Chaitanya Patel

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We’ve started hearing stories of people losing jobs in IT & BPO due to automation. Also, the pace of recruitment in these sectors is slowing down. The number of new jobs created in next few years would be far lesser than what was created in the past.  Many roles are becoming redundant. The starting salary for a fresher has been constant around 25K per month for last very many years.

Also many IT & BPO companies have started going for contract workers. In the coming decade, automation, robots and temporary staffing can change the way we look at jobs and career.

Soon factory floors may have more robots than human workers. There may not be any need to outsource manufacturing jobs to low wage countries.

Every month, in India, we are adding one million people to the job market. In 2020, we would have 900 million people of working age. Though as an economy we would continue to grow, the job growth may not be on par with economic growth. Skill development and providing employment opportunities would be a major challenge for the government.

We need to get used to temp employment. Temp employment means constant upgradation of skill and knowledge. This only would ensure that there are further opportunities after an assignment gets over. Investing in oneself would be the primary investment requirement. Without human capital, it would be difficult to generate and grow financial capital. We need to adjust ourselves to increasing life span and decreasing career span.

Normally we suggest having an emergency fund equivalent to at least one year of expenses. Considering the breaks one’s career may have, emergency fund need to be 2 to 3 years of expenses. Many do not take individual medical cover, as it is provided by the employer. Given the changing dynamics, individual medical cover would be mandatory. Otherwise any medical emergency can make us bankrupt.

At the moment, it is still difficult to envisage how job markets would be after 10 years.But those who would keep updating their skills and knowledge would always be in demand. Mere certifications or degrees would not be of much use. What matters is what you can ultimately deliver.

Financial planning would become all the more important as expenses are always certain while income may be uncertain. Not that people like me can take our profession for granted. Robo advisory is becoming very popular!

We are in for interesting times.

As I always say, the best antidote to uncertain future is financial independence.

Go for it.

In the Silicon Valley suburbs, activists are pushing for laws that limit rents, even though, as the article says, "economists have an almost universally dim view of rent control."

Here are a few more steps which will create an enormous amount of wealth for you: Get a good sensible degree: Get an Engineering degree from IIT, or say a CA degree, a law degree  – if you are an average student, the chances of making decent money improves with a good degree. While at […]

In yesterday’s Ask Me Anything, Abhay Rajan asked what I thought of the Second Amendment, no doubt prompted by the horrific mass shooting in a gay nightclub in Orlando, Florida, on Saturday night/Sunday morning at 2 AM Eastern. So far there are 50 people dead, and some from the critically injured may push that number up. The dead terrorist has been identified as Omar Mateen, a supporter of the Islamic State.

The 2nd amendment to the US constitution says, “A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.” [See the Cornell University Law School page on the 2nd Amendment for a brief discussion of it.]

My view on “the right of the people to keep and bear arms” is based on the principle that people should have the right to protect themselves against aggression. My ethical and moral position is that initiating aggression or coercion is almost[1] never justified, and one is perfectly justified to resist, violently if necessary, anyone who initiates force against one. The right to bear arms is therefore instrumental in keeping the peace by deterring those who would initiate violence.

More specifically, I read the 2nd amendment’s phrase “the security of a free State” to mean the security of the individuals that constitute the free State. The government of the State is also an agency that needs to be deterred from initiating force against the individuals of the State. Therefore the individuals must have the right to bear arms to protect themselves from the government if ever the government itself becomes tyrannical.

Second Amendment issues aside, my position is that a peaceful society is preferable to one in which violence is unchecked. Violence cannot be eliminated, only minimized to some optimal level. This notion of an “optimum level” appeals to economists intuitively. While non-economists would want that violence (or pollution, or corruption, or accidents, or theft, or any “bad”) be brought down to zero, economists would stop when the costs of reducing violence exceeds the benefits. In short, “what’s worth doing, is worth doing well” means doing it only so well and not more than that.

Any positive analysis (that is, an investigation into what is) will reveal that some humans are prone to aggression and violence. The normative prescription (that is, what should be done) follows from that positive analysis: deterrence of violence by credibly guaranteeing swift and proportionate reprisals. That necessary deterrence is provided by the instrument of guns.

[In a followup post, I will explore the idea of how guns reduce violence through “credible commitments.”]

Now it may not be that every society needs to have everyone carrying guns to protect themselves. Societies in which people don’t traditionally use guns to initiate aggression or settle disputes will have little need for guns. But for whatever reasons, if guns are widely available in some society, prohibiting citizens from owning guns for their self-protection is unwise.

Guns cannot be banned in the US

For historical reasons, in the US there is a tradition of guns and they are widely owned. Is it practical to ban gun ownership? No. However there is a middle ground between absolutely no restriction on gun ownership and total prohibition: that of “gun control”. By control I mean who is prohibited from buying guns and what types of guns.

Guns for self-defense is fine. But automatic assault rifles that are required only if you are defending yourself against several attackers similarly armed are pointless because that’s unlikely even in the US. So handguns and small caliber weapons should be allowed but not the possession of assault weapons. Who should be allowed to have them? All competent people, and perhaps with a waiting period of a month.

But, one may object, wouldn’t that mean that there will be a lot of gun violence if almost everyone could possess guns? Not really. Guns are instruments that can be used for offense as well as defense. What they are actually used for depends on factors that are independent of mere possession. For example, even if I owned a gun, I would not go around shooting people because initiating force against people is not part of me. Even if I was armed to the teeth on a flight, no one need worry. But if someone is hell-bent on destruction, they can lay their hands on a range of things other than guns to do so, from cars and pressure cookers packed with explosives to box cutters.

The fact is that guns are merely one of the instruments of murder. Instruments provide the necessary means to an end but they are not sufficient in themselves for the outcome. Guns don’t go off by themselves. Guns are instrumental but the motivation is personal to the criminal. These days the most familiar cases of senseless violence are motivated by ideological reasons — most commonly Islamic fundamentalism. Islam, in the Orlando shooting, is clearly implicated. Islam’s injunction for the murder of homosexuals provided the motivation for Omar Mateen to kill dozens of innocents who had meant him no harm.

Drain the swamps, don’t fight the alligators

Framing the Orlando mass murder as a “gun control” matter is at best stupid and at worst a deflection of public attention from the real underlying cause of the mayhem which is Islamic ideology that abhors homosexuality. Certainly, killing homosexuals for their sexuality is illegal in civilized countries but in Islamic states, it is perfectly legitimate. Thousands of homosexuals are killed every year legitimately, and with the full force of the Islamic states involved in the killings.

The American adage to “drain the swamps instead of fighting alligators” makes a lot of sense. You could distribute personal bazookas to a population that is ideologically pacific without losing any sleep. But with the most stringent gun control laws, the Islamic terrorist will find a way to kill by the dozens, as we saw in the Brussels attacks of a few months ago. The Islamic swamp must be drained.

NOTES:

[1] I wrote, “initiating aggression or coercion is almost never justified”. There are exceptions. Example: Suppose someone was going to launch a deadly attack and I was convinced of that, I would aggressively attempt to stop that person from causing violence.

“If the freedom of speech is taken away, then dumb and silent we may be led like sheep to the slaughter.” –George Washington

The importance of the freedom of speech is underestimated by most people.

George Washington stressed the instrumental role of the freedom of speech — as a defense against oppression. But freedom of speech, like the right to be left alone, is also something of value in and of itself, even if there was no possibility of being oppressed.

I wrote this piece for India Current (June 2016 issue). I reproduce it here, for the record.

Speaking of Freedom of Speech

Many of my NRIs friends, generally a well-informed group, are often surprised to learn that their resident Indian cousins don’t have the kind of freedom of speech they routinely enjoy in the US. They assume quite reasonably that in India too, just like in the US — both celebrated as exemplars of robust democracy — there are constitutional guarantees against governmental restrictions on the freedom of speech and the press. This is unfortunately not so.

Some time ago, while discussing the details of the content the editorial staff of an Indian newspaper would expect in a column, I was told that I was free to write about anything I wanted. But I was cautioned to stay clear of any criticism of the powers that be. Not just in general terms, I was told not to find fault with two specific politicians in power, whom I cannot name here for obvious reasons (privacy being only one of them.)

That happens in India but will not happen in the US. Here’s why.

“Congress shall make no law . . . abridging the freedom of speech, or of the press . . .”
–US 1st Amendment

The difference arises from the constitutions of the two. The First Amendment to the US Constitution (the first of 10 items that is the US “Bill of Rights”) states, in part, that “Congress shall make no law . . . abridging the freedom of speech, or of the press . . .” The important bit is that the US constitution does not grant the freedom of speech because that freedom is not for it to grant or withhold. The freedom of speech exists prior to the constitution; the amendment merely recognizes that fact by explicitly prohibiting any law that may tamper with it.

As it happens, the First Amendment to the Indian constitution, introduced by Mr J. Nehru in 1950 also, among other matters, deals with the freedom of speech and of the press. There are two major distinctions, though. First, I cannot quote the Indian amendment in its entirety here. The US 1st amendment is only 45 words long and is in plain English; the Indian counterpart is around 1750 words of impenetrable legalese.

Second, the Indian amendment grants the right to free speech. What the constitution grants, the constitution can also take away. In the finer details it says in essence that Indians are free to speak or write whatever they wish — provided the government agrees with it.

In short, you may speak or write admiringly about the emperor’s new clothes but you cannot point out that perhaps the emperor is naked. In fact, you are tacitly urged by the emperor to write encomiums on the brilliance of his attire.

Ruling politicians have the power to financially ruin any newspaper by withholding ads.

You may wonder, what does “tacitly urged” mean here? It means that when money speaks, you don’t need to. The Indian Ministry of Information and Broadcasting has a very, very large budget. (Why India has to have what amounts to a ministry of government propaganda is a matter for another day.) Currently it’s about Rs 4000 crores or about US$ 600 million a year. That’s the central budget; I presume the states have their own I&B budgets. Part of that humongous amount is spent on government advertisements in newspapers. Ruling politicians have the power to financially ruin any newspaper by withholding ads.

Even cognitively challenged people — and people who run newspapers are not stupid — know which side the bread is buttered, if you get my drift. But even if you lay that carrot aside (pardon the mixed metaphor), you have to mind that heavy stick. There are literally thousands of pages of rules and regulations that apply to all kinds of organizations, including publishing. No one really knows everything about what they are but it is quite easy to run afoul of some regulation or the other, if an inquiry was to be initiated against any business.

“There’s freedom of speech, but I cannot guarantee freedom after speech.” –Idi Amin

Publishing anything that the government is likely to take serious offense to is akin to publishing an invitation to officialdom to please come and shut down the business on some pretext or the other; and also to audit the accounts; and to get an income tax raid done on your home immediately; and file a few cases against your business which the courts will take decades to settle.

The freedom of speech and of the press forms part of the foundation of a free society. The other rights such as the right to choose who shall be entrusted with governance — democracy and all that — are rendered meaningless if one is ignorant about the deeds and misdeeds of those who govern. The search for good governance is bound to be fruitless if one has to do it blindfolded, which is what it amounts to when people lack the freedom to examine the government critically, fearlessly and frankly.

Perhaps Indians need to fight and win some real freedom, and not just be satisfied with dubious nominal freedoms that are granted only provisionally and exercised rarely for fear of government reprisals.

The deceleration of China's GDP growth rate has been seen both as a natural transition towards more sustainable growth rates and a sign that the Chinese model of growth is coming to an end. How does this deceleration of growth rates compared to similar historical episodes for other countries? Is 6-7% a sustainable growth rate for China?

Let's frame these questions in the traditional model economists use to look at growth rates of emerging and low-income economies: the convergence model (based on the work of Robert Solow). The main prediction: countries that are lagging have more opportunities for investment and they are likely to grow faster than countries at the technology frontier. Because of faster growth rates we expect to see convergence in GDP per capita. As convergence happens, growth rates will naturally slowdown to reach those of the countries at the frontier. [The theory also states that not all countries might converge to the same level of GDP per capita but let's ignore that for a second and focus on the predictions of relative growth rates.]

Start with an example that nicely validates the theory: South Korea. Let's plot the level of GDP per capita of South Korea relative to the US at the beginning of each of the last three decades and then compare it to the growth rate of GDP per capita during the years that followed [I will treat the 2000-2014 period as the "decade of the 2000s"].



The plot above (click on it for a larger picture) shows that South Korea starts in 1980 with a level of GDP per capita below 20% of the US leading to annual growth during the 1980-90 period of about 7%). This allows the country to reach a level of 30% relative to the US by 1990. At that point growth is decelerating and during the next 10 years it goes below 5.5%. The transition continues with decelerating growth during the next decade (around 4%). Today South Korea has a GDP per capita of about 65% of the US level and it is likely that over the coming years we will see a further slowing down of its growth rate as it continues its convergence towards the US.

So far so good for our theory. How about China?



In 1980 China starts at a much lower level of GDP per capita and, consistently with our logic, a very fast growth rate of about 7%. But as the country converges towards the US growth rates accelerate to above 8% during the 90s. One potential explanation for this acceleration is that China was moving towards a more natural growth rate given how low its GDP per capita was relative to, say, South Korea. But the next decade  (2000-2014) will bring yet one more increase in growth rates towards 9%. At that point the growth rate looks spectacular compared to the case of South Korea. To put it in perspective, by 2015 China has reached a level of 25% of US GDP per capita (the vertical red line) and when South Korea had reached that level it was already growing at less than 6%. The comparison to South Korea makes clear that growth rates of 8-9% in China given its current development would have looked like a true miracle.

What if South Korea is used to benchmark future Chinese growth rates? Given the current GDP per capita of China, we are looking at a growth rate of slightly below 6% over the next decade. And a growth rate that will decelerate further as time passes. This number is slightly lower than the current target of the Chinese government, but not far given that we are talking about 10 years in a path that is likely to be one of decelerating growth rates. [Note that the growth rates above are in per capita terms. Working age population is currently not growing much in China so the GDP figures should not be too different].

Final question: is South Korea a good benchmark for China? Let's look at other potential fast-growing economies during the same years.




South Korea is clearly the best performer in the range of countries that are below 50% of the US GDP per capita (and, yes, there are plenty of failures!). So using South Korea as a benchmark is providing a very optimistic case on Chinese growth. There are a few other countries that look like outliers (from above) in this relationship but it is unclear that they are relevant examples for China. Hong Kong and Singapore are small city states. Ireland in the 90s is a very unique decade for a European country, and oil producing countries (such as Norway) have dynamics that cannot be replicated without that level of natural resources.

In summary, the deceleration of GDP growth rate in China seems like a natural evolution of the economy as it follows its convergence path. Growth rates around 6% still put China as the best performer among all countries in the world, conditional on its level of GDP per capita. There are plenty of other countries in the world that show China what low growth rates of GDP really look like. And they might be an example of what could happen to the country if it cannot keep its policies and institutions among the best in class for its current level of development.

Antonio Fatás

The growth rate of 8 per cent in the last quarter has revived talk of a return to 8 per cent growth rate in the near future. Sorry to be a bit of a spoilsport but I'm afraid this is highly unlikely.

In 2015-16 the Indian economy grew at 7.6 per cent compared to 7.2 per cent in 2014-15. This was mainly on account of the steep fall in oil prices which translated into a surge in private consumption and also into higher government capital expenditure through higher taxes on oil products.

The hope was that this bonanza would continue in 2016-17 although in a muted form, with oil prices falling further to $30. This hope is being dashed by the rebound in oil prices to $50, which was the average for 2015-16. This takes away the whole of the contribution of 1-1.5 percentage points to growth that arose from the sharp fall in oil prices in 2015-16.

Some analysts think this will be compensated by greater rural consumption following better monsoons and better urban consumption because of the Pay Commission hike. I estimate the benefits on account of this two factors at 0. 3 per cent and 0.6 per cent of GDP respectively. As you can see, this doesn't compensate for the impact of oil prices.

Another blow is that the world economy is not only not reviving but is likely to slow down. The Economic Survey (2015-16) expected exports to contribute a solid 1.3 percentage points to growth. This looks likely to get washed out. In fact, export growth could slow down even further, dragging down economic growth.

Lastly, analysts have been making a hoopla over increased public capital expenditure. They overlook the fact that this is being offset by compression of government expenditure on other counts and also higher taxes. The fiscal deficit is going to shrink by 0.4 percentage points. That, basic economics should tell us, means a shrinkage in demand from the government. Using a multiplier of 1, this means minus 0.4 percentage points of growth.

I add up the numbers and find that the Indian economy is likely to grow at 7 per cent rather than 8 per cent in 2016-17- unless oil prices fall back to well below $50.

That's the short-run view. The medium-term outlook is just as sombre. Whoever is forecasting a return to 8 per cent growth has some explaining to do.

More in my article in the Hindu today, Tempering economic ebullience.

Sol Price is a legend in the retail business. Price founded one of the first discount retailers, FedMart, in the 1950s, and then later the pioneer warehouse club Price Club, which he later sold to Costco, a business started by his former protege Jim Sinegal. Price’s innovations would go on to change the retail landscape dramatically and permanently. Costco now does $120 billion in sales and Sam’s Club, owned by Wal-Mart, does about $60 billion. Adding in other smaller operations, warehouse retailing is at least a $200 billion business in the United States alone.

Price innovated in several ways: Membership fees, way fewer product SKUs in stock, much larger sizes, extremely low profit margins bordering on break-even, low employee turnover and a lean labor model. But these were all mere symptoms of his overall stance: Price’s fundamental innovation was his approach to the customer relationship.

Whereas most retailers saw customers as adversaries, bodies to be sold to, Price saw the world differently. He felt he was on the customers’ side. He felt his job as a retailer was to become the customer’s greatest friend and advocate, and in return, the customer would pledge his loyalty back. He understood that trust given is trust earned.

The idea was very simple: See the world through the eyes of the customer. His son Robert, influential in his own right, describes Price’s unusual attitude (which is still uncommon) in a book called Sol Price: Retail Revolutionary & Social Innovator:

Sol’s experience as an attorney representing clients, and his own moral code, became a foundational feature of the FedMart business. Sol described his business approach as “the professional fiduciary relationship between us (the retailer) and the member (the customer). We felt we were representing the customer. You had a duty to be very, very honest and fair with them and so we avoided sales and advertising. We have in effect said that the best advertising is by our members…the unsolicited testimonial of the satisfied customer.”

This fiduciary relationship with the customer was similar to the Golden Rule; the way Sol put it—if you want to be successful in retail, just put yourself in the place of a cranky, demanding customer. In other words, see your business through the eyes of the customer.

Clearly, Sol Price followed Tussman’s dictum to understand the world and act accordingly, and understood the value of a win-win relationship. The success of Costco in his wake, and the continued loyalty of its customers in the face of a rapidly changing retail landscape, is a testimony to the value of his attitude.

Price had a few simple tenets in running FedMart and Price Club, which Sinegal would later adopt at Costco:

1. Provide the best possible value to the customers, excellent quality products at the lowest possible prices.
2. Pay good wages and provide good benefits, including health insurance to employees.
3. Maintain honest business practices.
4. Make money for investors.

Regarding the last point, it was clearly important to Price to make money, and if you look at Costco today, the model is obviously profitable. But it’s not that profitable. Costco makes solid returns but not incredible ones. And that is by choice.

Price — and Sinegal by extension — wanted a win-win relationship whereby he made his investors a reasonable return on their capital and the customer got a better deal than they could find elsewhere, while employees were paid well enough and treated well enough that they wouldn’t want to leave. In his words, “If you recognize you’re really a fiduciary for the customer, you shouldn’t make too much money.” This model has been tough to beat.

Price was so hardcore about his fairness philosophy that he wouldn’t even engage in loss-leader pricing, which is common in retail. Have you ever found yourself saying How can they make any money at this price? Well, they may not be — products are frequently priced below cost to induce you to buy other products at a more inflated profit margin. But Price wouldn’t do this: It meant he was selling some portion of his goods at inflated prices to make up for the loss leaders, and that he would not abide.

His customer advocacy went so far that if Price’s competitors were selling a competing product below cost, Price did one of the most unusual things I’ve ever heard: He put up signs telling his customers to go shop there.

In this way and many others, the life of Sol Price reinforces the truth of Munger’s philosophy for living a more effective life: “Take a simple idea, and take it seriously.”

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Still Interested? Check out the book in its entirety.

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The more perceptive of you here would’ve known by now that I’ve finished the manuscript of a book on Liquidity. Having finished the draft, and one basic round of editing, I’m now sending it around to publishers, hoping to strike a deal.

One of these publishers wrote to me saying that while she loves the chapters I’ve sent her (a small sample), she doesn’t like the name of the book. “Liquidity”, she says, is too bland and doesn’t reflect the contents of the book, and has asked me to come up with a better name.

And I’m at a loss, in terms of coming up with a name. I don’t even know what kind of name I should pick for the book. So I need you to help out!

The book is about liquidity, in the context of different markets. Apart from the handful of obligatory chapters (my chapters are mostly tiny, and there are 21 of them) on financial markets, I have stories on markets in taxis, dating, footballers, real estate, agriculture, job hunting, food, etc.

Here is part of an introduction to the book I’ve written, which might help you help me!

So if you have any cool ideas on what to name the book, or at least a framework I need to follow to name it, please do let me know in the comments here! It might help you to know that the “acknowledgements” part of the book hasn’t been written yet!

The other way of saying ‘what would have I done differently’…. Read More books: clearly I would have read more books and on a much wider range of topics. Today I cannot bring myself to read books outside of finance, management, and fiction. ‘Being Mortal’ of course is a book I read, I read Gladwell, […]

This is the monthly update of the state of Indian stock markets. As of now, it comprises only of Nifty50's P/E, P/BV ratios and Dividend Yield. The numbers are averages of P/E, P/BV and Dividend Yield in each month. The maps don't show the maximum and minimum values of each month. Caution - Please remember that relying solely on averages can be risky. Its like a 6-feet person drowning in a

How would you measure GDP Growth? By comparing it to last year. And when you get a GDP growth figure … (Read On...)

I was on ET Now along with Prof M Govinda Rao to discuss this topic.

My view is that there is  a strong case for revisiting the targets. I give many reasons. Here I will mention two. One, our deviating from the FRBM target for nearly a decade past the deadline has not led to an unsustainable debt  situation. On the contrary, India is among the few economies whose debt to gdp ratio has declined over the past decade- at 67% of GDP today, it looks quite okay.

Two, we worry about the fiscal deficit because it can impact on interest rates. The impact on long-term rates of fiscal deficits is negligible, as empirical work has shown. However, the deficit can impact on short-term rates. On this count, concerns must be subdued at the moment given relatively low oil prices.

More fundamentally, I would question the idea that the way to reduce the fiscal deficit to GDP ratio is to attach the numerator, that is, reduce expenditure and, if possible, raise tax rates or increase the tax base. The point is that that is not how our ratio came down significantly in the first decade of the 2000s when we were almost close to attaining the 3% FRBM target at one point.

Rather, the numerator, the GDP, shot up due to exogenous factors, such as the global boom, and also due to the increase in the savings and investment rate over time. This also caused the numerator to decline because tax revenues rise with rising GDP.

The bottomline: the presumption that reducing the fiscal deficit is the key to better or stable growth must be questioned. It's very often the other way round. You do various things to boost growth - and the the fiscal deficit to gdp ratio takes care of itself. 

“It’s no accident that Singapore has a much better record, given where it started, than the United States. There, power was concentrated in one enormously talented person, Lee Kuan Yew, who was the Warren Buffett of Singapore.”
— Charlie Munger

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Singapore seemed destined for failure or subservience to a more powerful neighbor. The country is by far the smallest in Southeast Asia and was not gifted with many natural resources. Lee Kuan Yew thought otherwise. “His vision,” wrote Henry Kissinger, “was of a state that would not simply survive, but prevail by excelling. Superior intelligence, discipline, and ingenuity would substitute for resources.”

To give you an idea of the magnitude of success that Lee Kuan Yew achieved, when he took over, per capita income was about $400 and now, in only about two generations, it exceeds $50,000.

Here are 12 things I learned from Lee Kuan Yew about the world and the source of many of our present ills reading  Lee Kuan Yew: The Grand Master’s Insights on China, the United States, and the World

1. You need a free exchange of ideas. “China will inevitably catch up to the U.S. in absolute GDP. But its creativity may never match America’s, because its culture does not permit a free exchange and contest of ideas.”
2. Technology will change how governance operates. “Technology is going to make (China’s) system of governance obsolete. By 2030, 70% or maybe 75% of their people will be in cities, small towns, big towns, mega big towns. They are going to have cell phones, Internet, satellite TV. They are going to be well-informed; they can organize themselves. You cannot govern them the way you are governing them now, where you just placate and monitor a few people, because the numbers will be so large.”
3. Don’t try to install a democracy in a country that has never had one. “I do not believe you can impose on other countries standards which are alien and totally disconnected with their past. So to ask China to become a democracy, when in its 5,000 years of recorded history it never counted heads; all rulers ruled by right of being the emperor, and if you disagree, you chop off heads, not count heads.”
4. Welcome the best the world has to offer. “Throughout history, all empires that succeeded have embraced and included in their midst people of other races, languages, religions, and cultures.”
5. It’s about results, not promises. “When you have a popular democracy, to win voices you have to give more and more. And to beat your opponent in the next election, you have to promise to give more away. So it is a never-ending process of auctions—and the cost, the debt being paid for by the next generation. Presidents do not get reelected if they give a hard dose of medicine to their people. So, there is a tendency to procrastinate, to postpone unpopular policies in order to win elections. So problems such as budget deficits, debt, and high unmployment have been carried forward from one administration to the next.”
6. Governments shouldn’t have an easy way out. “American and European governments believed that they could always afford to support the poor and the needy: widows, orphans, the old and homeless, disadvantaged minorities, unwed mothers. Their sociologists expounded the theory that hardship and failure were due not to the individual person’s character, but to flaws in the economic system. So charity became “entitlement,” and the stigma of living on charity disappeared. Unfortunately, welfare costs grew faster than the government’s ability to raise taxes to pay for it. The political cost of tax increases is high. Governments took the easy way out by borrowing to give higher benefits to the current generation of voters and passing the costs on to the future generations who were not yet voters. This resulted in persistent government budget deficits and high public debt.”
7. What goes into a standard of living? “A people’s standard of living depends on a number of basic factors: first, the resources it has in relation to its population . . .; second, its level of technological competence and standards of industrial development; third, its educational and training standards; and fourth, the culture, the discipline and drive in the workforce.”
8. The single most important factor to national competitiveness … “The quality of a nation’s manpower resources is the single most important factor determining national competitiveness. It is a people’s innovativeness, entrepreneurship, team work, and their work ethic that give them the sharp keen edge in competitiveness. Three attributes are vital in this competition—entrepreneurship to seek out new opportunities and to take calculated risks. Standing still is a sure way to extinction. . . . The second attribute, innovation, is what creates new products and processes that add value. . . . The third factor is good management. To grow, company managements have to open up new markets and create new distribution channels. The economy is driven by the new knowledge, new discoveries in science and technology, innovations that are taken to the market by entrepreneurs. So while the scholar is still the greatest factor in economic progress, he will be so only if he uses his brains—not in studying the great books, classical texts, and poetry, but in capturing and discovering new knowledge, applying himself in research and development, management and marketing, banking and finance, and the myriad of new subjects that need to be mastered.”
9. Earning your place in history … “A nation is great not by its size alone. It is the will, the cohesion, the stamina, the discipline of its people, and the quality of their leaders which ensure it an honorable place in history.”
10. Weak leaders rely on opinion polls. “I have never been overconcerned or obsessed with opinion polls or popularity polls. I think a leader who is, is a weak leader. If you are concerned with whether your rating will go up or down, then you are not a leader. You are just catching the wind … you will go where the wind is blowing. . . . Between being loved and feared, I have always believed Machiavelli was right. If nobody is afraid of me, I am meaningless. When I say something … I have to be taken very seriously.”
11. We are fundamentally competitive. “Human beings are not born equal. They are highly competitive. Systems like Soviet and Chinese communism have failed, because they tried to equalize benefits. Then nobody works hard enough, but everyone wants to get as much as, if not more than, the other person.”
12. The value of history: “If you do not know history, you think short term. If you know history, you think medium and long term.”

 

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Lee Kuan Yew: The Grand Master’s Insights on China, the United States, and the World offers Yew’s timeless wisdom.

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With this results report card, today marks the end of the Earnings Season for the financial year 2015-16. Not all … (Read On...)

“In a recent incident, a senior citizen, a retired General Manager of a private sector company who had invested his retirement benefits in Fixed Deposits with one Private Sector bank was convinced by the bank’s representative to invest Rs. 2 lakh in an investment scheme assuring his funds would earn a minimum 11% interest and […]

The following note was sent out to our advisoryclients in February. This was in response to the jitters, some of them were experiencing after a 15% drop in the market. I think this is valid in all kinds of markets including the optimistic one we have now.

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I am not feeling any better knowing that the model portfolio is down less than the overall indices. I increased the cash holding a bit in the last few months and avoided the momentum stocks in the later part of 2015. Inspite of these defensive measures, the portfolio is getting hit and it is not pleasant to see losses every day.

At the end of 2014, after a 100%+ rise, I had written the following

It is easy to feel smug and complacent after a 100%+ rise in the portfolio. However it is precisely at this stage that the risks are the highest. The various companies in our portfolio are performing quite well in terms of business performance (topline and profit growth). In addition, we exited a few companies where I felt that the performance depended more on the macro than the company specific condition such as the management or the target market

If your time horizon is less than 3 years and you cannot bear a 15%+ drop in the portfolio, then you need to take action when the times are good (such as now) and not after the market drops due to some macro factor.

In my case, I consider my equity investments with 3-5 year perspective (or more) and will continue to hold the positions through any future volatility.

I did not know when a drop in the markets will happen, but was sure that it would occur as that is the nature of markets – greed and fear. We had a period of greed in 2014 and 2015, which has now turned to fear.

At times like these, no one is looking at the company and its fundamentals. The selling is often driven by panic and a desire to reduce the pain.

The only difference is that I try to ignore the pain and focus on the individual companies, their business and the intrinsic value. That helps me in maintaining some level of rationality.

How to handle the volatility

Let me share how I am looking at the current situation (as I have done in the past)

I have been doing that for all the positions in the model portfolio and have exited some, where my level of confidence was not high . As the market crashes and causes some level of business risks, it is important to have a decent understanding of the companies in the portfolio.

Position size and diversification
I have often been asked about position size and the level of diversification one should have in the portfolio. I have a much simpler approach – size it to a point where you can sleep well. If the size of a position or the level of diversification causes you lose sleep, then it is too high.

Look at the intrinsic value
I have always emphasized the important of intrinsic value and its growth for a company. One should always focus on that number. As a long as that number is stable or increasing, then one should stop worrying about the stock price.

My approach during such times in the past has been to add to my positions slowly over time as they became cheaper (subject to size limits) and not expect to make a killing in the short term.

My effort is to reduce the level of risk (of permanent loss of capital) in the portfolio. I have not tried to reduce volatility actively. Courage and ability to ignore the volatility comes down to temperament and that cannot be supplied by anyone.

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Stocks discussed in this post are for educational purpose only and not recommendations to buy or sell. Please contact a certified investment adviser for your investment decisions. Please read disclaimer towards the end of blog.

Once a bureaucrat, always a baboo(n). That does not change. Recently our MF regulator made a statement ‘the needs of the consumer are more important than that of the persons who are doing this as a business’. I wholly agree. “We should worry more about the investors than about those doing business of mutual fund […]

Did Modi do well over the past 2 years? I am sure that the jury is still out on that and people are evaluating..and that will continue.. I was not happy at the pace at which Na Mo was moving, but having spoken to many bankers, I was convinced that he is a man in […]

Well, what do you know? Once again Indian American kids have won the spelling bee. We’ll come to that in a bit. But first, here’s Akash Vukoti of San Angelo TX, just six years old and was the youngest of 280 contestants of the 2016 Scripps National Spelling Bee finals. He’s been at it since he was 2 years old. He’s pretty amazing. Watch this short video of him on a sneak peak of the NBC primetime show, “Little Big Shots,” which premiered in March. The little guy is full of beans and is an absolute delight.

He can’t stay put for even a second. He’s a billboard for hyperactivity. “Stand up, like you do at the contest. Act like you have a number on,” Steve Harvey tells Akash.

Anyhow, Akash did not win the championship. (He’s got another 6 or 7 years to do that.) “The Scripps National Spelling Bee ended in a tie for the third consecutive year Thursday night, with Jairam Hathwar and Nihar Janga declared co-champions after a roller-coaster finish.” And for the third consecutive year, the winners were Indian Americans. They’ve been champions for nine straight years and 14 out of the past 19. In 2015, the champs were Gokul Venkatachalam and Vanya Shivashankar. Vanya’s sister was the 2009 champion! It apparently runs in the family.

Although Akash didn’t win the championship, he’s clearly a champ. The guy is a natural performer and a stand up comedian. Here, you can see for yourself. He’s hilarious. At the end he rattles out the spelling of the longest word in the dictionary.

Here’s another Indian American featured in the “Little Big Shot” program. Kedar is only 7 years old and is into coding.

All this is really heart warming. Although I am stressing the Indian-American bit in this post, I don’t really care about that aspect. What I am amazed at is the dedication, hard work and parental support these kids have. They are the lucky ones. I also note in passing that these successes point to some simple economics concepts such as learning by doing, the importance of role models, and the acquisition of comparative advantage leading to competitive advantage.