Friday, May 25, 2012

Time to look at Farmland Investments

We are now at a time when investing in almost any asset class seems fraught with risk  - actually, that may have always been the case, I am sure every generation felt that way.  The exception was investments in equity post World War 2, along with the consequent rise in mutual funds dealing in them. The theory was – and still is – that you invested a constant amount in a SIP and the returns took care of themselves. There are detailed explanations of why a SIP works, but the basis on which the whole performance rests is a steadily rising long term trend line.  If there is volatility but the underlying trend line is rising, a SIP can be justified. If the volatility is high, then a longer investment horizon takes care of it.


All this was fine in an era of post-world war industrialization in the western countries which enjoyed a steady period of growth coupled with access to untapped markets with their superior mass-manufactured products.   The last half-century of prosperity that the western world has seen, which was helped in a big way by relative peace and prosperity, rise of democracy, free markets and capitalism, and increase in cross-border trades ensured that anyone who invested steadily in equity would win in the long run, since the companies in which they invested in prospered.

That unprecedented run has now come to an end. There is increasing uncertainty around the outlook for every world economy. Europe, US, China, Japan… the stories are too familiar and the ongoing crises very recent to require any repetition. In such an environment I would be hesitant to put my money in equity, SIP or otherwise. Any investment in stocks has to be highly stock specific where one is convinced of the story. Investing on the faith of underlying stock indices is risky in the current situation.


Investment in debt too has done reasonably well for many years, till a few years back; at least it protected you from the ravages of inflation. But returns on debt are being eroded by governments to close to zero. Any asset that you have accumulated, should work for you, i.e. generate passive income. But Governments are going around printing money these days like, well just like it is paper which it is, and the way they are handing it out free on the pretext of quantitative easing only ensures that the money you are holding now will soon erode itself to zero value if you hold it in the form of cash.


That leaves out gold and real estate. Gold has always been a good hedge against inflation and will continue to be so. But real estate is probably the only asset left where one can expect some real return, at the very least one which is higher than inflation, and most likely, returns that beat inflation. It is an asset that will hold its value under inflationary conditions, and it is probably the most productive asset that you can have under your direct control.


Within real estate, one can choose among various options – residential apartments/plots/villas, commercial buildings, and farmland.  Farmland is looking increasingly attractive as an investment option. There is always going to be demand for food, and the increasing depredations caused by innovative financial engineering are bound to result in some kind “return to the basics” backlash. There are several other reasons given in the nice article attached below.


I would suggest – start considering investing in farmland. And in case it happens to be on the outskirts of a city/town, that’s even better. At some point in time, you might end up selling by the square foot what you bought by the acre!  Believe me, there can be no greater satisfaction that that!


Attached: a good article on Farmland that was forwarded to me by a friend. The best line is the last, "farmland is not a miracle investment, but a solid investment from old fashioned investing. Go walk a field and you will learn so much."



The Allure Of Farmland Investments: Consistent Performance, Low Correlation

May 17, 2012  | 4 commentsby: CFA Institute

By Robert Stammers, CFA

Few have ever considered farmland to be an alluring investment. However, in recent years it has been getting more attention from investors, primarily due to strengthening fundamentals and a consistent performance record. Most people realize that the world population is growing and, as a consequence, the demand for food is increasing.

Net income per capita is also growing quickly, especially in countries like China that used to have surpluses but have become net importers of food, as of late. The change in diet around the world toward more expensive foods, an increase in the consumption of meat, and the consistent use of biofuels are also increasing the demand for grain and other agricultural commodities. All of this bodes well for the value and returns from direct investments in farmland and farmland-based funds, in which performance is tied to these ameliorating basics.

These were the central themes discussed at "Investing in Farmland and Feeding the World," an interactive session at the 65th CFA Institute Annual Conference in Chicago last week. The session was presented by Shonda Warner, a partner at Chess Ag Full Harvest Partners, the firm that advises and manages the Full Harvest Agricultural Opportunities series of funds. In addition to answering the question, "Why invest in farmland?" and highlighting the benefits and risks of investing in farmland funds, Warner spent time explaining how investors should approach valuation and where farmland values may be headed in the near future.

According to Warner, the investment returns on direct investment in farmland have been fairly consistent over the last 60 years, with appreciation of the land averaging 6.13% annually between 1951 and 2010. Current yields derived from renting land to farming tenants ranged between 2–5% annually over the same period, with the level of rents being a function of the level of interest rates, irrigation, location, and the types of crops that could be produced on the land. Total returns for the period averaged 11.52% annually with a standard deviation of 7.36% (USDA NASS returns, as compared to the S&P 500 return of 11.81% with a standard deviation of 16.83%).

Warner enumerated many other benefits of direct investment in crop land:

  • Returns have not been correlated to the stock market or other commercial real estate markets. (Correlations with the S&P 500 and REITs for the period 1972-2008 were -0.09 and 0.00, respectively.)
  • Rents can be increased, allowing crop land to provide a hedge during inflationary periods. (Correlation with inflation for the period 1972-2008 was 0.50.)
  • Crop land is not as heavily leveraged as some other real asset sectors.
  • Rents and the income component of returns should increase with an increase in the level of interest rates.

In addition to providing the investment rationale, Warner touched on the suitability of crop land as a portfolio diversifier and why obtaining a financial exposure to agriculture is gaining significant interest and acceptance from the investing public. "Investing in agriculture is a popular subject these days," Warner said. "When I started in the business in 2006, agricultural investing wasn't written about in the Wall Street Journal, Barron's, or anywhere else for that matter. Now it is everywhere."

The new and increasing interest in crop land isn't only a function of return expectations; it continues because the asset class provides a good fit with investor needs. Warner discussed some portfolio benefits, outlining how the asset class provides solutions to many investor concerns such as:

  • The need for uncorrelated and diversified investments.
  • Unease about high deficits and possible ensuing inflation.
  • Worries about the false economy created by continued cheap financing and apprehension over the normalization of interest rates (and their impact on the capital markets).
  • Demand from family offices and high-net-worth investors for alternatives to the equity markets.
  • Worries from many investors, especially aging baby boomers, about liability matching. These investors also require investments with some kind of stable coupon or income component.

Strengthening fundamentals in the agricultural market and the many positives that Warner mentioned had audience members wondering if farmland was witnessing a valuation bubble and what potential risks might derail the sector from its current course. According to Warner, most economists would say that farmland is not overvalued. She pointed to growing global demand, low interest and inflation rates, and a reliance on lower leverage and fixed-rate financing in the sector as reasons that values might continue to grow from current levels.

As for risks and potential trends that could impede future growth, Warner mentioned that new technologies could increase crop production at a rate that outpaces demand and puts downward pressure on commodity prices. She also mentioned that political support for ethanol could waver if oil prices drop, and that could impact corn prices and farm values. The expectations that interest rates will rise over the medium- to long-term could pose another risk. New types of ownership and the entrance of new, less-knowledgeable investors paying unsupported prices could also cause land prices to rise faster than they normally should, potentially leading to an asset bubble.

Although the increasing interest in farmland is motivating the creation of new ownership structures that can serve different segments of the investing public, investors need to understand that it is still a relatively inefficient asset class. Warner admitted that agriculture is a long-term investment, it is illiquid, and it is difficult to value correctly. One invests in the asset and can withstand short-term fluctuations due to a belief in its long-term potential. Investing in farmland-based funds is one way for smaller investors to gain an exposure to the asset class. Investments in commodities or stocks that service the agriculture sector may lessen some of the structural issues of direct investment but may also be more volatile or have a greater correlation to the stock market.

Warner acknowledged that regardless of investor interest, "farmland is not a miracle investment, but a solid investment from old fashioned investing. Go walk a field and you will learn so much."


Thursday, May 24, 2012

The Facebook Story

Mark Zuckerberg has changed the world. He is the pioneer (actually I don't know if he is, but at least he is the successful pioneer) of this new thing called Facebook, which is part of the new phenomenon called Social Media, which has changed our lives in profound ways.  Tracing the history of that and the impact it has had on our lives is interesting.


Young college kid starts a social media venture and becomes immensely successful.  He offers a platform for people to 'friend' each other and socialize online. Lots of people join up – it's free, it's a new way to communicate, it's a great place to hang out, and there is something immensely gratifying about letting people know what you are up to. We human beings are social animals and want to see and be seen with each other. We want to know what everyone else is doing, and want to impress them with gory details of our entirely uneventful lives.


Many people join up, it becomes popular and soon Facebook crosses a point where more people join because of the lot of people that are already on it. If you joined another social network – and dozens of them came up and vanished back into the ether – you were likely to be very lonely. And loneliness is something we don't like. Being in the company of other people, even virtually, is comforting.


So people go online and check out what their friends are up to. And all their friends seem to be having a great time. They have posted pictures of themselves at a party, in a group, drinking with friends, out on the beach, with beautiful babes or gorgeous hunks as the case may be, standing on the mountain top with a backpack and clouds for company,  wearing a new dress; and pictures of their cute boyfriend, cute child, and even cuter kittens. No one posts pictures of themselves lonely at home, staring at a wall depressed, getting abused by the spouse, being shouted at by the boss, crushed in a crowded train travelling to office, doing mundane daily chores,  or doing what most people actually do most of the time – that is, navigate the mundane aspects of daily life.


Which is what, you the Facebook user are doing, most of the time. Navigating the mundane aspects of daily life. And you resent the fact that all your friends are having a gala time, while you are stuck in your daily rut.  And this leads to Envy.  In the real world you envy your neighbor for her Miss Universe looks and the million dollar inheritance she has received from her dad, but this is quickly tempered by the fact that she has an absolutely pathetic dolt for a husband, and cannot speak good Hindi. Life has a way of equalizing which is not apparent on Facebook.


You get more and more hooked to the whole thing, and visit Facebook whenever you get time. You connect through your mobile, and post pictures of whatever you are doing immediately. There are cases of couples interrupting the marriage ceremony on the third phera, uploading a photo on Facebook, "getting married right now – doing the pheras" and then resuming walking around the fire. The pundit doesn't mind since he is catching up on mail in the meanwhile. More than focusing on what you are doing right now, you are always focused on your next update so that you can tell the whole world what you are doing right now, and checking out what others are doing right now. Instead of living in the present, where you are, and enjoying the moment, you live for projections – projecting what you are up to, and imagining what your friends are up to, based on what they are projecting about what they are up to.


And it is not even true friends that we are talking about.  Your friends consist of people you have last met while in school, whom you never got along with while there, ex-colleagues who just happened to be in your lives for a brief period, and friends of friends who are into collecting friends on Facebook. There was somebody called Dunbar who did some research on friendships and came up with the conclusion that no one can handle more than 150 friends in real life, and that includes real friends and virtual friends.  By definition, friends are people whose lives you keep close track of, and the brain switches off if loaded with too much data on too many people. In the process, what is the bet that you become less and less  aware of what your real friends (as in true friends, those who will come to your aid in times of need, stand by your bedside when you are ill, and have a drink with you when your spouse has thrown you out of the house) are up to, and load yourself up with useless data on people who don't matter to you, who you have not met and are not likely to meet anytime, and people who are staying thousands of miles away? You have crossed the Dunbar limit long back, and you find you are unable to cope.


In the meanwhile your girlfriend breaks up with you. Publicly, online. She posts it on Facebook – "with new boyfriend on the beach – left the old one, poor sod, whose face looks like a truck ran over it" – without even bothering to inform you about it. Seventy three of your friends "like" her post which makes you even more depressed. Your true friend, who is not on Facebook by the way, breaks open your door, and rushes you to hospital where they extract the residues of thirty sleeping pills with a stomach pump. Of course you cannot keep away from Facebook for long – you post "was in hospital for a minor stomach problem", get two hundred likes, and are rehabilitated into life.


Meanwhile your spouse sees a photo you are tagged in, with your arms around your girlfriend, not the one mentioned above, but the one whom you broke up with after college and caught up with after fifteen years, courtesy Facebook. The court case becomes very messy since her lawyer has dug out lots of dirt on you from Facebook, which proves that you are a philanderer deserving of the greatest punishment and the most punitive alimony. Your wife does not post anything on Facebook, since  vicarious voyeurism is her kick in life, and there lies your misfortune.


The alimony is really punitive. You feel like you are being punished for the sins of your past lives as well. To compound the misery, you have just seen a Facebook update where your wife is tagged with your ex-girlfriend – the one who didn't like your face – having a gala time on the beach in Hawaii.  You have had enough of girlfriends and wives in general and want to divert your energies to getting rich. Which is when the Facebook IPO is announced.


A once in a lifetime opportunity! Mark Zuckerberg  will be among the world's richest men! Grab a part of the story!  Subscribe to the IPO of Facebook!  You are at a very vulnerable time in your life, and you borrow a huge sum of money to invest in the IPO.


What happens after that is another story – we shall leave that for next time…

Wednesday, May 23, 2012

Facebook IPO


Facebook goes from $105 billion to $93 billion, within a couple of days of its IPO!


Who is to say what the right valuation is?  Who has seen a hundred billion? With revenues of 1 billion, what justifies a 100x valuation in a company that provides its primary services for free, and depends on “eyeballs” (reminds me of the dotcom days) and “stickiness” to generate revenues from advertisers? 


Where is the asset that is non-replicable? Where are the entry barriers? If these are solely due to the fact that people won’t move to other social networks, what benefit do you get by people sticking to your network? You allow them to post unlimited amounts of data and pictures, free,  and run datacenters with a capacity of gadzillions of bytes to allow people to socialize. And then what? Provide space for advertisers to display their hoardings, provide access to “big data” to firms that will do “analytics” – how much revenue will this result in?


I can understand religious faith – visit the temple and the Lord will shower blessings on you!  But what kind of faith is this, where people pour billions into an IPO where the revenue model is just that, a model – something that arrives at a Net Present Value of highly imaginary future cash flows? Pour your offerings into Mark Zuckerberg’s Hundi – if you don’t you are likely to suffer from a severe feeling of rejection, since everyone else is doing it, and there is comfort in belonging to the crowd. The Dutch Tulip case and several other examples of unsustainable price increases come to mind.


Ok, for that matter, why did people invest in Anil Ambani’s power projects, when all he had was a plan, to enrich himself?  Why are telecom companies selling stakes to each other at high valuations (maybe that is not true any longer)?  Why do people still invest in airline companies, which have no chance of making money, or in airline companies run by aging playboys, where the chances are even less?


Why does common sense desert us, and why do we always follow the herd?




(encl: nice article on Facebook, see below)



Facebook CEO: YOU Said Jump, I Said How High

By Damien Hoffman


Let’s forget about the scam underwriters such as Morgan Stanley (NYSE:MS) perpetrated on the public by manipulating Facebook’s (NASDAQ:FB) IPO price and share count in the final 48 hours. Instead, let’s take a look at the deal from 10,000 feet: after 2 bubbles and crashes in a decade of stock market activity, Mark Zuckerberg et al acted perfectly rational in sucking dry the equity value pre-IPO. Don’t believe me? Just ask Ivan Pavlov.



Yes, Mark Zuckerberg’s decisions regarding the Facebook IPO were as predictable as Pavlov’s dog coming for dinner at the sound of the bell. Our culture of greed has conditioned a new generation of entrepreneurs to meticulously pull as much wealth as humanly possible from their companies before throwing the stock certificates to the sleazebag thieves on Wall Street. Reid Hoffman, Andrew Mason, and Mark Pincus did the same atLinkedIn (NYSE:LNKD), Groupon (NASDAQ:GRPN), and Zynga (NASDAQ:ZNGA).


At first blush this behavior sounds hardcore, but is it? Is it unethical to spend every waking hour and ounce of energy building a company (which in this case 900 million people use for free) only to try to capture the full value of equity? Do value creators such as Zuckerberg owe public investors a piece of the upside? Can any of us truly look in the mirror and say we would’ve called our underwriters and said, “Hey, wait a minute. I am making too much money here. Can you please bring the price of the IPO down so the general public can get rich too?”

Right. I don’t think so.


So, before we go bashing Zuckerberg as a greedy bastard, keep a few things in mind:


1) He is merely a product of the culture we find ourselves in circa 2012.

2) Younger people like Zuckerberg have seen nothing but cycles of Wall Street ripping off entrepreneurs and the general public in what amounts to a rigged casino.

3) Zuckerberg had the steel nerves to leave a huge portion of his risk on the table much longer than almost every other entrepreneur who hit world shaking milestones.


And now for the most important lesson from the Facebook IPO:

When a stock is over-valued, don’t buy it. Plain and simple. It’s a free country … and stupidity is a personal freedom.

As the proverb goes: don’t hate the player, hate the game. And if we’re genuinely sick of the bullsh*t game, then we need to stop playing instead of letting greed get the best of us. Or has Wall Street turned us into Pavlov’s dog too?


Now check out The Decline and Fall of Facebook’s Empire >>


Friday, May 18, 2012

The Facebook IPO


Success has always been valued,

But now the game is valuation.

Each new investor now comes in,

Paying for future expectations!


Who has seen a hundred billion,

A tiny slice of which each will own?

Do they think it’ll reach a trillion,

Pray, what’s it they know that I don’t?


Brick and mortar demands actual cash,

Money flowing in that you can see.

With firms that run on the web and Net,

Who has actually seen the money?


It’s price paid for world dominance,

Through services based in the cloud;

A position easily threatened,

By  the next newborn upstart!



The pie is now so attractive,

That everyone wants a slice of it.

They’re paying to be in the party,

Each share’s a ticket, not investment!