Subramoney

http://www.utvi.com/personalfinance/financial-investment-india/15714/investing-sans-emotion.html# - is where the original is, for the others, here it is being reproduced!

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

I know a few HNI investors. One thing common to all HNI investors is that they do not like to be classified as a “HNI”. This is good for the adviser too, because no 2 HNIs are alike.

Some HNIs are well assured of themselves, satisfied with how their life is going and understand their finances. If you thought this is how all HNIs are - you are mistaken. HNIs are after all human and have all the problems of a typical human being.

Let me narrate the story of a one HNI investor. Am not saying this is typical, but he is one.

He deals with 4-5 banks, watches 3 business channels, handles technology for his organization, “reads” 2-3 business papers, reads 2-3 ‘investment’ magazines.

Now is the trick question. How many advisers do you think he has?

To my mind it is about 15. He hears them all, listens to none. His portfolio is a pot pouri of mutual funds, real estate pms, direct equity, structured products, rbi bonds, real estate, et al. Also very typical of a bull run he has committed himself to a real estate deal which requires regular payment of Rs. 2L a month for the next 3 years! He called me to ask from where to fund this real estate deal. I am one of those unfortunate ‘advisers’ he has. If I ask him for the full picture, he snorts “I know what is happening in my life”. So I have to run a delicate balance - he is my best friend’s brother-in-law to boot. So I played it by the ear - and asked him what he is planning to do.

The answer was exactly as expected. Since he has already committed Rs. 9 lakhs to the real estate deal, he has to pay further (total committed price is Rs. 81 lakhs, today

Well this HNI with all his equities down in the dumps has been partially downsized. He has been given a 6-month notice pay (damn lucky!) and he is looking for a job.

God Bless.

For most Americans, Christmas has been Hijacked. Or whatever was left of Christmas after the dreaded R word, the non-bail out of the auto giants, but the top most question is: In the fraud dictionary,

Has Madoff replaced Ponzi?

Every year, I watch, good, honest, hard-working people go and lose a lot of money to some Ponzi scheme or the other. This year it is Madoff. Of course all this has happened in the US, and many Indians do not identify themselves with the Madoff problem.

However, please remember all the characteristics that are present in the Madoff problem are there in India just as much. Some important questions to ask are – is my advisor competent and trustworthy?

It is not sufficient that he is your neighbor, boss, relative, etc. He should be both competent and trustworthy.

Does he walk the talk? Does he himself invest in similar asset classes that he advises you to invest or does he keep his money else where. Typically you are looking for a restaurant where the owner himself eats!

After executing the deal, do you really need him to access the investments? This is a little tricky question. In case you have anything less than Rs. 10 million to invest you should be using vehicles that have public access – like a mutual fund or a unit linked insurance plan apart from ppf, national savings certificate and bank deposits. Normally you should be able to access these investments without any intervention with the executor. The exceptions to this are of course some banks which do not allow you direct access of your mutual funds, your PMS, etc. In case you have invested in a PMS with a broking company and the DP is the same brokerage firm that should be a red flag.

If something was to go wrong, and you get falsified statements, you will not know till there is a huge scam.

So if your bank, broker or advisor gives you only his “view” of your investments and you cannot deal with your investments the way you want to deal with it when you want to deal with it without the intervention of your Relationship Manager that should be a big red flag. Madoff is proof that big social names are not a protection! So the agent belonging to your society, your club, your swimming pool, your walking club, etc. should not let you cloud your decision of choosing a professional. Treat your money with respect, please. It is hard earned!

Are my investments liquid without the need for the person through whom I executed the purchase? The answer to most PMS schemes, real estate partnership schemes, private equity deals, art, etc. the answer is no. So if you sour relationships with the guy(s) with whom you did the deal you can safely kiss your money good-bye. Take the case of art – the person who sold it to you does the valuation and keeps telling you that it is doing well. Frankly this is scary. Many buyers, many sellers, 3rd party valuations, are all not just nice things to have, but mandatory if you have put serious money into it.

And for heaven’s sake ask all these questions BEFORE you put your money, not after. Stunningly, in India well regulated industries open to public inspection can be sold only be ‘qualified’ people. However, F&O, PMS, equity broking, real estate PMS, real estate partnerships, etc. which are perhaps subject to less (or no?) regulation than mutual funds and life insurance can be sold by anybody.

If you remove the words Madoff and Ponzi, this article can still be suitable. So forget which part of the world you are. Forget that you are dealing with a ‘big’ bank which never lets you sleep, please learn to ask these questions. Surely SEBI, IRDA, RBI, Dr. Manmohan Singh, are all there.

However, when it is your backside that we are talking about, take care yourself!

and if you want to know about the oxymoron sophisticated investors who invested in Madoff, please read wsj. Specifically    http://online.wsj.com/article/SB122912266389002855.html

Costing is a difficult subject. It is difficult not only when you are a student (ask anybody who has passed CA in the ’80s) but also in real life. However it can at least be attempted. However benefits are far more difficult to quantify. When people ask me what is the cost of term life insurance for a 30 year old for 35 years for sum assured say Rs. 2 crores, my question is “Pray tell me what is the ‘cost’ of your dependents not having any fall back support”. For me that is an important question because if a person has not thought about what will happen to his family (or not quantified it) he may not appreciate the cost figure. All numbers can be made to look big or small - like the story of 2 lines.

When a friend called me saying “I am planning to buy a house for Rs. 60 lakhs, should I buy it?”. I asked him what was the cost of the house. He said Rs. 60 L, I just told you. I asked him again. He grew silent. Then I said “If the cost of the house is equal to the amounts paid, then the cost is EMI * No. of months. In this case it was working out to 75,000 (emi) * 240 months = Rs. 180 lakhs, not 60 lakhs.

This calculation of course ignores the time value of money - but given maintenance costs, painting…and other costs, real estate cannot give great returns.

we will do some more costing articles in later posts…

This article first appeared on the utvi.com web site - written by the famous anchor, Mr. Vikram Oza. It kind of explains the relationship between risk and return.

The stock markets are risky business. At least that’s the line most people who didn’t park their money in Dalal Street have maintained. But on the flip side, the argument is ‘no pain, no gain’… ‘no risk, no returns’. It’s an age-old dilemma… Damned if you do and damned if you don’t.

Take the case of Nirav Kaku. He’s an IT professional. He, like millions, invested in the stock market consistently during the bull-run. Over the last two years, he parked Rs 24 lacs in it. Today his portfolio has lost half its value. And he’s cursing his luck.

Nirav took higher risks in the hope of higher returns. Was he wrong?

‘Quite’, says Financial Trainer P V Subramanyam. “You may expect higher risks for higher returns, but that’s not always true. To get better returns, sometimes you need to reduce risk – not increase it.”

How do you do that? Here’s an easy approach:

Keep the money you require in the short term (i.e. less than 3 years) in debt instruments.

And invest the money you require in the long term (i.e. like 7 years or more) in equity.

But resisting a ride on the crest of the stock market is tough. Especially when it soars. Blocking out exclamations of joy from those who see the value of their portfolios rise with the Sensex isn’t easy. The trouble only begins when markets do a U-turn and a tailspin all at once. Investors break into a frenzy, and ultimately, despair.

“If you have a long term view, why do you track the markets on an hourly basis?” asks Subramanyam. True. An exercise in futility for all you do is die a million deaths – without hope of nirvana.

Then again, from another perspective, the markets going down are good for young investors. After all you have the opportunity to invest for the long term, getting stocks that you wouldn’t get – at unimaginable prices.

Indeed, with a long term vision, investing in a bearish market isn’t a risk, it’s an opportunity.  Trading is risky, but not investing. As Warren Buffet says, “If you know what you are doing, there is no risk”.

Think about it this way. Not taking a risk is also a risk. For one, the money that you keep under your pillow would erode all its value with rising inflation.

The idea then is to manage risk. Here’s how:

Study your portfolio from time to time, say every six months. And then identify your risks. Your risks will typically change over a period of time with changes in interest rates and inflation. Your default risk also changes when the company you’ve invested money in, goes bankrupt.

Set your goals… the crucial ones like retirement and the not-so-crucial ones like that Tag Heur watch you wanted to indulge in. That way, you’ll see how you can best reduce your risk.

Keep a balanced portfolio. Spread your risks across different asset classes. You should have money in a savings bank account, PPF, Fixed Deposits, Gold, Real Estate and Equity. Ensure you’ve allocated 50-60% in equity with a long term vision and the rest in other asset classes.

Remember! You can’t avoid risk. At best, it can be managed

I meet a lot of doctors in my professional and social life. Luckily I met a great homeopath doctor about 30 years back - and he has kept me away from medicines SINCE then! So I do not meet doctors for seeking medicines / treatment. However, here are my observations about a doc’s business skills. If you are a doctor I know, Or I do not know, please give a feedback on what I have said here!

Some amazing facts that come to light are the following:

1. Many doctors business skills, but do not know that they lack business skills.
2. The income that is reflected in the Profit and Loss account is a function of what their accountant thinks should be shown as an income – the reality is nowhere near the shown figure.
3. As they have a large amount of cash accumulated, the only “investment” that they can think of is property.
4. Throwing data about equity performance vs. real estate performance is of no use to them – they have far too much of cash to be invested – which can only be invested in real estate.
5. All the skill up-gradation that Doctors do is with regard to their own field and very little on practice management.
6. Doctors are a little scared of technology, finance, income tax, search, seizure, raids and of course accountants – unless they are married to one!
7. Most of the “finance” and “investment” knowledge that they have is got from their Accountants, real estate agents, or fellow doctors – and could be very lop sided.
8. A very, very few doctors plan their practice – which means taking on a partner, creating a franchise, selling while retiring, taking a vacation, are all very difficult.
9. Doctors ability to “market” their services is restricted to “hoping” that their existing clients will give them references. They do not even seek to members of networking organizations to learn the nuances of networking.
10. Doctors idea of financial planning is largely restricted to tax planning – which means they buy assets (and claim interest and depreciation as “expenses”), or use some tricks given by their accountants.
11. Insurance planning, wealth creation, making a will, financial goal setting, MIS, are alien to most doctors.
12. In all their education they have never thought it necessary to learn money or practice management skills. Nobody thinks it is worth teaching the docs!

Many people have asked me “Should I keep all my money IN CASH - is it the best asset class at this time?

So, I have been struggling to answer this question..and have instead said this -

Cash is surely one alternative - but please remember there is a huge amount of risk in terms of cash being stolen, fire, etc.

Bank deposits - another attractive place for many people to park their funds today is a “bank FD” - because they want to “preserve capital”.  Banks pay anything between 3% p.a. to about 11% p.a. if you see the pre-tax return. Both cash and bank deposits do not protect you against inflation and taxes. Post inflation and post tax you are losing you your capital - which is because of a negative return.

Income funds: If you think interest rates have peaked (Monika Halan came on Ndtv profit and said that interest rates have peaked, but I do not understand all that). So if you believe interest rates have peaked keep your money in Income funds.

Real estate: Ndtv profit says real estate markets will fall by 30% in the following months, so stay away from real estate. I do not understand how real estate markets move, so I cannot hazard a guess. If you think that real estate will give you a return in excess of the interest rates at which you are borrowing (fr the next 20 years) buy real estate.

Equity funds: Well the experts at all the channels seem to think that the markets are a bad place NOW to keep your money. Again I do not understand equity markets as well as the experts who come on TV. However I have kept my SIPs on - and now they have been on for 7-9 years….and I have not stopped them. Of course I find solace in that the experts who come on TV are only looking at a teleprompter and not at a crystal ball. Or in John Templeton’s statement “I do not know anybody who knows anybody who has perfected the art of Market Timing”.

Real Estate: Greenspan Is Right?

Alan Greenspan said falling home prices in America are “nowhere near the bottom”. Y V Reddy has been talking of an asset bubble for quite some time, but in our euphoria we chose to ignore him. Deepak Parekh has been shouting that real estate prices are far too high for about 2 years if not 3.

You may or may not agree with something these people have done or said over the years, but all 3 of them cannot be wrong, can they be?

This may surprise some, especially since the national media just reported the single largest year-over-year drop in U.S. home prices, May’s record 15.8% plunge.

I did a TGIF speech about investments - I met a person who told me that he clearly felt my blog was not addressing the new investor. Withing 5 minutes of him saying that one girl told me “i could not understand anything in your blog”. I hope this post removes that flaw in the blog.

Immaterial of whether you are in your 20s or in your 50s and you are looking at an investment you should know some of the basics of investing, so here it is.

By and large at some stage you must have been approached by some investment advisor. He (increasingly she) must have offered you mutual funds, ppf, unit linked plans, and thrown a lot of jargon.

Throwing jargon is one of the easiest (and impressive) way of getting the fees that the advisor earns. ALL industries do that. Take a simple English word and give it a different meaning, and then go about explaining it. Take a mouse, for example!

But what is an investment, shorn of all its jargon?

It is a sum of money that you outlay hoping to get a higher amount back. This can take two forms:

1. Investment like a lender
2. Investment like an owner

1. Investment like a lender means you are giving your money to an organisation for them to use so that they can grow their business. As a compensation for using the money, they pay you interest. If you invest in PPF, NSC, Kisan vikas patra, RBI bonds, etc. you are lending money to the government of India. However if you keep money in a fixed deposit in say, Hdfc you are lending to a private sector body. Bank deposits also fall in the category of “investing like a lender”. What are the advantages and shortcomings of such an investment?

· Certainty of interest, when it will be paid and when will the capital come back

· Convenient to handle

· Simple to understand – the only thing you need to know is the amount of interest, and will the original amount that you put in comeback

Shortcomings:

• Inflation may erode the amount, substantially. For e.g. if the inflation rate is 6%, the value falls by 44% in 10 years time. So if you get the SAME amount (back) that you put 10 years ago, inflation has eroded its value.
• Default risk – the person taking the money does not repay. Many co-operative banks, some nbfcs, some small business owners, may fall in this category.
• Delay risk – if the government of India decides to postpone your PPF payment by 10 years what will you do? Looks odd, but remember some politicians may decide that all amounts above Rs. 5L should be paid in installments you may have to grin and bear it.
• You take the risk, but if the company does well your rewards do not increase.
• Debt is not risky in the short run, but it is risky in the LONG RUN.

2a. Invest like an owner means you are joining a company as its partner. This obviously means you get a portion of the company, you get the accounts of the company, they report to you on a quarterly basis, they allow you to participate in the well being of the company, ….all the perks of ownership.

Advantages:

1.You get to participate in the well being and in the ill being of the company.

2. When the company does well, you get a fantastic hedge against inflation

3. You get dividends and price appreciation as rewards for holding shares

Shortcomings:

· Stock picking is not just watching TV and buying the “hottest stocks”. It takes a lot of effort to pick a good stock, to structure a portfolio and keep allocating resources to the correct companies

· It is very risky in the short run

· You require a good head, and a greater stomach to make money with shares

2b.Not enough attention is paid by people to investment in real estate (I mean actual, active investing, not buying a house and hope it will appreciate). If you can keep buying properties, rent it out, sell when appropriate, real estate will also give you an excellent inflation adjusted return. The advantages are that in a worst case scenario, you can use the assets, however it requires a lot of expertise. Also individual real estate calls are complicated (Real estate mutual funds – we have been hearing about it for long, hope it happens fast). A very unstructured, unsupervised market. If you find a good advisor, you are blessed. My real estate portfolio is with a veteran who gives me stunning returns.

2c. Starting / Partnering a small business! Small business is big business. Most of the world economy is supported by the small business owner. Most of the jobs are created by them. Their media share is much less than the market share that the small guys have!

I hope I kept is simple. My wealth creation has some formula. One of them is to do the following four:

· Invest in a good portfolio (mutual fund or unit linked insurance with a small recurring charge)

· Select a good fund manager (I mean fund house)

· Do an SIP

· Think long term – I mean 10+ years

If you do all four, I daresay you can look at Warren Buffet and say, “Sir I listened to your rule number 1. I have not made losses.” That is great!

pvsubramanyam@gmail.com

is where you can mail me!