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 have 2 friends – aged about 57 years. They were classmates and are now very close to retirement. Their investing philosophies are so different that I could not believe that the accumulated amounts could be so far away from each other. One of them did his MBA and joined ITC – and stayed there for 10 years before he went off on his own.He never married and so had no ‘house’ kind of expenses. Almost all his money (at least theoretically) could be saved.

The other person did not study beyond his graduation and held many jobs – currently he heads the sales function of a small company.

The person who did his MBA entered the equity market – and called himself an investor. However, he was just a incorrigible trader and traded every day. He was lucky to be a shareholder in ITC for a very long period of time and his portfolio other than ITC is a mess. He loses money every year in the markets and has no corpus to write home about. He would lapse into debt ocassionally (a.k.a trading losses) and then settle it from his professional income.

The other friend realised that he was no hare. He chose the traditional Indian way of saving (instead of investing) – ppf, lic, nsc, were his mainstay. Luckily I met him in the early 1990s and introduced him to some small equity portfolio. However he also was bitten by the equity bug and would put small amounts of money into some Fera dilution issue, picked up an odd L&T, Reliance, etc. – but the amounts invested could not have exceeded Rs. 500,000 over a period of 10-15 years. I introduced him to ELSS – and he has been at it for the past I guess about 10 years and with a vengance! He now has a portfolio of about Rs. 68 lakhs in equities.

I know another guy who was largely in debt for most of his life (say till 35, now he is 42) – but now seeks equity related ‘information’ from wherever he can get. In a train journey from Mulund to Mumbai VT if he overhears a share being discussed, he visits every site trying to do some research about it. However the buy or sell decision is mostly made on the group of people who travel with him. The research is some kind of ratification. As he is my neighbor’s friend ocassionally he calls me over telephone for a portfolio review. Of course his portfolio includes a lot of “i have no clue why I bought list” of shares – in fact it is dominated by such shares. Spoke to him last Sunday – he has shares in 44 companies totalling an investment of Rs. 13 lakhs – it is worth only Rs. 19 lakhs – over a period of 6-7 years. Do not know the IRR, but surely under performing ppf if I am not wrong. Quite a numbing experience.

Today the tortoise has a much larger portfolio. The hare and the tortoise story plays itself over in many ways, we close our eyes and refuse to learn. I do not know why.

Lessons:

Equity is a good asset class – but it needs far, far, far greater discipline and knowledge to build a portfolio than what a common man has. If in doubt Index or choose a decent fund manager. The gap between a debt product (with no fund management charges like Ppf) and an index fund (with low charges) is about 2-3% p.a. over a long period of time. However if you pick stocks keep measuring what you are doing. At some stage you need to accept that you cannot screw your own portfolio beyond a poing – of course there is no law against hurting yourself.

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Who can become a builder, who can become a broker, how much brokerage to charge, should prices be quoted for built up, super built up….NOTHING is even documented forget being regulated. You could go and look for a flat for Rs. 1.3 crores. On finalizing the flat you realize that the ‘other charges’ – loading, brokerage, stamp duty, parking charges, etc. etc. add upto Rs. 15 lakhs – about 12% of the so called ‘price’ of the house.

At least some of these costs are available upfront, while some of the costs is just a guess – like loading. Sometimes the neigbhouring building also seems to be in the loading – at least in big Indian villages like Mumbai.

The other real cost is the interest cost – let us say you borrowed the full Rs. 1.3 crores + the stamp duty + the life insurance charges – after all you want your wife to inherit only the home, not the home loan as the SBI life advertisement tells you! If you repay this as an EMI – for 20 years, the true cost of your house is Rs. 2.6 crores (without considering the regular maintenance and tear and wear that would have happened).

However if a person sells this house after 27 years, he will tell his friends “I bought this house for Rs. 1.3 crores (remembering the brokers words) and now I have sold this house for Rs. 4 crores – it is a 3 bagger in 27 years. I wish I had bought one more flat”. Mathematically I leave it to you to calculate the profits, and find out the IRR.

Amar Pandit has written a nice article in rediff.com about the list of ‘charges’ while doing a real estate deal. It is worth reading while finalising your house purchase.

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So if you do not understand SLR, CRR, Repo, ytm, current yield, plr, sub prime, pda, real rate, benchmark, rbi, sbi, reverse repo, basis point, g-sec, sgl, ocbs, nsdl, – if all these look like an alphabetic soup to you take heart. I will try to explain some of these words under this heading. Like I am doing a “mutual fund” tutorial, I also plan to do a “debt markets simplified”….so keep reading this space!

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