I have been asked this question a zillion times. My answer is – why do you not learn what you should know and what your relationship manager should know?

Actually the answer to this is sheer laziness. Most people do not want to learn about investing, but still hope to outperform the market by a mile (so they will not index). Regarding life insurance, the less said the better. They have no clue on what to buy, will not pay fees for consulting, and their ego will not allow them to ask. So they go ahead and s…w their money. Be my guest. If you lose money, hey that is not my problem is it?

Well I think there are a lot of things that you need to understand if you want to do your own investing – in mutual funds, direct equity or almost anywhere.  Let me name some of the things that you should know:

Economics: GDP, GNP, employment numbers, growth rate, fiscal policy, monetary policy (hey fiscal and monetary are different, dammit!!), Money supply (M1, M2, M3..), capital account convertibility, crr, irr, slr, cd, cp, dividend yield, current yield, yield to maturity, fiscal stimulus, green shoots, QE (1 to 100), fiscal deficit, repo rate, hedging, derivatives, oil bonds, inflation, stagflation, sensex, yield curve, relationship between interest rates, inflation and others,  etc.

Accountancy: Balance sheet, Profit and Loss account, ratio analysis, fund flow, cash flow, auditor’s report, auditor’s qualification, return on networth, debt equity ratio, roce, ronw, roa, …etc.

History of the capital markets, equity markets, debt markets, banking basics, etc.

this is just an indicative list – will keep adding…

There are 2 ways how you can use this list.

One: a lot of this you will surely find on www.subramoney.com for sure. You could read and learn.

The easier thing is to keep this list handy in a meeting with your Relationship Manager. If you use all these words with your RM there is a chance that he will not call you again. He will be intimidated. Either he will disappear or offer you simpler products like a an index fund, term insurance, savings bank account etc. Either way your purpose is served!!

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I am asked quite often why can you not suggest ’10 best stocks to buy’ or ‘top 5 mutual funds to invest’ or other simpler articles which can ‘lead us to action’.

I do have answers to all these questions, but it is difficult to convey it in a blog. The way to hell is paved with good intentions – ask any bureaucrat and he will tell you that. For example all the government ‘investor education programs’ are made by people who can do a 4 hour lecture and a 200 page on risk, but have never experienced risk! It is like a male gynaec talking about labor pain.

To me all lists in financial services literature is financial porn. If you think I have invented this word on the fly, sorry it is not original. See this link http://www.investorhome.com/porn.htm

It is easy to understand that a day and age when even smart educated people do not know the difference between a chemist and a doctor for people to ask for ‘Immediate, NOW kind of solutions’. I see the medical profession falling to this requirement of the ‘patient’ who is seen as the ‘client’. However I refuse to address doctors who ask for dinner and booze to attend my lectures.

Hey doc, you need me as much as I need you. If Wockhardt hospital were to do a lecture on how to take care of ‘MY heart’ I would attend it – and perhaps be happy to pay for it. I would not ask Wockhardt (Apollo, Hinduja, Ranbaxy, Fortis are you listening?) to give me food and booze.

Docs get chemists to do seminars and feel obliged to buy some medicine. It is like Wockhardt doing a workshop on ‘Heart care’ and in return expecting people to get a Angio done – just because they feel obliged. I would rather pay Rs. 500 for the lecture and be done

If I attend a free lecture and expect food and booze, well what I will get is porn. Understand doctors?

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Journo: Subra do you not think the life insurance guys get pampered?

Subra: Why do you say so?

Journo: 40% of the contribution as a commission is too much, do you not think so?

Subra: What about products with 122% commission?

http://www.subramoney.com/book-written-by-me/

J: Not possible in the financial service industry…..at least not in India

S: In India, in financial services, existing product, ….dekhnewala chahiye that is all.

J: Which is the product?

S: Mutual fund….

J: Will you please explain…???

S: take an excel sheet calculate for an SIP of Rs. 10,000 per month for 30 years…fund growing at 12%..0.5% trail…see the commission from the 21st year to the 30th year…it ranges from 41% to 122%.

J: OMG! This cannot be true…why is the media not talking about it?

S: You are the media…why are you asking me. Just do your homework…use excel

J: what is the catch in what you have said….can I do a story.

S: First understand..then write. What is wrong is the Time value of money has not been considered, nor has tax been considered. However anything that you do…mutual fund commissions are better than life insurance business. The smart online distributors like (they did not want to be mentioned) know that..

J: Such a revelation sir….

S: Imagine you spent Rs. 7 lakhs on an MBA degree….

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“I have a client who invests 5 a month in a mutual fund regularly. However I am under tremendous pressure to sell him a unit linked plan with a premium of at least 60 NOW. How do I handle this?” – if you are a unit manager, financial consultant, financial adviser, business development manager, sales manager, – generally anybody interested in life insurance sales you can indentify with this question. I have said 5 – you can add ’000s as per your convenience!

My answer is simple: In this market if you have a client who is giving you a regular business on a monthly basis – surely he believes in (and has perhaps benefitted by) SIP as a process. You should be happy for him, for your organisation, and thank him. You should seek his blessings for your career and some leads for further business.

The participants are not happy – they grumble – and say (almost audibly) trainers do not have to sell, so it is all right for ‘you’ to say this. The more sensitive guys (and gals too) say “We know this, but our superiors force us to do this….”

I am normally amused – the fact that I can afford to be in training comes from my sales background!

It reminds me of a story – the Monkey and the crocodile.

On the banks of a river there is nice huge tree – with lovely mangoes and a lot of monkeys. In the river is a big crocodile – who befriends one of the monkeys. The monkey gives the crocodile one mango a day. The crocodile shares this mango with its wife and is very happy.

One day however Mrs. crocodile tells Mr. Crocodile “if the monkey eats this fruit every day, his stomach and liver must be really sweet, let us eat him”. Mr. Crocodile protests – and says the monkey is my friend – how can you even say this? However under tremendous pressure Mr. Crocodile relents and decides to get Mr. Monkey to the Croc house.

Initially the monkey is also sceptical – and gives the normal excuses. “I cant swim”, “We are natural enemies, are we not” …but Mr. Croc who has been trained in “How to make a No to a Yes” and “Persuasion skills” and other ‘communication skills’ convinces Mr. Monkey to sit on Mr. Crocs back and is planning to take Mr. Monkey to his house.

On the way Mr. Croc (perhaps over ridden by guilt) tells Mr. Monkey – the real purpose of the visit. Mr. Monkey (usually true) who is much smarter than Mr. Croc says “I have not brought my kidney and stomach – I left it on the tree” (people say cheque book, Pan card, photograph…) – so the croc brings him back to the tree – to collect the stomach and liver. Mr. Monkey goes up the tree and thumbs his nose at Mr. Croc.

In real life however many monkeys end up in Croc stomachs.

Please remember even though we live in a democracy real incidents can only be written as stories. Like Shankar Sharma found out – we live in a political democracy and in an economic dictatorship. Like they say when in the water, you do not cross swords with a croc! Best of luck Shankar Sharma, if Mayawati becomes Prime Minister you will surely benefit!

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So are there some companies which are ethical and some which are not ethical?

Not sure. Recently I met a electrical contractor who rattled off all the big names in the country as his client. The list was really impressive and it was almost across the length and breadth of the country. It turned out that the owner was a big shot with fantastic political contacts and could get anything done in any state electricity board. Thus there was an element of bribe in the billing itself. So immaterial of whether you are a small company opening one factory or a big group with several locations this company could get something done for you.

Similarly there was a construction company, doing government construction, AND REFUSING to bribe. They got all their ‘EMD’ (Earnest Money Deposit) and such other deposits in full – they had a good legal team and accounting team which ensured this. Quite stunning that in the construction business (which you thought was dirty) such a company was in existence. All the merchant bankers had queued up, but they have chosen to remain private.

In the financial service industry though, it is difficult to find ‘clean’ companies. What they cannot do because of ‘regulations’ they do it through agencies whom they appoint. This is a recent phenomena – in the last 3-4 years life insurance companies have used Multi level Marketing (MLM) companies to get life insurance premiums, agents have openly rebated, – there is no company which can say it is clean. Some companies do it more openly than the others. Some of them wear a fig leaf and say ‘Our agents may be doing it, but we do not’. However the ‘agents’ who are ‘honoured’ are the same guys/gals who are doing all this.

Is this wrong or right? Well there is no clear answer. The equity markets have to decide. Normally markets know that sales got by short cut methods are not sustainable, so the price earning ratio has to fall. This should reduce the market capitalisation. Does it always happen? Well am not sure, but if you go to moneycontrol and see the mutual fund houses still holding Reliance Communications, it is scary.

Will the same treatment be given to companies in the retail business (no cash flow, no profits only hype), financial services (only 3 out of 42 mutual funds earn money, only 1 out of 17 life insurance companies make money, most brokerage houses make money on money lending, not brokerage income) – where only banks are extremely profitable (only one business – borrowing and lending, and a big income from the distribution business) time alone will tell…

Not so optimistic about flashy market cap. By now if you have been reading my blogs you know I have been trained to be conservative, BUT, BUT, BUT….let us have fun till it lasts.

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I do not wish to call this class 1 or class 2 – that raises expectations! But here is a small story…

A friend called up to say “This person has come to me with a UL policy – she says pay Rs. 50,000 for 3 years, then you can even remove all the balance above Rs. 50,000 (which is the minimum to be kept in your account)…and you can get Rs. 20,00,000 life cover till your age of 100 years.” I was sadly not impressed. So I explained to him:

1. The fund value of your policy is a function of No. of Units  x Nav per unit. If you think this is basic, well my HNI friend did not know it! Every year towards your risk cover some units will be reduced, so the value of the fund can fall. If the fund value falls below a threshold limit, your policy could be cancelled.

2. Policy servicing costs, fund switch costs, Premium redirection costs, will all be debited to your account.

3. With the continued recovery of mortality charges (on an increasing basis – with age), and other costs the value is likely to come down, not go up.

4. If the value went below the Minimum Paid up value, the policy WILL get canceled.

Here is a HNI customer who invests / saves at least 2-3 crores a year who did not know any of the above 4 TRUTHS. Neither had the girl who came to meet him tell him that. Simple she had not done her home work. In fact if she had done it she would have pitched him a Rs. 10,00,000 premium with a Rs. 1 crore sum assured, and collected the cheque. Her saying Rs. 50,ooo for a Rs. 20,00,000 cover exited him to call me.  LOL.

http://www.subramoney.com/book-written-by-me/

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Let us check out some history of investor protection. It is quite nice to see what history has to teach. The only thing that history teaches is ‘you cannot learn from history’. LOL. This is because the ‘small investor’ – I have 3 names for this person:

a. Voluntary contributor to the broker welfare fund,

b. Caretaker of the bear market: He buys a share at Rs. 10 watches it go down to Rs. 3. Then after 3 years he sells it for Rs. 10 and puts the money in national savings certificate. He is happy that he did not lose money.

c. The victim of the bear story (story is excellent, but cannot be put on this site).

The main characteristic of this person is he/she is good to very good in their field, are overconfident in their own abilities, have their brokers number on speed dial, are brilliant at Mental Accounting. On a full portfolio basis dramatically under-perform the index.

Let us go back to the start. Circa 1988 I was a sub-broker just coming out of my CA practise. Brokerage rates were 2% – and many clients loved to be on on profit sharing basis. Making money by transacting was nice but profit sharing was great. You could take money from one client, lend to another and make money on spreads. Not too much of technology. Clients were taken only on a solid reference because you had the risk of ‘bad delivery’ and signature difference. Then came the 1992 Banking scam. Happily the press called it the ‘share broker scam’. Even then I thought it was a joke to call it a ‘broker’ scam.

However, in 1993 NSE was set up. Professionals rejoiced. When we saw the ‘BSE’ membership was Rs. 4 crores, we wrote as a must buy in our ‘next janam ka list’. However NSE priced the card at Rs. 50 Lakhs for a Capital Market membership. So every Tom, Dick, Harry, Kulkarni, Natarajan, and Subramanyam got together and became a member. Brokerages came down. Did the broker earn less? Heck, no they just increased the churn!

Of course in intellectual India even a question like ‘Did NSE benefit the common investor (very few people in India call them traders – the Christian name)?’ is sacrilegious so I will not ask. There is whole army who can talk about impact cost, dis-intermediation, full disclosure, transparency, etc. and drown you. However when owner-brokers dealt with clients there was a sense of ownership and shame. Now it is the 8th level employee of a ‘branded brokerage house’ who churns, re churns and re re churns the client portfolio and everybody is happy, because the ‘brokerage’ has come down. Somehow it is like the telephone business. Call rates keep coming down, but sequentially i cannot find 3 months when my bill has come down!

Then the mutual fund industry was up and running. So in came a new business. You got booze to launch a scheme, when the scheme did well you got booze. When the fund did badly they gave you booze to stop the customer from leaving. Then another new issue was launched….burp! So there was a cap on asset management charges. Since funds had 100 to 200 crores of assets the caps were at a very very high 2.5%. Not bad there was an entry load and sometimes an exit load. So there was a lot of money to play around. A client who does a Rs. 10,000 monthly sip for 30 years (ok like a rational man this guy is also a fiction of my imagination) would end up paying Rs. 72,000 as entry load and more than Rs. 2 crores (repeat 2 crores) as asset management and other charges. Of course our intellectuals are thrilled that they have reduced the Rs. 72,000 to nil. Obviously all the hullabullo raised about the ‘entry’ load was not supported by the asset management companies – they knew a murmur could mean the ‘intellectuals’ will then look at the real numbers. Oops it hurts.

The life insurance regulator of course has protested against Swaroop’s paper. Not unexpectedly. However Swaroop has to prove that his NPS is a success before he claims that NPS ‘model’ should be copied. I do not know of anybody who knows anybody who knows a person with a NPS account. Still. Waiting.

Happy that I did not let my CA degree did not let me join the ‘intellectuals’ (you need a MA from JNU, DSE or a Journalist tag) or a PhD in ‘Why there were 22 columns in the share transfer form’. Happy to be a part of the small investor tribe and a scribbler on my own blog. No editor who is worried about ads. Just me and my google adsense. Please click on some of the ads!

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I heard one such story come back to me, and was amused. In the year 2001-2 there was a sales person (just about starting his life insurance career) sold a life insurance policy of Rs. 5 crores sum assured i.e. to say if the policy holder died during the tenure of the policy, the family would get paid Rs. 5 crores – as a term insurance. This was considered to be a really big policy sale and the whole organisation was reasonably excited. Then somebody must have exaggerated this and instead of a ‘pure risk’ plan as it was now called an endowment plan – which meant higher premium. Then people started tracking how much money this manager was making, etc. and in 2008 – I heard the story as a Rs. 5 crore premium in an unit linked plan! It was told to me saying – ‘You know he sold a Rs. 5 crore premium- in those days! I was stunned, because this particular company did not have an unit linked product at that point in time, but was reminded about Chinese Whispers and the story of the ‘Zen guru and the snake’.

The story goes like this. Once upon a time a man chanced upon a 3 foot snake in his backyard, so he took a stick and killed it. His neighbhor was very impressed seeing this – and rushed to tell his wife. Of course, as is the human habit, he made it into a ‘big’ snake. His wife immediately told a group of her friends “my neighbhor killed a 10 feet snake this morning. To cut a long story short, by the end of 2 days there was a ‘felicitation’ for the hero who had killed a 30-feet snake. One zen guru had just come from the neighbhoring town and looked at the ‘hero’ a little suspiciously.

The ‘hero’ was squirming – his lie was of course his silence – so the Zen guru wanted to be sure about the felicitation. So he asked the hero. The hero kept quite.

So the zen Guru asked the hero’s son. The hero’s son looked at the father and then at the guru. The son then asked the guru another question: ‘Does a dead snake grow?’ The guru said- No, of course not.

To which the son said – I saw the snake when my father killed it. It was only 3 feet long. If it has grown after that, I would not know!

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She said she wanted to buy a big policy – even by that bank standards – Rs. 35 lakhs regular premium was big. So the whole bank was guung ho. First the relationship manager said some nice things but could not explain the product. So the relationship manager, product manager, inusurance company’s manager, and the regional head of the life insurance company went on a joint call. She heard them out patiently and said, “Are you guys convinced that I need life insurance?” They chorused Yes. She had told them that her daughter had completed her education and her husband was earning more in a year than they could spend in a decade. They still said yes.

She countered saying – “If I need life insurance, do you guys not need life insurance?”. They chorused yes, of course, we also need life insurance. She then asked them “If you are all selling this product, is this the best?” They chorused yes.

She now made an offer. She said, tomorrow please get me YOUR POLICY copies, and I will pay a premium EQUAL to the premium of all 4 of you, or Rs. 35 lakhs, whichever is higher”

She felt it was a fair offer. They saw red. Only the representative of the life insurance company had a life insurance plan AT ALL and it was from a different company. On probing she found he had taken it in his PREVIOUS company – TO SAVE HIS JOB – under immense pressure from his boss. The quarter after that he was removed for not achieving his target!

It is not always possible for sales people to have all the products that they deal with. However, if you are a Maruti car dealer and move around in an Indica, to me, Indica is a better car BY YOUR BEHAVIOUR, not by your words. Similarly some agents (or relationship managers) may have a different profile, may be old enough not to need life insurance, may be too poor to own an unit linked plan, …’000s of reasons could be found. However, as this example proves, cusotmers like to eat in a hotel which has the guts to say “the owner eats here” .

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