Today, we would like to talk about India, but first we would like to summarize our views on investment management strategy and tactics.

A.     Since corporate profits grow most rapidly in countries where GDP is growing most rapidly, focus investments in those countries.  Which countries among the large countries will grow GDP and corporate profits fastest?  In our opinion, #1 will be China, #2 will be India, #3 will be Brazil, #4 will be the U.S., Canada, and Australia.  Europe and Japan will bring up the rear.

B.     How we judge stock valuation.  There are many measures of stock valuation.  Based on traditional valuation measures, the world markets were very highly valued in October 2007.  As of today, valuations have plummeted, especially for those countries where stock prices have fallen while corporate profits have grown.  As a result of a major bear market, some world markets have become very inexpensive, in our opinion.

C.     Last, but certainly not least, is RISK MANAGEMENT.  The standard “buy and hold” strategy employed by many investment managers may make their lives easier, but this strategy does not protect investors from violent financial declines, such as the world experienced since October 2007.  Guild Investment Management pursues active management by cutting losses.

Now that the damage to portfolios has been done, people are recognizing that many of the popular mathematical asset allocation models used by investors and financial mangers incorrectly managed for major risk by underestimating the frequency of such risks.

These financial planning and asset allocation models’ evaluation of the frequency of violent declines is something that I argued about with my professors forty years ago, so I can assure you that when Guild Investment Management originated, it was organized with a plan to control big risk.  Our motto has been to always cut losses quickly.  In our opinion, even if you re-enter the markets and lose again, stick to the policy and in the long run above average returns will result.

Here is an article on the subject from this past weekend’s Wall Street Journal.

Odds-On Imperfection: Monte Carlo Simulation
Financial Planning Tool Fails to Gauge Extreme Events
By Eleanor Laise, May 2, 2009.

If one had asked a financial adviser 18 months ago for retirement-planning guidance, there is a good chance he would have run a "Monte Carlo" simulation. This calculation method, as it is commonly used in financial planning, estimates the odds of reaching retirement financial goals.

But there is little chance your Monte Carlo simulation, named for the gambling mecca, would have highlighted a scenario like the market slide just seen. Though these tools typically run a portfolio through hundreds or thousands of potential market scenarios, they often assign minuscule odds to extreme market events. Yet these extreme events seem to be happening more often.

Some industry participants and academics are pushing to improve the Monte Carlo tools’ ability to highlight the risk of major market slides.

There is no standard Monte Carlo approach, but the method is nothing new. It was used during World War II to help develop the atomic bomb. By the late 1990s some financial-services firms, like T. Rowe Price Group Inc., had introduced Monte Carlo tools aimed at individuals.

Monte Carlo simulation has wide appeal, and is used in online tools offered by firms like Fidelity Investments and by independent retirement planners. The financial-services industry provides retirement planning, in part, because it attracts clients and boosts fee income.

Here is how a typical Monte Carlo retirement-planning tool might work: The user enters information about his age, earnings, assets, retirement-plan contributions, investment mix and other details. The calculator crunches the numbers on hundreds or thousands of potential market scenarios, guided by assumptions about inflation, volatility and other parameters.

It then spits out a "success rate," which shows the percentage of market scenarios in which the investor had money remaining at the end of his estimated life span. In many cases, the consequences of failure — say, running out of money at age 80 — aren’t laid out.

Many providers of the tools argue that it is a significant improvement over the traditional retirement-planning approach, which typically involves assuming some set market return, say 8% for U.S. stocks, year after year, an assumption considered unrealistic by academics and financial pros.

The questions about Monte Carlo tools reflect broader concerns about mathematical models for gauging portfolio risks.

These models were supposed to help quantify and manage the risks of mortgage-backed securities, credit-default swaps and other complex instruments. But given the events of the past couple of years, it appears that the models often gave big institutions, as well as small investors, a false sense of security.

Now, some investors have decided that if risk can’t be accurately measured, they will just have to play it safe. Jeff McComas, a chemical engineer in Woodbury, Minn., has used six or seven Monte Carlo calculators and found that none highlighted the possibility of a scenario like the recent market downturn. The lesson: "The future is so unknown that your prudent choice is to save as much as you can now and live below your means," said Mr. McComas, 39 years old.

Some financial advisers are equally skeptical. "I take whatever probability of failure that comes out of your Monte Carlo simulation and add 20 percentage points," said William J. Bernstein, author of "The Four Pillars of Investing."

Critics emphasize that the problem isn’t Monte Carlo itself, but the assumptions that go into it. Since no standard approach exists, one user might plug in a range of assumptions on interest rates, inflation or volatility that is different from another user.

Also controversial is that many Monte Carlo simulations assume that market returns fall along a bell-curve-shaped distribution. That means a high probability may be assigned to, say, a stock-market return of 5%, which would fall toward the middle of the bell, and negligible odds assigned to a 54% decline, which would fall near the extreme edge, or "tail."

"In a bell-shaped curve the probability of getting one of these extreme outcomes we’re seeing is basically zero," said Paul Kaplan, vice president of quantitative research at Morningstar Inc.
While a bell-curve model indicates there is almost no chance of a greater than 13% monthly decline in the Standard & Poor’s 500-stock index, such declines have happened at least 10 times since 1926, according to a report by Mr. Kaplan.

Some Monte Carlo models, like the one used by Financial Engines, assign higher odds to extreme market events than the bell-curve distributions. Even so, "I would not claim we have the magical ability to accurately predict very infrequent events," said Christopher Jones, the firm’s chief investment officer.
Some firms are considering revising Monte Carlo models to reflect a world where big market swings happen more often. Morningstar last year tweaked its asset-allocation software offered to institutional investors, allowing users to choose a bell-curve-shaped distribution or a "fat-tailed" distribution, which assigns higher probabilities to extreme market events. The company is exploring using this model in more products, Mr. Kaplan said.

Laurence Kotlikoff, a Boston University economics professor who developed the ESPlanner financial-planning software, and Richard Fullmer, senior portfolio strategist at Russell Investments, said they also are considering offering clients Monte Carlo scenarios that incorporate fatter-tailed distributions.
The choice could make a difference in an investor’s retirement plans. While a bell-curve model shows a negligible risk of a greater than 50% decline in the S&P 500 over extended time periods, a fatter-tailed model assigns it a probability of 4% or 5%, odds high enough to grab the attention of risk-adverse investors, according to Mr. Kaplan’s report.

Some industry participants and academics are pushing for Monte Carlo tools to more clearly illustrate the scarier scenarios. In a recent paper, Moshe Milevsky, associate finance professor at York University’s Schulich School of Business in Toronto, proposed a calculation that Monte Carlo tools could use to show a retirement plan’s vulnerability to extreme market events.

Some industry participants also are trying to set standards that could help Monte Carlo tools more accurately capture extreme market events. The Retirement Income Industry Association in 2007 issued a set of principles noting that the calculators should run a large number of scenarios.

The ideal models run tens of thousands or hundreds of thousands of scenarios, which help gauge extreme events at the tail end of the distribution, observers said. Yet some tools run only 1,000 scenarios or just several hundred.

—Neal Templin contributed to this article.


India is currently in the midst of a long national election process. The final results from all of India’s polling places will be announced on May 16, 2009.

Corruption will become more obvious as the election results are announced.  In India, some thieves (many politicians look at politics as a license to steal) will attain political office.  At the same time, many good people, who are selfless public servants, will also rise to high positions.  Still, India has managed to grow in spite of all of its myriad problems.

Most observers of the Indian scene agree that India is a land of large and numerous contrasts.  The election will point out many of these contrasts, and is likely to confuse us and other westerners.  It is easy to misunderstand India.

India has great intellects, a remarkable ancient culture.  India has some of the wisest and most foolish people I have ever met.  India has some of the most forward thinking, and backward thinking people I have ever met.  India may have the most educated and most uneducated people I have ever met, the most honest, and the most corrupt people that I have ever met, the most humble high achievers, and the most egotistic and arrogant failures…that I have ever met.

In short, I love India and remain baffled and enthralled by the place.  It has been forty four years since my first visit, and I have made forty or so more visits over the decades.


India is home to over 1.1 billion people.  It has numerous languages, cultures and many formerly independent countries operating as one nation.  Contrary to many countries, like the former Yugoslavia that have been broken into many parts, India has for the most part held together.  The current collapse of Pakistan makes India even more important to the entire world.

We look at India and see the potential for a huge positive force in world affairs, a country which is generally tolerant of difference, and which has been able to coexist with China and Pakistan on its borders.  Its military has had ongoing disputes with both, but have been able to avoid major wars with China.  Several very limited wars with Pakistan have developed in the decades since Pakistan and Bangladesh were carved out of India.

India is growing.  The key to their success has been education and wide spread spoken English.  They have developed a bigger domestic consumer market than China, but remain hampered by very poor infrastructure, a byzantine political system, and the remnants of a Fabian socialist economic system established by Oxford and Cambridge-educated Indians in the early and mid 20th century.   

Many uniquely Indian developments, such as the dreaded license Raj, (a system where a license is needed for many things that those of us in the west would never dream of needing permission to undertake) create bureaucracy.  The further problem is that underpaid civil servants make the granting of a license an opportunity to collect a gratuity. This often slows activity to a standstill.

On the positive side, the Indians are generally rational in foreign affairs and very skilled engineers, scientists, technologists, and businesspeople. Education is respected and sought after, and the intense competition within the Indian university system causes many highly intelligent Indians to seek education abroad. Historically many have remained abroad and many countries have benefited from the talents of Indian entrepreneurs and scientists.

Today, in the United States and other parts of the world, Indians sit as CEO’s of some of the largest companies.  Indian professors populate many universities and are widely found in the professions.

As a result of all these facts, and in spite of its problems, we expect India to grow rapidly. China has grown at a very rapid rate.  India will grow slightly slower but still at a rate far in excess of growth in the developed world.


The investment world has once again embraced India, Brazil, China, and emerging Asia as good areas to invest.  We are focusing on these areas, and certain sectors in the U.S.  We hold energy and precious metals related investments in Canada and Australia.  We see Europe as an underperforming region, and have only a few investments in Europe.

We had a hard time understanding, the rally in the U.S. dollar earlier this year.  Now, it has once again begun to decline, which has given a boost to gold and to Asian stock markets.  Gold has also benefited from the turmoil that has resulted from the melt down of Pakistan.  We believe that Pakistan is already lost, and when the world comes to realize this, gold will appreciate further.  The ongoing decline of the U.S. dollar and the fiscal irresponsibility at work in the world today will also benefit precious metals.

Thanks for listening.

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