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!

Regards,

N

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.

Regards,

N