Friday, 31 December, 2010

Using Power of Compounding - A New Year Resolution

Using Power of Compounding - A New Year Resolution

Einstein called it the eighth wonder of the world. Financial pundits from around the world have sung paeans in praise of it. I don't think that I can find any new word to praise the truly magical Power of Compounding.

Instead, I've created a simple illustration to demonstrate the power of compounding - First, take a look at it:

I'll strongly urge you to take a printout of the illustration given above and pin it up at a place you'll be able / forced to see almost on a daily basis.

Some observations to note and conclusions that I'd like to draw from my illustration:

  • So-called "risk-free" assets like PPF, Bank Fixed Deposits, etc. become highly risky assets over a period of time. Thanks to inflation.
  • So-called "risky" assets like equity shares, mutual funds, etc. become your dearest friends to beat the demon of inflation in a virtually risk-free manner. This is not automatic. This is achieved thanks to the amazingly powerful, yet simple tool - the Power of Compounding! We need to learn to use the power of compounding to our advantage.
  • The distinction between the returns generated by stuff like PPF, Bank Deposits, etc. vis-a-vis stuff like Mutual Funds and Equity Shares is borne out when you look at the highlighted portions of the illustration.
    • Rs. 5000/= per month invested in PPF for 20 years is literally mauled by just 20%, i.e.., Rs. 1000/= invested per month in shares and mutual funds for 20 years.
    • In fact, even a sum of Rs. 18 lakhs invested over a period of 15 years (at the rate of Rs. 10000/= per month for 15 years) ends up generating a sum that is comparable to the amount generated by a relatively miniscule Rs. 2.4 lakhs invested over a period of 20 years (at the rate of Rs. 1000/= per month for 20 years)
    • If we were to consider the example of a lower middle-class family saving relatively minor sums of Rs. 500/= to Rs. 1000/= per month, the results are similar. A sum of Rs. 2.4 lakhs invested over 20 years in PPF generates less than 40% of what you will get by investing half the sum (Rs. 1.2 lakhs, at the rate of Rs. 500/= per month) in equity shares and mutual funds.
  • Inflation is a monster that is only going to be too real. You don't even need a financial expert to enlighten you. Just try to recall what you paid for a tube of shaving cream, tooth paste, litre of petrol, a cup of coffee, a dinner at a restaurant, etc. around a decade back and around 20 years ago. And compare the same with what you're paying now for the very same items.
  • Life style inflation is a bigger monster that is not even recognised by the usual bunch of financial advisors. If you were going by bus 10 years back, you're probably riding a two-wheeler or driving a car now. A monthly dining out practice has morphed into a weekly affair. 4-6 sets of trousers, shirts, saris and salwars per annum has transformed into 10-12 per annum. A toffee to all classmates on a kid's birthday in yester-years has given way to full-fledged parties. A birthday cards to friends has been replaced by supposedly minor gifts. Akshaya Tritiya was unheard off earlier. Today, you can't avoid picking up some jewellery on that day. Social drinking was almost non-existent earlier. It is increasingly becoming the norm today. A holiday meant a trip to the native place. Today it is to tourist destinations for the middle class and exotic locations for those who are richer. To sum up, Life style inflation is truly unnerving and you can't escape from it. The figure of 6% that I've assumed for inflation is almost a joke. And a cruel one at that. To my mind, the total inflation (the actual inflation plus the life style inflation) figure is likely to be nothing less than 15% per annum for a vast majority of us.
  • If you end up investing your hard-earned savings in stuff like PPF, Fixed Deposits, etc., you're going to be a sitting duck waiting to be butchered by the monster of inflation. Believe me, there is no escape.
  • While income levels are increasing, savings are actually decreasing as a percentage of income and, in many cases, even in absolute terms.

To finally sum up,

This is both a New Year Gift to each of you and a dire warning to each of you.

Use the magical Power of Compounding, or else, be prepared to face all the negative consequences that are bound to follow.

Before it is too late for you.



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Thursday, 30 December, 2010

Intuitive Wealth Creation

Intuitive Wealth Creation

In the first issue of the recently launched magazine "ET Wealth", which came a couple of weeks back, there was an article featuring a 70+ man who has been ignoring ALL the traditional methods of investing in mutual funds. Interestingly, in the very next week, there was an "Expert Opinion" by, if I'm not mistaken, Dhirendra Kumar of Value Research Online, according to whom, virtually all the things that this 70+ man had been doing all these years was totally wrong!

Here are some of the things that the investor has apparently been doing for the past several decades, along with what is supposedly wrong with that according to traditional expert opinion:

Action - He's been investing in virtually ALL equity mutual funds, with a special focus on NFOs

Expert View - Involves over-diversification; Likely to result in dud holdings; NFOs are unproven quantities

Action - He's been investing in the dividend payout option

Expert View - For long term investments, the growth option is always better
Action - Investing in virtually every NFO of every Mutual Fund House.
Expert View - Certainly not the right approach - The NFO needs to establish its performance over a period of time before investing in that particular scheme. In any case, all necessary diversification can be achieved by investing regularly in 6-8 DIFFERENT schemes of 3-4 fund houses, preferably highly rated ones according to the ratings provided by organisations like ET, Mint 50, OLM 50, Value Research Online, CRISIL, etc. 
Action - Most of the disposable surplus, if not all, has been invested in Equity Mutual Funds.
Expert View - As one ages, equity exposure must be gradually reduced, with an increasing focus on debt funds and other fixed income products

Action - Over the past several decades, SIPs of small amounts have been made in a plethora of funds, resulting in holdings in more schemes and more fund houses than one can care to count.

Expert View - This is ridiculous. Involves investment in dud funds. Too much diversification. Administrative nightmare. Phenomenal paperwork. Even computation of income from such investments for filing IT returns will be a complex exercise.


However, the investor has done a few things perfectly, almost accidentally. This has resulted in genuine wealth creation that would be almost unimaginable for most investors, including supposedly financially savvy investors.

Here's the list of things that the investor has done right - for you and me to learn, internalise and follow:

  • ALL investments have been made through SIPs (Systematic Investment Plans).
    • This has resulted in avoiding the pitfalls of timing the markets.
  • He has almost indiscriminately invested in the entire gamut of equity mutual funds. This implies that he has invested relatively small amounts in each individual scheme as a percentage of the overall holdings.
    • Result - No single investment is large enough to "Catch the eye" and tempt him to redeem for any exigency. This further results in a "Buffett-like" holding period - virtually forever! If a sudden bulk expense (justified or otherwise) crops up, the very same "administrative nightmare" due to a plethora of funds protects him from redeeming his funds in a hurry.
  • All investments have been made in the dividend payout option
    • Result - Profit booking is automatic and done passively by our investor. Whenever the fund manager actually makes money (which is usually when the markets go up), he's likely to declare dividends. Obviously, excesses of the markets and volatility in individual scrips play out in favour of our investor.
      • When the market crashes due to extraneous reasons like the Harshad Mehta scam, Sub-prime crisis, etc., fund managers are less likely to declare dividends, but out investor continues to make SIPs
      • When the market booms due to extraneous reasons like the dot com bubble, "high-performing India Shining story", reforms by the government, formation of a stable government at the centre, etc., fund managers are more likely to declare "extra" dividends.
    • Obviously, the above results in our dear Investor deriving the benefits of "timing the market" without any specific efforts in that direction.
  • Our investor has been preferring funds with Low NAVs
    • Low NAV usually implies that the funds are gross underperformers. The regulatory environment does not allow the fund to swindle the investor and go away. Hence, chances are bright that one or more of the following will happen with such funds:
      • a better fund manager will come along and improve the performance
      • the fund house will be taken over by some other fund house resulting in improved performance
      • the stocks in the scheme which have been underperformers will start performing much better over a period of time
    • Result - Our investor ends up locking into such schemes at low prices. Thanks to his really Looooooooong holding period, these end up being surprisingly wonderful investments in the long run. For instance, I'm sure that he would have benefited from investing in tech funds subsequent to the dot com bust, in large cap funds subsequent to the sub-prime meltdown, etc.
  • Our investor has been investing in NFOs
    • While this can be a bad choice for lesser mortals with a holding period of less than a couple of years, this has proved to be an interesting strategy for our investor due to a multitude of factors:
      • NFOs are likely to grab undue management attention from the top brass of fund houses. Obviously, they would like to "prove a point"
      • NFOs are likely to be managed by relatively young fund managers under the strict supervision of the top brass. This would again result in "new and fresh" ideas from the young whiz kid, accompanied by the temporing wisdom from the top guns.
      • NFOs are likely to attract less number of investors because of the traditional understanding and guidance from advisors that you must stick to proven funds with a track record. Hence, the assets under management of such NFOs will be relatively small. Just ideal for an innovative fund manager to achieve significant outperformance vis-a-vis benchmark indices, as he will not be forced to invest in "boring, well-discovered" large caps due to liquidity factors.
  • Our investor, despite being a senior citizen, has still chosen to remain invested in Equity Mutual Funds
    • While this is also traditionally perceived to be "the wrong thing", it just so happens to be "Yehi Hai Right Choice, Baby" for this investor due to the following interesting reasons:
      • The very same "highly risky" Equity have miraculously been transformed into "Almost zero risk investments" due to the long holding periods.
      • The virtually daily receipt of one dividend or the other ensures that his routine liquidity requirements are more than met - very comfortably.
      • Considering the fact that he has a huge (and supportive) family, including a grandchild who has created an excel-based system to monitor his investments, there is no real risk of his investment details remaining unknown and hence unclaimed after his life time. Therefore, he'll end up not only enjoying a great quality of financial freedom during his life time, but will also end up bequeathing huge wealth to his family members in the years to come!

To conclude, this investor, almost intuitively, has ended up, in accordance to the most important piece of wisdom from the Graham & Buffett school of investing, ensured that he has focussed on "Time in the market, and not on timing the market". And, Einstein's 8th wonder of the world - The magic of Compounding - has been put to work almost as our dear investor's slave! No wonder he has built an enormous wealth over the years.

May more and more people learn the crucial lessons from this investor - not the superficial one of investing in all and sundry mutual funds!



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Wednesday, 29 December, 2010

Warren Buffett on Gold

Warren Buffett on Gold

"Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." - Warren Buffett

Wonder how many of us (especially our Indian women) would agree with him on this one???



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Tuesday, 28 December, 2010

A fool & his money seldom stay together!

A fool & his money seldom stay together!

You must have heard / watched / read about the fraud that happened at Citibank, Gurgaon, India.

Here are some details:

All I wish to point out is:

  • If someone is talking about doubling your money in double-quick time, is it not your responsibility to get enough details about it in terms of:
    • The type of investments 
    • The lock-in period, if any
    • How the returns are proposed to be generated
    • Charges involved
    • The comparable products for the same risk profile (from Citi as well as from other competitors)

If someone doesn't bother to do even such basic due diligence, I guess that such frauds will continue to happen from time to time.

If you're greedy, at least

  • Go and buy some junk stocks with the hope of tripling it in 10 days
  • Go and play around in futures and options, commodities, etc., preferably without doing too much of research about risks involved
  • By artwork by an unknown artist from Christies / Sotheby, hoping that he'll become tomorrow's Picasso / MF Hussain in the next couple of years

In each of the above options, the probability is high that you'll lose money. However, you'll at least have the satisfaction that the profits (if you're extraordinarily lucky) as well as losses will be entirely on account of your own efforts. You'll have the satisfaction of not having fallen prey to some conman!



A fool & his money seldom stay together!SocialTwist Tell-a-Friend

Thursday, 23 December, 2010

"Buy report", Sale executed - Same day, by same institution

"Buy report", Sale executed - Same day, by same institution

Take a look at this:

Why am I not surprised?

As an old grandma of mine used to say, "There are no free lunches".

But still, we keep expecting to find our friendly broker, newspapers, magazines, TV Channels, etc. to tell us precisely the best money-making idea.

First of all, if they knew which stock will go up or which one will go down, they'll much rather go long or short accordingly. Why would they even bother telling you?

Moral of the story: Same old stuff - Do your own research even if you get a recommendation / tip / advice / suggestion from someone who is indeed an expert and happens to be your well-wisher. You can't possibly be too careful. After all, it is your money, honey!



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Thursday, 16 December, 2010

Power of Blue Chips

Power of Blue Chips

Most of us who "invest" in shares genuinely believe that we're investing to "build wealth". Nevertheless, when we look at our own portfolio, we realise that we have a mixture of a wide variety of stocks, which I would like to classify into:

  • Blue Chips (Based on any yardstick of your own) - Most entries on this list would not be debated by anyone
  • IPO / FPO Stocks which got converted into "Long-term Holdings" for historical reasons (Usually the stocks were not sold on listing either due to greed or lethargy, and ended up in our "Long-term Holdings")
  • Momentum stocks - Flavour of the season stocks which got converted into "Long-term Holdings", again, for historical reasons
  • Stocks bought on "Tips" which got converted into "Long-term Holdings"
  • Loyalty-driven stocks - These are stocks of companies which were ex-employers of
    • The "investor"
    • His / Her "close" family members (Spouse, Parent, Child, Uncle, Aunt, etc.)
    • His / Her ex-boss held in high esteem
  • Stocks bought on "Research-recommendations" from Brokers, Investment Analysts, TV Anchors, News Magazines, etc.

Believe me, I have stocks in each of the above categories.

For ease of analysis, I put "Blue Chips" in one group and all others in another group.

I was curious to know how the two groups performed.

Here, I must mention two quick points before proceeding further:

  1. I've been consistently outperforming the Sensex, Nifty & my mutual fund holdings
  2. My vanity has made me to believe that I am reasonably careful with my investments

Due to the above factors I was startled by what I found:

  1. The Purchase Value of "Blue Chips" was just 42% (which, intuitively, ought to have formed at least 75-80% of the total purchase value of my overall Portfolio)
  2. The Current Value of "Blue Chips" was a much higher 54% of the current worth my overall portfolio.
  3. Over 90% of my holdings (after excluding those stocks purchased within the last 6 months) were all sitting on paper profits, which perhaps corroborates the fact that I have been consistently outperforming the Sensex & Nifty.

Very obviously, the "Blue Chips" are indeed "Blue Chips"! They have vastly outperformed ALL other shares. Despite the fact that I've been outperforming the Sensed & Nifty consistently, I would have done even better if only I had focussed more (some would say exclusively) on "Blue Chips"!

But very sadly, my ego and vanity took a mighty hit. I've been falling prey to all the behavioural biases that I am theoretically aware of.

Immediately, I contacted a few of my friends and acquaintances and asked them to do the same exercise. The results were broadly similar. Irrespective of their investment acumen. Without regard to their age or gender.

Obviously, some conclusions are in order:

  1. "Blue Chips" are "Blue Chips" - Don't ignore them
  2. Don't forget # 1 above
  3. Be aware of the significant out-performance of "Blue Chips" vis-a-vis other stocks
  4. Analyse your own portfolio on this basis during the next week-end
  5. Arrive at the percentage of "Blue Chips" that you wish to have in your own portfolio.
  6. Do this review at least once a year and re-align your portfolio accordingly to bring it back to your own target level of "Blue Chips".
  7. Don't forget # 1 above

Personally, I've decided that I will REFUSE TO BUY any scrip other than "Blue Chips" till the figure reaches at least 75%. Let's see where it takes my portfolio in the months ahead.



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Friday, 10 December, 2010

Undisguised Pyramid Scheme

Undisguised Pyramid Scheme

A few days back, I'd written a post about "Well-disguised Pyramid Schemes".

Got a few mails about the article, especially asking me to name the company.

However, one mail that was enlightening was about a perfectly "Undisguised Pyramid Scheme":

If you want a classic example of a pyramid scheme and how it operates, click on the above link - But, for heaven's sake, don't register in that scheme and get cheated!

If anyone is aware of which regulator is supposed to take care of such matters, please do let me know - or, better still, inform the concerned regulator about this one!



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Thursday, 9 December, 2010

Paradox of using Money to measure GDP

Paradox of using Money to measure Gross Domestic Product

Take a look at this interesting quote from Kennedy:

"Our gross national product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage. It counts special locks for our doors, and the jails for the people who break them. It counts the destruction of the redwoods, and the loss of our natural wonder in chaotic sprawl. It counts napalm, nuclear warheads, and armored cars for the police to fight the riots in our cities. Yet the gross national product does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our wit nor our courage, neither our wisdom nor our learning, neither our compassion nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile." Robert F Kennedy

How true? All the more so in the Indian context.

For the limited purpose of looking at overall financial position of the national economy, perhaps, the GDP is a useful tool.

However, the GDP hides much more than it reveals:

  • The GDP perfectly hides disparities across different sections of society based on age, caste, gender, geography, educational background, physical well-being, etc.
  • The GDP fails to give a clue on the real purchasing power of the average Aam Aadmi in real terms, vis-a-vis
    • What he used to purchase a year or a decade back
    • What people from other countries can purchase today (as well as what they could purchase a year or a decade back)
  • The quality of life in terms of satisfaction, happiness, peace of mind remains completely unknown
  • The GDP increases when we spend money on:
    • Sending a satellite to the moon
    • Building a 27-floor tower for the residence of a rich industrialist
    • Buying more guns to fight the maoist / naxalite problems
    • Buy more bullet proof cars for our netas
    • Pay salaries to our CBI officials to investigate and find in-depth details about the plethora of scams
    • Shooting for a movie like "Robot"
    • Lawyers to fight divorce cases in a family court
    • Doctors and hospitals to try and cure a lung cancer or a throat cancer (which was acquired due to chain-smoking, which, in turn, added to the GDP as well)
    • De-addiction centres for drug addicts
    • Holding public meetings with a plethora of politicians, National telecast of debates, etc. on some current scam.
    • Holding a seminar at Delhi and allow people to express anti-national views
    • Filing a case and investigating whether the law was violated by speeches made in the seminar referred to above
    • Drinking and dancing in liquour bars
    • Moral policing objecting to such activities
    • Security arrangements to prevent vandalism during such moral policing
  • We simply have no idea about the quality of the GDP in terms of:
    • Whether the growth in GDP is sustainable
    • Whether the growth in GDP is coming from money spent on alcohol or on education
    • Whether the growth in GDP is being inflated by Keynesian principles (of paying someone to dig a road and paying another to fill it up)
    • Whether the growth in GDP is being purchased from the future generations by focussing on current consumption at the expense of infrastructure development
    • Whether the growth in GDP is due to inflation or due to increase in real production of goods and services

Hence, while the GDP is a necessary and very useful unit of measurement of how we as a nation are faring in financial terms at a macro level, we must be conscious of the limitations of the same. Further, we must refrain from using the GDP to obfuscate real problems of India and Indian citizens.



Paradox of using Money to measure GDPSocialTwist Tell-a-Friend

Monday, 6 December, 2010

Warren Buffett on Diversification

Warren Buffett on Diversification

Here's an interesting thought from the master:

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing". - Warren Buffett



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Sunday, 5 December, 2010

Beware of well-disguised Pyramid Schemes

Beware of well-disguised Pyramid Schemes

We've all heard of a wide range of scam stories, pyramid schemes, etc.

I'm forwarding an excerpt from a mail that I received some time back that talks about one such obvious pyramid scheme:


----- Original Message -----
From: BS

As we found out, some 90% of PQR's borrowings are secured against the very loan it gives out, in a remarkable case of pyramiding. Banks are funding its receivables arising out of gold loans even though the underlying gold does not belong to it. In effect, thanks to an interesting piece of financial engineering and support from banks, the gold people loan out to PQR becomes an asset for the company! This looks like a pyramid scheme but everyone believes that the pyramid will not topple as long as the going is good. While we have no forecast on the price of gold, we certainly believe that a business model, built by pyramiding money, entirely based on the speculative price of a single product, has huge potential risks. What are these risks?


In the original mail, the name of the company was clearly mentioned. I'm referring to the company as "PQR" for the following reasons:

  • Since I'm not 100% sure of the absolute facts of the case, I feel that it is inappropriate to mention the name on a blog post with negative implications
  • I'm personally aware of at least half-a-dozen companies to whom this anecdote would apply. Hence, there's no point naming a single entity.
  • This blog post is intended solely as an "educational post" - The idea is to make you conscious of the kind of environment that we are finding ourselves in, and, to that extent, be better prepared.

I would like to elaborate on the mail with a clarificatory note:

  • Let's say, PQR is a small-time lender with a capital of Rs. 1,00,000/= to lend towards gold loans. Let's further assume that 10 persons borrow a sum of Rs. 10,000/= each by pledging their gold jewels. Thus far, there is no undue risk to any person.
  • Now, if PQR takes a loan of Rs. 90,000/= against the amount receivable from these 10 borrowers from a bank, they can make a further disbursal of 9 such loans of Rs. 10,000/= each. However, their capital remains Rs. 1,00,000/=.
  • If the above process is repeated a dozen times, we have a situation where the capital of PQR remains 1,00,000/=. However, thanks to what the financial experts would call "leverage", the quantum of loans disbursed would run upwards of Rs. 10,00,000/=.

This is not in any way unduly risky for the borrower who is pledging his gold. However, for people who have invested their hard-earned money in PQR (either by buying equity stakes in PQR or by making a fixed deposit with PQR), this can become quite risky.

Let's see how:

  • Supposing a bank hears rumours about
    • A few defaults by customers of PQR or
    • The trustworthyness or otherwise of PQR
  • Immediately, the bank will ask PQR to repay those loans. Soon the matter will be out in the market, and other banks will also ask for their money.
  • Unfortunately, PQR can't ask all their borrowers to repay right away. Nor can they sell the gold. They are obviously stuck between a rock and a hard place.
  • Result: Either significant losses for PQR or for bankruptcy of PQR. Both of these consequences are bad for people who have invested in PQR.

Moral of the story:

  • If you are borrowing (by pledging jewels) from a company like PQR, you should be aware of the risks involved. But, as your requirement is apparently urgent and critical, it is perhaps OK. Even then, your first preference should be to borrow from a recognised bank (preferably a public sector bank). Only if all such alternatives are exhausted should you approach people like PQR.
  • If you are an investor in PQR (either buying shares of PQR or by making fixed deposits in PQR) - BEWARE OF THE RISKS INVOLVED
  • Once you understand the risk involved thoroughly, if you still desire, you may choose to invest a very small portion of your overall portfolio of investible surplus funds in companies like PQR. And watch your investments like a hawk.

For the benefits of readers who wonder who is this notorious PQR, here's my response:

  • It doesn't matter. All companies which give loans to individuals like you and me have to manage this inherent risk of leverage.
  • If you still want clues, look at the "Loan available" ads among the Sunday Classfied columns, Gold Loan advertisements on TV, etc. 
  • Some of them, like banks, are well-regulated entities, operating under strict rules and regulations, including prudential capitalisation norms.
  • Others, like PQR, are either unregulated or are coming under much less rigourous regulations.

Hence, you just need to understand your risk profile and invest accordingly. On both a long-term and short-term basis, you'll find that well-regulated, adequately capitalised banks have less volatile share price movements, but companies like PQR will have share price movements which are much more volatile. You'll find companies like PQR quoting at ridiculously low levels at the depth of a bear market.

  • If you have a sufficiently high risk appetite, and are reasonably confident that PQR will not go bankrupt before the next bull run, you can go ahead and invest your money in buying shares of PQR. You may very well have a multi-bagger in your hands.
  • However, if you're the kind of person who will lose sleep over erosion of the value of your portfolio, better stay away from companies like PQR.



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Tuesday, 30 November, 2010

Why Credit Cards can be dangerous

Why Credit Cards can be dangerous

Here's a forward that I got from a friend. Subsequently I noticed that it is a cut and paste from a comment posted on Subra's blog (

I've always known that credit cards are potentially dangerous.

Here's one more anecdotal evidence:


  • Reproduction of the relevant part of the mail that I got:
    • Staying with credit cards, sometimes a disciplined approach but with a small scar can also be lethal.
    • I learnt this accidentally, but for those who have not learnt it yet, this might be something to watch out for.
    • I usually pay off my credit card bills every month without having any due carried forward. Few months back, I noticed something unusual in my credit card statement. There was an interest and subsequent surcharge. The interest was around 3% on my purchase which I did before the earlier month's bill date.
    • But I also remembered that I had paid the complete due amount, so out of curiosity I called up the customer care and asked for clarification. I was told that I had a balance which was carried forward and hence the 3% interest, other charges etc etc.
    • Just to cross check, whether the money which I had paid against my bill was taken into consideration at all, I asked him to explain. He told that the entire amount has been accounted for, but for 50 paise. The interest which was charged was around Rs. 1320 plus other charges. I was surprised about how much a 50 paise debit could cost me 
    • To impress my surprise on the caller on the other side, I asked him a question in exclamation: "If (not allowed in my card, but assuming it did) I made a purchase of 1 Crore and repay 99,99,999.50 immediately, you would still charge me 3% on 1 crore? He did not wait a second to answer me "YES"
    • I thought I was an idiot not knowing this, but when I told my project colleagues about this the next day, OMG :-) I was seeing their faces!! I am sure they would have started checking up their bills from thereon!!
    • Not buying things on credit is a very good habit. But if it happens for certain reasons, paying off the bill at end of every month is a good habit. But every importantly, paying off every penny you owe is a SMART habit :-) I have already started becoming smart these days!! And yes, I have started going through my credit card bills line by line, for which I had no time before :-)



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Monday, 29 November, 2010

Making Financial Inclusion Real

Making Financial Inclusion Real

The FM and different bigwigs of the financial services industry have been singing hosannas about Financial Inclusion.

But what is the action on the ground indicating?

  • A vast majority of banks (especially private sector banks, including those whose Chairmen keep giving lectures on Financial Inclusion) do not see the bottom of the pyramid as an opportunity - At best they view it as a necessary evil.
  • The government talks financial inclusion, but says "I'll deduct loads of TDS from your bank account if you don't have a PAN Card". Since when do the people who actually need financial inclusion even became aware of such a creature called a "PAN Card"? If I'm a poor landless farmer from interior Orissa, the last thing I would be looking forward is to get a PAN Card. Imagine the kind of apprehensions that I would have about the mysterious "Income Tax Officer" coming after me all of a sudden and asking all kinds of questions!!!
  • Microfinance institutions started off with noble intentions (supposedly following in the footsteps of the Grameen Bank of Bangladesh). Soon, the the real motive came out. Use the existence of a strategic gap between the "waive-all-bribery-driven-banks" and "fleece-the-last-drop-of-blood-moneylenders", freak out with huge interest rates, and still get a phenomenal return on capital employed for their shareholders. And, to top it off, try and come out with a public issue at a huge premium to boot!
  • "Farmer Subsidies" enriching the industrialist who is selling stuff like fertilizers, really rich rural landlords, etc. The truly poor remains truly poor.
  • Educational Loans, which are supposed to be available without any guarantees, security, etc. upto a certain limit, are hardly accessible to the genuinely poverty-stricken youth coming from an otherwise totally illiterate family.
  • Mutual Funds, especially equity mutual funds, could be a very useful tool to make the rural poor participate in the world-famous "India Growth Story". Just do a Google search to find out how much a simple SIP of Rs. 100/= per month over the last 5, 10, 20 years in any decent large-cap oriented mutual fund benchmarked to the Sensex. But, can the barely literate rural poor (or, for that matter, even urban poor ) invest in these? "Sorry", say the regulators. "We'd allowed that by mistake in the past, but now we've plugged that loophole by insisting on KYC norms for EVERY mutual fund investor, past, present and future"! The really big sharks have alternative mechanisms including the now notorious Hawala route to take their illegally gotten wealth overseas, only to bring it back to the country as and when needed (by the sharks, not the country) as "Foreign Investment".
  • Trade and commerce
    • The government will allow rats to eat foodgrains, but will refuse to build necessary infrastructure on a priority basis, which could enhance the holding power of the poor farmer. In today's scenario, the farmer is doomed if there is a drought or a flood. And he's doomed if there is a bountiful harvest. In case of scarcity, he has nothing to sell, and starves. In case of plenty, he finds it difficult even to recover the marginal cost. The middlemen, who have holding power, enrich themselves at every stage. The cost of shifting the agri-output is, directly or indirectly, borne by the farmer.
    • But when the farmer wants to buy his TV sets, chocolates, soaps, toothpaste, tractors, etc., he's told that "Market Economy" will apply, and he'll need to pay the right price to get what he wants. And the cost of reaching such goods to him at his village is obviously built into the price.
I'm a staunch capitalist by ideology. But if we need to apply principles of Capitalism and still flourish as a nation, we need to have equal opportunities for all. To begin with, the starting point in the race must be the same for all.

For this, the government needs to ensure:
  • Affordable, high quality education for all - till a certain age
  • Employability for all
  • Security of food for all
  • Reasonably good health care for all
  • High quality transport facilities across the length and breadth of the country
  • Transparency in procedures and processes.

Will we ever get such a government? Only then can we even dream of financial inclusion.



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Sunday, 28 November, 2010

Lesson from Bill Gates

Lesson from Bill Gates

The other day, I was reading a biography of Bill Gates.

While there are several lessons that one could learn from him, I would like to emphasise one key lesson here:
By and large, he never mixed business and charity.

As a businessman, he was a toughie. Ask many of the folks in the industry who actually hate him. There have been enough allegations about his anti-competitive behaviour.

As a philanthropist, he is generosity personified. He has chosen his preferred "causes". He has given tons of money - both his own and from his friends.

I like the above distinction for a very practical reason. Microsoft is a listed entity. Bill Gates is, at best, a part-owner. Charity, if any, should be done from one's own money. If Microsoft were to do charity, that would imply "imposing" the views of a limited few on the vast majority of other shareholders.

Not on. And Bill Gates recognised that.

Hence, what is the lesson for lesser mortals like you and me in the world of investing?

Here are a few thoughts (not for the big fish who invest zillions of dollars, but for ordinary mortals - retail investors like you and me who invest in a few thousands or a couple of lakhs at a time):
  • First, don't confuse investing and personal belief systems.
  • When you're investing in a company, you are doing so SOLELY for making money. For instance, it doesn't matter if you happen to be a non-smoker, it is OK to invest in ITC if you feel that it would increase your wealth. Once you acquire wealth using money generated from investments in ITC, nothing prevents you from using such money to actually contribute to an anti-tobacco campaign
  • Learn to distinguish ethical standards of a company and whether it is "investment-worthy". There are ethical companies which have gone bust. There are unscrupulous companies who have swindled investors funds. There are ethical companies who have lasted for a century. And unethical companies which flourish for decades. So far as your investment decisions are concerned, you should restrict your thoughts to the price that you are paying and the likely value of the company. As long as the price is less than the value according to you, you can go ahead and invest. For instance, when Satyam went from a couple of hundreds to sub-30 levels, the price on the ticker was visibly less than the intrinsic value according to many experts. And those who took the plunge, flourished. On the other hand, Infosys, known to be a highly ethical company, in the peak of the 2000 IT boom, was quoting at a PE ratio of over 100. Anyone who invested in Infosys then is probably still nursing his wounds. Again, several unethical companies use every boom to come out with IPOs at huge valuations, only to disappear with the investors money in due course.

The above points are especially useful to keep in mind in these scam-ridden times.

While I don't wish to take names, some companies which are obviously ethical and "high-performance" ones have been named in one or more of the recent scams.
Obviously, they have fallen like a pack of cards.

You just need to identify the gems among them and put in lots of money in these times of fear. As Warren Buffett would say, now that there's a lot of fear about these companies, it is time for you to be GREEDY about precisely the very same companies.

I've started doing precisely that with some of my surplus funds.


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Why "Experts" fail with their forecasts???

Why "Experts" fail with their forecasts???

Here's an article from moneylife, which is a magazine that I like:
Unfortunately, it is an article which is quite factual, but essentially useless - After all, do we really need such an article to let us know that short term predictions are never easy. (especially about the future, as Mark Twain is supposed to have said).



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Tuesday, 23 November, 2010

Is zero exit load necessarily bad?

Is zero exit load necessarily bad?

Came across this post in one of my favourite blogs - The Parag Parikh blog.

First, read it, before I comment on the same.

From: PPFAS Blog
Sent: Monday, November 22, 2010 6:08 PM
Subject: PPFAS Blog: Zero Exit Load...A boon for speculators

November 22, 2010 4:01 pm
Jayant Pai |
I saw an advertisement on the Value Research website last week. It showed a family exulting in the fact that their child had secured "Zero" marks in the examination. The father was holding a placard stating that "Zero is the new Hero" and the mother was doing a jig. The ad screamed "Zero exit load on two of our flagship funds".
The ad could be considered hilarious, if it were not so depressing. What is the mutual fund trying to communicate? Equity mutual fund managers espouse the cause of long-term investing and the virtues of "time in the market rather than timing the market". Is such a development in sync with this belief? It will only encourage hot money to enter and exit at zero impact cost. It will also prevent the fund manager from taking a long-term view w.r.t. investments. For instance, in the normal course, a fund manager could have allocated 20-25% of the corpus to promising mid-cap and small-cap stocks which were relatively illiquid. That will now be virtually impossible as the sword of untimely redemptions will always be hanging over his/her head. Consequently the manager will play safe either by keeping aside large amounts of cash or investing in liquid stocks even if they are not the best choices at that mom! ent in time.
This appears to be a clear case of the fund's sales team triumphing over the investment team. Such moves to boost assets will be counter-productive in the longer term. Once a fund house becomes notorious as a channel for "hot money", investors with a longer-term outlook shy away from it, as it is well known that sharp ebbs and flows in assets in any scheme hurts the longer term investor more. When SEBI jettisoned the entry-load concept, most of the major fund houses increased the exit load. More than earning income, the objective was to discourage quick entry and exit. Unfortunately, the battle for survival amongst the smaller funds has induced them to opt for this "100% Free" route.
I hope this does not lead to a competitive free-for-all (no pun intended) amongst such funds, who will be competing against one another on price and not on investment performance. This will be detrimental for the whole industry and this time they will not be able to blame the Regulator for the same….

This is one of those rare occasions where I hesitate to agree whole-heartedly with the views expressed in Parag Parikh's blog.

My own thoughts would be, as usual, "It all depends on the context of the individual investor and the context".
  • Firstly, those investors who are long-term investors, the mere absence of an exit load would certainly not motivate them to redeem early.
  • Secondly, those investors who have a short-term mentality, will, in any case, redeem as and when they're comfortable booking profits. For such investors, "zero exit load" is indeed a boon.
  • Thirdly, we now have a situation where more and more fund houses offer a feature to invest / redeem through the stock exchanges. Here again, zero exit loads becomes an attractive proposition.
  • Periodically, we have huge volatility in the markets. At such times, an exit load would become a "mental block" potentially preventing investors from redeeming / booking profits despite being conscious of live dangers lurking around the corner, which could put significant downward pressure on the indices. In such times, a "zero exit load" adds significant value.

Having said all the above, there is indeed an element of truth that a "zero exit load" would, indeed, motivate people towards having a short-term orientation.

But then, whoever said that investing and building wealth is an easy task!!!



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Sunday, 21 November, 2010

Major drawback of ULIPs

Major drawback of ULIPs

There have been multiple opinions expressed in different magazine articles, interviews, websites, etc. about ULIPs.

A majority of them have been focussing on two issues:

  • Mis-selling (especially due to the commission structure) and
  • High "charges" of different kinds, especially in the initial years.

However, of late, with IRDA tinkering with (or, to be more polite, changing) the rules to "limit the charges" and becoming more strict about mis-selling, lots of "experts" have started giving a more favourable review of ULIPs.

I disagree.

And disagree strongly. Here's why:

  • ULIPs involves combining investment and insurance, which I consider inefficient and hence dislike.
  • ULIPs involves long-term commitment, often practically irrevocable long-term commitment. I dislike such long-term commitments in the world of investments for the following reasons:
    1. New investment products may emerge in future, with much superior features, potential for returns, security, liquidity, etc.
    2. The fund managers managing your ULIPs may change - The new fund managers may or may not be of the same quality
    3. Even if the fund managers don't change, new fund houses may come up with much superior fund managers, thereby adversely impacting the relative performance of your ULIPs
    4. Your income levels may change - upwards (hopefully) or downwards - Your intended allocation to different investment products ought to change accordingly. Unfortunately, ULIPs don't provide the flexibility.
    5. The limitations of exit/entry clauses are "difficult". ULIPs typically involve a "Growth option" (and not a "Dividend Payout" option). This implies that you don't have the opportunity to book profits and/or drastically increase investments to a particular asset class, viz., ULIPs. The allocation to ULIPs remains fixed. At best, you can change the percentage allocated to equity vis-a-vis debt.
Take care. Happy investing!



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Tuesday, 16 November, 2010

Cash is King - 2010 Version

Cash is King - 2010 Version

A couple of days back, I came across an article which spoke about Warren Buffett holding 34% cash levels in his Berkshire Hathway portfolio as on September 30, 2010.

I've generally been increasing my cash levels for a while now.

Today, I came across this interview with another big name - Jeremy Grantham. Read this one:

Lots of TV analysts and experts have also been crying themselves hoarse that our markets in India are grossly overvalued. And have been recommending that we be cautious. That we ought to increase cash levels. That we ought to be booking profits. That though the "Long-term India Story" remains intact, we ought to be wary in the short term.

I have a contrarian question:

  • If so many folks are so cautious, and if so many retail guys have not participated in the rally, is it not logical that we're not anywhere close to the top, based on all the bubbles that we've experienced in the last couple of centuries?

My own answer to the above question:

Yes, indeed. We are nowhere near the top. Here's why:

  • There is a good chance that with all the guys who are waiting in the wings with loads of cash, every dip will be bought into. Especially by Indian retail investors and the domestic institutions, who have actually been booking profits regularly during the past 6-8 months.
  • The BIG MONEY coming from all the quantitative easing will need to be deployed. Certainly they are not going to invest in the crisis ridden markets of US or Europe. Nor will they invest in debt at yields pretty close to zilch. They will much rather park their money in good quality growh stories. Where else can they find such stories other than in the emerging markets, including India?
  • The 21000 of 2008 and 21000 of 2010 are very different. A good many corporates have increased their earnings. A lot of them have restructured their leveraged balance sheets and cleaned up their acts. Many of them are much leaner, having learned their lessons. Operational efficiencies have improved. Even the reform agenda of the government has gathered some momentum. Valuations, certainly, are not as rich and as obscene as they were in January 2008.
  • Even in the midst of all the corruption, there appears to be lots of political stability. We actually have a situation where there is competition to support the government. That too, publicly stated on National Television. Believe me, Manmohan Singh's position appears to be quite safe. And as long as you have political stability, one key danger for the markets is gone.
  • People will make noises about inflation, but go to the malls, theatres, cricket stadiums, airports, book shops, restaurants, jewellery shops, etc. You'll be amazed at the speed with which products are flying off the shelves. You'll wonder about the existence of such a creature called poverty.

Having said all the above, you must be wondering why I'm still increasing my cash levels.

Reasons are two-fold:

  • Churning of the portfolio. Some stocks have zoomed way beyond 2008 valuations. We ought to be selling them. Others are grossly undervalued, especially in the midcap space. We ought to be looking at them carefully.
  • There is a lot of global economic uncertainty. In times of uncertainty, I've often come across completely inexplicable and violent levels of volatility in share prices. This volatility is a scary scenario for those who seek stability. There are others who thrive in such volatility. I prefer to think that volatility is good for me. Gives me a lot of opportunities both to get in at low levels and to get out at comparitively high levels.

So, what's the conclusion?

Simple ... ... ... ... ... ...

  • Keep selling anything that you feel is overvalued today. Irrespective of what your cost price was. Profit in your bank account is better than profits in your demat account. And don't worry about whether or not the share that you just sold continues to go up further. It is always possible to have perfect 20-20 vision - in hindsight.
  • Keep cash in your kitty.
  • Keep buying anything that you like and you feel is undervalued today. People make more money by buying at a low price than by selling at a high price.
  • And remember, you can never, never ever, catch the bottom and the top - except with some crazy luck. And I wouldn't count on getting lucky.

Let me end with a quote from Jeremy Grantham (from the interview referred to earlier in this post):

  • "Cash has a virtue that people don't appreciate fully. And that is its optionality. In other words, if anything crashes and burns in value - say the U.S. stock market, if you have no resources, it doesn't help you. If the bond market crashes, and you have no resources, it doesn't help you. And what cash is is an available resource. It buys you the right to buy the U.S. market if the S&P drops from 1,220 today to 900, which is what we think is fair value."

Guess that it applies to us in India as well!

Take care. Happy investing!



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Sunday, 14 November, 2010

Useful Info on ATMs

Useful Info on ATMs

ATMs are a boon. 99% of the time.

The other 1%, we end up facing one or more of the following problems:

  • You have adequate balance in the bank, but you don't get cash
  • Your account is debited, but you don't get cash
  • Your ATM Card is "Swallowed" by the ATM

Here's an interesting article that I came across on the subject:

However, a couple of things that appear to have been missed out in the above referred article are:

  • Do not take the help of strangers / security personnel - especially if they come voluntarily to help you. They could very well be part of a gang of scamsters
  • In case the ATM is part of a bank branch (as against a stand-alone ATM) make it a point to personally inform the officials of the branch - in writing - about your problem (and, if possible, take an acknowledgement). If it is a stand-alone ATM or if the branch is closed, take the trouble of writing a note specifying the exact nature of the problem faced by you (along with your phone number) and put it in the drop box at the ATM. It could possibly help in the ATM care-takers to identify the affected person quickly, and, to that extent, minimise any negative consequence.



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