Chaitanya Patel

Commenting on my recent column, Paul Krugman wonders if I somehow missed the financial crisis of the past few years.  He seems to think the crisis proves that the titans of Wall Street earn much more than the value of their contributions. 

I will be the first to admit that measuring the social value of the financial sector is hard.  But let me offer a few observations:

1. In thinking about the social value of the workers in the financial system, it is as important to keep in mind long-run growth as well as short-run fluctuations.  Financial intermediation plays a key role in growth.  And a case can be made that for human welfare, growth swamps fluctuations.  (Robert Lucas most famously made this argument.)

2. It is too facile to blame the financial crisis entirely on Wall Street.  In the recent edition of my favorite intermediate macro textbook, there is a case study of who bears responsibility for the crisis.  It concludes there is no single culprit but lots of blame to spread around. (See page 580 of Chapter 20.)

3. It would be a mistake to think that the rich had it easy during this crisis.  According to the Saez-Piketty data, during the downturn from 2007 to 2009, average income fell 17 percent, but the incomes of the top 1 percent fell 36 percent.  Wall Street titans at the center of the crisis such as Dick Fuld and Hank Greenberg reportedly lost 90 percent of their net worth.  To be sure, they started off at a much higher base than most people, but let's not pretend the bankers got off scot-free.

Start early, compounding, saving is not enough you need to invest, plan early for retirement, lead a simple life…..etc. are things that I keep screaming. Assuming a person comes to this blog at age 21, it is about 15 years too late!!

You need to teach your children all these concepts at class 5 level or class 8 if you want to include COMPOUNDING AS THE first chapter! There is some talk of Sebi introducing these concepts in school, but I am yet to see the syllabus, and the implementation plan. Knowing Sebi, there may be no mention of banking, and life insurance. Surely there will be no mention of Real Estate. No way how they will talk of Equity, and currency trading which are toxic.

So to get the basic concepts through to your kids, YOU, have to teach YOUR kids about money. Thinking somebody else will is not going to happen!!

Even about old age – those who are in their ’70s and think their money is enough COULD be wrong. None of us have a clue as to how long we will live. So each generation looks at its previous generation and ASSUMES that they will live that long. Sadly Pattu cannot design a calculator which will tell you how long you will live!

So a person aged 77 years, a fixed corpus of Rs. 1 crore and a house may feel comfortable with his financial situation. Great. What happens if he lives till age 93? and his wife lives till her age of 94?

Are you prepared for this time bomb? Another 17 years? or 20 years? will your money be sufficient?

What about assisted living? what about day care? Who will fund it? Where will you live in your old age?

Scary, but longevity backed by poor planning is a time bomb on which we are sitting.

So get up and talk to your children about money. And children you need to know what is in store for you?

A poor middle age backed by a rich old age? or…..lol

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I am actually not sure whether Google and the internet in general has done good or harm! Also financial blogging throws up some very serious issues.

I was recently going through a link on value investing and found it very interesting. There was a big long ‘discussion’ on whether the Aditya Birla group has created wealth or destroyed wealth over say the last 10 years.

No, I am not naming that site nor getting into that discussion.

This not is not on that, it is on changing strategies. Once upon a time, long long ago ‘buy and hold’ worked. I am absolutely sure that it will work over the next 20 years too. However, a big change is happening. There is a huge churn among investors, mutual funds, as well as the FIIs. Almost every share shows a lot of gyrations close to their results. This actually means that almost every share gives you a chance for a 20% p.a. return over and above the annual growth. THIS IS NOT EASY TO ACHIEVE AND CAN HURT YOUR PORTFOLIO BADLY IF YOU ARE NOT CAREFUL.

Even dull boring scrips like Hindalco, Monsanto, Tata Steel, Cipla, Cholamandalam, Coromandel, – give you a chance to trade.

Normally, I am an anti-trading kind of a person. However in the past 4-5 years, my household expenses have been met by some violent trading in good quality scrips – like the ones mentioned above. Hindalco and Tata Steel would have been value destroyers in most portfolios ASSUMING you did not trade in them. However doing 2 transactions in a year in each of the shares HAS DRAMATICALLY improved the RoI for my portfolio. Is this value investing? I know not.

I am sure the puritans reading my blog do not think trading helps. I have no clue whether a Charles Munger or Warren Buffet think of this as Value investing. However one big value investor in India (big because of his brains which has created a networth close to US $ 1 billion in his lifetime) does. Had a long chat with his investment colleagues and found that he too has started riding the volatility.

The best transactions that I did have been in Reliance and Bharti Airtel – the kind of volatility that these 2 companies have provided has been phenomenal. Monsanto – never ever thought that it COULD give a 100% return in 5 months! Just too volatile a market.

How to play the Volatility card is NOT EASY AT ALL. However to be stuck with dogma of what is value investing is an academic luxury which practitioners cannot afford. So I do have money money in Franklin India Bluechip, Icici Pru Discovery, Franklin Prima, I Pru Discovery, I pru Balanced, I pru Dynamic, Hdfc Top 200, Templeton India Growth fund, Templeton India Equity Income fund, Hdfc Prudence, Hdfc Equity,…..

Mainly my money remains in Direct Equity, and is now managed very very differently from how it used to be managed in the 1980s,1990s.

Changing Tactics for Changing Times may not mean a departure in Strategy. You can only sigh for the Intellectuals who may not have the world of equity to experiment!

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A few years ago, somebody asking this question would have been dismissed as a nit picking nerd, but today that question has become extremely important. Last week, the Wall Street Journal’s MoneyBeat blog carried an interesting story about how this difference cost a trader $100,000.

The official market close in the US is 4:00:00 pm, but the computers at Nasdaq keep humming for almost one second longer to reconcile all trades and determine the market closing price. About 150 milliseconds after 4:00 pm on December 5, the earnings announcement of Ulta Salon Cosmetics & Fragrance Inc. hit Business Wire and within 50 milliseconds after that a series of sale orders started hitting the market. When the market closed 700 milliseconds after 4:00 pm, the stock had fallen from $122 to $118.

The problem is that companies that want to release earnings after trading hours assume that trading stops at 4:00:00 pm, while smart traders know that the actual close is nearer to 4:00:01. That creates a profit opportunity for the fastest machine readable news feeds and the fastest trading algorithms. Traders are thinking in terms of milliseconds, but regulators are probably thinking in terms of minutes. Time for the regulators to catch up!

The red line for the fiscal deficit/GDP ratio was 4.8% in 2013-14. Ostensibly, FM will adhere to this. Expenditure will be postponed to 2014-15. Expenditure incurred in Q4 of 2013-14 will be booked in Q1 of 2014-15. Plan/capital expenditure will be slashed. Had it not been for this, the fiscal deficit/GDP ratio would probably have been 5.4%. This is using the definition of fiscal deficit as it stands.

There is an entirely valid argument that other liabilities and off-budget items should also be included. If one does that, there are IMF estimates that the fiscal deficit/GDP ratio in 2013-14 will be more like 8.5%. On the face of it, most people will agree on the following. Return to FRBM. Reduce fiscal deficit and revenue deficits by about 0.5% of GDP every year. Increase Plan/capital expenditure. One must be careful though. There are artificial distinctions between Plan and non-Plan. There may be grants to States and UT-s which are revenue expenditure, even though they are used for creating capital assets there. Is it desirable to slash these? However, let's accept the general point. The problem is that this isn't much of a consensus. How can there be a consensus unless we agree on how to slash revenue expenditure and reduce deficits?

Most items of revenue expenditure (interest payments, pensions, salaries) are frozen in the short-turn for FM. No FM can do much about it. Consequently, post-1991, whenever FMs have reduced deficits, one of two things has happened. FM has slashed Plan/capital expenditure. Or, GDP has increased, thereby increasing the denominator (deficits are typically expressed as ratios) and also increasing tax revenue. You might point to subsidies. For the Union government, these primarily means food and petroleum products. Subsidies need proper targeting.

No scope for debate on that. Income transfers are more efficient, provided we agree on identifying BPL. However, efficiency is one thing, the fiscal implications are another. If every BPL household actually gets a subsidy, the fiscal cost may well increase. This is apart from governments, Union and State, refusing to reduce subsidies or target them better. But the simple point is that it isn't that easy to reduce fiscal costs of subsidies either. We haven't talked about defence. Under UPA-II, more in the last three years, budgetary allocations to defence amounted to over 2% of GDP. But actual allocations, evident in the revised figures, were closer to 1%. Presumably, we do want to increase allocations on defence and police.

Hence, I think there are only two ways for any FM to sensibly reduce deficits. First, privatization. There are 64 loss-making Central PSEs (public sector enterprises). There is no reason why the government should spend Rs 30,000 crores on these loss-making enterprises, restructuring or otherwise. These resources have opportunity costs and the government can spend them elsewhere. The arguments that restructuring will lead to better values eventually and that market conditions are not right now are also of dubious value. The profits of the 161 profit-making Central PSEs are also misleading. Profits in sectors with administrative pricing (coal, power, petroleum products) are no more than notional. Privatization, not creeping disinvestments, can bring in Rs 100,000 crores in 2014-15.

PSEs that remain should survive on competitive and commercial considerations. These temples of modern India should have idols of Lakshmi also installed in them. This requires an empowering of their boards, corporatizing them, granting them financial autonomy and making them independent of Ministerial interference. One should begin the process by completely revamping the Public Enterprises Selection Board (PESB).

There can be valid criticism that receipts from asset sales should not be used to finance revenue expenditure. This is valid. However, without privatization, I don't think any FM can reduce deficits. I said, there are two methods. The first is privatization. The second is removal of tax exemptions and I will save that for the next blog.

Though Seventh Pay Commission was announced in September 2013, its composition has just been approved. It will cover five million central government employees and three million pensioners. The recommendations will be implemented from January 1, 2016. The UPA-II announced Seventh Pay Commission before it needed to.

The ministry of labour and employment does a census of central government employees, and that number is only 3.1 million. That’s because PSUs are excluded. The number affected isn’t 3.1 million or five million. Although a central pay commission is meant for central government employees, spillovers into state governments and quasi-government employees, like teachers, are impossible to prevent. So, one is talking about 35-40 million people.

Inflation Pays

The Fifth Pay Commission devastated state government finances in late 1990s and the Sixth Commission did the same in late 2000s. We are headed for another devastation in late 2010s. But why must we have a pay commission once every 10 years?

Inflation is a standard argument, though there are dearness allowance (DA) hikes. The argument is that DA hikes don’t keep pace with inflation. Hence, a pay commission must redo the slabs.

Every year, the Economic Survey gives us figures on per-capita pay of PSU workers. This is what last year’s survey tells us. On a base of 1971-72, average all-India consumer price index in 2011-12 was 2,216.15. On the 1971-72 base, per-capita emolument of PSU employees in 2011-12 was 12,264.78. There has been a fairly significant real increase in per-capita emoluments of PSU employees.

Sure, this is for PSU employees and not all central government employees. However, there’s no reason to presume the trend is any different for the central government.

An Act of Commission

Logically, there should be a real increase if there has been an increase in productivity. Productivity is difficult to measure in the services sector. But do you think there has been an increase in central government productivity of that magnitude?

If there hasn’t been an increase in productivity, a pay commission redistributes resources, from those in unorganised sectors who have a pay omission, to those in organised sectors, as a pay commission leads to upward pressures in salaries of private organised workers too.

Even if one sticks to recent years, there is a long list of committees that have examined the question of civil service reform: the Fifth Central Pay Commission (1996), Expenditure Reforms Commission (2001), Surinder Nath Committee (2003), Committee on Civil Service Reforms (2004, also known as Hota Committee) and assorted reports of Second Administrative Reforms Commission.

This is a quote from the 10th report of Second Administrative Reforms Commission, “Many of the recommendations involving basic changes have not been acted upon and, therefore, the framework, systems and methods of functioning of the civil services based on the Whitehall model of the mid-19th century remain largely unchanged.”

Civil service reform is a broad area, given productivity concerns, the focus is on performance appraisal prior to vertical mobility, lateral entry, contractual appointments and exit. Unlike the Fifth Pay Commission, the Sixth Commission was silent on these issues. We shouldn’t prejudge the Seventh. Perhaps it will talk about productivity. But even if it talks about productivity, it doesn’t mean any of its recommendations are going to be implemented.

Corruption-Buster?

Another argument says we must have higher salaries within government to retain talent, perhaps even to prevent corruption. If one imputes for perks and allows for a job security premium, I am not convinced this is a plausible argument. A point often missed is about the distribution of employees, spread across grades. Here are some numbers from the Census: 3% belong to Group A (so called gazetted officers), 8% to Group B, 63% to Group C and 26% to Group D. The private sector argument applies to Group A. How can it be extended to the other 97%?

I am told, including overtime, a driver with the Airports Authority of India (AAI) is paid .`35,000 per month. Few private sector entities pay drivers that much. And as the number of AAI cars is half the number of drivers, half the drivers are idle. If I hire a cab in Delhi, should fare depend on distance, or should it be the same flat rate, regardless of distance? That sounds like a stupid question. It should certainly depend on distance. But this analogy drives home the difference between a marginal and an average.

The trouble with the pay commission is that it is based on averages. It assumes everyone within government is entitled to a certain salary and pension. If productivity was the norm, pay would have been based on the marginal. We aren’t doing that, so let’s not be hypocritical. Most of these 35-40 million are vocal and the pay commission panders to them.

Cannot agree more with Monika Halan, the Regulators need Regulation. Hey that will not happen!

Let us see 2 pieces of legislation that we saw today (13 Feb 2014, one day before Valentine’s Day, and on Kiss day!).

Both these legislation prove the following 2 things:

1. The Golden Rule of Life: The Man who has the Gold, makes the Rules.
and

2. The Regulator speaks in the voice of the Strongest player!

First let us look at the IRDA’s resolution saying who can REMAIN an agent. The original rule was that a person who becomes an agent stays on as an agent for life. However this was very hurtful and life insurance companies were WILD that agents who were not bringing new business were getting a lot of commission on the basis of their long past performance. So they started lobbying with IRDA using the correct jargon: Policy persistence, ..etc.

THE REAL BENEFICIARIES WILL BE THE BANKS. No way how a life insurance company can EVEN THINK of talking tough to its agent who gets them 80% of their business (Hdfc, Icici, Sbi, Kotak….). So they will throw away the agents and make sure that all the contacts etc. are shared with the banks…and banks will become Brokers.

Who will benefit? LiC of course. Awesome.

Now let us see what SEBI says.

It says to be an AmC you need to have a networth of Rs. 50 crores. Who are the losers? PPFAS, Motilal Oswal, Quantum….and many of the schemes by these firms were better than the schemes of SBI, LIC, UTI, Hdfc, …so the biggies who got worried about the small guys being better will have to worry less. So if there are say 3 good fund managers in the smaller Amcs, they will have to look for a job with the biggies…

What a shameless stroke of the pen!! Hdfc mutual fund was caught with a hand in the cookie jar, but got away with a rap on the knuckles!!

This is like saying – the auditor of Tata Steel should have a net-worth of at least 3o% of the client

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Gavyn Davies at the Financial Times reflects on the growing pessimism of Central Banks regarding the growth potential of advanced economies. In the US, the Euro area or the UK, central banks are reducing their estimates of the output gap. They now think about some of the recent output losses as permanent as opposed to cyclical.

It output is not far from what we consider to be potential, there is less need for central banks to act and it is more likely that we will see an earlier normalization of monetary policy towards a neutral stance.

Why did they change their mind? Is this evidence consistent with the standard economic models that we use to think about cyclical developments?

Measuring potential output or the slack in the economy has always been challenging. One can rely on models that capture the factors that drive potential output (such as the capital stock or productivity or demographics) or one can look at more specific indicators of idle capacity, such as capacity utilization or unemployment rate.

Narrow measures of idle capacity do signal a potential permanent reduction in output. For example, unemployment rates, in particular in the US, are coming down. Capacity utilization is also approaching levels that can be considered as close to normal. As an example, in the most recent Inflation Report, the Bank of England writes "Surveys suggest that the margin of spare capacity within companies narrowed in 2013 such that companies were, on average, operating at close to normal levels of capacity utilization".

But both of these measures while they might be ok are capturing short-run idle capacity are very problematic as indication of potential growth . In the case of unemployment, one of the main reasons why it has decreased in the US is because of the fall in participation rates. But some of these permanent changes in the labor force are the result of a long recession. There is evidence that in the US long-term unemployed workers are giving up, and leaving the labor market at increasing rates. A similar argument can be made about capacity utilization: it might be that we are getting close to normal utilization levels, but is capacity at a normal level? A long period of low investment rates will naturally lead to lower installed capacity. This is Say's Law backwards, demand (investment reacting to cyclical conditions) creates its own supply (capacity). [Several years ago I wrote a paper with a model and some empirical evidence in favor of this hypothesis].

Both of these arguments point in the same direction: business cycles can leave permanent (or at least very persistent) scars on output through the effects they have on the capital stock or the labor force. But it is important to understand that the permanent effects are the consequence of the recession itself. If we could manage to reduce the length and depth of the recessions we would be minimizing those permanent effects. And in that sense, accepting these changes as structural and unavoidable is too pessimistic, leads to inaction and just makes matters worse. If you read the evidence properly, you want to do the opposite, you want to be even more aggressive to avoid what it looks at a much bigger cost of recessions.

Antonio Fatás

 

What are primary and secondary markets?

When a fresh set of shares ARE CREATED – that means a new set of distinctive numbers of shares are created – it is called a Primary market offering. Prospectus is issued, application forms are printed and the public is asked to subscribe to the shares being offered.

Secondary market is when the shares already issued are bought and sold in the markets – like the National stock exchange and the Bombay stock exchange. Secondary market is for shares already issued in the primary market and now are being traded.

What do bullish and bearish markets mean?

When the markets are up we call them ‘bull’ markets and when the markets are down we call them ‘bear’ markets. At a point in time we do not know whether market is in a bull mode or in a bear mode. Only at a later date we are able to see a bull run or a bear run – in retrospect. So now we know that 2003 to 2007 was a bull market, 2008 was a bear market, …whether 2014 was a bull market or was it a bear market will be known sometime in 2016!

Book Closure

The time period when a company will not make changes to its member’s register, or requests to transfer shares. The book closure date is often used to identify the cut-off date determining which investors of record will be sent a given dividend payment. The shares of listed companies changes hands daily as investors buy and sell shares. Due to this, when a company declares it will pay a dividend, it must set a specific date when the company will “close” its shareholder record book and commit to send the dividend to all investors holding shares as of that date.

Record Date

When shares of a listed change hands during daily trades, identifying the owner of some shares becomes difficult. So how does a company pass on certain benefits (like bonus, splits,  and dividend payments) to shareholders?

So, when a listed company declares dividends or bonus issues, there has to be a cut-off date for such benefits to be transferred to the shareholders. This date is termed as “Book Closure” date or Record Date. It is the date after which the company will not handle any transfer of shares requests until the benefits are transferred. Only shareholders whose name appears in the company’s register at the Book Closure Date or the Record Date would be entitled to receive these benefits.

Bonus shares

Bonus shares are additional shares given to the current shareholders without any additional cost, based upon the number of shares that a shareholder owns. These are company’s accumulated earnings which are not given out in the form of shares instead of cash dividends. More a feel good factor and not really a financial benefit in its truest sense.

Rights

A rights issue is an issue of rights to buy additional securities  in a company made to the company’s existing security holders. In normal circumstances it is for equity share holders that it applies.

What are blue chip shares / stocks?

Shares of a large, well-established and financially sound company that has operated for many years. A blue-chip stock typically has a market capitalization in crores, is the market leader in its field and is generally a household name. Most blue-chips have a record of paying stable or rising dividends for years, if not decades. The term is believed to have been derived from poker, where blue chips are the most expensive chips.

What is securities transaction tax?

Securities Transaction Tax (STT) is a tax payable on the value of securities transacted through a recognized stock exchange. The tax is not applicable on off-market transactions or on commodity or currency transactions.  The STT for delivery-based equity trading is 0.1% on the turnover. For Futures, the tax has been reduced to 0.01% on the sell-side only.

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There are always so many jokes about economic forecasting, that one often forgets that the GDP numbers are estimates in themselves, estimates that are prone to revision, often without detailed explanation. The recent releases that have come out from the CSO within a span of a week haven't met with much comment, since they just reinforced the existing gloom. Also, there was nothing in there that would fundamentally alter the forecast for the next year. But actually, if you look closer into the details and go a little further back, there are some surprises - the construction sector for instance. Unlike agriculture where one can expect dramatic changes in the estimates, this is one sector that should not have seen such reversal in fortunes from one year to the other in the revisions.

 

This switch in growth from one year to the other may not really matter now, the prospects for the construction sector remain fairly bleak and the provisional estimates for 2013-14 have been set at a very low 1.7%. Yet, it does raise questions about how the income estimates are generated and revised.

The point is not that revisions should not be there, of course these will always exist. The point is there should be more transparency over how these revisions take place, especially when there are such large changes. In the press release of 31st January there is general mention of replacing IIP estimates with those from the Annual Survey of Industries, of the divergence between these two, of the divergence between the provisional and final results of the ASI etc., but there are no specific details on what exactly has changed for the construction sector estimates.

Then there is the underlying issue of more efficient and complete data collection and management for all our estimates. There have been enough of reports from the National Statistical Commission pointing out the flaws in the existing systems. The lack of response from reporting units for instance seems to be one issue that has not been resolved; this is probably one reason why the provisional can differ significantly from the revised. The RBI has often expressed concern on the quality and timeliness of data; as their policy decisions depend crucially on the latest provisional estimates, the closer these are to the final estimate, the more confident the central bank can be of doing the right thing.

Here is a request to the next government- whichever government comes to power, there is an air of overhauling systems radically and being the change - so can we at the very least look forward to more transparent and empowered statistical agencies, please?

I’ve mentioned before how all of my old articles at RealMoney were lost.  This was the draft version of Real Estate’s Top Looms published on 05/20/05.  I followed it up with  Housing Bubblettes, Redux on 10/27/05 and  September 2005 — The Residential Real Estate Inflection Point on 02/14/06.  Also, there was Wrecking Ball Looms for Big Housing Spec on 11/27/06, where I explained why it was likely that the subprime residential mortgage market was likely to blow up (can’t find the draft of that one).

But those links above no longer work — a real pity, and the one link below is corrected to point to the republished article at my blog.  Anyway, enjoy this if you want, because it outlines my thinking on how to recognize whether you are getting near the end of the bull phase of a market.

(Note: the italicized, indented portions, quote the original article The Fundamentals of Market Tops.  Much of what I write compares how residential real estate is similar to and different from stocks.)

-==-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=–=

About a year and a half ago, I wrote a piece called The Fundamentals of Market Tops.  It was an important piece for me because I received a lot of positive feedback from readers.  It was also important because it disagreed with the view of the firm that I worked for, and nearly led to my termination there, because they encouraged me to stop writing for RealMoney.  Neither termination happened, but it was touch-and-go for a while.

This piece unofficially represents the views of the firm that I work for, because my views of macroeconomics have become the firm’s views, but I don’t directly control our investment actions.  What I will try to accomplish here is to try to apply the logic of my prior article to the residential real estate market.  As opposed to my earlier article, I will try to show why I think we are close to a market top in residential real estate.  There is reason for pessimism.

The Investor Base Becomes Momentum-Driven

Valuation is rarely a sufficient reason to be long or short a market. Absurdity is like infinity. Twice infinity is still infinity. Twice absurd is still absurd. Absurd valuations, whether high or low, can become even more absurd if the expectations of market participants become momentum-based. Momentum investors do not care about valuation; they buy what is going up, and sell what is going down.

This is what I see in many residential real estate markets now: panicked buyers are saying “this is my last chance,” and buying houses using risky forms of financing.  At the same time, I read stories of despair as some potential buyers give up and say that a house is out of their reach for now; they waited too long.  Occasionally, I see a few articles or e-mails regarding people who seem to be bright selling their homes and renting, but this is a minority behavior.

In the face of this, residential real estate prices continue to rise, particularly in the hot coastal markets, which tells me that the price momentum can continue a little while longer until it fails because there is no incremental liquidity available to expand the bubbles.

You’ll know a market top is probably coming when:

1. The shorts already have been killed. You don’t hear about them anymore. There is general embarrassment over investments in short-only funds.

2. Long-only managers are getting butchered for conservatism. In early 2000, we saw many eminent value investors give up around the same time. Julian Robertson, George Vanderheiden, Robert Sanborn, Gary Brinson and Stanley Druckenmiller all stepped down shortly before the market top.

3. Valuation-sensitive investors who aren’t total-return driven because of a need to justify fees to outside investors accumulate cash. Warren Buffett is an example of this. When Buffett said that he “didn’t get tech,” he did not mean that he didn’t understand technology; he just couldn’t understand how technology companies would earn returns on equity justifying the capital employed on a sustainable basis.

4. The recent past performance of growth managers tends to beat that of value managers. (I am using the terms growth and value in a classic sense here. Growth managers attempt to ascertain the future prospects of firms with little focus on valuation. Value managers attempt to calculate the value of a firm with less credit for future prospects.) In short, the future prospects of firms become the dominant means of setting market prices.

5. Momentum strategies are self-reinforcing due to an abundance of momentum investors. Once momentum strategies become dominant in a market, the market behaves differently. Actual price volatility increases. Trends tend to maintain themselves over longer periods. Selloffs tend to be short and sharp.

6. Markets driven by momentum favor inexperienced investors. My favorite way that this plays out is on CNBC. I gauge the age, experience and reasoning of the pundits. Near market tops, the pundits tend to be younger, newer and less rigorous. Experienced investors tend to have a greater regard for risk control, and believe in mean-reversion to a degree. Inexperienced investors tend to follow trends. They like to buy stocks that look like they are succeeding and sell those that look like they are failing.

7. Defined benefit pension plans tend to be net sellers of stock. This happens as they rebalance their funds to their target weights.

Houses aren’t like stocks for several reasons:

1. Unlike stocks, houses are used by their owners every day.
2. We can short stocks, but we can’t short houses.  (Personally, I hope no one comes up with a clever way to do so.  We have enough volatility already.)  The most someone can do is sell his home and rent.
3. Perhaps the equivalent of a long-only manager is someone who owns his property debt-free, like me, and doesn’t see the need to lever up by moving up to a larger home.  Measured against the standard of “what might have been” is a terrifying taskmaster from an investment standpoint.  I avoid it in equity investing, and in home ownership.
4. I am aware of a number of people (I have been assured that they are not mentally incompetent) who have sold their homes and started renting.  This to me is the equivalent of going totally flat in equities, or other risky assets.  Not that one faces negative carry, because the ratio of rent to in the hot markets is pretty low.  In many markets, you can earn more off the proceeds than you pay in rent (leaving tax consequences aside).  This leaves aside the issue of appreciation/depreciation of housing values, but when one can rent more cheaply than buying, it is a negative for the housing market.
5. My point about momentum strategies is definitely pertinent here.  With the existence of contract-flipping, a high level of amateur investment (seemingly under the guise of “buy what you know”), and a high level of investor interest (10%+), there is a lot of momentum in real estate investment.  People buy because prices are going up.  Some buy because it is “the last train out,” and they have to jump rather than be stranded.  Nonetheless, momentum tends to maintain in the short run, and the slowdown posited last fall definitely has not occurred.
6. Value vs. Growth does not exactly apply here, but in the housing market, people are paying up for future prospects more than they used to, which is akin to growth investing.
7. This is just an opinion, but those who are making money in residential real estate today are inexperienced and less rigorous than most good businessmen.  They see the potential for profit, but not the possibility of loss.
8. Unfortunately, it is difficult to partially own a home.  Home ownership is largely a discrete phenomenon.
9. Using a concept from value investing we can look at the earnings yield that residential real estate is throwing off.  Compare the rents one could receive from a property versus the cost that it would take to finance the property on a floating rate basis.  What I am seeing is that more and more hot coastal markets earn less from rents than they require in mortgage payments.  Property price appreciation is no longer a nice thing; it is required to bail out inverted investors.  Contrast this with those that invested in tech stocks on a levered basis in early 2000; they paid cash out to hold appreciating positions, before they paid cash to hold depreciating positions, before they blew the positions out in panic.

Corporate Behavior

Corporations respond to signals that market participants give. Near market tops, capital is inexpensive, so companies take the opportunity to raise capital.  Here are ways that corporate behaviors change near a market top:

1. The quality of IPOs declines, and the dollar amount increases. By quality, I mean companies that have a sustainable competitive advantage, and that can generate ROE in excess of cost of capital within a reasonable period.
2. Venture capitalists can do no wrong, so lots of money is attracted to venture capital.
3. Meeting the earnings number becomes paramount. What is ignored is balance sheet quality, cash flow from operations, etc.
4. There is a high degree of visible and/or hidden leverage. Unusual securitization and financing techniques proliferate. Off balance sheet liabilities become very common.
5. Cash flow proves insufficient to finance some speculative enterprises and some financial speculators. This occurs late in the game. When some speculative enterprises begin to run out of cash and can’t find anyone to finance them, they become insolvent. This leads to greater scrutiny and a sea change in attitudes for financing of speculative companies.
6. Elements of accounting seem compromised. Large amounts of earnings stem from accruals rather than cash flow from operations.
7. Dividends become less common. Fewer companies pay dividends, and dividends make up a smaller fraction of earnings or free cash flow.

In short, cash is the lifeblood of business. During speculative times, watch it like a hawk. No array of accrual entries can ever provide quite the same certainty as cash and other highly liquid assets in a crisis.

1. Every time a new home is sold, a privately placed IPO is held, with one buyer.
2. When rates are low, it is no surprise that the homebuilders try to take advantage of the situation, and provide supply to meet the demand.  But if it is only rate-driven, rather than from growth in real incomes in the economy, the quality of the new buyers will be low, because now they can just barely finance the house they could not previously.  If their income level falters, they will not have any safety margin allowing them to hold onto the house.
3. Private investors in residential real estate have multiplied at present.  This is akin to an increase in venture capital.
4. Leverage for new buyers has never been higher.  This occurs through second and third mortgages, as well as subprime mortgages.  Interest only mortgages are commonplace among new mortgages.  Beyond this, investors hide themselves so that they can get the cheap rates associated with owner-occupied housing.
5. With housing, making the earnings estimate means being able to pay the mortgage payment each month.  The degree of slack here is less than in the past.

Other Gauges

These two factors are more macro than the investor base or corporate behavior but are just as important.  Near a top, the following tends to happen:

1. Implied volatility is low and actual volatility is high. When there are many momentum investors in a market, prices get more volatile. At the same time, there can be less demand for hedging via put options, because the market has an aura of inevitability.
2. The Federal Reserve withdraws liquidity from the system. The rate of expansion of the Fed’s balance sheet slows. This causes short interest rates to rise, making financing more expensive. As this slows down the economy, speculative ventures get hit hardest. Remember that monetary policy works with a six- to 18-month lag; also, this indicator works in reverse when the Fed adds liquidity to the system.

One final note about my indicators: I have found that different indicators work for market bottoms and tops, so don’t blindly apply these in reverse to try to gauge bottoms.

 There is no options market for residential housing, but the Federal Reserve is still a major influence in the housing market.  When the Fed is withdrawing liquidity from the system, the price of housing tends to slow down, if not reverse.  Like the equity market, this is not immediate but follows a six- to 18-month lag.  This is another case of “Don’t fight the Fed.”

No Top Now

There are reasons for concern in the present environment. Valuations are getting stretched in some parts of the market. Debt capital is cheap today. There are an increasing number of momentum investors in the market. Making the earnings estimate is once again of high importance. Nonetheless, a top in the market is not imminent, for these reasons:

• The Fed is on hold for now. Liquidity is ample, perhaps too much so.
• Actual price volatility is muted.
• Since all of the accounting scandals of the last few years, many corporations have cleaned up their accounting and become more conservative.
• Cash flow from operations comprises a high proportion of current earnings. More dividends are getting paid.
• Leverage has not declined, but most corporations have succeeded in refinancing themselves in a low interest rate environment.
• Conservative asset managers have not been fired yet.
• Most IPOs don’t seem outlandish.

Not all of the indicators that I put forth have to appear for there to be a market top. A preponderance of them appearing would make me concerned, and that is not the case now.

 Some of my indicators are vague and require subjective judgment. But they’re better than nothing, and kept me out of the trouble in 1999 and 2000. I hope that I — and you — can achieve the same with them as we near the next top.

The current market environment is not as favorable as it was a year ago, but there are still some reasonably valued companies with seemingly clean accounting to buy at present. Right now, being long the market is more compelling to me than being flat, much less short.

I would retitle this the “The Top is Coming Soon.”  The reasons that I mentioned to be worrisome remain:

• Valuations are getting stretched in some parts of the market.
• Debt capital is cheap today.
• There are an increasing number of momentum investors in the market.
• Making the earnings estimate is once again of high importance. (Gotta pay my mortgage!)

But there is more that makes me even more bearish:

• The Fed is on the warpath, and liquidity is scarce.
• Appraisals overstate the value of property that financial institutions lend against.
• Homeowners have a smaller margin of safety than they have had in the past.
• Leverage has increased for the average homebuyer.
• People are paying more than they ought to for new and existing homes.

I am decidedly a bear on housing prices (at least in the hot coastal markets) at present, but I recognize that momentum can carry prices far beyond sustainable levels.  That’s the way markets work.

Nonetheless, I am still a bear on those who build homes, and those who finance them.  We are at an unsustainable place in the ability to finance the residential hosing market.  Either an increase in interest rates or a decrease in ability to pay for housing can derail the market.  This is the inflection point that we are at over the next year.

For many people, especially, in Real estate investments, returns are always in 2 digits and this over 30 years of time.

I have found it futile trying to tell them that this CANNOT BE SO.

So long ago I had asked for our Calculator King a.k.a Pattabiraman to make a Real Estate Return calculator.

The advantage in asking him to make a calculator is, it gets made in a few hours and he is there saying

Knock Knock …can you take a look? I did. It works. I am wondering HOW MANY OF MY READERS WANT TO USE IT – sheer inertia is scary!

So here is your homework, please use this calculator (honestly) taking the LAST TRADED PRICE (not the hoped for price) and see your returns over 1, 3, 5, 10, 30…years and tell me what are the numbers. Either feel MORE happy or be happy with this realty check. To thank me and Pattu, please donate money to a charity of YOUR CHOICE. Fair enough?

http://freefincal.com/real-estate-returns-calculator/

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Thanks to the fact that the 80C limit has not been raised for a very long time, and the fact that the section has been crowded with too many deductions, the section has lost glitter. However many young people realize that the only saving/ investment that they are doing is under this section, and …

So many people have asked me for an exhaustive list of expenses / investments eligible for Sec 80 C deductions…so here it is…nothing original, but complete I guess:

There are some payments made which are eligible for section 80C. They are: 

• Premium on life insurance policies (terms and conditions apply, please see terms and conditions carefully!!)
• Children’s full-time education fees
• Principal repayment on home loan (check your EMI break up ONLY PRINCIPAL repaid is eligible)

Employee Provident Fund (EPF)

• A deduction that an employer makes from an employee’s salary towards the provident fund
• How much is deducted is subject to Rules and Company policy
• The return offered is 8.25%, and is a brilliant tax free compounding tool.
• Highly recommended, try to increase the contribution amount if possible. Must do.

Public Provident Fund (PPF)

• Good long term SAVINGS plan, government guaranteed.
• Current return is 8.8% p.a.- subject to change 
• Investment limit of Rs 1 lakh p.a. – including the contribution to minor children’s accounts
• Tax free compounding is the GREATEST attraction.
• Highly Recommended.

2 pension plans from the Mutual Fund stable – the Templeton India Pension Plan and the UTI pension plan. However they have about 70% in debt and I would recommend it only for small amounts for younger people. However people above 40 can invest more heavily in this than even in PPF, simply because of the compounding impact of equity.

National Savings Certificate (NSC)

• 5-year NSC delivers 8.6%, 10-year NSC offers 8.9%
• No investment limit, government guaranteed, interest taxable.
• Pain of dealing with the PO.
• Not recommended unless you are a senior citizen, are on a zero tax slab, AND have a trustworthy agent.

Fixed deposits (FD)

• The tenure of the FD must be for 5 years
• Lock In for the whole period
• Interest is taxable 
• Not recommended at all.

Equity Linked Savings Scheme (ELSS)

• Full equity exposure
• It has the least lock-in period of 3 years
• Suitable for young investors willing to hold on longer if markets are not favorable.
• Tax free compounding,
• Stick to Templeton or Icici Prudential or Hdfc and take a long term view

Senior Citizen Saving Scheme (SCSS)

• Only for senior citizens
• Interest offered is 9%
• Interest is taxable
• Only recommended if you are willing to deal with the PO. Interest will be automatically credited to your account.

Bonds – National Bank for Agriculture and Rural Development (NABARD)

• Lock-in period is 5 years
• Investment can be made up to Rs 1 lakh to avail of a deduction
• Interest earned is taxable.
• Not recommended unless you have a good agent who will help you with the process.

Insurance Plans 

• Any life cover plan.
• ULIPs can give you an exposure to equities also.
• NOT RECOMMENDED AT ALL except as Term insurance.

Sorry 80ccf has been withdrawn…i made this correction at 4.45pm…hence the comments. Thanks for pointing out.

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In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.

That sounds like reasonable, textbook economics. But I don't think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower labor supply means lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.

Perhaps the easiest way to think about this issue is in the context of a Solow growth model. In the Solow model, the steady-state real wage is a function of technology, the saving rate, and the population growth rate. If labor supply per person suddenly falls by, say, 2 percent and stays there, the real wage will rise initally, but it will eventually return to its former level. Steady-state income per person falls by the full 2 percent.

One effect that might occur is a change in the composition of labor income. If the Act reduces labor supply primarily among the low-skilled, while not having that effect among the highly-skilled, then we might get a change in the relative wages of skilled and unskilled. But an overall increase in real wages seems unlikely.

First of all remember that all people claiming to want to teach you personal finance are not here to teach. Many of them are here to peddle products.

I am not against peddling of products, I have done it in the past, and would happily peddle something or the other. Financial planning should be planning, peddling should be peddling. In fact teaching should LEAD TO LEARNING, NOT, SELLING.

Read both the links in this article – one is Debashis ripping a product, one is a sales pitch for LIC. Know the difference? Read and find out

And this obviously is the WORST WAY TO PLAN your old age retirement…

One day when you are 40, your wife will scream at you saying ‘You have done NOTHING’ for our old age…..

So you will feel guilty and continue to watch TV….but there will be no action….

Then one day at lunch your colleague will tell you …’hey you know what I just bought a pension plan’ and my old age is taken care of…and you will be impressed. Let alone that he is also a geek working on CAD and wanting to migrate to the US but his dad is not allowing him to…He is aged 32….and now you are doubly impressed.

So you tell him…’arre from whom did you buy?’ and he says…apna banker hai na…nice guy. He had come and showed me the projections…if I invest Rs. 25000 a month, I will get 51000 a month pension for the rest of my life after 58….

So you are impressed again! Wow Rs. 50,000 a month! Wow….

THAT IS EXACTLY WHAT YOU SHOULD NOT DO SIR! READ ON

http://www.moneylife.in/article/hdfc-life-pension-ad-taaki-kal-bilkul-aaj-jaisa-ho-ndash-how-true/31304.html

SEE what Debashis has to say….lol……

So how should you actually do it?

1. Know when you will retire

2. Estimate your expenses

3. Do a SIP in 2-3 funds starting NOW….Simple?

4. Do not touch a pension plan, unless you can reverse engineer the cost completely, find a low amc product, check the total cost and you are willing to pay the premium for the full term – best is stay away.

http://www.basunivesh.com/2014/02/10/best-pension-plans-in-india-how-to-choose-them/#comments

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Hi

Just trying to see how useful this blog has been in general….

will you please 3 questions?

a) what is the best investment / saving advice that you have received EVER?

b) what is the best investment / saving advice that you have received FROM THIS BLOG?

c) Other than ‘best stocks to buy’ what else do you want to see on this BLOG?

thanks.

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I have just started reading a bestseller titled ‘The Art of Thinking Clearly’ by Rolf Dobell. The very first chapter tells us why analyzing mistakes of dead companies can be beneficial for long term investors. If done diligently, this exercise helps one avoid making huge losses in stock markets. The author asks readers to visit a cemetery or a graveyard. A graveyard, where dead

People have been asking me to write about Equity Research…and I cannot even make a list of topics in Equity Research, because it is too damn vast. So let me try to say what are risks that a common man / lay investor should avoid.

This is the first among them….

IPOs are priced in a very funny sort of a process. People who have not been on the other side of the equity table will be shocked to know how big IPOs get priced. It is a function of the promoter’s ego, market mood (boom or doom), the greed of the merchant banker, the willingness of the merchant banker to lose reputation…….oh ha the EPS, projected p/e etc are then ‘adjusted’ to suit the SELLER.

When you buy an IPO you are given a price (fixed price) or a range (book building). As an ordinary investor, the best thing to do is to ignore it. Completely. As soon as the share is listed, it will find its true level.

Let us take the example of 2 companies – Speciality Restaurants and Mahindra Holiday Resorts. SR came out with a public issue at Rs. 150, and there was a very big promoter holding and the issue got subscribed without much effort. When an issue opens above the issue price, it hurts the promoter – and I am sure he must have screamed at the Merchant Banker for pricing it cheap. Lo and Behold the share went to Rs. 210 – or maybe even higher. Then the quarterly / six monthly results started coming in. The cash flows were not justifying the price (I am not passing a judgement about the current price, this is not a buy/sell call).

Maybe the company is still in its investing mode, maybe there has been some heavy selling……….I am not getting into any of those stories. However the market discovered price (far far superior to the merchant banker decided high price) is Rs. 112 – half of the top price that the company saw and 70% of the IPO price.

Of course much worse was the pricing of Reliance Power. The company issues shares to the promoter at Rs. 16 and in a few months thought it worthwhile to price it at Rs. 450. I laughed at the price then, and said (check the past posts) that a price of about Rs. 75 was justified, not Rs. 450. Of course other than blogging or laughing one could not do much – I could not have put options of an IPO. Then of course all the bad news started coming in and then I did see the price at Rs. 75. At that point I was not willing to buy even at that price because a much better company like NTPC was available at Rs. 130/-

Look at Mahindra Holiday Resorts. Very small issue, reputed promoter, successful issue. Issue was priced at Rs. 300, then it shot up to Rs. 574. Then the results started coming in. I am still looking for the cash flow. Go to Google and you find the millions of unhappy customers, and ’000s of happy customers. Sadly a million is greater than a thousand.

No cash flows, no price. Today the share price is closer to Rs. 200 and nowhere near the issue price.

Merchant bankers – the less said about them the better. Market is a fantastic pricing mechanism. So if you look at companies with say 15 quarters of rising EPS, or 3 years of increasing dividends, etc. etc. , has a market capitalisation of at least Rs. 5000 crores, and has decent promoters, do take a look. Look at the share price movement, if you are happy with the EPS, dividends, pe ration – this share is likely to be much much safer and better than a IPO,

Caveat: I have traded profitably in SR, MHRL and Reliance Power. Have shares of NTPC, and currently have no position in Reliance Adag.

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“Whatever I do, my weight does not come down” and “Whatever I do I cannot reduce my expenses” – are commonly heard statements.

If you are a doctor, a wealth guide, a financial planner, …you hear both of these statements. Normally people do not write down diligently what they earn, spend and invest.

Similarly for reducing weight you need to maintain a food diary which will tell you what you eat…and then you can analyse the same. See www.myfitnesspal.com

Let us see what makes a good budget? In all the budget blunders exercises, the same few problems keep rearing their ugly heads. To avoid them, here are the important features of a successful budget.
1.    Categories that fit your personal situation and your families’ spending habits.

2.    Accurate income projections. Salaried individuals have it easy. In case of self-employed people – they tend to dramatically over/under estimate their incomes.

3.    Enough categories to give you a meaningful picture of where your money goes and where you might be able to cut costs, but not so much detail that tracking is a chore that you’ll soon give up. Breaking up of your medical expenses into doctors’ fees, and medicines is fine. But if you try further breaking up medical expenses into generic and branded – you might give up the whole exercise.

4.    Inclusion of expenses that don’t occur on a monthly basis, such as car maintenance, term life insurance premium, festival expenses, clothes buying, etc.

5.    Regular review of categories to determine if you need more or fewer, review of expenses, and brainstorming about ways to reduce costs in each category.

6.    Cash spending is a big leak in most budgets. Cash disappears quickly and if you don’t write down everything you spend it on, you will not have a clear picture of your spending.

7.    A minimum saving amount – at least till you build your emergency fund.

8.    Realistic written goals. Budgeting is about setting financial goals (saving for a down payment on a house, buying a new car, getting out of debt, saving for retirement, putting your kids through college, travelling, etc.) and finding ways to meet them.

9.    Identification of spending patterns you may not have been aware of when you weren’t tracking your spending.

10.    Most importantly, internal motivation and a positive attitude!

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http://www.moneycontrol.com/video/stocks-classroom/what-isstockshare_1038019.html 

http://www.moneycontrol.com/video/stocks-classroom/why-should-i-investstock-market_1038021.html

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I have no clue why there is so much of noise, sound and fury about life insurance mis selling!

Is there no mis-selling in life insurance? heavens no, there is, but have you really looked around?

Have you seen mis selling happening in the following areas:

Medicine, hospitalisation, education, food, pharma, holidays (ask people who have bought packages from Mahindra Holiday resorts – also visible in its share price), real estate, gold, banking, mutual funds, mortgages, loans for education, loans for  marriage, …etc. etc.

The only place where mis-selling does not happen is bank fixed deposits (cannot), national savings certificates, etc. There is nothing variable so there is no mis selling!! or the facts are known to all, hence there is no mis selling. However fake national savings certificates are very common.

Face it. What hurts us more? One asset class like real estate which takes up 77% of our networth!

Here we do not know:

What we have bought (no common definitions!) – built up, super built up, is parking free, why there is a ‘transfer’ penalty if we sell within 3 years.

An MBA college which says ‘fees is Rs. 6 lakhs, but do not worry, the starting salary average is Rs. 10 lakhs’ – sure Mean is Rs. 10 lakhs, will you please tell me the median, mode and standard deviation also please?

Medical mis-selling is a book in itself. Greed Rules. Rules completely.

We end up talking only what we know and claim to understand. I can assure you that MOST of the people who write about ULIP mis selling do not even know that mutual funds can be created to create a far far superior trail commission. Ha, what do facts have to do with reporting?

Loans is another big area of mis-selling. Flat rates, monthly compounding vs Annual compounding, taking the last 2 instalments in advance, processing fees – no clue why people do not object.

The worst of course is the bank! Now SBI wants money for you to use their ATM, for giving you a statement, for visiting their branches,  - stunning how they want to loot you.

I think I can write about 10 pages on each of the ripping off. What about vegetables which the farmer gets Rs. 2.5 per kilo? and you paying Rs. 30?

Why do clients not ask for a vegetable market where Cauliflower is not priced at Rs. 10 a kg?

The buyer pays Rs. 10.50 and the seller gets 9.50?

fair enough?

hmmmm…..does not work na?

 

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Every day in every which way, Kejriwal figures out a new drama to be in the media spotlight. It seems to me that he is not acting alone — and by that I don’t mean that he does not have a bunch of very able sidekicks. He certainly has visible support. What concerns me is the invisible support. Are invisible hands guiding him? Here’s what I got in a forwarded email. I cannot vouch for its content. You be the judge. I am just posting it for the record. The original was in Hindi and I asked a friend (Thanks, Amit) to translate it into English.

Sub: 10lakh people called from America for Kejriwal, what was the contribution of Aadhar card in this and how did the data reach America? Is Aadhar card an American conspiracy?

Another explosive post that bares open the mystery behind Kejriwal . . . Friends, please read it, share it or copy paste it but do publicize this important information . . . A deep conspiracy is being hatched to enslave this country . . . Is America seeing Arvind Kejriwal as a useful tool, just like it saw Imran Khan in Pakistan?

To understand this, one has to look at Arvind’s background. Not just Kabir, Shimrit Li and Ford foundation but even some Indian industrialists are also involved in this effort. Gradually one thing is leading to another and the picture is evolving. Suddenly there is talk of looking at the political activities of Ford foundation in not just India but whole of Asia. It is identified as an American entity.

Kavita N Ramdas is the head of Ford foundation in South Asia. She is the eldest daughter of Admiral Ramdas. Admiral Ramdas is Arvind Kejriwal’s godfather. Admiral Ramdas was with Arvind Kejriwal even at the time of his nomination. Admiral Ramdas’ wife Leela Ramdas was made the chief of committee constituted under the Vishakha guideline. Ramdas is also a recipient of Magsaysay Award. The question therefore arises – is the Ramdas family helping Arvind Kejriwal on the instructions of Ford foundation?

Ford’s involvement in the politics of Asia can also be understood by this another example. Gauhar Rizvi, an ex office bearer of Ford foundation, now works as advisor to the Bangladeshi Prime Minister. Not just Kabir, Shimrit Li and Ford foundation but even some Indian industrialists are also involved in this effort.

Mr Narayan Murthy, Infosys Chief and member of Ford foundation, had also provided financial assistance of INR 25lac each year in 2008-2009 to Arvind Kejriwal’s organization. In 2010 when Shimrit joined Kabir, Narayan Murthy increased the assistance to 37lakh from 25lakh earlier. Not just this, Balkrishna a former senior employee of Infosys too joined the Aam Admi Party.

Nandan Nilekani is also linked with Infosys. Nilekani is also the chief of ‘biometric aadhar’ project. As soon as Kejriwal formed government in Delhi, he initiated steps to make Aadhar mandatory. One can understand Aadhar and Nandan as follows. As per information, a NewYork based company MongoDB gets associated with Nandan Nilekani’s Aadhar. This company is assigned the job of preparing the database of Indian citizens. On further enquiry on MongoDB, many startling revelations come forth.

A company called In-Q-Tel is invested in MongoDB. In-Q-Tel is the venture capital arm of CIA. Now it is important to see the link between Nandan Nilekani and Delhi elections. During Delhi elections, there were about 1Mn phone calls from America to India. It is said that they were all in support of Aam Admi party. But this raises several questions.

First question, were these phone calls made by India citizens overseas or an American agency? Second question, how did people in America get access to so many phone numbers from Delhi? This is where Nandan Nilekani’s role comes under suspicion. Actually the Aadhar project that Nandan heads makes phone numbers mandatory. Only someone like Nandan Nilekani would have access to such a large database of numbers. And this is the reason why Kejriwal’s Delhi government is asking for Aadhar numbers. When the SC has ruled making Aadhar a non-madatory requirement, then why is Kejriwal’s government asking for Aadhar numbers? After all what is his compulsion? This compulsion can be understood by the relations between Infosys Chief and Ford foundation. (This report of Rakesh Singh is full of fact based journalism).

That’s it. I don’t know what is going on. Is this some loony conspiracy theory? Could be. If you know, please post a comment. Thanks.

The Italian-born Antonia Maino-led Congress is in deep distress. It appears that the Modi wave tsunami is threatening to smash them to bits and drown the remains. (Previously I had written about the Modi juggernaut.) What are the options open to them? Here is my conjecture.

First is of course if Shri Modi were to meet with an unfortunate accident. Helicopters don’t usually drop out of the sky but in banana republics, aviation accidents are often used to settle political conflicts. Examples: Sanjay Gandhi, YSR Reddy.

Second, some disgruntled jihadis (ok, all jihadis are disgruntled) would plant a bomb at one of the many rallies. A huge boom and that would take care of Maino’s troubles.

Third, Maino makes a deal with Pakistan. For an undisclosed amount and for future concessions if the Italian-Indian Raul Vinci aka Rahul Gandhi were to become the PM, Sharif would start a minor war with India in early April. Then the appointed Prime Minister Manmohan Singh would declare “Emergency” and the elections would be postponed. This will give the Italian-Indian Congress some breathing room and allow more time for scenarios 1 and 2 above.

Now you may say that all this is tin-foil hat level crazy conspiracy. I hope it is only my natural paranoia. But what if it isn’t all that crazy a scenario? How does one guard against it?

The way forward is to put this crazy conspiracy in the public domain so that it becomes common knowledge — and thus render the tactic worthless.

In one of the most widely scrutinized CEO successions ever, Microsoft directors selected insider Satya Nadella to run the company, only their third CEO pick in the firm’s nearly 40-year history.  His challenges will be enormous. For starters, he will be running a $75 billion+ enterprise with some 100,000 employees, an army of software engineers and many moving parts. For finishers, he will have to change its treads—redirect its strategy—while barreling down a highway with no map for what lies ahead.

Microsoft’s board had considered a revolving roster of candidates over the past several months, from Nokia’s former CEO Stephen Elop (now back at Microsoft) to Ford’s CEO Alan Mulally. In betting on 22-year Microsoft veteran Nadella, the board has wagered the house: Right pick, Microsoft stays competitive with the likes of Apple, Google, and Oracle; Wrong pick, Microsoft is stuck in 2nd gear, or worse.

The vital—though not-soon-to-be answered—question is whether Mr. Nadella brings the right leadership talents not only to run the show but also to grow the enterprise at the center of one of most turbulent and competitive frays on earth.  And that question is likely to be answered in the affirmative if the directors have managed to avoid the Peter Principle.

Those who have been around a bit will remember a book of that name by Laurence J. Peter.  He argued with plenty of supporting material that sometimes companies, having promoted executives to what they were really good at, elevate them one time too many. Great at mid-level, the managers were not game-ready for the next level.

Moreover, reaching the ultimate level of chief executive is not just another move up the corporate ladder. It is a “jump shift,” as Procter & Gamble chairman A.G. Lafley has described it. Prior jobs cannot totally prepare one for the elevated reality, especially when it now requires running the whole show. The stakes rise exponentially when the final level is the corner office because, unlike lesser destinations, the entire enterprise can be put at risk with the wrong choice.

Fortunately, history is not destiny, and that is no doubt why the Microsoft board, under the guidance of lead director John Thompson, devoted so many months to vetting their twenty-some finalists. And what was critical here, in our view, or at any major enterprise for that matter, is for the directors to take the time to watch the candidates in action and to drill down with bottoms up data. An apples-to-apples comparison of the finalists can be vital as well.

Consider the CEO succession process at pharmaceutical giant GlaxoSmithKline beginning in 2004 when chief executive Jean-Pierre Garnier said he would be exiting in three years. That gave the directors plenty of time, and with that luxury, they methodically narrowed the field to three strong successors, all on the inside. During the final year, they added three paths to gather a last round of data:

1) The CEO and directors assigned a year-long CEO-level project to each of the three finalists. The projects all touched on areas of great strategic concern to the company, and the directors required each of the candidates to report their appraisals and plans to the board.

2) The CEO and directors conducted a “450-degree” assessment of each of the candidates, an expansion of the traditional “360” to include an extra “90” degrees:  They asked fourteen executives who had worked with all three finalists to privately compare their strengths for the top job at hand.

3) They arranged for a one-on-one lunch or dinner for each of the three candidates with each of the company’s sixteen directors.

No one piece of evidence yielded a killer conclusion, but the three sources taken together led to the appointment of dark-horse candidate Andrew Witty as the next CEO.  Even the sitting CEO who knew the three finalists as well as anybody was surprised.

By way of underscoring the power of the bottom-up appraisal, America’s special forces have utilized a similar method in selecting those who will join the nation’s most elite missions. Gathering appraisals from other special-forces personnel on the final candidates—from fellow service members who have seen the finalists on the ground or even in combat—has proven a telling source.

Or consider managed-health care provider Humana’s decision in 2013 to recruit an outsider as its next chief executive. William J. McDonald, who chaired the board’s committee that led the succession process, explained why it had gone to the outside. “I think one of the biggest mistakes boards make is to assess people only in the context of their current jobs.” Becoming a CEO is a far more expansive and demanding job, and he and his fellow directors worried whether the inside talent was then ready for the catapult upward.  “People can change dramatically when they get the brass ring,” he warned.

Most CEO candidates for large companies—like Satya Nadella at Microsoft—emerge from within, and that by definition can give the board the time it needs to vet the candidates in these several ways. But even if insiders are not yet ready, Humana’s McDonald explained that succession is all about “lead time, lead time, lead time.”

Plenty of time also gives the CEO and directors an opportunity to ensure that the eventual insider finalists are given a chance to master the additional skills required for moving up, for transcending any Peter Principle limitations.

Here learn-by-doing can be essential, especially in acquiring an experience-informed ability to work with the directors, investors, analysts, and reporters.  And that extends as well to rounding out the candidates’ personal familiarity with a firm’s far-flung geography and its many technical functions.  Mentoring by the CEO and lead director can be vital here, as can service on another board or two.  When George Buckley served as CEO for innovative manufacturer 3M, he actively encouraged rising stars at the company to serve on outside boards, join quarterly analyst calls, and work directly with the media.

Finally, we appreciate from the experience of many firms that CEO succession should focus on candidates who are top-ranked not only for past performance but also for future challenges. Making that “strategic fit” was surely a factor in Microsoft’s selection of Mr. Nadella, who evidently brings a special appreciation for cloud computing and mobile devices, a new world that the next CEO has to face even if his predecessors had belatedly done so.

Microsoft investors, customers, and employees are all hoping that John Thompson and his board got it right, and that they have managed to avoid Peter’s pitfall to select the leadership that Microsoft requires in the years ahead.