Heaven

“Heaven signifies day and night, cold and heat, times and seasons.” Thus, Heaven signifies the broader environment of a conflict, regardless of the nature of that conflict.
Some say that Napoleon studied Sun Tzu’s “The Art of War” extensively in developing his military strategies. However, if this is so, Napoleon blinded himself to the constant of Heaven when he invaded Russia in ignorance of the seasons, and was thus defeated by the Russian winter far more than any battlefield setback up to that point. This is one aspect of Heaven.
However, for the modern American businessman, the fiscal year, S.E.C. filing schedules, the filing of taxes, and public disclosure laws, are every bit as important and ever-present as the seasons and the phases of the moon. This is the broader legal environment within which a corporation exists.  Ignorance of Heaven is simply not acceptable.
Each strategist is responsible for understanding the context of his or her battlefield. Let each of us meditate on what constitutes our broader environment, and how we may take this into account as we conduct our business.

The Moral Law

One of the more fundamental concepts in Sun Tzu is “The Moral Law,” one of the Five Constants of warfare, as translated by Lionel Giles in 1910. Regardless of the label we use for it, Sun Tzu’s definition serves well: “The Moral Law causes the people to be in complete accord with their ruler, so that they will follow him regardless of their lives, undismayed by any danger.” Thus, “The Moral Law” is the unifying cause that unites a nation, an army, or a corporation; it is, in a more military sense, the mission. In business, this is what constitutes the content of the mission statement to all stakeholders.
Sun Tzu’s concept of generalship is public service, albeit for a ruler who, in his day, was a king, and thus a law unto himself. Nonetheless, the same core principle holds: a nation with a stronger reason to fight and more vibrant leadership has an advantage in war. This advantage is far from absolute; it is merely one of five constants Sun Tzu writes of. However, its importance cannot be dismissed.
In American history, various self-appointed missions have come and gone. One of the more notable ones in war was that expressed by President Franklin D. Roosevelt in his “Day of Infamy” speech; he laid out to the nation a great cause justified any hardship and any sacrifice in obtaining what was considered to be righteous vengeance against Japan, in addition to full war against Japan’s ally,  Germany, in ending further threats to American soil. What matters here is that the American people were heavily motivated by the idea behind American involvement in the war, now that the war had been brought to America (from their layman’s perspective).
The Moral Law is unity of purpose. Unity of purpose, in turn, provides the motivation for those participating in the organization to act, to follow orders, to obey regulations, and to further the interests of the leader. It is the foundation of organized action. Its importance must not be dismissed.

Employees or Sons & Daughters ?

In studying Sun Tzu’s “The Art of War,” I found one piece of advice to be particularly poignant:
“Regard your soldiers as your children, and they will follow you into the deepest valleys; look upon them as your own beloved sons, and they will stand by you even unto death.”
This principle has borne fruit throughout history. Those leaders in war who were regarded as sharing the dangers and sacrifices of the troops were particularly loved and respected by their troops. Some took this behavior to extremes; others simply made a point of showing solidarity with the rank and file.
Before getting carried away with this notion, let us read the next passage and understand both in proper context:
“If, however, you are indulgent, but unable to make your authority felt; kind-hearted, but unable to enforce your commands; and incapable, moreover, of quelling disorder: then your soldiers must be likened to spoilt children; they are useless for any practical purpose.”
Of course, we should bear in mind that the ancient Chinese idea of how to treat children is very much in line with “spare the rod and spoil the child”; however, Sun Tzu was, particularly by the standards of the ancient world, a humanitarian who regarded proper treatment as an advantage rather than a sign of weakness. Even so, Sun Tzu was a practical man mindful of reality; to be kind but soft is fatal to leadership in any organization.
Placed in the context of a modern business organization, these words may seem strange. Yet these words were no less strange in ancient times. The difference between a general and his men seemed as great as that between the earth and the sky; many argue that the difference between a Fortune 500 C.E.O. and a front line factory worker is of a similar breadth. It is also not particularly the point.
A father does not treat his sons well because he is their brother. A father looks after his sons because he has greater power and authority than they do, and thus, a greater responsibility to them, and greater control over himself; he chooses whether or not to make the extra effort. Thus it is with a businessman; there is no power that will force him to look after his employees’ interests. That is precisely why such behavior is respected and admired. Common is the leader who ignores the needs of those that follow him; rare is the leader who takes the time to ask himself, what ails those I am responsible for? What can I do to help them?
Though a manager can be too concerned with the superficial and not enough about the bottom line, similar to a “player’s coach” in basketball who lets millionaire players walk all over him more often than not, the wise leader looks after his charges by looking at the big picture; by taking responsibility for the overall success of the organization. False economy is not a viable long-term option; indulgences that harm the organization and lead to long-term failure are not in the best interests of employees, even if the employees themselves believe otherwise. No one said being a parent was easy.
Above all, trust can only be built by a combination of humanity and consistency. By ensuring that your instructions are followed, all while demonstrating through deed that you are concerned for the welfare of all and not just yourself, you ensure that you are not only liked, but respected. This is not done through verbal tantrums or making your nickname “Chainsaw”; it can only be accomplished by making sound decisions, persistently following up, and building a truthful expectation that you will act in the best interests of those impacted directly by your decisions.
This is a certain path to victory.

Art of War by Sun Tzu

One thing i owe to my Strategy Prof is the fact that he introduced me to the world of Sun Tzu and his fabulous book Art of War. Believe it or not i had never heard of the book until he mentioned in our first Strategy class. I found it interesting and went on to watch a documentary by History Channel on Art of War.
To all those strategy enthusiasts out there i would recommend the movie as well as the book. I would be discussing some excerpts from the book and blogs i have read about the book.

~Ciao !!

GOLD

The following is an excerpt from the paper i wrote sometime back on Gold as an investment. I came across this article in one of the magazines and researched a more on the same. The references are mentioned underneath.

At close to USD 1550 per ounce, “Astounding” is one word that describes the recent run in Gold prices. For some sceptical souls out there, Gold prices are at height of a bubble waiting to burst. So, without wasting more time, let us clarify what we mean by bubble being formed. An investment is in a bubble when the asset price is highly inflated. Quite simple, isn’t it? But when we are saying inflated then there must be a reference of some sort to measure the degree of inflation. For investments, this reference value is known as intrinsic value. This brings us to our very first question.    

Can Gold be considered an investment?

Before we answer this question, let us ponder for a moment on how an investment is evaluated. An investment is evaluated using its underlying value (intrinsic value). The father of value investing, Benjamin Graham, proposed that a value investor buys undervalued securities and sells the ones that are overvalued. On the other hand, speculative bets are placed looking at the price of something and simply hoping the price goes up. So, in a nutshell, investment is about value while speculation is all about price. Carl Richards, a certified financial planner based in Utah, USA in his New York Times article “Gold is not an investment” uses the definition of investment just stated, to classify Gold as a speculative bet rather than an investment.

The problem with Gold is nobody knows what a bar or a coin of Gold is really worth. It has no underlying real value. It neither produces anything, nor are there any cash inflows associated during the period you hold a bar of Gold. Warren Buffet, legendary investor, compares buying Gold to buying a piece of art which you hope will sell for more than you bought it for.  "Gold really doesn't have utility," the 80-year old told shareholders at Berkshire Hathaway's annual general meeting this year. "I'd bet on a good producing business to outperform something that doesn't do anything. But with gold, you can sit on your Gold, stare at it, polish it and do whatever makes you feel good but it is not going to produce anything.”

What drives the price of Gold?

The price of Gold is a function of perceived economical and geo-political risks as well as the risks associated with other commodities or currencies. The greater these risks, greater would be the demand for Gold and greater the upswing on the price of Gold.

Take for example, year 2008 when Gold hit USD 1000 per ounce and crashed and then rebound. Looking at the series of events in 2008, in March of 2008 one of the big US equity firms Bearstones collapsed. This created a huge amount of panic in the global markets with the result that people started moving away from equity, from the debt market etc into Gold and that was the reason for the upward spiral in the Gold prices.

Come July 2008, Lehman Brothers collapsed and that created another huge crisis of confidence globally. The immediate impact of Lehman Brothers collapse was a 'sell everything and hold cash' syndrome. Everybody had only one motivation in mind and that was selling everything and holding cash as an asset. Not even stocks, not even bonds, not even Gold.

February last year, Gold prices hit their low at USD 1035 per ounce. The slide ended as soon as the news of Greece default came up and within 48 hours of bailout announcement Gold had hit USD 1235 per ounce. With the recent developments in Eurozone, Gold can be expected to react to sovereign debt concerns for the “PIGS” economies.

Besides these, geo-political instability in Middle East and North Africa region has also contributed to rising Gold prices. Earthquake in Japan and its ultimate impact on already shrinking Japanese economy as well as rising oil prices have also made a positive impact on the Gold prices during last year.

Where is Gold heading now?

Uncertainty in Eurozone and weakening of US dollar during recent times has caused central banks around the world to limit their exposure to greenback. According to a report by World Gold Council, purchases by central banks in the first quarter of 2011 jumped to 129 tonnes (USD 5.7 billion), more than the total for 2010 as a whole. Central banks, especially in the emerging economies, are using Gold as a mean of diversifying their reserves and limiting the exposure to US dollar.  Such moves have led to the recent rise in Gold prices. How long this run would continue? “No one knows”.

Gold Exchange Traded Funds

Let’s suppose you as an investor who wants to gain exposure to Gold. You could either buy Gold in physical form or go for Gold Exchange Traded Funds. Investing in Gold ETFs gives the investor all the advantages of investing in Gold while eliminating drawbacks of physical Gold -- cost of storage, liquidity and purity, among others.

Gold ETFs are transparent investment vehicles that conform to rigid regulations on investment. This assures the quality of Gold that the fund invests in and transparency in calculation of NAVs and, consequently, the market price at which these units trade.

Gold ETFs allow investment in Gold in small denominations, which makes it easier for the retail investor to participate. On the secondary market, the minimum lot is one unit. The units can be redeemed either from the fund directly or from the market.

Further, investing in paper Gold gives investors’ tax advantages over investing in physical Gold. Gold ETF units held for more than one year qualify for long-term capital gains at 20 per cent, whereas the holding period in physical form has to be three years to qualify for long-term capital gains. For less than three years, the gains are taxed at 30 per cent. Also, Gold held in paper form is not liable for wealth tax.

In India Gold ETFs is a relatively new phenomenon with the first Gold ETF being Gold Benchmark ETF launched in Feb, 2007. It raised 96.26 Cr Rupees, while today its assets under management (AUM) stand at 1703.49 Cr Rupees as on March 31, 2011. Overall, since Feb 2007, Gold ETFs in India raised around 941 Cr Rupees. As on Mar 31, 2011, their current assets total more than 5643 Cr Rupees. The number of retail folios in Gold ETFs has doubled over the last financial year.

Gold vs SENSEX

If we look at the past three year duration 2008-11, the yellow metal shines bright making equity look like its poor cousin. The following graph shows how two Gold ETF’s, Gold BeES and Kotak Gold ETF, have beaten the BSE SENSEX in last three years considering an investment of INR 10,000. Kotak Gold ETF’s return is shown in green while the return of Gold BeES in blue is not visible since it exactly matched the return of Kotak Gold ETF. SENSEX return is shown in Yellow.

Source: www.moneycontrol.com

On the other hand, if we take last three decades, the story is different. Gold delivered an annual return of 2.5 percent, barely beating inflation while the sensex generated 17 percent per annum over the same period.  This leads us to the conclusion that just like any other speculative bet, Gold beats the market return over a short duration but over a rather longer duration of time, “Market” prevails.

Should you invest?

Stability, reduced volatility in a well-diversified portfolio, inflation-plus returns, convenient investment vehicle to get tax-efficient exposure, are all good reasons to invest in Gold ETFs. However, there are certain issues that investors must keep in mind. Liquidity may become an issue for small investors who want to exit, especially in times of crisis. Finding buyers at a fair price in the markets may become a problem if you need to convert gold to money.

Redeeming units directly from the fund may not be an option available always. During periods of financial crisis like hyperinflation or failure of banks, the large investors may convert paper holdings to physical Gold. Small investors who do not have this option may be left holding illiquid paper. In such a situation, Gold loses its edge as a store of value.

On the returns front, while Gold ETFs can add lustre over smaller periods, the returns they generate in the long term are not very encouraging. Entry loads and fund management costs further reduce returns. You could consider buying the units in the secondary market, where brokerage costs may be lower than the applicable entry load.

If an investor is clear about the reasons for investing in Gold and the issues related to it, there is every reason to include Gold as an asset class in the portfolio and the Gold ETF may be just the ideal vehicle to join in the Gold rush.

  

References:

www.valueresearchonline.com

www.moneycontrol.com

www.etfgold.net