Subramoney

Recession, slow down, pessimism about the Indian economy (of course because of the recession in the U.S. economy) are words that become common place in local lingo!

Everybody and his aunty is now convinced that the Sensex will touch 5000 very soon, and the last place to be investing now is the equity markets. Of course many of these people were sure that the equity markets will touch 25000 – just about 12 months back.

Times are tough. People who had Rs. 20 lakhs as salary and Rs. 55 lakhs bonus, however forgot that the bonus may disappear. Now the bonus has disappeared (luckily the job may still be there) but the EMI refuses to go away! Similarly the friendly agent who said that Unit Linked Insurance policy is a 3 year plan NOW tells you that there is some more premium to be paid! Forget vanishing premium, the policy seems to be vanishing!

Too many investment myths have gone unchallenged lately. And we love to believe that tomorrow will be like today. So the best thing to do is relax, and read the classics. This feeling is a little funny - today was just not like yesterday!

Let’s begin by examining the four biggest investment myths circulating right now:

Myth #1: The Market will recover in 3 months time

In case your broker, banker, relationship manager, - anybody whose job is dependent on the size of your cheque tells you that the market will recover in 3 months. He / She is praying loud. Like God, you can either listen to it, or ignore it.

Democracies, Free Markets, are the way to go. Even the Chinese believe in that! So the markets will do well – after all the index is a slave of earnings and optimism (price-earning ratio!). However, nobody can put a time line to it. That is tough.

Myth #2: Indian Growth Rate is poor!

The reality is India will continue to grow at a decent rate – 6.5% - is a FANTASTIC growth rate. All the strength of the English speaking population, BPO, KPO, software, exports are all in place. The strengthening of the US $ is a boon, the falling prices of oil is a boon, the falling wages is a boon for the manufacturing and software sectors – so just chill.

Three years ago, most of us would have given an arm and a leg for 6% growth. You need to remember that the US has a strong ability to innovate and grow. India will continue to be an important partner for the US, and we are not in a gloom only scenario. Our balance sheets are not over-leveraged (the equity markets will punish the excesses – look at Cholamandalam DBS – the share has fallen from Rs. 370 to the current price of Rs. 40!) – which means our recovery will be faster than the US economy.

Myth #3: The FII money will not come back!

The strengthening of the US dollar is surely going to make Emerging Markets as a class less attractive. However, if you believe that the US cannot go on converting all their coniferous trees into green backs, the US dollar will weaken. Thus at some stage when our earnings move up, and the markets look attractive, the monies will come back.

The flip side is there are many people who believe that the lag in the FII investment will be taken up by the mutual funds and the unit linked plan collections. This looks good in theory, however in real life it may be difficult. As downsizing happens, the first casualty will be the mutual fund SIPs and the Life insurance premium. This is a major cause of worry – as the BFSI sector is also a big employer. My take on this is very hazy.

Myth #4: Real estate and equity markets will take decades to recover!

In the more than 200-year history of equity investing in the United States, stocks have never taken decades to recover. I used the US example because Indian stock market history is not long enough. However, if there was an index fund available since 1978 (sensex base year), done a SIP, and re-invested the dividends, I dare say you would have got a great return (say 5% real return) over 30 long years. Add compounding to it, and you would be a rich person! Remember, you would have out performed your bank fixed deposit partner by a mile. (The key is regular investment and reinvested dividends, and a low asset management fee.)

The Nikkei 225 in Japan, is down more than 65% from its peak in 1989. Could India be headed for the same long, deflationary spiral? Not likely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were knee deep in shit. Indian economy is still growing.

In India the real estate mess is in the capital market – so risk transfer is quick, brutal and immediate. Real estate companies have fallen between 30 – 80% from their peaks.

Also remember the market normally does things in advance – so the battering may have happened AHEAD of the real market events. So if real estate prices were to fall (say 30%) the shares of real estate may actually go up! Logic being “Oh! After all the markets have fallen ‘only’ 30%, we had expected 80%”.

So, let’s buck the trend together - and look forward to a happy, healthy and prosperous New Year!

Happy 2009, and happy investing

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!

I normally do not write about politics but this are special times! There is a chance that the government will fall (this is a defeat for Anil Ambani) or the government will survive (there is enough that AS and AA can do to irritate Mukesh).

However, there is a good chance that if the UPA government survives this scare, it will call for elections as soon as they announce some populist schemes. However in the meanwhile both the brothers will take a few millions from their market capitalisation, and this will hurt the sensex.

Congress and SP need to collect money for the elections (and for 5 years of unemployment perhaps) so you will find some shocking policies, and this will hurt. Badly.

Anil’s fight will mean Mayawati will not clear any proposal of his in UP. Reliance Power has quoted prices which are difficult to achieve in the best of situation. In a revised situation like this, I guess you will be able to get his share at the same price at which he took it.

If there is a “windfall tax” on Reliance, will Mukesh hit with a “you got cheap spectrum tax” on Reliance Communication? A good idea.

Uncertainty, political (business) fights, snatching Mukesh’s plane (posturing?), Chidambaram at his giving best - he telephones people to reduce prices while giving salary hikes to govt employees,…will see the market swing sensationally. So, like a broker told me buy puts and calls - both will make money if you do not panic!!

This is arguably the most important financial decision in your life you will ever make! Not too long ago life was simple. You wanted a bank account, you went to a bank. If you wanted to buy shares, you went to a sub-broker (a broker was out of reach till about 15 years back). If you wanted a life insurance, a LIC agent sold you some policy which you hoped was good.

Today you find bankers who actively discourage you from coming to a bank. Insurance agents who sell you anything buy a life insurance product. Bankers who sell you mutual funds, life insurance, broking accounts, and real estate!

And the companies that sell you financial products are dime a dozen - Reliance (Mukesh) has a loyalty card, Reliance (anil) has a credit card. A call from Reliance Money says “Reliance Bank” and offers you a loan! Airtel offers you money transfer, cell phones can be used for paying utility bills. Why do I need a bank, a cheque book, a relationship manager? I do not know!

Now into this mess comes in a financial adviser. He should tell you the difference between information and noise. He should encourage you to write down your goals. He should be able to understand the difference between a 3 month track record of a scheme and a 3 year performance. He should be able to FORCE you to buy life insurance MUCH BEFORE you need it. Your pension plans and medical insurance plans should be in place when you CAN rather than when you must. He should be able to help you prioritise your goals. He should have the guts to tell you that your goals make sense only when you allocate resources for the same.

HOWEVER, he should not sell any products to you EVEN if it is a zero load mutual fund. Because then, he loses credibility. It is like a rep of a pharma company - I cannot trust him like i trust my family doctor. Sorry, I know this is an old world view.

SIP creates wealth in the long run, however it gives no immediate gratification. Equity trading (what the common man thinks is investing) gives immediate gratification and does not create wealth for the client. The broker wants him to trade so that broker’s wealth goes up.

So what is the solution?

Sell SIP in equities as a fantastic product. The call goes something like this - “Sir in volatile markets you should be investing in small lots instead of lump-sum, so we have an EQUITY SIP …it works like this. Every month you invest Rs. 5k in a scrip that we choose, thus you create a portfolio”

Sounds good, well it is not. Averaging works only in a portfolio - rupee (dollar) cost averaging - which is what SIP helps you do DOES NOT WORK IN CASE OF A SINGLE SCRIP. Imagine if you had bought silverline at Rs. 1300 ….and you are still averaging, you would have been wiped out. In case of a large cap mutual fund, the ups and downs are not so steep, so you can do an SIP.

With a single scrip you can average, but requires tremendous amount of information, and skill. Do not fall for such sales pitches. You will be red in 3 years time!

This actually reminds me of a Ben Graham quote:” The individual investor should consistently act as an investor and not as a speculator”

It is customary in film circles to say “i was inspired by Kishore Kumar or S D Burman or …” what have you and then copy their song - either partially or in toto.

In fund management too you can copy and the advantage is your money in the bank, is yours.

Your money does not tell you “Oh, so you copied Peter Lynch or Warren or Prashant Jain or a Vallabh Bhansali” - and that is a huge advantage. And since we are comfortable with this concept let us look at what we can learn from Warren Buffet - after all if you are copying, you might as well copy from the greatest business manager. Warren Buffet.

Think 10 years, rather than 10 minutes.

Not too many brokers who read this will like this post. Warren Buffet, luckily, is a business manager and not a fund manager. In case he were a fund manager he would be worried about soft dollar commissions, asset management expenses, etc. There would also be a brokerage firm breathing down his neck to transact!

Clearly when he says think 10 years, the main thing that he is saying is “Create wealth for yourself, not for your broker”.

So be an investor and have patience. Thanks to compounding, success will follow!