How people love a rising market! So one good day and the world wants to announce that the worst is behind us.

My foot. Remember it took a long time for the world to recover from the Lehman collapse – a company who had an audited balance sheet. When it comes to countries, you are talking of non existent balance sheets, a reserve bank which has many secrets, guaranteed revenue leakages, riots, – a guaranteed collapse of at least Greece and perhaps Italy.

How will the market react to this? NO clue, no idea whatsoever!

Will the dollar tank? Will the dollar appreciate? No clue.

What will happen to the EURO? Is Japan doomed, or is it just the darkness before the dawn?

Is it sunlight in USA or is it just the dawn?

We all have a vested interest in the markets going up, so we keep predicting a bull market.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

If you see the amount of money Coke, Pepsi, Citibank spend on lobbying in the US, you know how much of wrong doings they must be doing. The food industry, pharma, insurance, banking, auto and of course the lobbying industry are really the villians in US.

It is amazing that the financial services industry in the US spends more on lobbying in Washington than the combined lobbying budget of many industries put together! If the people in the US CANNOT see it, maybe they are blind. Let us not sleep – sleeping is the prerogative of the government and the regulators. As an individual I know I have to be alert to be alive.

The Financial Services industry’s contribution to the Presidential campaign is too huge for us to ignore ( upwards of  2 billion US dollars in the past decade ).

The banks are allowed to take deposits (guaranteed by the government) and they play the derivatives market – we need socialism back in some form to stop this stupid crony capitalism. This is like saying I will guarantee/ insure all your risks, but the premium will be collected by some body else. The losses belong to the people, and the profits belong to the EMPLOYEES (shareholders be damned!!). This is the impact of lobbying.

Theoretically it is possible that another Lehman/ AIG is building up somewhere (in terms of derivative positions) with the money that a bank has got (guaranteed by the government) – if there is a loss, the bank WILL HAVE TO BE BAILED OUT by the Congress. Rofl or LoL – you decide. If you are asking me ‘Will the Congress pass this?’.

Well, well fair enough a question – there are ONLY 70 members on the House Committee on Financial Services – what more do I need to say?

If you are wondering why the people in the US are angry at wall street you must see what Citibank has done. There is a link at the end of the page just read it..

http://www.time.com/time/business/article/0,8599,2097308,00.html

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Financial planner: Borrowing sensibly is a good way to build wealth. Do a disciplined borrowing and you will make money because the equity market moves faster than the interest rates that you pay on your borrowing. This logic can be made to look even more convincing with graphs and charts!

You should: Borrow cautiously, if at all. You have to worry about the total amount of debt too! The quarter-century leading up to 2007 wasn’t simply a golden age for stocks. It was also a bull market for leverage. (That’s Broker’s Bluff for debt.) Since 1999, mortgage rates have fallen, college loans have ensured that parents can hold on to assets while their kids borrowed. Cars, scooters, mutual funds were all available on loan! People responded to easy credit in a predictable way. Houses got bigger, shares were not for investment – they were for ‘call options’ and ‘futures’ – again naked debt! The personal savings rate fell, and household debt payments as a percentage of disposable income rose. Home up grades ensured that big houses were furnished big, EMI was bigger.

Looking back, retail investor (ok I should call them traders) borrowing binge was bizarre. But it didn’t feel that way at the time. There were retail traders who would have a leveraged position on the buy side on a single share and a leveraged position of a single share on the sell side. It was a brokers delight – surely the brokerage generated was far, far greater than the wealth created for all the investors put together. This was stunning, and RBI too should have been perplexed if the overall picture was available on one page! Forget the common man in India, Alan Greenspan thought everything was hunky dory.

If you watch Suzie Orman Show you cannot believe that nobody in USA was bothered about the leverage based on ‘ever-increasing’ housing price spiral. Indian bankers did not give Rs. 500,000 loan to a fruit seller with a Rs. 17000 annual income. In the US it was easy to get NINJA (No Income No Job Applicants) loans.

The obvious moral here is to be conservative. There are always good reasons to borrow, even today. You need to borrow to get a good education, you need a mortgage to buy a house, maybe a car loan – of an affordable size. However when buying a house you can always pay 50% down payment installment instead of 10% which the banker was asking for.

There’s a subtler lesson too. When leveraging keep an eye on the total borrowing. Lehman was so smart! They failed first. Bear Sterns did not get the bail out. The overall leverage hurts when EVERYBODY tries to give up the debt. Maybe your builder has gone under and he is pushing you for EARLY installments. Your employer may be laying people off to reduce leverage. Your equity portfolio may be doing badly – and your banker may be making margin calls on your mobile. Suddenly that PMS you could “easily” handle on your salary does not look like a great idea. You cannot depend on your equity or debt for help, because many of the companies you owned are revealing their true leverage and the market is furiously re-rating. And your extra bedroom which you bought cannot increase your cash on hand by selling ‘just that room’. Banks are no longer falling all over you to increase leverage – cards, cars or a foreign trip.

MUST DO: Be conservative about debt. Make that very conservative. Especially when your neighbors aren’t. Get a mortgage you can afford for the life of the loan, and put at least 35% down payment. Furnishing or home improvement loans make no sense – spend on consumables from your income. Just because a loan is available you do not have to take it. Taking a loan is easy – sometimes repaying becomes difficult.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Then Tata Motors, Cholamandalam, Hindustan Oil exploration, Tata Investment corporation, Hindalco, announced their rights issues. Just to be liquid for these right issues, I sold again. When the issue actually came, I was sitting on cash, but had no desire to fill the rights form. So again am sitting on cash. I think God protects people who do not know what they are doing.

Other than God I should also thank Ken Fisher for his book – “Only 3 things that Count”. This book MADE me learn 2 things -

1) it is all right to be in equities during slow downs, but in fmcg and pharma rather than infrastructure and banking

2) Even if you do not believe in ‘timing’ if a portion of your portfolio can be save from the blood bath, your overall returns over long periods of time can be better than blind ‘time in the market game’.

However for all the readers I have a few lessons from 2008:

1. Like me, if you get lucky, do not argue against luck, protect your money.

2. Know the difference between skill and luck. I had luck so I sold enough shares to pay for the rights (and additional shares too!). If I had skill I would have sold much more, sold Kotak Bank, bought puts on Icici bank, sold Tata Steel and Hindalco.

3. Stock picking is tough – Bear Sterns, Lehman, Citibank, Morgan Stanley. Closer home Satyam, Cholamandalam, Dlf, etc.

4. Diversification did not help! – Debt in Nagarjuna group was wiped out. If you put money in a real estate pms, you lost.

5. Liquidity: when you need your money, if you do not get it, it is not there!

6. Leveraging which made you look smart in a bull run, can wipe you out in a bear phase.

7. Indexing works, indexing works, indexing works. Believing in ULIPs for wealth creation or Mutual fund investing based on Advisor’s skills and hoping to out performing the index is a nice fantasy like Santa Claus.

8. If your Advisor or fund manager has no transparency or you do not understand equity trading – you are better off in ppf.

9. Past performance is as useful as last year’s weather pattern on a particular day to carry an umbrella. If you get wet, do not blame the forecast.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Or so goes a story. If you think there have been excesses in the American economy, please re-think.

Top executives at Bear Stearns, Lehman Brothers, AIG (which put client’s premium money into aircraft leasing!) and other financial giants received hundreds of millions of dollars in compensation (as salary, bonus, esop, etc.) just before their firms went to the Fed with a begging bowl!

Many people find this terrible and shameful. Galling as an American would say. But the excessive and unwarranted compensation at Bear Stearns and Lehman doesn’t bother me, personally.

Why?

Simply because I do not own any equity share in any of these companies!

However, unfortunately, we all have a stake in the future of the U.S. economy as much as we have in the Indian economy.

What about the Indian companies in which many of us have a stake? Do we have any idea of the kind of stunningly stupid decisions that they have taken in the past?

You need to be in a particular company to get a closer picture. Satyam deal will look like a picnic. Corporate governance, my foot!

First started this “mind-share”, and “market-share” game. So pharma companies, FMCG companies and public sector companies were raided for people. Then the salaries were raised from Rs. 2 lakhs to Rs. 10 lakhs. Then regional managers were being hired for Rs. 40 lakhs. This meant national level positions went for Rs. 80 Lakhs. CEOs were hired first for Rs. 1 crore, and then for US $ 1 million.

Strategies were copied – branches were opened all over the place.

“How many policies have we sold in pin code 9001234? How come we do not have a branch there? So a branch was opened. A branch here and a branch there. After all Rin and Liril and Wills sold only because there were so many shops. So every where there was a railway station they opened a branch. Only problem was they extended it to local stations also. In cities like Mumbai the right side of the station was “East” and the left side of the station was “West”. So Rabale station got a “Rabale East branch” and a “Rabale West branch”.

Ha ha we have now opened 2300 branches they announced. Obviously 2300 branches meant 2300 branch managers, 23000 business development managers, 23000 sales development managers, 4600 clerical assistants, 7500 air-conditioners, 4600 tea vending machines, 6900 security guards, …..it was a employment exchange’s delight.

Obviously the sales had to go up proportionately. That did not happen. So “products” which looked profitable with “only” 50% upfront load and 1% asset management charges, were no longer profitable. So new products were launched with “only 40% up front load – but for the first 2 years” and the asset management fee was raised to “only” 1.94% p.a.

However, the client who had put Rs. 10,000 in a ulip in the year 2006, 2007 and 2008 found that there was only Rs. 16,000 left in the fund.

The question that the life insurance industry – and the financial services industry is asking is – did we overpay?

The answer is of course not. The client overpaid. Now he is not willing to. That is all.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

No money comes free – immaterial of whether it is called Debt or Equity. The authorities have put a lot of conditions – no cash dividend, limits on executive pay, no throwing out people out of homes, et al. All these are “visibly” good for the authorities who want to feel good (“God” perhaps?) about what they are doing.

All this brings us to a big question – like all subsidy will it actually bring good or bad to the system?

If you believe in a free market should you throw a life boat for the people who are sinking? Surely when Lehman went down, in India, Nomura Securities took over the business, all the people were gainfully employed – at comparable salaries. So what is the downside of a bankruptcy? Really difficult to say.

When you believe in free markets you do not interfere in any of the “market” discoverd figures – be it salary, interest, price-earning ratio, rent, or IPO pricing. Similarly when GM says it is facing bankruptcy what it means is the sum total of its assets is LESS than the sum total of its liabilities. However there is value in each of the assets. So if out of say the plants of GM if Honda, Toyota, Mercedes, Tata Motors, …each one decides to take some part of the assets AND use it more efficiently, the market benefits. However if a life boat is thrown at GM, they will keep coming back. Next time it will be in 2015, if not earlier!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

fuller version of this article of mine appeard in retuers under this heading:

The Meltdown’ What to do?

As a colleague in the office told me, if you want to fail and you are expecting a storm, fail first!

So some of the “early birds” got protection, and then the protection vanished!
The Fed is run like any other bureaucracy, it cannot be policed. Why did Bear Stearns get bailed out (I have called it a burial elsewhere) and Lehman did not? Search me!

So here is the list

First it was Countrywide.

Second was Bear Stearns.

Then Freddie and Fannie.
Then Lehman Brothers filed for Chapter 11.
Bank of America bought Merrill Lynch.
One of the biggest insurers AIG is seeking a multi – billion bridge loan from the Fed.

If you see the manner in which the market priced these shares in the past few months (more appropriately past few weeks) it kept telling you what the auditor, regulator, rating agency, media refused to tell you.
 

Indian market will also be hit and hit hard. As an investor, what should you do now?

Well, you can panic and sell! That hasn’t been terribly productive in the past. Or, you stick with your discipline – provided it is a good one.Stick to the fundamental principles of investing: “Buy quality. Diversify broadly. Asset allocate properly. And think long term“.

Let’s take a closer look at each of these.

It is true that all shares are down, both here and abroad. But if you own great companies, they will recover when this storm passes When you see HDFC, SBI, Larsen & Toubro, TCS, all beaten down around 20% from current valuation; maybe it is the right time to buy?

It was in 1992 that we had Harshad Mehta as a problem, then it was Ketan Parekh, then it was the dot bomb…

Internationally it was the Russian default (in classrooms we say the “sovereign” cannot default) which happened about 10 years ago. It took LTCM along with it.

Of course then there was 9/11; people redefined risk. They thought there would be a world war and for some time there was chaos in the world markets. However, nothing really happened; we did not have a choice, so we went about doing our routine work.

Today all those crises seems like nothing more than a blip on the charts.

Frankly, I think this crisis may take a little longer to correct. It is about Americans realizing that the rest of the world does not owe them a living. Whenever Americans have been threatened they change the rules that the world has to live by! They still have to grapple with their credit card debt, student loan, car loan, and home mortgages. If they all start defaulting (this is called moral hazard) hoping that Uncle sam will bail them out, the US $ will be worth one Yen!

Remember when they did not have enough gold, and they defaulted (well technically!) they removed the “gold standard”.

When they did not see any strength in the dollar, they convinced (you know how the mafia “convinces”) the Arab world to designate oil in dollars.

However, this situation of US hegemony is simply going to have to play out. Like a great teacher said “this too shall pass”; some homeowners will lose their house, they will increase the rents! Some bankers, equity brokers, realtors and mortgage brokers are going to become bartenders. Bargirls, please excuse.But, at the end, the underlying strength of the American economy will prevail, just as it always has in the past: through financial crises, war, inflation, recession and depression. (In this we believe – because  we must)
They have so much muscle power that they will prevail; so much of money of the Japanese, Chinese, Taiwanese, Indian, Arab money is in dollars, that we cannot let America fail!!

That doesn’t mean that things aren’t going to get worse before they get better. But as I have said in this column many a times, you shouldn’t have money in the stock market that you need in less than five years, this time maybe ten years.

A long-term investor diversifies beyond traditional stocks. If you are sitting on cash, choose a fund with say 70% in equity and 30% in debt – like HDFC Prudence fund and do an SIP.
If you are a direct equity person, keep 60% in stocks, have 10% in good bond funds – floaters or liquid funds, which may already be up! Have 10% in FMPs. You should have at least 5% in gold etfs, which fluctuates thanks to the dollar! Keep the balance in cash. Your worst enemy right now is not likely to be the market but your emotions. Instincts prompt us to “do something” when we feel threatened or nervous. But strong emotions are often the prelude to bad decision-making.
Firstly, do a reality check; recognize that investing in stocks means your account value is bound to sustain wide fluctuations from time to time.

It’s unrealistic to think that you’re going to earn the superior returns that stocks can give, in a manner as smooth as gaining returns from a PPF account. You have to be aware that the pattern will vary.

I will also guide you to how to automate your investments and invest unemotionally, regardless of how you may feel. It is a simple process called SIP done by ECS and that over a 5, 10 or 20 year period; maybe longer. If you are 22 years of age and expect to live up till the age of 90, you should be having a 68 year time frame!!

As Warren Buffett said, “Inactivity strikes us as intelligent behavior.”

In short, it’s one thing to feel fearful about the market; it’s quite another to let that fear trump your well-laid investment plans.

Studies clearly demonstrate that it’s not your store of market knowledge that is most likely to determine your success as an investor; it’s whether you let your emotions dictate your actions or no.
Like Peter Drucker says “It is not your brain, but your stomach that is likely to decide your success in the equity markets”

That’s not a problem in good markets, the test of your resolve is in times like now. It is what you do, not what the market does. So do what you have to do. The market will do what it has to do. Amen.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

There are many like us …so as usual I searched and a friend obliged. So here is the link – please read it:

http://freakonomics.blogs.nytimes.com/2008/09/18/diamond-and-kashyap-on-the-recent-financial-upheavals/?em

I hope you like it. It is in simple English…however if you have any queries, I will happily reply to them!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

When Lehman, AIG, Merrill, etc. were distributing high salaries all of them looked like they believed in capitalism. Surely they would have said “there should be no government oversight” – thank God for the English language! Surely for FED it was oversight. All that happened was over its sight!!

Now that Lehman has gone under, and AIG was almost there, there is a clamour for government help – Fred and Mac got help, but Lehman did not. Now AIG has got protection. Will somebody get up and say how does the FED behave? Please? What logic?

Anyway if I sound like a commie, please excuse me. Does it not sound like the profits are in the private sector, the risk on the government, and failure on the tax payer? To me this sounds bizarre.

Post Footer automatically generated by Add Post Footer Plugin for wordpress.

Media TRP / clicks are a function of excitement in the market – not a bull run or a bear run. Similarly brokers revenues are a function of frenzied activity by the client. Not just a buy and hold theory.

First it was Lehman. Then Merrill was taken over by Bank of America. That will stretch its ratings – it has still not ingested the Countrywide take over. Then it was AIG. Now there are rumours about Washington Mutual and Morgan STanley. Then the bluest of them all Goldman Sachs. Will investment banking as a stand alone activity die? I know not. Is it the end of the world? I think not. Are equity markets bleeding? Yes.

Equity markets need 2 things to do well. One they need fundamentals – good growth, decent management, good people, etc.

The other major ingredient is of course liquidity. When both of these are available in good supply, markets will thrive.

This is like a runner – he needs to keep on working on his fitness. He should eat right, exercise right, have a good coach. This is a throughout the year effort. He cannot be lax, or feel “bored” doing it.

On the day he gets the motivation, his fit body is ready to take the opportunity, and win.

In the Indian market too, the fundamentals were good in 1999, 2000, 2001. However, it was in 2002 the cashflow (motivation) was provided and the inflows came in thick and fast – and provided momentum for the market to go from 3000 to 21000.

Now the fundamentals are in place. The motivation (cashflow) is missing. In fact it is negative. Nothing can be done to bring it back. The “gora” investor needs money back home. It is irrelevant that this is a small portion of his money. When Morgan Stanley, AIG, Merrill, Blackstone invested, we rejoiced. Now when they need to sell, and are therefore selling, we cannot mourn.

So, remember, the fundamentals are in place, the motivation is gone. Will it come back? Of course, the cash will come back. First in trickles, then in a flood.

However, the turmoil could take the index from 14000 to 9000 and then in 2013 to 30,000. Will this happen? I know not. Will it not happen? I know not.

But I know something. Just like the runner, you need to be there doing your bit everyday. If you think you can get out at 13000 and come back at 9000 that may not be possible. Just continue doing your SIPs. Invest when the market is at 13000, at 12000 and at 11000. Because the market is capable of doing funny things – it might turn back from 9123 and you might be waiting for 9000. However, if you continue your SIPs you will be investing small amounts at all prices, and the index reaches 30000, you can feel happy and satisfied.

Just a note though, please do not hold me to any of these numbers!!

Post Footer automatically generated by Add Post Footer Plugin for wordpress.