Fear & Greed - 2008 Version
Self-explanatory (Original source unknown - got it through email from a friend):
Regards,
N
Thursday, 16 October 2008
Fear & Greed - 2008 Version
Self-explanatory (Original source unknown - got it through email from a friend):
Tuesday, 14 October 2008
Warren Buffett on Leverage
Warren Buffett on Leverage
Here goes a gem from Warren Buffett:
"Leverage," he said, "is the only way a smart guy can go broke … You do smart things, you eventually get very rich. If you do smart things and use leverage and you do one wrong thing along the way, it could wipe you out, because anything times zero is zero. But it's reinforcing when the people around you are doing it successfully, you're doing it successfully, and it's a lot like Cinderella at the ball. The guys look better all the time, the music sounds better, it's more and more fun, you think, 'Why the hell should I leave at a quarter to 12? I'll leave at two minutes to 12.' But the trouble is, there are no clocks on the wall. And everybody thinks they're going to leave at two minutes to 12."
Many of us would wish that we read this (and followed the implied advice) in January 2008!
Regards,
N
Sunday, 5 October 2008
Financial Bubbles - A simple illustration for the financial dummy!
Financial Bubbles - A simple illustration for the financial dummy!
Here's a gem that I got from a friend. Didn't know whether it deserves mention on this blog or my "Something to Smile" blog. Hence I'm posting it on both!
* * * * * * * * * * * * * * *
Once there was a little island country. The land of this country was the tiny island itself. The total money in circulation was 2 dollars as there were only two pieces of 1 dollar coins circulating around.
1) There were 3 citizens living on this island country. A owned the land. B and C each owned 1 dollar.
2) B decided to purchase the land from A for 1 dollar. So, now A and C own 1 dollar each while B owned a piece of land that is worth 1 dollar.
* The net asset of the country now = 3 dollars.
3) Now C thought that since there is only one piece of land in the country, and land is non producible asset, its value must definitely go up. So, he borrowed 1 dollar from A, and together with his own 1 dollar, he bought the land from B for 2 dollars.
*A has a loan to C of 1 dollar, so his net asset is 1 dollar.
* B sold his land and got 2 dollars, so his net asset is 2 dollars.
* C owned the piece of land worth 2 dollars but with his 1 dollar debt to A, his net residual asset is 1 dollar.
* Thus, the net asset of the country = 4 dollars.
4) A saw that the land he once owned has risen in value. He regretted having sold it. Luckily, he has a 1 dollar loan to C. He then borrowed 2 dollars from B and acquired the land back from C for 3 dollars. The payment is by 2 dollars cash (which he borrowed) and cancellation of the 1 dollar loan to C. As a result, A now owned a piece of land that is worth 3 dollars. But since he owed B 2 dollars, his net asset is 1 dollar.
* B loaned 2 dollars to A. So his net asset is 2 dollars.
* C now has the 2 coins. His net asset is also 2 dollars.
* The net asset of the country = 5 dollars. A bubble is building up.
(5) B saw that the value of land kept rising. He also wanted to own the land. So he bought the land from A for 4 dollars. The payment is by borrowing 2 dollars from C, and cancellation of his 2 dollars loan to A.
* As a result, A has got his debt cleared and he got the 2 coins. His net asset is 2 dollars.
* B owned a piece of land that is worth 4 dollars, but since he has a debt of 2 dollars with C, his net Asset is 2 dollars.
* C loaned 2 dollars to B, so his net asset is 2 dollars.
* The net asset of the country = 6 dollars; even though, the country has only one piece of land and 2 Dollars in circulation.
(6) Everybody has made money and everybody felt happy and prosperous.
(7) One day an evil wind blew, and an evil thought came to C's mind. "Hey, what if the land price stop going up, how could B repay my loan. There is only 2 dollars in circulation, and, I think after all the land that B owns is worth at most only 1 dollar, and no more."
(8) A also thought the same way.
(9) Nobody wanted to buy land anymore.
* So, in the end, A owns the 2 dollar coins, his net asset is 2 dollars.
* B owed C 2 dollars and the land he owned which he thought worth 4 dollars is now 1 dollar. So his net asset is only 1 dollar.
* C has a loan of 2 dollars to B. But it is a bad debt. Although his net asset is still 2 dollars, his Heart is palpitating.
* The net asset of the country = 3 dollars again.
(10) So, who has stolen the 3 dollars from the country? Of course, before the bubble burst B thought his land was worth 4 dollars. Actually, right before the collapse, the net asset of the country was 6 dollars on paper. B's net asset is still 2 dollars, his heart is palpitating.
(11) B had no choice but to declare bankruptcy. C as to relinquish his 2 dollars bad debt to B, but in return he acquired the land which is worth 1 dollar now.
* A owns the 2 coins; his net asset is 2 dollars.
* B is bankrupt; his net asset is 0 dollar. (He lost everything)
* C got no choice but end up with a land worth only 1 dollar
* the net asset of the country = 3 dollars.
************ **End of the story; BUT ************ ********* ******
There is however a redistribution of wealth.
A is the winner, B is the loser, C is lucky that he is spared.
A few points worth noting -
(1) when a bubble is building up, the debt of individuals to one another in a country is also building up.
(2) This story of the island is a closed system whereby there is no other country and hence no foreign debt. The worth of the asset can only be calculated using the island's own currency. Hence, there is no net loss.
(3) An over-damped system is assumed when the bubble burst, meaning the land's value did not go down to below 1 dollar.
(4) When the bubble burst, the fellow with cash is the winner. The fellows having the land or extending loan to others are the losers. The asset could shrink or in worst case, they go bankrupt.
(5) If there is another citizen D either holding a dollar or another piece of land but refrains from taking part in the game, he will neither win nor lose. But he will see the value of his money or land goes up and down like a see saw.
(6) When the bubble was in the growing phase, everybody made money.
(7) If you are smart and know that you are living in a growing bubble, it is worthwhile to borrow money (like A) and take part in the game. But you must know when you should change everything back to cash.
(8) As in the case of land, the above phenomenon applies to stocks as well.
(9) The actual worth of land or stocks depends largely on psychology (or speculation)
* * * * * * * * * * * * * * *
Regards,
N
Saturday, 4 October 2008
Need for Retirement Planning
Need for Retirement Planning
Hear out the lament of a retired pensioner - not a rather impoverished, uneducated retired clerk from the back of beyond, but a senior management pro from a PSU giant:
Many of us tend to postpone financial planning for our post-retirement years till it is way too late. Just listen to Einstein's sermons on the "Power of Compounding" being the "Eighth wonder of the world".
The link referred to above is just one more reminder to those of you who are over the ripe old age of 25!
Regards,
N
Wednesday, 1 October 2008
Tata Motors, Singur, Transparency, etc.
Tata Motors, Singur, Transparency, etc.
Recently I happened to read an article in Economic Times:
Normally, I expect ET folks to write stuff that is reasonable and fair. This article half-accuses the Tatas of
- not being transparent
- almost exploiting the WB government by getting land on terms which are supposedly very favourable to the Tatas, and at a great cost to the general public
Before I express my views on the matter, let me add a disclaimer - I've not invested in shares of Tata Motors & do not have any personal stake if Tata Motors were to gain something significant from their business dealings at Singur.
Now that the disclaimer is done away, here goes:
- Whenever any business house proposes new investments in a state, it asks for a basket of concessions in lieu of its commitments in terms of investments, employment generation, etc. There's no reason why details of a purely business agreement should be available in the public domain. It will certainly go against the business interest of the investor(s) vis-a-vis their business rivals. At the maximum, the details can be made available to the plethora of Audit teams that are bound to scrutinise all such deals at various levels, including any review committees of state / central governments, which can obviously include members from the opposition if appropriate. Why should the details be available to the general public??? Is it to enable the TV channels to gain TRPs or to improve the circulation of business journals?
- To claim that the concessions given by the WB government are unwarranted is perhaps within the bounds of tolerable limits - one can always argue for and against such concessions on behalf of the Government; But to blame the Tatas for the same is certainly laughable. Certainly, Tata Motors was not negotiating with a small scale industrial unit with 45 employees from Ambattur or Adityapur Industrial Estates. They were negotiating with powerful and highly educated officials of a State Government. Surely, one doesn't expect them to be bull-dozed or bribed into an agreement to the detriment of the state.
- If any reviewing authority finds that the terms are unduly and unfairly favouring the Tatas, it can be only due to inefficient negotiations or corrupt practices on the part of the negotiators. In either case, the negotiating team must be taken to task in accordance with the rules and norms for the same, instead of blaming the Tatas. After all, when one goes even to the vegetable market, if we try to bargain beyond a point, the "choota boy" at the shop asks us to take a walk!
Regards,
N
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