Subramoney

Two or three days ago I had done a post saying “golden rules of investing”. Today I am going to add a few more:

1. Do not abdicate financial understanding: “I trust my adviser” is not always a statement of faith. In many cases I know, it is a matter of laziness or convenience. Do not do it. It is necessary for you to know why somethings are being done, how, and what are the implications.

2. Ask sensible questions: Ask your adviser why certain things are being done. If you do not understand and you do not ask, you might be in trouble later on. Do not assume, ask.

3. Trust your adviser: trusting your adviser should be an exercise that is done diligently. Do not think “he looks fine”, “he dresses well” “goes to the same club”. Also to remind you of what Ronald Reagen (late President of USA) said “trust, but verify”.

4. Do not issue cheques in the name of the adviser: Asking the adviser to pay the premium on your behalf is not a good idea - but people routinely do it, and then repent.

5. Choose your adviser carefully - read Deepa Gopalan’s book ..(What your financial agent will tell you, and you should not listen) regarding about your agent’s lingo (or relationship manager of a bank) and then chose your agent.

6. Ask the agent about conflict of interest: Check who is paying him, how much, etc. - and check out whether that is more than what you have been told.

So these if you ask me are the Golden rules - the real ones!

Government guaranteed bonds are medium to long term bonds (securities) issued by government agencies and in some cases by PSU (public sector undertaking). The interest and the principal in such instruments is guaranteed by the Central Government or the State Government.

Since most state government guarantees mean nothing, largely people buy these bonds because there is an unwritten law that ultimately the central government  will bail them out!

Some of the great classic advice that you will hear in an economy that slows down are the following:

1. Shift to cash - it is safe, at least it will not go down!

2. If you must invest, be safe get into gilts - it is almost capital protected, interest rates can only go down, so you will get “good” returns.

3. If you still insist, buy “large cap” stocks - like L&T, Bhel, Reliance, SBI, Hdfc - how much further can they fall?

Surely you must have heard all this advice, have you not?

Let us look at each one of them!

Normally the least attractive asset class gives the best return - over a short period - but this logic cannot be extended indefinitely. For example equity has given 19% return over the past 25 years, but -40% over the past 6 months. Why do we take the last 6 months figure and extrapolate for the next 35 years? This is plain stupid. So will cash be the best asset class? You ought to be joking if you are thinking say for 15 years.

Debt products are good and surely have a place in your portfolio - for portfolio protection for short periods of time. However debt products which give -5% return (taking taxes and inflation into account) cannot create WEALTH - can it?

When the markets go through a turmoil shift to LARGE caps - they will recover first. Great in theory. However liquid shares are the LIQUIDITY providers. So every person who is liquid and wants to invest will invest there - so these shares will always quote at a high premium compared to other shares!

So what to do now? let us see in a few days time….

If you pick any book on investing you will find the following steps to financial “Nirvana”:

1. Have a plan

2. Make a budget

3. Save regularly, and then invest regularly

4. Know your risk profile

5. Understand asset allocation - and stick to it like a discipline

6. Review regularly.

I have no doubt that these are the golden rules. However people who say this (other than trainers ha ha ha) have to sell you a product. And their life depends on how many people buy those products! So for all these rules to hold good commissioned products should do well. Financial Planners (by what ever name called) should be excellent in their integrity.

Gimme a break. That is too tough an assumption. So tomorrow I will give you the real Golden rules, happy investing!

Have you ever been tempted by newsletters, sooth sayers, channels, websites offering you immense riches by “timing the market”? I bet you have been.

Each year millions of people (worldwide) spend ‘000s of dollars to subscribe to newsletters, email services, sms alerts, phone calls, etc. trying to beat the market. If you see the long term charts of most equity indices, intutively this looks very appealing. There is only one problem, it does not work. This is because the guru of investing late John Templeton says “I do not know of anybody who knows anybody who has made money timing the market”.

Is market timing difficult, NO, it is almost impossible for the common man - so the best thing to do is to stay away. The best 10 days can give you say 55% of the total return for the year! So for whatever reason you stayed away - if you did stay away those 10 days, your returns could be below Savings Bank ratel

One organisation with whom I am associated has many 22 year olds working on technology, news, financial calculators etc. - all this work is somewhat connected to equity markets. Most of these people have a brokerage account - and based on their own knowledge try market timing. It is surely a brokers delight. Most of them do not calculate how much returns they get, so there is no comparison to market returns. Talking to them on a adhoc basis, I know most of them are getting below bank FD rates - at the gross, subject to taxation, as most of the “gains” if any are short term

A few days back you saw the posting of a kid girl who had spoken about her financial life - and how a mess was created. So here is the solution to the problem.

Before I start, let me be clear that this write-up is not a plug for sympathy! I am just intending to share – “HOW BAD CAN IT GET?” – and how can I get out of this mess, asap?

My Comment: Well, if you leave it unattended it can get much worse!
It’s been almost a year since my dad passed away. My mom is 43, while my dad was 54, when he left us. And it was a love marriage!

My Comment: Given your mom’s age she can live till the age of say 90. This means she can live more than what she has already lived, so please prepare for a long life ahead. She needs to learn a trade or profession – right from running a crèche or being a part of a community kitchen scheme.

I am completely in love with my family, and I think, the only reason for our financial crunch is - “LACK OF KNOWLEDGE”.

Comment: This is a good learning at such a young age, congrats.
Papa always spent every penny of his income on us, for all the avoidable things we demanded! But this did not provide my family with any buffer to protect us from a financial emergency. We do have savings, but they are just not enough! Too many bills, not enough money! Problems never disappear, but the money does!

Comment: Downsize your life-style. Live within your means. Check your expenses and see what you can cut down, maybe bit by bit if not dramatically. Write down your expenses, by hand or in an excel sheet – and then take action, FAST.

I don’t remember the last time I sat down surrounded by all of my personal and financial documents and took stock of my overall financial situation, including reviewing spending, savings, future goals, and insurance.
Comment: Hey kid, this is true for most of us. We worry about risk only after the problem hits us.
Key issues of my family:
*No planning – start now.
*Delaying saving – do not delay further.
*Loans – repay asap.
*Business partnership problems – now it is over, is it not?
*Overspending – all 3 of you should reduce your spending, NOW.
*No insurance: After all the problems, I have learnt one very important insurance lesson – “Don’t wait for a tragedy to strike to have the right insurance coverage.”
Take a term life insurance for you and your sister. Take a medical insurance for all 3 of you, TODAY.

*Emotional decisions – stop making them!

Start a SIP for you and your sister, today. If your sister needs money for her MBA go to a bank (I think it is a lousy idea to think of a Rs. 2 lakhs part-time MBA or a full time Rs. 6 lakhs MBA, however it is your call).

“I have invested in M/F near 2.9 lacs in various funds in various firms. Now NAV of all the funds is lower than the NFO. It is worth about Rs. 1.9 lakhs. Should i continue or exit?”

In such extra-ordinary times this is a pretty normal question. All those investors who were brave in Jan ‘08 when the index was at 21000 are now panicking. Co-incidentally the index at the time of writing is HALF of the Jan index! Risk, they say is counter-intutive. When you think is highest it perhaps is lowest and vice-versa.

What should this reader do? Simple he should stay invested. Assuming that the investments were made in a lump-sum his portfolio could be down anywhere between 40 to 70 percent. It is all right to lose money, but do not lose the lessons of investing.

What caused it? – Lack of understanding that a market which goes up can also come down. The speed with which the equity markets went up were matched in viciousness in the downward journey. If he knew AND he was investing, he was understanding the risk. However if his agent (or relationship manager) told him “next month the index will be 25000 and he believed it, it is his fault – NOT the markets’ fault!

Most agents and relationship managers are rewarded better on a lump-sum basis than on a SIP basis. However, readers should push the agent for a SIP form rather than a lump-sum investment.

Investing through a SIP is a safe and sensible way of investing – so all readers who have invested should start a sip at least now. Over the next 4-5 years you will get a return superior to debt market returns. However stop tracking your portfolio on a daily basis. Just relax and let the fund manager do his job. Most people who have done a SIP in a balanced fund (like Templeton India pension plan) for the past 4 years are also in the red. However if the markets were to suddenly bounce to 14000, they might suddenly be in the black!

In all market conditions remembering that equity markets shudder, quiver and fall – dramatically. However, it is the markets resilience that it comes back usually stronger. So go out there and read about equity markets, keep learning, do a SIP and please appreciate that equity markets are for the long term. When I say long term I mean 7 years plus – and I have friends who think I am being aggressive. The real good fund managers normally mean 20 years as a long term period!

So here is Children’s Day – a good day for parents and children to take stock financially speaking!

Most parents like to think they are helping their children by helping them financially. Especially if you are doing well – but in many cases even if you are not doing so well. Take the case of Amitabh Bachan – a bungalow in Juhu was anyway within the reach of Abhishek and Aishwarya also!

However even assuming that it was not there was a good chance that the “successful father” would have gifted it! Most parents love their children and want the best for them. And they want their children to have an easier run through life than they may have had. Consequently they tend to spoil their kids a bit: certainly the kids almost always get more material benefits than their parents had at the same age.

And they keep talking about how difficult life was for them! If your parents grew up in India during the 1960s and 1970s you will hear horror stories of queues for ration, milk, kerosene, etc. However, they will continue to spoil their kids. Helping children financially is not a good idea.

One 23 year old girl told me “I just want a small wedding, but if my parents want a “tamasha” of a wedding, let them pay for it. Completely correct. If you pay for your daughter’s wedding, it is not because the kids want it, you wish to show off to your friends, relatives, colleagues etc. Children who receive significant financial assistance from parents tend to under-perform in the income and the asset accumulation stakes in their own personal lives!

May be the knowledge and expectation of regular financial assistance takes away the imperative of working hard for oneself. The children may not be hungry for success, and may not feel the need to work hard and generally plan for their own financial successes. I know of many successful lawyers and doctors whose progeny is no patch on their parents. I know of a 40 year old who still keeps talking of his father as a great success – he now has a major complex!

Of course one exception is education: financial assistance to allow children to maximize their education almost always makes sense. Education is NORMALLY an excellent investment. And the return on investment is almost infinite. I earn more per month than what my father spent on my education THROUGH OUT MY CAREER. Other exceptions can be found – medical help, a short term loan to bail out of a difficult situation, a start up with a small capital requirement, etc. However it is better to structure all these as loans (or gifts) properly documented and transparent to all the other kids.

Nevertheless, as a general proposition financial assistance to children is not a good idea. The child buying his or her own home incites strong emotions for parents. Parents can be anxious that the child buys well and gets a good home in a good location. If ever there will be financial assistance, it will be now (even if the parents are not doing that well themselves). I am still against this. Funnily in India sons being helped by their parents is accepted but a father-in-law helping a son-in-law is emasculating!

I know of a doctor who wanted to insure his daughter – I convinced him to insure his son-in-law! After all, his daughter needed protection. It was a difficult sale, I can assure you!

Another doctor’s wife was delighted to tell me about her daughter’s recent wedding to another upcoming dentist. The daughter was looking after the parent’s practice and the son-in-law was a dentist practicing in the same area. The parents were looking for a suitable house for the young couple – and the budget was far, far beyond the young couple’s budget for sure!

The elder couple wanted to pay about 70 per cent of the cost! Will tell you what happened in a later post!!

If the market goes up 3 days in a row, i get emails / queries asking “Is this the end of a bear market”. UNfortunately I do not have any simple answers.

First of all the market does not announce the starting of bull / bear markets. Pundits have chosen the names and almost always tell you “This was a bear market” after the event is OVER. Similarly in case of a bull market. Also people who have got the predictions correct may have got it by luck. They have no clue how long it will be there - and what rate will it come up. If it does come up, will it come up at the same speed at which it went down. Or let us say in case of Indian conditions will the journey from 14k to 22k take much longer than it took last time? Nobody has the correct answers to these questions.

However let us look at the industries which were directly put to inconvenience - BFSI. In the mutual fund space a beginning has been made. Lotus India Amc has been taken over by another new comer Religare. Similarly there are some talks about 2-3 other mutual funds being on the block. It may or may not happen. However, salaries will take a whiplash.

One large broker has recently cut salaries - in the trading team. Another large player has downsized aggressively. One shipping company (non bfsi) has not paid salary for September….the list is long.

At the end of a bear market, at least half the brokerage terminals have to be shut, mutual funds have to downsize their working force, while increasing their aum. This will lead to lesser amc charges - and hopefully to better returns to customers.

So is the bear market over? I Have no clue!