March 23, 2009

A few thoughts on other instruments

I received the following comment from Raj. I am posting my response via a post. Please feel free to share your comments

Hi Rohit/Everybody,

Can we include below mentioned financial instruments in personal finance and short comments (how easy they are for new investors, who should dabble with them, pros/cons) on them:
A) Commodities
B) Gold
C) Debt instruments
D) Derivatives (options etc.)

Commodities – An easy one for me. I have zilch idea about it. Due to my mindset (value investing, looking at intrinsic value etc), I have not been able to figure out a way to invest rationally in commodities. It does not mean commodities are bad or anything. I just find them outside my scope of competence and would not recommend a new investor to dabble big time in commodities.

Gold – A subset of the above. However I am baised against gold and am a contrarian on gold. The reason for all this excitement on gold is more due to the price run up in the recent past. Look at this
chart . Over the past 20+ years, gold has barely doubled giving a return of 3.5% per annum with the entire return coming over the past 5 years. Unless you have some special insight into the demand supply scenario of gold over the next few years, I would not invest in gold based on what others are saying.

Debt instruments – my thoughts on the same

Derivatives – A short cut to ruin if you don’t know what you are doing. I have personally started looking at these instruments and am currently in the learning phase. I am currently reading and investing in these instruments in a very small way. The idea for me is to test and learn over the next few years before I increase my commitment. This is same approach I adopted when I started investing a decade ago – learn and invest small so that early mistakes are not fatal to your networth and self confidence.

I personally consider derivatives, complex and not an easy way to make money. The upside may be high, but at the same time the risk is high (due to the inherent leverage in these instruments) especially if you are new to investing and have just started out.


Anonymous said...

I don't know my thoughts are in line with the discussion or not. But my exposure to market (Mainly Equity) is financed by my Home Equity Line of Credit. and it's for longer duration like 20 years etc.

This would give me benefits of difference between market value of my home and my Home loan. that i like to call as margin of safety. Currently I have a margin of safety of 50%, that means home prices should have to fall 50% from current level(Mar 2009) in order to my mortgage becomes underwater.

I am enjoying this personal financing option (for last couple of years)as my bank (PSU) offers me all the loans at Home loan rate & for full tenure of the loan (20 yrs).

Benefits of keeping margin of safety:

In that 50%
I can raise my loan to buy another property, Land, Expenses like furniture or Investments (Which i am doing)

Since all the exposure (Debt) has Single collateral for longer duration with very low Interest rates like Home loan rates, I can service that home loan easily from my salary/ other income/ Regular profit booking/ Short term trading.. etc.

income.portfolio said...


You had an interest viewpoint on investing in commodities. I posted a similar article on my blog about commodity investing. After you read it let me know what you think?

Best Regards,

Anonymous said...

one good thing about investing in commodities is that unlike stocks they never go to ZERO.

Anonymous said...

In line with my first comment,
My Interest on my total home loan outstanding (Home Loan + Top Up) is tax deductible. So If I invest top Up amount i will have tax exemption + Dividends + Price appreciation for 20 years.

Rohit can you please share your views?

Rohit Chauhan said...

hi anonymous
i am personally not comfortable with home equity loans ..and not comfortable investing borrowed money in the market. so i am the wrong person to ask this question ..i will never attempt what you are doing ..just my personal risk attitude

anon2 - why do think a basket of stocks (key word basket) chosen with proper analysis would go to zero ?


Rohit Chauhan said...

hi income.portfolio
i have not been able to find your article on commodities on your website