Capability or resources?

Someone asked me a pertinent question recently. Why should you be fixated on equity? Why not invest in real estate, commodities, currencies or even art? After all, we are trying to make money with money, so any asset class should do. I looked around. There's Jim Rogers, commodities guru, egging us on to accumulate everything from sugar and corn to lead and coal. The evidence is all around us. Oil has surged from $20 to over $100 a barrel.Metals have been on a gallop. Wheat acreage is continuously on the decline (atta is up to around Rs 20 a kg from under Rs 14 two years ago), while other grains and sugar are diverted to alcohol. Palm oil futures have doubled in less than a year, and a global fertiliser shortage looms.Art is no different. A Husain will some day be as coveted as a Gaugin or Picasso original. And Ravi Varma aspires to rub shoulders with Rembrandt. First-time investors are busy figuring out how to short the dollar and roll long positions on the renminbi, while moneybags from Boston, Hong Kong and Dubai are gobbling up millions of square feet of real estate in Vashi and Gurgaon.Where does all this leave the stock markets? Even here, many of the big opportunities being touted are in infrastructure and real estate, or iron ore, coal and other mining stories. But I think there is more to investing than just picking broad themes and riding waves. Sure, there might be money in doing this, but it does not hook me in the same way that a great management in charge of a good business does.
The principal reason is ironic, to say the least. A good management gives me protection against bad times. The biggest plus about capability is that it helps you survive bad weather. This cushion does not exist for resource stories, which bear the brunt of low prices at the trough of every cycle.Ask the Arabs who sold oil at $16 a barrel. Likewise, all the iron ore mines in Jharkhand and Orissa were useless when ore sold for Rs 700 at the pit head, and you spent more than that in raising cost. But Tata Steel lived through those times, living off its "lowest cost converter in the world" tag.Now compare the options that you have as an investor: buy gold (or copper, zinc, corn, crude, or sugar, using futures) to play on its price, or invest in an economic organism called a business that employs people, machines and time to work on your money. And deliver something useful to its customers, for a price that the competition does not like.Times change, the business reinvests its profits into new areas and capacity and moves on in its quest for earning a fair return to its shareholders, as also engaging and (mostly enriching) its other constituencies: employees, governments and society at large.Not all businesses do all of this, but the ones that donft do this soon get waylaid. This great cycle of business life repeats itself across companies, and serves to multiply investor wealth when listed companies do a good job of playing it out successfully. How exciting to own and daily track the fortunes of such an organism!Against this, you can choose to hold on to futures contracts or pieces of a precious metal that you can stash away in a corner of your home. Or, you can choose to invest in a Ganesh Pyne original or an acre on Sohna Road in Gurgaon. Youfd be very rich if you could stash away things like that or crude oil, zinc or iron ore. Or if you could short the dollar.In fact, I know of several people who have made pots of money sitting on bounties of resources that they inherited or bought at the "right" time. They include sheikhs in the oil rich countries of West Asia. Or legends like Jim Rogers, who punted on a wide range of commodities. And iron ore mine owners in Jharkhand, Orissa and Karnataka who have raked it in over the past five years after decades of pain. Not to forget mining companies like BHP Billiton or Rio Tinto, which own coal, iron ore and other mines in several countries.Plus the big oil firms like Chevron, BP and Shell. But not one of them has the sustainable profit and business franchise that a Warren Buffet inevitably looks for in every company he buys. Who do you want to follow?

The writer is head of research, Wealth Management Advisory Services. He can be reached at dipen@wealthmanager.ws