The Curious Case of an Indian Investor...

Indian investors have been very keen savers for a long time now. Looking at the fact that savings in India are close to 30% of the GDP, one should have a very optimistic feeling about our future, sadly that's not the case. Although we have been very high savers, historically we lack the financial wisdom to chose the right asset class.  

Let me begin by sharing a very simple yet insightful view^ of perhaps the most successful investor, the world has ever seen, also known as the Oracle of Omaha, Warren Buffet.

"Investing is defined as the transfer of your purchasing powers now, to others, with the reasoned expectation of receiving more purchasing power in the future. Simply put, investing is forgoing consumption now in order to have the ability to consume more at a later date.

Let's melt all of the world's gold stock of 170,000 tons together to form a Cube of about 68 feet per side, lets call this Pile A. This pile A is worth about 9.6 trillion dollars. Also, let us create another Pile B of similar value, but with this we could buy all of US cropland (400 million acres with output of about $200 billion annually, plus 16 Exxon Mobils 

(the world's most profitable company, one earning more than $40 billion annually.) After these purchases, we would still have about $ 1 trillion left over for walking around money. Can you imagine an investor with $ 9.6 trillion selecting Pile A over Pile B?

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton and other crops - and will continue to do so. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillion dollars (and remember you have got 16 Exxons). The 170,000 tons of Gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond"

There are many things you could learn from this letter by Warren Buffet but the top 3 that make my list are:

1. All of us consume so many products each day, manufactured by various companies and will continue to do so in the future too, without even wondering where the profits of these companies go. Isn't it silly of us to NOT invest a part of our savings in these companies and be a part of their business success, instead of  just piling money in traditional financial instruments?

2. We own gold and real estate as it has a strong emotional appeal, there is pride of ownership in it, why cant we share the same pride in owning a part of successful, profitable businesses? This "the blind leading the blind" attitude agonizes me to think when an investor comes to seek advice on property and gold by compromising on their major life goals like retirement. 

3.  Most Indian households talk very freely about owning gold and real estate and how these assets have been passed on from generation to generation, especially with our children, do we ever think or talk about owning equity in the same way? Why not? We need to make sure we talk to our children about investing in Equity too, after all they are the future.

With only 3-5% of our savings being channeled into equity asset class including mutual funds, compared to 77% in the US*, 41% in Europe* and 33% in the UK*, our Equity markets are highly undervalued. If this figure moves up to 15% in India, our markets will get a big "push" and reduce dependence on the foreign inflows! 

Remember this performance will ultimately benefit us, if and only if we have the courage to systematically invest and be patient with our investments, otherwise we will still continue to consume, but sadly enough, not be a part of a wonderful and developing nation.

Ninad Kamat
CERTIFIED FINANCIAL PLANNER^{CM
www.letsmakeaplan.in}
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^ Source - Warren Buffet's letter to share holders.

* Source - KPMG report & RBI report FY-2012