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?

Wrong.

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:

• "Denmark sets NEGATIVE interest rates for the first time" - Reuters

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!

Regards,

N

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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!

Regards,

N

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Financial Impact of Education Loans

Financial Impact of Education Loans

It is that time of the year when many of your children, nephews and nieces, friends, kids of friends, etc. will be wondering about a critical decision which could impact their entire life:

• Which group should I take in +2? Which course/specialisation should I join in Engineering? Which college should I choose? Should I consider my current job offer or should I go in for another couple of years of "higher" education by way of a post-graduation in my field or, for that matter, a nice MBA from a "reputed" institute?

Obviously, the decision-making process is tough enough even without taking into account the financial impact of the decision. However, I wish to draw your attention to the actual financial impact of any decision that you take now and highlight the need to think about this aspect at some length.

A typical engineering/medical degree from a good college costs upwards of 10-15 lakhs these days. Often, the figure is in excess of 20 lakhs. And an investment of nothing less than 4-6 years of your life. If you include the cost of a quality PG degree from a premier domestic institution, the cost will increase further by another 10-15 lakhs. And a couple of years extra. In case of a "foreign" degree from the typical US / UK / European college, the costs will zoom up even further.

When you calculate the cost, you must not only include the actual cost of education, hostel fees, etc., but should also calculate the opportunity cost of the time you'll be investing in such a course, especially when you are calculating the cost of a post-graduate course.

The two obvious choices to fund this education are:

• Own funds / parents funds
• Education Loans

In case of the former, you need to calculate the opportunity cost of utilising your own funds vis-a-vis the cost of borrowing.

In case of the latter, you need to be even more aware of the ACTUAL cost of committing yourself to a reasonably long-term educational loan for an amount that is certainly not an insignificant one. Do a realistic calculation of the likely EMI (Equated Monthly Instalments) and the duration for which you'll continue to be repaying.

Use your own simple rules of thumb to assist your decision-making process.

For instance, if, after completing your education, you are able to save 20% of your salary every month, how soon will you be able to clear off your loans? What back-up plans do you have if you lose your job (or god forbid, not get a job)? If you are going to be repaying your educational loan for 3 years after you pass out of college, is that education loan worth taking in the first place? What if the repayment duration is 5 years? What if it is 7 years? 10 years?

I'm not for a moment suggesting that you refrain from either spending your parents money on education or that you should avoid taking an education loan. All I'm suggesting is that you MUST think through the implications before deciding to take that education loan.

Again, as a rule of thumb, if the cost of a good MBA from IIM Ahmedabad is going to be around 20 lakhs and you're going to land up a job that pays 15 lakhs per annum after passing out, perhaps it ought to be worth your while taking a loan. After all, you'll be able to clear off the loan in 3-4 years with ease.

However, if you're going to do a not-so-good MBA from XYZ College, costing around 25 lakhs, and the average placement record of that college suggests that you'll land up with a job that pays you 5 lakhs per annum, would you still take a loan to fund your education?

Think about it!

Regards,

N

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Success in using Trading Strategies

Success in using Trading Strategies

While going through what's probably an ancient book (by today's standard of viewing a week-old article as "old"), I came across a very interesting study - the Ralph Vince Experiment. For those who are interested in the name of the book, it is "The Complete Guide to Day Trading" by Markus Heitkoetter.

First, the details of the experiment:

The Ralph Vince Experiment Ralph Vince is a well-respected and well-known financial investor and educator. He's published a number of books on trading and the trading industry, and he also performed a very famous experiment known as the Ralph Vince Experiment. Mr. Vince took 40 Ph.D.s and set them up to trade with a computer game. Now, these 40 people all had doctorates, but Mr. Vince made sure that none of their doctorates involved any sort of background in statistics or trading. In the game, each of them were given $1,000 and 100 trades, with a 60% winning percentage. When they won, they won the amount of money they risked. When they lost, they lost the amount of money they risked. Simple. As you can see, ALL of them had a profitable trading strategy. So, after all 40 had completed their 100 trades, how many do you think made money? Only 2 - Just TWO Only 2 doctorates out of 40 were able to make money. The other 38 failed to succeed. Source: CSI News Journal, March 1992

I've been in the investment world for over a couple of decades now. With reasonable success. As an investor - not as a trader. Certainly not as a day-trader. I'm aware that a vast majority of investors end up losing money in the stock markets. I should admit that I've periodically wondered why?!?!??!

While it is true that I've always been surprised by this, I'd not bothered to think much about it till I started reading up and doing some research in the field of Behavioural Finance.

Here are a few reasons for such high overall failure rates:

• Traders hate - Hate - HATE to book losses - Intellectually they know that they should "cut their losses" and "let the profits run". Practically, they often fail to "cut their losses". Instead, they let the losses run due to:
  • Ego hassles - they don't like to admit even to themselves that they were wrong
  • Loss aversion - they don't like to actually incur the loss - as long as it is a paper loss, it is OK!
  • Hope - Surprisingly large number of traders almost have a belief that "Hope" can be a winning strategy!
• Greed - Traders love profits - Hence, traders commit one of two cardinal sins:
  • They often book profits very quickly - only to see the stock run on in an upward trajectory after they've sold out or ...
  • They want to catch the "Peak" - And wait till eternity, only to see all their paper profits evaporate
  • And they repeat the above two sins every day, week, month and year - without fail.
• Traders don't learn lessons from history.
  • Despite knowing that guys of the calibre of Warren Buffett, Rakesh Jhunjhunwala, etc. earn "ONLY" x% p.a., they seek to earn 3x, 5x, 10x% p.a.
  • Despite knowing that old story of the inventor of Chess (who asked for 1 grain on the first square, 2 on the second, 4 on the third, 8 on the fourth, 16 on the fifth square, etc. - only to make the king realise that his entire kingdom will never be able to meet the demand of the inventor of chess), traders still fall for every single Ponzi scheme that comes their way
  • They firmly believe in the "Greater Fool Theory" - Not once do they begin to wonder if they will end up being the "Greatest Fool"!!
• Traders seldom bother to invest time, money and energy to learn - In virtually every other field ranging from law to medicine to engineering to agriculture to fishing to cricket to singing, people put in enormous efforts to learn - BEFORE they start performing. Unfortunately, trading and investing in equity is one field which everyone tends to assume "is easy". They literally follow the NIKE slogan - Just do it!

And most importantly, a vast majority of traders KNOW all the above points and still continue to make virtually EACH of the above mistakes

Do we still wonder as to why many old-timers equate "Equity investments" with Gambling???

Regards,

N

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Rajiv Gandhi Equity Savings Scheme

Rajiv Gandhi Equity Savings Scheme

Came across in the website of Money Life an interesting article about:

• Rajiv Gandhi Equity Savings Scheme

The author has given a whole host of suggestions, most of which are valuable. One hopes that someone "up there" passes it on to Pranabda!

However, I disagree strongly with respect to a critical point mentioned in the article:

• The author says: "SEBI should ban loss-making companies from coming out with Initial Public Offers (IPOs)".

I wonder why??? There are many instances, especially in a capital-starved, infrastructure-deficit country like ours, when new companies seek to come up with greenfield projects which involve long gestation periods. These projects are often highly capital-intensive. In fact, even in industries which are highly profitable, the initial years of a company are not profitable as they need to establish themselves in an already competitive market.

It is but natural that such compies which are loss-making in the initial years would not find too many easy sources of funds. One of the best ways of raising funds for such companies is to come up with an IPO. Obviously, the IPO is likely to be priced at a far more "reasonable" level when the company is incurring losses than when it becomes a cash cow. If anything, the promoter should be worried about diluting his stake at such low levels.

Hence, to ban an IPO of loss-making entities is to miss the woods for the trees. Equity investments, by nature, are risky. You can perhaps ban such loss-making companies from raising public deposits (which are unsecured). Don't ban them from raising equity capital. Let the retail investors participate in the development of the nation and reap the rewards in due course - albeit with a bit of risk in the process.

Regards,

N

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