Chaitanya Patel

Photo Credit: Matt Cavanagh

There is a saying in the markets that volatility is not risk. In general this is true, and helps to explain why measures like beta and standard deviation of returns do not measure risk, and are not priced by the market. After all, risk is the probability of losing money, and the severity thereof.

It’s not all that different from the way that insurance underwriters think of risk, or any rational businessman for that matter. But just to keep things interesting, I’d like to give you one place where volatility is risk.

When overall economic conditions are serene, many people draw the conclusion that it will stay that way for a long time. That’s a mistake, but that’s human nature. As a result, those concluding that economic conditions will remain serene for a long time decide to take advantage of the situation and borrow money.

When volatility is low, typically credit spreads are low. Why not take advantage of cheap capital? Well, I would simply argue that interest rates are for a time, and if you don’t overdo it, paying interest can be managed. But what happens if you have to refinance the principal of the loan at an inopportune time?

When volatility and interest spreads are low for you, they are low for a lot of other people also. Debt builds up not just for you, but for society as a whole. This can have the impact of pushing up prices of the assets purchased using debt. In some cases, the rising asset prices can attract momentum buyers who also borrow money in order to own the rising assets.

This game can continue until the economic yield of the assets is less than the yield on the debt used to finance the assets. Asset bubbles reach their breaking point when people have to feed cash to the asset beyond the ordinary financing cost in order to hold onto it.

In a situation like this, volatility becomes risk. Too many people have entered into too many fixed commitments and paid too much for a group of assets. This is one reason why debt crises seem to appear out of the blue. The group of assets with too much debt looks like they are in good shape if one views it through the rearview mirror. The loan-to-value ratios on recent loans based on current asset values look healthy.

But with little volatility in some subsegment of the overly levered assets, all of a sudden a small group of the assets gets their solvency called into question. Because of the increasing level of cash flows necessary to service the debt relative to the economic yield on the assets, it doesn’t take much fluctuation to make the most marginal borrowers question whether they can hold onto the assets.

Using an example from the recent financial crisis, you might recall how many economists, Fed governors, etc. commented on how subprime lending was a trivial part of the market, was well-contained, and did not need to be worried about. Indeed, if subprime mortgages were the only weak financing in the market, it would’ve been self-contained. But many people borrowed too much chasing inflated values of residential housing.  As asset values fell, more and more people lost willingness to pay for the depreciating assets.

We’ve had other situations like this in our markets. Here are some examples:

• Commercial mortgage loans went through a similar set of issues in the late 80s.
• Lending to lesser developed countries went through similar set of issues in the early 80s.
• The collateralized debt obligation markets seem to have their little panics every now and then. (late 90s, early 2000s, mid 2000s, late 2000s)
• During the dot-com bubble, too much trade finance was extended to marginal companies that were burning cash rapidly.
• The roaring 20s were that way in part due to increased debt finance for corporations and individuals.

At the peak some say, “Nobody rings a bell.” This is true. But think of the market peak as being like the place where the avalanche happened 10 minutes before it happened. What set off the avalanche? Was it the little kid at the bottom of the valley who decided to yodel? Maybe, but the result was disproportionate to the final cause. The far more amazing thing was the development of the snow into the configuration that could allow for the avalanche.

This is the way things are in a heavily indebted financial system. At its end, it is unstable, and at its initial unwinding the proximate cause of trouble seems incapable of doing much harm. But to give you another analogy ask yourself this: what is more amazing, the kid who knocks over the first domino, or the team of people spending all day lining up the huge field of dominoes? It is the latter, and so it is amazing to watch large groups of people engaging in synchronized speculation not realizing that they are heading for a significant disaster.

As for today, I don’t see the same debt buildup has we had growing from 2003 to 2007. The exceptions maybe student loans, parts of the energy sector, parts of the financial sector, and governments. That doesn’t mean that there is a debt crisis forming, but it does mean we should keep our eyes open.

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When somebody asks you a question like this, what can you really say?

I have seen Suzie Orman say “you have $ 59,000 in a Roth IRA, you have………blah blah….” so go ahead and you will be able to afford it!

In Indian conditions it is far more difficult to say this. Remember we have no Critical Care Insurance, nor do we have any kind of social security available. Also, I, would like to take a slightly different route.

Let us say the person asking this question is 29 years of age and has a Gross salary of Rs. 700,000 and a take home salary of Rs. 45,000 after all deductions. He is a good planner and has decided to do some Investments etc. and this is how his money is spent:

Rs. 19,000 towards household expenses,

Rs. 8700 SIP towards housing emi and Rs. 5500 towards car emi,

Rs. 6000 towards retirement goals, and Rs. 4000 towards eating out, and other entertainment.

This means he does not have a cash flow of Rs. 12000 to pay for the shoe. It also means that he KNOWS what he is spending on and what is he investing for. All this is good. In fact very good.

It also brings us to the question – can he afford it?.

Ha! he has decided that he will invest Rs. X for retirement, and his ENTERTAINMENT expense will NOT EXCEED Rs. X.

So his annual entertainment budget is Rs. 65,000 (retirement figure is Rs. 72,000) – and he will keep about Rs. 7000 for some emergency that might come up. His budget of Rs. 65,000 includes money for eating out, movies, hobbies, etc.

Now for his hobbies. He is an avid runner and takes part in 5 events in a year. Each of these events cost him about Rs. 2000. He eats out and spends about Rs. 3000 per month on that. That leaves him with about Rs. 19,000 for other entertainment. He attends weddings of friends, etc. and that takes away …some.

So on the whole Rs. 12k for a shoe looks fine – on a CTC of Rs. 700,000 – it really does not look too big. However, when he looks at it as 9k/ 65k it does look big and if he takes off his eating out, etc. it looks like 12k / 29k!! Now it is really tight is it not?

So ask yourself: Out of the Entertainment box, are you willing to spend Rs. 2000 on a running seminar, Rs. 1500 on the registration fees, on the Rs. 8000 air fare to go to a running venue, Rs. 4000 to support a runner who wants to run at a foreign location, …………….

Can you afford an Asics, Reebook, Adidas, Nike, Puma,…..well, well..

the answer is obvious, is it not?

You need to decide!!

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There is a sweet battle going on between online and offline retailers. To give you a quick summar, offline retailers are feeling the heat from inve$tor-backed online players who are selling items far below the purchase price.

Online Vs. Offline Retailers : The War is ON

Earlier, Nikon removed Flipkart and Snapdeal, Lenovo de-authorised Flipkart, Snapdeal and Amazon from selling their products on the ecommerce stores.

And now, IT and telecom products traders’ association ADCTA (All Delhi Computer Traders Association) has asked its 25,000 members across the country to stop supplying goods to e-commerce portals and retailers if they sell any product below the price at which they have originally purchased it (via).

“A few companies namely Flipkart, Snapdeal and Amazon etc are selling the goods through Internet. In most of the cases, these companies are selling fast moving goods at a much lesser price than purchase price.”

Is this new? Definitely not. Read : Ecommerce Gets Real in India: The Offline-Online Vendor War Begins.

The standard response from most of the ecommerce companies is that we are a marketplace and we let sellers decide the pricing. Which is highly questionable, if you know even a slight bit of ecommerce sourcing and pricing strategy followed by heavily funded ecommerce companies, who are losing money on each and every transaction.

Are offline players right in doing so? Well, they have no choice but to fit-in. Crying foul may not help and given that they have support from a lot of FMCG brands, we’d expect brands to interfere and define the sourcing and pricing strategy.

Till then, consumer is the king.

The post Delhi Traders’ Association Asks 25K Sellers To Stop Selling on Ecommerce Cos Selling Below Purchase Price appeared first on NextBigWhat.com

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Recently I was approached by Moneytips to ask my opinions about retirement. They sent me a long survey of which I picked a number of questions to answer. You can get the benefits of the efforts of those writing on this topic today in a free e-book, which is located here: http://www.moneytips.com/retiree-next-door-ebook.  The eBook will be available free of charge through September 30^th.  I have a few quotes in the eBook.

Before I move onto the answers, I would like to share with you an overview regarding retirement, and why current and future generations are unlikely to enjoy it to the degree that the generations prior to the Baby Boomers did.

The first thing to remember is that retirement is a modern concept. That the world existed without retirement for over 5000 years may mean that it is not a necessary institution. For a detailed comment on this, please consult my article, “The Retirement Tripod: Ancient and Modern.” Here’s a quick summary:

In the old days, when people got old, they worked a reduced pace. They relied on their children to help them. Finally, they relied on savings.

Savings is the difficult concept. How does one save, such that what is set aside retains its value, or even grows in value?

If you go backwards 150 years or further in time, there weren’t that many ways to save. You could set aside precious metals, at the risk of them being stolen. You could also invest in land, farm animals, and tools, each of which would be the degree of maintenance and protection in order to retain their value. To the extent that businesses existed, they were highly personal and difficult to realize value from in a sale. Most businesses and farms were passed on to their children, or dissolved at the death of the proprietor.

In the modern world we have more options for when we get old – at least, it seems like we have more options. In retirement, we have three ways to support ourselves: we have government security programs, corporate security programs, and personal savings.

Quoting from an earlier article of mine, Many Will Not Retire; What About You?:

Think of this a different way, and ignore markets for a moment.  How do we take care of those that do not work in society?  Resources must be diverted from those that do work, directly or indirectly, or, we don’t take care of some that do not work.

Back to markets: Social Security derives its ways of supporting those that no longer work from the wages of those that do work.  That’s one reason to watch the ratio of workers to retired.  When that ratio gets too low, the system won’t work, no matter what.  The same applies to Medicare.  With a population where growth is slowing, the ratio will get lower. If the working population is shrinking, there is no way that benefits for those retiring will be maintained.

Pensions tap a different sort of funding.  They tap the profit and debt servicing streams of corporations and other entities.  Indirectly, they sometimes tap the taxpayer, because of the Pension Benefit Guaranty Corporation, which guarantees defined benefit pensions up to a limit.  There is no explicit taxpayer backstop, but in this era of bailouts, who can tell what will be guaranteed by the government in a crisis?

That said, not many people today have access to Defined-Benefit pensions. Those are typically the province of government workers and well-funded corporations. That leaves savings as the major way that most people fund retirement aside from Social Security.

One of the reasons why the present generations are less secure than prior generations with respect retirement is that the forebears who originally set up defined-benefit pensions and Social Security system set up in such a way that they gave benefits that were too generous to early participants, defrauding those who would come later. Though the baby boomers are not blameless here, it is their parents that are the most blameworthy. If I could go back in time and set things right, I would’ve set the defined-benefit pension funding rules to set aside considerably more assets so that funding levels would’ve been adequate, and not subject to termination as the labor force aged.

I also would’ve required the US government to set benefits at a level equal to that contributed by each generation, and given no subsidy to the generations at the beginning of the system. Truth, I would eliminate the Social Security system and Medicare if I could. I think it is a bad idea to have collective support programs. There are many reasons for that, but a leading reason is that it removes the incentive to marry and have children. Another reason is that it politicizes generational affairs, which will become obvious to the average US citizen over the next 10 to 15 years.

Back to Savings

As for personal savings today we have more options than our great-great-great-grandparents did 150 years ago. We can still buy land and we can still store precious metals – both of those have a great ability to retain value. But, we can buy shares in businesses and we can buy the debt claims of others. We can also build businesses which we can sell to other people in order to fund our retirement.

But investing is tricky. With respect to lending, default is a significant risk. Also, at the end of the term of lending, what will the money be worth? We have to be aware of the risks of inflation and deflation.

In evaluating businesses more generally, it is difficult to determine what is a fair price to pay. In a time of technological change, what businesses will survive? Will the business managers be clever enough to make the right changes such that the business thrives?

You have an advantage that your parents did not have, though. You can invest in the average business and debt of public companies in the US, and around the world through index funds. This is not foolproof; in fact, this is a pretty new idea that has not been tested out. But at least this offers the capability of opening a fraction of the productive assets in our world, diversified in such a way that it would be difficult that you end up with nothing, unless the governments of the world steal from the custodians of the assets.

With that, I leave you to read my answers to some of the questions that were posed to me regarding retirement:

What is a safe withdrawal rate?

A safe withdrawal rate is the lesser of the yield on the 10 year treasury +1%, or 7%. The long-term increase in value of assets is roughly proportional to something a little higher than where the US government can borrow for 10 years. That’s the reason for the formula. Capping it at 7% is there because if rates get really high, people feel uncomfortable taking so much from their assets when their present value is diminished.

How should you handle a significant financial windfall?

If you have debt, and that debt is at interest rates higher than the 10 year treasury yield +2%, you should use the windfall to reduce your debt. If the windfall is still greater than that, treat it as an endowment fund, invest it wisely, and only take money out via the safe withdrawal rate formula.

What are some ways to learn to embrace frugality?

This is a question of the heart. You have to master your desires to have goods and services today that are discretionary in nature. Life is not about happiness in the short term but happiness and long-term. Embrace the concept of deferred gratification that your great-grandparents did and recognize that work and savings provide for a secure and happy future.

How can the average worker start earning passive income?

Passive income is a shibboleth. People look at that as a substitute for investing, because they can’t control investment returns, and they think they can control income.

Income comes from debt or a business. If from debt, it is subject to prepayment or default; it is not certain. Also, income that comes from debt is typically fixed. That income may be sufficient today, but it may not be so if inflation rises. Also your capital is tied up until the debt matures. When the debt matures, reinvestment opportunities may be better or worse than they were when you started.

If income comes from a business, it is subject to all the randomness of that business; it is not certain. It is subject to all of the same problems that an investment in the stock market is subject to, except that you have to oversee the business.

There is no such thing as a truly passive income. Get used to the fact that you will be investing and working to earn an income.

What can those workers who are not employed by a large company or the public sector do to maximize their retirement savings?

You can start an IRA. Until the rules change, you can create healthcare savings account, not use it, and let it accrue tax-free until you’re 59 1/2. Oh, you get an immediate income deduction for that too.

If you are a little more enterprising, you can start your own business. If your business succeeds, there are a lot of ways to put together a pension, deferring more income than an individual can. By the time you get there, the rules will have changed, so I won’t tell you how to do it today; at the time, get a good pension consultant.

Why is calculating how much you’ll need for retirement an important exercise?

You have to understand that retirement is a new concept. In the ancient world, retirement meant continued work at a slower pace on your farm, living off of savings (what little was storable then – gold, silver, etc.), and help from your children whom you helped previously as you raised them.

Today’s society is far more personal, far less family centered, and far more reliant on corporate and governmental structures. Few of us produce most of the goods and services that we need. We rely on the division of labor to do this.  Older people will still rely on younger people to deliver goods and services, as the older people hand over their accumulated assets in exchange for that.

Practically, modern retirement is an exercise in compromise. You will have to trade off:

• How long you will work
• At what you will work
• What corporate and governmental income plans you participate in
• How much income with safety your assets can deliver, with an allowance for inflation
• How much you will help your children
• How much your children will help you

As such, calculating a simple figure how much your assets should be may be useful, but that one variable is not enough to help you figure out how you should conduct your retirement.

Why don’t more people consult investment professionals? What keeps them from doing so?

There are two reasons: first, most people don’t have enough income or assets for investment professionals to have value to them. Second, people don’t understand what investment professionals can do for them, which is:

• They can keep you from panicking or getting greedy
• They can find ways to reduce your tax burdens
• They can diversify your assets so that you are less subject to large drawdowns in the value of your assets

Other than maximizing your annual contribution, what other things can you do to get the most out of your IRA and 401(k)?

Diversify your investments into safe and risky buckets. The safe bucket should contain high quality bonds. The risky bucket should contain stocks, tilted toward value investing, and smaller stocks. New contributions should mostly feed investments that have been doing less well, because investments tend to mean-revert.

Stocks are clearly risky and investors have emotional reactions to that. How can investors rationally manage their stock investments so that they are less likely to regret their decisions?

When I was a young investor, I had to learn not to panic. I also had to learn not to get greedy. That means tuning out the news, and focusing on the long run. That may mean not looking at your financial statements so frequently.

As for me as a financial professional, I look at the assets that I manage for my clients and me every day, but I have rules that limit trading. I do almost all trading once per quarter, at mid-quarter, when the market tends to be sleepy, and not a lot of news is coming out. When I trade, I am making business decisions that reflect my long-term estimates of business prospects.

Closing

And if that is not enough for you, please consult my piece The Retirement Bubble.  You can retire if you put enough away for it, but it is an awful lot of money given that present investments yield so little.

In The Darwin Economy: Liberty, Competition, and The Common Good Robert H. Frank, an economics professor at Cornell’s Johnson Graduate School of Management, takes on the debate of who was a better economist—Adam Smith or Charles Darwin. Frank, surprisingly, sides with Darwin, arguing that within the next century Darwin will unseat Smith as the intellectual founder of economics.

Why does the invisible hand, “which says that competition challenges self-interest for the common good” break down?

Without question, Adam Smith’s invisible hand was a genuinely ground breaking insight. Producers rush to introduce improved product designs and cost-saving innovations for the sole purpose of capturing market share and profits from their rivals. In the short run, these steps work just as the producers had hoped. But rival firms are quick to mimic the innovations, and the resulting competition quickly causes prices to fall in line with the new, lower costs. In the end, Smith argued, consumers are the ultimate beneficiaries of all this churning.

But many of Smith’s modern disciples believe he made the much bolder claim that markets always harness individual self-interest to produce the greatest good for society as a whole. Smith’s own account, however, was far more circumspect. He wrote, for example, that the profit-seeking business owner “intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was not part of it [emphasis added].”

Smith never believed that the invisible hand guaranteed good outcomes in all circumstances. His skepticism was on full display, for example, when he wrote, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” To him, what was remarkable was that self-interested actions often led to socially benign outcomes.

Like Smith, modern progressive critics of the market system tend to attribute its failings to conspiracies to restrain competition. But competition was much more easily restrained in Smith’s day than it is now. The real challenge to the invisible hand is rooted in the very logic of the competitive process itself.

Charles Darwin was one of the first to perceive the underlying problem clearly. One of his central insights was that natural selection favors traits and behaviors primarily according to their effect on individual organisms, not larger groups. Sometimes individual and group interests coincide, he recognized, and in such cases we often get invisible hand-like results. A mutation that codes for keener eyesight in one particular hawk, for example, serves the interests of that individual, but its inevitable spread also makes hawks as a species more successful.

In other cases, however, mutations that help the individual prove quite harmful to the larger group. This is in fact the expected result for mutations that confer advantage in head-to-head competition among members of the same species. Male body mass is a case in point. Most vertebrate species are polygynous, meaning that males take more than one mate if they can. The qualifier is important, because when some take multiple mates, others get none. The latter don’t pass their genes along, making them the ultimate losers in Darwinian terms. So it’s no surprise that males often battle furiously for access to mates. Size matters in those battles, and hence the evolutionary arms races that produce larger males.

Elephant seals are an extreme but instructive example.10 Bulls of the species often weigh almost six thousand pounds, more than five times as much as females and almost as much as a Lincoln Navigator SUV. During the mating season, pairs of mature bulls battle one another ferociously for hours on end, until one finally trudges off in defeat, bloodied and exhausted. The victor claims near-exclusive sexual access to a harem that may number as many as a hundred cows. But while being larger than his rival makes an individual bull more likely to prevail in such battles, prodigious size is a clear handicap for bulls as a group, making them far more vulnerable to sharks and other predators.

Given an opportunity to vote on a proposal to reduce every animal’s weight by half, bulls would have every reason to favor it. Since it’s relative size, not absolute size, that matters in battle, the change would not affect the outcome of any given head-to-head contest, but it would reduce each animal’s risk of being eaten by sharks. There’s no practical way, of course, that elephant seals could implement such a proposal. Nor could any bull solve this problem unilaterally, since a bull that weighed much less than others would never win a mate.

Similar conflicts pervade human interactions when individual rewards depend on relative performance. Their essence is nicely captured in a celebrated example by the economist Thomas Schelling. Schelling noted that hockey players who are free to choose for themselves invariably skate without helmets, yet when they’re permitted to vote on the matter, they support rules that require them. If helmets are so great, he wondered, why don’t players just wear them? Why do they need a rule?

His answer began with the observation that skating without a helmet confers a small competitive edge—perhaps by enabling players to see or hear a little better, or perhaps by enabling them to intimidate their opponents. The immediate lure of gaining a competitive edge trumps more abstract concerns about the possibility of injury, so players eagerly embrace the additional risk. The rub, of course, is that when every player skates without a helmet, no one gains a competitive advantage—hence the attraction of the rule.

As Schelling’s diagnosis makes clear, the problem confronting hockey players has nothing to do with imperfect information, lack of self-control, or poor cognitive skills—shortcomings that are often cited as grounds for government intervention. And it clearly does not stem from exploitation or any insufficiency of competition. Rather, it’s a garden-variety collective action problem. Players favor helmet rules because that’s the only way they’re able to play under reasonably safe conditions. A simple nudge—say, a sign in the locker room reminding players that helmets reduce the risk of serious injury—just won’t solve their problem. They need a mandate.

What about the libertarians’ complaint that helmet rules deprive individuals of the right to choose? This objection is akin to objecting that a military arms control agreement robs the signatories of their right to choose for themselves how much to spend on bombs. Of course, but that’s the whole point of such agreements! Parties who confront a collective action problem often realize that the only way to get what they want is to constrain their own ability to do as they please.

As John Stuart Mill argued in On Liberty, it’s permissible to constrain an individual’s freedom of action only when there’s no less intrusive way to prevent undue harm to others. The hockey helmet rule appears to meet this test. By skating without a helmet, a player imposes harm on rival players by making them less likely to win the game, an outcome that really matters to them. If the helmet rule itself somehow imposed even greater harm, it wouldn’t be justified. But that’s a simple practical question, not a matter of deep philosophical principle.

Rewards that depend on relative performance spawn collective action problems that can cause markets to fail. For instance, the same wedge that separates individual and group interests in Darwinian arms races also helps explain why the invisible hand might not automatically lead to the best possible levels of safety in the workplace. The traditional invisible-hand account begins with the observation that, all other factors the same, riskier jobs tend to pay more, for two reasons. Because of the money employers save by not installing additional safety equipment, they can pay more; and because workers like safety, they will choose safer jobs unless riskier jobs do, in fact, pay more. According to the standard invisible-hand narrative, the fact that a worker is willing to accept lower safety for higher wages implies that the extra income was sufficient compensation for the decrement in safety. But that account rests on the assumption that extra income is valued only for the additional absolute consumption it makes possible. When a worker gets a higher wage, however, there is also a second important benefit. He is able to consume more in absolute terms, yes—but he is also able to consume more relative to others.

Most parents, for example, want to send their children to the best possible schools. Some workers might thus decide to accept a riskier job at a higher wage because that would enable them to meet the monthly payments on a house in a better school district. But other workers are in the same boat, and school quality is an inherently relative concept. So if other workers also traded safety for higher wages, the ultimate outcome would be merely to bid up the prices of houses in better school districts. Everyone would end up with less safety, yet no one would achieve the goal that made that trade seem acceptable in the first place. As in a military arms race, when all parties build more arms, none is any more secure than before.

Workers confronting these incentives might well prefer an alternative state of the world in which all enjoyed greater safety, even at the expense of all having lower wages. But workers can control only their own job choices, not the choices of others. If any individual worker accepted a safer job while others didn’t, that worker would be forced to send her children to inferior schools. To get the outcome they desire, workers must act in unison. Again, a mere nudge won’t do. Merely knowing that individual actions are self- canceling doesn’t eliminate the incentive to take those actions.

The Darwin Economy goes on to explore the consequences and implications of Darwin’s theory being a better model for economics than Smith’s invisible hand.

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When it comes to acquiring knowledge, there is only one place on the Internet nowadays, every successful person would suggest without hesitation – TED talks. TED talks are the epitome of knowledge. Their motto – ideas worth spreading – signifies the purpose of this movement and justifies its amazing ability to effectively spread high-quality ideas in today’s internet’s chaotic environment. Despite the amazing value TED talks have to offer, there is a small problem about them. There are more than 1600 TED talks out there and you could spend hours trying to identify the ones that are more beneficial to you and your reality. For that reason, I decided to draft this article. I thought that instead of spending hours listening to people talk about […]

The post These Are Τhe 10 Amazing TED Talks You Need Τo Watch appeared first on Dumb Little Man.

Photo Credit: DonkeyHotey

Comments

• Pretty much a nothing-burger. Few significant changes, if any.
• Despite lower unemployment levels, labor market conditions are still pretty punk. Much of the unemployment rate improvement comes more from discouraged workers, and part-time workers.  Wage growth is weak also.
• Small $10 B/month taper. Equities rise and long bonds fall.  Commodity prices are flat.  The FOMC says that any future change to policy is contingent on almost everything.
• Don’t know they keep an optimistic view of GDP growth, especially amid falling monetary velocity.
• The FOMC needs to chop the “dead wood” out of its statement. Brief communication is clear communication.  If a sentence doesn’t change often, remove it.
• In the past I have said, “When [holding down longer-term rates on the highest-quality debt] doesn’t work, what will they do? I have to imagine that they are wondering whether QE works at all, given the recent rise and fall in long rates.  The Fed is playing with forces bigger than themselves, and it isn’t dawning on them yet.
• The key variables on Fed Policy are capacity utilization, labor market indicators, inflation trends, and inflation expectations. As a result, the FOMC ain’t moving rates up, absent improvement in labor market indicators, much higher inflation, or a US Dollar crisis.

Google is on a roll in India. The company launched Android One in India, announced offline Youtube access on Android One devices and has also launched Newsstand in India (in partnership with 30 publishers including India Today/NDTV/Forbes India etc).

Google Newsstand in India

Will Indians buy (anything) on Android?

India is an Android nation, but unfortunately Indians do not buy on Android (1 year back, half of Android users didn’t even have data plan). Google is smartly bundling Newsstand free for one year for all customers who are on Android One – i.e. the company is trying to hook them up and eventually plans to show value to developers, who are mostly living well below the app poverty line.

App Developer Revenue : Not a Happy World

So far, the Android story in India has mostly been about a ‘great looking smartphone’, but there has been very little monetization angle to Android.

Serious app developers and publishers prefer iOS when it comes to monetization.

Will this change with Android One? We don’t think so (unless there is operator billing integration enabling micro-payments).

The post Google Launches Newsstand in India. Will Indians Buy (Anything) On Android? appeared first on NextBigWhat.com

Photo Credit: B Gilmour

Yesterday I was at a conference for Registered Investment Advisors. There were about 11 of us in the room, and a variety of different parties pitched us on their services. Some of the pitches were harder, most were softer.

Two of the presentations I felt were deceptive, though I don’t believe the presenters intended to be deceptive. The idea was, you need to provide alternative investments to your clients, because clients can’t earn what they need to in stocks and bonds. Private equity investments and real estate outperform stocks, and we have new durable income vehicles that outperform bonds. What’s more, we can remove a lot of volatility from the portfolio.

Imagine for a moment that you’re investing in two private companies that after you buy them, you will have to own them for 10 years. The money is committed, and you have no way to get liquidity from the companies until the 10 years are up. One of the companies will leverage up a little bit, and invest in stocks. The other company will leverage up a great deal, and invest in bonds; it will behave like a shadow bank.

Now imagine on your brokerage statement, that your broker does not have to mark the positions to market.  After all, the corporations are not publicly traded and so the companies are valued at the amount of your investment until they dissolve and pay out their proceeds at the end of 10 years.

Does this method of investing limit volatility? It looks like it does, but it really doesn’t. Your investments are subject to all of the vicissitudes of the stock and bond markets, and then some, because the private companies took on some leverage. Though the values may be constant on the accounting statements, the volatility of the investing will be delivered in full at the end of the 10 years.

That’s the way some of these alternatives work, except they get applied not to public stocks and bonds, but private companies, real estate, mortgages, etc.  They are subject to the same economic forces as the public stocks and bonds, and once you strip out the effect of the additional leverage they perform about the same.

The story was told that this is the way that the wealthy got wealthy, by investing in private corporations, and investing in real estate. This is true as far as it goes except that the wealthy concentrated their investments in a few real estate projects and a few corporations that they themselves actively managed. Those offering alternative products investing in private equity and real estate are investing far more broadly in order to reduce risk. Even if the investments do well, you won’t get wealthy off them, though you might do well.

What is also not mentioned is that many more people who try to become wealthy by concentrating their investments fail. If this were easy, everyone would be doing it. The volatility is not eliminated; far from it, the volatility is amplified, and for those wealthy that succeed, that was the road to wealth for them.

As with public equity and bond investments, you will find that there are talented managers who can outperform the rest. Many of the talented managers in private investments limit the amount they manage, and money from new investors is not welcome.  The best managers of alternative investments are not open to the public, and not to these private investment middlemen as the conference.

The same logic applies to hedge funds. There are many different types of hedge funds, and performance data for them is dirty. Some managers are good, some are bad, and on average they’re about as good as markets they invest in. As for some of the data abnormalities, the good ones get into the databases before they’re actually taking money from outside clients which overstates the returns to clients. The bad ones exit the databases early, so the returns on their failure do not get reported.

Though some notable managers will do well, average managers will not outperform investments in public stocks and bonds. This is another case where the actual underlying investments matter more than the legal form that the investments take. Private and public investments exist in the same economy and get roughly the same returns. This should be no surprise.

The upshot of what I’m trying to say is that if you are not investing in alternatives, don’t feel bad because you’re not missing anything on average. Just beware slick marketing pitches designed to make you feel inferior because you’re not one of the “cool kids” investing in illiquid private securities.  After the next bear market, many “cool kids” will find that they lost a lot of money along with everyone else, if their alternatives mature in the bear market.

A Final Note — Fixed Income or Banking Income?

I also believe that income investors in some of these new approaches will be the most disappointed in the next bear market. When I was a portfolio manager managing mortgage bonds, we had a rule: don’t buy mortgages on operating properties like hotels, marinas, casinos, theaters, etc. When you do that, you cease to be a lender, because the underlying cash flows of the property are not stable enough to support a loan. If you do such a loan, you have a smaller loan that is real, and the rest is an equity investment.  In a bear market, that “equity investment” could prove worthless.

People will find out this same thing with durable income products, they will prove far more risky than ordinary fixed income investments in the next bear market because they are running a levered lending business. And in the few cases where the business is not levered, the riskiness of the investments is higher than what would commonly expect.

And thus my counsel is focus on the return of your money, rather than the return on your money. Play it safe with your fixed-income investments.

Financial planning, selling mutual funds, life insurance, other financial products…all these are functions that an INDEPENDENT FINANCIAL AGENT does.

I have met many IFAs – and most of them are one man shows. Some of them of course are bigger and have between 2-10 employees. When you have a few employees, HR comes into play. No, you do not need a HR manager to handle a team size of 10, but good HR practices cannot be ignored.

Let us look at some of the challenges:

1. Most IFAs tell me ‘this is the best quality of people that I can get’ : the IFA himself is SURE that good people will not join him. They are sure that good people will either get better jobs or they will go for higher studies. This is not true – there are many kids who cannot afford higher studies and are looking for a career near their houses – so recheck your catchment area.

2. Make sure that the basic hygiene is in place – a clean loo, at least 2 women employees (get a family member in at least for some time if u have only a young girl working in your office), cleanliness of office – physical and mental, making sure that the staff use nice language – some girls can get terrified if they hear ‘gaalis’ from the boss, BE CAREFUL.

3. Have a nice atmosphere – celebrate birthdays, holidays,…whatever – keep the atmosphere friendly, DO NOT CRINGE ABOUT costs. Offer nice, free good advice to the kids in the office, give them good career guidance, academic and financial guidance. Make them feel wanted and relaxed. If you file IT returns do it FREE FOR THEM, their parents, etc. it helps.

4. Pay slightly more than the market, but obviously less than the organised sector – you cannot afford to compete with HDFC Bank, right? Spend lavish amounts of time in training them and teaching them. Get your friends to talk to them about subjects that they love – cricket, music, films, …does not matter what.

5. Take them out to lunch frequently and lavishly – remember no IFA closed down because he spent money on his staff eating well. You lose business because your employee spoke poorly.

What are the advantages of doing all this?

1. Employees will stay loyal to you : Remember your database is your ONLY asset. All employees carry a cell phone and a camera, so stealing data today is child’s play. One disgruntled employee can steal your efforts of the past 30 years. Caveat.

2. Happy employees talk to customers well, ask for reference, and do not ask clients for leads for jobs!! The whole atmosphere can be made friendly, happy, and successful….these kids will enjoy what they are doing only when they feel wanted…

3. I interact with many small businesses – and have had pleasure and pain. One hotel with good food and decent service left a poor after taste once at dinner…putting me off by about 6 months – before I visited them again.

4. A good enthusiastic employee will be proactive with clients – their enthusiasm will rub off on the client too. Once they know the values of the organisation, they will encourage longer SIPs, reduce withdrawals – have seen this happening in 2 IFA offices in Mumbai. Sadly I do not have too much interaction with the IFA offices so cannot generalize very easily.

5. By being different from the competition, your employees will also be proud that they are adding value to the whole chain! I know one IFA who has guaranteed all his staff’s Home Loan and provides LUNCH from a good source on a DAILY basis. His longest serving employee has been with him for the past 14 years. Business is about 16 years old…

…more to follow…

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Is real estate a fantastic Investment?

If yes, are the math tools available to prove that?

If no, are the math tools available to prove that point of view?

The jury is still out there to judge these questions and there are no clear answers. However I found an article in the Times of India (it is an old article, May 2014)..and am reproducing it here.

Read the article carefully – when it is considering the costs, the author has considered only 6% costs – in reality there is a 6% stamp duty, there are society entry fee, brokerage, if the paper work is done by a lawyer then the lawyer’s fees…in all practically the costs come to about 8% – and some times it can go higher to about 10%.

While considering the rentals, he has assumed A FULL OCCUPANCY with a clear annual increase – nice assumption, rarely holds true.

He has ignored society charges – assuming Rs. 1000 a month – that also changes the equation by a bit.

Instead of saving money in a bank fd, if the person were to keep it in an EQUITY mutual fund, the whole gain is TAX FREE….

http://timesofindia.indiatimes.com/business/india-business/Only-builders-banks-gain-when-you-take-loan-to-invest-in-realty/movie-review/34712813.cms

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A lot of big investors are humble.

Do you know why this happens? Simply because they keep an investment diary. It is your investment diary and your real life kids who keep your ego in check.

If I go back and recollect why I bought certain shares, I feel it very funny. I am an incorrigible value seeker – and for me value HAS to come from cash compensation in the holding period. This normally means dividend, because my only asset class is equities. If my equities were to be taken away from me and my immediate family I would be devastated.

Let me tell you some of the mistakes and wrong calls.

1. Bought Cholamandalam at 65: Happy with the call timing (could have been far better, it was also available at 47). I thought it would be 5 bagger when I bought it a few years ago. Was compensated on the way by way of decent dividends (about 5% yield). However NOT SELLING NOW could be a mistake, only time will tell. However partially sold a few shares ….and I guess if it does become a 10 bagger, I hope to live to tell the tale.

2. Kajaria Ceramics: Have said this in the past: One of the worst things one can do is buy a small lot and sell on the up…and be left with 500 shares without the heart to buy at this price.

3. Bharti Airtel: First time bought it at 80 and sold it at 1200. Sadly a very small lot. Now hopefully will ride it from 257 to Rs. 500 at least – even if it takes 3 more years. Thankfully size is decent.

I could just go on and on. If you maintain a diary and you write down why you are buying (Subra told me, Subra’s barber, doctor, driver, reader – told me, whatever be the reason. When you maintain it in excel sheets you can also set targets, benchmarks, etc.

You write down the reason and go completely wrong. Whenever there is a BIG MISTAKE take action. I bought Crest Animation BECAUSE Vallabh Bhansali joined the board. Forgot to sell when he quit. So, so, so damn stupid.

Having a diary, writing a diary, seeing the DIARY REGULARLY for what action to take – all these are required.

I did not do it diligently, I wish I had.

Please listen to the rants of an old man…..

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How many guys over 30 years of age are now FATTER than their fathers?

Have you wondered why?

“I remember what my grandfather and father used to eat when they were my age, I SURELY EAT LESS than them, but I am fatter than what they were at my age” – said a friend. I said there is not much to think about. Blame it on your life style that is all..I said. So we set about looking at the problem in a different way.

I asked him a few questions..and he gave truthful answers:

What was your weight when at college?

He: Not sure but I guess it was in the mid to late 50s..say 57kgs.

Me: What is your weight now?                He: About 84 kgs.

Me: When did you leave college?              he said 1988

Me: Which means you have put on 27kgs in about 27 years…is that right?

He: Yes, yes I have put on about 1kg per year…

I told him the following:

Your father ate more at home, and less outside. As a family your mother bought more raw material and made things at home, but you tend to buy more things. Your consumption of MAIDA has gone up SUBSTANTIALLY because you not only eat samosa (which your father also did), you also eat noodles, bread, pizza and a host of other such products.

Your father went using public transport to go wherever he wanted. This meant he walked down the steps (your old building did not have a lift), he walked to the bank, he went shopping he WENT walking and took a rick only if the had to buy (and carry) a lot of things (that too on the way back).

Assume for a minute that all this took about 100 calories. Also assume that you drink one cup of extra tea a day. (about 100 calories a day). This means that you are consuming about 20o calories a day. The rough equivalence is about 8000 calories add up to one kilo. So in one year – you are consuming about 73000 calories MORE than your dad (365 * 200). This is about 9 kg a year is the weight that you are putting on every YEAR….you are lucky that you are doing something because of which your weight has gone up by ONLY ONE KILO per year…it should have been more.

Now get serious, keep a tab on what you are eating, how much,….etc…..and take care.

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As human beings we do not understand risk much. Our brain gets excited when Tragedy is combined with Mystery. And we have no clue of what is tragedy. The Jury is still out on whether death is a tragedy!

We worry about ‘risks’ that hit us suddenly, in big numbers (air crash), mysterious (nuclear leakage), but not about things which could really impact us (road safety – drunken driving, dozing off while driving, not wearing a seat belt, poor car maintenance, over eating, lack of exercise etc.).

Take the American context – I would be worried if my daughter told me that she is going to a friends house if the friend’s father had a gun. Guns scare us. However 2 girls aged 15 could be in far greater danger of trying alcohol and drowing in a swimming pool.

Take the case of Investing. People worry too much about volatility in a portfolio, and not about the ABSOLUTE returns over a long period of time. If you do not have time or the inclination to invest in direct equities or managed funds, go and do a SIP in an index fund. YOU JUST CANNOT GO WRONG if you do a 10 year SIP. Over this period you will see the markets go up, go down, some funds beat the index, some under perform the index. As long as you promise YOURSELF that you will not worry about VOLATILITY, you will get awesome returns adjusted for inflation.

The catch phrase of course is “You should remain cool”.

Even when ET does an article like how you could have got only PPF returns over 20 years, you realize that it is either a stupid article or an article which has picked up the date PERFECTLY. The year 1993 was one in which equities gave 65% returns – it takes a couple of years to recoup such a sprint, does it not?

So such articles FEED on the risks that scare. The ET will not come out with an article showing the impact of inflation on wealth. Why? because it is far more difficult to do.

So here is a challenge – take 3 scenarios – assuming a nice portfolio (even Sensex is fine) see the impact of timing – one person who bought at the TOP every year from 1979 to 2014, one person who bought only at the bottom every year, one who did a flat investment every month….YOU WILL BE AMAZED TO SEE THE IMPORTANCE OF time (n) of the compounding formula. The impact of r is at best marginal.

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If its voters choose independence next week, Scotland will join the ranks of the world’s small, affluent countries. Over the past couple of decades, that’s been a good club to belong to. As Gideon Rachman put it in the FT in 2007:

This is the age of the small state. Look at almost any league table of national welfare and small countries dominate.

Things have gotten a little more complicated since then. (Rachman in 2009: “Big is beautiful again.”) Several small nations suffered brutally from the financial crisis and subsequent Euro mess: Greece, Iceland, Ireland, Portugal.

Still, several of the emerging bigs (Brazil, India, Russia) have since run into economic headwinds too. And small countries remain overrepresented near the top of lists of the world’s most affluent, most competitive, healthiest, and smartest nations.

So it’s not crazy to think that Scotland, which on its own would be a country of 5.3 million people with a GDP per capita ranking between Finland’s and Belgium’s (that’s counting offshore oil revenue), could be an economic success. But it’s not guaranteed, either.

What has made small countries so economically successful over the past few decades is less their smallness than the ways they’ve taken advantage of it. David Skilling, a former New Zealand government official and McKinsey consultant who now advises small-country governments and companies from a base in Singapore, has spent as much time thinking and writing about the strengths and weaknesses of small states as anybody. In a 2012 paper that should be required reading in Scotland, he lists two main characteristics of successful small states:

1. They’re cohesive, and thus able to make policy decisions quickly and stick with them.
2. They tend to make good policy decisions, in part because they’re very aware of the world around them and what it takes to compete in it.

In polls, Scotland appears evenly split on whether to leave the United Kingdom. That doesn’t look very cohesive. But one of the forces that’s been driving Scotland toward possible separation has been the divergence between Scottish political priorities and those of the rest of the UK. The ruling Conservatives hold only one of the 59 Scottish seats in the British parliament; two leftist parties, Labour and the Scottish National Party, dominate Scottish politics. If the question of independence were settled, it seems like the Scots would be able to find lots of other things to agree on.

Would they agree on the right things? A generous welfare state and economic success aren’t incompatible for small nations — there are several examples of this just across the North Sea from Scotland. But since a stretch of tough economic times in the early 1990s, Denmark, Sweden, and Finland have combined their generosity with remarkable efficiency and economic savvy (Norway, with its vast oil riches, hasn’t had to make quite as many hard choices). They and other successful small states tend to balance their budgets, export more than they import, and invest heavily and smartly in infrastructure and R&D. As Skilling tells it, they have designed their economies to be globally competitive.

“Being a small country offers a lot of in-principle upside, brings with it significant risks, and is what you make it — but it’s only for serious countries,” Skilling replied when I emailed him about Scotland.

So is Scotland serious? Skilling thinks it is, but the leaders of the “Yes” movement don’t seem to be quite there yet. They assume that they can continue in a currency union with London when officials in London say that won’t work, for one thing. What’s more, Scotland today has giant government deficits, a fast-aging population, and not much in the way of exports apart from oil, The Economist argued this summer. That, and it has spent the past three centuries becoming ever more economically intertwined with the rest of Britain. Set loose alone on the rough seas of the global economy, it seems likely to founder at first.

After that, the question is whether the small-state effect would kick in. Would the Scots be able to get their act together and rally around things like fiscal discipline and smart tax policies and R&D investment? This is the land that spawned such great economic thinkers as Adam Smith, David Hume, and — what the heck — John Law. Surely the Scots could figure it out eventually. And once they did, it is entirely possible that an independent Scotland with a clear economic identity would be a more vibrant, cosmopolitan, thriving land than the sometimes-neglected northern appendage of a populous country that it is now.

The big question — which neither I nor anybody else outside Scotland can really answer — is whether it would be worth the pain it will probably take to get there.

Many people do not know the word asset allocation. Recently I have been talking to reasonably successful people who have achieved fantastic financial success but with a breathtakingly risky portfolios.

This is like saying ‘I drove from Mumbai to Pune in 2 hours flat – I drove at a speed of 120 km per hr.’

Met a few people last week – and 2 SENIOR EXECUTIVES stood out dramatically in this group. Both were CEOs  and both had created net worth of Rs. 50 crores each for themselves. Sure they had very good salaries, they were investing aggressively and obviously were lucky!

However the routes chosen was very very different. The first person had bought a lot of real estate since the late 90s, flipped properties, leveraged to buy more, paid off the loans fast and every 3-4 years sold, took the profits and leveraged once more!

The second person had got a lot of ESOPs from 3 companies in which he worked – and ALL the 3 companies had done well. His net worth of Rs. 50 crores included Rs. 44 crores of one companies esop. He had leveraged, taken the esop, and held on.

What is wrong with such wealth creation? Well it is like the guy who traveled from Mumbai to Pune in 2 hours. Does it make sense NOW to continue with such dare devilry?

One important thing to note is that Big Wealth has been created using business acumen, concentrated bets, leverage, and some mind boggling risks.

HOWEVER, having created say Rs. 40 crores using such a strategy, CAN YOU AFFORD to lose it all?

The answer is NO.  You need to reduce risk (it may not improve your net-worth, but it will let you sleep better.

The concept of asset allocation is that your assets (what you own) should be split into a few asset classes so that you do not put all your eggs in one basket. The biggest asset that a 30 year old has is?

OBVIOUSLY HIS FUTURE EARNING POTENTIAL – over the next 30 years he will earn say Rs. 15 crores. All his other assets pale in significance compared to this asset. Now assuming he is in a private sector he could assume a reasonably rough  ride to become the CEO and earn much more. However if he is in the government he will get a smoother ride and an indexed pension. So really the sum total of the money adjusted for time value is really not very different. So if you have a high risk private sector job with a lot of incentive based payments, you should have a portfolio more in debt – sure, largely fixed, and secure. If you have a not very well paying government job without much cash, you should have a more variable portfolio. Thus over all balancing your risk – in the job and in the investment

So when you consider asset allocation consider the following as your assets:

Qualifications, Job, and Industry: A well qualified person in a growing industry is obviously better off. If you are working in a dying industry and you are 48 years of age, well your risk profile is lower.

Understanding and liking of assets: I understand Real Estate but do not like it as an asset class. Hey that is personal!

Know that diversification across debt classes is fine – provided you understand it – and you are happy staying saved instead of being invested.

IF I HAVE CONFUSED YOU ENOUGH, hey I have done my job….

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Once you pay off your loan, a big responsibility is off your mind and you feel relaxed. Its a moment where you do not want any further run around and want to now move on to other things in life. And this is exactly why most of the loan customer do not collect a document called “NOC” or “No Objection Certificate” from their lender and it can get them into...

The post Why you should collect NOC (No Objection Certificate) once your loan is complete ? appeared first on Jagoinvestor - Personal Finance Blog.

Let me use this article to answer a few questions.

Will Hdfc Ltd. be merged into Hdfc Bank?

If yes, when?

Will the ratio be favoring the bank or will it be favoring the erstwhile parent.

A brief introduction: Hdfc Ltd. is a company formed in the 1970s – and its first public issue was in 1978 if I am not wrong (I am not even doing arm chair research or checking of dates please). It has been a super multi bagger and has been paying nice big dividends also. Apart from making money in housing finance Hdfc has promoted many businesses / funded many start ups and this has also added a lot of value to the shareholders. 3 of the prominent start ups are Hdfc bank, Hdfc asset management company (aka Hdfc Mutual Fund) and Hdfc Life Insurance. They also have a General Insurance business.

In 1994 Hdfc Ltd did an IPO of Hdfc Bank where the equity shares were issued at par, and the shareholders of Hdfc Ltd. were given 200 shares as a firm allotment. Many shareholders of Hdfc Ltd. may have still held on to the bank shares and hence benefited hugely from the surge in the prices of the parent company and the bank.

The group’s main strength today is the bank. The bank’s strength comes from the fantastic branch net work. This branch network brings in all the moolah – in form of deposits, casa balances, loans, and very importantly sales of life insurance and mutual fund products. In case of mutual fund products it is a case of open architecture – the bank sells all mutual funds (legally it can, practically it sells the most profitable), but in case of life insurance, it is a tied arrangement. This means for Hdfc bank there is NO CHOICE BUT to sell Hdfc Insurance. This means for Hdfc Insurance it is like having 50,000 feet on street – and they have a nice office from which to do their sales. Of course it should be a part of the group philosophy to sell more of the home grown mutual fund also.

The merger will release a lot of people – the bank will logically not need the Hdfc Ltd’s branch network – so that will release a lot of real estate, people, and other resources for more productive use. This should dramatically improve the profitability of the bank. The  only question to ask is will the current employees of the mortgage company, the mutual fund and the Life Insurance companies be able to take the heat of the hard task master Aditya Puri ? We might see a lot of attrition – this augurs well for the profitability of the new bank.

The cost of funds for the bank is lower than that of Hdfc Ltd (the money from individuals as FD will be repaid with lower cost CASA funds. Again good news.

All this means Hdfc bank shareholders should rejoice, while the shareholders of Hdfc Ltd. should do well to sell some of the parent and buy that of the kid.

Now coming back to the questions:

Will Hdfc Ltd be merged with Hdfc bank? It is not a question of whether, it is a question of when.  Will it be 2014, 2018, or 2022? Nobody in the aam junta is likely to know, but I guess it will be much sooner than you think. So sooner rather than later.

What will be the ratio? Cost of funds for the bank is lower (thanks to fantastic bank branch expansion especially into the smaller towns), so the bank has to be favored more. Both the companies have very strong shareholders, so there will be a very fair valuation by a reputed company and the valuation merger will be fair to both the shareholders.

These companies are reputed and as and when they decide in the Board within 20 minutes the Exchanges and the Media will know about it. That is exactly the time that yours truly will have the answer. Sigh.

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I recently got an offer on email. Somebody was offering me a news letter which promised to double my money every 2 years. Got me interested in the model.

Here all I had to do was to put just Rs. 10 million into this scheme. In about 20 years time I would have about Rs. 1 billion – and if I waited for 2 more years would have about Rs. 2 billion. Not bad considering that the last 3-4 generations of our family would not have even thought of such a nice round sum. Why not convert the whole thing to US $?

Then the reality hit me. I actually liked the business model of the offer – there was an entry fee for the introductory seminar, fee for the annual newsletter, then there was even a free e-mail newsletter, then a full workshop.

The accountant that I am started wondering if I can convert my own Rs. 10 million to Rs. 1 billion, why not leverage – get a couple of billion $ to start with and in 20 years have enough money to fund Obama and Osama? Why create newsletters and write blogs for fun?

Then I heard my daughter wake me up from my dream…..so I went to have dinner.

This is the problem with market timing. If you cannot do it right every time and with every share you think you are a failure. I have met some seriously rich people who have made the ‘000 crores in the Indian equity markets. One of them told me about 20 years ago “I have NEVER been able to buy any share at its bottom AND sell it at its top”. He had found many tops and many bottoms, but not in a single share had he found both.

Another very big Investor (and was a big broker till recently) told me “I think the market will close about 200 points lower today – on a particular day” . At the end of the day it closed 85 points HIGHER. He said see – I got neither the quantum NOR the direction right. However I have seen him hold 2 shares from Rs. 1 crore to Rs. 1000 crore in his family portfolio. This is not easy. He is not a promoter – so the logic of the holding was purely from an investment angle.

So when I see articles in the main stream media or in blogs saying ‘how timing is very important to get good returns in equity markets’ i feel amused and disappointed with irresponsible journalism. I have time the market in the past, and done it successfully many times, but it is NOT something that I would EVER recommend in a blog. I need to be seeing the person, making sure his greed, anger, expectations, understanding, …etc. are all at levels when timing is possible. And needless to say you can rarely time the market – you can perhaps time a particular scrip at best. Recently I bought Gillette at a foolishly high price or Rs. 1700 and sold it to a greater fool at Rs. 2700 – 2690 to be precise. Does it mean Gillette will not go up again? NO. It means this was a nice trading transaction. Period.

Too many purists stick to one style and think other styles are wrong. However I tread the market as a speculator, trader, position trader, investor, real long term investor – and I can assure you you can do all this in a portion of YOUR portfolio also….be careful of the time spent, transaction costs, greed,….that is all. If you have some of these shares you can look at today’s prices and gulp, but I do not have the guts to buy Nestle, Colgate, PnG, Glaxo – Pharma or Food, …at these prices. That is my problem, not yours….

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