Here are some lessons which I wish somebody gives to all graduates. It does not matter whether you are a CA, MBA, a doctor, Engineer or a plain graduate. These lessons are the basics of finance which is nice to know and MUST to implement. Let us enumerate them:

1. Avoid credit cards: Well Warren Buffet (forget his recent behavior, he is still a genius) says this is the most important lesson which a college graduate should know. If you understand compounding you will realize what 3.25% p.m (compounded monthly) can do to your portfolio. If somebody was paying you that on your deposit you would be a millionaire several times over!

2. Learn self -control: What ever you need today see if you can count to 25. If you can hold on to a desire for 25 days and then buy a lot of harsh, impulse purchases can be avoided. Of course if your parents taught you self control that is great!

3. Take to some sport: Company deadlines are all fine..but do not miss out on the fun, it is not worth it. Continue playing with the kids of your building – they will provide more energy than your friends. The energy of a 14 year old is higher than the energy of a 24 year old! Playing some ad-hoc sport and some organized sport both have their advantages.

4. Take charge of your personal finance: Let not your parents, elder brother or even worse a financial adviser not tell you ‘It is too complicated for you to understand’. Get the books to read, understand, and be responsible for your financial welfare.

5. Share the Economic responsibility with your parents: It means learning how to run the house within a budget. Learn if you do not already know how to do it and your parents have not taught it to you.

6. Learn compounding – it will inspire you to invest for the longer term. In the year 2065 or in the year 2070 YOU TOO WILL RETIRE! Start preparing for it. Sign up for a nice equity mutual fund with a clear large cap mandate. Do not buy a pension plan from a life insurance company.

7. Create an Emergency fund: ‘Just in case’ if something goes wrong – an accident, loss of job, replacing a laptop – you do not know from where the emergency could come. So be prepared for it. Of course it you are staying with your parent and he has an emergency fund …you may be better off, but still it is better to create a fund for your own self.

8. Take trouble to understand your C T C (cost to the company) – and your monthly statement. See if you need to make investments to save tax. If the answer is yes start NOW. Today, not tomorrow.

9. Treat your employment as a business: Your boss pays you a salary out of the profits that you make for him (i.e. the income you earned for him MINUS the expenses that you incurred – including salary paid to YOU) adjusted for the risk that he takes. If you brought no revenue learn to be happy with what you are getting.

10. Look after your health: Do everything in moderation – eating, freaking out, drinking, scullying, having fun. All these have their place under the sun, but your health cannot be ignored. Damage done now will haunt you for life. Be careful and take care.

11. Look after your wealth (and your parent’s wealth): If your parents / siblings depend on your income (or even if they do not) see whether you need medical, auto, life insurance – it is important to protect your wealth.

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Q1. If a person is well educated he will be good at managing money.

Ans. FALSE. Completely false. Why do you expect a doctor or an engineer to be suddenly good (or bad) at managing money? No, there is no connection between education and money management skills. No co-relationship has been observed at all.

Q2. If the person is a CA or an MBA (finance), he or she will be good at understanding personal finance.

Ans. FALSE. A degree is normally obtained during your young age when you are seriously wondering what you will do in life. Most degrees including CA and MBA finance do not equip you with personal finance knowledge.

Q3. If a person works in financial services he or she will be good at understanding personal finance.

Ans. Absolutely untrue. If a person works in Marketing or Sales he/she says so many things about their own products, that they start believing it themselves. If they are in HR, Accounts, Operations they normally do not understand compounding, SIP, long term, patience, etc. so they keep their money in bank fixed deposits. So again not true at all.

Q4. If a person is a Wealth Manager he can understand markets so they can manage their own wealth.

Ans. Not at all. Being a WM in a bank means you have sales targets, NOT WEALTH targets. So he/she is used to churning, selling products with the highest margins…if they end up buying what they are pushed to sell the chances are it will be financially ruinous for himself/herself.

Clearly personal finance is no rocket science. The fact that it is simple does not mean it gets done. Many people who do it themselves also ruin themselves because of overconfidence or choosing the wrong adviser. I know people in all the categories mentioned above, but will not name them – some of them may even be reading the blog.

more to follow…………

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This was the reaction of about 40 people I met last fortnight at a ‘pre-wedding’ food party at a Gujarati friends ‘so called’ party. The food was amazing and for a non 5* setting Rs. 1900 per plate was what I thought well, too much. Considering that the food did not even contain onion or garlic .

However as is wont the discussion went to ‘investing’ (between these 40 people in the room they could have been holding a small portion of the Indian market capitalization!!). These are not the guys you meet in the day to day business – almost all of them would be having a net-worth in excess of Rs. 20 – 25 crores..and a few of them could ad at least one zero to it. One of them is a huge builder whose son’s wedding was attended by a big part of the Maharashtra state cabinet and a couple of Ministers of the Central cabinet. Obviously when these people invest / trade in equity markets they are dependent on their CA, an analyst, a portfolio adviser, …and some of us who give ‘vishesh tippuni’ from time to time.

Now in a conversation with a group of 3-4 people I heard stunning stories of hammering the index by a mile even in this decade of 2000 to 2010. This period of course saw the greatest every bull run, then a great fall o f 2008, and a spectacular come-back of 2009. To them the ‘Index’ did not mean anything. For example one investor had invested in Siemens which he exited in 2007 Dec / 2008 Jan to invest in a huge office property. He calls this sheer luck because prices in that location had not fallen after his purchase. Even ignoring such transactions these people have got far, far greater than the Sensex. Their take on mutual funds:

a. Integrity of fund managers is impossible to monitor the way we monitor our portfolio.

b. Forget corruption, how do we monitor competence of fund managers?

C. WE HEAR OF fund manager corruption FROM corporates who place shares with them….what should we do? How do we react?

d. When our broker asks us to buy a share in most cases he gives us a price at which a particular fund is planning to buy a stake – what should we do?

These people have all kept it very simple. Their portfolio consists of some bonds / bank fixed deposits / post office savings – the income from this technically can take care of their day to day living expenses. This allows them to buy equities – shares like Gillette, Colgate, Siemens, Tata group shares, Birla group, other Mnc bluechips are in almost all their portfolios. Immaterial of what happens some of these shares will never go out of their portfolios – 5-7 years of under-performance does not bother them. Principally they do not trade -but 4-5 of them have given their money to one broker for ‘trading’. This portfolio they review once in a while and feel good (i guess!).

One very philosophical statement I heard was “when too much money is accumulated in one place the government will try to get something out of it”. Look at the ‘trail commission’ being used for ‘investor education’ – goddammit, it should NOT BE CHARGED…WHO the @#$%^ is amfi to say that I should pay for ‘investor education’ from MY MONEY. Damn the investor who does not get educated!

2-3 of them are so against going short that they do think of people who go short as people who should be banned!

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Financial planner: supposed to know everything about you PERSONALLY so actually called ‘personal financial planner’ who helps you with YOUR GOALS and the steps to achieve them. He tells you your asset allocation – say 70% equity and 30% Debt.

Portfolio Manager: He chooses in which shares and which mutual funds should your money be invested.

Broker: Executes transactions on the basis of the Portfolio Manager’s advise.

Demat provider: Keeps safe custody of shares, bonds, and now even mutual funds

Insurance BROKER: buys you the TERM life policy based on financial stability of the provider and the least cost basis.

Clerk: Enters all this in www.valueresearchonline.com, myiris.com or www.moneycontrol.com to keep track of all these transactions

CA: Files your tax return on the basis of the details provided by the clerk.

To add to all this you can have another financial planner who will whet the process and tell you things are fine (just joking? think again!)

Banker: Claims he can do all of the above.

Investor: Gets a 24% gross return..pays fees to all the above and then is left with a 7.9% return. May have actually been happier in a PPF

http://www.bookzone.in/newtopsellers10.asp?qs=30 feels good to be the bestseller of the month at a leading book store in Mumbai

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Nice to see the old values (how funny we are happy to PAY to see the good man win, because in real life we are not sure what happens in the end!). So a good guy who works with a reasonable margin, has good HR practices, has good ideas can succeed in a big bad world.

I know my friends who are not in sales will not like my writing -  thanks to the equity markets and a fantastic portfolio manager I may not care about what they think – but they too should watch this movie!

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She co-ordinates with his broker, banker, CA to file his tax returns. His car is taken care of by his administration – right from fuel to servicing, he knows nothing. He does not know where is passport, pan-card, HOUSE DOCUMENTS, gas connection, health and life insurance papers are kept. He carries his driving license (he needs in to enter airports you see!).

He says his life style is very simple – and he spends only Rs. 15-20,000 a month.

To me this is a joke. He and his wife eat out at least 6-10 times a month (his figures, not mine), he happily sends ‘gifts’ to friends and relatives. Any travel is air travel, any local travel is by a Honda Accord. His kids have flown the nest, however he has 2 servants, one cook, and a driver. On days the driver is absent, it is Meru Cabs or the company finds a substitute driver. Vacations are in 5 star plus hotels, Diwali card sending happens at company expense (oops I am harsh, am I?), medical expenses are company paid.

My estimate is he and his wife have a Rs. 100,000 per month life style if not more. His monthly electricity bill was Rs. 5440. He thought it was 1200-1300. He had no clue about his expenses – he had never kept track. Meeting me was not a pleasurable experience for him.

His estimate was he needed about Rs. 2 crores to retire, I multiplied it by a factor of 10. He baulked. No clue whether he will call me again.

If this is your story, re think and re consider – see where you stand. Make a realistic estimate of your expenses, then multiply it by TWO. Chances are you will be correct. If you have kept track of your expenses – writing it down or in excel – you will be right. If you are doing ‘mental accounting’ chances are you will be wrong. Dramatically wrong.

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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Ok if you do google you will find the steps – have a plan, make a budget, save money, invest it, put it in a mutual fund, do an SIP, buy a house,….etc.

Unfortunately the following steps are a little different – and are perhaps far more important (please allow me to change my mind – I do it quite often!). The new steps are:

1. Choose and go to a good college and do well. Doing well academically is nice – but ensure you participate in elocution, debates, quizzes, sports (co-curricular and extra curricular). I keep telling my daughter these activities are as important (if not more) as studies.

2. Get as much educational qualifications as you think necessary – it is each individual’s call. If you are planning to do a business in India it is still worthwhile going to a good college – you meet smart people and it is a good networking opportunity. If you plan to do an international business…go to an Ivy League school. It is worth the money that you invest. In an earlier post you will find education as one of the best ROI while investing.

3. Be adaptable – you will do 5-6 different kind of jobs. One day you could be selling blades, then paint, then handling HR, then heading training in a life insurance company, mentoring kids in a college, then ending up as a CEO in a consulting company. No MBA or CA degree prepares you for this roller coaster ride that life takes you.

4. Spend time lavishly on finding a good financial adviser. Initially trust him, but verify. Once he / she passes the trust and verifying stage, spend time to resolve the conflict between selling and advising. For e.g. I charge a client on his TOTAL NET – WORTH immaterial of what he consults with me. Thus I do not need to ask him to enter one fund and not the other. Or even worse I do not need to ask him to sell a share and buy a MF! This time is really well spent.

5. Never cede the control of your finances – demat a/c, cheque book, etc. to anybody. Even my parents sign their own demat a/c and cheque books. Let me repeat NEVER, NEVER, NEVER cede control of your money to any advisor – even if it is convenient.

6. Once you trust your advisor ALL your investments should be routed through him. He has to take you to a specialist – a CA, a lawyer,  …or whoever. That is why you are paying him an amc based fee. Use him to say yes or say no. Make sure he has no ego – and be willing to say he does not understand certain things. If you do not understand a leveraged Structured Note, or a negatively leveraged real estate deal with a fantastic 12 year pay off, JUST SAY NO. Kill your ego. Indexing is great. Like Daal chawal it will keep you healthy and fine.

7. Remember if you are doing your own business, your own business, own office, training your own staff, your own clients, etc are perhaps the best investments that you can make. Getting your advisor on your side is rule one. If he is on the other side he may make you do sub-optimal things sometimes even UNCONSCIOUSLY.

8. Ensure that your advisor does not get stubborn about any company. Especially if he has now grown and become a merchant banker, equity or real estate broker, life insurance agent, etc! Having a good agent is not enough reason to be complacent. I found my doctor in 1983 and my ‘adviser’ in 1979. We attended each other’s wedding. I recently attended my adviser’s daughter’s engagement. We never used the word ‘Relationship Manager’. We introduce each other as friends – client or patient sounds too restrictive, does it not?

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Let me now bat for the FA. A good FA should be well qualified (let us call him a CA) so that he can understand equity markets, debt markets, financial planning, drafting of a will, pre-nup agreements, life insurance, mutual funds, real estate, and at least a passing interest in commodities. He should also have some experience.

Now we are talking about a 30 year old CA trying to make a living as a FP. Let us say he can get 4 NEW appointments a week and he is able to convince 2 people to sign up for his “FP” services. Assuming he has an office he should be spending Rs. 30k a month on the office and about Rs. 10k towards conveyance etc. Thus he spends say Rs. 500,000 a year on the office. A self respecting CA aged 30 would be able to get a Rs. 12 lakh job, so being on his own he may be targetting Rs. 15L a year. This means he has to earn Rs. 20L a year to break even with his counterpart in service.

If he gets (and retains) say 100 clients a year, he has to earn Rs. 15,00,000 / 100 = Rs. 15,000 for a cient at the minimum. Now if he has personal expenses of Rs. 12,00,000 a year, – he has to earn (thanks to tax) an additional Rs. 15 lakh. Thus he has to charge the client Rs. 30,000 a year – without any money available money for investing / saving! Let us say he is a straight forward person and he says invest money in an index (etf) and take a term insurance. This is honest advice.

I think I can count the number of people willing to part with Rs. 30k for such a simple advice. Can you count even as many?

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This of course could be a fantastic tag line for a financial education business! However I have been convinced about a few things. The old Macaulay system of education in India – and perhaps around the world was created by the ‘Ruler’ who wanted to have a huge supply of clerks and soldiers. It is of course shameful that we have not made any change. However, as Robert Kiyosaki asks – is it accidental or is it deliberately done by the RICH so that the poor do not understand the REAL RULES of money? Welcome to financial literacy.

I wish to do a series of articles / lectures – hate to give it away free, but do not know how to charge!

Let us look at the American ‘s.*.o.^b.s did in 1971. They said we have the right to print as many notes as we want, there is no gold linkage. Simple. If you had done it, you would be in jail. Nixon could do it.

In 2005-8 they gave NINJA loans – No Income No Job jokers could get loans because their home value was going up.

Ben was printing notes and making all Americans millionaires, billionaires and now Trillionaires! In US savers was a word  spelt as -S*U*C*K*E*R*S!

In India too the mushrooming of financial product companies – who surely have an agenda of financial illiteracy – and a combination of people thinking ‘financial literacy is too painful’ is a heady cocktail for a financial tsunami. If you have lived your life ensure that your kids do not get caught in it. If you do not know what is a mutual fund, hedge fund, unit linked insurance plan, e-broking account, F&O, credit card but you have all of them, you are already a tsunami victim.

The victim is not an illiterate, servant in your house. It could be a 54 year old Chartered Accountant working as an Executive Director in a Pharmaceutical company who signed up a form because a beautiful girl from a bank called on him. Cost of financial illiteracy? Only Rs. 20 lakhs. Not bad, if he had attended my lecture on personal finance, he would have paid Rs. 20000. He would have found a cheaper way of buying THE SAME POLICY – and saved Rs. 200,000 in fees. Not a bad ROI?

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