Friday, 14 January, 2011

And You Thought that Greece won't go Kaput!

And You Thought that Greece won't go Kaput!

I must give credit where it is due. I keep getting ideas on which articles to read from among the millions that keep cropping up on the web from the following sources:

  • My favourite newspapers - Economic Times, Hindu, etc.
  • My favourite blogs - Like Subramoney, Generational Dynamics, Parag Parikh, etc.
  • My favourite web-sites like moneycontrol, ICICI Direct, Outlook Money, India Today, etc.
  • My friends' emails
  • My blog readers' emails

Sometimes, I give credit specifically, while at other times I don't - Not because I don't wish to, but because I genuinely forgot the original source.

Here's an excellent article that I was referred to by Subramoney Blog:

It is indeed a long article, but even if you glance through it, you'll start wondering about when Greece will go bankrupt.

If you don't have the time or inclination to go through the whole of it, here are a few lines:

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In just the past decade the wage bill of the Greek public sector has doubled, in real terms—and that number doesn't take into account the bribes collected by public officials. The average government job pays almost three times the average private-sector job. The national railroad has annual revenues of 100 million euros against an annual wage bill of 400 million, plus 300 million euros in other expenses. The average state railroad employee earns 65,000 euros a year. Twenty years ago a successful businessman turned minister of finance named Stefanos Manos pointed out that it would be cheaper to put all Greece's rail passengers into taxicabs: it's still true. "We have a railroad company which is bankrupt beyond comprehension," Manos put it to me. "And yet there isn't a single private company in Greece with that kind of average pay."

The Greek public-school system is the site of breathtaking inefficiency: one of the lowest-ranked systems in Europe, it nonetheless employs four times as many teachers per pupil as the highest-ranked, Finland's. Greeks who send their children to public schools simply assume that they will need to hire private tutors to make sure they actually learn something. There are three government-owned defense companies: together they have billions of euros in debts, and mounting losses. The retirement age for Greek jobs classified as "arduous" is as early as 55 for men and 50 for women. As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, waiters, musicians, and on and on and on. The Greek public health-care system spends far more on supplies than the European average—and it is not uncommon, several Greeks tell me, to see nurses and doctors leaving the job with their arms filled with paper towels and diapers and whatever else they can plunder from the supply closets.

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My own worries are:

  • If Greece is going bankrupt, what is the REAL position of other countries?
  • How do we know that there will be no contagion effect?
  • If a simple Lehman can cause such global harm, imagine the impact of an entire nation (even a "small" one like Greece) going bankrupt!
  • What will happen if some of our Communist friends go on a tour to Greece - The ideas that they will get on subsidies, social welfare expenses, pension commitments, etc. will go a long way to jeopardise the India Growth Story!

Guess that we must all have a very strong Plan B in place for the wellbeing of our portfolios. Here's a few suggestions:

  • Increase your allocation to fixed income products as a percentage of your overall asset allocation - Give a preference to relatively safe stuff like those "quasi-guaranteed" by the Government (like fixed deposits with public sector banks).
  • Stay away from Futures & Options, unless your portfolio is worth a few hundred crores (in which case you can affort to lose a couple of crores here and there)
  • If possible, stay away from short-term investment in shares (for any period less than 6 months) - Unless of course, you happen to realise that your shares have gone up significantly within that period - in which case SELL and keep your profits with you. Not as paper profits which may evaporate if the share prices crash again.
  • Have a core portfolio of blue chip shares and highly rated equity mutual funds which you're willing to hold for a decade and beyond, even if in the intervening period they plummet and crash like a house of cards and stay at low levels for a couple of years. The very real India Growth Story will take care that your investments reap a rich harvest by that time
  • Have a "Satellite Portfolio" of shares which you use for medium-term (6 months to 3 years). This should be your "Trading portfolio". For this part of your portfolio, you must be nimble-footed, and keep booking profits regularly. More important, keep very strict stop losses to ensure that your capital does not get wiped out.
  • Have a significant amount in cash and cash equivalents. This would come in handy to buy shares at ridiculously low levels as and when a sudden, violent and deep crash comes along due to local or global factors.

Stay safe with your hard-earned money!

Regards,

N


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