech sector and then focused his efforts on his own global macro fund. Peter Thiel was the co-founder of PayPal and led them to a monster exit when eBay bought them. The article has an ultra positive tone which was the vibe in the financial markets back in 2007, the article briefly mentions his Facebook investment.  Some great quotes from the article:

- If all goes well, Clarium might one day manage as much as $10 billion
- If Facebook one day pulls off a deal like YouTube’s, Thiel would pocket about $100 million.

Now in January 2011 the roles have reversed, most articles about Peter focus on his Facebook investment and don’t talk much about Clarium Capital his global macro hedge fund. Recently, Bloomberg online had an article about Clarium and the numbers they presented were jaw-dropping to say the least. Clarium’s assets under management (AUM) have dived 90% from a peak of USD 7.2 billion to USD 681 million, a combination of bad bets and customers hitting the exit button.

He is certainly trying to stem the losses, Peter hired Patrick Kenary from Man Investments. Man Investment’s is the mega alternative investment management firm that practically invented algorithmic trading via their AHL acquisition. Having someone with that pedigree is nothing to sneeze at.

In the end, I’m sure most people are sticking around with Clarium hoping that Peter might have another Facebook type investment where they can roll their assets into. Guys like Buffet, Roberton, Rogers and Soros make investing look really easy but when you got billions on the line it’s a very different ball game then trying to launch/run an internet company.

Within the trading community Trader Vic is a legend. The intersection of financial markets and technology has always fascinated me and Victor Sperandeo has married the two into a highly successful career.

Victor recently announced he was going to give back to the community and teach a lucky few how to trade using his proprietary trading methods. Even more exciting, is my ex-colleague Michael Martin will be presenting with him. Mike and I launched India’s first algo/quant commodity fund back in the day.

The Master Class will be taught in Manhattan in early Feb 2011, if you want more information I recommend checking out Mike’s website – MartinKronicle.

Since the financial meltdown of 2008 I’ve been trying to pull my thoughts together around the idea that long term stock selection is dead. Recently, I came across two articles that really got my thoughts in order.

Article 1: NY Times. Nov. 26, 2010. A Dying Banker’s Last Instructions. Gordon Murray was a hotshot at Goldman Sachs, Lehman Brothers and Credit Suisse First Boston. Even though he was in the business for over 25 years his own finances were pretty haphazard and realized most investment advice is skewed in favor of the advisor. Meaning the advisors select products that maximize the advisors returns not yours. The general theme of the article is that no one can predict the future with any regularity, so why would you think that active managers can beat their respective indexes over time?

Article 2: SF Mag. Dec 2006. The best investment advice you’ll never get. Google can afford to bring in the best investment advisors and they did right before their IPO. Most of the big names said the same thing:

Put your savings into some indexed mutual funds, which will make you just as much money (if not more) at much less cost by following the market’s natural ebb and flow, and get on with building Google.

I couldn’t agree more.

For most people getting an index fund that tracks the entire market is the way to go. I believe picking a basket of stocks today and saying it’s part of your long-term portfolio is just plain stupid, it might have worked in the past but there are to many new factors that might skew the 10-30 year horizon for investing.

Case in point, Skype filed their S-1 document in August with the intention of going IPO very soon. Skype is an amazing technology/service and I have been using them for many years, but would I buy their shares during the IPO? no chance.  Do you honestly think Skype will be around 10-15 years from now? I doubt it, the speed with which internet technologies move, Skype could be outdated in 5 years. An IPO is simply a way for founders to get liquidity, plain and simple. Of course, everyone will point to a Google or the highly anticipated Facebook IPO but those are far and few between.

Let’s forget technology for a while and focus on what made America great – the car industry. If you had GM shares from the first IPO they would be worthless today. In a cruel joke, the US government took over GM and then re-IPO’d the shares in the world’s largest IPO a couple weeks back. I would love to ask those fund managers back in 2000 where GM would be in 10 years.

It’s not just the US, look at the current flavor in India – microfinance.  3 months back everyone was tripping over each other to praise SKS Microfinance and the feel good story of helping poor woman in India make a living. Now the stock is down over 20% because the business model is not healthy…what? SKS has been around for 12 years and somehow in the last 90 days their business model is out of whack?  I would say it has more todo with politics and money, people saw how much money SKS made in the IPO and they felt left out.

So what is an investor to do? As I said before put most of your equity allocation into an index fund and forget it.  Then if you have the urge to gamble, put 10-15% of that equity allocation into investments you track on a daily/weekly/monthly basis. Activities can include trading stocks based on information you get or the latest algo-trading genius or some new IPO to flip. This approach will give you the “feel” of the market and yet have most of your equity investments in an index fund.