Monday, 24 December, 2012

Don't Listen to Experts - Especially Now

Don't Listen to Experts - Especially Now

OK, Let me be even more specific:

Don't listen to and follow "Investment Advice", "Stock Ideas", "Stock Tips", "Suggestions for 2013", etc. given by "Experts", "Investment Gurus", "Fund Managers", etc. - Especially now.

You may wonder why I say so, knowing fully well that we all do keep quoting experts, and that the experts have their reputation at stake.

Here are a few interesting reasons:

  • First and foremost, this happens to be the season for "Experts". You'll find them all over the place. In every TV news channel. In every business newspaper or magazine. In the business section of every magazine or newspaper. In every second website that has anything to do with the world of finance. After all, we're fast approaching the new year. And more importantly, we are pretty close to two landmark levels on the NIFTY - One is the psychologically important level of 6000. Second, we are close to the "All-time-high" levels. When there is such a plethora of demand for "Experts", obviously, a lot of "not-so-good" "Experts" will also end up proffering their suggestions and recommendations. That can't be good for your financial health.

  • Secondly, all experts will try to come up with a "new and unique" stock idea. At last count, I have heard/read at least 70 "experts" thus far in the past week alone. Even after eliminating the rare overlaps among different experts, you'll end up having a virtual laundry list of nothing less than a couple of hundred stocks to consider. I'm yet to come across any individual who can or needs to deploy some funds in each of them. And those who can and need to own 200 stocks are probably belonging to such a "high networth" category, that they'll probably be either experts in their own right or they'll have hired their own personal expert for handling their investments.

  • Thirdly, assuming that a particular expert has a "silver bullet investment idea" which is going to be a real multibagger, he / she is not going to go public with that name - It will make far better sense for him / her to pump in their own money (along with money borrowed from friends, family and financiers) into that stock if it is such a surefire bet!

  • Fourthly, even assuming that the expert is going to come up with such an idea, it is going to be based on a certain set of assumptions about the time horizon of investment, likely performance parameters of the company, risk factors applicable, profit targets, risk profile of the investor for whom the idea is being suggested, etc. It is indeed rare to find an investor for whom such a stock idea will be perfectly applicable.

  • Fifthly, the "Expert" may periodically change his opinion about the company from time to time based on the change in circumstances of the company or the economy or the markets or his own risk profile. You may not be aware of such changes in his opinion.

  • Even if he's committed enough to keep updating his modified opinions from time to time, he may be willing to "cut his losses" based on his risk profile in case of need. Are you?

I guess that these reasons are good enough for you to take all "Expert Opinions" with a pinch of salt at least till the new year!

Merry Christmas to all my blog readers!



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Wednesday, 19 December, 2012

Pre-2014 Suggestions for our Finance Minister & the Prime Minister - Part 1

Igniting the Animal Spirit of the Markets - Part 1

Pre-2014 Suggestions for our Finance Minister & the Prime Minister

Come 2013, our Prime Minister and the Finance Minister will face a rather interesting situation. They'll have to come up with all kinds of schemes and policy announcements as well as present a budget that will address conflicting demands of various stakeholders which include, but are not restricted to:

  1. Contain the fiscal deficit, trade deficit and current account deficit within reasonable levels
  2. Control the monster of inflation
  3. Bring back the growth rates of GDP to the rates that prevailed "gung-ho years" - if you can achieve a sustained GDP growth of 10% per annum that would be even better
  4. Come up with "populist schemes" that will benefit the "Aam Aadmi" and help the UPA government to hold on to power in the 2014 elections
  5. Ensure the recovery of the Capex cycle of investments in industry, infrastructure, education, health, etc.
  6. Enable methods to minimise (or, better still, eliminate) corruption.
  7. Come up with schemes to improve the motivation level and the productivity of the bureaucracy
  8. Put more money in the hands of the "Common Man", thereby enhancing the "Feel Good Factor"
  9. Provide enough funds to Defence and Internal Security so as to ensure that "neighbours" and the "maoists" don't try anything "adventurous"
  10. Satisfy the "demands" of "alienated" people from regions like Telangana, North East, etc.

The demands are endless, I'm sure. Hence, we need to think of "innovative", "Out of the box" solutions to enable the government to meet most, if not all of these conflicting demands.

I plan to come up with a series of "quick-gun-Murugan" suggestions. The idea is to focus on suggestions which will satisfy the following conditions:

  1. They should be either revenue-enhancing or revenue neutral. If they are revenue-reducing suggestions, the alternative to "make up" the lost revenue will also be given alongside.
  2. They should appear to be so populist that it would be rather difficult for most political parties to oppose the suggestions. Except for token symbolic opposition or opposition by "committed opposition members" like the communists and the Trinamool, for instance.
  3. Ideally, they should not require legislative approval, wherever feasible. Any suggestion which warrants legislative approval can easily get mired in significant delays.
  4. They should be "easy-to-implement". Better still, they should not only be easy to implement, wherever feasible, the results or impact should be immediately felt by the potential beneficiaries.

Changes to Income Tax Laws - 1

Introduce the following changes:

  • Exempt income categories
    • Agricultural income - it is a political hot potato - Keep it exempt for some more time (I promise that we'll address this hot potato in due course in future posts on this blog).
    • Income from transactions in Recognised Stock Exchanges - All forms of income (whether it is presently known as capital gains or business income or speculative gains) arising from sale of equity shares or redemption of mutual fund units or sale of futures and options - as long as they are subjected to Securities Transaction Tax. The Securities Transaction Tax can be increased suitably to offset any revenue loss to the taxation authorities.
  • Introduce New Income Tax Slabs
    • Rs. 0-1000,000/= - NIL (Yes! No IT for income upto a million rupees per annum)
    • Rs. 1000,001-10,000,000/= - 20% (Yes, you will have to get an annual income of over a crore rupees before you move on to the "top income-tax slab")
    • Rs. 10,000,001/= and above - 30%
    • All the above slab limits will be automatically revised at the end of every 3 years to take into account the impact of inflation. The inflation rate for this purpose would be the weighted average rate of the weekly / monthly inflation figures determined and released by the Reserve Bank of India. If the inflation adjusted figures are not released within 3 months of the end of each 3 year period, the base rate for retail car loans during the same three years charged by State Bank of India will be assumed to be the rate of inflation. (The last provision is to ensure that the IT authorities do not try to use a delay tactic to avoid changing the exemption slabs - the base rate charged for car loans by the State Bank of India would be higher than the actual inflation figure on most occasions).
  • No surcharge, cess, etc. will be applicable.
  • All deductions and exemptions (and all the confusions - like the 80C deductions, 80D deductions, 80G exemptions, etc.) will be gone. There will be a simple matter of "Calculate your income, pay your tax, file your returns and forget about your tax worries".
  • This will also make the "SARAL FORM" - the form for filing Income Tax returns truly simple.
  • In case of Individual assessees, there shall be no mandatory requirement of filing of Income Tax returns if no tax is payable. However, if any Income Tax evasion is proven in the case of such individuals who have not filed their Income Tax returns, they will be charged income tax at the maximum marginal rate of Income tax on ALL their incomes for the preceding five assessment years and will be liable to a MINIMUM jail sentence of 6 months simple imprisonment. The maximum jail sentence in such cases will be 5 years for the first offence and 10 years for subsequent offences. For the purpose of arriving at the income for each of the last five years, the income calculated (by the assessee with proof) or 10% of their present Gross Fixed Assets, whichever is higher, will be taken as the Annual Income.
  • Scrutiny of Income Tax returns will be done on a random basis. However, the punishment for any false statement in the Income Tax returns will be severe, as per the following details:
    • However, if any Income Tax evasion (due to concealment or understatement of income) is proven in the case of such individuals, they will be charged income tax at the maximum marginal rate of Income tax on ALL their incomes for the preceding five assessment years and will be liable to a MINIMUM jail sentence of three months simple imprisonment. The maximum jail sentence in such cases will be 5 years for the first offence and 10 years for subsequent offences. For the purpose of arriving at the income for each of the last five years, the income calculated (by the assessee with proof) or 10% of their present Gross Fixed Assets, whichever is higher, will be taken as the Annual Income.

Benefits of the above proposals:
  • The middle-class voters, especially the salaried class will be "bowled over". Both by the simplification and by the increase in the slab structure.
  • Chances are bright that the changes will be revenue neutral. The increased slab structure will partially be offset by the removal of exemptions.
  • More importantly, the propensity to "cheat on tax" will be minimised. Again partly due to the simplification, but more so due to the strong deterrent punishment. The threat of actually going to jail will ensure that people remain honest in their income and tax liability declarations. Use of technology and mining of data pertaining to investments, expenses, etc. will enable the Income Tax authorities to zero in on those who still try to cheat.
  • You will encourage true financial planning and sensible asset allocation. Today, a vast majority of so-called "investments" are made almost exclusively with a view to cutting down one's tax liability. Further, in today's exemption structure, the government takes the liberty to "suggest, guide and cajole" the citizen to park his/her money in certain categories of assets. It is high time the government puts the money back in the hands of the people. Let the "Aam Aadmi" decide how much to save, where to park his savings, what kind of risk he should take, etc.
  • For obvious reasons, NO political party will be able to meaningfully oppose these proposals.



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Monday, 19 November, 2012

Wealth by Stealth

Wealth by Stealth

I've often been told: "I know that I get a big fat salary, but I don't know what happens to it - by the end of the month, it is all gone".

The disciplined saver has a simple enough solution: "Make savings your first expense. First put away a pre-determined sum of money in your favourite liquid fund or equity mutual fund or Savings Bank account for onward deployment in accordance with your overall asset allocation. Then start incurring all your other expenses like buying groceries, paying your EMIs, paying rent, paying your phone bills, etc."

Unfortunately, the guy who finds "his money disappearing" is certainly not exactly a "disciplined saver".

Is there a simple solution for such an individual?

Fortunately, yes indeed. Such a person just needs to go back to the late 60's, 70's and perhaps the ealry 80's to find a good enough solution - Try and adopt (with necessary modifications) the techniques that used to be followed by middle-class housewives, bank employees, junior management staff of private sector companies, etc. in those days:

Wealth by Stealth

Your money does have a "knack" to disappear. To make it stay with you, here are a few simple "tricks". The key is not to simply read these tricks, but to put them into practice:

  • Identify 2-3 spots (perhaps one each at your home and your work spot) where you will keep a "Savings Hundi" - It could even be a simple small box / purse / pouch where you will park your temporary savings
  • Identify a "very small" sum of money which you consider as "throw away money" which you'll not even notice if it disappears on any given day. First thing in the morning, every day, without fail, before you brush your teeth, take this quantum of money and put it off in this "savings Hundi". People have told me that 0.5% to 0.75% of your monthly take-home income would be an appropriate sum of money for this purpose. (Congrats, you've just made a beginning.)
  • If you are not a typical "disciplined saver", you will typically be spending money often on a lot of "small-ticket" items of expenditure, often on a whim. For instance, you'll be waiting for someone on the streets, and just to pass the time, you'll buy either a magazine or a cup of coffee or a bottle of coke. Each time you do this, you would have offered the same bottle of coke to any friend of yours who would have been around at that time. Assume that such a friend was there with you, and put the same quantum of money in this "savings Hundi" of yours. This may sound odd, but is a pretty simple tool to ensure "forced savings".
  • Impulse buying is a bane for a person like you. Each time when you are "tempted" to buy something, ask yourself whether you actually need it. If so, (for the moment), go ahead and buy it. If not, pick up that money that you would have "blown up" otherwise and put it in that "savings Hundi". An example: When you are walking down and aisle at a shopping mall, you find an offer: "Buy a box of sweets and get another box free". And you get tempted. If you don't buy it, that's money saved - put it off in that "savings Hundi".

I'm consciously not giving any more ideas - I'd like you to execute the above before proceeding further.

At the end of each month, pick up all the amount collected in the Hundi and deposit the money in a dedicated savings bank account during the last weekend of the month.

As soon as the amount in this dedicated savings bank account crosses a threshold, deploy the sum of money in a suitable investment keeping in mind your overall asset allocation plan.

Review the investment value of these "minor savings" after a year. You'll be surprised. 

Follow this process for a while, and the "Wealth by Stealth"  would convert you very quickly into not only a "disciplined saver", but also a "savvy investor".

Good luck!



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Thursday, 15 November, 2012

Fool & his/her money quickly part ways

Fool & his/her money quickly part ways

I've been watching with interest the news item about the "cheating couple".

Apparently, they have "looted" over Rs. 500 crores. This figure may be disputed, but indications are that the amount involved is huge.

What did they promise?

Here's a summary based on what I saw on TV News Channels:

The "Promise"
Hey folks, please deposit a sum of Rs. xxx with us.
You'll be paid an interest of
  • 20% per month for Six months
  • And your principal of Rs. xxx will be returned in the Seventh month
This essentially implies that you will more than double your money in much less than a year!
Hey friends, come, come quickly and put in all the money that you can right away with us! 

This promise reminds of the story about the "old, unfit tiger" which used the garb of "having renounced the world" to attract naive innocent victims only to kill them and eat them up.

When someone promises to double your money in 6-7 months, obviously there must be a catch in it. Especially when the bank deposits give you a return of less than 10% per annum. Especially when one of the greatest investors of all time, Warren Buffett generates a return of less than 30% per annum.

If you still get tempted and put in your hard-earned money with the couple who promised you to double your money in less than a year,
I'll certainly not have any sympathy for you - I'll not even admit that the couple has cheated you.

A fool and his/her money
Deserve to part ways
No regrets!



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Wednesday, 14 November, 2012

Super-bull-market ahead in India (with certain caveats)

Super-bull-market ahead in India
(with certain caveats)

I was reading some stuff from the Economic Survey, and found a vital "interesting" point. Then I looked for a shorter version of the same point so that the readers of this blog can quickly read, and found it in the Times of India:

Key excerpts from the above link:

Labour growth has slowed down in both public and private organized sectors, the Economic Survey has revealed. Just 15% of the total labour force has regular salaried jobs. While employment in the public sector grew at just 0.4% between 2010 and 2009 as compared to 0.7% between 2009-2008 , private sector employment grew at 4.5% as compared to 5.1%.
Job creation remains a massive problem. The government aims to create 5.8 crore jobs between 2007 and 2012, but in the five-year period between 2004-5 and 2009-10 , only 1.8 crore jobs were created. Moreover, the labour force expanded by just 1.2 crore in that period, possibly because more young people stayed on in education, the Survey estimates.
Source: Times of India, March 16, 2012

The fact that just 15% of the labour force has regular salaried jobs is most interesting.

It reminds me of the story of the two Bata shoe salesmen who went to Sub-saharan Africa to explore the market for shoes. The pessimist came back, saying that "Nobody wears shoes - there's no market here". The optimist sent a fax: "Send me a million pairs of shoes - Nobody wears shoes here. The market potential is unlimited".

In a similar vein, a significant group of those who are faced with a constraint of looking at the next quarter or two would belong to the camp of pessimists. And will say: Growth is slowing down. There's very little employment. Both investment and consumption is slowing down. There's too little to hope. And, to top it off, the global trends are not supportive.

However, I'm an optimist and also have a much longer time horizon when it comes to handling my own personal investments. The fact that only 15% of the labour force have salaried jobs represents a humongous opportunity to my mind.

Look at it this way:
  • Schemes like the NREGA are already putting a lot of money in the hands of people at the bottom of the pyramid. Consumption-led demand is far more to blame for the high inflation. While the inflation monster must be tamed, the fact that purchasing power is going up can't be all that bad.
  • Guaranteed education is going to make an ever-increasing group of people "employable" in the years ahead vis-a-vis the number of "employable" people among "new adults" in the past several decades.
  • There is a significant focus on "Skill Development" - don't recall the exact scheme off the cuff, but I'm conscious that there is a lot of concerted (and government supported) effort to actually develop skills.

The above points will ensure that the number of people who enter the "salaried class" will only keep increasing in an exponential manner in the years ahead.

The figure of 15% of the labour force belonging to the salaried class is so very low that the "base effect" will work to our advantage in the years ahead. When the percentage of people belonging to the salaried class goes up from, say, 50 to 55%, that works out to just a 10% increase in percentage terms. However, if the current 15% figure goes up to 20%, that translates to a huge 33% increase.

Statistics has shown that when the per capita income of a country crosses a threshold of $ 1000/=, the momentum of the economy picks up in a significant manner thereafter. We've crossed the figure recently.

And when the inevitable march of an ever increasing population enters the "salaried class", there will be an unprecedented economic boom due to an increase in consumption in virtually every sector that you can imagine. The disposable income would be going up enormously. The ability to spend AND the ability to save will only increase. And we'll enter a virtuous cycle of:
  • Increase in disposable incomes
  • Increase in savings (which enter the economy through either the banking system or through the equity route to promote investments)
  • Increase in consumption expenditure.
  • Increase in demand
  • Improvement in the pricing power of companies
  • Greater volume growth and increased margins for companies
  • Higher tax collection for the government
  • Increased infrastructure spending
  • Much higher GDP growth rates
  • Huge inflow of global capital due to the attractiveness of the country
  • Reducing interest rates
  • Increased earnings of corporates
  • Greater wealth creation for investors
  • Improvement of the physical infrastructure of the country
  • Increase in the number of retail investors entering the equity market directly or through mutual funds
  • Improved feel good factor
  • A repetition of virtually most of the above points due to the rest of the points coming true

The natural result???

A huge bull market that will last for an unimaginably long period of time lasting at least a couple of decades, if not more.

The obvious caveats would be:
  • Local: The government does something stupid and derails one or more of the steps in the virtuous cycle as described above
  • Global: Some major unexpected fiasco occurs resulting in a global recession

My hunch is that the first caveat, while probable, is unlikely: Too many smart people across all major political parties will ensure that the right things get done. I do believe that corruption is likely to reduce in the years ahead. Even corrupt practices continue to prevail, the very same corrupt politician / babu / industrialist nexus will be able to make much more "corrupt money" in a high growth economy than in a recessionary economy. This, by itself, will ensure that all key stakeholders will, in due course, strive to achieve high growth.

The second caveat - that of a global recession - is far more likely in comparison. However, while it will definitely set us back by a couple of years, the advantage that India has vis-a-vis many other developing countries is the domestic consumption story. This key differentiator will ensure that the inward FDI flows resumes in due course.

Folks, the coming bull market is going to be huge. You may question the "when", but you can't question the "whether".

Keep reading my blog regularly for inputs on how to maximise your benefit from the coming bull market.



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Sunday, 11 November, 2012

The Individual Investor's Edge

The Individual Investor's Edge

Just came across excerpts from a nice book "Money Makers" by Jonathan Davis. In this book, he comes up with an interesting point: The individual investor has an edge over a professional fund manager. And elaborates with a few reasons.

The more I think about it, the more it sounds appealing. I thought further about the subject. The greatest advantage is simply that the ordinary investor has no need to abide by the rules of the professional game.
Here are a few very valid reasons (some provided by the aforementioned Jonathan Davis, and some based on my own understanding of how the market works):

  • For a start, no private investor has to try and outperform the market: your livelihood does not depend on relative success. Your main concern is the absolute level of return you make on your money, and the risk you have to take to achieve it.

  • As a corollary to the above, it is possible for an individual investor to put all his equity allocation to an index fund and forget it for a long while. A fund manager often can't do so.

  • Private investors are one of the few classes of investors who can often afford to take a genuinely long-term view of their investments. While many professional investors say publicly that they adopt a long perspective, in practice most are still bound by to do if they are genuinely investing for the longer term. Fund managers often have quarterly targets. They need to get their increments, they have their bonus worries, they want their promotions. Individual investors have no such worries. As an example, when Ranbaxy witnessed a change in management, the share prices tumbled to sub-200 levels. A fund manager would have easily found it difficult to buy at 200-250 levels and hold on to those shares. An individual investor could easily have done so, if he had the risk appetite to see even lower sub-200 levels for a short span of time. Today, you all know the prices of Ranbaxy. A similar situation could possibly hold water for stocks like Tata Steel and BHEL which are wildly out of favour. When the tide turns, however, the returns could be great.

  • Individual investors are not burdened with the sheer size of portfolios with which most professional fund managers have to grapple. The bigger the fund, the harder it becomes to sustain an edge in performance. An individual, on the other hand, can easily achieve adequate diversification with a portfolio of anywhere between 7 to 20 companies.

  • A professional investor is constrained by the "nature of fund", "fund house guidelines", etc. For instance, for an equity fund, as per present rules, a fund manager is forced to hold at least 65% in equity shares. An individual investor has no such worries. If he was prepared to do so, nothing prevented him from holding 10% equity and 90% cash when the index hit 21000 in 2008. After all, he knew (as well as the fund managers did) that a whole lot of shares had gone up to crazy heights. Even if a fund manager knew that he was personally uncomfortable holding on to those shares at such high levels, the fund manager could not have "sold out". The individual investor has no such restrictions.

  • When a fund manager buys a share (or sells a share), he has the obligation to "justify" the decision to his internal bosses. On the one hand, this delays the process. On the other, it results in "Group Think", where all members of a team try to be agreeable, rather than to express what's right. The individual investor does not face such restrictions. He can jolly well go by his own analysis.

In terms of inputs (whether data or knowledge), with the explosion of the internet and the plethora of disclosure norms, the individual investor does not face any significant disadvantage vis-a-vis the fund manager.

Still, many individual investors, including the "theoretically knowledgeable" investors do not make enough money in the equity markets.

Besides the problems that are associated with stock-selection, I feel that there are a few key behavioural finance issues that prevents the individual investor from becoming truly wealthy:

  • Information overload - The individual investor tends to believe that "the other guy" knows more - Just because someone writes in a magazine or publishes a blog post or appears on TV, one need not presume that such an individual knows "more than" oneself. After all, NOBODY knows exactly what's going to happen in the market in the near future.

  • Bias for action - This one is linked to the information overload. The individual investor, hearing all the "noise" from various sources, ends up with a strong bias for action. In the markets, "being still", being patient, waiting with your stocks - these are the traits that make you solid money. I distinctly recall buying Titan industries several years ago at a pre-bonus, pre-split price of sub-50. In hindsight, I also know that I had bought it at around the same time as Rakesh Jhunjhunwala made his initial investment in Titan. I got tempted by my "ability to make quick money" and sold out when the share prices doubled. Rakesh is still holding on to Titan. I remain a "retail investor", while Rakesh has become "The Big Bull". Obviously.

  • Greed for more - We're keen to get the last penny from our shares. Hence, despite knowing that a share is overvalued and can only go down, we wait till the music stops. All of us will be familiar with the 2008 story of how the indices fell from 21000 to sub 10000 levels in no time. I just happened to listen to a fund manager a few days back mentioning about how he failed to sell Pentafour Products at over 2000 - He was constantly hoping for more, and today he's left with those shares quoting below Rs. 5/=.

  • Fear factor - This is the converse of Greed - When we know that a high quality company is quoting at ridiculous levels due to temporary problems (either in the company or due to market sentiments), we're way too scared to pick up the shares. A good example would be Tata Motors and Tata Steel. After they picked up Jaguar Land Rover and Corus respectively, the share prices tumbled. Went down to levels so crazy as to become meaningless. And we all knew fully well that the house of Tatas are adequately reliable. We knew about their ethical standards, their management bandwidth, their longevity. Still, many of us failed to pick up those shares at such low levels and hold on to them.

If we can manage to overcome these behavioural "problems", any prudent individual investor who bothers to analyse well before investing can surely become truly wealthy over a period of time. So what if he "underperforms" the index or a couple of fund managers for a couple of quarters or even a couple of years? What matters to the individual investor is whether or not his investments yield the desired wealth over a period of several years.

Happy Diwali!



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Tuesday, 30 October, 2012

World Thrift Day

World Thrift Day

At the cost of repetition, once in a few months, I would like to write about the Power of Compounding.

Here's an ad-verbatim reproduction of one of my earlier posts in this blog (as a special post for a new year a couple of years back). I would like to insist that it would be worth reading even for those of you who have read it earlier. Including for those who happen to know about it already - merely as a matter of reminding yourself about the "whole damn thing" which you can't afford to forget!

Here goes:

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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Friday, 26 October, 2012

Exploiting Financial Ignorance

Exploiting Financial Ignorance

Out here in India, we're reasonably familiar with the notorious moneylenders exploiting ignorant, impoverished, illiterate people quite liberally. We're also familiar with the kind of usurious rates of interest charged by them.

Apparently, we're not the only ones who have such moneylenders. Out there in the US, the entire process has been institutionalised.

Take a look at:

A key difference that I noticed was that in our case, the moneylenders' loans are comparatively risky. In contrast, the so-called "Payday loans" offered by the US banks appear to be completely secure, linked as they are, to the weekly / monthly salary that's likely to be credited into the very same accounts, with a provision for directly debiting the amount due to the banks from the customers' savings accounts!

Obviously, a Heads-I-win-Tails-you-lose situation for the banks.

I'm sure that a class-action suit is not too far off out there.

But then, I wonder if our banks and NBFCs are having any such interesting products and whether our regulators are keeping a watch to prevent customers from being fleeced???

The only obvious thing that I can think of is the "revolving credit" facility offered by credit card providers to their customers.

I'd welcome feedback on your experiences in this connection. 



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Jaspal Bhatti Dies in Road Accident

Jaspal Bhatti Dies in Road Accident

Just heard the news earlier today about:

Certainly, shocking news indeed. And sad. He was such a delightful provider of endless bouts of laughter to an entire generation of people.

And he was just 57 years of age.

All that is fine, but what is this news item doing in a "financial blog"?

Simple - some basic questions that need to be asked will become relevant when they are asked at the right time (due to the "shock and awe" value):

Did Jaspal Bhatti, while he was still alive, 
  1. Have the faintest clue that he will be no more in a few hours / days / weeks? 
  2. Take an insurance policy for his life? Was the sum assured adequate, considering the kind of income that he was earning?
  3. Nominate different people for all his financial assets like bank accounts, mutual funds, etc.?
  4. Keep all his financial papers, documents, etc. in a well-organised manner and in an easily accessible location?
  5. Write a will clearly mentioning a sufficiently exhaustive list of all his assets (including intangible assets like royalty on his works, for instance) and indicating who should be receiving each of those assets and in what proportion?
And most importantly, has Jaspal Bhatti actually intimated at least two of his near and dear ones about the answers to each of the above questions?

For the sake of his family members, I do hope that the answers are indeed available. A few days / weeks / months later, when they have overcome their grief, they will certainly be seeking answers to all the above questions, and Jaspal Bhatti's soul will rest in peace if and only if his near and dear ones have satisfactory answers for these questions.

Now the critical question for each one of the readers of this blog post is:
  • Do YOUR near and dear ones have satisfactory answers if you disappear from this planet all of a sudden to the very same questions asked above?

For obvious reasons, I would like each of you to live for several decades more, and remain healthy, happy and prosperous. But then, it will be prudent for each of you AND me to ponder, introspect and provide answers for the above crucial questions.

Give it a thought!



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Thursday, 4 October, 2012

Kingfisher Employee's Wife Commits Suicide

Kingfisher Employee's Wife Commits Suicide

The news has been flashing all over TV channels. In case you've missed it, you can see the link here:

She is supposed to have taken this drastic step on account of the "acute" Financial Strain caused by non-payment of salaries for around six months.

Very sad, indeed. For the limited purpose of this blog post, I'm assuming that the news reports are accurate and she did commit suicide due to Financial Strain.

However, some questions arise from the point of view of Financial Planning.

The lady who committed suicide was around 45 years of age. Her husband apparently retired from the Indian Air Force before joining Kingfisher Airlines.

Quite obviously, they must have enjoyed the "benefit" of a regular, steady salary (though perhaps not flashy) for at least a couple of decades. With ENORMOUS savings potential by normal Indian middle class standards.

Further, the pay scale at Kingfisher must have been quite decent (though the salaries apparently have not been paid for the past six months).

The questions that come right off to my mind are:

  1. Did the family never hear about terms such as "regular savings", "Financial Planning", "Investment for Retirement", etc.? If not, why not?
  2. Considering the fact that her husband is an engineer and that her 18-year old son is also an engineering student, chances are bright that their family can be considered to be a "reasonably progressive, educated family". If people belonging to such a background are not aware of the need for fiscal prudence and financial planning, where are we, as a nation, going? What's likely to be the plight of the vast majority of Indians whose financial situation will, in fact, be far worse?
  3. The typical TV debates have been pouncing on the Kingfisher Management and the Government. Why is nobody raising those uncomfortable, politically incorrect questions which lay the blame squarely on the family of the deceased. It may sound cruel and heartless, but it a person who has been enjoying the benefits of a very decent professional life for over two decades has lived the life of a Grasshopper, when winter comes, he should be ready to pay the price. He should not expect the benefits which are presently being enjoyed by the Ant.

If at all we ought to be blaming the Government, it should be to the limited extent of not providing meaningful financial literacy (and hence Financial Independence) to all its citizens after over half a century after obtaining Independence.

Give it a thought!



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Monday, 3 September, 2012

Wonderful blog that I came across -

Wonderful blog that I came across -

Hi folks!

Coming from a financial blog, you must be wondering why I'm doing a post introducing you to another one!

Reason is simple - when high quality knowledge is available somewhere, and I've been prompted to take a look at it by someone, obviously, it becomes my duty to share the same with you. Obviously, I would further expect you to do likewise by sharing similar knowledge with as many others as you can!

A sample post that I liked:

Enjoy reading!



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Saturday, 1 September, 2012

Myth of US Stocks being cheap

Myth of US Stocks being cheap

There have been a number of folks on TV who have been screaming from the roof tops that the US stocks are presently undervalued.

Just came across a nice article which busts this myth.

Read on:
Certainly worth reading.



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Thursday, 30 August, 2012

Untold Story of Municipal Bond Defaults

Untold Story of Municipal Bond Defaults

You might recall an earlier post of mine on "LIBOR Fixing - The Mother of all Scams". I had alluded to the fact that the volumes involved run to Trillions of Dollars - Every Day!

You'll also be painfully aware of the sub-prime crisis that was caused due to "Collateral Debt Obligations", popularly known in the financial circles as CDOs. 

You'll further recall Warren Buffett's remarks about derivatives being "Weapons of Mass Destruction".

I don't intend to repeat what I've already stated about the LIBOR scam - If required, you can refer to the link provided above.

However, if the Sub-prime crisis can be compared to a simple knife in the hands of a warrior, imagine what would be an aircraft loaded with the latest nuclear bombs. Ideally, you should wish that you'll never have to know. I certainly wish that the Financial Armageddon does not occur during my lifetime. 

Unfortunately, I can't be certain that it won't happen. 

In this blog post and in a few future posts, I intend to highlight a few possibilities which can create a worldwide depression on a scale never seen since the Great Depression (1929-1933).

First, take a look at the story of a market which runs into trillions of dollars - The Municipal Bond market of US cities and states:

Till the sub-prime crisis erupted, virtually nobody in the outside world knew about the CDOs which had been created based on sub-prime mortgages (which somehow got a AAA credit rating).

In a similar vein, thus far, I've not got any meaningful clue about the quantum of derivatives which have been created based on these US Municipal Bonds. Considering the perceived (though wrongly perceived, if I may say so) notion that US Municipal Bonds are safe, I'm sure that there would be tons and tons of derivatives that must have been created and sold to institutions around the world.

When the Municipal Bond defaults escalate and reach a tipping point, all these derivatives will blow in the faces of ALL Financial Institutions and HNIs who happen to be holding derivatives based on these bonds. And the resultant crash in the
  • Municipal Bond markets, followed by
  • The run on a wide range of banks, followed by
  • A major crash in the stock markets around the world, followed by
  • Margin calls leading to unheard of bankruptcies around the world
.... .... .... .... is way to scary for me to contemplate.

Thus far, I've not ventured to figure out if there is any economy in the world or any asset class that would remain safe from such a crash. I'm still looking.

Good luck!



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Tuesday, 14 August, 2012

Seven Subjects that I learnt @ Marwari Business School

Seven Subjects that I learnt @ Marwari Business School

Stephen Covey is dead, but he's immortalised the number SEVEN.

I was thinking about Covey and his seven habits. And casually browsing the web.

And came across something interesting:

Hope it adds value to you SEVEN times over!




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Friday, 13 July, 2012

Financial Predictions

Financial Predictions

It has become fashionable to make all kinds of predictions about:

  • The Euro Mess
  • US Recovery
  • Chinese Hard Landing
  • Indian GDP Growth rate for the next decade
  • When the Nifty & Sensex will cross their earlier "ALL-TIME" Highs

Different experts come up with different answers.

My take: Take all of that with a Dead Sea of salt.

I ought to thank for referring me to this Motley Fool article:

Basically, you'll perhaps be better off if you treat the predictions of business news channels and business newspapers the same way you'll treat the "Next Week for you" column on astrology in your weekend newspapers & nes magazines.

Remember Mark Twain's immortal words: "Prediction is difficult, especially about the future"



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Tuesday, 10 July, 2012

First in Denmark, Now Negative Yields in France & Germany

First in Denmark, Now Negative Yields in France & Germany

A couple of days back, in one of my posts, I'd written about how Denmark is offering negative yields (ie., they are charging you a bit of money for the perceived assurance of keeping it safely with them!).

Apparently, the Euro-mess is such a big mess that other countries perceived to be "safe" are also following suit. Take a look:



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Saturday, 7 July, 2012

No "Automatic" safety against Inflation - You need to create it!

No "Automatic" safety against Inflation - You need to create it!

Many of us in India (especially those above 50, who had perhaps started earning in the late 70's or early 80's) tend to feel confident about investing in bank and corporate deposits (as against equity shares or equity mutual funds). And think that they can protect themselves (by and large) against inflation.

But is all that equally valid for the next generation?


Especially wrong for those who are in their 20's & 30's today. Chances are bright that India will become part of the "developed" economies in the next 10-15 years. And when that happens, the pace of growth will taper off to levels presently prevailing in Europe / US. And that will be accompanied by low - very low interest rates.

By the time YOU (the guy/gal who is presently just about finishing your formal education or starting out on your career) reach your middle age, say by the year 2025, watch out for the big monster of inflation:

And if you thought that depositors will continue to get some returns on their deposits, look at Denmark today:

The "official" inflation may continue to remain low. However, commodity inflation is set to grow with increasing prosperity and Service costs are also set to grow due to scarcity of skillsets - After all, if you as a software engineer or a lawyer or a doctor wish to earn ever increasing incomes, so will other service providers! This will imply an ever-increasing cost of living even to maintain your standard of living. And, you're likely to aspire to continuously improve your standard of living!

You'll continue to want to change your mobiles every 6-12 months, your car every 3-5 years, your washing machines, TV sets, etc. every 5 years, etc.

And, thanks to your increasing health-consciousness, you're likely to live for at least a decade more than those belonging to your parents generation.

How are you going to protect yourselves against inflation?

You can't expect simple bank deposits or government securities to provide you that protection.

You need to endeavour to create that protection.

The onus is on you.

You have to wake up, and wake up now.

Watch this space for tools and techniques.

Hopefully, I'll have the time, inclination and ideas to post appropriate info for your consumption!



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Wednesday, 4 July, 2012

LIBOR Fixing - Mother of All Scams

LIBOR Fixing - Mother of All Scams

Many of you must have heard about Barclays Bank being in the soup on getting caught with their pants down in the act of supposedly "fixing" LIBOR rates (London Inter-Bank Offer Rate) over the past several years. Their big bosses have obviously resigned. And there is a lot of "mud-throwing" going on all around.

However, a few points are worth noting:

  • Barclays Bank, irrespective of how large it is / was, couldn't have done it alone. It has already tried to pass some of the buck / muck to Bank of England (Take a look at: Barclays Bank blames Paul Tucker of Bank of England for LIBOR Mess)
  • If Barclays was doing it, obviously it must have been benefitting in a HUGE manner both at the level of the bank and at the level of the individual top management members. Believe me, the figures will make our 2G Scam accused Raja look like a minor pick-pocket in comparison - you'll come to agree when you look at the volumes involved (which I'll be giving a clue about at the end of this post)
  • If Barclays was doing it, chances are bright that at least half-a-dozen other equally large banks must have been doing the same.
  • As a corollary, it must have been an industry-wide mess.
  • Equally obviously, the auditors, the regulators, the government authorities, etc. must have definitely been fully aware of and perhaps even participating in this fraud. The fraud is way too huge to have been brushed under the carpet without involving a multitude of individuals across multiple organisations.
  • In a nutshell, the whole thing stinks - It appears to be a systematic fraud intended to loot a whole range of corporates, countries, including developing countries such as India to the tune of millions of dollars every year.

To get an idea of the volumes involved, look at just the notional value of Interest Rate Swap figures of LCH Clearnet, the global leader in interest rate swaps - Source: LCH Clearnet Website:

  • Daily Volumes for July 3, 2012 - $ 1,986,805,421,914
  • Outstanding Volumes as on July 3, 2012 - $ 306,817,351,398,322

When just a single player (even if the player is the # 1 in the industry), you can imagine the size of the industry.

Even if we assume that 1% of the total volumes involved are adversely impacted due to the fudging of LIBOR rates by people like Barclays, you can imagine the implications of the litigation that would naturally follow.

Now, I can safely repeat, the figures do make our 2G Scam accused Raja look like a minor pick-pocket in comparison!

What does all this mean for India and for Indian corporates?

Simple - There is going to be a lot of turmoil in the months and quarters ahead (as though we've not had enough of that in the past 3-5 years).

Likely to impact all corporates (and the state and central governments) who have borrowed (or lent) any kind of money on the basis of "LIBOR Plus" interest rates, which virutally is the norm for all kinds of overseas borrowings.

Likely to impact all corporates and governments around the world who have borrowed/lent any kind of money on the basis of "LIBOR Plus" interest rates.

Likely to cause huge volatility in both debt markets and equity markets around the world.

Likely to cause completely unexpected and perhaps even unintended consequences in terms of direction and level of capital flows, cost of borrowing, foreign currency exchange rates, etc.

Be ready for a rocky ride!



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