Friday, October 14, 2011

Life in the cloud: A modern fairy tale

Once upon a time there was a rich man in a village. He had a lot of land, a lot of cows, and gold tucked away under his mattress. He was a very contented man. He had earned it all in his lifetime through his hard work and had something concrete to show for it.

His son, who grew up in the village, went to the nearby city to do business. He was a very sensible, level-headed person and he was a shrewd businessman as well. He became a wealthy man in this own right by trading in grains and agricultural commodities. His warehouses were always full, and so were his vaults. His wealth was something that gave him a lot of satisfaction - and it was something he could see and feel the effect of in front of his eyes.

This man's son, who grew up with him in the city, went to the big city when he was twenty. He joined a software company, went to the land of El Dorado, quit, and started his own software company. He and his bunch of ten people wrote out some instructions to a box they called the computer, which were carried out in what they called the cloud, and serviced a few million people whom they never met. None of those people paid any money to access those services from somewhere in the ether; and the company did not earn a cent from its customers. But still they made a lot of money. Everyday there was a queue of people waiting outside its offices with sacks of money, begging them to take it. All that those people wanted in return was a share in the pie in the sky. Which our prodigal son gave, very grudgingly, and a small slice at a time. Each time he gave away a piece of this pie in the sky, what he called the valuation of the whole pie would be more than the previous time. And each time he increased the value, there were more people who were willing to pay more money for it.

The prodigal son invested some of this money in reaching his services to more people whom he never met, and soon there came a point where those people started coming in greater and greater numbers to visit his cloud, since the people they knew were visiting too. They all met somewhere in space, no one knows where, and they chatted, celebrated, mourned, hung out, discussed, debated, protested, grouped together, banded, disbanded - did all the things that people do in real life, but they never met each other face to face. They were all happy meeting in the cloud, where connections were instantaneous - you did not have to travel physical distances to meet. All you had to do was think of a person, the other person would tune in to your thoughts and think of you, and you were connected. Whether the other person actually existed in this world, or had an existence only in the cloud, was in several cases hard to determine. In fact, there were several cases where people fell in love with someone in the cloud, wanted to meet them in real life, and then found that they were actually talking to a ghost. After many disappointments like this, a few of these people had a brainwave. They started embodying for themselves a life in the cloud. They went and created an identity for themselves, in a completely new and different world called thirdlife. All their friends in the cloud, whom they had never met, did that too. Each of them created his own identity in thirdlfe, and there they met. In this process, they got more and more disconnected from their physical life here on earth. Their second life was in the cloud where they met people they knew somewhere they knew not where. The thirdlfe was in the newly created world, where they met new embodiments created by people they knew, in forms that were new, in a piece of real estate created in the cloud. They even got married in thirdlife and raised children.

How is our prodigal son connected to all this? He was not the creator of third life, but being the shrewd businessman that he was, using the money he got for his cloud, he bought a lot of real estate on thirdlife, near the temple of the cloud god. As thirdlife took on a viral form, and everyone had an embodiment in it, these embodiments wanted to stay near the temple of the cloud god in thirdlife. Now the cloud god was famous for curing problems stemming from insecurities caused due to embodiment of disembodied souls, and our shrewd son had rightly estimated that this would be a major problem among all the souls residing in thirdlife. He converted all the real estate he bought near the temple of the cloud god into sanatoriums, and charged by the day. The payment was in cloud real estate only, and thus he grew his empire. He soon became the richest man in thirdlife.

He still had lots of money left in his physical avatar out here. This was real money, and he needed further avenues to invest it. He went and bought some disembodied wealth in the form of what they called securities, and received a sixteen digit number with a twelve digit password. These securities were not ordinary securities. By some mysterious process which involved millions of people punching some numbers into the cloud through what they called trading terminals, the value of his securities changed by the day, by the hour, even by the minute. He would get messages every fifteen minutes from the cloud informing him about the status of his wealth.

The prodigal son was rich. He had all his money in the disembodied securities cloud, and in the embodiment of the disembodied cloud called thirdlife. On days that his wealth grew by five percent or more, he felt very elated. On days that his wealth declined by five percent or more, he felt very depressed. There were many days when the price movements in the cloud were so extreme that he could not sleep, either due to too much elation, or due to too much depression. It soon became too much for him to handle. All his joy and sorrow stemmed from the cloud, but he still had to handle it with his body and his mind, very physical resources which were rebelling at this overload.

The prodigal son could not take it any more. Wherever he turned, he saw embodiments of disembodied souls, handling vapors of different colors they called wealth, standing on clouds. He turned mad. His doctors advised a rest cure.

He went to his grandfather's village - yes, the grandfather was still alive - for rest. There he met some real people, walked on hard ground in real green fields, and shared in real joys and sorrows of his neighbors. He got cured in a month, and never went back again to his former life of disembodiment. And thus he lived happily ever after.

Wednesday, October 12, 2011

Time to sit on cash?

Volatility is the order of the day today. Markets go up by a few hundred points the day Merkel and Sarkozy meet and make vague promises, when BIg Ben announces US Quantitative Easing with a Twist, when Chidambaram and Pranab grudgingly make up after a meeting with Madam, when inflation data is bad, and on the days it is particularly cloudy. Markets go down by a couple of hundred points when people feel Merkel and Sarkozy's promises are vague, when they feel that Ben's efforts are not yielding any results, when they feel Chidambaram and Pranab are still plotting against each other, when inflation data is bad, and on the days it looks a bit sunny. The whole world seems spooked right now. The sins of the past are reappearing to haunt us; we are afraid in our heart of hearts of the consequences of economic catastrophe that will follow, which we do not want to acknowledge; and everyone is looking at others to see how scared they are. If everyone feels everyone is scared, everyone pulls out money from some assets and puts it into some other assets like US Treasuries; and if everyone feels everyone is confident, everyone pulls out money from US Treasuries and pushes up prices of all other assets by their buying.

At this point in time, it looks there is very little good news on the horizon. Europe is teetering from one promise to another, hoping to stave off the current crisis to some time in the future; the situation will get clearer by end-November. China is not going to get out of its slump in a hurry. The Indian economy seems to be slowing down due to a variety of factors including high inflation, RBI's efforts to fight it by raising interest rates, an ineffective government where paralysis seems to have set in, and of course slowdown of growth across the world. We don't know if the world is going to face a full-blown recession, but it certainly seems like there is going to be prolonged phase of low growth and uncertainty.

So at this point in time, what should be our investment strategy?

Buying stocks in the current situation seems a little risky. A lot of good stocks are available at what appears to be reasonable valuations. However, the benchmark to judge what is a reasonable price is the market itself and the markets seem to be highly uncertain right now. The upside seems to be minimal at this point, and the downside even from current levels could be significant. If you are convinced about any particular stock that you have been tracking for long, or if you are betting on or against specific events like buying stocks that have been affected by the recent mining ban in Karnataka in expectation of the ban not lasting for long, then go ahead and buy. But remember that the broad market is influenced to a high degree on FII and Institutional flows, who are in turn influenced by world trends and who tend to have a follow-the-herd mentality, which magnifies movements either way.

Gold has seen a steady rise in the last few years, with the last couple of years showing very high increase. The current consensus is that given all the uncertainties in the world economy, demand for gold will continue, and there is still scope for significant increase in prices over the next year or two. I would continue buying gold in small quantities.

Silver has dropped steeply in the last couple of months. It now seems to be quoting at attractive levels, and it looks like it may be a good time to buy. Silver is highly volatile, and may even go down further. In case it does, buy more. I am very bullish on the long-term prospects of silver - I think it is good to keep accumulating, especially on declines since the prices are highly volatile. The slowdown in the world economy should keep the prices down for a while, since silver has many industrial uses, but its value as a precious metal (like gold) and the fact that a lot of it gets consumed or used up, should ensure silver's long term value.

Real Estate prices have not dropped in the last few months, in spite of the increasing interest rates and tightening of liquidity by RBI. In fact, in the quarter ended June, real estate prices seem to have firmed up - across India the prices of apartments were twenty percent to forty percent up compared to a year ago. Real Estate prices always lag the economy and stock markets. Prices at these levels may not be sustainable, and the affordability problem of paying EMI's will show effect at some point. Expect real estate prices to decline from now till March.

Having said that, real estate is also about identifying good properties that are set to appreciate due to location, development in the locality, and other factors that could influence demand. If you get the right deal that you are convinced about, you should invest. It is worth looking at Tier 2 cities - in Bangalore check out this new area Budigere that all builders are flocking to.

Cash is good. Interest rates are reasonably high (though of course inflation is high too making real interest rates close to zero) and it is a good idea to park your money in FD's or income funds for a while. Get into cash, and wait for the right opportunities to invest in stocks or in real estate. Good opportunities are bound to come up with all this volatility in the markets.

Whoever said investment is a passive activity? "Invest in SIP's a given amount every month, don't worry about price movements, and in the long run you will emerge the winner!" I don't know if that is the right strategy any more, given this kind of volatility and greater positive correlation among all asset classes. Perhaps we need to get more savvy about the investment options available, keep track of them, and be ready to capitalize on opportunities when they arise.

Happy Investing!