Saturday 30 July 2011

Lies, Damned Lies, Statistics, Government Statistics and Official Government Statisics in troubled times!

Lies, Damned Lies, Statistics, Government Statistics and Official Government Statisics in troubled times!

We've all been conscious of the statistics brought out by Indian authorities.

Many of the figures are especially heart-breaking to the real "aam-aadmi", and hilarious to those who understand economics.

Especially in the areas of:

  • Official Inflation figures - Week after week, the official figures are in single digits. Wonder if they have ever gone out to buy vegetables, buy groceries, catch a cab or auto, filled up their fuel tanks, bought some jewels, watched a movie, dined out at a restaurant, booked an apartment, etc. If the government officials had actually spent any money of their own on any of these activities, they would know that the "real" inflation experienced by you and me is at least in low double digits, if not upwards of 20% per annum.
  • Defining "Poverty" for the purpose of providing subsidies to "Below Poverty Line" families
  • Determining "Market Rates" while determining compensation levels for acquiring land from farmers

Many of us would have been under the impression that "This happens only in India".

Apparently not. Obfuscation of reality in financial matters is another area where we've learnt a great deal from the west!

Take a look at this article about the GDP figures for USA and you'll realise that the Western Government economists are as adept as we are in the art of generating "figures that please the boss":

Regards,

N


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Friday 29 July 2011

SEBI's new Announcement impacting Retail Investors

SEBI's new Announcement impacting Retail Investors

Disclaimer: I'm writing this post based on the memory of what I watched on TV earlier in the day. Facts need to be verified after the implementation process starts in due course!

SEBI has made a series of announcements regarding mutual fund investments, IPO investing, Takeover norms, etc.

Here is a quick synopsis along with my brief comments:

  • Transaction Charges of Rs. 100/= to Rs. 150/= announced for investment in mutual funds. Some kind of differentiation is being made between new and existing investors.

    • Is this the beginning of the attempt to re-introduce entry loads once more? - Almost for sure, I guess!

    • How is it going to be collected? Will it be deducted from the initial sum invested? Then why is it not a minor / microscopic percentage of the sum invested? A fixed charge is obviously regressive - Penalises the small and middle class investor more than the large investors

    • Is it a one-time fee for a particular year? For investment in a particular scheme? For investment in a particular fund house? No clarity as of now.

    • It would have been much more honest if SEBI had simply re-introduced an entry load or retain the present system of the fees being negotiated by the distributor with the investor.

    • Will the transaction charge be applicable only for equity funds or even for stuff like debt funds? No clarity.

  • New & Improved "Unified KYC norms" being introduced.

    • This almost looks like a "New & Improved Surf" or "New & Improved Hamam"!

    • Either you're going to insist on true KYC norms on a logical basis - which will involve providing proof of Identity, Address, Date of Birth, and, in some cases, financial status. Or you're going to be lax in the name of being "customer-friendly". For Heaven's sake, let SEBI decide once for all which one it wants. And stick to that.

    • We're way too tired, having moved from virtually nothing, to providing a photo & address proof, to providing PAN card details, to providing a MAPIN reference to the current system of KYC norms, which is again sought to be changed.

    • I only hope and pray that presently KYC compliant customers are not harassed once more to re-invent the wheel and provide all and sundry details!

  • IPO Forms to be modified and simplified.

    • I'll just need to wait and respond.

    • For most of us who depend on online options for IPO investing, fortunately, things are already fairly simple. This is one area where SEBI has been reasonably helpful. (Caveat - IPOs need to be sold for promoters to get the required funds. Perhaps the pressure from promoters and merchang bankers have ensured that the IPO investing process has become so simple!)

  • New Mutual Fund Advertisement norms to be implemented. Ads to mention absolute returns and not CAGR returns.

    • This is truly amazing. CAGR is the only truly comparable piece of data that is relevant. To claim that it is "Too complex" for investors to understand is indeed strange. If CAGR is too complex, how are they supposed to really comprehend the obfuscating risk factors including claims about "past performance do not necessarily predict future performance" or "the name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns"? Give me a break!

  • Takeover norms being changed - Trigger moved from 15 to 25%; Minimum quantum of open offer to be 26% instead of 20%; No-compete Fees banned.

    • Will enable strategic investors to enter to a greater extent without worrying about the need to make an open offer.

    • 100% Open offer would have perhaps been better for retail investors, but pressure groups seem to have prevailed in this regard.

    • The removal of a separate "No-compete Fees" given exclusively to promoters is indeed a step in the right direction.

    • On the whole the proposed changes in takeover norms seem to be fairly balanced, keeping in mind the overall constraints in the Indian scenario.

As I mentioned right at the outset, let's wait for the details to come out and then react further, if required.

Regards,

N


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Thursday 28 July 2011

The fiscal situation in US - A Pictorial Representation

The fiscal situation in US - A Pictorial Representation

The old adage about a picture being worth a thousand words is indeed true.

Just take a look at the following link:

Gives a great idea as to the kind of financial mess that the US of A is finding itself right now. Wonder what would be the implications to stock markets around the world when the bubble eventually bursts. Hopefully, they'll be able to "kick the ball further" long enough for me to be "independently self-sufficient" irrespective of what happens in the financial markets!

Regards,

N


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Sunday 24 July 2011

Leveraging - Learning the basics

Leveraging - Learning the basics

Here's a wonderful article by Deepak Shenoy:

Explains in simple, lucid terms about:

  • The meaning of leverage
  • Opportunities that come due to leveraging
  • Dangers that can occur due to leveraging

Very well written article. Absolutely easy to understand.

The only things that could have been added to the above article are:

  • Extending the concept of leveraging to stock market and commodities market through:
    • Margin-based day-trading
    • Playing in the derivatives segment - Futures & Options
  • What kind of individuals should indulge in leveraging? Under what circumstances? To what extent?

My own take:

  • Nobody other than professional traders with rich experience should indulge in leveraging - they should restrict their area of operation to long-term investing.
  • Even professional traders should learn enough about asset allocation, money management, behavioural finance, operation of stop-losses, etc. before leveraging.
  • Even then, they should start really small, allocating a "trial based" sum of money to "learn the tricks of the trade"
  • Most importantly, those who indulge in leveraging, should continue to do so, only if they are able to develop a trading strategy and actually execute the strategy - Many of them end up burning their fingers by their own inability to actually execute the strategy. For instance, even if you have an excellent strategy involving a "stop-loss" to be triggered when your losses reach a particular level, it simply can't work if you change your stance midway and fail to cut the losses at the appropriate time.
  • We should understand that there is a role for a Sehwag, a role for a Dravid and a role for a Harbajan. If any of them starts trying to imitate either of the other two, the result would be disasterous. In a similar vein, we should understand our own individual style of investing and stick to that.

Take care. Be cautious. Make money.

Regards,

N


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Tuesday 19 July 2011

Egan Jones cuts US credit rating - Source: Bloomberg

Egan Jones cuts US credit rating - Source: Bloomberg

Lots of doomsayers have been crying wolf.

Finally, a credit rating agency has actually cut the US Ratings. Read on for details:

It is interesting to note that Egan Jones was the first agency that forecast the 2008 financial collapse and, more recently, placed USA on credit watch (if I'm not mistaken from March 1, 2011), well before S & P and Moodys followed suit.

Wonder when (not whether) the other major credit rating agencies are going to actually downgrade the AAA rating for USA???

Watch out! The fun and games are just beginning.

If the Republicans & Democrats agree on increasing the statutory debt limit and US Printing presses go to work and lots of dollars are pumped into the global economy (to buy Greek bonds, for instance), perhaps there will be an artificial sense of security. This will result in a huge boost to the stock markets, especially in fast growing parts of the world like Brazil and India. Result could be a new all-time high for our very own Nifty and Sensex.

Alternatively, if S & P and Moodys also quickly downgrade USA and if the European mess is not quickly resolved to bail out Greece, Portugal, Italy, etc., it is almost a certainty that all hell will break loose. And the sub-prime crisis of 2007-08 will look like a walk in the park. Result: All bets are off, and Nifty, Sensex can reach ridiculously low levels. I can't even begin to hazard a guess at the levels to which the indices can fall in such a scenario.

Unfortunately, I'm a bit of a realist and am afraid that the pessimistic option given above looks increasingly likely.

Regards,

N


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Wednesday 13 July 2011

Pareto Principle


Pareto Principle

There are a few principles that stand the test of time.
Pareto principle is one such. The old, famous, 80-20 rule.
The picture below explains it eloquently:
       
To the best of my knowledge, Pareto principle works perfectly in all walks of life (at least in 80% of the situations).
All the more so, in the world of personal finance, especially in the wonderland of shares & equity mutual funds.
Some of the things that I've observed:
  • 80% of the profits that you derive come from 20% of your investment decisions

  • 80% of the profits that you derive come from 20% of your shares & mutual funds

  • 80% of the total losses that you incur in each year comes from 20% of your shares & mutual funds

  • 80% of profits (and losses) are generated in 20% of your holding period of the concerned investment (unfortunately, as David Ogilvy would have perhaps said, you don't know which 20% - Hence it makes sense to refrain from trying to time the markets!)

  • 80% of what you hear / read / listen to from public sources are either unreliable or have already been factored in by the markets already

  • 80% of the "secret tips", "sureshot advice" that you get from friendly brokers, neighbours, relatives, colleagues, well-wishers are junk material

  • 80% of such junk material referred to above are very tempting to act upon. 

  • 80% of our actions based on such advice referred to above result in losses

  • 80% of ALL short-term predictions that you act upon are totally wrong, misleading, unreliable, useless or all of this and more!

  • 80% of ALL short-term players, traders, self-learnt share "dabblers" lose money. Often lose the principal.
So, what does one do?
For those of us who are not making 80% of our total income from trading in shares, it does not make sense to "trade" at all!
Instead, the 80% of us who are not making 80% of our TOTAL INCOME from trading in shares must become investors in the true sense of the term.
And follow some basic norms such as:
  • Don't forget - It is your money that you are investing. Never lose the capital. Don't take a risk that you can't accept. Mentally or financially.
  • Do not buy before doing your own research - Really.
  • Do not invest in shares if you are unwilling or incapable of holding the shares for at least 3-5 years. Really.
  • Do not expect returns which are more than double what you get from a fixed deposit in a public sector bank.
  • Do not hesitate to book your profits when you get your expected returns. Especially when you get such profits in unexpectedly quick time!
  • Do not invest any money that you may require within the next 1-2 years
  • Do not invest borrowed money in shares
  • Just like you can't catch all the fish in a fishing trip, you will miss buying the right shares OFTEN and you'll sell too early - OFTEN. It is OK, as long as you don't end up buying the wrong shares and end up holding such junk for too long.
  • Do not invest ALL your investible surplus in a single company / sector / promoter group.
  • Do understand your risk profile and plan your asset allocation carefully before investing in shares.
  • If, in the unlikely event of your share zooming into the stratosphere after you bought it, just before selling it to book your profits, ask yourself: "Will I buy this share at the current price if I had the money?" - If the answer is an unequivocal "Yes", Don't sell right now.
  • The share market is not for historians. You deal with the future; you deal with uncertainties; you deal with probabilities; you deal with the unknowns. Be prepared by understanding the concept of "Maximum acceptable loss" and get out if your share price falls below this level.
  • The shares you have bought are not your parents nor is it your beloved spouse. Be willing to "Let go" and sell it - either to book profits or to minimise losses.
  • The share market does not owe you money. The share market does not know that you have bought a particular share. The share market will take the share prices up and down. The share prices will be volatile. Make volatility your friend. If not, it will become your worst enemy.
  • Investing in shares is not a game of cricket or chess or soccer. It is like manufacturing steel or creating software or making biscuits. You should not treat it as a game of chance or a game of skill. You should treat it on par with something like buying a house, for instance. Before purchasing a house, all of us go through a whole range of evaluation parameters.
All said, remember the Pareto Principle.
Learn to relax by focusing on the key 20% - Always.
Regards,
N


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Wednesday 6 July 2011

Why should we be worried about ETF Money entering India

Why should we be worried about ETF Money entering India

Of late, you'd have heard an occasional voice or two talking about a relatively new phenomenon of ETF Money entering Indian Markets.

In India, we don't have too many Exchange Traded Funds (ETFs). We just have a few basic ones - which either invest in Gold or in specific shares which make up the benchmark index in the same proportion as the index.

So, why is there such a brouhaha about ETF money entering India?

The simple reason is that the financial "wizards" of the western world have created literally hundreds of different types of ETFs. Not all of them are simple ones. Certainly, most of them are not only complex, but also

  • Difficult to understand
  • Highly risky
  • Very costly in terms of fund management fees (vis-a-vis our plain vanilla ETFs)
  • Highly unsuited to "ordinary investors"
  • Designed almost specially for very larger institutional investors / HNIs who use it for a whole variety of ultra-short-term, short-term, medium-term and long-term purposes.

With all these ETFs, much of the money invested in such ETFs is considered to be "Hot Money" - which very quickly moves in and out of markets in search of returns.

Do take a look at the following article from Economist.com for an in-depth understanding of how and why ETFs can be dangerous:

Regards,

N


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