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A presentation on the causes and consequences of the global crisis, and strategies for investment planning in uncertain times. Topics include risky mortgages, moral hazard, market crashes, wealth destruction, and the need for disciplined and informed investing.
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Global Crisis & Investment Planning --a presentation by R. Kuppanna GM, Kuwait India
The Broken Window • The art of economics consists in looking not merely at the immediate but at the long effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups – Henry Hazlitt
Global Crisis - - Causes US Government’s Encouragement of Risky Mortgages to “sub-prime” borrowers (Community Reinvestment Act, Federal Housing Administration’s lowering of down-payment standards, Dept. of Housing & Urban Development’s pressure on lending institutions) Freddie Mac & Fannie Mae grew to own or guarantee about 50% of the $ 12 trillion mortgage market. ======================================= All that is necessary for the triumph of evil is that good men do nothing - - Edmund Burke
Global Crisis - - Causes Moral Hazard caused by Freddie/Fannie Cheap Money Policy of the Fed that fueled these risky mortgages (fed rates down from 6.25% to 1.75% in 2001; reduced further to a low of 1% in mid-2003) ========================================================= Every step which leads from capitalism toward planning is necessarily a step nearer to absolutism and dictatorship – Ludwig von Mises (Omnipotent Government)
Global Crisis - - Consequences Riskier mortgages, irresponsible buying/lending of loans, rising volumes, skyrocketing housing prices, price crash, rising defaults, bankruptcies of major institutions, cascading effects on other markets, global meltdown, decline in income/savings, rising unemployment, risk aversion, massive wealth destruction… Demand for more intervention, stimulus/bailouts and more of the same disastrous policies Seeds for another, greater CRISIS ============================================== Let’s not be stuck in the dreary desert sand of dead habit - - Tagore
Your Choice From a state monopoly on money, to state guarantees of bank liabilities, to state sponsorship of mortgages, to state ownership of banks ---the progression in the past century has been to move away from free markets toward socialist banking. The welfare state and its main financier, the Federal Reserve, are ultimately “justified” on the grounds that the government has a moral duty to provide the needy with goods and services – from education to health care/insurance to mortgages. Think!! The choice between the alternatives is yours. So are the consequences.
Investment Planning Against this global background, how does one plan investments? Protect savings and wealth? Is there hope? Principles & Framework Process : long term, systematic, patient, disciplined No substitute for continual reading, research ======================================== A public opinion poll is no substitute for thought - - Warren Buffett
The Power of Compounding • A sum of Rs. 100 invested would add up to:
Investing Framework • Intelligence vs. Independence • Top Down vs. Bottom-Up Approach • Preparation: >generate alternatives > eliminate alternatives > construct portfolio • Margin of Safety • Investor or Speculator? ==================================================== An investment in knowledge always pays the best interest - - Benjamin Franklin
Conclusion On a lighter note: OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks . The other months are July, January, September, April, November, May, March, June, December, August, and February. - Pudd'nhead Wilson's Calendar There are two times in a man's life when he should not speculate: when he can't afford it and when he can. - Following the Equator, Pudd'nhead Wilson's New Calendar (Both quotes from Mark Twain)
